UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED COMMISSION FILE NO.
DECEMBER 31, 2004 0-28606
NUWAVE TECHNOLOGIES, INC.
(NAME OF SMALL BUSINESS ISSUER IN ITS CHARTER)
DELAWARE 22-3387630
-------- ----------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
1416 MORRIS AVENUE, SUITE 207
UNION, NEW JERSEY 07083
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
(908) 851-2470
(Issuer's telephone number, including area code)
______________
Securities registered under Section 12(g) of the Exchange Act:
COMMON STOCK, PAR VALUE $0.001 PER SHARE
(TITLE OF CLASS)
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 [ ]
Check if there is no disclosure of delinquent filers in response to Item 405
of Regulation S-B contained herein, and no disclosure will be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference to Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. [X]
State issuer's revenues for its most recent fiscal year: $0
Aggregate market value of the voting stock held by non-affiliates based on
the last sale price for such stock at April 8, 2005: $159,000.
The number of shares of Common Stock outstanding as of March 30, 2005:
2,062,013
Transitional Small Business Disclosure Format: Yes [ ] No [X]
1
NUWAVE TECHNOLOGIES, INC.
FORM 10-KSB
TABLE OF CONTENTS
PART I.....................................................................1
FORWARD-LOOKING STATEMENTS...............................................1
ITEM 1. DESCRIPTION OF BUSINESS.........................................1
ITEM 2. DESCRIPTION OF PROPERTIES.......................................6
ITEM 3. LEGAL PROCEEDINGS...............................................8
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.............8
PART II....................................................................9
ITEM 5. MARKET FOR NUWAVE TECHNOLOGIES, INC.'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS......................................................9
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.......13
ITEM 7. FINANCIAL STATEMENTS............................................21
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE....................................................21
ITEM 8A. CONTROLS AND PROCEDURES.......................................22
Part III..................................................................23
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS...23
ITEM 10. EXECUTIVE COMPENSATION........................................25
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT,
PRINCIPAL SHAREHOLDERS AND SECURITY OWNERSHIP OF MANAGEMENT.............27
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS................29
ITEM 13. EXHIBITS......................................................30
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES........................33
EXHIBIT 31.1............................................................35
EXHIBIT 32.1............................................................37
FINANCIAL STATEMENTS.....................................................F-1
PART I
INTRODUCTORY NOTE
FORWARD-LOOKING STATEMENTS
Information included or incorporated by reference in this Annual Report
may contain forward-looking statements. This information may involve known
and unknown risks, uncertainties and other factors which may cause our actual
results, performance or achievements to be materially different from the
future results, performance or achievements expressed or implied by any
forward-looking statements. Forward-looking statements, which involve
assumptions and describe our future plans, strategies and expectations, are
generally identifiable by use of the words "may," "should," "expect,"
"anticipate," "estimate," "believe," "intend" or "project" or the negative of
these words or other variations on these words or comparable terminology.
This Form 10-KSB Annual Report contains forward-looking statements,
including statements regarding, among other things, (a) our projected sales
and profitability, (b) our growth strategies, (c) anticipated trends in our
industry, (d) our future financing plans and (e) our anticipated needs for
working capital. These statements may be found under "Management's
Discussion and Analysis or Plan of Operations" and "Description of Business,"
as well as in this Annual Report generally. Actual events or results may
differ materially from those discussed in forward-looking statements as a
result of various factors, including, without limitation, the risks outlined
under "Risk Factors" and matters described in this Annual Report generally.
In light of these risks and uncertainties, there can be no assurance that the
forward-looking statements contained in this Annual Report will in fact occur.
ITEM 1. DESCRIPTION OF BUSINESS
General
NuWave Technologies, Inc. ("NuWave" or the "Company") was incorporated
in Delaware on July 17, 1995. Since its formation in 1995, NuWave has been a
technology company, focused upon the development and marketing of technology
and technology products related to enhancing image and video output. NuWave's
annual sales have declined from $20,000 in 2003 to $0 in 2004, as it has had
difficulty securing buyers for its technology products in a very competitive
market environment. NuWave has incurred net losses of $790,000 and $336,000
in 2003 and 2004, respectively.
During 2003, in conjunction with a restructuring with the Company's
primary lender, all of NuWave's officers and employees resigned or were
terminated. On September 10, 2003, NuWave entered into an agreement with its
existing lender, Cornell Capital Partners, LP, to settle a default on
indebtedness owed to Cornell Capital Partners, LP. This indebtedness,
consisting of notes payable of $484,000 and accrued interest of approximately
$93,000, was settled in full for the net sum of $460,000 on September 10,
2004.
During 2003, NuWave made changes to its product lines and business
strategy. NuWave has had difficulty in selling its technology related to
image and video enhancement. This technology is designed to enrich picture
and video output with clearer, more defined detail in texture, color,
contrast and tone. NuWave competes in a very competitive and quickly evolving
market. NuWave's products have not been price competitive in the market, and
this has made it difficult to obtain placements within end-use electronics
markets. NuWave previously marketed three product lines; however, based on a
reevaluation of these lines, it is no longer marketing the retail and
security/surveillance products and the Company's marketing efforts of the
digital filtering technology and the NuWave video processor ("NVP") are
limited to responding to inquiries from potential technology customers.
The Company would like to broaden its base of products and investments
in order to diversify its product portfolio into a broad spectrum of
industries and to improve profitability. In 2003 and in the first quarter of
2004, NuWave formed five new subsidiaries for the purpose of acquiring and
holding real estate and other assets. On October 20, 2003, NuWave formed
Lehigh Acquisition Corp ("Lehigh"). On December 22, 2003, NuWave, through
its wholly owned subsidiary, Lehigh, acquired vacant land that it intends to
develop into a community for residents over the age of 55. During November
2004, Lehigh sold a 20% interest in the vacant land.
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In January and February 2004, NuWave formed NuWave Acquisition Corp.,
Harwood Acquisition Corp., WH Acquisition Corp. and JK Acquisition Corp. On
April 30, 2004, NuWave, through its 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's plan is to redevelop and then later sell this
property.
As of April 11, 2005, the Company has not as yet identified any other
properties, markets, or investments, and has made no commitments to purchase
any such assets.
Other Potential Products
The Company continues to search for companies and investments, as well
as products that use the Company's technology. Each opportunity will be
evaluated for both its fit for the Company and the time frame upon which it
will bring a satisfactory return on the Company's investment. As of April
11, 2005, the Company has not identified nor purchased any new investment
products or companies.
Research and Development
During the one year period starting on October 31, 2003, the Company
made its research and development testing facilities and testing equipment
available to an independent commissioned agent who worked with potential
customers and markets to develop sales opportunities for the Company. The
marketing agreement with the agent expired in October 2004.
During the years 2004 and 2003, NuWave incurred $0 and $134,000,
respectively, on research and development activities. The research and
development expenses incurred in 2003 were in engineering salaries, outside
consulting fees and lab supplies of approximately $79,000, $28,000 and
$9,000, respectively.
Marketing and Sales
In its technology business, from October 31, 2003 through October 2004,
NuWave marketed its products through a sales and marketing agent who
assisted with the marketing and sales of our NVP technology. This agent
previously served as the Company's chief technology officer. This agent
worked with the NuWave under a marketing agreement for the one-year period
ended October 2004, during which there were no sales of our products. NuWave
currently is evaluating whether to renew its agreement with that agent or to
engage a new agent to assist NuWave in marketing its technology.
Manufacturing
The Company does not contemplate that it will directly manufacture any
of its products. In the past, the Company has contracted with third parties
to manufacture NuWave's NVP Application Specific Integrating Chips ("ASIC")
and its product line up. NuWave also may license to third parties the rights
to manufacture the products, through direct licensing, Original Equipment
Manufacturer ("OEM") arrangements or otherwise.
The Company intends to produce the NVP ASIC chips only as ordered under
firm commitments by customers.
Patents; Proprietary Information
The Company is presently re-evaluating its technology line-up and
product strategy. In the past, the Company has filed U.S. patents and/or
copyright applications for certain of its proposed products and technology.
The Company has also filed applications in key industrial countries
worldwide. The Company intends to protect patents and technologies in key
strategic technology product areas.
In April 1996, the Company filed two U.S. patent applications on behalf
of Rave Engineering Corporation ("Rave") for its Randall connector system.
One patent was granted in November 1997 and the second patent was granted
January 1998. Under the terms of a settlement agreement with Rave, the
Company retains the exclusive license rights to these patents.
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In April 1998, the Company filed three U.S. patent applications for
certain of its independently developed products: one for the NVP and two for
the Softsets, these patents were granted in November 2000, February 2001 and
May 2001, respectively. In August 1999, the Company filed a patent
application for its digital software technology as used in its PicturePrep
product line, this patent was granted in October 2001. There is no assurance
that any patent will provide the Company with commercially significant
protection of our technology or that we will have adequate resources to
enforce our patents.
The Company historically sold its technology and products in foreign
markets. As such, it has filed for foreign patent protection in the
countries forming the European Union, Japan and Korea. The patent laws of
other countries may differ significantly from those of the United States as
to the patentability of the Company's products and technology. Moreover, the
degree of protection afforded by foreign patents may be different from that
in the United States.
Patent applications in the United States are maintained in secrecy
until the patents are issued, if a non-publication request is timely made and
the applications are not foreign filed, and are otherwise published 18 months
after filing. Publication of discoveries in scientific or patent literature
tends to lag behind actual discoveries by several months. As a result, the
Company cannot be certain that it will be the first creator of inventions
covered by any patent applications it makes or the first to file patent
applications on such inventions.
Management believes that the products the Company intends to market and
sell do not infringe the patents or other proprietary rights of third
parties. Further, it is not aware of any patents held by competitors that
will prevent, limit or otherwise interfere with the Company's ability to make
and sell its products. However, it is possible that competitors may have
applied for, or may in the future apply for and obtain, patents which have an
adverse impact on the Company's ability to make and sell its products. There
is no assurance that competitors will not infringe the Company's patents.
Defense and prosecution of patent suits, even if successful, are both costly
and time consuming. An adverse outcome in the defense of a patent suit could
subject the Company to significant liabilities to third parties, require
disputed rights to be licensed from third parties or require it to cease
selling its products.
The Company also relies on unpatented proprietary technology. There is
no assurance that others may not independently develop the same or similar
technology or otherwise obtain access to the Company's unpatented
technology. To protect its trade secrets and other proprietary information,
the Company requires employees, advisors and collaborators to enter into
confidentiality agreements. The Company could be adversely affected in the
event that these agreements fail to provide meaningful protection for its
trade secrets, know-how or other proprietary information.
Competition
The technology markets in which the Company competes are characterized
by intense competition, and, particularly with respect to the market for
video editing, video production and video processing products, there is
typically significant price erosion over the life of a product. The
Company's products will directly compete with those of numerous
well-established companies, such as Sony Electronics, Inc., Panasonic
Division of Matsushita Electric Industrial Co., Motorola, Inc., Mitsubishi
International Corp. and Royal Philips Electronics, NV, which design,
manufacture and/or market video technology and other products. All of these
companies have substantially greater financial, technical, personnel and
other resources than the Company and have established reputations for success
in the development, licensing, sale and service of their products and
technology. Certain of these competitors dominate their industries and have
the necessary financial resources to enable them to withstand substantial
price competition or downturns in the market for video products.
In regard to real estate development, we will have to compete against
other real estate developers. However, in these markets competitors tend to
be more localized. The Company will be competing against other providers of
housing for those in the over age 55 category. Potential purchasers of real
estate units have the opportunity to choose from a rental community housing
or housing in which individual units are purchased, and from a range of
service offerings. The Company will be competing against all of these
housing providers in its real estate business.
Employees
The Company currently has two full-time employees, of whom one is an
executive and depending on its level of business activity, expects to hire
additional employees in the next 12 to 18 months, as needed, to support
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marketing and sales, development and construction. The Company also retains
a number of consultants on an as-needed basis. None of NuWave's present
employees are represented by a labor union. The Company considers its
employee relations to be good.
RISK FACTORS
NuWave is subject to various risks that may materially harm our
business, financial condition and results of operations. You should carefully
consider the risks and uncertainties described below and the other
information in this filing before deciding to purchase our common stock. If
any of these risks or uncertainties actually occurs, our business, financial
condition or operating results could be materially harmed. In that case, the
trading price of our common stock could decline and you could lose all or
part of your investment.
We Have Historically Incurred Losses and Losses May Continue In The Future
To date, we have received only limited revenue from the sale of our
technology products, and no revenue yet from the real estate business. We
have historically incurred losses. NuWave has experienced losses from
operations as a result of its investment necessary to achieve its operating
plan, which is long-range in nature. For the year ended December 31, 2004, we
had a net loss applicable to common stockholders of $336,000. In the year
ended December 31, 2003 we had a net loss applicable to common shareholders
of $809,000. Management anticipates that we may continue to incur losses for
at least the next twelve to eighteen months. Accordingly, we may experience
significant liquidity and cash flow problems because historically our
operations have not been profitable. As of December 31, 2004, we had an
accumulated deficit of approximately $28,259,000 and a stockholders'
deficiency of $1,671,000. We anticipate receiving only limited revenues from
the technology business during 2005. Revenues, if any, on developed
properties from real estate investments are not forecast until 2006 or 2007.
We may be unsuccessful in reaching or maintaining profitable operations.
Our Continued Development Efforts And Future Growth Depend Upon Our Ability
To Raise Additional Capital Which May Not Be Available To Us When Needed Or
On Acceptable Terms.
We have relied on significant external financing to fund our operations
and expect to rely on external financing for the foreseeable future. Such
financing has historically come from a combination of borrowings and sale of
common stock from third parties. We cannot assure you that financing, whether
from external sources or related parties, will be available if needed or on
favorable terms. We have sufficient funds to continue operations for one year
under our Standby Equity Distribution Agreement with Cornell Capital
Partners, LP but will require additional capital to complete our real estate
development projects. We anticipate, based on our current proposed plans and
assumptions relating to our operations, that we will require additional
capital in order to implement our business plan. Our inability to obtain
adequate financing will result in the need to curtail business operations.
Any of these events would be materially harmful to our business and may
result in a lower stock price. We will need to raise additional capital to
fund our anticipated future expansion. Among other things, external financing
may be required to cover our operating costs. To the extent that any future
financing involves the sale of our equity securities, our existing
stockholders could be substantially diluted.
The Standby Equity Distribution Agreement and Convertible Debentures Contain
Certain Covenants Prohibiting Us From Raising Capital At Less Than the Market
Price Or Pledging Assets to Other Lenders
The Standby Equity Distribution Agreement and Convertible Debentures
contain covenants that restrict the following activities:
o Raising capital from the sale of common stock or other securities
convertible into common stock at a price less than the market price
of NuWave's common stock on the date of issuance; or
o Granting a security interest in NuWave's assets, which security
interest may be needed in order to obtain borrowings or capital from
a lender.
The existence of these covenants may severely limit NuWave's ability to
borrow money or raise capital from the sale of common stock or convertible
securities because any potential lender will likely require collateral in
the form of a security interest on NuWave's assets to secure a loan and
A-4
purchasers of our common stock or convertible securities may want to pay a
discount to the market price of our stock.
We Have Been the Subject Of A Going Concern Explanatory Paragraph Included
Within the Reports From Our Independent Registered Public Accounting Firms,
Which Means That We May Not Be Able To Continue Operations Unless We Obtain
Additional Funding
Our independent registered public accounting firms have added an
explanatory paragraph to their audit reports issued in connection with the
consolidated financial statements for the years ended December 31, 2004 and
2003, which states that NuWave has experienced recurring net losses, negative
cash flows from operations, a net working capital deficiency and a stockholders'
deficiency, which raise substantial doubt about the Company's ability to
continue as a going concern. Our financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
We Could Fail To Attract Or Retain Key Personnel, Which Could Be Detrimental
To Our Operations
Our success largely depends on the efforts and abilities of our Chief
Executive Office, Principal Accounting Officer and our President, Mr.
Kanakis. The loss of the services of Mr. Kanakis could materially harm our
business because of the cost and time necessary to replace and train a
replacement. Such a loss would also divert management attention away from
operational issues. We do not presently maintain a key-man life insurance
policy on Mr. Kanakis. To the extent that we are smaller than our competitors
and have fewer resources we may not be able to attract the sufficient number
and quality of staff.
We Have A Limited Operating History Upon Which You Can Evaluate Our Business
As to our technology business, until June of 2001 the Company was a
development stage enterprise. At that time the Company shifted to
commercialization and thus has had only a limited operating history. Since
inception in July 1995, the Company has been engaged primarily in raising
funds and continuing the development of the NuWave Video Processor (NVP)
Technology. During the second half of 2001, the Company began producing and
selling the NVP Video Processor in an ASIC format for the Original Equipment
Manufacturer market and our first set top box product utilizing the NVP
technology the Video Game Enhancer ("VGE") for the retail market. During late
2002 and throughout 2003, the Company terminated all engineering employees
and most of its engineering and product development consultants in an effort
to reduce costs. During the one year period from October 31, 2003 through
October 2004, the Company utilized the services of a sales agent to identify
and develop markets and opportunities for our proprietary video and imaging
technology. NuWave currently is evaluating whether to renew its agreement
with that agent or whether to engage a new agent to assist NuWave in
marketing its technology. The Company may not be able to generate significant
revenues or achieve profitable operations.
The Company entered the real estate market in December 2003. The
Company is not likely to see revenue on developed properties from its real
estate investments until some time late in 2006 or 2007, if at all. There
remain many risks, such as market risks, interest rates and competition in
this market. Our real estate business may not be able to generate significant
revenues or achieve profitable operations.
Our Common Stock May Be Affected By Limited Trading Volume And May Fluctuate
Significantly
There has been a limited public market for our common stock and there
can be no assurance that an active trading market for our common stock will
develop. An absence of an active trading market could adversely affect our
shareholders' ability to sell our common stock in short time periods, or
possibly at all. Our common stock has experienced, and is likely to
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experience in the future, significant price and volume fluctuations that
could adversely affect the market price of our common stock without regard to
our operating performance. In addition, we believe that factors such as
quarterly fluctuations in our financial results and changes in the overall
economy or the condition of the financial markets could cause the price of
our common stock to fluctuate substantially.
Our Common Stock Is Deemed To Be "Penny Stock," Which May Make It More
Difficult For Investors To Sell Their Shares Due To Suitability Requirements
Our common stock is deemed to be "penny stock" as that term is defined
in Rule 3a51-1 promulgated under the Securities Exchange Act of 1934. These
requirements may reduce the potential market for our common stock by reducing
the number of potential investors. This may make it more difficult for
investors in our common stock to sell shares to third parties or to otherwise
dispose of them. This could cause our stock price to decline. Penny stocks
are stock:
o With a price of less than $5.00 per share;
o That are not traded on a "recognized" national exchange;
o Whose prices are not quoted on the NASDAQ automated quotation system
(NASDAQ listed stock must still have a price of not less than $5.00
per share); or
o In issuers with net tangible assets less than $2.0 million (if the
issuer has been in continuous operation for at least three years) or
$5.0 million (if in continuous operation for less than three years),
or with average revenues of less than $6.0 million for the last
three years.
Broker-dealers dealing in penny stocks are required to provide potential
investors with a document disclosing the risks of penny stocks. Moreover,
broker-dealers are required to determine whether an investment in a penny
stock is a suitable investment for a prospective investor.
ITEM 2. DESCRIPTION OF PROPERTIES
NuWave maintains its headquarters in Union, New Jersey, a shared space
for which NuWave pays $500 per month, on a month-to-month basis, based upon
an oral agreement. In addition, NuWave maintains approximately 1,000 square
feet of lab and storage space in Fairfield, New Jersey and pays $1,200 per
month, on a month-to-month basis, based upon an oral agreement. Effective
July 2004, NuWave entered into a five-year lease agreement for approximately
3,500 square feet of office tower space in Jersey City, New Jersey. NuWave
incurs a net cost of approximately $5,000 per month for this space, when
combining the rent and other costs such as utilities, taxes and maintenance.
This net cost reflects the benefit of NuWave subleasing approximately 50% of
the space to a subtenant. NuWave believes that its property is well
maintained and suitable for NuWave's current needs.
Effective in December 2003, NuWave began making investments in real
estate properties. Currently, there are no limitations on the types of assets
NuWave may invest. This policy may be changed without the consent of
shareholders. It is NuWave's policy to invest in properties primarily for
possible capital gain.
NuWave may invest in most property, including, for example, undeveloped
acreage, shopping centers, single family residences and office buildings.
NuWave intends to finance the acquisition of these properties through a
combination of debt and equity financing. NuWave intends to hold and manage
properties for only the duration which will facilitate the sale for the
possible capital gain.
NuWave has no current intention to invest in real estate mortgages.
NuWave may invest in the common stock of companies that are in the real
estate business. Primary real estate activities in which NuWave may invest in
the future include investing in undeveloped and developed properties.
In April 2004, NuWave, through its wholly owned subsidiary, WH
Acquisition Corp., purchased residential property consisting of land and a
residential building in Jersey City, New Jersey for a total purchase price of
$122,000. The purchase price was paid with $113,000 in cash and $9,000 in the
form of a deposit. NuWave intends to redevelop and then later sell this
property.
On December 22, 2003, NuWave acquired a parcel of undeveloped acreage
in Cranford, New Jersey. This land was purchased for $4,950,000 from Stone
Street Asset Management, LLC ("Stone Street"), a company under common control
with Cornell Capital Partners, LP. NuWave obtained an appraisal by an
independent certified general real estate appraiser, who valued the acreage
at $4,950,000. In exchange for the undeveloped acreage, NuWave issued
$3,550,000 in convertible debentures and $1,400,000 in a note payable. Of the
total $3,550,000 convertible debentures, a single $3,300,000 convertible
debenture, which was replaced during January 2005 with a $3,481,274
non-convertible promissory note (including $181,274 of accrued interest) is
collateralized with a first mortgage lien on the land, and is held by Cornell
Capital Partners, LP. The $1,400,000 note payable is secured with a second
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mortgage on the land and was held by Stone Street Asset Management, LLC and
was subsequently assigned to Cornell Capital Partners, LP on January 26,
2005. Stone Street and Cornell Capital Partners, LP are related parties in
that they have common ownership. The $4,950,000 purchase price of the
undeveloped acreage represents a price that was approximately $2,035,000
greater than the cost basis in the hands of Stone Street immediately prior to
the sale. Stone Street purchased the property from an independent third party
in August 2003. As a result of Stone Street's relationship with Cornell
Capital Partners, LP and Cornell Capital Partners, LP's ability to influence
the management of NuWave, NuWave has recorded the land on its books at the
cost basis of the seller. NuWave has a deeded interest in the property. Of
the convertible debentures issued to acquire the land, $250,000 of these
convertible debentures are due December 2005. The remaining convertible
debenture of $3,300,000 has been replaced with a $3,481,274 non-convertible
promissory note (including accrued interest) that is due in December 2008.
The holders of the convertible debentures may convert any portion of the
convertible debentures into NuWave's common stock at any time. The $1,400,000
note, as amended, is payable over 48 months, starting January 1, 2006. All
of these obligations accrue interest at a 5% annual interest rate.
During July 2004 and August 2004, the Company entered into an Agreement
of Sale and a Convertible Debenture, respectively, related to its transfer of
a 20% fee simple interest in its land held for development and sale as a
tenant in common. During November 2004, the Agreement of Sale and the
Convertible Debenture were terminated and rescinded in their entirety and
replaced with an Amended and Restated Agreement of Sale issued in November
2004, as described below.
The terms of the July 2004 Agreement of Sale and the August 2004
Convertible Debenture are outlined below.
The Company sold a 20% fee simple interest in its land held for
development and sale as a tenant in common to an entity which is a related
party to Michael Kesselbrenner, a current holder of the Company's convertible
debentures ("Investor") and received cash proceeds of approximately
$1,784,000.
The Company may reacquire an interest in the property ("Company's
Option"). At any time after closing and upon 15 days advance written notice,
the Company may repurchase all or a portion of the interest sold at a
purchase price computed at 120% of the price, or portion thereof, paid by the
Investor on the effective date.
The Investor, at any time after closing and upon 15 days advance
written notice, may sell back to the Company all or any portion of its
interest in the property ("Investor's Option"). The Investor may sell this
property back to the Company through exercise rights under a convertible
debenture agreement, discussed below. The Investors Option expires on August
1, 2007, and shall thereupon be exercised automatically for any portion of
the property interest not already reacquired by the Company.
In addition, the Investor has provided the Company with a right of
first offer to reacquire the Company's interest in the property. If, at any
time prior to August 1, 2007, the Investor wishes to sell its interest to a
third party, it must first notify the Company. Upon such notice, the Company
may, within 30 days, repurchase all of the remaining property interest for a
price equal to a pro-rata portion of the original price paid by the Investor
at the effective date (approximately $1,784,000). If the Company fails to
exercise this offer within the 30 day period, then the Investor shall be
allowed 90 days in which to sell all of its interests in the property to a
third party.
In conjunction with this transaction, the Company issued a convertible
debenture in favor of the Investor for approximately $1,784,000. This
convertible debenture bears interest from July 14, 2004 at 10% per annum,
with the interest payable monthly, starting September 1, 2004. This
convertible debenture matures on August 1, 2007.
Under the terms of the convertible debenture, an exercise of the
Company's Option to reacquire its former interest in the property is treated
as a redemption of all or a portion of its obligations under the convertible
debenture. The Company's purchase price in this case is a premium of 120% of
the price, or portion thereof, paid by the Investor on the effective date, as
discussed above.
An exercise of the Investor's Option to sell its interest in the land
back to the Company is accomplished through the Investor's right to convert
the amount outstanding under the convertible debenture into the Company's
common stock. The aggregate amount of principal and any unpaid interest is
convertible at the per share price equal to the lesser of (a) 120% of the
closing bid price at August 20, 2004, or (b) 80% of the lowest closing bid
price for the five days immediately preceding the conversion date. Upon such
conversion, a pro-rata portion of the interest in the property is sold back
to the Company. Upon the maturity of the convertible debenture, the
Investor's Option terminates and any remaining amount of the convertible
debenture is automatically converted into the Company's common stock. Upon
such conversion, the remaining portion of the interest in the property is
sold back to the Company.
A-7
The Company's reacquisition of its interests in the property under the
terms of the rights of first offer, as described above, shall represent a
satisfaction of its obligations at face value under the convertible
debenture.
Upon the Investor's sale of the property to a third party under the
terms of the rights of first offer, as described above, all obligations of
the Company under the convertible debenture shall immediately terminate.
In accordance with the provisions a Statement of Financial Accounting
Standards ("SFAS") No. 66, "Accounting for Sales of Real Estate," the Company
has accounted for this transaction as a financing transaction. Under the
provisions of SFAS No. 66, when the seller has an obligation to repurchase
the property, or the terms of the transaction allow the buyer to compel the
seller to repurchase the property or interest, then the transaction shall be
accounted for as a financing transaction, rather than a sale. Under the
terms of this transaction, the Investor's Option requires the Investor to
sell the property back to the Company. This sale back to the Company will be
satisfied through the conversion of the Investor's interest under the
convertible debenture into the Company's common stock.
Upon the Investor's sale of the property interest to a third party
under the terms of the rights of first offer, as described above, this
financing transaction shall be deemed to have terminated and the Company
shall thereupon account for the proceeds received as a sale of its interest
in the property, with any gain or loss on such sale to be recognized
accordingly at that time.
During November 2004, the July 2004 Agreement of Sale and the August
2004 Convertible Debenture were rescinded and terminated pursuant to an
Amended and Restated Agreement of Sale. Under this Amended and Restated
Agreement of Sale, for a selling price of approximately $1,427,000, the
Company has sold a 20% fee simple interest in its land held for development
and sale as a tenant in common to an entity which is a related party to
Michael Kesselbrenner, a current holder of the Company's convertible
debentures. The Company has applied the $1,427,000 sale amount against the
proceeds from the convertible debenture and has incurred interest expense of
$38,000 for the three month period ended September 30, 2004, $30,000 of which
has been paid to the buyer through September 30, 2004. The Company has
incurred additional interest expense of $20,000 through the date of
termination. On November 29, 2004, NuWave paid approximately $326,000 to the
buyer, representing approximately $28,000 in accrued interest and $298,000 in
refunded proceeds.
NuWave intends to develop the property into a 55 and over residential
community. NuWave intends to develop residential dwelling units and limited
retail space on the site. The residential dwelling units will be sold to
individual buyers. Currently the acreage is not developed. NuWave believes
that there is a demand for these 55 and over units. Reasons include an aging
population with disposable income, the continued positive economic outlook
for the Northeast economy and the positive local economics in the Cranford,
New Jersey area. NuWave expects that planning for the project will be
completed by the end of 2005 and that construction and development will begin
in late 2006 or 2007. NuWave is currently developing cost estimates for the
development of the property.
The Company maintains adequate liability insurance on the undeveloped
acreage.
ITEM 3. LEGAL PROCEEDINGS
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
A-8
PART II
ITEM 5. MARKET FOR NUWAVE TECHNOLOGIES, INC.'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
Market for Common Equity
The Company's Common Stock, par value $.001 per share is traded on the
Over-the-Counter Bulletin Board (the "OTCBB") Market under the symbol
NUWV.OB. The OTCBB is a regulated quotation service that displays real-time
quotes, last-sale prices and volume information in over-the-counter equity
securities. Prior to August 13, 2002, the stock had been traded on the
NASDAQ SmallCap Market. The following table sets forth the range of high and
low closing sale prices for the Common Stock as reported on the OTCBB Market
during each of the quarters presented. The quotations set forth below are
inter-dealer quotations, without retail mark-ups, mark-downs or commissions
and do not necessarily represent actual transactions. On July 21, 2003, the
Company affected a 1:50 reverse stock split, as previously approved by
shareholders. All closing sales prices below have been restated
retroactively for the effect of the reverse stock split.
Common
Stock
HIGH LOW
Three Months Ended March 31, $8.00 $0.18
2003
Three Months Ended June 30, 2003 0.45 0.10
Three Months Ended September 0.60 0.10
30, 2003
Three Months Ended December 31, 0.31 0.10
2003
Three Months Ended March 31, 0.18 0.10
2004
Three Months Ended June 30, 2004 0.17 0.04
Three Months Ended September 0.085 0.065
30, 2004
Three Months Ended December 31, 0.09 0.065
2004
As of April 8, 2005, there were approximately 196 holders of record of
the Company's common stock and 2,062,013 shares of common stock issued and
outstanding.
During October, 2003, the Company redeemed its convertible preferred
stock. In accordance with the redemption, the Company paid a one time deemed
dividend - redemption premium in total of $19,400. These convertible
preferred shares have now all been redeemed are there remain no shares
outstanding.
The Company has never declared or paid any cash dividends on its common
shares. The Company currently intends to retain any future earnings to
finance the growth and development of its business and future operations, and
therefore does not anticipate paying any further cash dividends in the
foreseeable future.
Recent Sales of Unregistered Securities
Standby Equity Distribution Agreement
A-9
On January 26, 2005, NuWave entered into a Standby Equity Distribution
Agreement with Cornell Capital Partners, LP. Pursuant to the Standby Equity
Distribution Agreement, we may, at our discretion, periodically sell to
Cornell Capital Partners, LP shares of common stock for a total purchase
price of up to $30 million. For each share of common stock purchased under
the Standby Equity Distribution Agreement, Cornell Capital Partners, LP will
pay NuWave 99% of the volume weighted average price on the Over-the-Counter
Bulletin Board or other principal market on which our common stock is traded
for the 5 days immediately following the notice date. Further, Cornell
Capital Partners, LP will retain a fee of 10% of each advance under the
Standby Equity Distribution Agreement. In connection with a now-terminated
Standby Equity Distribution Agreement, we paid Newbridge Securities
Corporation a fee of 111,111 shares of common stock.
Convertible Debenture
During August 2004, the Company raised approximately $1,784,000 through
the issuance of a convertible debenture to a party related to Michael
Kesselbrenner, a current convertible debenture holder. This debenture bore
interest at 10% per annum, with interest payable monthly and was secured
through an interest in the land held for development and sale. At the option
of the holder or the Company, at any time, this convertible debenture could
be converted into the Company's Common Stock. The value of principal and
accrued interest was convertible at the per share price equal to the lesser
of (a) 120% of the closing bid price at August 20, 2004, or (b) 80% of the
lowest closing bid price for the five days immediately preceding the
conversion date. In connection with the issuance of this convertible
debenture the Company transferred a 20% fee simple interest in its land held
for development and sale. In addition, the Company and the transferee each
had the option to effectively void all or a portion of the transfer. In the
event that neither option was exercised within three years, the 20% fee
simple interest would revert to the Company upon settlement of the
convertible debenture. Upon issuance NuWave recorded a debt discount of
$446,000, for the August 2004 debenture. This debt discount was recorded to
reflect the value of the beneficial conversion feature related to the
convertible debentures. Accordingly, NuWave recorded the value of the
beneficial conversion feature as a reduction to the carrying amount of the
convertible debt and as an addition to additional paid-in capital. This debt
discount was being amortized over the term of the related debentures, which
was 36 months, and the amortization of such discount was recorded as interest
expense on the accompanying consolidated statement of operations for the year
ended December 31, 2004.
During November 2004, the July 2004 Agreement of Sale and the August
2004 Convertible Debenture were rescinded and terminated pursuant to an
Amended and Restated Agreement of Sale. Under this Amended and Restated
Agreement of Sale, for a selling price of approximately $1,427,000, the
Company has sold a 20% fee simple interest in its land held for development
and sale as a tenant in common to an entity which is a related party to a
current holder of the Company's convertible debentures. The Company has
applied the $1,427,000 sale amount against the proceeds from the convertible
debenture and has incurred interest expense of $38,000 for the three month
period ended September 30, 2004, $30,000 of which has been paid to the buyer
through September 30, 2004. The Company has incurred additional interest
expense of $20,000 through the date of termination. On November 29, 2004
NuWave paid approximately $326,000 to the buyer, representing approximately
$28,000 in accrued interest and $298,000 in refunded proceeds.
Convertible Debentures
During October 2004, NuWave issued $100,000 in a convertible
debenture. This debenture bears interest at a rate of 5% per annum, with
interest due at maturity or upon conversion. This debenture matures in
October 2006. NuWave has recorded a debt discount of $25,000 at issuance of
this convertible debenture to reflect the value of the beneficial conversion
feature related to the convertible debenture. Accordingly, NuWave has
recorded the value of the beneficial conversion feature as a reduction to the
carrying amount of the convertible debt and as an addition to additional
paid-in capital. This debt discount is being amortized over the term of the
related debenture, which is 24 months, and such amortization is recorded as
interest expense in the consolidated statement of operations. At the option
of NuWave, upon the maturity date, this convertible debenture and accrued
interest may be converted into NuWave's Common Stock. At the option of the
holder, at any time prior to maturity, any portion of this convertible
debenture may be converted into Common Stock. The value of principal and
accrued interest is convertible at the per share price equal to the lesser of
(a) 120% of the closing bid price on date of issue, or (b) 80% of the lowest
closing bid price for the five days immediately preceding the conversion
date. In addition, NuWave may redeem, with 15 days advance notice, a portion
or all of this outstanding debenture at 110% of the dollar value of the
amount redeemed plus accrued interest.
A-10
In June 2004, NuWave issued $250,000 in a convertible debenture. This
debenture bears interest at a rate of 10% per annum, with interest due at
maturity or upon conversion and matures in June 2006. NuWave has recorded a
debt discount of $83,000 at issuance of this convertible debenture to reflect
the value of the beneficial conversion feature related to the convertible
debenture. At the option of NuWave, upon the maturity date, this convertible
debenture and accrued interest may be converted into NuWave's Common Stock.
At the option of the holder, at any time prior to maturity, any portion of
this convertible debenture may be converted into Common Stock. The value of
principal and accrued interest is convertible at the per share price equal to
the lesser of (a) 120% of the closing bid price on April 26, 2004, or (b) 75%
of the lowest closing bid price for the five days immediately preceding the
conversion date. In addition, NuWave may redeem, with 15 days advance
notice, a portion or all of these outstanding debentures at 125% of the
dollar value of the amount redeemed plus accrued interest.
During January 2004, NuWave issued $110,000 in convertible debentures.
These debentures bear interest at a rate of 5% per annum, with interest due
at maturity or upon conversion. These debentures mature in January 2006.
NuWave has recorded a debt discount of $27,000 at issuance of these
convertible debentures to reflect the value of the beneficial conversion
feature related to the convertible debentures. Accordingly, NuWave has
recorded the value of the beneficial conversion feature as a reduction to the
carrying amount of the convertible debt and as an addition to additional
paid-in capital. This debt discount is being amortized over the term of the
related debentures, which is 24 months, and such amortization is recorded as
interest expense on the accompanying consolidated statement of operations for
the year ended December 31, 2004. At the option of NuWave, upon the maturity
date, these convertible debentures and accrued interest may be converted into
NuWave's Common Stock. At the option of the holder, at any time prior to
maturity, any portion of these convertible debentures may be converted into
Common Stock. The value of principal and accrued interest is convertible at
the per share price equal to the lesser of (a) 120% of the closing bid price
on the date of issue, or (b) 80% of the lowest daily volume weighted average
price for the five days immediately preceding the conversion date. In
addition, NuWave may redeem, with 15 days advance notice, a portion or all of
these outstanding debentures at 110% of the dollar value of the amount
redeemed plus accrued interest.
During October 2003, NuWave raised $200,000 through the issuance of a
convertible debenture to Cornell Capital Partners, LP. In addition, during
December 2003, NuWave raised $195,000 through the issuance of convertible
debentures to various unrelated parties. In September 2004, NuWave redeemed
the $200,000 convertible debenture with Cornell Capital Partners, LP and
$70,000 of the convertible debentures issued in December 2003 and January
2004. On December 22, 2003, NuWave issued a convertible debenture for
$3,300,000 to Cornell Capital Partners, LP, which was subsequently terminated
and replaced with a $3,481,274 non-convertible promissory note (including
accrued interest of $181,274) on January 26, 2005, and $250,000 to unrelated
parties in connection with the acquisition of land held for development and
sale which is secured through a first mortgage lien on the land. All of
these debentures bear interest at a rate of 5% per annum, with interest due
at maturity or upon conversion. These debentures mature at various dates
ranging from October 2005 through December 2008. At the option of NuWave,
upon the maturity date, these convertible debentures and accrued interest may
be converted into NuWave's Common Stock. At the option of the holder, at any
time prior to maturity, any portion of these convertible debentures may be
converted into Common Stock. The value of principal and accrued interest is
convertible at the per share price equal to the lesser of (a) 120% of the
closing bid price, or (b) 80% of the lowest daily volume weighted average
price for the five days immediately preceding the conversion date. In
addition, NuWave may redeem a portion or all of these outstanding debentures
at 110% of the dollar value of the amount redeemed plus accrued interest.
Under the conversion limitation for the debentures, NuWave may issue shares
under conversion only so long as, at conversion, the holder has no more than
9.9% of NuWave's outstanding shares.
Note Payable - Related Party
On December 22, 2003, Lehigh issued a note for $1,400,000 to Stone
Street in conjunction with its purchase of land in New Jersey. The note, as
amended, provides for the payment of forty-eight equal monthly installments
of principal and interest of $35,546 beginning on January 1, 2006, matures on
January 10, 2010 and is secured through a second mortgage on the land. The
note bears interest at a rate of 5% per annum. The note was assigned to
Cornell Capital Partners, LP on January 26, 2005.
A-11
Warrants
On September 24, 2003, NuWave issued 200,000 warrants to purchase
NuWave's common stock at $1.00 per share. These warrants were issued to two
former officers for prior services provided to NuWave. The warrants are
exercisable over a five-year period which expires in September 2008.
Equity Line of Credit
As of January 1, 2003, NuWave had a $3,000,000 Equity Line of Credit
Agreement with Cornell Capital Partners, LP, under which NuWave could, at its
option, periodically require the purchaser to purchase up to $100,000 in any
seven day period of NuWave's common stock. For issuance under this Equity
Line of Credit Agreement, as of January 1, 2003 there were 280,000 shares
registered under the Securities Act of 1933. NuWave registered an additional
1,200,000 shares on January 10, 2003, bringing the total registered shares to
1,580,000 under the Equity Line of Credit Agreement. For each share of
common stock purchased under the Equity Line of Credit, the Purchaser paid
97% of the then market price, and was paid a fee of 4% of each advance. This
Equity Line of Credit Agreement expired on April 15, 2004.
During July 2003, NuWave reached the limit of 1,580,000 registered
shares that were issuable under the Agreement.
NuWave received loans aggregating $357,000 during the year ended
December 31, 2003 from Cornell Capital Partners, LP. NuWave repaid certain of
these loans in the amount of $273,000, during the year ended December 31,
2003 through the issuance of 1,151,490 shares of NuWave's common stock. The
common shares issued to repay these notes were issued at a 3% discount. These
loans were non-interest bearing during their terms, which ranged from 90 days
to 180 days.
The balance of these loans as of September 2003, totaling $284,000,
were not repaid within their term and were in default. During September 2003,
NuWave entered into an Agreement with Cornell Capital Partners, LP to settle
the default on these loans. In connection therewith, Cornell Capital
Partners, LP agreed not to foreclose on its outstanding indebtedness of
$284,000 owed by NuWave. In addition, on September 29, 2003, Cornell Capital
Partners, LP entered into a new loan agreement with NuWave for $200,000 to be
deposited in escrow to be used to satisfy certain outstanding obligations of
NuWave, including trade payables, unpaid wages, and settlement of employment
agreements. The loan was non-interest bearing for its original term of 180
days.
On March 27, 2004, the $200,000 loan matured and was not repaid
according to its terms. On April 5, 2004, Cornell Capital Partners, LP agreed
to extend the due dates of the $284,000 of loans and the $200,000 loan to
April 15, 2005. On May 11, 2004, Cornell Capital Partners, LP agreed to
further extend the due dates of these $484,000 in loans to August 1, 2005.
On July 20, 2004, Cornell Capital Partners, LP agreed to further extend the
due dates of these $484,000 in loans to December 5, 2005. While in default
and through the extended maturity date, the $284,000 of loans and the
$200,000 loan accrued interest from the default dates at a rate of 24% per
annum. On September 10, 2004, NuWave satisfied its obligations for principal
and accrued interest related to its $484,000 in loans to Cornell Capital
Partners, LP.
Convertible Preferred Stock
During May 2003, NuWave entered into a Securities Purchase Agreement
with several independent buyers whereby NuWave issued and sold to the buyers
67,000 shares of Series A Preferred Stock at $1 per share. The buyers were
entitled, at their option, to convert the Series A Preferred Stock into
shares of NuWave'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 would automatically convert into shares of NuWave's Common Stock
at an adjusted conversion price of $0.05 per share. NuWave had 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 NuWave chose to redeem some, but not all, of the
Series A Preferred Stock, NuWave could redeem a pro rata amount from each
holder of the Series A Preferred Stock. The preferred stock was redeemed by
NuWave in October 2003 for a total redemption price of $86,400. The $19,400
excess of the amount of the redemption over the amount of the original issue
has been recorded as a deemed dividend - redemption premium on the
convertible preferred stock.
A-12
Shares issued for services
On June 30, 2003, NuWave issued 25,000 shares of common stock valued at
approximately $5,000 in exchange for services provided to NuWave.
On May 25, 2004, NuWave issued 111,111 shares of common stock to
Newbridge Security Corporation, which were valued at approximately $10,000 in
exchange for services provided to NuWave under a now-terminated Standby
Equity Distribution Agreement.
Effective June 1, 2004, NuWave issued 75,000 shares of common stock to
George Kanakis, its President and Chief Executive Officer, under the terms of
his employment contract. Mr. Kanakis is also entitled to options to purchase
100,000 shares of common stock at some future date. NuWave has not yet
adopted a stock option plan, and as such, no options have been granted to Mr.
Kanakis.
Reduction in Par Value and Reverse Stock Split
On July 21, 2003, NuWave's Board of Directors declared effective a
reverse split of NuWave's common shares in the ratio of 1 to 50 as voted on
and approved by the stockholders at NuWave's Annual Stockholders' meeting
held on December 20, 2002, and effective on July 21, 2003. All share and per
share amounts have been retroactively restated for the stock split.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
Summary Financial Information
The summary financial data set forth below are derived from and
should be read in conjunction with the consolidated financial statements,
including the notes thereto, filed as part of this Form 10-KSB.
Year Ended Year Ended
Consolidated Statement of December 31, December 31,
Operations Data: 2004 2003
(in thousands, except for
share and per share data)
Revenues $ 0 $ 20
Net loss applicable to
common stockholders $ (336) $ (809)
Net loss per common share,
basic and diluted $ (.17) $ (.56)
Weighted average number of
shares -basic and diluted $ 1,986,640 $ 1,455,365
Comprehensive loss $ (211) $ (809)
December 31,
Consolidated Balance Sheet 2004
Data:
Working capital deficiency $ (36)
Total assets $ 3,203
Total liabilities $ 4,874
Stockholders' deficiency $ (1,671)
Forward-looking Statements
The following discussion and analysis should be read in
conjunction with the Consolidated Financial Statements and the Notes thereto
included herein. The information contained below includes statements of
NuWave's or management's beliefs, expectations, hopes, goals and plans that,
if not historical, are forward-looking statements subject to certain risks
and uncertainties that could cause actual results to differ materially from
those anticipated in the forward-looking statements. For a discussion on
forward-looking statements, see the information set forth in the Introductory
Note to this Annual Report under the caption "Forward Looking Statements,"
which information is incorporated herein by reference.
A-13
General
Our mission is to profitably exploit our proprietary imaging technology
and to identify and develop other business opportunities that will diversify
the Company's operations. We have diversified the Company's operations by
acquiring land for development and sale. We also continued to offer for sale
our 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, including our NUWAVE Video Processor ("NVP")
Technology (see "Marketing and Sales").
Note - the Company will discuss its technology business under Results of
Operations and will discuss its new real estate development business under
Plan of Operation. See below.
Going Concern
Our independent registered public accounting firm has added an
explanatory paragraph to their audit report issued in connection with the
consolidated financial statements for the year ended December 31, 2004, which
states that NuWave has experienced recurring net losses, negative cash flows
from operations, a net working capital deficiency and a stockholders'
deficiency, which raise substantial doubt about the Company's ability to
continue as a going concern. Our consolidated financial statements do not
include any adjustments that might result from the outcome of this
uncertainty. The Company's annual sales have declined from approximately
$20,000 to $0 for each of the years 2003 and 2004, respectively, as the
Company has had difficulty securing buyers for its technology products in a
very competitive environment and that there have yet to be revenues from the
sale of developed real estate properties. The Company has incurred annual
net losses of approximately $790,000 and $336,000 for the years ended
December 31, 2004 and 2003, respectively, resulting in a stockholders'
deficiency of approximately $1,671,000 at December 31, 2004.
Critical Accounting Policies
NuWave's 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 consolidated
financial statements.
Our significant accounting policies are summarized in Note 3 of our
consolidated financial statements at December 31, 2004. 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 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 consolidated
results of operations, financial position or liquidity for the periods
presented in this report.
NuWave's critical accounting policies include the accounting for an
acquisition of a parcel of land, outlined as follows. On December 22, 2003,
Lehigh acquired a parcel of land in New Jersey for $4,950,000 that it intends
to develop and then sell. This land was acquired from Stone Street Asset
Management LLC ("Stone Street"), a company under common control with Cornell
Capital Partners, LP. In connection with this purchase of land, NuWave
incurred debt obligations consisting of a $3,300,000 convertible debenture to
Cornell Capital Partners, LP, which was subsequently terminated and replaced
with a $3,481,274 promissory note on January 26, 2005, $250,000 of
convertible debentures to unrelated parties and a $1,400,000 secured note
payable to Stone Street, which was subsequently assigned to Cornell Capital
Partners, LP on January 26, 2005. As a result of Stone Street's relationship
A-14
with Cornell Capital Partners, LP, and Cornell Capital Partners, LP's
relationship with NuWave, NuWave has recorded the land at the historical cost
basis as recorded by Stone Street of approximately $2,915,000 in accordance
with accounting rules regarding transfer of non-monetary assets. The
difference of $2,035,000 between the fair value of the land as determined by
an independent appraiser and the carryover cost basis of land from Stone
Street has been recorded as an adjustment to additional paid-in capital.
Additionally, during July 2004 and August 2004, the Company entered
into an Agreement of Sale and a Convertible Debenture, respectively, related
to its transfer of a 20% fee simple interest in its land held for development
and sale as a tenant in common. During November 2004, the Agreement of Sale
and the Convertible Debenture were terminated and rescinded in their entirety
and replaced with an Amended and Restated Agreement of Sale issued in
November 2004, as described below.
The terms of the July 2004 Agreement of Sale and the August 2004
Convertible Debenture are outlined below.
The Company sold a 20% fee simple interest in its land held for
development and sale as a tenant in common to an entity which is a related
party to a current holder of the Company's convertible debentures
("Investor") and received cash proceeds of $1,783,549.
The Company may reacquire an interest in the property ("Company's
Option"). At any time after closing and upon 15 days advance written notice,
the Company may repurchase all or a portion of the interest sold at a
purchase price computed at 120% of the price, or portion thereof, paid by the
Investor on the effective date.
The Investor, at any time after closing and upon 15 days advance
written notice, may sell back to the Company all or any portion of its
interest in the property ("Investor's Option"). The Investor may sell this
property back to the Company through exercise rights under a convertible
debenture agreement, discussed below. The Investors Option expires on August
1, 2007, and shall thereupon be exercised automatically for any portion of
the property interest not already reacquired by the Company.
In addition, the Investor has provided the Company with a right of
first offer to reacquire the Company's interest in the property. If, at any
time prior to August 1, 2007, the Investor wishes to sell its interest to a
third party, it must first notify the Company. Upon such notice, the Company
may, within 30 days, repurchase all of the remaining property interest for a
price equal to a pro-rata portion of the original price paid by the Investor
at the effective date ($1,783,549). If the Company fails to exercise this
offer within the 30 day period, then the Investor shall be allowed 90 days in
which to sell all of its interests in the property to a third party.
In conjunction with this transaction, the Company issued a convertible
debenture in favor of the Investor for $1,783,549. This convertible
debenture bears interest from July 14, 2004 at 10% per annum, with the
interest payable monthly, starting September 1, 2004. This convertible
debenture matures on August 1, 2007.
Under the terms of the convertible debenture, an exercise of the
Company's Option to reacquire its former interest in the property is treated
as a redemption of all or a portion of its obligations under the convertible
debenture. The Company's purchase price in this case is a premium of 120% of
the price, or portion thereof, paid by the Investor on the effective date, as
discussed above.
An exercise of the Investor's Option to sell its interest in the land
back to the Company is accomplished through the Investor's right to convert
the amount outstanding under the convertible debenture into the Company's
common stock. The aggregate amount of principal and any unpaid interest is
convertible at the per share price equal to the lesser of (a) 120% of the
closing bid price at August 20, 2004, or (b) 80% of the lowest closing bid
price for the five days immediately preceding the conversion date. Upon such
conversion, a pro-rata portion of the interest in the property is sold back
to the Company. Upon the maturity of the convertible debenture, the
Investor's Option terminates and any remaining amount of the convertible
debenture is automatically converted into the Company's common stock. Upon
such conversion, the remaining portion of the interest in the property is
sold back to the Company.
The Company's reacquisition of its interests in the property under the
terms of the rights of first offer, as described above, shall represent a
satisfaction of its obligations at face value under the convertible
debenture.
A-15
Upon the Investor's sale of the property to a third party under the
terms of the rights of first offer, as described above, all obligations of
the Company under the convertible debenture shall immediately terminate.
In accordance with the provisions a SFAS No. 66, "Accounting for Sales
of Real Estate," the Company has accounted for this transaction as a
financing transaction. Under the provisions of SFAS No. 66, when the seller
has an obligation to repurchase the property, or the terms of the transaction
allow the buyer to compel the seller to repurchase the property or interest,
then the transaction shall be accounted for as a financing transaction,
rather than a sale. Under the terms of this transaction, the Investor's
Option requires the Investor to sell the property back to the Company. This
sale back to the Company will be satisfied through the conversion of the
Investor's interest under the convertible debenture into the Company's common
stock.
Upon the Investor's sale of the property interest to a third party
under the terms of the rights of first offer, as described above, this
financing transaction shall be deemed to have terminated and the Company
shall thereupon account for the proceeds received as a sale of its interest
in the property, with any gain or loss on such sale to be recognized
accordingly at that time.
During November 2004, the July 2004 Agreement of Sale and the August
2004 Convertible Debenture were rescinded and terminated pursuant to an
Amended and Restated Agreement of Sale. Under this Amended and Restated
Agreement of Sale, for a selling price of approximately $1,427,000, the
Company has sold a 20% fee simple interest in its land held for development
and sale as a tenant in common to an entity, which is a related party to a
current holder of the Company's convertible debentures. The Company has
applied the $1,427,000 sale amount against the proceeds from the convertible
debenture and has incurred interest expense of $38,000 for the three month
period ended September 30, 2004, $30,000 of which has been paid to the buyer
through September 30, 2004. The Company has incurred additional interest
expense of $20,000 through the date of termination. On November 29, 2004
NuWave paid approximately $326,000 to the buyer, representing approximately
$28,000 in accrued interest and $298,000 in refunded proceeds.
Effects of New Accounting Pronouncements
In December 2003, the Financial Accounting Standards Board ("FASB")
issued FASB Interpretation Number 46R "Consolidation of Variable Interest
Entities." FIN 46R, which 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 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 charge for abnormal amounts 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.123R, "Share-Based Payment"
(SFAS No. 123R). This statement replaces SFAS No. 123 and supersedes
Accounting Principles Board ("APB") No. 25. SFAS 123R 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 123R 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.
A-16
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 153 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
Nonmonetary 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 an 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
Overall, we incurred a net loss of $336,000 and $790,000 for the years
ended December 31, 2004 and 2003, respectively. This represented a $454,000
decrease in the Company's net loss. This decrease in the net loss was
primarily attributable to the recognition of a gain on the sale of an
interest in real estate, as further explained Plan of Operation - Real Estate
Activities, below.
General and administrative expenses for the overall Company for the
year ended December 31, 2004 were $741,000, as compared to $958,000 for the
year ended December 31, 2003, a decrease of $217,000 or 23%. This decrease
was the result of reductions in salaries of $167,000 resulting from the
resignation of all management and employees with only a new CEO in September
2003 and one other administrative employee hired on November 1, 2003. There
were also decreases in insurance of $190,000 and depreciation expense of
$37,000. There were increases in accounting fees of $70,000, financial and
other consulting fees of $46,000, and legal fees of $53,000. These
professional fees increased on account of the Company having to rely on
consultants to perform functions such as accounting and reporting, that
previously were performed by employees, as well as to support the Company's
efforts to prepare for its registration filing relating to the Standby Equity
Distribution Agreement and other financing programs. Real estate taxes
increased by $47,000 on account of the Company's investment in real estate
properties for development. The Company allocated approximately $256,000 and
$943,000 of these general and administrative expenses to the Video and Image
Technology segment and approximately $485,000 and $15,000 to the Real Estate
segment, for the years ended December 31, 2004 and 2003, respectively.
Results of Operations - Technology business operations
Revenues for the year ended December 31, 2004 were $0 as compared to
$20,000 for the year ended December 31, 2003. Revenues for 2004 were
negatively impacted by our inability to secure customers for our image and
technology products. This matter is made difficult by the heavy competition
and price compression in the image and video sectors of the electronics
markets. For the technology business operations, the Company recorded a net
loss of approximately $412,000 and $773,000, for the years ended December 31,
2004 and 2003, respectively.
During December 2001, we entered into a strategic alliance with Gemini
Industries ("Gemini"), a manufacturer and distributor of consumer electronics
accessories. Gemini was granted a five-year exclusive license to market and
distribute NuWave's Video Game Enhancer ("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 sales for the year ended December 31, 2003 were primarily
sales of the Company's remaining domestic VGE inventory to Gemini, as the
Company's efforts were concentrated on sales of NVP 1104.
Cost of sales for the year ended December 31, 2004 was $0 versus $5,000
for the year ended December 31, 2003. The decrease in cost of sales was a
result of no sales in 2004. Research and development costs for the year
ended December 31, 2004 were $0; a reduction of $134,000 from the prior year.
This reduction primarily resulted from a reduction in all research and
development due to liquidity constraints and the head count reductions in
order to decrease costs. The decreases in research and development were in
engineering salaries, outside consulting fees and lab supplies, which
represented costs in 2003 of approximately $79,000, $28,000 and $9,000,
respectively. General and administrative expenses related to the technology
business for the year ended December 31, 2004 were $256,000, a decrease of
$687,000 from the prior year. This decrease was the result of a significant
reduction in most all expenses resulting from the resignation of all
management and employees with only a new CEO in September 2003 and one other
administrative employee hired on November 1, 2003. The decrease is also
attributable to a decrease in management time and resources to the technology
business, in favor of the land development segment. Interest expense
allocated to technology operations increased to $206,000 in 2004, as compared
to $53,000 in 2003, an increase of $153,000, as a result of additional notes
payable to finance liquidity and paying interest rates on these notes at the
default penalty rate of 24% per annum. Gain on forgiveness of debt decreased
to $20,000 in 2004 from $347,000 in 2003, as the financial restructuring with
vendors, reflecting the settlement of various liabilities for approximately
10% of the amounts owed, was effectively completed in 2003.
A-17
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. 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.
NuWave intends to develop the land held for development and sale and
the parcel acquired in April 2004 and then sell both of these developed
properties for a gain. To date, there are no revenues from the sale of
developed properties. Revenues from development activities are not projected
to be realized until mid to late 2007.
During the year ended December 31, 2004, the real estate activities
incurred general and administrative expenses of approximately $485,000, which
consisted principally of real estate taxes and maintenance expenses of
approximately $65,000 and an allocation of other general and administrative
expenses of approximately $420,000. During the year ended December 31, 2003,
the real estate activities incurred general and administration expenses of
$15,000, representing real estate taxes. Interest expense for the real
estate activities was approximately $312,000 and $2,000, for years ended
December 31, 2004 and 2003, respectively, with the increase in 2004
attributable to the costs of financing the acquired real estate for a full
year. In addition, the Company capitalized interest and development costs of
$273,000 and $37,000, respectively, for the year ended December 31, 2004 and
$0 and $53,000, respectively, for the year ended December 31, 2003,
respectively.
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.
During July 2004 and August 2004, the Company entered into an Agreement
of Sale and a Convertible Debenture, respectively, related to its transfer of
a 20% fee simple interest in its land held for development and sale as a
tenant in common. During November 2004, the Agreement of Sale and the
Convertible Debenture were terminated and rescinded in their entirety and
replaced with an Amended and Restated Agreement of Sale issued in November
2004, as described below.
The terms of the July 2004 Agreement of Sale and the August 2004
Convertible Debenture are outlined below.
The Company sold a 20% fee simple interest in its land held for
development and sale as a tenant in common to an entity which is a related
party to a current holder of the Company's convertible debentures
("Investor") and received cash proceeds of $1,783,549.
The Company may reacquire an interest in the property ("Company's
Option"). At any time after closing and upon 15 days advance written notice,
the Company may repurchase all or a portion of the interest sold at a
purchase price computed at 120% of the price, or portion thereof, paid by the
Investor on the effective date.
The Investor, at any time after closing and upon 15 days advance
written notice, may sell back to the Company all or any portion of its
interest in the property ("Investor's Option"). The Investor may sell this
property back to the Company through exercise rights under a convertible
debenture agreement, discussed below. The Investors Option expires on August
1, 2007, and shall thereupon be exercised automatically for any portion of
the property interest not already reacquired by the Company.
In addition, the Investor has provided the Company with a right of
first offer to reacquire the Company's interest in the property. If, at any
time prior to August 1, 2007, the Investor wishes to sell its interest to a
third party, it must first notify the Company. Upon such notice, the Company
may, within 30 days, repurchase all of the remaining property interest for a
price equal to a pro-rata portion of the original price paid by the Investor
A-18
at the effective date ($1,783,549). If the Company fails to exercise this
offer within the 30 day period, then the Investor shall be allowed 90 days in
which to sell all of its interests in the property to a third party.
In conjunction with this transaction, the Company issued a convertible
debenture in favor of the Investor for $1,783,549. This convertible
debenture bears interest from July 14, 2004 at 10% per annum, with the
interest payable monthly, starting September 1, 2004. This convertible
debenture matures on August 1, 2007.
Under the terms of the convertible debenture, an exercise of the
Company's Option to reacquire its former interest in the property is treated
as a redemption of all or a portion of its obligations under the convertible
debenture. The Company's purchase price in this case is a premium of 120% of
the price, or portion thereof, paid by the Investor on the effective date, as
discussed above.
An exercise of the Investor's Option to sell its interest in the land
back to the Company is accomplished through the Investor's right to convert
the amount outstanding under the convertible debenture into the Company's
common stock. The aggregate amount of principal and any unpaid interest is
convertible at the per share price equal to the lesser of (a) 120% of the
closing bid price at August 20, 2004, or (b) 80% of the lowest closing bid
price for the five days immediately preceding the conversion date. Upon such
conversion, a pro-rata portion of the interest in the property is sold back
to the Company. Upon the maturity of the convertible debenture, the
Investor's Option terminates and any remaining amount of the convertible
debenture is automatically converted into the Company's common stock. Upon
such conversion, the remaining portion of the interest in the property is
sold back to the Company.
The Company's reacquisition of its interests in the property under the
terms of the rights of first offer, as described above, shall represent a
satisfaction of its obligations at face value under the convertible
debenture. Upon the Investor's sale of the property to a third party under
the terms of the rights of first offer, as described above, all obligations
of the Company under the convertible debenture shall immediately terminate.
In accordance with the provisions a SFAS No. 66, "Accounting for Sales
of Real Estate," the Company has accounted for this transaction as a
financing transaction. Under the provisions of SFAS No. 66, when the seller
has an obligation to repurchase the property, or the terms of the transaction
allow the buyer to compel the seller to repurchase the property or interest,
then the transaction shall be accounted for as a financing transaction,
rather than a sale. Under the terms of this transaction, the Investor's
Option requires the Investor to sell the property back to the Company. This
sale back to the Company will be satisfied through the conversion of the
Investor's interest under the convertible debenture into the Company's common
stock.
Upon the Investor's sale of the property interest to a third party
under the terms of the rights of first offer, as described above, this
financing transaction shall be deemed to have terminated and the Company
shall thereupon account for the proceeds received as a sale of its interest
in the property, with any gain or loss on such sale to be recognized
accordingly at that time.
During November 2004, the July 2004 Agreement of Sale and the August
2004 Convertible Debenture were rescinded and terminated pursuant to an
Amended and Restated Agreement of Sale. Under this Amended and Restated
Agreement of Sale, for a selling price of approximately $1,427,000, the
Company has sold a 20% fee simple interest in its land held for development
and sale as a tenant in common to an entity which is a related party to a
current holder of the Company's convertible debentures. The Company has
applied the $1,427,000 sale amount against the proceeds from the convertible
debenture and has incurred interest expense of $38,000 for the three month
period ended September 30, 2004, $30,000 of which has been paid to the buyer
through September 30, 2004. The Company has incurred additional interest
expense of $20,000 through the date of termination. On November 29, 2004,
NuWave paid approximately $326,000 to the buyer, representing approximately
$28,000 in accrued interest and $298,000 in refunded proceeds.
NuWave's tentative plans for the land held for development and sale
acquired in 2003 call for the development of approximately 100 residential
dwelling units. NuWave has engaged an architectural consultant during 2004
for the purpose of preparing drawings that support the approval and
permitting process. Once the approvals and permits are in place, NuWave will
contract with a developer to build out the property. Land development and
construction costs are estimated to be $15,000,000 to $18,000,000. NuWave
will have to raise additional funds to finance construction. Such financing
may come from the sale of securities, advances under our Standby Equity
Distribution Agreement or through bank or other debt financing.
A-19
Liquidity and Capital Resources
The Company had cash balances on hand of $84,000 as of December 31,
2004. During August 2004, NuWave received proceeds of approximately
$1,784,000 from the issuance of a convertible debenture related to its
transfer of a 20% fee simple interest in NuWave's land held for development
and sale. During November 2004, the convertible debenture was terminated and
rescinded in its entirety and replaced with an Amended and Restated Agreement
of Sale dated November 2004. Under this Amended and Restated agreement of
sale, for a selling price of approximately $1,427,000, the Company has sold a
20% fee simple interest in its land held for development and sale as a tenant
in common to an entity which is a related party to a current holder of the
Company's convertible debentures. The Company has applied the $1,427,000
sale amount against the proceeds from the convertible debenture and has
incurred interest expense of $38,000 for the three month period ended
September 30, 2004, $30,000 of which has been paid to the buyer through
September 30, 2004. The Company has incurred additional interest expense of
$20,000 through the date of termination. On November 29, 2004, NuWave paid
approximately $326,000 to the buyer, representing approximately $28,000 in
accrued interest and $298,000 in refunded proceeds.
A portion of the proceeds from the Company's receipt of the convertible
debenture was applied to repay obligations consisting of notes payable to
Cornell Capital Partners, LP of approximately $460,000; convertible
debentures payable to Cornell Capital Partners, LP of $200,000 and
convertible debentures of four other debenture holders aggregating
approximately $79,000. The remaining funds will provide the Company with
current working capital. The Company's future cash funding sources continue
to be uncertain. The Company's primary cash needs are to fund ongoing
operations and real estate development activities. The Company will defer
any land development and construction expenditures until after it has
arranged adequate funding. In order to obtain funding during the next twelve
months, the Company intends to seek financing through a combination of
sources. These sources might include, in addition to the Standby Equity
Distribution Agreement, funding through the sale of securities or loans.
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 most of its funding needs in 2005 pursuant to the Standby
Equity Distribution Agreement. In addition, NuWave will seek outside mortgage
financing for certain of the properties that it might acquire in the future,
as well as to finance development and construction of the dwelling units on
the undeveloped acreage. The cost cutting has reduced cash requirements at
NuWave. 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 year ended December 31, 2004 and 2003, the Company had a net
decrease in cash and cash equivalents of $35,000 and $55,000, respectively.
The Company's sources and uses of funds were as follows:
Cash Used In Operating Activities. Net cash used in operating
activities for the year ended December 31, 2004 was $661,000, resulting
primarily from a consolidated net loss of approximately $336,000, offset by
the amortization of debt discount of $230,000 and the net change in the tax
credit receivable from the sale of certain state net tax operating losses of
$175,000, and the use of cash is increased by the effect of the gain
recognized on the sale of an interest in the Company's land held for
development and sale of $850,000. Net cash used in operating activities for
the year ended December 31, 2003 was $858,000, resulting primarily from a
consolidated net loss of $790,000, and by a non-cash gain on forgiveness of
debt of $347,000, offset by decreases in inventory, prepaids and other assets
totaling approximately $203,000.
Cash Used in Investing Activities. During the year ended December 31,
2004, the Company purchased $22,000 of new computer and office equipment,
acquired a parcel of land for $122,000, purchased marketable securities -
available-for-sale, for approximately $131,000 and incurred $37,000 for legal
costs toward development of the land held for development and sale. During
the year ended December 31, 2003, the Company used net cash of $55,000 for
the purchase of development costs on the investment in land.
Cash Provided by Financing Activities. During the year ended December
31, 2004, the Company raised $2,244,000 in funds through the issuance of
convertible debentures, offset by the repayment in September 2004 of notes
A-20
and convertible debentures to Cornell Capital Partners, LP of $460,000 and
$200,000, respectively; and repayments of other convertible debentures of
approximately $619,000. During the year ended December 31, 2003, the Company
raised $557,000, $39,000 and $395,000 in advances under the Equity Line of
Credit, sales of common stock under the Equity Line of Credit and through the
issuance of convertible debentures, respectively, and of which $200,000 of
the $395,000 in convertible debentures were issued to a related party. Also,
during the year ended December 31, 2003, the Company issued and then redeemed
$67,000 in preferred stock, which, upon redemption, the Company paid a
dividend of $19,000, and repaid a note payable to a former
officer/shareholder, requiring cash of $115,000.
At December 31, 2004 and 2003, the Company had negative net working
capital of approximately $36,000 and $50,000, respectively. The Company
intends to monitor spending carefully until such time that new funding is
arranged.
In May 2004, NuWave 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
NuWave to pay rent of approximately $7,000 and approximately $3,000 in shared
building operating expenses, each month. NuWave subleases one half of this
space to a subtenant, for approximately $5,000 per month, including
approximately $1,750 of shared building operating expenses.
On January 26, 2005, NuWave issued a $3,481,274 promissory note to
Cornell Capital Partners, LP and terminated the outstanding $3,300,000
convertible debentures, which were issued to Cornell Capital Partners, LP on
December 22, 2003. The face amount of the promissory note includes accrued
interest from the debentures, and is secured through a first mortgage lien on
Lehigh's (NuWave's wholly owned subsidiary) land located in New Jersey. The
promissory note bears interest at a rate of 5% per annum, with interest due
at maturity. The maturity date is December 22, 2008.
On January 26, 2005, NuWave entered into an assignment and amendment
agreement of our $1,400,000 secured note payable to Stone Street and
therewith, Stone Street has assigned its right under the agreement to Cornell
Capital Partners, LP. In addition, Stone Street, Cornell Capital Partners,
LP and Lehigh have agreed to defer the beginning of the monthly payments
hereunder for a period of one year to January 1, 2006.
On January 26, 2005, NuWave entered into a Standby Equity Distribution
Agreement with Cornell Capital Partners, LP. Pursuant to the Standby Equity
Distribution Agreement, we may, at our discretion, periodically sell to
Cornell Capital Partners, LP shares of Common Stock for a total purchase
price of up to $30 million. For each share of Common Stock purchased under
the Standby Equity Distribution Agreement, Cornell Capital Partners, LP will
pay NuWave 99% of the volume weighted average price on the Over-the-Counter
Bulletin Board or other principal market on which our Common Stock is traded
for the 5 days immediately following the notice date. Further, Cornell
Capital Partners, LP will retain a fee of 10% of each advance under the
Standby Equity Distribution Agreement.
ITEM 7. FINANCIAL STATEMENTS
The information required by this item is incorporated by reference to
pages F-1 through F-40 of this Annual Report on Form 10-KSB.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
On July 2, 2004, NuWave Technologies, Inc. engaged Weiser LLP as its
principal accountant to audit NuWave Technologies's financial statements.
NuWave did not consult Weiser LLP on any matters described in paragraph
(a)(2)(i) or (ii) of Item 304 of Regulation S-B during the Registrant's two
most recent fiscal years or any subsequent interim period prior to engaging
Weiser LLP.
Effective on June 30, 2004, NuWave Technologies, Inc. dismissed Marcum
& Kliegman LLP as its independent registered public accounting firm.
Marcum & Kliegman LLP's report on NuWave's consolidated financial
statements for the year ended December 31, 2003 did not contain an adverse
opinion or a disclaimer of opinion and was not qualified as to uncertainty,
audit scope, or accounting principles; however, the report was modified to
include an explanatory paragraph wherein Marcum & Kliegman LLP expressed
substantial doubt about NuWave's ability to continue as a going concern.
A-21
Marcum & Kliegman LLP's dismissal was recommended and approved by
NuWave's Board of Directors.
During the year ended December 31, 2003, as well as the subsequent
interim period through June 30, 2004, there were no disagreements on any
matter of accounting principles or practices, financial statement disclosure,
or auditing scope or procedures, which disagreements if not resolved to their
satisfaction would have caused them to make reference in connection with
their opinion to the subject matter of the disagreement. Marcum & Kliegman
LLP did not advise NuWave Technologies, Inc. of any of the matters
identified in paragraph (a)(1)(B), (a) (1) (C), (D) or (E) of Item 304 of
Regulation S-B.
On October 30, 2003, NuWave Technologies, Inc. dismissed Eisner LLP as
its independent registered public accounting firm.
Eisner's report on NuWave's financial statements for the years ended
December 31, 2001 and 2002, respectively, did not contain an adverse opinion
or a disclaimer of opinion. However, the report did reflect a going concern
uncertainty.
Eisner's dismissal was recommended and approved by NuWave's Board of
Directors.
Since January 1, 2001, as well as any subsequent interim period prior
to dismissal, there were no disagreements on any matter of accounting
principles or practices, financial statement disclosure, or auditing scope or
procedures, which disagreements if not resolved to their satisfaction would
have caused them to make reference in connection with their opinion to the
subject matter of the disagreement.
Since January 1, 2001, as well as any subsequent interim period prior
to dismissal, Eisner did not advise NuWave Technologies, Inc. of any of the
matters identified in paragraph (a)(1)(iv)(B) of Item 304 of Regulation S-B.
On October 30, 2003, NuWave Technologies, Inc. engaged Marcum &
Kleigman, LLP as its principal accountant to audit NuWave Technologies's
financial statements. NuWave did not consult Marcum & Kleigman, LLP on any
matters described in paragraph (a)(2)(i) or (ii) of Item 304 of Regulation
S-B from January 1, 2003 or any subsequent interim period prior to engaging
Marcum & Kliegman, LLP.
ITEM 8A. CONTROLS AND PROCEDURES
The Company's principal 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 Annual Report on Form 10-KSB. 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, 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
A-22
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.
Except as described above, there were no significant changes in our
internal controls over financial reporting that occurred during the year
ended December 31, 2004 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 has concluded that such controls and procedures
are effective at the "reasonable assurance" level. However, we do not
currently have any operating businesses.
Part III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS
Set forth below are the names as of April 11, 2005 and the
business experience of the directors and executive officers of the Company:
Name Age Position
---- --- --------
George D. Kanakis 32 President, Chief Executive Officer,
Principal Financial Officer and Director
Gary H. Giannantonio 32 Director
There are no family relationships among any of the directors or
executive officers of the Company. None of the Company's directors or
executive officers is a director of any other company that files reports with
the SEC. None of the Company's directors have been involved in any bankruptcy
or criminal proceeding (excluding traffic and other minor offenses), nor has
been enjoined from engaging in any business.
The following information is furnished for each of the executive
officers and directors of the Company:
GEORGE D. KANAKIS has been a Director of the Company and the President,
Chief Executive Officer and Principal Financial Officer of the Company since
September 10, 2003. From March 2002 through August 2003, Mr. Kanakis had
been a Vice President of Corporate Finance for Cornell Capital Partners, LP,
where he structured equity and debt financings, as well as provided
consulting to clients on mergers and acquisitions. From 1993 to 2001, Mr.
Kanakis managed the Futures and Options Group at Barclays Capital, where he
serviced primarily institutional clients around the world. Mr. Kanakis holds
an MBA in Finance and Investments from the Zicklin School of Business at
Baruch College where he graduated in December 2001 and a degree in Economics
from Rutgers University where he graduated in May 1995.
GARY H. GIANNANTONIO became a Director of the Company on May 17, 2004.
He is an associate at the law firm of Kalebic, McDonnell & Miller, P.C. in
Hackensack, New Jersey. Mr. Giannantonio's primary legal experience involves
residential and commercial real estate transactions. He also has
experience handling general civil litigation, collections, landlord/tenant,
matrimonial, and bankruptcy matters. Mr. Giannantonio is also an Assistant
Municipal Prosecutor in Palisades Park, New Jersey. He received his Juris
Doctor degree from New York Law School in 1998 and a Bachelor of Arts Degree
in Political Science from Boston University in 1994. He is licensed to
practice in New Jersey State Courts as well as the United States District
Court for the District of New Jersey.
A-23
Code of Ethics
On March 30, 2004, the Board of Directors of the Company adopted a
written Code of Ethics designed to deter wrongdoing and promote honest and
ethical conduct, full, fair and accurate disclosure, compliance with laws,
prompt internal reporting and accountability to adherence to the Code of
Ethics.
Committees
NuWave does not currently have an audit committee, and the Board of
Directors serves this function. The Board of Directors does not have a
"financial expert" due to the lack of capital needed to attract a qualified
expert.
Section 16(a) Beneficial Ownership
Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934 and the rules
thereunder require NuWave's officers and directors, and persons who
beneficially own more than ten percent of a registered class of NuWave's
equity securities, to file reports of ownership and changes in ownership with
the Securities and Exchange Commission and to furnish NuWave with copies.
Based on its reviews of the copies of the Section 16(a) forms received
by it, or written representations from certain reporting persons, the Company
believes that, during the last fiscal year, all Section 16(a) filing
requirements applicable to its officers, directors and greater than
ten-percent beneficial owners were complied with and filed timely.
A-24
ITEM 10. EXECUTIVE COMPENSATION
COMPENSATION OF EXECUTIVE OFFICERS
The following table sets forth the annual and long-term compensation
for services in all capacities for the fiscal years ended December 31, 2004,
2003 and 2002 paid to George D. Kanakis and Gerald Zarin. No other executive
officer received compensation exceeding $100,000 during the years ended
December 31, 2004, 2003 and 2002. The employment of Mr. Zarin was terminated
on September 29, 2003. Mr. Kanakis became our Chief Executive Officer and
Principal Financial Officer on September 10, 2003.
SUMMARY COMPENSATION TABLE
Long Term
Annual Compensation Compensation Awards
------------------- -------------------
Securities
Underlying
Other Options
Name and Annual (Number All Other
Principal Position Year Salary Bonus Compensation of Shares) Compensation
------------------ ---- ------ ----- ------------ ----------- ------------
George D. Kanakis,
President and Chief 2004 $ 73,00 -- $ 7,500 -- --
Executive Officer 2003 $ 12,500 -- -- -- --
Gerald Zarin 2004 $ -- -- -- -- --
Former President and 2003 $ 117,000 -- -- -- --
Chief Executive Officer 2002 $ 155,000 $ 30,000 -- -- --
Note: Effective June 1, 2004, George D. Kanakis' annual salary was
$125,000.
Note: Gerald Zarin's employment terminated on September 29, 2003. In
conjunction therewith, he received 100,000 warrants to purchase NuWave's
stock at $1.00 per share. Mr. Zarin surrendered all options upon his
resignation during 2003.
Stock Options
For the years ended December 31, 2003 and 2004, there were no options
granted.
On January 12, 2003, the former executive officers of NuWave and all
employees voluntarily and irrevocably surrendered all options granted to them
through that date. As such, no options remain outstanding as of this date.
All stock option plans have been terminated.
Directors' Compensation
Directors who are not employees of NuWave are entitled to a fee of
$2,500 per quarter for serving on the Board of Directors. Each director is
also reimbursed for expenses incurred in connection with attendance at
meetings of the Board of Directors.
Employment Agreement
Effective June 1, 2004, NuWave entered into a five-year employment
contract with George Kanakis. Pursuant to the contract, Mr. Kanakis is
employed as President and Chief Executive Officer at an annual salary of
$125,000 per year, subject to increases at the Board of Directors'
discretion. Mr. Kanakis is also entitled to a bonus equal to 12.5% of the
net income attributable to each of NuWave's 5 subsidiaries, plus a
discretionary bonus as determined by the Board of Directors. Mr. Kanakis is
also entitled to 75,000 shares of common stock and options to purchase
100,000 shares of common stock at some future date. NuWave has not yet
adopted a stock option plan. Accordingly, no options have been issued to Mr.
Kanakis.
A-25
Until September 29, 2003, NuWave had employment agreements with its
former President and CEO, Mr. Gerald Zarin and its Chief Financial Officer,
Mr. Jeremiah F. O'Brien. These agreements terminated upon the September 29,
2003 resignations of these two former officers.
A-26
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT,
PRINCIPAL SHAREHOLDERS AND SECURITY OWNERSHIP OF MANAGEMENT
Beneficial Owners
The table below is based on information obtained from the persons named
therein with respect to the shares of Common Stock beneficially owned, and
sets forth, as of April 11, 2005, information with respect to the beneficial
ownership of our common stock by (i) persons known by us to beneficially own
more than five percent of the outstanding shares, (ii) each director,
(iii) each executive officer and (iv) all directors and executive officers as
a group.
Common Stock
Beneficially Owned
---------------------------
Name/Address Number Percent(1)
------------ ----------- -------------
George Kanakis
1416 Morris Avenue, Suite 207
Union, NJ 07083 75,000(3) 3.6%
Gary H. Giannantonio
167 Main St
Hackensack, NJ 07601 -- --
All Officers and Directors as a group (2 persons) 75,000(3) 3.6%
Gerald Holland
22 Coult Lane
Old Lyme, CT 06371 226,615(2) 9.9%
David Kesselbrenner
c/o Ms. Doree Kesselbrenner, as Custodian,
10 Devenshire Road
Livingston, NJ 07039 226,615(2) 9.9%
Sarah Kesselbrenner
c/o Ms. Doree Kesselbrenner, as Custodian,
10 Devonshire Road
Livingston, NJ 07039 226,615(2) 9.9%
Joseph Kesselbrenner
c/o Ms. Doree Kesselbrenner, as Custodian,
10 Devonshire Road
Livingston, NJ 07039 226,615(2) 9.9%
Louis Kesselbrenner
c/o Ms. Doree Kesselbrenner, as Custodian,
10 Devonshire Road
Livingston, NJ 07039 226,615(2) 9.9%
Joanna Saporito
668 W. Saddle River Road
Ho-Ho-Kus, NJ 07423 226,615(2) 9.9%
A-27
Common Stock
Beneficially Owned
---------------------------
Name/Address Number Percent(1)
------------ ----------- -------------
Michael Kesselbrenner
10 Devonshire Road
Livingston, NJ 07039 226,615(2) 9.9%
Mary-Ellen Viola
294 Long Hill Drive
Short Hills, NJ 07078 226,615(2) 9.9%
Newbridge Securities Corporation
1451 Cypress Creek Road, Suite 204
Fort Lauderdale, Florida 33309 111,111 5.4%
____________________________________
(1) Applicable percentage of ownership is based on 2,062,013 shares of
common stock outstanding as of April 11, 2005. Beneficial ownership
is determined in accordance with the rules of the Commission and
generally includes voting or investment power with respect to
securities. Shares of common stock subject to options that are
currently exercisable or exercisable within 60 days of April 11,
2005 are deemed to be beneficially owned by the person holding such
options for the purpose of computing the percentage of ownership of
such person, but are not treated as outstanding for the purpose of
computing the percentage ownership of any other person. The common
stock is the only outstanding class of equity securities of NuWave.
(2) These represent the approximate number of shares underlying
convertible debentures at an assumed price of $0.052 per share
(i.e., 80% of a recent price $0.065 per share), subject to a
ownership limitation of 9.9% contained in the convertible
debentures. Because the conversion price will fluctuate based on the
market price of our stock, the actual number of shares to be issued
upon conversion of the debentures may be higher or lower.
(3) Includes 75,000 shares granted to Mr. Kanakis in connection with his
employment agreement.
A-28
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Lehigh acquired a parcel of land in New Jersey for $4,950,000 that it
intends to develop and then sell. Lehigh based its purchase price on an
independent commercial appraisal. This land was acquired from Stone Street
Asset Management LLC ("Stone Street"), a Company under common ownership and
control as Cornell Capital Partners, LP. In connection with this purchase of
land, NuWave incurred debt obligations consisting of a $3,300,000 convertible
debenture to Cornell Capital Partners, LP., which was subsequently terminated
and replaced with a $3,481,274, including accrued interest of $181,274,
non-convertible promissory note on January 26, 2005, $250,000 of convertible
debentures to unrelated parties and a $1,400,000 note payable, as amended, to
Stone Street, which was subsequently assigned to Cornell Capital Partners, LP
on January 26, 2005 (see Notes 5, 7 and 17 to the December 31, 2004 NuWave
Consolidated Financial Statements). As a result of Stone Street's
relationship with Cornell Capital Partners, LP, NuWave has recorded land at
the cost basis recorded by Stone Street of approximately $2,915,000. In
November 2004, Lehigh sold a 20% fee simple interest in its land held for
development and sale as a tenant in common to an entity which is a related
party to Michael Kesselbrenner, a current holder of the Company's convertible
debentures.
Effective July 2004, NuWave entered into a five year lease agreement
for approximately 3,500 square feet of office tower space in Jersey City, New
Jersey. NuWave incurs a net cost of approximately $5,000 per month for this
space, when combining the rent and other costs such as utilities, taxes and
maintenance. This net cost reflects the benefit of NuWave subleasing
approximately 50% of the space to a subtenant. NuWave's obligations under
this lease are guaranteed by Yorkville Advisors Management, LLC
("Yorkville"). Yorkville is the general partner of Cornell Capital Partners,
LP, a related party to NuWave.
At December 31, 2004, NuWave's investment in marketable securities -
available-for-sale, represents an investment in the common stock of an
affiliate of Cornell Capital Partners, LP.
Other than as described above, none of our officers or directors, nor
any proposed nominee for election as a director, nor any person who
beneficially owns, directly or indirectly, shares carrying more than 5% of
the voting rights attached to all of our outstanding shares, nor any
promoter, nor any relative or spouse of any of the foregoing persons has any
material interest, direct or indirect, in any transaction since our
incorporation or in any presently proposed transaction which, in either case,
has or will materially affect us.
A-29
ITEM 13. EXHIBITS
(a) Documents Filed As Part Of This Report:
See Index to Consolidated Financial Statements attached, which
are filed as part of this report.
(b) Description of exhibits:
Exhibit No. Description Location
----------- ----------- --------
3.1 Articles of Incorporation of NuWave Incorporated by reference to
(Delaware) Exhibit 3.1(a) to Registration
Statement on Form SB-2 filed
with the Securities and
Exchange Commission on April 2,
1996
3.2 Certificate of Amendment to Articles Incorporated by reference to
of Incorporation of NuWave (Delaware) Exhibit 3.1(b) to Registration
Statement on Form SB-2 filed
with the Securities and
Exchange Commission on April 2,
1996
3.3 Certificate of Authority (New Jersey) Incorporated by reference to
Exhibit 3.1(c) to Registration
Statement on Form SB-2 filed
with the Securities and
Exchange Commission on April 2,
1996
3.4 Amended Certificate of Authority (New Incorporated by reference to
Jersey) Exhibit 3.1(d) to Registration
Statement on Form SB-2 filed
with the Securities and
Exchange Commission on April 2,
1996
3.5 Certificate of Amendment to Articles Incorporated by reference to
of Incorporation of NuWave (Delaware) Exhibit 3.1(e) to Registration
Statement on Form SB-2 filed
with the Securities and
Exchange Commission on April 2,
1996
3.6 By-Laws of NuWave Incorporated by reference to
Exhibit 3.2 to Registration
Statement on Form SB-2 filed
with the Securities and
Exchange Commission on April 2,
1996
4.1 Form of Common Stock Certificate Incorporated by reference to
Exhibit 4.1 to Amendment No. 2
to Registration Statement on
Form SB-2 filed with the
Securities and Exchange
Commission on July 3, 1996
4.2 Form of Public Warrant Agreement Incorporated by reference to
between NuWave, American Stock Exhibit 4.2 to Amendment No. 1
Transfer & Trust Company and Rickel & to Registration Statement on
Associates, Inc. Form SB-2 filed with the
Securities and Exchange
Commission on May 22, 1996
4.3 Form of Public Warrant Certificate (See Exhibit 4.3 to Amendment
No. 2 to Registration Statement
on Form SB-2 filed with the
Commission on July 3, 1996
4.4 Form of Underwriter's Warrant Incorporated by reference to
Agreement (including Warrant Exhibit 4.4 to Amendment No. 1
Certificate) between NuWave and to Registration Statement on
Rickel & Associates Form SB-2 filed with the
Securities and Exchange
Commission on May 22, 1996
10.1 Form of Stock Purchase Agreement, Incorporated by reference to
dated as of June 2002, between NuWave Exhibit 10.45 to Registration
Technologies, Inc. and certain Statement on Form SB-2, filed
investors with the Securities and
Exchange Commission on July 11,
2002
A-30
Exhibit No. Description Location
----------- ----------- --------
10.2 Form of Selling Stockholders Incorporated by reference to
Agreement, dated as of July 2002 Exhibit 10.46 to Registration
among NuWave and the Purchasers. Statement on Form SB-2, filed
with the Securities and
Exchange Commission on July 11,
2002
10.3 Revolving Line of Credit Secured Incorporated by reference to
Demand Promissory Note, dated Exhibit 10.47 to Registration
December 10, 2002, to Gerald Zarin by Statement on SB-2 filed with
NuWave Technologies, Inc. the Securities and Exchange
Commission on December 27, 2002
10.4 Agreement with Cornell Capital Incorporated by reference to
Partners LP, dated September 10, 2003 Exhibit 10.1 to Form 8-K, filed
with the Securities and
Exchange Commission on
September 10, 2003
10.5 Convertible Debenture dated as of Incorporated by reference to
December 22, 2003 issued to Cornell Form 10-KSB filed with the
Capital Partners, LP Securities and Exchange
Commission on April 13, 2004
10.6 Termination Agreement related to the Incorporated by reference to
Convertible Debenture dated as of Form 8-K filed with the
December 22, 2003 issued to Cornell Securities and Exchange
Capital Partners, LP Commission on January 26, 2005
10.7 Promissory Note dated January 26, Incorporated by reference to
2005, between Cornell Capital Form 8-K filed with the
Partners, LP and NuWave Securities and Exchange
Commission on January 26, 2005
10.8 Secured Note Payable Agreement dated Incorporated by reference to
December 22, 2003, between Stone Form 10-KSB filed with the
Street Asset Management, LLC and Securities and Exchange
NuWave Commission on April 15, 2004
10.9 Form of convertible debenture, dated Incorporated by reference to
as of December 2003, between NuWave Form 10-KSB filed with the
and certain investors Securities and Exchange
Commission on April 15, 2004
10.10 Independent Sales Agent Agreement Incorporated by reference to
between Nextgen Associates, Inc. and Form 10-KSB filed with the
NuWave dated October 31, 2003 Securities and Exchange
Commission on April 15, 2004
10.111 Termination Agreement related to the Incorporated by reference to
Standby Equity Distribution Agreement Form 8-K filed with the
dated as of May 2004 between NuWave Securities and Exchange
and Cornell Capital Partners, LP Commission on January 27, 2005
10.12 Standby Equity Distribution Agreement Incorporated by reference to
dated January 26, 2005 between NuWave Form 8-K filed with the
and Cornell Capital Partners, LP Securities and Exchange
Commission on January 27, 2005
10.13 Placement Agent Agreement dated Incorporated by reference to
January 26, 2005 between NuWave, Form 8-K filed with the
Newbridge and Cornell Capital Securities and Exchange
Partners, LP. Commission on January 27, 2005
10.14 Registration Rights Agreement dated Incorporated by reference to
January 26, 2005 between NuWave and Form 8-K filed with the
Cornell Capital Partners, LP Securities and Exchange
Commission on January 27, 2005
10.15 Employment Agreement dated June 1, Incorporated by reference to
2004 between NuWave and George Kanakis Form SB-2 filed with the
Securities and Exchange
Commission on February 4, 2005
10.16 Agreement of sale between 24 West Incorporated by reference to
96th Street Realty Corp. and Lehigh Form 10-QSB filed with the
Acquisition Corp dated July 1, 2004 Securities and Exchange
Commission on November 22, 2004
10.17 Convertible Debenture agreement Incorporated by reference to
between 24 West 96th Street Realty Form 10-QSB filed with the
Corp. and NuWave dated August 20, 2004 Securities and Exchange
Commission on November 22, 2004
A-31
Exhibit No. Description Location
----------- ----------- --------
10.18 Amended and restated Agreement of Incorporated by reference to
sale between 24 West 96th Street Form 10-QSB filed with the
Realty Corp. and Lehigh Acquisition Securities and Exchange
Corp dated November 10, 2004 Commission on November 22, 2004
10.19 Assignment and Amendment Agreement Incorporated by reference to
related to the Secured Note Payable Form 8-K filed with the
Agreement dated December 22, 2003, Securities and Exchange
between Stone Street Asset Commission on January 27, 2005
Management, LLC and NuWave
14.1 Code of Ethics Incorporated by reference to
Form 10-KSB filed with the
Securities and Exchange
Commission on April 15, 2004
31.1 Certification of Chief Executive Provided herewith
Officer Pursuant to Rule 13a-14(a)
32.1 Certification of the Company's Provided herewith
principal financial officer pursuant
to 18 U.S.C. Section 1350 as adopted
pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
A-32
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Audit Fees. The aggregate fees for professional services rendered was
approximately $70,000 and $53,500 for the audits of the Company's
consolidated annual financial statements for the years ended December 31,
2004 and 2003, respectively, and the reviews of the consolidated financial
statements included in the Company's Forms 10-QSB for those years.
Audit-Related Fees. The aggregate fees billed was $0 in each of the
last two years for assurance and related services by the principal accountant
that are reasonably related to the performance of the audit or review of the
Company's consolidated financial statements and not reported under the
caption "Audit Fee."
Tax Fees. The aggregate fees billed by the principal accountant for
tax compliance was $5,000 and $3,000 for the fiscal years ended December 31,
2004 and 2003, respectively.
All Other Fees. Other than the services described above, the aggregate
fees for services rendered by the principal accountant was approximately
$39,000 for the fiscal years ended December 31, 2004. These fees related to
the review of the Company's Registration Statement.
Audit Committee Policies and Procedures. The Board of Directors
performs the duties of an audit committee. The Board of Directors must
pre-approve all auditing services and permitted non-audit services (including
the fees and terms thereof) to be performed for the Company by its
independent auditors, subject to the de minimus exceptions for non-audit
services described in Section 10A(i)(1)(B) of the Securities Exchange Act of
1934, which should be nonetheless be approved by the Board of Directors prior
to the completion of the audit. Each year the independent auditor's
retention to audit our consolidated financial statements, including the
associated fee, is approved by the committee before the filing of the
previous year's annual report on Form 10-KSB. At the beginning of the fiscal
year, the Board of Directors will evaluate other known potential engagements
of the independent auditor, including the scope of work proposed to be
performed and the proposed fees, and approve or reject each service, taking
into account whether the services are permissible under applicable law and
the possible impact of each non-audit service on the independent auditor's
independence from management. At each such subsequent meeting, the auditor
and management may present subsequent services for approval. Typically,
these would be services such as due diligence for an acquisition, that would
not have been known at the beginning of the year.
Since May 6, 2003, the effective date of the Securities and Exchange
Commission rules stating that an auditor is not independent of an audit
client if the services it provides to the client are not appropriately
approved, each new engagement of Weiser LLP (and Marcum & Kliegman LLP
through June 30, 2004, the date of their dismissal), has been approved in
advance by the Board of Directors, and none of those engagements made use of
the de minimus exception to the pre-approval contained in Section
10A(i)(1)(B) of the Securities Exchange Act of 1934.
A-33
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: April 13, 2005 By: /s/ George Kanakis
--------------------------------------
George Kanakis,
President, Chief Executive Officer and
Principal Financial Officer
SIGNATURE TITLE DATE
/s/ George Kanakis Director April 13, 2005
-----------------------
George Kanakis
/s/ Gary Giannantonio Director April 13, 2005
-----------------------
Gary Giannantonio
A-34
NUWAVE TECHNOLOGIES, INC. AND SUBSIDIARIES
Index to Consolidated Financial Statements
Page(s)
-------
Report of Independent Registered Public Accounting Firm - Weiser LLP F-2
Report of Independent Registered Public Accounting Firm - Marcum & Kliegman LLP F-3
Consolidated Balance Sheet as of December 31, 2004 F-4
Consolidated Statements of Operations and Comprehensive Loss
for the years ended December 31, 2004 and 2003 F-5
Consolidated Statements of Stockholders' Deficiency
for the years ended December 31, 2004 and 2003 F-6
Consolidated Statements of Cash Flows for the years ended December 31, 2004 and 2003 F-7 - F-9
Notes to Consolidated Financial Statements F-10 - F-40
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders
NuWave Technologies, Inc.
We have audited the accompanying consolidated balance sheet of NuWave
Technologies, Inc. and Subsidiaries (the "Company") as of December 31, 2004 and
the related consolidated statements of operations and comprehensive loss,
stockholders' deficiency, and cash flows for the year then ended. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of NuWave
Technologies, Inc. and Subsidiaries as of December 31, 2004 and the consolidated
results of their operations and their cash flows for the year then ended, in
conformity with U.S. generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 2 to the
consolidated financial statements, the Company has experienced recurring net
losses, negative cash flows from operations, a net working capital deficiency
and a stockholders' deficiency, which raise substantial doubt about the
Company's ability to continue as a going concern. Management's plans in regard
to these matters are also described in Note 2. The financial statements do not
include any adjustments that might result from the outcome of this uncertainty.
/s/ Weiser LLP
--------------
Weiser LLP
New York, New York
February 28, 2005
F-2
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders and Board of Directors
NuWave Technologies, Inc.
We have audited the accompanying consolidated statements of operations and
comprehensive loss, stockholders' deficiency and cash flows of NuWave
Technologies, Inc. and Subsidiaries (the "Company") for the year ended December
31, 2003. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audit.
We conducted our audit in accordance with standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the 2003 consolidated financial statements referred to above
present fairly, in all material respects, the consolidated results of operations
and cash flows of NuWave Technologies, Inc. and Subsidiaries for the year ended
December 31, 2003, in conformity with U.S. generally accepted accounting
principles.
The accompanying 2003 consolidated financial statements have been prepared
assuming the Company will continue as a going concern. As discussed in Note 2 to
the consolidated financial statements, the Company incurred a loss during the
year ended December 31, 2003 of approximately $790,000 and had, as of December
31, 2003, stockholders' and working capital deficiencies of approximately
$1,705,000 and $50,000, respectively, which raises substantial doubt about its
ability to continue as a going concern. Management's plans in regard to these
matters are also described in Note 2. The consolidated financial statements do
not include any adjustments that might result from the outcome of this
uncertainty.
/s/ Marcum & Kliegman LLP
-------------------------
Marcum & Kliegman LLP
April 9, 2004
New York, New York
F-3
NUWAVE TECHNOLOGIES, INC. AND SUBSIDIARIES
Consolidated Balance Sheet
(In thousands, except share and per share data)
ASSETS
December 31,
2004
--------
Current assets:
Cash and cash equivalents $ 84
Marketable securities - available-for-sale 256
Inventory 1
Other current receivables 30
Deferred tax asset 50
--------
Total current assets 421
Property and equipment, net 21
Land held for development and sale 2,761
--------
Total assets $ 3,203
========
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
Current liabilities:
Accounts payable, accrued interest and accrued liabilities $ 122
Current portion of convertible debentures, net of unamortized
discount of $50 335
--------
Total current liabilities 457
Non-current liabilities:
Note payable - related party 1,400
Convertible debentures - related party,
net of unamortized discount of $694 2,607
Convertible debentures, net of unamortized discount of $37 163
Accrued interest - non-current 247
--------
Total non-current liabilities 4,417
--------
Total liabilities 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 2
Additional paid-in capital 26,461
Accumulated other comprehensive income 125
Accumulated deficit (28,259)
--------
Total stockholders' deficiency (1,671)
--------
Total liabilties and stockholders' deficiency $ 3,203
========
The accompanying notes are an integral part of these consolidated financial statements.
F-4
NUWAVE TECHNOLOGIES, INC. AND SUBSIDIARIES
Consolidated Statements of Operations and Comprehensive Loss
(In thousands, except share and per share data)
For the Years Ended December 31,
--------------------------
2004 2003
----------- -----------
Net sales $ - $ 20
Cost of sales - 5
----------- -----------
Gross profit - 15
----------- -----------
Operating expenses:
General and administrative 741 958
Research and development - 134
----------- -----------
Total operating expenses 741 1,092
----------- -----------
Loss from operations (741) (1,077)
----------- -----------
Other income (expense):
Gain on forgiveness of debt 20 347
Gain on sale of interest in undeveloped land,
net of expenses of sale of $27 850 -
Interest income 3 -
Interest expense (including related party interest
expense $267 in 2004 and $52 in 2003) (518) (55)
----------- -----------
Other income, net 355 292
----------- -----------
Loss before benefit from (provision for) income taxes (386) (785)
Benefit from (provision for) income taxes 50 (5)
----------- -----------
Net loss (336) (790)
Deemed dividend - Redemption premium on
convertible preferred stock - (19)
----------- -----------
Net loss applicable to common stockholders $ (336) $ (809)
=========== ===========
Basic and diluted net loss per common share:
Weighted average number of
common shares outstanding 1,986,640 1,455,365
=========== ===========
Basic and diluted net loss per common share $ (0.17) $ (0.56)
=========== ===========
Comprehensive loss:
Net loss $ (336) $ (809)
Other comprehensive income net of income taxes:
Unrealized gain on marketable securities 125 -
----------- -----------
Comprehensive loss $ (211) $ (809)
=========== ===========
The accompanying notes are an integral part of these consolidated financial statements.
F-5
NUWAVE TECHNOLOGIES, INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders' Deficiency
(In thousands, except share and per share data)
Convertible
Common stock preferred stock Additional Accumulated Total
---------------------- ----------------- paid-in Accumulated other comprehensive stockholders'
Shares Amount Shares Amount capital deficit income deficiency
------------- -------- -------- -------- --------- --------- -------------------- -----------
Balance, January 1, 2003 507,734 $ 1 - $ - $ 26,927 $ (27,114) $ - $ (186)
Common shares issued under the
equity line of credit for
repayment of notes payable,
net of costs 1,151,490 1 - - 272 - - 273
Proceeds from issuance of
common stock under Equity
Line of Credit 191,678 - - - 39 - - 39
Common shares issued for
services 25,000 - - - 5 - - 5
Proceeds from issuance of
convertible preferred stock - - 67,000 1 66 - - 67
Warrants issued for services - - - - 22 - - 22
Redemption of convertible
preferred stock - - (67,000) (1) (66) (19) - (86)
Recording of convertible debt
discount - - - - 986 - - 986
Adjustment to record acquired land
at the seller's historical cost
basis (Note 5) - - - - (2,035) - - (2,035)
Net loss - - - - - (790) - (790)
------------- -------- -------- -------- --------- --------- -------------------- -----------
Balance, December 31, 2003 1,875,902 $ 2 - $ - $ 26,216 $ (27,923) $ - $ (1,705)
Recording of convertible debt
discount - - - - 630 - - 630
Reacquisition of beneficial
conversion feature on
convertible debentures - - - - (529) - - (529)
Common shares issued for
services 111,111 - - - 10 - - 10
Common shares issued for
compensation 75,000 - - - 8 - - 8
Forgiveness of debt - related party - - - - 126 - - 126
Net unrealized gain on -
marketable securities - - - - - - 125 125
Net loss - - - - - (336) - (336)
------------- -------- -------- -------- --------- --------- -------------------- -----------
Balance , December 31, 2004 2,062,013 $ 2 - $ - $ 26,461 $ (28,259) $ 125 $ (1,671)
============= ======== ======== ======== ========= ========= ==================== ===========
The accompanying notes are an integral part of these consolidated financial statements.
F-6
NUWAVE TECHNOLOGIES, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(In thousands, except share data)
For the Years Ended December 31,
-------------------------------
2004 2003
------------- --------------
Cash flows from operating activities:
Net loss $ (336) $ (790)
------------- --------------
Adjustments to reconcile net loss to net cash used
in operating activities:
Provision for bad debt expense - 11
Provision for deferred income taxes - 5
Depreciation 5 42
Gain on sale of interest in land held for
development and sale (850) -
Amortization of debt discount, including
related party amounts of $102 in 2004 and $9 in 2003 230 11
Issuance of stock and warrants for consulting services
and compensation 18 27
Gain on forgiveness of debt (20) (347)
(Increase) decrease in operating assets:
Inventory - 24
Other current receivables (30) -
Prepaid expenses and other current assets - 159
Other assets - 20
Deferred tax asset 175 -
Increase (decrease) in operating liabilities:
Accounts payable, accrued interest and accrued liabilities
including related party accrued interest of $66 in
2004 and $29 in 2003 147 (20)
------------- --------------
Total adjustments (325) (68)
------------- --------------
Net cash used in operating activities (661) (858)
------------- --------------
Cash flows from investing activities:
Purchase of marketable securities (131) -
Purchase of property and equipment (22) -
Land acquisition and land development costs (159) (55)
Proceeds from sale of land, net of $27 of expenses (27) -
Proceeds from sale of equipment - 1
------------- --------------
Net cash used in investing activities $ (339) $ (54)
------------- --------------
(continued)
The accompanying notes are an integral part of these consolidated financial statements.
F-7
NUWAVE TECHNOLOGIES, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows, continued
(In thousands except share data)
For the Years Ended December 31,
---------------------------------
2004 2003
-------------- ---------------
Cash flows from financing activities:
Proceeds from issuance of notes payable - related party - 557
Proceeds from issuance of common stock
under Equity Line of Credit - 39
Proceeds from issuance of convertible debentures 2,244 395
Proceeds from issuance of convertible preferred stock - 67
Repayment of note payable to officer/stockholder - (115)
Repayment of notes payable - related party (460) -
Repayment of convertible debentures (619) -
Repayment of convertible debenture - related party (200)
Redemption of convertible preferred stock (inclusive of
redemption premium of $19) - (86)
-------------- ---------------
Net cash provided by financing activities 965 857
-------------- ---------------
Net decrease in cash and cash equivalents (35) (55)
Cash and cash equivalents - beginning of the year 119 174
-------------- ---------------
Cash and cash equivalents - end of the year $ 84 $ 119
============== ===============
(continued)
The accompanying notes are an integral part of these consolidated financial statements.
F-8
NUWAVE TECHNOLOGIES, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows, continued
(In thousands except share data)
For the Years Ended December 31,
---------------------------------
2004 2003
-------------- ---------------
Supplemental disclosure of cash flow information:
Cash paid during the year for interest $ 105 $ 25
============== ===============
Supplemental disclosures of non-cash investing and
financing activities:
Recording of debt discount $ 630 $ 986
============== ===============
Issuance of 1,151,490 shares of common stock
during 2003 in settlement of notes payable $ - $ 273
============== ===============
On December 22, 2003, the Company
acquired a parcel of land through the
assumption of debt as follows:
Land held for development and sale $ - $ 2,915
Note payable - Related party - Stone Street
Asset Management , LLC - (1,400)
Convertible debenture - Related party - Cornell
Capital Partners, LP - (3,300)
Convertible debentures - (250)
-------------- ---------------
Additional paid-in capital - adjustment
to record acquired land at the seller's historical
cost basis $ - $ (2,035)
============== ===============
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 $ 273 $ -
============== ===============
Gain on related party forgiveness of debt credited
to additional paid-in capital $ 126 $ -
============== ===============
Sale of a 20% interest in its
land held for development and sale
through the partial redemption of a convertible
debenture $ 1,427 $ -
============== ===============
Reacquisition of beneficial conversion
feature upon early extinguishment of debt $ (529) $ -
============== ===============
The accompanying notes are an integral part of these consolidated financial statements.
F-9
NUWAVE TECHNOLOGIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Organization and Nature of Operations
NuWave Technologies, Inc. ("NuWave") was incorporated in Delaware on
July 17, 1995. On October 20, 2003, NuWave formed Lehigh Acquisition Corp
("Lehigh") and during January and February 2004, NuWave formed NuWave
Acquisition Corp. ("NuWave Acquisition"), Harwood Acquisition Corp. ("Harwood"),
WH Acquisition Corp. ("WH Acquisition") and JK Acquisition Corp. ("JK
Acquisition") (collectively, the "Company"). Since its inception, NuWave has
operated as a technology company, focusing on technology related to enhancing
image and video output. NuWave continues to market its proprietary
video-enhancement technology. During November, 2003, through Lehigh, NuWave
entered the land development business. On December 22, 2003, Lehigh purchased a
parcel of land from a related entity and intends to develop and sell residential
units. Through WH Acquisition, in April 2004, NuWave acquired land and building
that it intends to develop and then sell. In November 2004, through Lehigh,
NuWave sold a 20% interest in its parcel of land held for development and sale.
2. Going Concern and Management's Plans
Over the last two years, the Company's annual sales have declined from
approximately $20,000 to $0 for each of the years 2003 and 2004, respectively,
as the Company has had difficulty securing buyers for its technology products in
a very competitive environment and that there have yet to be revenues from the
sale of developed real estate properties. The Company has incurred annual net
losses of approximately $790,000 and $336,000 in 2003 and 2004, respectively,
resulting in a stockholders deficiency of approximately $1,671,000 at December
31, 2004, which raise substantial doubt about the Company's ability to continue
as a going concern.
F-10
NUWAVE TECHNOLOGIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. Going Concern and Management's Plans - continued
Management has taken a number of actions to lower costs and to improve
the Company's liquidity. The Company has substantially reduced its cash flow
requirements through significant reductions in payroll and various other
operating expenses. During August 2004, the Company has raised approximately
$1,784,000 through the issuance of a convertible debenture related to the
Company's land held for development and sale. In November 2004, this convertible
debenture was terminated and rescinded and approximately $1,427,000 of this
amount was retained by the Company and was applied toward the sale of an
interest in the Company's land held for development and sale (see Note 5). In
November 2004, approximately $298,000 from the proceeds of this terminated
convertible debenture were refunded to the holder. The net proceeds from this
convertible debenture of $1,129,000 have provided cash flows for operating
expenses and for the repayment of certain obligations. During September 2004 the
Company applied approximately $460,000 of these funds to pay off in full certain
obligations to a related party, Cornell Capital Partners, L.P. ("Cornell")
totaling $484,000. In addition, during September 2004 the Company paid off
convertible debenture obligations to Cornell and others with a face value of
$200,000 and $320,000, respectively. Although it continues to find it difficult
to generate revenues, the Company intends to remain in the technology business.
In addition, management's plans include the raising of cash through the
issuance of debt or equity although there are no assurances that the Company
will be successful. The Company continues to require funding by and the
financial support of Cornell. In January 2005, the Company entered into a
Standby Equity Distribution Agreement ("SEDA") with Cornell (see Note 9).
On February 14, 2005, the Company filed an amended Form SB-2
Registration Statement, with the Securities and Exchange Commission, seeking to
register 130,690,033 shares of its common stock, including 120,122,191 shares of
common stock to be sold by Cornell pursuant to the SEDA. On February 14, 2005,
the Securities and Exchange Commission declared the registration statement
effective.
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 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 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.
F-11
NUWAVE TECHNOLOGIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. Summary of Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements include the accounts of NuWave
and its wholly-owned subsidiaries Lehigh, NuWave Acquisition, Harwood, WH
Acquisition and JK Acquisition. All significant intercompany accounts and
transactions have been eliminated in consolidation.
Use of Estimates
The preparation of consolidated financial statements in conformity with
accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the consolidated financial statements and the
reported amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
Cash and Cash Equivalents
The Company considers all highly liquid investments with a maturity of
three months or less when purchased to be cash equivalents.
F-12
NUWAVE TECHNOLOGIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 consolidated 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, net of tax, reported in stockholders'
deficiency under the caption "Accumulated Other Comprehensive Income." Realized
gains and losses and declines in value judged to be other-than-temporary on
available-for-sale securities are included in investment income (expense). 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.
The following is a summary of marketable securities at December 31, 2004:
Gross
Unrealized Estimated
Cost Gains Fair Value
---- ----- ----------
Available-for-sale equity
securities $131,000 $125,000 $256,000
======== ========= ========
Proceeds from sales of available-for-sale securities were $0 in 2004.
Purchases of available-for-sale securities were $131,000 in 2004. There were no
sales of available-for-sale securities during the year ended December 31, 2004.
The available-for-sale securities consist of shares of common stock of an
affiliate of Cornell.
Inventory
Inventory consists of purchased components and supplies, and is stated
at the lower of cost determined on the first-in, first-out method or market.
F-13
NUWAVE TECHNOLOGIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. Summary of Significant Accounting Policies - continued
Property and Equipment
Property and equipment is stated at cost, less accumulated
depreciation. Depreciation of property and equipment is determined using the
straight-line method over their estimated useful lives, generally three to seven
years. Upon retirement or other disposition of these assets, the cost and
related accumulated depreciation of these assets are removed from the accounts
and the resulting gains or losses are reflected in the consolidated results of
operations. Expenditures for maintenance and repairs are charged to operations.
Land Held for Development and Sale
Land held for development and sale is stated at the seller's historical
cost basis (see Note 5), plus the costs of improvements.
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.
Impairment of Long-Lived Assets
The Company periodically assesses the recoverability of long-lived
assets, including property and equipment and land held for development and sale,
when there are indications of potential impairment, based on estimates of
undiscounted future cash flows. The amount of impairment is calculated by
comparing anticipated discounted future cash flows with the carrying value of
the related asset. In performing this analysis, management considers such
factors as current results, trends, and future prospects, in addition to other
economic factors.
Revenue Recognition
Revenues from sales of real estate are recorded when title is conveyed
to the buyer, adequate cash payment has been received and there is no continued
involvement. Revenue from technology products is recorded when orders are
shipped and the Company has no further involvement with the product.
F-14
NUWAVE TECHNOLOGIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. Summary of Significant Accounting Policies, continued
Research and Development Costs
Research and development costs are charged to expense as incurred.
There were no research and development costs incurred during the year ended
December 31, 2004. During the year ended December 31, 2003, the Company incurred
approximately $134,000 in research and development costs.
Income Taxes
The Company recognizes deferred tax assets and liabilities based on the
difference between the financial statement carrying amounts and tax bases of
assets and liabilities, using the enacted tax rates in effect in the years in
which the differences are expected to reverse. A valuation allowance is
established when necessary to reduce deferred tax assets to the amount expected
to be realized.
Stock-Based Compensation
On December 31, 2003, the Company terminated its two stock-based
employee compensation plans (see Note 9). As permitted under Statement of
Financial Accounting Standards ("SFAS") No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure", which amended SFAS No. 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 ("FASB")
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 loss, as all options granted under those
plans had an exercise price equal to the market value of the underlying common
stock on the date of grant. For the years ended December 31, 2004 and 2003 the
effect on net loss had the Company applied the fair value recognition provisions
of SFAS No. 123 to stock-based employee compensation was not material.
Accordingly, there are no differences between basic and diluted net loss per
share as reported and pro forma net loss.
On June 1, 2004, the Company granted 75,000 shares of stock to its
President and Chief Executive Officer ("CEO") under his employment agreement and
recorded an earnings charge of $7,500 (see Note 9).
F-15
NUWAVE TECHNOLOGIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. Summary of Significant Accounting Policies, continued
Loss per Share
The Company follows SFAS No. 128, "Earnings Per Share", which provides
for the calculation of "basic" and "diluted" earnings (loss) per share. Basic
loss per share includes no dilution and is computed by dividing 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 years
ended December 31, 2004 and 2003, potential common shares amount to
approximately 76,988,651 and 35,441,444, respectively, and have not been
included in the computation of diluted loss per share since the effect would be
antidilutive. Conversion of all convertible debentures was based upon a
conversion price of $0.052 and $0.112 per share at December 31, 2004 and 2003,
respectively.
Concentration of Credit Risk - Cash
The Company maintains its cash and cash equivalents with various
financial institutions, which exceed federally insured limits at times
throughout the year. At December 31, 2004, the Company had cash on deposit that
was within federally insured limits.
F-16
NUWAVE TECHNOLOGIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. Summary of Significant Accounting Policies, continued
Fair Value of Financial Instruments
The consolidated financial statements include various estimated fair
value information at December 31, 2004 and 2003, as required by SFAS No. 107,
"Disclosures about Fair Value of Financial Instruments". Such information, which
pertains to the Company's financial instruments, is based on the requirements
set forth in that statement and does not purport to represent the aggregate net
fair value to the Company.
The following methods and assumptions were used to estimate the fair
value of each class of financial instruments for which it is practicable to
estimate that value:
Cash and cash equivalents: The carrying amount approximates
fair value because of the short-term maturity of those instruments.
Marketable securities - available-for-sale: The fair value is
estimated based upon quoted market prices for these investments.
Other receivables: The carrying amount approximates fair value
because of the short-term maturity of those instruments.
Accounts payable, accrued interest and accrued liabilities:
The carrying amounts approximate fair value because of the short
maturity of those instruments.
Notes payable and convertible debentures: The carrying amounts
of notes payable and convertible debentures approximate fair value due
to the length of the maturities, and/or due to the interest rates not
being significantly different from the current market rates available
to the Company.
Effect of Recent Accounting Pronouncements
In December 2003, the Financial Accounting Standards Board issued FASB
Interpretation Number 46R "Consolidation of Variable Interest Entities." FIN
46R, which 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.
F-17
NUWAVE TECHNOLOGIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. Summary of Significant Accounting Policies, continued
Effect of Recent Accounting Pronouncements, continued
In November 2004, the FASB issued 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 charge for abnormal amounts 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.123R, "Share-Based Payment"
(SFAS No. 123R). This statement replaces SFAS No. 123 and supersedes APB 25.
SFAS 123R 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 123R 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 153 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 Nonmonetary
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 an 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.
4. Property and Equipment
Property and equipment consist of the following:
Estimated December 31,
----------------- 2004
Useful Lives in ------------
Years
Furniture and fixtures 7 $ 14,000
Computer equipment 5 234,000
Equipment 5 100,000
------------
$ 348,000
Less: accumulated depreciation 327,000
------------
$ 21,000
============
Depreciation expense on property and equipment for the years ended
December 31, 2004 and 2003 amounted to approximately $5,000 and $42,000,
respectively.
F-18
NUWAVE TECHNOLOGIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. Land Held for Development and Sale
During April 2004, WH Acquisition Corp. purchased real estate property
consisting of land and a residential building in Jersey City, New Jersey for a
total purchase price of $122,000. The purchase was paid with $113,000 in cash
and $9,000 in the application of a deposit. The Company intends to redevelop and
then sell this property
On December 22, 2003, Lehigh acquired a parcel of land in New Jersey
for $4,950,000 that it intends to develop and then sell. This land was acquired
from Stone Street Asset Management LLC ("Stone Street"), a company under common
control with Cornell. In connection with this purchase of land, the Company
incurred debt obligations consisting of a $3,300,000 convertible debenture to
Cornell, which was subsequently terminated and replaced with a $3,481,274,
non-convertible promissory note, which includes accrued interest of $181,274, on
January 26, 2005, $250,000 of convertible debentures to unrelated parties and a
$1,400,000 secured note payable to Stone Street (see Note 7). As a result of
Stone Street's relationship with Cornell, and Cornell's relationship with the
Company (see Note 7), the Company has recorded the land at the historical cost
basis as recorded by Stone Street of approximately $2,915,000 in accordance with
accounting rules regarding transfer of non-monetary assets. The difference of
$2,035,000 between the fair value of the land as determined by an independent
appraiser and the carryover cost basis of land from Stone Street has been
recorded as an adjustment to additional paid-in capital.
During the years ended December 31, 2004 and 2003, the Company
capitalized approximately $273,000 and $0 of interest relating to the financing
costs incurred for the portion of Lehigh land that was capitalized in December
2003 and $37,000 and $12,000 in legal fees, respectively.
Termination and Rescission of July 2004 Agreement of Sale and August
2004 Convertible Debenture and Recognition of the Sale of an Interest
in Land Held for Development and Sale
During July 2004 and August 2004, the Company entered into an Agreement
of Sale and a Convertible Debenture, respectively, related to its transfer of a
20% fee simple interest in its land held for development and sale as a tenant in
common. During November 2004, the Agreement of Sale and the Convertible
Debenture were terminated and rescinded in their entirety and replaced with an
Amended and Restated Agreement of Sale issued in November 2004.
The terms of the July 2004 Agreement of Sale and the August 2004
Convertible Debenture are outlined below.
The Company sold a 20% fee simple interest in its land held for
development and sale as a tenant in common to an entity which is a related party
to Michael Kesselbrenner, a current holder of the Company's convertible
debentures ("Investor") and received cash proceeds of approximately $1,784,000.
The Company may reacquire an interest in the property ("Company's
Option"). At any time after closing and upon 15 days advance written notice, the
Company may repurchase all or a portion of the interest sold at a purchase price
computed at 120% of the price, or portion thereof, paid by the Investor on the
effective date.
F-19
NUWAVE TECHNOLOGIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. Land Held for Development and Sale, continued
Termination and Rescission of July 2004 Agreement of Sale and August
2004 Convertible Debenture and Recognition of the Sale of an Interest
in Land Held for Development and Sale, continued
The Investor, at any time after closing and upon 15 days advance
written notice, may sell back to the Company all or any portion of its interest
in the property ("Investor's Option"). The Investor may sell this property back
to the Company through exercise rights under a convertible debenture agreement,
discussed below. The Investor's Option expired on August 1, 2007, and shall
thereupon be exercised automatically for any portion of the property interest
not already reacquired by the Company.
In addition, the Investor has provided the Company with a right of
first offer to reacquire the Company's interest in the property. If, at any time
prior to August 1, 2007, the Investor wished to sell its interest to a third
party, it must first notify the Company. Upon such notice, the Company may,
within 30 days, repurchase all of the remaining property interest for a price
equal to a pro-rata portion of the original price paid by the Investor at the
effective date ($1,784,000). If the Company fails to exercise this offer within
the 30 day period, then the Investor shall be allowed 90 days in which to sell
all of its interests in the property to a third party.
In conjunction with this transaction, the Company issued a convertible
debenture in favor of the Investor for approximately $1,784,000. This
convertible debenture was to bear interest from July 14, 2004 at 10% per annum,
with the interest payable monthly, starting September 1, 2004. This convertible
debenture was to mature on August 1, 2007.
Under the terms of the convertible debenture, an exercise of the
Company's Option to reacquire its former interest in the property is treated as
a redemption of all or a portion of its obligations under the convertible
debenture. The Company's purchase price in this case is a premium of 120% of the
price, or portion thereof, paid by the Investor on the effective date, as
discussed above.
An exercise of the Investor's Option to sell its interest in the land
back to the Company is accomplished through the Investor's right to convert the
amount outstanding under the convertible debenture into the Company's common
stock. The aggregate amount of principal and any unpaid interest is convertible
at the per share price equal to the lesser of (a) 120% of the closing bid price
at August 20, 2004, or (b) 80% of the lowest closing bid price for the five days
immediately preceding the conversion date. Upon such conversion, a pro-rata
portion of the interest in the property is sold back to the Company. Upon the
maturity of the convertible debenture, the Investor's Option terminates and any
remaining amount of the convertible debenture is automatically converted into
the Company's common stock. Upon such conversion, the remaining portion of the
interest in the property is sold back to the Company.
F-20
NUWAVE TECHNOLOGIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. Land Held for Development and Sale, continued
Termination and Rescission of July 2004 Agreement of Sale and August
2004 Convertible Debenture and Recognition of the Sale of an Interest
in Land Held for Development and Sale, continued
The Company's reacquisition of its interests in the property under the
terms of the rights of first offer, as described above, represented a
satisfaction of its obligations at face value under the convertible debenture.
Upon the Investor's sale of the property to a third party under the
terms of the rights of first offer, as described above, all obligations of the
Company under the convertible debenture shall immediately terminate.
In accordance with the provisions a SFAS No. 66, "Accounting for Sales
of Real Estate," the Company has accounted for this transaction as a financing
transaction. Under the provisions of SFAS No. 66, when the seller has an
obligation to repurchase the property, or the terms of the transaction allow the
buyer to compel the seller to repurchase the property or interest, then the
transaction shall be accounted for as a financing transaction, rather than a
sale. Under the terms of this transaction, the Investor's Option required the
Investor to sell the property back to the Company. This sale back to the Company
would have been satisfied through the conversion of the Investor's interest
under the convertible debenture into the Company's common stock.
Upon the Investor's sale of the property interest to a third party
under the terms of the rights of first offer, as described above, this financing
transaction shall be deemed to have terminated and the Company shall thereupon
account for the proceeds received as a sale of its interest in the property,
with any gain or loss on such sale to be recognized accordingly at that time.
During November 2004, the July 2004 Agreement of Sale and the August
2004 Convertible Debenture were rescinded and terminated pursuant to an Amended
and Restated Agreement of Sale. Under this Amended and Restated Agreement of
Sale, for a selling price of approximately $1,427,000, the Company has sold a
20% fee simple interest in certain of its land held for development and sale as
a tenant in common to an entity which is a related party to Michael
Kesselbrenner, a current holder of the Company's convertible debentures. The
Company has applied the $1,427,000 sale amount against the proceeds from the
convertible debenture. On November 29, 2004, the Company paid approximately
$326,000 to the buyer, representing approximately $28,000 in accrued interest
and $298,000 in refunded proceeds.
During November 2004, the Company recorded a total net gain of $850,000
on the sale of the 20% interest in the land held for development and sale, with
such gain having been offset by approximately $27,000 representing the legal and
filing expenses of the sale.
F-21
NUWAVE TECHNOLOGIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. Accounts Payable, Accrued Interest and Accrued Liabilities
Accounts payable, accrued interest and accrued liabilities consist of
the following:
December 31,
2004
-------------
Accounting and legal fees $ 76,000
Accrued interest - related parties 241,000
Accrued interest 26,000
Consulting fees 11,000
Miscellaneous 15,000
------------
Total $ 369,000
Less - current portion 122,000
------------
Accrued interest - non-current portion $ 247,000
============
7. Notes Payable and Convertible Debentures
Note Payable Officer/Stockholder
On December 10, 2002, the Company entered into a 60 day Revolving Line
of Credit and Secured Promissory Note with the Company's former CEO and
stockholder. Under the terms of the agreement, the former CEO agreed to lend the
Company, as needed for working capital requirements, up to $230,000. At December
31, 2002, there was an outstanding balance of $115,000, which was repaid on
January 2, 2003.
Notes Payable - Related Party
Effective upon September 29, 2003, Cornell became a related party (see
below).
The Company received loans ("Loans") aggregating $357,000 during the
year ended December 31, 2003. The Company repaid certain of these Loans in the
amount of $273,000 during the year ended December 31, 2003 from the proceeds
received under the Equity Line of Credit through the issuance of 1,151,490
shares of the Company's common stock (see Note 9). The common stock issued to
repay these notes were issued at a 3% discount. These Loans were non-interest
bearing during their terms, which ranged from 90 days to 180 days.
F-22
NUWAVE TECHNOLOGIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. Notes Payable and Convertible Debentures, continued
Notes Payable - Related Party, continued
The balance of these Equity Line Loans as of September 2003, totaling
$284,000, were not repaid within their term and were in default. During
September 2003, the Company entered into an Agreement with Cornell to settle the
default on these loans. The Agreement provided for the following:
o Cornell agreed not to foreclose on its outstanding
indebtedness of $284,000 owed by the Company. In addition, on
September 29, 2003, Cornell entered 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. The loan was non-interest
bearing for its original term of 180 days.
o Cornell would provide additional capital to the Company and
assist in identifying new businesses for the Company's growth.
Cornell agreed to maintain the Company's public filings and
status. The Company's CEO and Chairman of the Board of
Directors, and Chief Financial Officer ("CFO"), agreed to
resign their positions with the Company, and as such, their
employment agreements terminated at the same time. 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 9). The Company's Board of
Directors appointed a nominee to its Board of Directors,
selected by Cornell. Upon such appointment, the Company's
existing Board members resigned. As of December 31, 2004, the
Company's Board of Directors consists of two directors, one of
which is the director nominee appointed by Cornell.
o 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 $347,000 during the year ended December 31,
2003.
On March 27, 2004, the $200,000 loan matured and was not repaid
according to its terms. On April 5, 2004, Cornell agreed to extend the due dates
of the $284,000 of Equity Line Loans and the $200,000 loan to April 15, 2005.
While in default and through the extended maturity date, the $284,000
of Equity Line Loans and the $200,000 loan accrued interest from the default
dates at a rate of 24% per annum. Interest expense on these loans from Cornell
for the years ended December 31, 2004 and 2003 was approximately $69,000 and
$46,000, respectively.
At December 31, 2003, accrued interest on these loans due to Cornell
included in accounts payable, accrued interest and accrued liabilities on the
accompanying consolidated balance sheet was approximately $23,000.
F-23
NUWAVE TECHNOLOGIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. Notes Payable and Convertible Debentures
Notes Payable - Related Party
On September 10, 2004, the Company repaid in full the $484,000 balance
of the notes payable - related party, and related accrued interest of
approximately $93,000, for the net sum of $460,000. Such forgiveness,
aggregating approximately $117,000 has been recorded as an addition to
additional paid-in capital. Funds for this repayment were provided through the
proceeds received from the convertible debenture related to the land held for
development and sale (see Note 5).
Convertible Debentures
During November 2004, NuWave redeemed a convertible debenture with a
face amount of $250,000 for approximately $287,000, including a redemption
premium of $25,000 and accrued interest through redemption of approximately
$12,000. Upon early redemption, the Company incurred a charge to additional paid
in capital of approximately $83,000 to reacquire the related beneficial
convertible feature of the convertible debenture instrument and a gain on early
extinguishment of debt of approximately $20,000 representing the amortization
from inception of the beneficial conversion feature.
During October 2004, NuWave issued a $100,000 convertible debenture.
This debenture bears interest at a rate of 5% per annum, with interest due at
maturity or upon conversion. This debenture matures in October 2006. NuWave has
recorded a debt discount of $25,000 at issuance of this convertible debenture to
reflect the value of the beneficial conversion feature related to the
convertible debenture. Accordingly, NuWave has recorded the value of the
beneficial conversion feature as a reduction to the carrying amount of the
convertible debt and as an addition to additional paid-in capital. This debt
discount is being amortized over the term of the related debenture, which is 24
months, and such amortization is recorded as interest expense on the
consolidated statement of operations. At the option of NuWave, upon the maturity
date, this convertible debenture and accrued interest may be converted into
NuWave's Common Stock. At the option of the holder, at any time prior to
maturity, any portion of this convertible debenture may be converted into Common
Stock. The value of principal and accrued interest is convertible at the per
share price equal to the lesser of (a) 120% of the closing bid price, or (b) 80%
of the lowest closing bid price for the five days immediately preceding the
conversion date. In addition, NuWave may redeem, with 15 days advance notice, a
portion or all of this outstanding debenture at 110% of the dollar value of the
amount redeemed plus accrued interest.
During August 2004, the Company raised approximately $1,784,000 through
the issuance of a convertible debenture to a party related to a current
convertible debenture holder. This debenture bears interest at 10% per annum,
with interest payable monthly and is secured through an interest in the land
held for development and sale. This debenture was to mature in August 2007.
F-24
NUWAVE TECHNOLOGIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. Notes Payable and Convertible Debentures, continued
Convertible Debentures, continued
For the convertible debenture issued in August 2004, at the option of
the holder or the Company, at any time, this convertible debenture could have
been converted into the Company's Common Stock. The value of principal and
accrued interest was convertible at the per share price equal to the lesser of
(a) 120% of the closing bid price at August 20, 2004, or (b) 80% of the lowest
closing bid price for the five days immediately preceding the conversion date.
In connection with the issuance of this convertible debenture the Company
transferred a 20% fee simple interest in its land held for development and sale.
In addition, the Company and the transferee each had the option to effectively
void all or a portion of the transfer. In the event that neither option was
exercised within three years, the 20% fee simple interest would revert to the
Company upon settlement of the convertible debenture. This convertible debenture
was terminated and rescinded during November 2004.
Upon the issuance of the convertible debenture issued in August 2004,
the Company has recorded a debt discount of $446,000. This debt discount was
recorded to reflect the value of the beneficial conversion feature related to
the convertible debenture. Accordingly, the Company has recorded the value of
the beneficial conversion feature as a reduction to the carrying amount of the
convertible debt and as an addition to additional paid-in capital. This debt
discount was being amortized over the term of the related debenture, which was
36 months, and amortization of such discount was recorded as interest expense on
the accompanying consolidated statement of operations.
During November 2004, the Company sold a 20% fee simple interest in
certain of its land held for development and sale to the holder of this
convertible debenture and has applied $1,427,000 of the sale amount against the
proceeds from the convertible debenture. On November 29, 2004, the Company paid
approximately $326,000 to the buyer, representing approximately $28,000 in
accrued interest and $298,000 in refunded proceeds.
During November 2004, the Company recorded a total net gain of $850,000
on the sale of the 20% interest in the land held for development and sale, with
such gain having been offset by approximately $27,000 representing the legal and
filing expenses of the sale (see Note 5).
On September 14, 2004, the Company redeemed convertible debentures with
a face amount of $70,000 for approximately $80,000, including the 10% redemption
fee and accrued interest through the date of redemption. The unamortized
discount aggregating approximately $11,000 at September 14, 2004 has been
recorded as interest expense. On September 10, 2004, the Company redeemed a
convertible debenture - related party with a balance of $200,000 and accrued
interest of approximately $9,000 at redemption for the net sum of $200,000. The
lender waived receipt of the accrued interest. Such forgiveness, aggregating
approximately $9,000 has been recorded as an addition to additional paid-in
capital. The unamortized discount of approximately $28,000 at September 10, 2004
has been recorded as interest expense.
F-25
NUWAVE TECHNOLOGIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. Notes Payable and Convertible Debentures, continued
Convertible Debentures, continued
During June 2004, the Company raised $250,000 through the issuance of a
convertible debenture to an unrelated party. This debenture bears interest at
10% per annum, with interest due at maturity or upon conversion. This debenture
matures in June 2006 and during November 2004 was redeemed in full. During
January 2004, the Company raised $110,000 through the issuance of convertible
debentures to two unrelated parties. These debentures bear interest at a rate of
5% per annum, with interest due at maturity or upon conversion. These debentures
mature in January 2006.
For the convertible debenture issued in June 2004, at the option of the
Company, upon the maturity date, this convertible debenture and accrued interest
may be converted into the Company's common stock. At the option of the holder,
at any time prior to maturity, any portion of this convertible debenture may be
converted into the Company's common stock. The value of principal and accrued
interest is convertible at the per share price equal to the lesser of (a) 120%
of the closing bid price at April 26, 2004, or (b) 75% of the lowest closing bid
price for the five days immediately preceding the conversion date. In addition,
the Company may redeem, with 15 days advance notice, a portion or all of these
outstanding debentures at 125% of the dollar value of the amount redeemed plus
accrued interest.
For the convertible debentures issued in January 2004, at the option of
the Company, upon the maturity date, these convertible debentures and accrued
interest may be converted into the Company's common stock. At the option of the
holder, at any time prior to maturity, any portion of these convertible
debentures may be converted into the Company's common stock. The value of
principal and accrued interest is convertible at the per share price equal to
the lesser of (a) 120% of the closing bid price, or (b) 80% of the lowest daily
volume weighted average price for the five days immediately preceding the
conversion date. In addition, the Company may redeem, with 15 days advance
notice, a portion or all of these outstanding debentures at 110% of the dollar
value of the amount redeemed plus accrued interest.
Upon the issuance of the convertible debentures issued in June 2004 and
January 2004, the Company has recorded debt discounts of $83,000 and $27,000,
respectively. These debt discounts are recorded to reflect the value of the
beneficial conversion feature related to the convertible debentures.
Accordingly, the Company has recorded the value of the beneficial conversion
features as a reduction to the carrying amount of the convertible debt and as an
addition to additional paid-in capital. This debt discount is being amortized
over the term of the related debentures, which is 24 months, and amortization of
such discounts were recorded as interest expense on the accompanying
consolidated statement of operations.
F-26
NUWAVE TECHNOLOGIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. Notes Payable and Convertible Debentures, continued
Convertible Debentures, continued
During October 2003, the Company raised $200,000 through the issuance
of a convertible debenture to Cornell. In addition, during December 2003, the
Company raised $195,000 through the issuance of convertible debentures to
various unrelated parties. On December 22, 2003, the Company issued a
convertible debenture for $3,300,000 to Cornell and $250,000 to unrelated
parties in connection with the acquisition of land held for development and sale
(see Note 5) which is secured through a first mortgage lien on the land. All of
these debentures bear interest at a rate of 5% per annum, with interest due at
maturity or upon conversion. These debentures mature at various dates ranging
from October 2005 through December 2008.
At the option of the Company, upon the maturity date, these convertible
debentures may be converted into the Company's common stock. At the option of
the holder, at any time prior to maturity, any portion of these convertible
debentures may be converted into the Company's common stock. The value of
principal and accrued interest is convertible at the per share price equal to
the lesser of (a) 120% of the closing bid price, or (b) 80% of the lowest daily
volume weighted average price for the five days immediately preceding the
conversion date. In addition, the Company may redeem, with 30 days advance
notice, a portion or all of these outstanding debentures at 120% of the dollar
value of the amount redeemed plus accrued interest. Under the conversion
limitation for the debentures held by Cornell, the Company may issue shares
under conversion only so long as, at conversion, the Cornell holds no more than
9.9% of the Company's outstanding shares.
For all of its convertible debentures, the Company has recorded debt
discounts of $581,000 and $986,000, with amounts related to convertible
debentures issued to Cornell of $0 and $875,000, during the years ended December
31, 2004 and 2003, respectively, at issuance of these convertible debentures to
reflect the value of the beneficial conversion feature related to the
convertible debentures. In addition, the Company has recorded a debt discount of
approximately $49,000 related to the accrual of the beneficial conversion
feature of accrued interest paid in kind, eligible for conversion, during the
year ended December 31, 2004, with an amount of $42,000 related to interest
accrued related to Cornell. Accordingly, the Company has recorded the value of
the beneficial conversion features as a reduction to the carrying amount of the
convertible debt and as an addition to additional paid-in capital.
The Company is amortizing the debt discount over the term of the
related debentures which range from 24 months to 60 months. The Company has
recorded as interest expense on the accompanying consolidated statement of
operations the amortization of debt discounts of approximately $230,000 and
$11,000, of which approximately $104,000 and $9,000 relate to convertible
debentures issued to Cornell, during the year ended December 31, 2004 and 2003,
respectively.
F-27
NUWAVE TECHNOLOGIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. Notes Payable and Convertible Debentures, continued
Note Payable - Related Party
On December 22, 2003, Lehigh issued a secured note for $1,400,000 to
Stone Street in conjunction with its purchase of land in New Jersey (see Note
5). As issued, the note provided for the payment of sixty equal monthly
installments of principal and interest of $27,741 beginning on January 1, 2005,
maturing on January 10, 2010 and secured through a second mortgage on the land.
The note bears interest at a rate of 5% per annum. On January 26, 2005, Stone
Street assigned its rights under this note to Cornell (see Note 17). In
addition, interest and principal payments have been deferred for one year.
Accordingly, as amended, monthly payments of approximately $36,000 will begin on
January 1, 2006, while maintaining the same maturity date. The accrued interest
of approximately $70,000 and the full principal balance for this obligation,
accordingly, are classified as non-current obligations on the consolidated
balance sheet at December 31, 2004.
Aggregate annual maturities of notes payable - related party and
convertible debentures - related party and other, at December 31, 2004 are as
follows:
Year Ending December 31, Amount
------------------------ ------
2005 $ 385,000
2006 524,000
2007 341,000
2008 3,658,000
2009 378,000
---------
Total note payable - related party -
and convertible debentures - related
party and other
5,286,000
Less: unamortized debt discount 781,000
---------
Total notes payable - related party
and convertible debentures - related
party and other, net $4,505,000
==========
F-28
NUWAVE TECHNOLOGIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. Accrued Interest
The Company accrues interest payable on all of its debt obligations.
For the convertible debentures - related party and the other 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. Accrued interest on convertible
debentures due before December 31, 2005 of approximately $20,000 are classified
as current, with the accrued interest on the remaining obligations, of
approximately $175,000, classified as non-current on the consolidated balance
sheet at December 31, 2004.
Under the terms of the amended 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 December 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 (see Note 7).
9. 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 shares of Series A Preferred Stock at $1.00 per share. The
buyers were 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 would automatically convert into shares of the Company's
Common Stock at an adjusted conversion price of $0.05 per share. The Company had
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 chose to redeem a part, but not all, of
the Series A Preferred Stock, the Company could 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. The $19,400
excess of the amount of the redemption over the amount of the original issue has
been recorded as a deemed dividend - redemption premium on convertible preferred
stock.
F-29
NUWAVE TECHNOLOGIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
9. Stockholders' Deficiency, continued
Common Stock and Warrants
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 this 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. On
February 14, 2005, the Company completed its registration of 120,122,191 shares
of common stock in conjunction with this SEDA. On May 25, 2004, the Company
issued 111,111 shares to the placement agent engaged in association with this
agreement, and recorded an earnings charge of $10,000. During August 2004, the
Company paid Yorkville Advisors, an affiliate of Cornell, a fee of $14,000,
recorded as a general and administrative expense in the accompanying
Consolidated Statements of Operations and Comprehensive Loss for the year ended
December 31, 2004, for advisory services in connection with NuWave's preparation
of its Form SB-2 Registration Statement.
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 Securities and Exchange Commission ("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.
On June 1, 2004, the Company issued 75,000 shares of common stock to
Mr. Kanakis, its President and CEO, in accordance with the terms of his
employment agreement. Compensation costs related to issuance of these shares for
the year ended December 31, 2004 included in the consolidated statement of
operations amounted to $7,500 (see Note 13).
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, and effective on July 21, 2003. All share and per
share amounts have been retroactively restated for the stock split.
F-30
NUWAVE TECHNOLOGIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
9. Stockholders' Deficiency, continued
Common Stock and Warrants, continued
On April 15, 2002, the Company entered into a $3,000,000 Equity Line of
Credit Agreement (the "Agreement") with Cornell (the "Purchaser"). Provided the
Company was in compliance with the terms of the Agreement, the Company could, at
its option, periodically require the Purchaser to purchase up to $100,000 in any
seven day period of the Company's common stock (the "put" shares) up to a
maximum of $3,000,000 over the next two years, commencing on May 31, 2002 (the
effective date of a Securities Act of 1933 registration statement on Form SB-2
for the registration of 100,000 shares of common stock to be sold under the
Agreement, plus 4,762 shares of common stock mentioned below). Additional
registration statements added 280,000 shares on November 1, 2002 and 1,200,000
on January 10, 2003, bringing the total registered shares to 1,580,000 under the
Agreement. The Company issued to the Purchaser 4,362 shares of common stock as a
commitment fee for entering into the Agreement. In addition, the Company issued
to the placement agent 400 shares of the Company's common stock. For each share
of common stock purchased under the Equity Line of Credit, the Purchaser paid
97% of the then Market Price (as defined in the Agreement), and was paid a fee
of 4% of each advance. The Company has issued 1,343,168 common shares (of which
1,151,490 represented shares utilized for the repayment of notes payable to
Cornell - see Note 7) under the Agreement for the year ended December 31, 2003.
The Agreement was non-exclusive; thereby permitting the Company to
offer and sell its securities to third parties while the Equity Line of Credit
was in effect. The Company had the option to terminate the Equity Line of Credit
Agreement at any time, provided there is no pending advance thereunder. During
July 2003, the Company reached the limit of 1,580,000 registered shares that
were issuable under the Agreement.
On June 30, 2003, the Company issued 25,000 shares of common stock
valued at approximately $5,000 in exchange for services provided to the Company.
On September 24, 2003, the Company issued 200,000 warrants to purchase
the Company's common stock at $1.00 per share. These warrants were issued to two
former officers for prior services provided to the Company. The warrants are
exercisable over a five-year period which expires in September 2008. The fair
value of the warrants was estimated at $0.09 per warrant on the date of issuance
using the Black-Scholes pricing model. Compensation costs related to these
warrants for the year ended December 31, 2003 included in the consolidated
statement of operations amounted to $18,000.
F-31
NUWAVE TECHNOLOGIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
9. Stockholders' Deficiency, continued
Common Stock and Warrants, continued
During the years ended December 31, 2004 and 2003, a total of 3,130 and
94,879 warrants expired, respectively.
At December 31, 2004 there were 215,100 warrants outstanding as
follows:
Number of Weighted
Common Shares Average
Underlying Exercise Price Exercise Expiration
Warrants Range per Share Price Dates
-------- --------------- ----- -----
12,000 $37.50 - $100.00 $68.79 February 2005 to
November 2005
3,100 $5.00 - $50.00 $38.39 January 2007 to
October 2007
200,000 $1.00 $1.00 September 2008
--------
215,100
========
Stock Options
On January 12, 2003, the Company's employees and directors rescinded
their interest in 23,780 of the Company's options that had been granted to them.
During 2003, all other outstanding options expired.
The Company accounted for stock options in accordance with Accounting
Principles Board Opinion No. 25, Accounting for Stock Issued to Employees ("APB
No. 25") and related interpretations. Under APB No. 25, generally, no
compensation expense is recognized in the consolidated financial statements in
connection with the awarding of stock option grants to employees provided that,
as of the grant date, all terms associated with the award are fixed and the
quoted market price of the Company's stock, as of the grant date, is not more
than the amount an employee must pay to acquire the stock as defined; however,
to the extent that stock options are granted to non employees, for goods or
services, the fair value of these options is included in operating results as an
expense.
F-32
NUWAVE TECHNOLOGIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
9. Stockholders' Deficiency, continued
Stock Options, continued
A summary of the Company's stock option activity under its plans, and
related information, is as follows. All amounts have been restated to reflect
the impact of the reverse stock split:
Weighted
Number of Average Number of
Common Exercise Price Exercise Shares
Shares Range per Share Price Exercisable
------ --------------- ----- -----------
Outstanding at December 31, 2002 27,357 $30.50 - $337.50 $114.50 26,991
Forfeited during the year ended
December 31, 2003 27,357 $30.50 - $337.50 $114.50
-------
Outstanding at December 31, 2004 and
2003 - -
======= =======
Performance Incentive Stock Option Plan
On January 31, 1996, the Company adopted its 1996 Performance Incentive
Stock Option Plan (the "Plan"). Under the Plan, incentive and nonqualified stock
options, stock appreciation rights and restricted stock could be granted to key
employees and consultants (the "Participants") by certain disinterested
directors of the Board of Directors. Any incentive option granted under the Plan
would have an exercise price of not less than 100% of the fair market value of
the shares on the date on which such option is granted. With respect to an
incentive option granted to a Participant who owns more than 10% of the total
combined voting stock of the Company or of any parent or subsidiary of the
Company, the exercise price for such option would be at least 110% of the fair
market value of the shares subject to the option on the date on which the option
is granted. A nonqualified option granted under the Plan (i.e., an option to
purchase the common stock that does not meet the Internal Revenue Code's
requirements for incentive options) would have an exercise price of at least the
par value of the common stock. Stock appreciation rights could be granted in
conjunction with the grant of an incentive or nonqualified option under the Plan
or independently of any such stock option. The directors determined the vesting
of the options under the Plan at the date of grant. A maximum of 24,100 options
could be awarded under the Plan (as amended May 26, 1998). No options were
issued during the year ended December 31, 2003 under the Performance Incentive
Stock Option Plan. This plan was terminated by the Company on December 31, 2003.
F-33
NUWAVE TECHNOLOGIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
9. Stockholders' Deficiency, continued
Non-Employee Director Stock Option Plan
On November 25, 1996, the Company established a Non-Employee Director
Stock Option Plan (the "Director's Plan"). The Director's Plan provided that
each member of the Board of Directors (an "Eligible Director") who otherwise (1)
was not currently an employee of the Company, or (2) was not a former employee
still receiving compensation for prior services (other than benefits under a
tax-qualified pension plan) would be eligible for the grant of stock options
under the Director's Plan. Each Eligible Director at the time of his election to
the Board of Directors, would be granted an option to purchase 60 shares of the
Company's common stock at an exercise price equal to closing price of such
common stock at close of business at the date of such grant, such option to vest
immediately and to expire five years from the date of such grant.
Beginning with the annual meeting of the stockholders of the Company
held on May 29, 1997 and provided that a sufficient number of shares remained
available under the Director's Plan, each year immediately following the date of
the annual meeting of the Company there automatically would be granted to each
Eligible Director who was then serving on the Board an option to purchase 100
shares of the Company's common stock. The first 20 options vested immediately,
the remainder vested equally over the next four years from the date of grant and
were exercisable at the closing price of such shares of common stock at the date
of grant. Such options expired five years from the date of vesting. No options
were issued during the year ended December 31, 2003 under the Director's Plan.
The maximum number of shares of Common Stock with respect to which
options could be granted under the Director's Plan (as amended May 26, 1998) was
4,700 shares.
This plan was terminated by the Company on December 31, 2003.
10. Employee Benefit Plan
The Company maintained a noncontributory Employee Savings Plan,
operated in accordance with the provisions of Section 401(k) of the Internal
Revenue Code that was terminated during the year ended December 31, 2003.
Pursuant to the terms of the plan, participants could defer a portion of their
income through contributions to the plan. During the year ended December 31,
2003, the Company did not make any discretionary additional contributions to the
plan. The termination of the Plan had no effect on the consolidated financial
statements.
F-34
NUWAVE TECHNOLOGIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
11. Income Taxes
The benefit (provision for) income taxes for the years ended December
31, 2004 and 2003 consist entirely of state deferred taxes and is comprised of
the following:
2004 2003
---- ----
State deferred $ 50,000 $ (5,000)
The difference between the statutory federal income tax rate and the
effective rate for the Company's income tax benefit for each of the years ended
December 31, 2004 and 2003, respectively, is summarized as follows:
2004 2003
---- ----
Tax at federal statutory rate 34.0% 34.0%
4.4% (0.2)%
State income tax benefit (expense) net of federal tax effect
Increase in valuation allowance aaallowance (20.9)% (37.0)%
(4.5)% 2.6 %
Miscellaneous
Effective income tax rate 13.0 % (0.6)%
The tax effect of temporary differences consists of the following:
December,
31, 2004
---------------
Deferred tax assets:
Net operating loss carryforward $ 10,078,000
Land held for development and sale 642,000
Research and development credits 201,000
Property and equipment 22,000
---------------
10,943,000
Valuation allowance (10,893,000)
---------------
$ 50,000
==============
F-35
NUWAVE TECHNOLOGIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
11 Income Taxes, continued
In accordance with New Jersey statutes, the Company entered into an
agreement to sell certain New Jersey net operating losses ("NOL") and research
and development credits. The deferred tax asset at December 31, 2004 and 2003 of
$50,000 and $225,000 respectively, is related to the sale of a portion of the
New Jersey NOL recorded in 2004 and 2002, respectively, that was received by the
Company in January 2005 and 2004, respectively. The Company has not recorded
additional state deferred tax assets at December 31, 2004 and 2003 related to
the sale of the remaining New Jersey NOL (see below).
A (decrease) increase in the valuation allowance of approximately
$(145,000) and $1,477,000, respectively, for the years ended December 31, 2004
and 2003 was recorded because it was more likely than not that the deferred tax
assets would not be realized.
As of December 31, 2004, the Company has unused federal net operating
loss carryforwards ("NOL") of $27,763,000, with $3,760,000, $23,080,000 and
$923,000 in NOL's expiring in years 2010 to 2012, 2018 to 2022 and 2023 to 2024,
respectively. The Company has unused state NOL's of $9,914,000, which expire in
various years from 2007 to 2011. The Company may be subject to limitations on
the use of its NOL's as provided under Section 382 of the Internal Revenue Code.
In addition, the Company has research and development tax credit carryforwards
for federal and state purposes of approximately $146,000 and $55,000,
respectively that expire in various years from 2010 to 2024.
12. Segment Data
The Company presents segment information in accordance with the
provisions of SFAS No. 131,"Disclosures About Segments of an Enterprise and
Related Information" ("SFAS No. 131"). SFAS No. 131 establishes standards for
the way public enterprises report information about operating segments in annual
financial statements and requires those enterprises to report selected
information about operating segments in interim financial reports issued to
stockholders.
Commencing with the acquisition of land held for development and sale
(see Note 5) 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.
F-36
NUWAVE TECHNOLOGIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
12. Segment Data, continued
Summarized financial information concerning the Company's reportable segments is
shown in the following tables for the years ended December 31, 2004 and 2003:
Year Ended December 31, 2004
(In thousands)
Real Estate
Video & Image Development and
Technology Sale Total
-------------------- ------------------- -------------------
Net revenues from customers $ - $ - $ -
-------------------- ------------------- -------------------
Loss from operations $ (256)$ (485)$ (741)
-------------------- ------------------- -------------------
Gain on sale of interest in
undeveloped land $ - $ 850 $ 850
-------------------- ------------------- -------------------
Interest income $ - $ 3 $ 3
-------------------- ------------------- -------------------
Interest expense $ 206 $ 312 $ 518
-------------------- ------------------- -------------------
Total identifiable assets $ 55 $ 3,148 $ 3,203
-------------------- ------------------- -------------------
Capital expenditures, including
capitalized interest $ - $ 455 $ 455
-------------------- ------------------- -------------------
Depreciation $ - $ 5 $ 5
-------------------- ------------------- -------------------
Year Ended December 31, 2003
(In thousands)
Real Estate
Video & Image Development and
Technology Sale Total
-------------------- ------------------- -------------------
Net revenues from customers $ 20 $ - $ 20
-------------------- ------------------- -------------------
Loss from operations $ (1,062)$ (15)$ (1,077)
-------------------- ------------------- -------------------
Gain on forgiveness of debt $ 347 $ - $ 347
-------------------- ------------------- -------------------
Interest income $ - $ - $ -
-------------------- ------------------- -------------------
Interest expense $ 53 $ 2 $ 55
-------------------- ------------------- -------------------
Total identifiable assets $ 349 $ 2,970 $ 3,319
-------------------- ------------------- -------------------
Capital expenditures $ - $ 2,970 $ 2,970
-------------------- ------------------- -------------------
Depreciation $ 42 $ - $ 42
-------------------- ------------------- -------------------
F-37
NUWAVE TECHNOLOGIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
13. Employment Agreement
Effective June 1, 2004, NuWave entered into a five-year employment
contract with its President and CEO, George Kanakis, at an annual salary of
$125,000 per year, subject to increases at the Board of Directors' discretion.
Mr. Kanakis is also entitled to a bonus equal to 12.5% of the net income
attributable to each NuWave subsidiary, plus a discretionary bonus as determined
by the Board of Directors. In addition, Mr. Kanakis was issued 75,000 shares of
common stock. Under the contract, at some future date, Mr. Kanakis will be
entitled to receive options to purchase 100,000 shares of common stock. The
Company has not yet adopted a stock option plan and as such, no options have yet
been issued to Mr. Kanakis. The Company recorded an earnings charge of $7,500 in
connection with the issuance of the 75,000 shares of common stock.
14. Lease Commitment
Effective July 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 requires the Company to pay rent of
approximately $7,000 and approximately $3,000 in shared building operating
expenses, each month. The Company subleases one half of this space to a
subtenant, for approximately $5,000 per month, including approximately $1,750
per month in shared monthly building operating expenses. 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. At December 31, 2004, the Company has recorded a receivable of
approximately $15,000 for rents in arrears due from the subtenant. The Company
believes that it will collect these rents in full within the next three months.
The approximate future minimum lease payments under the Company's
non-cancellable operating lease in effect at December 31, 2004, offset by
projected proceeds to be received for subtenant rentals, are as follows:
Minimum Lease Projected Proceeds Minimum Lease
Payments Under To Be Received Under Payments, Net of
Year: Operating Lease Sub-tenant Rentals Sub-tenant Rentals
----- --------------- ------------------ ------------------
2005 78,000 39,000 39,000
2006 78,000 39,000 39,000
2007 78,000 39,000 39,000
2008 78,000 39,000 39,000
2009 40,000 20,000 20,000
--------------- ------------------ ------------------
Total $ 352,000 $ 176,000 $ 176,000
=============== ================== ==================
F-38
NUWAVE TECHNOLOGIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
15. Major Customers
There were no sales for the year ended December 31, 2004. For the year
ended December 31, 2003, two customers accounted for sales of $12,720 (65%) and
$4,375 (22%), respectively.
16. Sales and Marketing Agreement
In October 2003, the Company entered into a non-exclusive contract with
a sales and marketing agent, who is the Company's former chief technology
officer. The agent will market, promote, sell and distribute the Company's
technology, in exchange for a commission equal to 90% of the net profits derived
from such efforts. This agreement expired in October 2004.
17. Subsequent Events
Termination of the May 2004 Standby Equity Distribution Agreement and
Entry into a new Standby Equity Distribution Agreement in January 2005
During January 2005, the Company entered into a Termination Agreement
with Cornell, whereby that certain 2004 Agreement, dated as of May of 2004, and
related Registration Rights Agreement, Placement Agent Agreement and Escrow
Agreement of even date therewith were terminated.
Upon execution of the Termination Agreement, the Company entered into a
new SEDA with Cornell on January 26, 2005 with substantially the same terms as
the terminated 2004 Agreement. Cornell's obligation to purchase shares of the
Company's common stock under the SEDA is subject to certain conditions,
including the Company obtaining an effective registration statement for shares
of common stock sold under the SEDA (see Note 9).
Termination of the December 2003 Convertible Debenture, with Cornell
and Reissuance in January 2005 of a Promissory Note to Cornell
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
will record a net charge of $644,000 to additional paid in capital.
F-39
NUWAVE TECHNOLOGIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
17. Subsequent Events, continued
Assignment and Amendment of the Note Payable - related party to Stone
Street
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. 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.
F-40