UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
-----------
(MARK ONE)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2004
or
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _________________ to _____________________
Commission file number 0-28606
NUWAVE TECHNOLOGIES, INC.
(name of small business issuer in its charter)
DELAWARE 22-3387630
(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification No.)
1416 Morris Avenue, Suite 207
Union, New Jersey 07083
(Address of principal executive offices)(Zip Code)
(908)- 851-2470
(Issuer's telephone number, including area code)
--------------
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Securities Exchange Act of 1934 during the past 12 months (or
for such shorter period that the registrant was required to file such reports)
and (2) has been subject to such filing requirements for the past 90 days. Yes
[XX] No [_]
The number of shares of Common Stock outstanding as of November 12, 2004:
2,062,013
NUWAVE TECHNOLOGIES, INC. AND SUBSIDIARIES
FORM 10-QSB
SEPTEMBER 30, 2004
INDEX
PART I - FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS PAGE(S)
-------
Balance Sheets as of September 30, 2004 (unaudited)
and December 31, 2003 P. 3
Statements of Operations and Comprehensive Income (Loss) for
the three and nine months ended September 30, 2004
(unaudited) and September 30, 2003
(unaudited) P. 4
Statements of Cash Flows for the nine months ended September
30, 2004 (unaudited) and September 30, 2003
(unaudited) P. 5
Notes to Condensed Consolidated Financial Statements P. 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR
PLAN OF OPERATION P. 20
ITEM 3. CONTROLS AND PROCEDURES P. 28
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS P. 29
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF
OF PROCEEDS P. 29
ITEM 3. DEFAULTS UPON SENIOR SECURITIES P. 30
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS P. 31
ITEM 5. OTHER INFORMATION P. 31
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K P. 32
SIGNATURES
EXHIBIT 10.1
EXHIBIT 10.2
EXHIBIT 10.3
EXHIBIT 31.1
EXHIBIT 32.1
2
PART I
Financial Information
ITEM 1. FINANCIAL STATEMENTS
NUWAVE TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data)
ASSETS
SEPTEMBER DECEMBER
30, 31,
2004 2003
-------- --------
(unaudited)
Current assets:
Cash and cash equivalents $ 822 $ 119
Marketable securities - available-for-sale 85 --
Inventory 1 1
-------- --------
Total current assets 908 120
Property and equipment, net 22 4
Land held for development and sale 3,328 2,970
Deferred tax asset -- 225
-------- --------
Total assets $ 4,258 $ 3,319
======== ========
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
Current liabilities:
Accounts payable, accrued interest and accrued liabilities $ 101 $ 170
Current portion of note payable - related party 198 --
-------- --------
Total current liabilities 299 170
-------- --------
Non-current liabilities:
Notes payable - related party -- 484
Note payable - related party, net of current portion 1,202 1,400
Convertible debentures - related party,
net of unamortized discounts of $697 and $866, respectively 2,603 2,634
Convertible debentures,
net of unamortized discounts of $574 and $109, respectively 1,945 336
Accrued interest - non-current 208 --
-------- --------
Total non-current liabilities 5,958 4,854
-------- --------
Total liabilities 6,257 5,024
-------- --------
Stockholders' deficiency:
Series A Convertible Preferred Stock, noncumulative,
$.01 par value; authorized 400,000 shares; none issued -- --
Preferred stock, $.01 par value; authorized 1,600,000
shares; none issued - (preferences and
rights to be designated by the Board of Directors) -- --
Common stock, $.001 par value; authorized 140,000,000 shares;
2,062,013 shares issued and outstanding at September 30, 2004 2 2
and 1,875,902 shares issued and outstanding at December 31, 2003
Additional paid-in capital 26,916 26,216
Accumulated other comprehensive loss (45) --
Accumulated deficit (28,872) (27,923)
-------- --------
Total stockholders' deficiency (1,999) (1,705)
-------- --------
Total liabilties and stockholders' deficiency $ 4,258 $ 3,319
======== ========
See accompanying notes to these condensed consolidated financial statements.
3
NUWAVE TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE INCOME (LOSS)
(In thousands, except share and per share data)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------------- ---------------------------
2004 2003 2004 2003
----------- ----------- ----------- -----------
(unaudited) (unaudited) (unaudited) (unaudited)
Net sales $ -- $ 4 $ -- $ 19
Cost of sales -- 2 -- 5
----------- ----------- ----------- -----------
Gross profit -- 2 -- 14
----------- ----------- ----------- -----------
Operating expenses:
General and administrative 280 59 572 631
Research and development -- 1 -- 127
----------- ----------- ----------- -----------
Total operating expenses 280 60 572 758
----------- ----------- ----------- -----------
Loss from operations (280) (58) (572) (744)
Other income (expense):
Gain on forgiveness of debt -- 265 -- 265
Interest expense (202) (14) (377) (21)
----------- ----------- ----------- -----------
Net income (loss) $ (482) $ 193 $ (949) $ (500)
=========== =========== =========== ===========
Weighted average number of
common shares outstanding 2,062,013 1,866,788 1,961,240 1,267,079
=========== =========== =========== ===========
Basic and diluted net income (loss)
per common share $ (0.23) $ 0.10 $ (0.48) $ (0.39)
=========== =========== =========== ===========
Comprehensive loss:
Net income (loss) $ (482) $ 193 $ (949) $ (500)
Other comprehensive (loss) net of income taxes:
Unrealized losses on marketable securities (45) -- (45) --
----------- ----------- ----------- -----------
Comprehensive income (loss) $ (527) $ 193 $ (994) $ (500)
=========== =========== =========== ===========
See accompanying notes to these condensed consolidated financial statements.
4
NUWAVE TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands except share data)
NINE MONTHS ENDED
SEPTEMBER 30,
------------------------
2004 2003
-------- ---------
(unaudited) (unaudited)
Cash flows from operating activities:
Net loss $ (949) $ (500)
-------- --------
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation 3 42
Provision for bad debt expense -- 11
Gain on forgiveness of debt -- (265)
Amortization of debt discount 170 --
Issuance of stock options and warrants
for consulting services 18 27
Decrease in operating assets:
Inventory -- 24
Prepaid expenses and other current assets -- 159
Other assets 20
Deferred tax asset 225 --
Increase (decrease) in operating liabilities:
Accounts payable, accrued liabilities and
accrued interest 123 (237)
-------- --------
Total adjustments 539 (219)
-------- --------
Net cash used in
operating activities (410) (719)
-------- --------
Cash flows from investing activities:
Purchase of marketable securities (130) --
Purchase of property and equipment (21) --
Land acquisition and land development costs (149) --
-------- --------
Net cash used in investing activities (300) --
-------- --------
(continued)
See accompanying notes to these condensed consolidated financial statements.
5
NUWAVE TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED
(In thousands except share data)
NINE MONTHS ENDED
SEPTEMBER 30,
--------------------------
2004 2003
--------- ---------
Cash flows from financing activities:
Proceeds from issuance of notes payable - related party -- 557
Proceeds from issuance of convertible debentures 2,143 --
Proceeds from equity offerings -- 122
Repayment of note payable to officer/stockholder -- (115)
Repayment of notes payable - related party (460) --
Repayment of convertible debentures (270) --
Costs incurred for equity offerings and warrants -- (15)
--------- ---------
Net cash provided by financing activities 1,413 549
--------- ---------
Net increase (decrease) in cash and cash equivalents 703 (170)
Cash and cash equivalents - beginning of the period 119 174
--------- ---------
Cash and cash equivalents - end of the period $ 822 $ 4
========= =========
Supplemental disclosure of cash flow information:
Interest paid during the period $ 3 $ 12
========= =========
Supplemental disclosures of non-cash investing and
financing activities:
Recording of debt discount $ 556 $ --
========= =========
Issuance of 1,151,489 shares of
common stock in settlement of notes payable $ -- $ 273
========= =========
Recording of interest payable and amortization of
debt discount that is capitalized as an addition to
the cost of the land held for development and sale $ 209 $ --
========= =========
Gain on related party forgiveness of debt credited
to additional paid-in capital $ 126 $ --
========= =========
See accompanying notes to these condensed consolidated financial statements.
6
NUWAVE TECHNOLOGIES, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF INTERIM FINANCIAL STATEMENT PREPARATION
The accompanying unaudited condensed consolidated financial statements
have been prepared in conformity with accounting principles generally accepted
in the United States of America for interim information. Accordingly, they do
not include all of the information and footnotes required by accounting
principles generally accepted in the United States of America for complete
financial statements. The results of operations for the interim periods shown in
this report are not necessarily indicative of expected results for any future
interim period or for the entire fiscal year. NUWAVE Technologies, Inc. (the
"Company" or "NUWAVE"), believes that the quarterly information presented
includes all adjustments (consisting only of normal, recurring adjustments)
necessary for a fair presentation in accordance with accounting principles
generally accepted in the United States of America. The accompanying condensed
consolidated financial statements should be read in conjunction with the
Company's Annual Report on Form 10-KSB as filed with the Securities and Exchange
Commission ("SEC") on April 15, 2004.
2. GOING CONCERN AND MANAGEMENT'S PLANS
Over the last three years, the Company's annual sales have declined from
approximately $505,000 in 2001 to approximately $286,000 in 2002 to
approximately $20,000 in 2003 and no sales in the three and nine month periods
ended September 30, 2004, as the Company has had difficulty securing buyers for
its technology products in a very competitive environment. The Company has
incurred annual net losses of approximately $4,273,000, $2,674,000, $790,000 in
2001, 2002 and 2003, respectively. As shown in the accompanying condensed
consolidated financial statements, the Company incurred a net loss of
approximately $482,000 and $949,000 during the three and nine months ended
September 30, 2004, respectively, resulting in a stockholders' deficiency of
approximately $1,999,000 at September 30, 2004. For the nine months ended
September 30, 2004, the Company has net cash used in operations of approximately
$410,000, resulting primarily from a net loss of approximately $949,000, offset
by amortization of debt discount of $170,000 and the receipt of the proceeds
from the sale of certain state net tax operating losses of $225,000. This
represents a decrease of $309,000 over the Company's net use of cash of $719,000
for the corresponding nine month period ended September 30, 2003. Net cash
provided by financing activities increased by approximately $864,000 to
$1,413,000, primarily through the issuance of convertible debentures of
$2,143,000. These matters raise substantial doubt about the Company's ability to
continue as a going concern. The accompanying condensed consolidated financial
statements have been prepared on a going concern basis, which contemplates the
realization of assets and satisfaction of liabilities in the normal course of
business. These condensed consolidated financial statements do not include any
adjustments relating to the recovery of the recorded assets or the
classification of the liabilities that might be necessary should the Company be
unable to continue as a going concern.
7
2. GOING CONCERN AND MANAGEMENT'S PLANS - CONTINUED
Management has taken a number of actions to lower costs and to improve the
Company's liquidity. The Company has substantially reduced its cash flow
requirements through significant reductions in payroll and various other
operating expenses. The Company has raised approximately 1,783,000 through the
issuance of a convertible debenture related to the Company's land held for
development and sale. In November 2004, this convertible debenture was
terminated and rescinded and a significant portion of the proceeds retained by
the Company were applied toward the sale of an interest in the Company's land
held for development and sale (see Note 12). The current net proceeds of
approximately $1,783,000 from this convertible debenture has provided cash flow
for operating expenses and for repayment of certain obligations. The Company
applied approximately $460,000 of these funds to pay off in full certain
obligations to Cornell Capital Partners, L.P. ("Cornell") totaling $484,000. In
addition, the Company paid off convertible debenture obligations to Cornell and
others with a face value of $200,000 and $70,000, respectively. The Company
intends to remain in the technology business. The Company has found it difficult
to generate revenues through its technology business.
In addition, Management's plans include the raising of cash through the
issuance of debt or equity although there are no assurances that the Company
will be successful. The Company continues to require funding by and the
financial support of Cornell. In May 2004, the Company entered into a Standby
Equity Distribution Agreement ("SEDA") with Cornell (see Note 9).
On August 9, 2004, the Company filed a Form SB-2 Registration Statement,
with the Securities and Exchange Commission. The Company is seeking to register
130,690,033 shares of its common stock.
Management does not intend to expend any additional funds toward the
development of the land held for development and sale until such time as new
funding is secured.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of NuWave and
its wholly-owned subsidiaries Lehigh Acquisition Corp ("Lehigh"), WH Acquisition
Corp, Harwood Acquisition Corp and JK Acquisition Corp (collectively, the
"Company"). All significant intercompany accounts and transactions have been
eliminated in consolidation.
8
NUWAVE TECHNOLOGIES, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
STOCK-BASED COMPENSATION
On June 1, 2004, the Company granted 75,000 shares of stock to its
President and CEO under his employment agreement and recorded an earnings charge
of $7,500 (see Note 8). In addition, for the three months and nine months ended
September 30, 2004 and 2003, there was no other stock based employee
compensation expense as determined under the fair value based method.
Accordingly, for these periods, there are no differences between basic and
diluted net income (loss) per share as reported and pro forma net income (loss).
REVENUE RECOGNITION
In regard to the technology operations, income is recorded when orders are
shipped and the Company has no further involvement with the product. In regard
to real estate operations, income from sales of real estate is recorded when
title is conveyed to the buyer, adequate cash payment has been received and
there is no continued involvement.
EARNINGS (LOSS) PER SHARE
The Company follows Statement of Financial Accounting Standards ("SFAS")
No. 128, "Earnings Per Share", which provides for the calculation of "basic" and
"diluted" earnings (loss) per share. Basic earnings (loss) per share includes no
dilution and is computed by dividing earnings (loss) available to common
stockholders by the weighted-average number of common shares outstanding for the
period. Diluted earnings per share reflects the potential dilution that could
occur through the effect of common shares issuable upon the exercise of stock
options and warrants and convertible securities. For the periods ended September
30, 2004 and 2003, potential common shares amount to 80,198,409 and 220,230
shares, respectively. For the three and nine months ended September 30, 2004 and
the nine months ended September 30, 2003, such potential common shares have not
been included in the computation of diluted loss per share since the effect
would be antidilutive. For the three months ended September 30, 2003, the
potential common shares were warrants that were out of the money.
MARKETABLE SECURITIES
The Company evaluates its investment policies and the appropriate
classification of securities at the time of purchase consistent with Statement
of Financial Accounting Standards ("SFAS") No. 115, "Accounting for Certain
Investments in Debt and Equity Securities," at each balance sheet date and
determined that all of its investment securities are to be classified as
available-for-sale. Available-for-sale securities are carried at fair value,
with the unrealized gains and losses reported in Stockholders' Deficiency under
the caption "Accumulated Other Comprehensive Loss." Realized gains and losses
and declines in value judged to be other-than-temporary on available-for-sale
securities are included in general and administrative expenses. The cost of
securities sold is based on the specific identification method. Interest and
dividends on securities classified as available-for-sale are included in
interest and dividend income.
9
NUWAVE TECHNOLOGIES, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
INTEREST CAPITALIZATION
The Company follows SFAS No. 34, "Capitalization of Interest Costs", which
provides for the capitalization of interest as part of the historical cost of
acquiring certain assets. Interest is capitalized on assets that require a
period of time to get them ready for their intended use, such as real estate
development projects. Interest is capitalized from the period activities begin,
such as planning and permitting, until such time as the project is complete.
Interest costs include interest recognized on obligations having explicit rates,
as well as the amortization of discounts that result from imputing interest on
convertible debentures over the life of the obligation. Interest is capitalized
on only the net book value of the land and improvements, net of the discount
recorded on the acquisition of the land. Interest on specific borrowings
associated with the land, that are in excess of its net book value are expensed
as incurred.
EFFECT OF RECENT ACCOUNTING PRONOUNCEMENTS
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities" ("FIN 46"), which clarifies the application of
Accounting Research Bulletin No. 51, "Consolidated Financial Statements." FIN 46
requires certain variable interest entities to be consolidated by the primary
beneficiary of the entity if the equity investors in the entity do not have the
characteristics of a controlling financial interest or do not provide sufficient
equity at risk for the entity to support its activities. In December 2003, the
FASB revised certain elements of FIN 46 ("FIN 46-R"). The FASB also modified the
effective date of FIN 46. This interpretation applies immediately to variable
interest entities created after January 31, 2003 and variable interest entities
in which the Company obtains an interest after January 31, 2003. For variable
interest entities in which a company obtained an interest before February 1,
2003, the interpretation applies to periods ending after December 15, 2004. The
adoption of FIN 46 is not expected to have a material impact on the consolidated
financial statements.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of Both Liabilities and Equity". SFAS
No. 150 establishes standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equity. SFAS
No. 150 requires that an issuer classify a financial instrument that is within
its scope as a liability (or an asset in some circumstances). SFAS No. 150 is
effective for financial instruments entered into or modified after May 31, 2003
and, otherwise, is effective at the beginning of the first interim period
beginning after June 15, 2003. The Company adopted SFAS No. 150 in the third
quarter of 2003. The adoption has not had, and is not expected to have, a
material impact on the Company's consolidated financial position or results of
operations.
10
NUWAVE TECHNOLOGIES, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
4. LAND HELD FOR DEVELOPMENT AND SALE
During April 2004, WH Acquisition Corp. purchased real estate property
consisting of land and a residential building in Jersey City, New Jersey for a
total purchase price of $122,000. The purchase was paid with $113,000 in cash
and $9,000 in the application of a deposit. The Company intends to redevelop and
then later sell this property. On December 22, 2003, Lehigh acquired a parcel of
land in New Jersey that it intends to develop and then sell. During the three
and nine month periods ended September 30, 2004, the Company capitalized
approximately $68,000 and $209,000 of interest relating to the financing costs
incurred for the portion of Lehigh land that was capitalized in December 2003
and $12,000 and $27,000 in legal fees, respectively.
During August 2004, the Company received proceeds of approximately
$1,783,000 through the issuance of a convertible debenture that is secured
through an interest in the Company's land held for development and sale (see
Note 12).
5. NOTES PAYABLE - RELATED PARTY
On September 10, 2004, the Company repaid in full the $484,000 balance of
the notes payable - related party, and related accrued interest of approximately
$93,000, for the net sum of $460,000. Such forgiveness, aggregating
approximately $117,000 has been recorded as an addition to additional paid-in
capital. Funds for this repayment were provided through the proceeds received
from the convertible debenture related to the land held for development and sale
(see Note 4).
6. CONVERTIBLE DEBENTURES
During August 2004, the Company raised approximately $1,783,000 through
the issuance of a convertible debenture to a party related to a current
convertible debenture holder. This debenture bears interest at 10% per annum,
with interest payable monthly and is secured through an interest in the land
held for development and sale. This debenture was to mature in August 2007 (see
Note 12).
On September 14, 2004, the Company redeemed convertible debentures with a
face amount of $70,000 for approximately $80,000, including the 10% redemption
fee and accrued interest through the date of redemption. The unamortized
discount aggregating approximately $11,000 at September 14, 2004 has been
recorded as interest expense. On September 10, 2004, the Company redeemed a
convertible debenture - related party with a balance of $200,000 and accrued
interest of approximately $9,000 at redemption for the net sum of $200,000. The
lender waived receipt of the accrued interest. Such forgiveness, aggregating
approximately $9,000 has been recorded as an addition to additional paid-in
capital. The unamortized discount of approximately $28,000 at September 10, 2004
has been recorded as interest expense.
During June 2004, the Company raised $250,000 through the issuance of a
convertible debenture to an unrelated party. This debenture bears interest at
10% per annum, with interest due at maturity or upon conversion. This debenture
matures in June 2006. During January 2004 the Company raised $110,000 through
the issuance of convertible debentures to two unrelated parties. These
debentures bear interest at a rate of 5% per annum, with interest due at
maturity or upon conversion. These debentures mature in January 2006.
11
NUWAVE TECHNOLOGIES, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
6. CONVERTIBLE DEBENTURES - CONTINUED
For the convertible debenture issued in August 2004, at the option of the
holder or the Company, at any time, this convertible debenture could have been
converted into the Company's Common Stock. The value of principal and accrued
interest was convertible at the per share price equal to the lesser of (a) 120%
of the closing bid price at August 20, 2004, or (b) 80% of the lowest closing
bid price for the five days immediately preceding the conversion date. In
connection with the issuance of this convertible debenture the Company
transferred a 20% fee simple interest in its land held for development and sale.
In addition, the Company and the transferee each had the option to effectively
void all or a portion of the transfer. In the event that neither option was
exercised within three years, the 20% fee simple interest would revert to the
Company upon settlement of the convertible debenture. This convertible debenture
was terminated and rescinded during November 2004 (see Note 12).
Upon the issuance of the convertible debenture issued in August 2004, the
Company has recorded a debt discount of $446,000. This debt discount was
recorded to reflect the value of the beneficial conversion feature related to
the convertible debenture. Accordingly, the Company has recorded the value of
the beneficial conversion feature as a reduction to the carrying amount of the
convertible debt and as an addition to additional paid-in capital. This debt
discount was being amortized over the term of the related debenture, which was
36 months, and amortization of such discount was recorded as interest expense on
the accompanying condensed consolidated statement of operations (see Note 12).
For the convertible debenture issued in June 2004, at the option of the
Company, upon the maturity date, this convertible debenture may be converted
into the Company's Common Stock. At the option of the holder, at any time prior
to maturity, any portion of this convertible debenture may be converted into the
Company's Common Stock. The value of principal and accrued interest is
convertible at the per share price equal to the lesser of (a) 120% of the
closing bid price at April 26, 2004, or (b) 75% of the lowest closing bid price
for the five days immediately preceding the conversion date. In addition, the
Company may redeem, with 15 days advance notice, a portion or all of these
outstanding debentures at 125% of the dollar value of the amount redeemed plus
accrued interest.
For the convertible debentures issued in January 2004, at the option of
the Company, upon the maturity date, these convertible debentures may be
converted into the Company's Common Stock. At the option of the holder, at any
time prior to maturity, any portion of these convertible debentures may be
converted into the Company's common stock. The value of principal and accrued
interest is convertible at the per share price equal to the lesser of (a) 120%
of the closing bid price, or (b) 80% of the lowest daily volume weighted average
price for the five days immediately preceding the conversion date. In addition,
the Company may redeem, with 15 days advance notice, a portion or all of these
outstanding debentures at 110% of the dollar value of the amount redeemed plus
accrued interest.
12
NUWAVE TECHNOLOGIES, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
6. CONVERTIBLE DEBENTURES - CONTINUED
Upon the issuance of the convertible debentures issued in June 2004 and
January 2004, the Company has recorded debt discounts of $83,000 and $27,000,
respectively. These debt discounts are recorded to reflect the value of the
beneficial conversion feature related to the convertible debentures.
Accordingly, the Company has recorded the value of the beneficial conversion
features as a reduction to the carrying amount of the convertible debt and as an
addition to additional paid-in capital. This debt discount is being amortized
over the term of the related debentures, which is 24 months, and amortization of
such discounts were recorded as interest expense on the accompanying condensed
consolidated statement of operations.
7. OTHER NON-CURRENT LIABILITIES
The Company accrues interest payable on all of its debt obligations. For
the convertible debenture issued in August 2004, the interest is payable
monthly. For the convertible debentures - related party and the other
convertible debentures, the interest is payable at maturity or redemption, if
earlier, and such interest will be converted to common stock upon the conversion
of the convertible debentures. For the August 2004 convertible debenture
obligation, the corresponding accrued interest payable is classified as a
current liability. The remaining obligations and the corresponding accrued
interest obligations thereon are classified as non-current obligations on the
condensed consolidated balance sheet at September 30, 2004.
Under the terms of the note payable - related party, the Company accrues
interest from the date of issue, December 22, 2003, through December 31, 2004.
Pursuant to the terms of the note, effective on January 1, 2005, the accrued
interest will be added to the principal balance of the obligation. The Company
will then begin making 60 equal payments of $27,740, including interest at 5%
per annum, which will fully repay the outstanding obligations under the note by
January 2010. The accrued interest on this note payable, aggregating
approximately $54,000 at September 30, 2004, is reflected in accrued interest -
non-current in the balance sheet as of September 30, 2004.
8. EMPLOYMENT AGREEMENT
Effective June 1, 2004, NuWave entered into a five year employment
contract with its President and Chief Executive Officer, George Kanakis, at an
annual salary of $125,000 per year, subject to increases at the Board of
Directors' discretion. Mr. Kanakis is also entitled to a bonus equal to 12.5% of
the net income attributable to each NuWave subsidiary, plus a discretionary
bonus as determined by the Board of Directors. In addition, Mr. Kanakis was
issued 75,000 shares of common stock. Under the contract, at some future date,
Mr. Kanakis will be entitled to receive options to purchase 100,000 shares of
common stock. The Company has not yet adopted a stock option plan and as such,
no options have yet been issued to Mr. Kanakis. The Company recorded an earnings
charge of $7,500 in connection with the issuance of the 75,000 shares of common
stock.
13
NUWAVE TECHNOLOGIES, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
9. STANDBY EQUITY DISTRIBUTION AGREEMENT
In May 2004, NuWave entered into a Standby Equity Distribution Agreement
with Cornell. Pursuant to the Standby Equity Distribution Agreement, the Company
may, at its discretion, periodically sell to Cornell registered shares of common
stock for a total purchase price of up to $30 million. For each share of common
stock purchased under the Standby Equity Distribution Agreement, Cornell will
pay NuWave 99% of the volume weighted average price on the Over-the-Counter
Bulletin Board or other principal market on which its common stock is traded for
the 5 days immediately following the notice date. Further, Cornell will retain a
fee of 10% of each advance under the Standby Equity Distribution Agreement.
Pursuant to the terms of this Standby Equity Distribution Agreement, the Company
is restricted from raising capital from the sale of securities at a price less
than the market price of the Company's stock on the date of issuance or granting
additional security interests in the Company's assets. The Company intends to
register 67,000,000 shares of common stock in conjunction with this Standby
Equity Distribution Agreement. On May 25, 2004, the Company issued 111,111
shares to the placement agent engaged in association with this agreement, and
recorded an earnings charge of $10,000.
The amount of each advance is limited to a maximum draw down of $1,000,000
every 7 trading days up to a maximum of $4,000,000 in any 30-day period. The
amount available under the Standby Equity Distribution Agreement is not
dependent on the price or volume of the Company's common stock. The Company's
ability to request advances is conditioned upon the Company registering the
shares of common stock with the SEC. In addition, the Company may not request
advances if the shares to be issued in connection with such advances would
result in Cornell Capital Partners, L.P. owning more than 9.9% of the Company's
outstanding common stock.
14
NUWAVE TECHNOLOGIES, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
10. SEGMENT DATA
Commencing with the acquisition of land in December 2003, the Company
operates in two industry segments - video and image technology and real estate
development and sale. The Company evaluates segment performance based on loss
from operations.
Summarized financial information for the three and nine months ended
September 30, 2004 concerning the Company's reportable segments is shown in the
following table:
THREE MONTHS ENDED SEPTEMBER 30, 2004
(IN THOUSANDS)
REAL ESTATE
VIDEO & IMAGE DEVELOPMENT
TECHNOLOGY AND SALE TOTAL
------------- ----------- ----------
Net revenues from customers $ -- $ -- $ --
============= =========== ==========
Loss from operations $ (79) $ (201) $ (280)
============= =========== ==========
Interest expense $ 86 $ 116 $ 202
============= =========== ==========
Total identifiable assets $ 5 $ 4,253 $ 4,258
============= =========== ==========
Capital expenditures, including
capitalized interest $ -- $ 86 $ 86
============= =========== ==========
NINE MONTHS ENDED SEPTEMBER 30, 2004
(IN THOUSANDS)
REAL ESTATE
VIDEO & IMAGE DEVELOPMENT
TECHNOLOGY AND SALE TOTAL
------------- ----------- ----------
Net revenues from customers $ -- $ -- $ --
============= =========== ==========
Loss from operations $ (224) $ (348) $ (572)
============= =========== ==========
Interest expense $ 162 $ 215 $ 377
============= =========== ==========
Total identifiable assets $ 5 $ 4,253 $ 4,258
============= =========== ==========
Capital expenditures, including
capitalized interest $ -- $ 379 $ 379
============= =========== ==========
15
NUWAVE TECHNOLOGIES, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
11. LEASE COMMITMENT
In May 2004, the Company entered into a five year sublease agreement for
the rental of 3,580 square feet of corporate office tower space in Jersey City,
New Jersey. This rental agreement is effective July 1, 2004 and requires the
Company to pay rent of approximately $7,000 and approximately $3,000 in shared
building operating expenses, each month. The Company subleases one half of this
space to a subtenant, for approximately $5,000 per month. The Company's
obligations under this lease are guaranteed by Yorkville Advisors Management,
LLC ("Yorkville"). Yorkville is related to Cornell a related party to the
Company.
The approximate future minimum lease payments under the Company's
non-cancellable operating lease in effect at September 30, 2004, offset by
projected proceeds to be received for subtenant rentals, are as follows:
PROJECTED PROCEEDS
MINIMUM LEASE PAYMENTS TO BE RECEIVED UNDER MINIMUM LEASE PAYMENTS,
UNDER OPERATING LEASE SUB-TENANT RENTALS NET OF SUB-TENANT RENTALS
---------------------- -------------------- -------------------------
Year:
2004 $ 20,000 $10,000 $ 10,000
2005 78,000 39,000 39,000
2006 78,000 39,000 39,000
2007 78,000 39,000 39,000
2008 78,000 39,000 39,000
2009 40,000 20,000 20,000
---------------------- -------------------- -------------------------
Total $ 372,000 $ 186,000 $ 186,000
====================== ==================== =========================
16
NUWAVE TECHNOLOGIES, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
12. SUBSEQUENT EVENTS
ISSUANCE OF CONVERTIBLE DEBENTURE
During October 2004, NuWave issued $100,000 in a convertible debenture.
This debenture bears interest at a rate of 5% per annum, with interest due at
maturity or upon conversion. This debenture matures in October 2006. NuWave has
recorded a debt discount of $25,000 at issuance of this convertible debenture to
reflect the value of the beneficial conversion feature related to the
convertible debenture. Accordingly, NuWave has recorded the value of the
beneficial conversion feature as a reduction to the carrying amount of the
convertible debt and as an addition to additional paid-in capital. This debt
discount is being amortized over the term of the related debenture, which is 24
months, and such amortization will be recorded as interest expense on the
condensed consolidated statement of operations. At the option of NuWave, upon
the maturity date, this convertible debenture may be converted into NuWave's
Common Stock. At the option of the holder, at any time prior to maturity, any
portion of this convertible debenture may be converted into Common Stock. The
value of principal and accrued interest is convertible at the per share price
equal to the lesser of (a) 120% of the closing bid price, or (b) 80% of the
lowest closing bid price for the five days immediately preceding the conversion
date. In addition, NuWave may redeem, with 15 days advance notice, a portion or
all of this outstanding debenture at 110% of the dollar value of the amount
redeemed plus accrued interest.
TERMINATION AND RESCISSION OF JULY 2004 AGREEMENT OF SALE AND AUGUST 2004
CONVERTIBLE DEBENTURE AND RECOGNITION OF THE SALE OF AN INTEREST IN LAND HELD
FOR DEVELOPMENT AND SALE
During July 2004 and August 2004, the Company entered into an Agreement of
Sale and a Convertible Debenture, respectively, related to its transfer of a 20%
fee simple interest in its land held for development and sale as a tenant in
common. During November 2004, the Agreement of Sale and the Convertible
Debenture were terminated and rescinded in their entirety and replaced with an
Amended and Restated Agreement of Sale issued in November 2004.
The terms of the July 2004 Agreement of Sale and the August 2004
Convertible Debenture are outlined below.
The Company sold a 20% fee simple interest in its land held for
development and sale as a tenant in common to an entity which is a related party
to a current holder of the Company's convertible debentures ("Investor") and
received cash proceeds of $1,783,549.
The Company may reacquire an interest in the property ("Company's
Option"). At any time after closing and upon 15 days advance written notice, the
Company may repurchase all or a portion of the interest sold at a purchase price
computed at 120% of the price, or portion thereof, paid by the Investor on the
effective date.
The Investor, at any time after closing and upon 15 days advance written
notice, may sell back to the Company all or any portion of its interest in the
property ("Investor's Option"). The Investor may sell this property back to the
Company through exercise rights under a convertible debenture agreement,
discussed below. The Investor's Option expires on August 1, 2007, and shall
thereupon be exercised automatically for any portion of the property interest
not already reacquired by the Company.
17
NUWAVE TECHNOLOGIES, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
12. SUBSEQUENT EVENTS - CONTINUED
In addition, the Investor has provided the Company with a right of first
offer to reacquire the Company's interest in the property. If, at any time prior
to August 1, 2007, the Investor wishes to sell its interest to a third party, it
must first notify the Company. Upon such notice, the Company may, within 30
days, repurchase all of the remaining property interest for a price equal to a
pro-rata portion of the original price paid by the Investor at the effective
date ($1,783,549). If the Company fails to exercise this offer within the 30 day
period, then the Investor shall be allowed 90 days in which to sell all of its
interests in the property to a third party.
In conjunction with this transaction, the Company issued a convertible
debenture in favor of the Investor for $1,783,549. This convertible debenture
bears interest from July 14, 2004 at 10% per annum, with the interest payable
monthly, starting September 1, 2004. This convertible debenture matures on
August 1, 2007.
Under the terms of the convertible debenture, an exercise of the Company's
Option to reacquire its former interest in the property is treated as a
redemption of all or a portion of its obligations under the convertible
debenture. The Company's purchase price in this case is a premium of 120% of the
price, or portion thereof, paid by the Investor on the effective date, as
discussed above.
An exercise of the Investor's Option to sell its interest in the land back
to the Company is accomplished through the Investor's right to convert the
amount outstanding under the convertible debenture into the Company's common
stock. The aggregate amount of principal and any unpaid interest is convertible
at the per share price equal to the lesser of (a) 120% of the closing bid price
at August 20, 2004, or (b) 80% of the lowest closing bid price for the five days
immediately preceding the conversion date. Upon such conversion, a pro-rata
portion of the interest in the property is sold back to the Company. Upon the
maturity of the convertible debenture, the Investor's Option terminates and any
remaining amount of the convertible debenture is automatically converted into
the Company's common stock. Upon such conversion, the remaining portion of the
interest in the property is sold back to the Company.
The Company's reacquisition of its interests in the property under the
terms of the rights of first offer, as described above, shall represent a
satisfaction of its obligations at face value under the convertible debenture.
Upon the Investor's sale of the property to a third party under the terms
of the rights of first offer, as described above, all obligations of the Company
under the convertible debenture shall immediately terminate.
18
NUWAVE TECHNOLOGIES, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
12. SUBSEQUENT EVENTS - CONTINUED
In accordance with the provisions a SFAS No. 66, "Accounting for Sales of
Real Estate," the Company has accounted for this transaction as a financing
transaction. Under the provisions of SFAS No. 66, when the seller has an
obligation to repurchase the property, or the terms of the transaction allow the
buyer to compel the seller to repurchase the property or interest, then the
transaction shall be accounted for as a financing transaction, rather than a
sale. Under the terms of this transaction, the Investor's Option requires the
Investor to sell the property back to the Company. This sale back to the Company
will be satisfied through the conversion of the Investor's interest under the
convertible debenture into the Company's common stock.
Upon the Investor's sale of the property interest to a third party under
the terms of the rights of first offer, as described above, this financing
transaction shall be deemed to have terminated and the Company shall thereupon
account for the proceeds received as a sale of its interest in the property,
with any gain or loss on such sale to be recognized accordingly at that time.
During November 2004, the July 2004 Agreement of Sale and the August 2004
Convertible Debenture were rescinded and terminated pursuant to an Amended and
Restated Agreement of Sale. Under this Amended and Restated Agreement of Sale,
for a selling price of approximately $1,427,000, the Company has sold a 20% fee
simple interest in its land held for development and sale as a tenant in common
to an entity which is a related party to a current holder of the Company's
convertible debentures. The Company has applied the $1,427,000 sale amount
against the proceeds from the convertible debenture and has incurred interest
expense of $38,000 for the three month period ended September 30, 2004, $30,000
of which has been paid to the buyer through September 30, 2004. The Company
expects to incur interest expense of $20,000 through the date of termination and
expects to refund $298,000 to the buyer by November 30, 2004.
19
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
FORWARD-LOOKING STATEMENTS
This Report on Form 10-QSB contains "forward-looking statements" within
the meaning of Section 27A of the Securities Act and Section 21E of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"). All statements
other than statements of historical facts included in this Report, including
without limitation, the statements under "Results of Operations," "Plan of
Operation" and "Liquidity and Capital Resources" are forward-looking statements.
The Company cautions that forward-looking statements are subject to certain
risks and uncertainties that could cause actual results to differ materially
from those indicated in the forward-looking statements, due to several important
factors herein identified. Important factors that could cause actual results to
differ materially from those indicated in the forward-looking statements
("Cautionary Statements") include delays in product and real estate development,
competitive products and pricing, general economic conditions, interest rate
risks, risks of intellectual property litigation, product demand and industry
capacity, new product development, commercialization of new technologies, the
Company's ability to raise additional capital, the Company's ability to obtain
the various approvals and permits for the land development and the risk factors
detailed from time to time in the Company's periodic reports and other materials
filed with the Securities and Exchange Commission ("SEC").
All subsequent written and oral forward-looking statements attributable to
the Company or persons acting on its behalf are expressly qualified in their
entirety by the Cautionary Statements.
OVERALL FINANCIAL PERFORMANCE
Nine Months Ended September 30, 2004 Compared to Nine Months Ended September 30,
2003
For the nine months ended September 30, 2004, the Company reported a net
loss of $949,000 as compared to a net loss of $500,000 for the nine months ended
September 30, 2003. This represented a $449,000 increase in the Company's net
loss. This increase in the net loss was primarily attributable to an increase in
interest expense.
General and administrative expenses for the overall Company for the nine
months ended September 30, 2004 were $572,000, as compared to $631,000 for the
nine months ended September 30, 2003, a decrease of $59,000 or 9%. This decrease
was the result of reductions in salaries of $148,000 resulting from the
resignation of all management and employees with only a new CEO in September
2003 and one other administrative employee hired on November 1, 2003. There were
also decreases in insurance of $195,000 and depreciation expense of $39,000.
There were increases in accounting fees of $116,000, financial consulting
$76,000, and legal fees of $65,000. These professional fees increased on account
of the Company having to rely on consultants to perform functions such as
accounting and reporting, that previously were performed by employees, as well
as to support the Company's efforts to prepare for its registration filing and
other financing programs. Real estate taxes increased by $46,000 on account of
the Company's December 2003 investment in a real estate parcel for development.
The Company allocated approximately $224,000 of these general and administrative
expenses to the Video and Image Technology segment and approximately $348,000 to
the Real Estate segment, for the nine months ended September 30, 2004.
20
Three Months Ended September 30, 2004 Compared to Three Months Ended September
30, 2003
For the three months ended September 30, 2004, the Company reported a net
loss of $482,000 as compared to a net profit of $193,000 for the three months
ended September 30, 2003. This represented a $675,000 decrease in the Company's
net income.
General and administrative expenses for the Company for the three months
ended September 30, 2004 were $280,000, as compared to $59,000 for the three
months ended September 30, 2003, an increase of $221,000 or 375%. This increase
was primarily the result of increases in professional fees incurred in order to
prepare the Company's financial reports and to support the Company's capital
raising initiatives. These professional fees were incurred partially due to the
resignation of all management and employees with only a new CEO in September
2003 and one other administrative employee hired on November 1, 2003.
Additionally, during the three months ended September 30, 2003, NuWave underwent
a restructuring which required all vendors to substantially reduce all current
and past charges to the company. During the three months ended September 30,
2004, there were increases in accounting fees of $85,000, financial consulting
fees of $36,000 and legal fees of $89,000. There were decreases in salaries of
$34,000 and insurance of $13,000. Real estate taxes increased by $16,000 on
account of the Company's December 2003 investment in a real estate parcel for
development. The Company allocated approximately $79,000 of these general and
administrative expenses to the Video and Image Technology segment and
approximately $201,000 to the Real Estate segment, for the three months ended
September 30, 2004.
Note - the Company will discuss its technology business under Results of
Operations - Video and image technology business operations and will discuss its
real estate development business under Plan of Operation - Real estate
activities. See sections, below.
RESULTS OF OPERATIONS - VIDEO AND IMAGE TECHNOLOGY BUSINESS OPERATIONS
Nine Months Ended September 30, 2004 Compared to Nine Months Ended September 30,
2003
The Company continues to have difficulty selling its video and image
technology products. The market for the Company's technology products continues
to be adversely affected by strong competition and price compression in the
imaging and video electronics markets. There were no revenues for the nine month
period ended September 30, 2004, as compared to revenues of $19,000 for the nine
month period ended September 30, 2003. These 2003 revenues related to the
Company's sale of its inventory of its retail line of products to its former
exclusive licensee.
Research and development expenses for the nine months ended September 30,
2004 were $0, as compared to expenses of $127,000 for the nine months ended
September 30, 2003. These expenses have decreased because the Company has
terminated all research and development employees and research consulting
agreements during 2003. The decrease in research and development expenses were
in engineering salaries of $79,000, research and development fees of $9,000 and
$9,000 in laboratory supplies and laboratory operating expenses.
General and administrative expenses for the technology business for the
nine months ended September 30, 2004 were $224,000, as compared to $631,000 for
the nine months ended September 30, 2003, a decrease of $407,000 or 65%. This
decrease was the result of a reduction in the allocation of the overall NuWave
general and administrative expenses to the technology activities. Interest
expense for non real estate operations increased $141,000 on account of notes
payable and convertible debenture obligations incurred during 2003 and the first
nine months of the year 2004 to provide liquidity for the Company's operations.
The notes payable, which were repaid in September 2004, accrued interest at the
default penalty rate of 24% per annum. The convertible debenture obligations
applied to the technology operations bear a weighted average annual interest
rate of approximately 20%.
21
Three Months Ended September 30, 2004 Compared to Three Months Ended September
30, 2003
The Company continues to have difficulty selling its video and image
technology products. The market for the Company's technology products continues
to be adversely affected by strong competition and price compression in the
imaging and video electronics markets. There were no revenues for the three
month period ended September 30, 2004, as compared to revenues of $4,000 for the
three month period ended September 30, 2003. These 2003 revenues are related to
the Company's sale of its inventory of its retail line of products.
Research and development expenses for the three months ended September 30,
2004 were $0, as compared to expenses of $1,000 for the three months ended
September 30, 2003. These expenses have decreased because the Company has
terminated all research and development employees and research consulting
agreements during 2003.
General and administrative expenses for the technology business for the
three months ended September 30, 2004 were $79,000, as compared to $59,000 for
the three months ended September 30, 2003, an increase of $20,000 or 34%. This
increase was the result of an overall increase in NuWave general and
administrative expenses, offset by a lower percentage allocation of these
expenses to the technology activities. Interest expense for non real estate
operations increased $72,000 on account of notes payable and convertible
debenture obligations incurred during 2003 and the first nine months of the year
2004 to provide liquidity for the Company's operations. The notes payable, which
were repaid in September 2004, accrued interest at the default penalty rate of
24% per annum. The convertible debenture obligations applied to the technology
operations bear a weighted average annual interest rate of approximately 22%.
PLAN OF OPERATION - REAL ESTATE ACTIVITIES
Nine Months Ended September 30, 2004 Compared to Nine Months Ended September 30,
2003
The Company's first real estate investment, of land held for development
and sale, acquired through its wholly owned subsidiary, was made on December 22,
2003. On April 30, 2004, the Company, through a separate wholly owned
subsidiary, purchased a parcel of residential real estate for $122,000,
utilizing approximately $113,000 in cash and the application of deposits of
approximately $9,000.
NuWave intends to develop the land held for development and sale. To date,
there are no revenues from the sale of developed properties. Revenues from
development activities are not projected to be realized until mid to late 2005.
During the nine months ended September 30, 2004, the Company incurred
general and administrative expenses of approximately $348,000, which consisted
of real estate taxes and maintenance expenses of approximately $49,000 and an
allocation of other general and administrative expenses of approximately
$299,000. Interest expense for the nine months ended September 30, 2004 was
$215,000. In addition, during the nine months ended September 30, 2004, costs
for legal expenses regarding the development plan of $27,000 and interest of
$209,000 has been capitalized to the cost of the land held for development and
sale. Accordingly, the Company recorded a net loss on the real estate segment of
approximately $563,000.
22
The Company follows SFAS No. 34, "Capitalization of Interest Costs", which
provides for the capitalization of interest as part of the historical cost of
acquiring certain assets. Interest is capitalized on assets that require a
period of time to get them ready for their intended use, such as real estate
development projects. Interest is capitalized from the period activities begin,
such as planning and permitting, until such time as the project is complete.
Interest costs include interest recognized on obligations having explicit rates,
as well as the amortization of discounts that result from imputing interest on
convertible debentures over the life of the obligation. Interest is capitalized
on only the net book value of the land and improvements, net of the discount
recorded on the acquisition of the land. Interest on specific borrowings
associated with the land, that are in excess of its net book value are expensed
as incurred.
The Company's tentative plans for the 2003 property call for the
development of approximately 100 residential dwelling units. The Company intends
to engage an architect during late 2004 for the purpose of drawing up
specifications and establishing budgets for costs for the project. Once the
architectural plans are in place, the Company will interview and contract with a
developer to build out the property. Land development and construction costs are
roughly estimated to be $8,000,000 to $10,000,000. The Company will have to
raise additional funds to finance construction. Such financing may come from the
sale of securities or through bank or other debt financing.
Regarding the residential property acquired in April 2004, the Company
intends to redevelop and then sell this property.
Three Months Ended September 30, 2004 Compared to Three Months Ended September
30, 2003
The Company's first real estate investment, of land held for development
and sale, acquired through its wholly owned subsidiary, was made on December 22,
2003. On April 30, 2004, the Company, through a separate wholly owned
subsidiary, purchased a parcel of residential real estate for $122,000,
utilizing approximately $113,000 in cash and the application of deposits of
approximately $9,000.
NuWave intends to develop the land held for development and sale. To date,
there are no revenues from the sale of developed properties. Revenues from
development activities are not projected to be realized until mid to late 2005.
During the three months ended September 30, 2004, the Company incurred
general and administrative expenses of approximately $201,000, which consisted
of real estate taxes and maintenance expenses of approximately $18,000 and an
allocation of other general and administrative expenses of approximately
$183,000. Interest expense for the three months ended September 30, 2004 was
$116,000. In addition, during the three months ended September 30, 2004, costs
for legal expenses regarding the development plan of $12,000 and interest of
$68,000 has been capitalized to the cost of the land held for development and
sale. Accordingly, the Company recorded a net loss on the real estate segment of
approximately $317,000 for the three months ended September 30, 2004.
The Company follows SFAS No. 34, "Capitalization of Interest Costs", which
provides for the capitalization of interest as part of the historical cost of
acquiring certain assets. Interest is capitalized on assets that require a
period of time to get them ready for their intended use, such as real estate
development projects. Interest is capitalized from the period activities begin,
such as planning and permitting, until such time as the project is complete.
Interest costs include interest recognized on obligations having explicit rates,
as well as the amortization of discounts that result from imputing interest on
convertible debentures over the life of the obligation. Interest is capitalized
on only the net book value of the land and improvements, net of the discount
recorded on the acquisition of the land. Interest on specific borrowings
associated with the land, that are in excess of its net book value are expensed
as incurred.
23
During July 2004 and August 2004, the Company entered into an Agreement of
Sale and a Convertible Debenture, respectively, related to its transfer of a 20%
fee simple interest in its land held for development and sale as a tenant in
common. During November 2004, the Agreement of Sale and the Convertible
Debenture were terminated and rescinded in their entirety and replaced with an
Amended and Restated Agreement of Sale issued in November 2004, as described
below.
The terms of the July 2004 Agreement of Sale and the August 2004
Convertible Debenture are outlined below.
The Company sold a 20% fee simple interest in its land held for
development and sale as a tenant in common to an entity which is a related party
to a current holder of the Company's convertible debentures ("Investor") and
received cash proceeds of $1,783,549.
The Company may reacquire an interest in the property ("Company's
Option"). At any time after closing and upon 15 days advance written notice, the
Company may repurchase all or a portion of the interest sold at a purchase price
computed at 120% of the price, or portion thereof, paid by the Investor on the
effective date.
The Investor, at any time after closing and upon 15 days advance written
notice, may sell back to the Company all or any portion of its interest in the
property ("Investor's Option"). The Investor may sell this property back to the
Company through exercise rights under a convertible debenture agreement,
discussed below. The Investors Option expires on August 1, 2007, and shall
thereupon be exercised automatically for any portion of the property interest
not already reacquired by the Company.
In addition, the Investor has provided the Company with a right of first
offer to reacquire the Company's interest in the property. If, at any time prior
to August 1, 2007, the Investor wishes to sell its interest to a third party, it
must first notify the Company. Upon such notice, the Company may, within 30
days, repurchase all of the remaining property interest for a price equal to a
pro-rata portion of the original price paid by the Investor at the effective
date ($1,783,549). If the Company fails to exercise this offer within the 30 day
period, then the Investor shall be allowed 90 days in which to sell all of its
interests in the property to a third party.
In conjunction with this transaction, the Company issued a convertible
debenture in favor of the Investor for $1,783,549. This convertible debenture
bears interest from July 14, 2004 at 10% per annum, with the interest payable
monthly, starting September 1, 2004. This convertible debenture matures on
August 1, 2007.
Under the terms of the convertible debenture, an exercise of the Company's
Option to reacquire its former interest in the property is treated as a
redemption of all or a portion of its obligations under the convertible
debenture. The Company's purchase price in this case is a premium of 120% of the
price, or portion thereof, paid by the Investor on the effective date, as
discussed above.
An exercise of the Investor's Option to sell its interest in the land back
to the Company is accomplished through the Investor's right to convert the
amount outstanding under the convertible debenture into the Company's common
stock. The aggregate amount of principal and any unpaid interest is convertible
at the per share price equal to the lesser of (a) 120% of the closing bid price
at August 20, 2004, or (b) 80% of the lowest closing bid price for the five days
immediately preceding the conversion date. Upon such conversion, a pro-rata
portion of the interest in the property is sold back to the Company. Upon the
maturity of the convertible debenture, the Investor's Option terminates and any
remaining amount of the convertible debenture is automatically converted into
the Company's common stock. Upon such conversion, the remaining portion of the
interest in the property is sold back to the Company.
24
The Company's reacquisition of its interests in the property under the
terms of the rights of first offer, as described above, shall represent a
satisfaction of its obligations at face value under the convertible debenture.
Upon the Investor's sale of the property to a third party under the terms
of the rights of first offer, as described above, all obligations of the Company
under the convertible debenture shall immediately terminate.
It was the Company's intention to retain control of this property and to
exercise its rights, as appropriate to do so.
In accordance with the provisions a SFAS No. 66, "Accounting for Sales of
Real Estate," the Company has accounted for this transaction as a financing
transaction. Under the provisions of SFAS No. 66, when the seller has an
obligation to repurchase the property, or the terms of the transaction allow the
buyer to compel the seller to repurchase the property or interest, then the
transaction shall be accounted for as a financing transaction, rather than a
sale. Under the terms of this transaction, the Investor's Option requires the
Investor to sell the property back to the Company. This sale back to the Company
will be satisfied through the conversion of the Investor's interest under the
convertible debenture into the Company's common stock.
Upon the Investor's sale of the property interest to a third party under
the terms of the rights of first offer, as described above, this financing
transaction shall be deemed to have terminated and the Company shall thereupon
account for the proceeds received as a sale of its interest in the property,
with any gain or loss on such sale to be recognized accordingly at that time.
During November 2004, the July 2004 Agreement of Sale and the August 2004
Convertible Debenture were rescinded and terminated pursuant to an Amended and
Restated Agreement of Sale. Under this Amended and Restated Agreement of Sale,
for a selling price of approximately $1,427,000, the Company has sold a 20% fee
simple interest in its land held for development and sale as a tenant in common
to an entity which is a related party to a current holder of the Company's
convertible debentures. The Company has applied the $1,427,000 sale amount
against the proceeds from the convertible debenture and has incurred interest
expense of $38,000 for the three month period ended September 30, 2004, $30,000
of which has been paid to the buyer through September 30, 2004. The Company
expects to incur interest expense of $20,000 through the date of termination and
expects to refund $298,000 to the buyer by November 30, 2004.
The Company's tentative plans for the 2003 property call for the
development of approximately 100 residential dwelling units. The Company intends
to engage an architect during late 2004 for the purpose of drawing up
specifications and establishing budgets for costs for the project. Once the
architectural plans are in place, the Company will interview and contract with a
developer to build out the property. Land development and construction costs are
roughly estimated to be $8,000,000 to $10,000,000. The Company will have to
raise additional funds to finance construction, from the sale of securities or
through bank or other debt financing.
Regarding the residential property acquired in April 2004, the Company
intends to redevelop and then sell this property.
LIQUIDITY AND CAPITAL RESOURCES
The Company had cash balances on hand of $822,000 and $119,000 as of
September 30, 2004 and December 31, 2003, respectively. During August 2004,
NuWave received proceeds of approximately $1,783,000 from the issuance of a
convertible debenture related to its transfer of a 20% fee simple interest in
NuWave's land held for development and sale. During November 2004, the
25
convertible debenture was terminated and rescinded in its entirety and replaced
with an Amended and Restated Agreement of Sale dated November 2004. Under this
Amended and Restated agreement of sale, for a selling price of approximately
$1,427,000, the Company has sold a 20% fee simple interest in its land held for
development and sale as a tenant in common to an entity which is a related party
to a current holder of the Company's convertible debentures. The Company has
applied the $1,427,000 sale amount against the proceeds from the convertible
debenture and has incurred interest expense of $38,000 for the three month
period ended September 30, 2004, $30,000 of which has been paid to the buyer
through September 30, 2004. The Company expects to incur interest expense of
$20,000 through the date of termination and expects to refund $298,000 to the
buyer by November 30, 2004.
A portion of the proceeds from the Company's receipt of the convertible
debenture was applied to repay obligations consisting of notes payable to
Cornell Capital Partners, L.P. of approximately $460,000; convertible debentures
payable to Cornell Capital Partners, L.P. of $200,000 and convertible debentures
of four other debenture holders of an aggregate approximating $79,000. These
funds will provide the Company with current working capital. The Company's
future cash funding sources continue to be uncertain. The Company's primary cash
needs are to fund ongoing operations and real estate development activities. The
Company will defer any land development and construction expenditures until
after it has arranged adequate funding. In order to obtain funding during the
next twelve months, the Company intends to seek financing through a combination
of sources. These sources might include funding through the sale of securities
or loans.
In seeking sources of liquidity, the Company intends to continue to rely
on the sale of securities or loans for near term working capital needs. The
Company expects to satisfy a significant portion of its funding needs in late
2004 and 2005 with advances that the Company will seek under the Standby Equity
Distribution Agreement.
In May 2004, the Company entered into a Standby Equity Distribution
Agreement with Cornell Capital Partners, L.P. Pursuant to the Standby Equity
Distribution Agreement, the Company may, at its discretion, periodically sell to
Cornell Capital Partners, L.P. shares of common stock for a total purchase price
of up to $30.0 million. For each share of common stock purchased under the
Standby Equity Distribution Agreement, Cornell Capital Partners, L.P. will pay
99% of the lowest volume weighted average price on the Over-the-Counter Bulletin
Board or other principal market on which the Company's common stock is traded
for the 5 days immediately following the notice date. Cornell Capital Partners,
L.P. is a private limited partnership whose business operations are conducted
through its general partner, Yorkville Advisors, LLC. Further, Cornell Capital
Partners, L.P. will retain a fee of 10% of each advance under the Standby Equity
Distribution Agreement.
Pursuant to the Standby Equity Distribution Agreement, the Company may
periodically sell shares of common stock to Cornell Capital Partners, L.P. to
raise capital to fund the Company's working capital and real estate development
needs. The periodic sale of shares is known as an advance. The Company may
request an advance every 7 trading days. A closing will be held 1 trading day
after the end of each pricing period at which time we will deliver shares of
common stock and Cornell Capital Partners, L.P. will pay the advance amount.
The Company may request advances under the Standby Equity Distribution
Agreement once the underlying shares are registered with the Securities and
Exchange Commission. Thereafter, the Company may continue to request advances
until Cornell Capital Partners, L.P. has advanced $30.0 million or 24 months
after the effective date of the accompanying registration statement, whichever
occurs first.
The amount of each advance is limited to a maximum draw down of $1,000,000
every 7 trading days up to a maximum of $4,000,000 in any 30-day period. The
amount available under the Standby Equity Distribution Agreement is not
dependent on the price or volume of the Company's common stock. The Company's
ability to request advances is conditioned upon the Company registering the
shares of common stock with the SEC. In addition, the Company may not request
advances if the shares to be issued in connection with such advances would
result in Cornell Capital Partners, L.P. owning more than 9.9% of the Company's
outstanding common stock.
26
On August 9, 2004, the Company filed with the SEC a Registration Statement
on Form SB-2 to register the shares to be issued under the Standby Equity
Distribution Agreement.
Additionally, the Company will seek outside financing for certain of the
properties that it might acquire in the future, as well as to finance
development of the land and construction of the dwelling units on the
undeveloped parcels.
The cost cutting has reduced the Company's cash requirements. In their
reports on the audit of Nuwave's consolidated financial statements for the years
ended December 31, 2003 and 2002, the Company's independent auditors' included
an explanatory paragraph in their report because of the uncertainty that we
could continue in business as a going concern. In the event we are unable to
raise the anticipated operating capital needs through the sale of securities or
some other form of financing or receive cash from sales of the Company's
products, there would be substantial doubt about the Company's ability to
continue as a going concern.
During the nine month period ended September 30, 2004, the Company had a
net increase in cash of $703,000. The Company's sources and uses of funds were
as follows:
CASH USED IN OPERATING ACTIVITIES. Net cash used in operating activities
was $410,000. This was primarily driven by a consolidated net loss of $949,000,
offset by the receipt of proceeds of $225,000 from the sale of certain of the
Company's state net operating losses.
CASH USED IN INVESTING ACTIVITIES. The Company purchased $21,000 of new
computer and office equipment. The Company acquired a parcel of land for
$122,000. The Company purchased marketable securities - available-for-sale, for
approximately $130,000. Also, the Company incurred $27,000 for legal costs
toward development of the land held for development and sale.
CASH USED IN FINANCING ACTIVITIES. The Company raised $2,143,000 in funds
through the issuance of convertible debentures. This was offset by the repayment
in September 2004 of notes and convertible debentures to Cornell Capital
Partners, L.P. of $460,000 and $200,000, respectively; and repayments of other
convertible debentures of approximately $70,000.
At September 30, 2004, the Company had positive net working capital of
approximately $609,000. The Company intends to monitor spending carefully until
such time that new funding is arranged.
In October 2004, NuWave raised $100,000 through the issuance of a
convertible debenture.
In May 2004, the Company entered into a five year sublease agreement for
the rental of 3,580 square feet of corporate office tower space in Jersey City,
New Jersey. This rental agreement is effective July 1, 2004 and requires the
company to pay rent of approximately $7,000 and approximately $3,000 in shared
building operating expenses, each month. The Company subleases one half of this
space to a subtenant.
The Company's common stock is traded on the OTC Bulletin Board (OTCBB)
under the symbol "NUWV." The OTCBB is a regulated quotation service that
displays real-time quotes, last-sale prices and volume information in
over-the-counter (OTC) equity securities. Prior to August 13, 2002, the stock
had been traded on the NASDAQ Small Cap Market.
27
ITEM 3. CONTROLS AND PROCEDURES
Based on his evaluation of the effectiveness of our disclosure
controls and procedures as of September 30, 2004, our Chief Executive Officer
has concluded that our disclosure controls and procedures are effective for
gathering, analyzing and disclosing the information we are required to disclose
in our reports filed under the Securities and Exchange Act of 1934. During the
period reported upon, there were no significant changes in the Company's
internal controls pertaining to its financial reporting and control of assets or
in other factors that could significantly affect these controls.
28
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
During January 2004 and June 2004, the Company issued $110,000 and
$250,000, respectively, in convertible debentures to two unrelated third party
investors. These debentures bear interest at a rate of 5% and 10%, respectively,
per annum, with interest due at maturity or upon conversion. These debentures
mature in January 2006 and June 2006, respectively. The Company has recorded
debt discounts of $27,000 and $83,000, respectively, at issuance of these
convertible debentures to reflect the value of the beneficial conversion feature
related to the convertible debentures. Accordingly, the Company has recorded the
value of the beneficial conversion features as a reduction to the carrying
amount of the convertible debt and as an addition to additional paid-in capital.
This debt discount is being amortized over the term of the related debentures,
which is 24 months, and such discount was recorded as interest expense on the
accompanying condensed consolidated statement of operations.
At the option of the Company, upon the maturity date, these convertible
debentures may be converted into the Company's Common Stock. At the option of
the holder, at any time prior to maturity, any portion of these convertible
debentures may be converted into Common Stock. For the $110,000 debenture issued
in January 2004, the value of principal and accrued interest is convertible at
the per share price equal to the lesser of (a) 120% of the closing bid price at
the date of issue or (b) 80% of the lowest daily volume weighted average price
for the five days immediately preceding the conversion date. In addition, the
Company may redeem, with 15 days advance notice, a portion or all of these
outstanding debentures at 110% of the dollar value of the amount redeemed plus
accrued interest. For the $250,000 debenture issued in June 2004, the value of
principal and accrued interest is convertible at the per share price equal to
the lesser of 120% of the closing bid price at April 26, 2004, or (b) 75% of the
lowest daily closing bid price for the five days immediately preceding the
conversion date. In addition, the Company may redeem, with 15 days advance
notice, a portion or all of this outstanding debenture at 125% of the dollar
value of the amount redeemed plus accrued interest.
In May 2004, the Company entered into a Standby Equity Distribution
Agreement with Cornell Capital Partners, L.P. Pursuant to the Standby Equity
Distribution Agreement, the Company may, at its discretion, periodically sell to
Cornell Capital Partners, L.P. shares of common stock for a total purchase price
of up to $30.0 million. For each share of common stock purchased under the
Standby Equity Distribution Agreement, Cornell Capital Partners, L.P. will pay
99% of the lowest volume weighted average price on the Over-the-Counter Bulletin
Board or other principal market on which the Company's common stock is traded
for the 5 days immediately following the notice date. Cornell Capital Partners,
L.P. is a private limited partnership whose business operations are conducted
through its general partner, Yorkville Advisors, LLC. Further, Cornell Capital
Partners, L.P. will retain a fee of 10% of each advance under the Standby Equity
Distribution Agreement. In addition, the Company engaged Newbridge Securities
Corporation, a registered broker-dealer, to advise us in connection with the
Standby Equity Distribution Agreement. For its services, Newbridge Securities
Corporation received a fee of 111,111 shares of our common stock.
29
During August 2004, the Company raised approximately $1,783,000 through
the issuance of a convertible debenture to a party related to a current
convertible debenture holder. This debenture bore interest at 10% per annum,
with interest payable monthly and was secured through an interest in the land
held for development and sale. This debenture matured in August 2007. At the
option of the holder or the Company, at any time, this convertible debenture
could be converted into the Company's Common Stock. The value of principal and
accrued interest was convertible at the per share price equal to the lesser of
(a) 120% of the closing bid price at August 20, 2004, or (b) 80% of the lowest
closing bid price for the five days immediately preceding the conversion date.
In connection with the issuance of this convertible debenture the Company
transferred a 20% fee simple interest in its land held for development and sale.
In addition, the Company and the transferee each have the option to effectively
void all or a portion of the transfer. In the event that neither option is
exercised within three years, the 20% fee simple interest will revert to the
Company upon settlement of the convertible debenture. Upon issuance NuWave has
recorded a debt discount of $446,000, for the August 2004 debenture. This debt
discount was recorded to reflect the value of the beneficial conversion feature
related to the convertible debentures. Accordingly, NuWave has recorded the
value of the beneficial conversion feature as a reduction to the carrying amount
of the convertible debt and as an addition to additional paid-in capital. This
debt discount was being amortized over the term of the related debentures, which
was 36 months, and such discount was recorded as interest expense on the
accompanying condensed consolidated statement of operations.
During November 2004, the July 2004 Agreement of Sale and the August 2004
Convertible Debenture were rescinded and terminated pursuant to an Amended and
Restated Agreement of Sale. Under this Amended and Restated Agreement of Sale,
for a selling price of approximately $1,427,000, the Company has sold a 20% fee
simple interest in its land held for development and sale as a tenant in common
to an entity which is a related party to a current holder of the Company's
convertible debentures. The Company has applied the $1,427,000 sale amount
against the proceeds from the convertible debenture and has incurred interest
expense of $38,000 for the three month period ended September 30, 2004, $30,000
of which has been paid to the buyer through September 30, 2004. The Company
expects to incur interest expense of $20,000 through the date of termination and
expects to refund $298,000 to the buyer by November 30, 2004.
During October 2004, NuWave issued $100,000 in a convertible debenture.
This debenture bears interest at a rate of 5% per annum, with interest due at
maturity or upon conversion. This debenture matures in October 2006. NuWave has
recorded a debt discount of $25,000 at issuance of this convertible debenture to
reflect the value of the beneficial conversion feature related to the
convertible debenture. Accordingly, NuWave has recorded the value of the
beneficial conversion feature as a reduction to the carrying amount of the
convertible debt and as an addition to additional paid-in capital. This debt
discount is being amortized over the term of the related debenture, which is 24
months, and such amortization will be recorded as interest expense on the
condensed consolidated statement of operations. At the option of NuWave, upon
the maturity date, this convertible debenture may be converted into NuWave's
Common Stock. At the option of the holder, at any time prior to maturity, any
portion of this convertible debenture may be converted into Common Stock. The
value of principal and accrued interest is convertible at the per share price
equal to the lesser of (a) 120% of the closing bid price, or (b) 80% of the
lowest closing bid price for the five days immediately preceding the conversion
date. In addition, NuWave may redeem, with 15 days advance notice, a portion or
all of this outstanding debenture at 110% of the dollar value of the amount
redeemed plus accrued interest.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
30
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
31
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) DOCUMENTS FILED AS PART OF THIS REPORT.
10.1 Amended and Restated Agreement of Sale between 24 W. 96th Street
Corp. and Lehigh Acquisition Corp dated November 10, 2004.
10.2 Agreement of Sale between 24 W. 96th Street Corp. and Lehigh
Acquisition Corp dated July 1, 2004
10.3 Convertible Debenture between 24 W. 96th Street Corp. and NuWave
dated August 1, 2004
31.1 Certification re: Section 302
32.1 Certification re: Section 906
32
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
NUWAVE TECHNOLOGIES, INC.
(Registrant)
----------------------------
Date: November 22, 2004 By: /s/ George D. Kanakis
Chief Executive Officer and
Chairman of the Board, President
(Principal Executive and Financial
Officer)
33