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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(Mark one)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2003
or
| | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period __________ from to
Commission file number 0-28606
NUWAVE TECHNOLOGIES, INC.
(Exact name of small business issuer as specified in its charter)
DELAWARE 22-3387630
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
ONE PASSAIC AVENUE, FAIRFIELD, NEW JERSEY 07004
(Address of principal executive offices) (Zip Code)
Issuer's telephone number, including area code: (973) 882-8810
Check whether the issuer (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or such shorter period that registrant was required to file
such reports) and (2) has been subject to such filing requirements for the past
90 days. Yes |X| No |_|
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS
Check whether the registrant filed all documents and reports required
to be filed by Section 12, 13 or 15(d) of the Exchange Act after the
distribution of securities under a plan confirmed by court. Yes | | No | |
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's classes
of common equity, as of November 14, 2003: 1,875,902
Transitional Small Business Disclosure Format: Yes | | No |X|
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NUWAVE TECHNOLOGIES, INC.
FORM 10-QSB
INDEX
PART I - FINANCIAL INFORMATION
ITEM 1. CONDENSED FINANCIAL STATEMENTS
Condensed Balance Sheets as of September 30, 2003 (unaudited)
and December 31, 2002 P. 3
Condensed Statements of Operations for the three and nine
months ended September 30, 2003 (unaudited) and
September 30, 2002 (unaudited) P. 4
Condensed Statements of Cash Flows for the nine months ended
September 30, 2003 (unaudited) and September 30, 2002
(unaudited) P. 5
Notes to Condensed Financial Statements P. 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS P. 8
PART II - OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES P. 15
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K P. 16
SIGNATURES P. 16
EX 31.1
EX 32.1
2
Balance Sheets
(In thousands, except share data)
ASSETS
September December
30, 31,
2003 2002
-------- --------
(unaudited)
Current assets:
Cash and cash equivalents $ 4 $ 174
Accounts receivable, net - 11
Inventory 1 25
Prepaid expenses and other current assets - 159
-------- --------
Total current assets 5 369
Property and equipment, net 4 47
Other assets - 20
Deferred tax benefit 230 230
-------- --------
Total assets $ 239 $ 666
======== ========
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
Current liabilities:
Accounts payable and accrued liabilities $ 35 $ 537
Note payable to officer/stockholder - 115
-------- --------
Total current liabilities $ 35 $ 652
-------- --------
Long-term liabilities:
Notes payable 484 200
-------- --------
Total liabilities 519 852
-------- --------
Commitments
Stockholders' deficiency:
Series A Convertible Preferred Stock, noncumulative,
$.01 par value; authorized 400,000 shares; 67,000 issued and
outstanding at September 30, 2003 1 -
Preferred stock, $.01 par value; authorized 1,000,000
shares; none issued - (preferences and
rights to be designated by the Board of Directors) - -
Common stock, $.001 par value; authorized 140,000,000 shares;
1,875,902 shares issued and outstanding at September 30, 2003 and
507,735 shares issued and outstanding at December 31, 2002 2 1
Additional paid in capital 27,331 26,927
Accumulated deficit (27,614) (27,114)
-------- --------
Total stockholders' deficiency (280) (186)
-------- --------
Total liabilties and stockholders' deficiency $ 239 $ 666
======== ========
See accompanying notes to these condensed financial statements
3
NUWAVE TECHNOLOGIES, INC.
Statements of Operations
(In thousands, except share and per share data)
Three Months Three Months Nine Months Nine Months
Ended Ended Ended Ended
September 30, September 30, September 30, September 30,
2003 2002 2003 2002
----------- ----------- ----------- -----------
(unaudited) (unaudited) (unaudited) (unaudited)
Net sales $ 4 $ - $ 19 $ 281
Cost of sales (2) - (5) (148)
----------- ----------- ----------- -----------
Gross profit 2 - 14 133
----------- ----------- ----------- -----------
Operating expenses:
Research and development (1) (122) (127) (591)
General and administrative (59) (442) (631) (1,679)
----------- ----------- ----------- -----------
Total operating expenses (60) (564) (758) (2,270)
----------- ----------- ----------- -----------
Loss from operations (58) (564) (744) (2,137)
----------- ----------- ----------- -----------
Other income (expense):
Gain on forgiveness of debt 265 - 265 -
Interest income - - - 5
Interest expense (14) (2) (21) (3)
----------- ----------- ----------- -----------
Total other income (expense) 251 (2) 244 2
----------- ----------- ----------- -----------
Net income (loss) $ 193 $ (566) $ (500) $ (2,135)
=========== =========== =========== ===========
Basic and diluted net income (loss) per share:
Weighted average number of
common shares outstanding 1,866,788 277,046 1,267,079 254,487
=========== =========== =========== ===========
Basic and diluted net income
(loss) per share $ 0.10 $ (2.04) $ (0.39) $ (8.39)
=========== =========== =========== ===========
See accompanying notes to these condensed financial statements
4
NUWAVE TECHNOLOGIES, INC.
Condensed Statements of Cash Flows
(In thousands)
Nine Months Nine Months
Ended Ended
September 30, September 30,
2003 2002
---------------- ----------------
(unaudited) (unaudited)
Cash flows from operating activities:
Net loss $ (500) $ (2,135)
Adjustments to reconcile net loss to net cash used in operating
activities:
Issuance of stock, options and warrants for consulting services 27 209
Gain on forgiveness of debt 265 -
Depreciation expense 42 24
Loss on disposal of equipment - 7
Provision for bad debts 11 -
(Increase) decrease in operating assets:
Accounts receivable - 132
Inventory 24 147
Prepaid expenses and other current assets 159 (5)
Other assets 20 4
Increase (decrease) in operating liabilities:
Accounts payable and accrued liabilities (767) (287)
---------------- ----------------
Net cash used in operating activities (719) (1,904)
---------------- ----------------
Cash flows from investing activities:
Purchase of property and equipment - (7)
Proceeds from sale of equipment - 3
---------------- ----------------
Net cash used in investing activities - (4)
---------------- ----------------
Cash flows from financing activities:
Proceeds from equity offerings 122 815
Proceeds from notes payable 557 300
Repayment of notes payable to officer/stockholder (115) -
Costs incurred for equity offerings and warrants (15) (156)
---------------- ----------------
Net cash provided by financing activities 549 959
---------------- ----------------
Net decrease in cash and cash equivalents (170) (949)
Cash and cash equivalents at the beginning of the period 174 1,011
---------------- ----------------
Cash and cash equivalents at the end of the period $ 4 $ 62
================ ================
See accompanying notes to these condensed financial statements
5
NUWAVE TECHNOLOGIES, INC.
NOTES TO
CONDENSED FINANCIAL STATEMENTS
1. Basis of Interim Financial Statement Preparation
The accompanying unaudited condensed 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 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, 2003.
2. Going Concern and Management's Plan
As shown in the accompanying consolidated financial statements, the
Company incurred a net loss of approximately $500,000 during the nine months
ended September 30, 2003, resulting in an stockholders deficiency of
approximately $280,000. The Company also has a working capital deficit of
approximately $30,000 at September 30, 2003. These matters raise substantial
doubt about the Company's ability to continue as a going concern. Management's
plans include the raising of cash through the issuance of debt or equity and
increasing revenues. The accompanying condensed 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 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.
The Company continues to require funding by Cornell Capital Partners,
LP ("Cornell") to provide funding under the Equity Line of Credit Agreement with
Cornell. This Equity Line of Credit Agreement is non-exclusive; thereby
permitting the Company to offer and sell its securities to third parties while
the Equity Line of Credit is in effect. In the event the Company is unable to
complete the sale of its Common Stock pursuant to the Equity Line of Credit, the
Preferred Stock Purchase Agreement (see Note 5) or otherwise; there would be
substantial doubt about the Company's ability to pay its creditors and to
continue as a going concern. Currently the Company's efforts to satisfy its
reduced cash flow needs through utilization of the Equity Line of Credit, to
raise capital in the financial markets as well as exploring other options such
as mergers/acquisitions and strategic alliances have not been productive. There
can be no assurance that we will be successful in these endeavors and therefore
may have to consider our alternatives.
6
3. Summary of Significant Accounting Policies
Earnings (Loss) per Share
Options and warrants to purchase approximately 221,300 and 142,100
shares of common stock were outstanding at September 30, 2003 and 2002,
respectively, but were not included in the computation of diluted earnings
(loss) per share as the options and warrants were antidilutive.
Stock Options and Similar Equity Instruments
At September 30, 2003, the Company had two stock-based employee
compensation plans. As permitted under Statement of Financial Accounting
Standards ("SFAS") No. 148, "Accounting for Stock-Based Compensation--Transition
and Disclosures", which amended SFAS No. 123 ("SFAS 123"), "Accounting for
Stock-Based Compensation", the Company has elected to continue to follow the
intrinsic value method in accounting for its stock-based employee compensation
arrangements, as defined by Accounting Principles Board Opinion ("APB") No. 25,
"Accounting for Stock Issued to Employees", and related interpretations
including Financial Accounting Standards Board Interpretation No. 44,
"Accounting for Certain Transactions Involving Stock Compensation", an
interpretation of APB No. 25. No stock-based employee compensation cost is
reflected in net income (loss), as all options granted under those plans have an
exercise price equal to the market value of the underlying common stock on the
date of grant. The following table illustrates the effect on net income (loss)
and earnings (loss) per share if the Company had applied the fair value
recognition provisions of SFAS 123 to stock-based employee compensation:
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------- ---------------------
(000's omitted except per share data)
2003 2002 2003 2002
------- ------- ------- -------
Net Income (Loss) as Reported $ 193 $ (566) $ (500) $(2,135)
------- ------- ------- -------
Deduct: Total stock-based employee compensation
expense determined under fair value-based method
for all awards, net of related tax effect (3) (7) (11) (21)
------- ------- ------- -------
Pro Forma Net Income (Loss) $ 190 $ (573) $ (511) $(2,156)
------- ------- ------- -------
Basic and Diluted Net Income (Loss) per share as Reported $ 0.10 $ (2.04) $ (0.39) $ (8.39)
------- ------- ------- -------
Basic and Diluted Pro Forma Net Income (Loss)Per Share $ 0.10 $ (2.07) $ (0.40) $ (8.47)
------- ------- ------- -------
7
The fair value of options at date of grant was estimated using the Black-Scholes
fair value based method with the following weighted average assumptions:
Nine Months Ended
-----------------
September 30, 2003 September 30, 2002
------------------ ------------------
Expected Life (Years) 10 10
------- -------
Interest Rate 5% 5%
------- -------
Annual Rate of Dividends --% --%
------- -------
Volatility 110% 110%
------- -------
The weighted average fair value of options at date of grant using the fair value
based method during 2003 and 2002 was estimated at $0.78.
Recent Accounting Pronouncements
In May 2003, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 150 " Accounting for Certain Financial Instruments with Characteristics
of Both Liabilities and Equity". SFAS No. 150 establishes standards for
classification and measurement in the statement of financial position for
certain instruments with characteristics of both liabilities and equity. It
requires classification of 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 during the quarter ended
September 30, 2003. The adoption did not have a significant impact on the
Company's condensed financial statements.
4. Notes Payable
On January 15, 2003, in connection with an Equity Line of Credit
Agreement dated April 15, 2002 ("Equity Line Of Credit"), the Company entered
into a Promissory Note for $125,000. The Note was payable in full within one
hundred fifty (150) calendar days from the date of the agreement. The Note was
not paid in full when due, and therefore the outstanding balance will accrue
interest at the rate of twenty four percent (24%) per annum until paid in full.
As of September 30, 2003, the outstanding balance of this Note was $84,000.
On February 27, 2003, in connection with an Equity Line of Credit, the
Company entered into a Promissory Note for $125,000. The Note was payable in
full within ninety (90) calendar days from the date of the agreement. The Note
was not paid in full when due, and therefore the outstanding balance will accrue
interest at a rate of twenty four percent (24%) per annum until paid in full. As
of September 30, 2003, the outstanding balance of this Note was $125,000.
8
On June 19, 2003, in connection with an Equity Line of Credit, the
Company entered into a Promissory Note for $75,000. The Note is payable in full
within one hundred seventy-one (171) calendar days from the date of the
agreement. If the Note is not paid in full when due, the outstanding balance
plus interest at a rate of twenty four percent (24%) per annum shall be paid in
full. As of September 30, 2003, the outstanding balance was $75,000.
On September 10, 2003, in connection with an Equity Line of Credit, the
Company entered into a Note Payable agreement ("Note") for $200,000. The note is
to payoff certain obligations under a settlement agreement dated September 20,
2003. (see Note 6). The Note is non-interest bearing and has no specified due
date. As of September 30, 2003 the outstanding balance was $200,000.
All notes payable to Cornell under the Equity Line of Credit Agreement
are scheduled to be repaid from puts under this Equity Line of Credit.
5. Stockholders' Deficiency
Convertible Preferred Stock
During May 2003 the Company entered into a Securities Purchase
Agreement with several independent buyers whereby the Company issued and sold to
the buyers 67,000 Series A Preferred Stock at $1 per share. The buyers are
entitled at their option to convert the Series A Preferred Stock into shares of
the Company's Common Stock at any time commencing after May 1, 2004 at an
adjusted conversion price of $0.05 per share. Any unconverted shares as of May
1, 2005 will automatically convert into shares of the Company's Common Stock at
an adjusted conversion price of $0.05 per share. The Company has the right to
redeem the outstanding Preferred Stock upon 30 days written notice at a
redemption price of 150% of the subscription amount plus interest on the
purchase price of 24%. If the Company seeks to redeem some, but not all, of the
Series A Preferred Stock, the Company shall redeem a pro rata amount from each
holder of the Series A Preferred Stock. The preferred stock was redeemed by the
Company in October 2003 for a total redemption price of $86,400.
Common Stock
On July 21, 2003, the Company's Board of Directors declared effective a
reverse split of the Company's common shares in the ratio of 1 to 50 as voted on
and approved by the stockholders' at the Company's Annual Stockholders' meeting
held on December 20, 2002. All share and per share amounts have been
retroactively restated for the stock split.
During the nine months ended September 30, 2003:
9
o The Company issued 1,151,489 shares of common stock for the
repayment of $273,000 of notes payable to Cornell.
o The Company issued 191,678 shares of common stock via the
exercise of $55,000 of puts under the Equity Line of Credit
Agreement with Cornell.
o The Company issued 25,000 shares of common stock for the
payment of services rendered of $5,000.
Warrants
On March 3, 2003, 8,000 warrants at an exercise price of $200 per
warrant issued in conjunction with a consulting agreement on March 3, 1998
expired. On March 14, 2003, 20,886 warrants at an exercise price of $197.50 per
warrant issued in a private placement on March 14, 2000 expired.
On May 11, 2003, 41,144 warrants and 22,849 at exercise prices of $162
and $179, respectively, per warrant, that were originally granted to placement
agent warrants issued in a private placement in May 1998 expired.
On September 24, 2003 200,000 warrants were issued to two former
officers of the Company in connection with settlement and severance agreements
(see Note 6). The warrants are convertible into a total of 200,000 shares of the
Company's common shares at an exercise price of $1.00 per common share. The
warrants are exercisable for a five-year period beginning September 29, 2003 and
ending on September 24, 2008. The fair value of the warrants was estimated at
$0.09 per warrant utilizing the Black-Scholes pricing model. The total value of
the warrants of $18,000 was charged to compensation and included in general and
administrative expense in the accompanying condensed statement of operations for
the three and nine months ended September 30, 2003.
Stock Options
On January 12, 2003 the Company's executive officers, directors and
employees voluntarily and irrevocably surrendered all 23,577 of the Company's
options that had been granted to them through that date. During February 2003,
2,680 options previously granted to a retired employee and a former director
expired.
6. Change of Control/Settlement Agreements
On September 10, 2003, the Company entered into an Agreement with
Cornell to settle a default on its indebtedness owed to Cornell. Pursuant to the
Agreement, Cornell and the Company agreed to the following:
o Cornell agreed not to foreclose on its outstanding
indebtedness owed by the Company.
o Cornell agreed to enter into a new loan agreement with the
Company for $200,000 to be deposited in escrow to be used to
satisfy certain outstanding obligations of the Company,
including trade payables, unpaid wages, and settlement of
employment agreements.
10
o Cornell will consider providing additional capital to the
Company and assisting in identifying new businesses.
o Cornell agrees to maintain the Company's public filings and
status.
o The Company's Chief Executive Officer ("CEO") and Chairman of
the Board of Directors, and Chief Financial Officer ("CFO"),
agreed to resign their positions with the Company. The CEO and
CFO received a settlement consisting of cash and warrants to
purchase shares of the Company's common stock at an exercise
price of $1.00 per share (see Note 5).
o The Company's Board of Directors appointed a nominee to its
Board of Directors, selected by Cornell. Upon such
appointment, the Company's current Board members agreed to
resign.
The Agreement was consummated on September 29, 2003 and effective with
the closing and the resignations of the Board members. As a result of reaching
settlements to satisfy certain outstanding obligations of the Company, including
trade payables, unpaid wages, and settlement of employment agreements, the
Company realized a gain on forgiveness of debt of approximately $265,000.
7. Subsequent Events
On October 21, 2003, the Company raised $200,000 through the issuance
of a convertible note to Cornell. The note bears interest at a rate of 5% per
annum and is payable along with all accrued interest on the second anniversary
of the note. The note along with accrued interest is convertible at the option
of Cornell into shares of the Company's common stock at a conversion price equal
to the lesser of (a) an amount equal to $0.25 or (b) an amount equal to 80% of
the lowest closing bid price of the Company's common stock for the five trading
days immediately preceding the conversion date. Cornell's right to convert the
debenture shall terminate on the second anniversary of the note at which time
the note is automatically convertible into the Company's common stock as
outlined in the agreement. Interest on the note will be paid at the time of
maturity or conversion and is payable at the discretion of Cornell in cash or
the Company's common stock.
The Company at its option shall have the right to redeem, within 15
business days advance written notice, a portion or all of the outstanding
convertible debenture. The redemption price shall be 120% of the amount redeemed
plus accrued interest. In the event the Company exercises a redemption of either
all or a portion of the convertible debenture, Cornell shall receive a warrant
to purchase 10,000 shares of the Company's common stock for every $100,000
redeemed, on a pro-rata basis. The warrant shall be exercisable on a cash basis
and have an exercise price of 120% of the closing bid price of the Company's
common stock on the closing date of the redemption. During October 2003, the
Company utilized a portion of the proceeds to redeem its preferred stock for a
total redemption price of $86,400.
11
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 "General," "Marketing and Sales," 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 development, competitive products and
pricing, lack of acceptance of the Company's products, general economic
conditions, risks of intellectual property litigation, product demand, industry
capacity, new product development, failure of distributor to market our products
effectively, commercialization of new technologies, the Company's ability to
raise additional capital under the Cornell Equity Line or otherwise,
developments resulting from the Company's inability to liquidate its accounts
payable and the risk factors detailed from time to time in the Company's Annual
Report on Form 10-KSB and other materials filed with the 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.
General
The Company has been severely limited due to its inability to
successfully market its products to date. This combined with the low
price/trading volume of our common stock has seriously impacted our ability to
raise the necessary working capital needed to continue to actively market our
products and technology. As a result of being in default on its indebtedness
owed to Cornell Capital Partners, LP ("Cornell") and in order to avoid
foreclosure on such debt, the Company entered into an agreement with Cornell
Capital Partners in September 2003 whereby an appointee of Cornell was named to
the Board of Directors of the Company and the then Board of Directors and
management of the Company agreed to resign. Also as part of the agreement,
Cornell entered into a new loan agreement with NUWAVE for net proceeds of
$200,000 which was used to satisfy certain outstanding obligations of NUWAVE,
including a substantial portion of trade payables, all unpaid wages, and
settlement of employment agreements. Cornell also agreed to consider providing
additional capital to NUWAVE and to assist in identifying new businesses.
12
To date our mission has been to identify, develop and commercialize
high-margin, proprietary technologies suited for high-volume, high-growth
markets and, in turn, achieve attractive long-term growth for our Company. Our
focus to date has been on technology related to image and video enhancement
designed to enrich picture and video output with clearer, more defined detail in
texture, color, contrast and tone, at low cost. Our initial products can be used
by original equipment manufacturers (OEM's) for placement into products that
produce images for display screens such as televisions and/or DVD players, for
supplementing and increasing video quality on existing television monitors and
video displays via set-top boxes containing our technology, and by individuals
over the Internet for improving their personal images and photographs. Our
patented high speed filtering technology removes approximately 70% of the
picture noise while retaining correct focus (the image and text in the image
does not blur). The three product lines based upon our proprietary technology
are: 1) Retail and Security/Surveillance Products, 2) the NUWAVE Video Processor
(NVP) Technology and 3) Digital Filtering Technology.
Notwithstanding the Company's endeavors to achieve sales goals through
comprehensive sales, marketing and licensing programs, to date we have only been
able to produce the minimal results as shown for the three and nine months ended
September 30, 2003. Therefore no assurance can be given that these products will
be successfully marketed or that losses will not continue to occur. See
"Liquidity and Capital Resources."
Results of Operations
Nine Months Ended September 30, 2003 Compared to Nine Months Ended September 30,
2002.
Revenues for the nine months ended September 30, 2003 were $19,000
compared to $281,000 for the nine months ended September 30, 2002. The sales in
the first half of 2002 were the result sales of the Company's VGE inventory to
Gemini Industries, Inc. ("Gemini") the exclusive licensee of NUWAVE's VGE retail
product. In December 2001, Gemini, a manufacturer and distributor of consumer
electronics accessories, was granted a five-year exclusive license to market and
distribute NUWAVE's VGE in North America. Initial shipments of the VGE and ASIC
chips to Gemini took place during the first quarter of 2002. Minimum ongoing
purchase requirements under the contract were to begin in July 2002. After
having received a three-month extension, Gemini still had not met their minimum
contractual purchase requirements and management determined it was in the
Company's best interest to terminate the agreement. The Company is currently
concentrating its efforts on sales and/or licensing of its NVP 1104 technology.
Cost of sales decreased by $143,000 for the nine months ended September 30, 2003
as compared to the nine months ended September 30, 2002 primarily due to the
decrease in sales during 2003.
During the nine months ended September 30, 2003, $127,000 was spent on
research and development activities compared to $591,000 for the same nine-month
period in 2002, a decrease of $464,000. The majority of the research and
development expenditures incurred during the first nine months of 2002 related
to the development and completion of the Company's NVP 1104 ASIC chip. The
decreases in the first nine months of 2003 were primarily a result of the
completion of the NVP 1104 design in July 2002 and the Company's efforts to
reduce expenditures in order to preserve cash for immediate needs until more
permanent financing is secured.
13
General and administrative expenses for the nine months ended
September 30, 2003, totaled $631,000 representing a decrease of $1,048,000
compared to the nine months ended September 30, 2002. Such decrease was the
result of management's company wide cost cutting efforts as noted above that
reduced marketing costs by $125,000 combined with decreases in payroll of
$225,000, professional fees of $198,000, investor relations costs of $61,000,
China Agency costs of $110,000, travel costs of $47,000, financial consulting of
$180,000, secretarial support of $21,000, filing fees of $31,000 and other of
$50,000. Interest expense for the nine months ended September 30, 2003 was
$21,000 compared to $3,000 for the same period last year.
In addition the Company recognized a one-time gain of $265,000 in
September, 2003 as a result of agreements reached with creditors for the
settlement of outstanding debt.
As a result of the above, we incurred a net loss of $500,000 for the
nine months ended September 30, 2003 compared to a net loss for the nine months
ended September 30, 2002, of $2,135,000.
Three Months Ended September 30, 2003 Compared to Three Months Ended September
30, 2002.
Revenues and cost of sales for the three months ended September 30,
2003 were $4,000 and $2,000 respectively. There were no sales during the three
months ended September 30, 2002.
During the three months ended September 30, 2003, $1,000 was spent on
research and development activities compared to $122,000 for the same
three-month period in 2002, a decrease of $121,000. The majority of the research
and development expenditures incurred during quarter ended September 30, 2002
related to the development of the Company's NVP 1104 ASIC chip. The decreases in
2003 were primarily a result of the completion of the NVP 1104 design in July
2002 and the Company's efforts to reduce expenditures in order to preserve cash
for immediate needs until more permanent financing is secured.
General and administrative expenses for the three months ended
September 30, 2003, totaled $59,000 representing a decrease of $383,000 compared
to the three months ended September 30, 2002. Such decrease was primarily the
result of management's company wide cost cutting efforts as noted above that
reduced marketing costs by $4,000 combined with decreases in payroll of $40,000,
professional fees of $146,000, China Agency costs of $26,000, travel costs of
$9,000, financial consulting of $59,000, investor relations of $20,000,
secretarial support of $7,000 and other of $38,000. Interest expense for the
three months ended September 30, 2003 was $14,000 compared to $2,000 for the
three months ended September 30, 2002.
14
In addition the Company recognized a one-time gain of $265,000 in
September 2003 as a result of agreements reached with creditors for the
settlement of outstanding debt.
As a result of the above, we had net income of $193,000 for the three months
ended September 30, 2003 compared to a net loss for the three months ended
September 30, 2002, of $566,000.
Marketing and Sales
Utilizing our proprietary technologies, we have completed development
of three product lines: (1) Retail and Security/Surveillance products; (2) the
NUWAVE Video Processor (NVP) Technology; and (3) Digital Filtering Technology.
These three product lines have been marketed to their respective distribution
channels as follows:
Retail and Security/Surveillance Products
In February 2003, the Company announced the signing of a Memorandum of
Understanding with Go Direct International Ltd. ("Go Direct") for the
manufacture and marketing of products utilizing NUWAVE's proprietary video
processor technology. Go Direct develops, manufactures, markets, and distributes
innovative consumer retail products in conjunction with leading brands or custom
branded products for the global marketplace. The Go Direct manufacturing group
consists of eight factories with over 6,000 employees. The two companies'
engineering and design teams are jointly working and are near completion on the
first product to be released under this arrangement. In this regard, in April,
Go Direct placed its initial purchase order for chips to be used in its start-up
production run in order to test product sell-thru at selected retailers. Once
the production run is completed and if the test is successful, the companies
expect to finalize negotiations and enter into a formal agreement.
Under the terms of the proposed agreement, NUWAVE will sell to Go Video
its NVP 1104 video enhancement ASIC chips and grant to Go Direct the rights to
manufacture retail gaming console products utilizing this technology. NUWAVE
will also grant to Go Direct exclusive marketing and distribution rights for
sale of these products in North America, Europe and parts of Asia. During the
start-up period and subsequent to the results of their initial marketing tests
the companies will establish minimum annual purchase quantities in order to
extend the exclusive nature of the agreement for a longer period.
Also, in February 2003, the Company announced a strategic alliance with
Distinctive Devices Inc. (DDI), a manufacturer and marketer of telcom access
products, in which Distinctive Devices was granted the exclusive license to
market and distribute NUWAVE's proprietary video enhancement ASIC chip
technology in India. DDI plans to incorporate NUWAVE's NVP 1104 technology into
set-top boxes designed for the Indian cable television industry. We believe this
design process is underway. The Indian Parliament mandated the use of set top
boxes by the industry in December 2002, for all cable subscribers (currently 50
million), implementation is set to start in July 2003. The purpose of this
legislation is to protect the consumers from being charged for broadcast
channels that the subscriber does not choose to view. To date, we have not
received any firm commitments or orders from DDI.
15
During the second half of 2002, we announced a new line of retail
video products. The new products are powered by the Company's new
state-of-the-art "1104 ASIC chip technology." Through alliances such as Unical
and Go Direct, the retail line is expected to be marketed to consumer electronic
distributors, national retail chains and specialty audio/video stores and
includes a series of video game hook-up cables, an "S" Video Enhancer (SVE)
set-top box and four video selector boxes that feature the Company's proprietary
technology for image enhancement. The introduction of these products will allow
consumers to mix multiple video sources, from popular products like DVD Players,
Satellite Receivers, Video Camcorders, and Video Game Consoles
Also during the second half of 2002 we announced the newest addition to
our retail product line, a universal remote control unit. At the same time we
announced the receipt of a $2.85 million purchase order for this product from
Electronics Etc, Inc., a consumer products distributor with a wide retail
customer base. Although this product does not contain NUWAVE's proprietary
technology it is compatible with and complementary to NUWAVE's newly introduced
line of retail video enhancement products and can therefore be sold either
independent of or together with its retail video enhanced selector boxes. We
initially anticipated this order would begin shipping during the fourth quarter
of 2002 but due to product specification changes and market condition changes
the order has been delayed.
Subsequent to the termination of the Gemini Agreement and in line with
our objectives, in March 2003 we entered into a new agreement with Unical
Enterprises, Inc. for the sales and distribution of our new line of proprietary
products as well as a full line of consumer electronics accessories to be
established by Unical with access to the Sylvania brand. Unical Enterprises,
Inc., a leading manufacturer and distributor of Northwestern Bell Phones and the
exclusive licensee of the Sylvania name for home automation and consumer
electronics accessories, recently announced its entry into the video game
accessories market.
In Addition, NUWAVE has developed a line of products for sale to the
Security/Surveillance marketplace as well as other video enhancement set-top
boxes for the consumer retail marketplace.
NVP ASIC Technology
The NUWAVE Video Processor (NVP) technology is proprietary
video-enhancement technology designed to significantly enhance video output
devices with clearer, sharper details and more vibrant colors when viewed on the
display screen. We have been marketing this technology in the form of ASIC chips
(Application Specific Integrated Circuits) directly to OEM's who by
incorporating this enabling technology would improve picture quality in their
televisions, VCR's, DVD's, camcorders, set-top boxes and other video output
devices. This technology can also be licensed to the OEM for incorporation onto
their own ASIC design.
16
During July 2002, the Company announced the availability of its new
advanced second generation ASIC Chip, the "NVP 1104". This new chip can create
economies of scale in the marketplace by offering a superior product with unique
features, which satisfy customer's demands for higher video quality at modest
prices. It supports the latest video standards such as component video and
progressive scan systems and includes features that are targeted at video
enhancement for the Security/Surveillance and Home Entertainment applications.
These important features together with its low cost implementation make it very
attractive to incorporate into OEM consumer audio/video products like DVD
players, AV receivers, Video Games, Satellite Receivers, AV Selectors, TV's and
Retail set-top box products. The NVP 1104 is `future proofed' due to its unique
design philosophy, and by its ability to function with the many video standards
available today. We are currently in discussions with potential retail customers
who had indicated their desire to incorporate our technology into their
products. We expect to close some of these customers within the next few months.
Digital Filtering Technology
Our proprietary digital filters remove graininess and digital artifacts
while preserving proper focus better than any other "real time" filters that are
on the market today. In October 2001, we were granted a patent by the U.S.
Patent Office covering our digital filters. We plan to license our digital
filtering technology to OEM's for embedding in products such as PC's, printers,
scanners, camcorders and DVD's, among other digital imaging devices. These
patented filters are expected to be in demand for use in processing digital
video and movies used for streaming video over the Internet. The digital
technology not only complements our proprietary analog ASIC chip technology but
can also work in conjunction with it to further improve the resulting image
quality. In April 2002, we signed an agreement with Sony Corporation, giving
Sony the non-exclusive right to use one of our filters in its digital color
printers, in return for a nominal one-time licensing fee. In October 2002, we
provided Sony an upgrade to this filter.
Notwithstanding the Company's endeavors to achieve sales goals through
a comprehensive sales, marketing and licensing programs and activities such as
those outlined above, to date we have only been able to produce the minimal
results as shown above for the three and nine months ended September 30, 2003.
Therefore no assurance can be given that these products will be successfully
marketed or that losses will not continue to occur during such period. See
"Liquidity and Capital Resources."
Liquidity and Capital Resources
On September 30, 2003, the Company had cash and cash
equivalents of approximately $4,000 and accounts payable of $35,000 resulting in
a negative working capital position as well as a negative net worth. Other than
the $484,000 due to Cornell Capital Partners, L.P. which is scheduled to be
repaid from the proceeds of puts under the Equity Line of Credit there are no
long-term liabilities. On April 15, 2002, we entered into a $3 million Equity
Line of Credit. Provided we are in compliance with the terms of the Equity Line
of Credit Agreement and provided the Company has available sufficient shares
registered with the Securities and Exchange Commission, we may, at our option,
17
require the Purchaser to purchase up to $100,000 in any seven business day
period of our Common Stock, up to a maximum of $3 million over the two years
from May 31, 2002. However, under the terms of the agreement in no event shall
the number of shares issuable to the Investor pursuant to any single advance
exceed 9.9% of the then outstanding Common Stock of the Company. Because of the
low selling price of the Company's common shares, this has severely limited the
amount the Company is actually able to require the Investor to purchase. The
purchase price of the shares for any given advance is 97% of the then current
market price. For all advances, the Investor receives a fee equal to 4% of the
gross proceeds of each advance. The Equity Line of Credit is non-exclusive;
thereby permitting us to offer and sell our securities to third parties while
the Equity Line of Credit is in effect. We have the right to terminate the
Equity Line of Credit Agreement at any time, provided there is no pending
advance thereunder. From August 20, 2002 through September 30, 2003, the Company
received loans from Cornell Capital totaling $1,082,000. The loans were secured
by advance puts under the Equity Line of Credit. As of September 30, 2003, we
have repaid $598,000 of the outstanding balance from the proceeds of puts under
the Equity Line of Credit, leaving a current balance of $484,000, which is
scheduled to be repaid from the proceeds of puts under the Equity Line of
Credit. As of September 30, 2003, we have utilized $693,000 of the Equity Line
credit facility and have issued 1,578,818 shares of common stock under the terms
of the agreement. In addition, the outstanding loan balance due to Cornell
Capital is secured by advance puts. To repay the current debt owed to Cornell or
to continue to utilize the Equity Line will require the Company to register
additional shares with the Securities and Exchange Commission.
The Company's obligations and the periods in which they are scheduled
to become due are set forth in the following table:
(000's omitted)
Due in Less Due in 1- Due in Due after
Obligation Total than 1 year 3 years 4 - 5 years 5 years
----------------------------------- --------------- -------------- -------------- -------------- -------------
Long-term debt $ 484 $ -- $ 484 $ -- $ --
----------------------------------- --------------- -------------- -------------- -------------- -------------
Total cash Obligations $ 484 $ -- $ 484 $ -- $ --
----------------------------------- --------------- -------------- -------------- -------------- -------------
During May 2003 the Company entered into a Securities Purchase
Agreement with several independent buyers whereby the Company issued and sold to
the buyers 67,000 Series A Preferred Stock at $1 per share. The buyers are
entitled at their option to convert the Series A Preferred Stock into shares of
the Company's Common Stock at any time commencing after May 1, 2004 at an
adjusted conversion price of $0.05 per share. Any unconverted shares as of May
1, 2005 will automatically convert into shares of the Company's Common Stock at
an adjusted conversion price of $0.05 per share. The Company has the right to
redeem the outstanding Preferred Stock upon 30 days written notice at a
redemption price of 150% of the subscription amount plus interest on the
purchase price of 24%. If the Company seeks to redeem some, but not all, of the
Series A Preferred Stock, the Company shall redeem a pro rata amount from each
holder of the Series A Preferred Stock. The preferred stock was redeemed by the
Company in October 2003 for a total redemption price of $86,400.
18
In their report on the audit of NUWAVE's financial statements for the
year ended December 31, 2002, our independent auditors included an explanatory
paragraph because of the uncertainty that we could continue in business as a
going concern. In the event we are unable to complete the sale of our Common
Stock pursuant to the Equity Line, the Preferred Stock Purchase Agreement or
otherwise; there would be substantial doubt about our ability to pay our
creditors and to continue as a going concern. Currently our efforts to satisfy
our reduced cash flow needs through utilization of the Equity Line of Credit, to
raise capital in the financial markets as well as exploring other options such
as mergers/acquisitions and strategic alliances have not been productive. There
can be no assurance that we will be successful in these endeavors and therefore
may have to consider our alternatives.
The Company's common stock is traded on the OTC bulletin board (OTCBB)
Market 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.
19
PART II - OTHER INFORMATION
Item 2. Changes in Securities
On July 21, 2003, the Company's Board of Directors declared effective a
reverse split of the Company's common shares in the ratio of 1 to 50 as voted on
and approved by the shareholders' at the Company's Annual Shareholders' meeting
held on December 20, 2002. All share amounts have been retroactively restated
for the stock split.
o The Company issued 1,151,490 shares of common stock for the
repayment of $273,000 of notes payable to Cornell Capital
Partners, LP ("Cornell").
o The Company issued 191,678 shares of common stock via the
exercise of $55,000 of puts under the Equity Line of Credit
Agreement with Cornell
o The Company issued 25,000 shares of common stock for the
payment of trade payables of $5,000.
During May 2003 the Company entered into a Securities Purchase
Agreement with several independent buyers whereby the Company issued and sold to
the buyers 67,000 Series A Preferred Stock at $1 per share. The buyers are
entitled at their option to convert the Series A Preferred Stock into shares of
the Company's Common Stock at any time commencing after May 1, 2004 at an
adjusted conversion price of $0.05 per share. Any unconverted shares as of May
1, 2005 will automatically convert into shares of the Company's Common Stock at
an adjusted conversion price of $0.05 per share. The Company has the right to
redeem the outstanding Preferred Stock upon 30 days written notice at a
redemption price of 150% of the subscription amount plus interest on the
purchase price of 24%. If the Company seeks to redeem some, but not all, of the
Series A Preferred Stock, the Company shall redeem a pro rata amount from each
holder of the Series A Preferred Stock. The preferred stock was redeemed by the
Company in October 2003 for a total redemption price of $86,400.
Warrants
On March 3, 2003, 8,000 warrants at an exercise price of $200 per
warrant issued in conjunction with a consulting agreement on March 3, 1998
expired. On March 14, 2003, 20,886 warrants at an exercise price of $197.50 per
warrant issued in a private placement on March 14, 2000 expired.
On May 11, 2003, 41,144 warrants and 22,849 at exercise prices of $162
and $179, respectively per warrant, that were originally granted to placement
agent warrants issued in a private placement in May 1998 expired.
On September 24, 2003 200,000 warrants were issued to two former
officers of the Company in connection with a settlement and severance agreement
(see Note 6). The warrants are convertible into a total of 200,000 shares of the
Company's common shares at an exercise price of $1.00 per common share. The
warrants are exercisable for a five-year period beginning September 29, 2003 and
ending on September 24, 2008. The fair value of the warrants was estimated at
$0.09 per warrant utilizing the Black-Scholes pricing model. The total value of
the warrants of $18,000 was charged to compensation and included in general and
administrative expense in the accompanying condensed statement of operations for
the three and nine months ended September 30, 2003.
20
Stock Options
On January 12, 2003 the Company's Executive Officers, Directors and
employees voluntarily and irrevocably surrendered all 23,577 of the Company's
options that had been granted to them through that date. During February 2003,
2,680 options previously granted to a retired employee and a former director
expired.
Item 3. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Our Chief Executive and Financial Officer has reviewed and evaluated
the effectiveness of the Company's disclosure controls and procedures (as
defined in Exchange Act Rules 240.13a-14(c) and 15d-14(c) as of a date within 90
days before the filing date of this quarterly report. Based on that evaluation,
the Chief Executive and Financial Officer and has concluded that the Company's
current disclosure controls and procedures are effective and timely, providing
all material information relating to the Company required to be disclosed in
reports filed or submitted under the Exchange Act.
Changes in Internal Controls
There have not been any significant changes in the Company's internal
controls over financial reporting or in other factors that could significantly
affect these controls subsequent to the date of their evaluation. We are not
aware of any significant deficiencies or material weaknesses, therefore no
corrective actions were taken.
21
Item 6. Exhibits and Reports on Form 8-K
31.1 Rule 13a-14(a)/15d-14(a) Certification by Chief Executive and
Financial Officer
32 Section 1350 Certification
(b) Reports on Form 8-K
Current Report on Form 8-K, dated July 21, 2003.
Current Report on Form 8-K, dated June 4, 2003.
Current Report on Form 8-K, dated July 18, 2003.
Current Report on Form 8-K, dated September 23, 2003.
Current Report on Form 8-K, dated November 12, 2003.
SIGNATURES
In accordance with the requirements of the Exchange Act, the Registrant
has caused this Quarterly Report to be signed on its behalf by the undersigned,
thereunto duly authorized in the City of Fairfield in the State of New Jersey on
November 19th, 2003.
NUWAVE TECHNOLOGIES, INC.
(Registrant)
DATE: November 19, 2003 By: /s/ George D. Kanakis
--------------------------------
Chief Executive Officer and
Chairman of the Board
(Principal Executive and Financial
Officer)
22