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 March 31, 2005
or
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____________________ to ______________________
Commission file number 0-28606
NUWAVE TECHNOLOGIES, INC.
(Exact Name of Small Business Issuer in Its Charter)
DELAWARE 22-3387630
(State or Other Jurisdiction (IRS Employer
of Incorporation or Organization) Identification No.)
101 Hudson Street, Suite 3701
Jersey City, New Jersey 07302
(Address of Principal Executive Offices)
(201) 309-1880
(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 [X] No [ ]
The number of shares of Common Stock outstanding as of May 14, 2005: 2,529,303
NUWAVE TECHNOLOGIES, INC. AND SUBSIDIARIES
Form 10-QSB
March 31, 2005
Index
PART I - FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Page(s)
-------
Balance Sheets as of March 31, 2005 (unaudited)
and December 31, 2004 P. 3
Statements of Operations and Comprehensive Loss
for the three months ended March 31, 2005
(unaudited) and March 31, 2004 (unaudited) P. 4
Statements of Cash Flows for the three months ended March 31,
2005 (unaudited) and March 31, 2004
(unaudited) P. 5
Notes to Condensed Consolidated Financial Statements P. 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR
PLAN OF OPERATION P. 15
ITEM 3. CONTROLS AND PROCEDURES P. 18
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS P. 19
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES
AND USE OF PROCEEDS P. 19
ITEM 3. DEFAULTS UPON SENIOR SECURITIES P. 19
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS P. 19
ITEM 5. OTHER INFORMATION P. 19
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K P. 20
SIGNATURES
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
March 31, December 31,
2005 2004
------------------------
(unaudited)
Current assets:
Cash and cash equivalents $ 23 $ 84
Marketable securities - available-for-sale 171 256
Inventory 1 1
Other current receivables 20 30
Deferred tax asset -- 50
------------------------
Total current assets 215 421
Property and equipment, net 19 21
Land held for development and sale 2,821 2,761
------------------------
Total assets $ 3,055 $ 3,203
========================
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
Current liabilities:
Accounts payable, accrued liabilities and accrued interest $ 250 $ 122
Current portion of convertible debentures, net of unamortized
discount of $48 and $50 437 335
Current portion of note payable - related party 89 --
------------------------
Total current liabilities 776 457
------------------------
Non-current liabilities:
Note payable - related party 3,482 --
Note payable - related party, net of current portion 1,311 1,400
Convertible debentures - related party,
net of unamortized discounts of $0 and $694, respectively -- 2,607
Convertible debentures,
net of unamortized discounts of $19 and $37, respectively 81 163
Accrued interest - non-current 122 247
------------------------
Total non-current liabilities 4,996 4,417
------------------------
Total liabilities 5,772 4,874
------------------------
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 March 31, 2005 2 2
and December 31, 2004
Additional paid-in capital 25,783 26,461
Accumulated other comprehensive income 40 125
Accumulated deficit (28,542) (28,259)
------------------------
Total stockholders' deficiency (2,717) (1,671)
------------------------
Total liabilties and stockholders' deficiency $ 3,055 $ 3,203
========================
3
NUWAVE TECHNOLOGIES, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Operations
And Comprehensive Loss
(In thousands, except share and per share data)
Three Months Ended March 31,
----------------------------
2005 2004
------------ ------------
(unaudited) (unaudited)
Net sales $ -- $ --
Cost of sales -- --
------------ ------------
Gross profit -- --
------------ ------------
Operating expenses:
General and administrative 229 126
Research and development -- --
------------ ------------
Total operating expenses 229 126
------------ ------------
Loss from operations (229) (126)
Other expense:
Interest expense (54) (76)
------------ ------------
Net loss $ (283) $ (202)
============ ============
Weighted average number of
common shares outstanding 2,062,013 1,875,902
============ ============
Basic and diluted net loss
per common share $ (0.14) $ (0.11)
============ ============
Comprehensive loss:
Net loss $ (283) $ (202)
Other comprehensive loss net of income taxes:
Unrealized loss on marketable securities (85) --
------------ ------------
Comprehensive loss $ (368) $ (202)
============ ============
4
NUWAVE TECHNOLOGIES, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(In thousands except share data)
Three Months Ended March 31,
------------------------
2005 2004
---------- ----------
(unaudited) (unaudited)
Cash flows from operating activities:
Net loss $ (283) $ (202)
---------- ----------
Adjustments to reconcile net loss to net cash provided
by (used in) operating activities:
Depreciation 2 --
Amortization of debt discount 22 34
(Increase) decrease in operating assets:
Other current receivables 10 --
Other assets -- (10)
Deferred tax asset 50 225
Increase (decrease) in operating liabilities:
Accounts payable, accrued liabilities and accrued
interest 148 (10)
---------- ----------
Total adjustments 232 239
---------- ----------
Net cash provided by (used in)
operating activities (51) 37
---------- ----------
Cash flows from investing activities:
Purchase of property and equipment -- (15)
Land acquisition and land development costs (10) (7)
---------- ----------
Net cash used in investing activities (10) (22)
---------- ----------
(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)
Three Months Ended March 31,
------------------------
2005 2004
---------- ----------
Cash flows from financing activities:
Proceeds from issuance of convertible debentures -- 110
---------- ----------
Net cash provided by financing activities -- 110
---------- ----------
Net increase (decrease) in cash and cash equivalents (61) 125
Cash and cash equivalents - beginning of the period 84 119
---------- ----------
Cash and cash equivalents - end of the period $ 23 $ 244
========== ==========
Supplemental disclosure of cash flow information:
Interest paid during the period $ -- $ --
========== ==========
Supplemental disclosures of non-cash investing and financing activities:
Recording of debt discount $ -- $ 28
========== ==========
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 $ 50 $ 73
========== ==========
Reacquisition of beneficial conversion
feature upon early extinquishment of debt $ (678) $ --
========== ==========
Refinancing of the convertible debenture - related
party, as follows:
Convertible debenture - related party $ (3,300) $ --
Accrued interest (182) --
---------- ----------
Promissory note - related party $ 3,482 $ --
========== ==========
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 13, 2005.
2. Going Concern and Management's Plans
The Company's annual sales have declined from approximately $20,000 to $0
and $0 for each of the years 2003 and 2004 and the three month period ended
March 31, 2005, respectively, as the Company has had difficulty securing buyers
for its technology products in a very competitive environment and there have yet
to be revenues realized from the sale of developed real estate properties. The
Company has incurred annual net losses of approximately $790,000, $336,000 and
$283,000 for the years 2003, 2004 and for the three months ended March 31, 2005,
respectively, resulting in a stockholders deficiency of approximately $2,717,000
at March 31, 2005, which raises substantial doubt about the Company's ability to
continue as a going concern.
Management has taken a number of actions to lower costs and to improve the
Company's liquidity. The Company has reduced its cash flow requirements through
its control and management of general operating expenses. Although it continues
to find it difficult to generate revenues, the Company intends to remain in the
technology business.
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 Capital Partners, LP ("Cornell"). In January 2005, the
Company entered into a Standby Equity Distribution Agreement ("SEDA") with
Cornell, and during April 2005, the Company raised net cash of $22,000 through
the SEDA facility (See Note 11).
On February 4, 2005, the Company filed a Form SB-2 Registration Statement,
with an amendment filed on February 14, 2005 with the SEC, to register
130,690,033 shares of its common stock, including 120,122,191 shares of common
stock to be issued to Cornell pursuant to the SEDA. On February 14, 2005, the
Securities and Exchange Commission declared the registration statement
effective.
7
NUWAVE TECHNOLOGIES, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
2. Going Concern and Management's Plans - continued
During May 2005, the Company issued a convertible debenture in the face
amount of $250,000 to Cornell (see Note 11).
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.
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. Accordingly, there is substantial doubt about the Company's
ability to continue as a going concern. There can be no assurance that the
Company will be successful in these endeavors and therefore may have to consider
other alternatives.
3. Summary of Significant Accounting Policies
Principles of Consolidation
The condensed 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.
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.
Stock-Based Compensation
For the three months ended March 31, 2005 and 2004, there was no 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 loss per share as reported and proforma net loss.
8
NUWAVE TECHNOLOGIES, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
3. Summary of Significant Accounting Policies - continued
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 March 31,
2005 and 2004, potential common shares amount to 11,411,738 and 44,335,215
shares, respectively. For the three months ended March 31, 2005 and 2004, such
potential common shares have not been included in the computation of diluted
loss per share since the effect would be antidilutive.
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.
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.
9
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 Company intends to hold 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 month
periods ended March 31, 2005 and 2004, the Company capitalized approximately
$50,000 and $73,000 of interest relating to the financing costs incurred for the
portion of the Lehigh land that was capitalized in December 2003 and $10,000 and
$7,000 in legal fees, respectively.
5. Note Payable - Related Party
During January 2005, the Company's wholly-owned subsidiary, Lehigh,
entered into an Assignment and Amendment Agreement (the "Assignment Agreement")
related to that certain $1,400,000 Note Payable - related party issued by Lehigh
on December 22, 2003 to Stone Street Asset Management, LLC ("Stone Street").
Pursuant to the Assignment Agreement, Stone Street assigned its rights under the
note to Cornell. In addition, Stone Street, Cornell and Lehigh agreed to defer
the begining of the monthly payments due under the note of $35,546 per month for
the period of one year, from January 1, 2005 to January 1, 2006.
6. Convertible Debentures
During January 2005, the Company and Cornell terminated the $3,300,000
convertible debenture - related party, that was issued to Cornell on December
22, 2003. Upon the termination of the convertible debenture - related party, the
Company issued a $3,481,274 promissory note - related party (the "Promissory
Note") to Cornell, representing the sum of the unpaid balance of $3,300,000 and
accrued interest of $181,274 through the date of the termination. The Promissory
Note bears interest at a rate of 5% per annum, with interest due at maturity.
The Promissory Note matures on December 22, 2008 and is secured by the Company's
investment in its land held for development and sale located in Cranford, New
Jersey. In order to record the reacquisition of the beneficial conversion
feature related to the extinguishment of the convertible debenture, the Company
recorded a net charge of $678,000 to additional paid in capital.
10
NUWAVE TECHNOLOGIES, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
7. Other Non-Current Liabilities
The Company accrues interest payable on all of its debt obligations. For
the convertible debentures, the interest is payable at maturity or redemption,
if earlier, and such interest may be converted into the Company's common stock
upon the conversion of the convertible debentures. For the $3,482,000 note
payable - related party, the interest is payable at maturity or redemption, if
earlier. Accrued interest of approximately $31,000 on convertible debentures due
before March 31, 2006 are classified as current, with the accrued interest on
the remaining obligations, of approximately $33,000, classified as non-current
on the condensed consolidated balance sheet at March 31, 2005.
Under the terms of the amended $1,400,000 note payable - related party,
the Company accrues interest from the date of issue, December 22, 2003, through
December 31, 2005. Pursuant to the terms of the amended note, the interest that
accrues through March 31, 2005 will be capitalized to the balance of the note
and then will be repaid in 48 equal installments of $35,546 per month, including
interest at 5% per annum, which will fully repay the outstanding obligations
under the note by January 2010. Accrued interest of approximately $89,000 is
classified as non-current on the condensed consolidated balance sheet at March
31, 2005.
8. Standby Equity Distribution Agreement
In May 2004, NuWave entered into a Standby Equity Distribution Agreement
(the "2004 Agreement") with Cornell which was terminated during January 2005 and
the Company entered into a new SEDA with Cornell on January 26, 2005 with
substantially the same terms as the 2004 Agreement. Pursuant to the new SEDA,
the Company may, at its discretion, periodically sell to Cornell registered
shares of the Company's common stock for a total purchase price of up to $30
million. For each share of common stock purchased under the SEDA, 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 SEDA. Pursuant to the terms of the SEDA,
the Company is restricted from raising capital from the sale of securities at a
price less than the market price of the Company's common stock on the date of
issuance or granting additional security interests in the Company's assets.
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 SEDA 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 having enough shares of common stock registered pursuant to the
SEC rules and regulations. In addition, the Company may not request advances if
the shares to be issued in connection with such advances would result in Cornell
owning more than 9.9% of the Company's outstanding common stock.
11
NUWAVE TECHNOLOGIES, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
9. 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 months ended March 31, 2005
and 2004 concerning the Company's reportable segments is shown in the following
table:
Three Months Ended March 31 2005
(In thousands)
Real Estate
Video & Image Development and
Technology Sale Total
---------- ---- -----
Net sales from customers $ -- $ -- $ --
============== ============== ==============
Loss from operations $ (21) $ (208) $ (229)
============== ============== ==============
Interest expense $ 34 $ 20 $ 54
============== ============== ==============
Total identifiable assets $ 4 $ 3,051 $ 3,055
============== ============== ==============
Capital expenditures, including
capitalized interest $ -- $ 60 $ 60
============== ============== ==============
Three Months Ended March 31 2004
(In thousands)
Real Estate
Video & Image Development and
Technology Sale Total
---------- ---- -----
Net sales from customers $ -- $ -- $ --
============== ============== ==============
Loss from operations $ (69) $ (57) $ (126)
============== ============== ==============
Interest expense $ 34 $ 42 $ 76
============== ============== ==============
Total identifiable assets $ 5 $ 3,319 $ 3,324
============== ============== ==============
Capital expenditures, including
capitalized interest $ -- $ 95 $ 95
============== ============== ==============
12
NUWAVE TECHNOLOGIES, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
10. 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, monthly. 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 March 31, 2005, offset by projected
proceeds to be received for subtenant rentals, are as follows:
Projected Proceeds
To Be Minimum Lease
Minimum Lease Received Under Payments, Net of
Payments Under Sub-tenant Sub-tenant
Period: Operating Lease Rentals Rentals
------- --------------- ------- -------
Nine months ended
December 31, 2005 59,000 29,000 30,000
Year ended December 31, 2006 78,000 39,000 39,000
Year ended December 31, 2007 78,000 39,000 39,000
Year ended December 31, 2008 78,000 39,000 39,000
Six-months ended June 30, 2009 40,000 20,000 20,000
----- ------ ----- ------
Total $333,000 $166,000 $167,000
======== ======== ========
13
NUWAVE TECHNOLOGIES, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
11. Subsequent Events
Issuance of Convertible Debenture
During May 2005, NuWave issued a $250,000 in a convertible debenture to
Cornell, a related party. This debenture bears interest at a rate of 12% per
annum, with interest due at maturity or upon conversion. This debenture matures
in December 2006. 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 $0.10 per share.
At the option of the Company at any time, or upon maturity for any amounts not
converted, the Company may redeem this convertible debenture and upon such,
shall pay a 20% redemption premium to Cornell.
Issuance of Shares Under SEDA
During April 2005, the Company issued 467,290 shares of common stock to
Cornell under the SEDA in exchange for gross proceeds of $25,000. NuWave paid
fees of $2,500 and $500 to Cornell and an affiliate of Cornell, respectively.
14
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.
Going Concern
The Company's annual sales have declined from approximately $20,000 to $0
and $0 for each of the years 2003 and 2004 and the three month period ended
March 31, 2005, respectively, as the Company has had difficulty securing buyers
for its technology products in a very competitive environment and there have yet
to be revenues realized from the sale of developed real estate properties. The
Company has incurred annual net losses of approximately $790,000, $336,000 and
$283,000 for the years 2003 and 2004 and for the three months ended March 31,
2005, respectively, resulting in a stockholders deficiency of approximately
$2,717,000 at March 31, 2005, which raise substantial doubt about the Company's
ability to continue as a going concern. Our 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. Our 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.
Critical Accounting Policies
NuWave's condensed consolidated financial statements and related public
financial information are based on the application of accounting principles
generally accepted in the United States ("GAAP"). GAAP requires the use of
estimates, assumptions, judgments and subjective interpretations of accounting
principles that have an impact on the assets, liabilities, revenue and expense
amounts reported. These estimates can also affect supplemental information
contained in our external disclosures including information regarding
contingencies, risk and financial condition. We believe our use of estimates and
underlying accounting assumptions adhere to GAAP and are consistently and
conservatively applied. We base our estimates on historical experience and on
various other assumptions that we believe to be reasonable under the
circumstances. Actual results may differ materially from these estimates under
different assumptions or conditions. We continue to monitor significant
estimates made during the preparation of our condensed consolidated financial
statements.
Certain of our significant accounting policies are summarized in Note 3 of
our condensed consolidated financial statements at March 31, 2005. While all
these significant accounting policies impact its financial condition and results
of operations, NuWave views certain of these policies as critical. Policies
determined to be critical are those policies that have the most significant
impact on NuWave's condensed consolidated financial statements and require
management to use a greater degree of judgment and estimates. Actual results may
differ from those estimates. Our management believes that given current facts
and circumstances, it is unlikely that applying any other reasonable judgments
or estimate methodologies would cause a material effect on our condensed
consolidated results of operations, financial position or liquidity for the
periods presented in this report.
Effects of New Accounting Pronouncements
In December 2003, the Financial Accounting Standards Board issued FASB
Interpretation Number 46-R "Consolidation of Variable Interest Entities." Fin
46-R, which modifies certain provisions and effective dates of FIN 46, sets
forth criteria to be used in determining whether an investment in a variable
interest entity should be consolidated. These provisions are based on the
general premise that if a company controls another entity through interests
other than voting interests, that company should consolidate the controlled
entity. The Company believes that currently, it does not have any material
arrangements that meet the definition of a variable interest entity, which would
require consolidation.
In November 2004, the FASB issued Statement of Financial Accounting
Standards ("SFAS") No. 151, "Inventory Costs - An Amendment of ARB NO. 43,
Chapter 4" (SFAS No. 151). SFAS No. 151 requires all companies to recognize a
current-period for abnormal amount of idle facility expense, freight, handling
costs and wasted materials. This statement also requires that the allocation of
fixed production overhead to the costs of conversion be based on the normal
capacity of the production facilities. SFAS No. 151 will be effective for fiscal
years beginning after June 15, 2005. The Company does not expect the adoption of
this statement to have a material effect on its consolidated financial
statements.
In December 2004, the FASB issued SFAS No.123(R), "Share-Based Payment"
(SFAS No. 123(R)). This statement replaces SFAS No. 123 and supersedes APB 25.
SFAS 123(R) requires all stock-based compensation to be recognized as an expense
in the financial statements and that such cost be measured according to the fair
value of stock options. SFAS 123 (R) will be effective for quarterly periods
beginning after December 15, 2005. The Company is currently evaluating the
impact this statement will have on its consolidated financial statements.
In December 2004, the FASB issued SFAS No. 153, "Exchanges on Nonmonetary
Assets - An Amendment of APB Option No. 29, Accounting for Nonmonetary
Transactions" (SFAS 153) SFAS eliminates the exception from fair value
measurement for nonmonetary exchanges of similar productive assets in paragraph
21(b) of APB Opinion No. 29, "Accounting for Nonmentary Transactions," and
replaces it with an exception for exchanges that do not have commercial
substance. SFAS 153 specifies that a nonmonetary exchange has commercial
substance if the future cash flows of the entity are expected to change
significantly as a result of exchange. SFAS 153 is effective for fiscal periods
beginning after June 15, 2005. The Company does not expect the adoption of this
statement to have a material effect on its consolidated financial statements.
Overall Financial Performance
Three Months Ended March 31, 2005 Compared to Three Months Ended March 31, 2004
For the three months ended March 31, 2005, the Company reported a net loss
of $283,000 as compared to a net loss of $202,000 for the three months ended
March 31, 2004. This represented a $81,000 increase in the Company's net loss.
General and administrative expenses for the Company for the three months
ended March 31, 2005 were $229,000, as compared to $126,000 for the three months
ended March 31, 2004, an increase of $103,000 or 82%. 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 and only a new Chief Executive
Officer was hired on September 1, 2003 and one other administrative employee was
hired on November 1, 2003. During the three months ended March 31, 2005, there
were increases in accounting fees of $94,000, financial consulting fees of
$8,000 and decreases in legal fees of $7,000 and in other consulting fees of
$22,000. There were increases in rent of $13,000 and salaries of $13,000. The
Company allocated approximately $21,000 of these general and administrative
expenses to the Video and Image Technology segment and approximately $208,000 to
the Real Estate segment, for the three months ended March 31, 2005.
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 Results of Operations - Real estate
operations and Plan of Operation - Real estate activities.
Results of Operations - Video and image technology business operations
Three Months Ended March 31, 2005 Compared to Three Months Ended March 31, 2004
The Company recorded net loss on the video and image technology segment of
approximately $55,000 and $103,000 for the three month periods ended March 31,
2005 and 2004, respectively.
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 March 31, 2005 and 2004.
General and administrative expenses for the technology business for the
three months ended March 31, 2005 were $21,000, as compared to $69,000 for the
three months ended March 31, 2004, a decrease of $48,000 or 70%. This decrease
was the result of a lower percentage allocation of general and administrative
expenses to the technology activities. Interest expense for non real estate
operations remained at approximately the same level of $34,000.
Results of Operations - Real estate operations
Three Months Ended March 31, 2005 Compared to Three Months Ended March 31, 2004
The Company recorded net income (loss) on the real estate segment of
approximately $76,000 and ($17,000) for each of the years ended December 31,
2004 and 2003, respectively and a net loss of ($228,000) and ($99,000) for the
three month periods ended March 31, 2005 and 2004.
During the three months ended March 31, 2005, our real estate activities
incurred general and administrative expenses of approximately $208,000, which
consisted principally of real estate taxes and maintenance expenses of
approximately $16,000 and an allocation of other general and administrative
expenses of approximately $192,000. During the three months ended March 31,
2004, the real estate activities incurred general and administration expenses of
$57,000, representing real estate taxes of $15,000 and an allocation of other
general and administrative expenses of approximately $42,000. Interest expense
for the real estate activities was approximately $20,000 and $42,000 for the
three months ended March 31, 2005 and 2004, respectively. In addition, the
Company capitalized interest and development costs of $50,000 and $10,000,
respectively, for the three months ended March 31, 2005 and $7,000 and $73,000,
respectively, for the three month period ended March 31, 2004, respectively.
Plan of Operation - Real estate activities
The Company's first real estate investment, of land held for development
and sale, acquired through its wholly owned subsidiary, Lehigh, was made on
December 22, 2003. On April 30, 2004, the Company, through a separate wholly
owned subsidiary, WH Acquisition Corp., 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 property acquired on December 22, 2003 and
then sell this developed property for a gain. The property acquired in April
2004 will not be developed and is in the process of being marketed by a real
estate company for sale for a gain. To date, there have been no revenues from
real estate activities. Revenues from development activities are not projected
to be realized until late 2007 into mid 2008.
NuWave 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.
Liquidity and Capital Resources
The Company had cash balances on hand of $23,000 and $84,000 as of March
31, 2005 and December 31, 2004, respectively. The Company's future cash funding
sources continue to be uncertain. The Company's primary cash needs are to fund
ongoing operations, debt instruments and related interest when due 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, in
addition to the Standby Equity Distribution Agreement, funding through the sale
of securities, loans, property, finding a merger candidate and establishing
joint venture or partner arrangements.
On January 26, 2005, the Company entered into a Standby Equity
Distribution Agreement with Cornell Capital Partners, LP ("Cornell"). Pursuant
to the Standby Equity Distribution Agreement, the Company may, at its
discretion, periodically sell to Cornell registered shares of the Company's
common stock for a total purchase price of up to $30 million. For each share of
common stock issued 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 the 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 common stock on the date of issuance or
granting additional security interests in the Company's assets.
In seeking sources of liquidity, NuWave intends to continue to rely on the
sale of securities or loans for near term working capital needs. NuWave expects
to satisfy its funding needs in the remaining part of 2005 through the Standby
Equity Distribution Agreement and other financing sources. In addition, NuWave
will seek outside mortgage financing to finance development and construction of
the dwelling units on the undeveloped acreage. In their reports on the audits of
NuWave's consolidated financial statements for the years ended December 31,
2004, and 2003, our independent registered public accounting firms included an
explanatory paragraph in their reports 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 our products, there would be
substantial doubt about our ability to continue as a going concern.
During the three month period ended March 31, 2005, the Company had a net
decrease in cash of $61,000. The Company's sources and uses of funds were as
follows:
Cash Used In Operating Activities. Net cash used in operating activities
was $51,000 for the quarter ended March 31, 2005, as compared to net cash
provided by operating activities of $37,000 for the quarter ended March 31,
2004. This was primarily driven by a condensed consolidated net loss of
$283,000, offset by the receipt of proceeds of $50,000 from the sale of certain
of the Company's state net operating losses and an increase in accounts payable,
accrued liabilities and accrued interest of $148,000.
Cash Used in Investing Activities. Net cash used in investing activities
was $10,000 for the quarter ended March 31, 2005, as compared to $22,000 for the
same period in 2004. The decrease in cash used in investing activities was due
to a decrease in cash used for legal costs toward development of the land held
for development and sale and the land acquisition and land development costs.
Cash Used in Financing Activities. There were no cash flows from financing
activities for the period ended March 31, 2005, as compared to cash provided by
financing activities of $110,000 for the same period in 2004, which was provided
from the issuance of convertible debentures.
At March 31, 2005, the Company had a negative net working capital position
of approximately $561,000. The Company intends to monitor spending carefully
until such time that new funding is arranged. Beyond the financing provided
through the Standby Equity Distribution Agreement, NuWave is exploring other
means of providing working capital that may include seeking joint venture
partners and lenders.
During April 2005, NuWave received net proceeds of approximately $22,000
under the Standby Equity Distribution by issuing 467,290 shares of common stock
to Cornell. On May 5, 2005, NuWave received net proceeds of $220,000 from the
issuance of a convertible debenture to Cornell. Any part of the principal amount
of the convertible debenture, plus accrued interest, is convertible at Cornell's
option any time up to maturity into shares of the Company's common stock at a
fixed price per share equal to $0.10. The convertible debenture has a 210-day
term, has piggy-back registration rights and accrues interest at 12% per year.
ITEM 3. CONTROLS AND PROCEDURES
The Company's Chief Executive Officer, who is also the acting Principal
Financial Officer, has evaluated the effectiveness of the Company's "disclosure
controls and procedures," as such term is defined in Rule 13a-15(e) of the
Securities Exchange Act of 1934, as amended, as of the end of the period covered
by this report. The evaluation process, including the inherent limitations on
the effectiveness of such controls and procedures is more fully discussed below.
Based upon his evaluation, the principal executive officer, who is also the
acting principal financial officer, has concluded that the Company's disclosure
controls and procedures, although effective, did contain a material weakness.
This material weakness is the lack of the necessary corporate accounting
resources. At the current time, the, Company's Chief Executive Officer, who is
one of only two of the Company's full time employees, solely has the
responsibility for receipts and disbursements. The Company employs a financial
consultant to prepare the periodic financial statements and public filings.
Reliance on these limited resources impairs our ability to provide for a proper
segregation of duties and the ability to ensure consistently complete and
accurate financial reporting, as well as disclosure controls and procedures. As
the Company grows, and as resources permit, we project that the Company's Chief
Executive Officer will hire such additional competent financial personnel to
assist in the segregation of duties with respect to financial reporting, and
Sarbanes-Oxley Section 404 compliance.
We believe that, for the reasons described above, we will be able to
improve our financial reporting and disclosure controls and procedures and
remedy the material weakness identified above. Because of the inherent
limitations in all control systems, no evaluation of controls can provide
absolute assurance that all control issues and instances of fraud, if any, will
be or have been detected.
There were no changes in our internal controls over financial reporting
that occurred during the quarter ended March 31, 2005 that have materially
affected, or are reasonably likely to materially affect, our internal control
over financial reporting.
Limitations on the Effectiveness of Controls
We believe that a control system, no matter how well designed and
operated, cannot provide absolute assurance that the objectives of the control
system are met, and no evaluation of controls can provide absolute assurance
that all control issues and instances of fraud, if any, within a company have
been detected. Our disclosure controls and procedures are designed to provide a
reasonable assurance of achieving their objectives and our Chief Executive
Officer and Acting Principal Financial Officer has concluded that such controls
and procedures are effective at the "reasonable assurance" level. However, we do
not currently have any operating businesses.
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
During April 2005, NuWave received net proceeds of approximately
$22,000 under the Standby Equity Distribution Agreement by issuing 467,290
shares of common stock to Cornell.
On May 5, 2005, NuWave received net proceeds of $220,000 from the
issuance of a convertible debenture to Cornell. Any part of the principal amount
of the convertible debenture, plus accrued interest, is convertible at Cornell's
option any time up to maturity into shares of the Company's common stock at a
fixed price per share equal to $0.10. The convertible debenture has a 210-day
term, has piggy-back registration rights and accrues interest at 12% per year.
In regard to this transaction, the facts relied on to make the exemption from
registration provided by Section 4(2) of the Securities Act of 1933 available
for the sale of securities discussed above were: (1) the limited number of
purchasers; (2) the sophistication or accreditation of the purchasers; (3) their
relationship with the Company and/or access to material information about the
Company; (4) the information furnished to them by the Company; (5) the absence
of any general solicitation or advertising; and (6) restrictions on transfer of
the securities issued to them as indicated by a legend on the certificates
representing such securities.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Documents filed as part of this report.
31.1 Certification by Chief Executive Officer/Acting Principal Financial
Officer pursuant to 15 U.S.C. Section 7241, as adopted pursuant to Section 302
of the Sarbanes-Oxley Act of 2002
32.1 Certification by Chief Executive Officer/Acting Principal Financial
Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906
of the Sarbanes-Oxley Act of 2002
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: May 20, 2005 By:
------------------------------
George Kanakis,
President, Chief Executive Officer and
Acting Principal Financial Officer
SIGNATURE TITLE DATE
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Director May 20, 2005
---------------------------
George Kanakis
Director May 20, 2005
---------------------------
Gary Giannantonio