As filed with the Securities and Exchange Commission on November 16, 1998
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark one)
/X/ Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the quarterly period ended September 30, 1998
or
/ / Transition Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the transition period from ________________ to __________________
Commission file number 0-28606
NUWAVE TECHNOLOGIES, INC.
(Exact name of small business issuer as specified in its charter)
Delaware 22-3387630
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
One Passaic Avenue, Fairfield, New Jersey 07004
(Address of principal executive offices) (Zip Code)
Issuer's telephone number, including area code: (973) 882-8810
Check whether the issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding
12 months (or such shorter period that registrant was required to file such
reports) and (2) has been subject to such filing requirements for the past 90
days. Yes /X/ No / /
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS
Check whether the registrant filed all documents and reports required to
be filed by Section 12, 13 or 15(d) of the Exchange Act after the distribution
of securities under a plan confirmed by court. Yes / / No / /
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's classes of
common equity, as of November 16, 1998: 8,358,515
Transitional Small Business Disclosure Format: Yes / / No /X/
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<PAGE>
NUWAVE TECHNOLOGIES, INC.
(A Development Stage Enterprise)
FORM 10-QSB
INDEX
PART I - FINANCIAL INFORMATION
ITEM 1. CONDENSED FINANCIAL STATEMENTS
Balance Sheet - September 30, 1998 (unaudited) P. 3
Statements of Operations - For the three and nine month
periods ended September 30, 1997 (unaudited) and
September 30, 1998 (unaudited) and for the period
July 17, 1995 (inception) to September 30, 1998
(unaudited) P. 4
Statements of Cash Flows - For the three and nine month
periods ended September 30, 1997 (unaudited) and
September 30, 1998 (unaudited) and for the period
from July 17, 1995 (inception) to September 30, 1998
(unaudited) P. 5
Notes to Condensed Financial Statements P. 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION P. 10
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS P. 18
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS P. 18
ITEM 3. DEFAULTS UPON SENIOR SECURITIES P. 18
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS P. 18
ITEM 5. OTHER INFORMATION P. 18
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K P. 18
SIGNATURES P. 19
2
<PAGE>
NUWAVE TECHNOLOGIES, INC
(A Development Stage Enterprise)
Balance Sheet
ASSETS
September 30,
1998
--------------
(unaudited)
Current assets:
Cash and cash equivalents $ 5,641,565
Inventory 61,784
Prepaid expenses and other current assets 194,634
--------------
Total current assets 5,897,983
Property and equipment 110,169
Restricted Cash 132,003
Other assets 164,552
--------------
Total assets $ 6,304,707
==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities $ 162,742
--------------
Total liabilities 162,742
--------------
Commitments and contingencies
Stockholders' equity:
Series A Convertible Preferred Stock, noncumulative,
$.01 par value; authorized 400,000 shares; issued and
outstanding - none
Preferred stock, $.01 par value; authorized 1,000,000
shares; issued and oustanding - none (Such preferences and
rights to be designated by the Board of Directors)
Common stock, $.01 par value; authorized 20,000,000
shares; as of September 30, 1998; issued and outstanding
8,358,515 shares 83,585
Additional paid in capital 18,218,740
Deficit accumulated during the development stage (12,160,360)
--------------
Total stockholders' equity 6,141,965
--------------
Total liabilties and stockholders' equity $ 6,304,707
==============
The accompanying notes are an integral part of
these condensed financial statements
3
<PAGE>
NUWAVE TECHNOLOGIES, INC
(A Development Stage Enterprise)
Statements of Operations
<TABLE>
<CAPTION>
Cumulative from
July 17, 1995
Three months Three months Nine months Nine months (inception)
ended ended ended ended to
September 30, September 30, September 30, September 30, September 30,
1997 1998 1997 1998 1998
------------ ------------ ------------ ------------ --------------
(unaudited) (unaudited) (unaudited) (unaudited) (unaudited)
<S> <C> <C> <C> <C> <C>
Net Sales $ 6,395 $ 9,666 $ 6,395 $ 9,666 $ 19,941
Cost of Sales (3,080) (3,363) (3,080) (3,363) (7,577)
---------- ----------- ----------- ----------- ------------
3,315 6,303 3,315 6,303 12,364
---------- ----------- ----------- ----------- ------------
Operating expenses:
Research and development expenses $ (411,196) $ (466,247) $(1,343,964) $(1,323,483) (5,132,284)
General and administrative expenses (562,417) (558,482) (1,853,471) (1,799,078) (6,361,309)
---------- ----------- ----------- ----------- ------------
(973,613) (1,024,729) (3,197,435) (3,122,561) (11,493,593)
---------- ----------- ----------- ----------- ------------
Loss from operations (970,298) (1,018,426) (3,194,120) (3,116,258) (11,481,229)
---------- ----------- ----------- ----------- ------------
Other income (expense):
Interest income 37,551 81,120 155,164 145,454 500,571
Interest expense (331,542)
---------- ----------- ----------- ----------- ------------
37,551 81,120 155,164 145,454 169,029
---------- ----------- ----------- ----------- ------------
Net loss before extraordinary item (932,747) (937,306) (3,038,956) (2,970,804) (11,312,200)
Extraordinary item (848,160)
---------- ----------- ----------- ----------- ------------
Net loss $ (932,747) $ (937,306) $(3,038,956) $(2,970,804) $(12,160,360)
========== =========== =========== =========== ============
Basic and diluted loss per share:
Weighted average number of
common shares outstanding 5,348,334 8,358,515 5,341,667 6,898,426
========== =========== =========== ===========
Basic and diluted loss per
share $ (0.17) $ (0.11) $ (0.57) $ (0.43)
========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of
these condensed financial statements
4
<PAGE>
NUWAVE TECHNOLOGIES, INC.
( A Development Stage Enterprise)
Statements of Cash Flows
Increase (decrease) in cash and cash equivalents
<TABLE>
<CAPTION>
Cumulative from
July 17, 1995
Three Months Three Months Nine Months Nine Months (inception)
ended ended ended ended to
September 30, September 30, September 30, September 30, September 30,
1997 1998 1997 1998 1998
------------ ------------ ------------ ------------ -------------
(unaudited) (unaudited) (unaudited) (unaudited) (unaudited)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss $ (932,747) $ (937,306) $(3,038,956) $(2,970,804) $(12,160,360)
Adjustments to reconcile net loss to net
cash used in operating activities:
Extraordinary item 848,160
Depreciation expense 12,340 12,532 35,983 37,041 99,111
Amortization of unamortized debt discount 168,778
Amortization of deferred financing costs 89,062
Issuance of common stock for services rendered 20,600
(Increase) decrease in inventory (21,877) 685 (21,877) (1,967) (61,785)
Increase in prepaid expenses and other
current assets 47,158 70,717 (58,156) (83,628) (194,633)
(Increase) decrease in other assets 471 (69,476) (17,737) (82,353) (164,553)
Increase (decrease) in accounts payable and
accrued liabilities (101,700) (263,179) (239,366) 9,118 162,741
----------- ----------- ----------- ----------- ------------
Net cash used in operating activities (996,355) (1,186,027) (3,340,109) (3,092,593) (11,192,879)
----------- ----------- ----------- ----------- ------------
Cash flows from investing activities:
Purchase of property and equipment (3,458) (1,851) (69,532) (43,738) (209,280)
----------- ----------- ----------- ----------- ------------
Net cash used in investing activities (3,458) (1,851) (69,532) (43,738) (209,280)
----------- ----------- ----------- ----------- ------------
Cash flows from financing activities:
Proceeds from sales of Series A Convertible
Preferred Stock 900,000
Proceeds from issuance of initial bridge units 350,000
Proceeds from issuance of bridge units, net of
exchange of initial bridge notes 1,650,000
</TABLE>
The accompanying notes are an integral part of
these condensed financial statements
5
<PAGE>
NUWAVE TECHNOLOGIES, INC.
( A Development Stage Enterprise)
Statements of Cash Flows
Increase (decrease) in cash and cash equivalents
<TABLE>
<CAPTION>
Cumulative from
July 17, 1995
Three Months Three Months Nine Months Nine Months (inception)
ended ended ended ended to
September 30, September 30, September 30, September 30, September 30,
1997 1998 1997 1998 1998
------------ ------------ ------------ ------------ -------------
(unaudited) (unaudited) (unaudited) (unaudited) (unaudited)
<S> <C> <C> <C> <C> <C>
Proceeds from IPO $ $ $ $ $11,753,010
Proceeds from equity offering - February 6, 1998 1,000,000 1,000,000
Proceeds from Janssen Meyers equity offering
May & June 1998 7,280,546 7,280,546
Repayment of notes issued in connection with
initial bridge notes (2,000,000)
Costs incurred for equity offerings (14,019) (1,308,249) (3,656,830)
Issuance of common stock in connection with
exercise of stock options 46,668 23,332 100,000
(Increase) decrease in restricted cash 21,999 11,185 (256,003) 89,479 (132,002)
Deferred financing costs (201,000)
---------- ----------- ---------- ----------- -----------
Net cash provided (used in) by financing
activities 21,999 (2,834) (209,335) 7,085,108 17,043,724
---------- ----------- ---------- ----------- -----------
Net increase (decrease) in cash and cash
equivalents (977,814) (1,190,712) (3,618,976) 3,948,777 5,641,565
Cash and cash equivalents at the beginning of
the period 3,416,799 6,832,277 6,057,941 1,692,788 -
---------- ----------- ---------- ----------- -----------
Cash and cash equivalents at the end of the
period $2,438,965 $ 5,641,565 $ 2,438,965 $ 5,641,565 $ 5,641,565
========== =========== =========== =========== ===========
Supplemental disclosure of cash flow information:
Interest paid during the period $ 73,702
===========
Supplemental disclosure of non cash investing and
financing activities:
Deferred financing costs incurred in connection
with the exchange of the initial bridge notes
for 14 bridge units $ 140,000
===========
Deferred equity costs charged to additional paid
in capital in connection with the PPO $ 13,400
===========
Deferred financing costs charged to additional
paid-in capital in connection with the IPO $ 25,000
===========
600,000 Series A Convertible Preferred Stock
converted into Common Stock $ 6,000
===========
</TABLE>
The accompanying notes are an integral part of
these condensed financial statements
6
<PAGE>
NUWAVE TECHNOLOGIES, INC.
(A Development Stage Enterprise)
NOTES TO CONDENSED FINANCIAL STATEMENTS
1. Basis Of Interim Financial Statement Preparation
The accompanying unaudited condensed financial statements have been
prepared in accordance with generally accepted accounting principles for interim
information. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. The results of operations for the interim periods shown in
this report are not necessarily indicative of expected results for any future
interim period or for the entire fiscal year. NUWAVE Technologies, Inc. (the
"Company" or "NUWAVE"), a development stage enterprise, believes that the
quarterly information presented includes all adjustments (consisting only of
normal, recurring adjustments) necessary for a fair presentation in accordance
with generally accepted accounting principles. The accompanying condensed
financial statements should be read in conjunction with the Company's Annual
Report on Form 10-KSB as filed with the Securities and Exchange Commission
("SEC") on April 14, 1998.
2. Capital Transactions
On February 6, 1998, the Company entered into a two-year agreement with an
investor whereby the Company issued 253,485 shares of the Company's common
stock, par value $0.01 per share ("Common Stock"), for an aggregate purchase
price of $1,000,000. In addition, subject to certain conditions, the agreement
provides that, from time to time over the life of the agreement the Company
shall issue "Puts" to the investor whereby the Company shall issue for each Put
and the investor shall purchase, at the Company's option, shares of the
Company's Common Stock for a minimum of $250,000 and a maximum of $750,000. The
total aggregate value of the Puts over the life of the agreement must be a
minimum of $1,000,000 and cannot exceed $5,000,000. The purchase price of the
stock will be at 88% of the fair market value of the stock at the time of the
Put. The following restrictions, among others, apply beginning with the second
Put: 1) there must be 20 business days between Puts; 2) the average daily
trading volume in the Company's Common Stock for the 30 trading days prior to
the Put date must be at least 20,000 shares; 3) the minimum bid price for the
Company's Common Stock on the trading day immediately preceding the Put date
must be at least $2.50; and 4) unless the investor agrees otherwise, no Put can
be made which causes the investor to own more than 9.9% of the Company's then
outstanding Common Stock.
In connection with the agreement the Company issued to the investor
warrants to purchase an aggregate of 50,000 shares of Common Stock at a purchase
price of $6.41 per share and additional warrants (the "supplemental warrants")
to purchase an aggregate of 50,000 shares of Common Stock at a purchase price of
$3.95 per share. The warrants may be exercised at any time beginning August 6,
1998 and ending 3 years thereafter. The supplemental warrants may be exercised
at any time beginning April 19, 1998 and ending 5 years thereafter.
7
<PAGE>
NUWAVE TECHNOLOGIES, INC.
(A Development Stage Enterprise)
NOTES TO CONDENSED FINANCIAL STATEMENTS ---(Continued)
On March 3, 1998, the Company entered into a consulting agreement with an
organization (the "Consultant") whereby the Consultant will perform consulting
services relating to corporate finance and other financial services matters. As
compensation for such services, the Company shall pay the consultant $5,000 per
month during an initial term ending September 3, 1999 subject to automatic
one-year renewal terms unless either the Company or the Consultant shall have
given written notice of termination at least 30 days prior to the end of the
initial or subsequent terms.
In connection with such consulting agreement, the Company issued to the
Consultant 400,000 common stock purchase warrants. The warrants have an exercise
price of $4 and are exercisable after September 3, 1999. The warrants expire on
March 3, 2003.
On May 11, 1998 the Company entered into a placement agency agreement with
the Consultant to act as the Company's placement agent in a private equity
placement whereby the Company issued to certain accredited investors, as defined
under Regulation D as promulgated under the Securities Act of 1933, as amended
(the " Securities Act"), 2,745,030 shares of the Company's Common Stock and
2,058,801 Class A Redeemable Warrants ("Class A Warrants") between May 19, 1998
and June 6, 1998 for an aggregate purchase price of $7,280,546. Each Class A
Warrant entitles the holder thereof to purchase one share of Common Stock at an
exercise price per share of $3.24, subject to adjustment upon the occurrence of
certain events to prevent dilution, at any time during the period commencing on
June 6, 1998 and expiring on May 11, 2003. The Class A Warrants are subject to
redemption by the Company at $.01 per Class A Warrant 12 months after the
effective date of a registration statement covering the Class A Warrants on not
less than 30 days prior written notice to the holders of the Class A Warrants,
provided the average closing bid price of the Common Stock has been at least
250% of the then current exercise price of the Class A Warrants for a period of
thirty consecutive trading days ending on the day prior to the day on which the
Company gives notice of redemption. The Class A Warrants will be exercisable
until the close of business on the day immediately preceding the date fixed for
redemption.
The Consultant received for acting as placement agent, a commission of 10%
($728,055) of the gross proceeds from the sale of the Units (consisting of the
Company's Common Stock and Class A Warrants), as well as a 3% non-accountable
expense allowance ($218,416) and reimbursement of other costs, including legal
expenses relating to the offering ($77,171). In addition, the Consultant
received as part of its compensation, warrants exercisable until May 11, 2003 to
purchase up to (i) 688,084 shares of the Company's Common Stock at a price per
share ranging from $2.50 to $3.06 and (ii) 516,068 warrants to purchase up to
516,068 shares of the Company's Common Stock at a price per share of $3.24.
As a result of the above capital transactions and in accordance with the
provisions of the Warrant Agreement dated as of July 3, 1996, between the
Company, Rickel &
8
<PAGE>
NUWAVE TECHNOLOGIES, INC.
(A Development Stage Enterprise)
NOTES TO CONDENSED FINANCIAL STATEMENTS ---(Continued)
Associates, Inc. and American Stock Transfer & Trust Company,
adjustments have been made to the exercise price (the "Warrant Price") for the
warrants issued pursuant to such Warrant Agreement (the "Public Warrants") and
to the number of shares of Common Stock issuable on exercise of the Public
Warrants. The Warrant Price has been reduced from $5.50 to $4.15. In addition,
for every share of Common Stock the warrant holders were entitled to prior to
the dilutive transactions (2,530,000 shares), the warrant holders are now
entitled to 1.325 shares (3,352,250 shares). Also, pursuant to the Warrant
Agreement, the Company can redeem the Public Warrants in the event that the
average closing price of the Company's Common Stock is at least 150% of the then
current Warrant Price of the Public Warrants for a period of 20 consecutive
trading days: consequently, the average closing price now required is $6.225
versus the original price of $8.25.
On March 19, 1998, a director exercised options with respect to 11,666
shares of Common Stock at $2.00 per share.
9
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
Forward Looking Statements
This Report on Form 10-QSB contains "forward-looking statements" within
the meaning of Section 27A of the Securities Act and Section 21E of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"). All statements
other than statements of historical facts included in this Report, including
without limitation, the statements under "General," "Marketing and Sales,"
"Research and Development," "Manufacturing," "Liquidity and Capital Resources,"
and "Plan of Operation" are forward-looking statements. The Company cautions
that forward-looking statements are subject to certain risks and uncertainties
that could cause actual results to differ materially from those indicated in the
forward-looking statements, due to several important factors herein identified.
Important factors that could cause actual results to differ materially from
those indicated in the forward-looking statements ("Cautionary Statements")
include delays in product development, competitive products and pricing, general
economic conditions, risks of intellectual property litigation, product demand
and industry capacity, new product development, commercialization of new
technologies, the Company's ability to raise additional capital when required,
and the risk factors detailed from time to time in the Company's annual report
on Form 10-KSB and other materials filed with the SEC.
All subsequent written and oral forward-looking statements attributable to
the Company or persons acting on its behalf are expressly qualified in their
entirety by the Cautionary Statements.
General
The Company, a development stage enterprise organized in July 1995, was
formed to develop, manufacture and market products which improve picture quality
image in set top boxes, televisions, VCR's, DVD's, camcorders and other video
devices by enhancing and manipulating video signals, and to facilitate the
production of sophisticated consumer and professional videos. In July 1996, the
Company completed an initial public offering ("IPO") of its Common Stock and
Public Warrants from which it received net proceeds of $9,538,428 and repaid
$2,000,000 principal amount of promissory notes issued in a previous financing.
See Note 2 ("Capital Transactions") to the Condensed Financial Statements for
information as to certain transactions whereby the Company raised equity capital
in 1998.
At the time of the IPO, the Company had produced and tested fully
operational working prototypes of certain of the "Licensed Products" as such
term is defined in the Exclusive Worldwide License Agreement ("License
Agreement") between the Company and Rave Engineering Corporation ("Rave") dated
July 21, 1995 (the "Initial Products"). Subsequent to the IPO, the Company
established the Advanced Engineering Group to support the continuing development
of its products and related technology, and the identification of additional
sources of new technology. The Advanced Engineering Group is made up of the
Company's own employees and third party consultants who work with
10
<PAGE>
the Company on a project by project basis. The Advanced Engineering Group
operates under the direction of the Company's Vice President-Engineering (prior
to September 1998, it operated under the direction of the Company's Vice
President-Marketing/Technical Development). The Company utilizes its Advanced
Engineering Group to create products and technology independent of the "Licensed
Products and Technology" as outlined in the License Agreement. These
independently developed products and technology include the NUWAVE Video
Processor (the "NVP"), a significant amount of the software included in each of
its products and new circuitry to allow certain of the products to be produced
as ASICs. The Advanced Engineering Group also developed the Softsets for the NVP
and certain of the enhancements to it. Utilizing this technology, the Company
has developed the ProWave NVP 2.2 that is currently available as a stand-alone
unit or a PC board with software. The Advanced Engineering Group is also
currently developing a commercial video retail product also utilizing the NVP
technology (the "retail version").
The Company intends to produce the NVP in the form of an ASIC chip in
accordance with the customer's specific application requirements supported by
firm commitments rather than producing and inventorying ASIC chips in
anticipation of applications required by customers in the future. In this
regard, the Company contracted with Adaptive Micro-Ware Inc. ("Adaptive"), to
provide necessary technical support and manage this process under the Company's
direction. The Company also contracted with TEC to complete the design work
necessary to convert the Company's current NVP PC board design to ASIC
specifications and contracted with ZMD for production of the ASIC. The Company
anticipates the final design layout will be completed and sent to the foundry at
ZMD during the fourth quarter of 1998 and expects production of the ASIC chip to
begin in the Spring of 1999.
The Company has significantly scaled back its research and development,
and marketing and related activities with respect to all other existing or
proposed products in order to concentrate its resources on the continued
development and marketing of its Softsets and NVP products (i.e., ASIC chip for
the OEM market, the ProWave NVP 2.2 in the stand alone unit and PC board version
for the professional video market and the consumer video retail version). The
Company believes this product strategy will allow it to take full advantage of
the growth opportunity presented by the converging PC, television, HDTV and
telecommunication markets, which the Company believes to be quite significant.
The Company anticipates this strategy will also allow it to conserve its
resources and at the same time maximize the benefits to be derived from
introducing these products into these converging and expanding markets.
As of September 30, 1998 the Company had accumulated a deficit during the
development stage of $12,160,360 which includes a net loss for the nine months
ended September 30, 1998 of $2,970,804. The loss for the nine months ended
September 30, 1998 included $1,799,078 in general and administrative expenses,
representing a decrease of $54,393 compared to the nine-month period ended
September 30, 1997. This decrease included a reduction in sales and marketing
costs of $364,027 discussed more fully below and a $70,000 decrease in payments
made to Prime Technologies, Inc. ("Prime") pursuant to the Exclusive Agency
Agreement ("Agency Agreement") between the Company and
11
<PAGE>
Prime dated July 21, 1995. See "Liquidity and Capital Resources." Such decreases
were substantially offset by increases resulting from the Company's planned
growth and expansion including increased personnel and payroll costs ($16,840),
professional and legal services ($175,650), insurance costs ($29,747), investor
relations ($73,870), travel and entertainment costs ($23,140), office rent
($12,547), recruiting costs ($40,000) and other ($7,840). Although the Company
anticipates deriving some revenue from the sale of its proprietary software
(Softsets) and the NVP products during 1999, no assurance can be given that
these products will be successfully marketed during such period. Even if
revenues are produced from the sale of such products, the Company expects to
continue to incur losses for at least the next 12 months. See "Liquidity and
Capital Resources."
Marketing and Sales
In anticipation of production of its NVP ASIC chip, the Company has been
conducting sales presentations of the NVP and Softsets to prospective OEM
customers world wide (i.e., original equipment manufacturers of set top boxes,
televisions, VCR's, DVD's and other video devices). Although the Company is
unable to predict whether its marketing efforts will be successful, it believes
that its products have been well received. In January 1998, the Company entered
into a multi year supply agreement with Thomson Consumer Electronics for the
purchase of its NVP ASIC chip and expects to begin filling the Thomson orders in
1999. The Company originally anticipated the production of its ASIC during the
second half of 1998, however the design cycle has taken longer than expected and
management currently expects production of the ASIC chip in the Spring of 1999.
The availability of the completed ASIC chip is directly related to the Company's
ability to generate OEM orders and revenues for the 1999 selling season.
During the second quarter of 1998 the Company opened a sales and
engineering office in Osaka, Japan to maintain on-going discussions, provide
in-person demonstrations of NUWAVE technology and directly participate in
technical due diligence sessions with potential customers who are evaluating the
Company's technology. During the third quarter of 1998 the Company opened a
sales and engineering office in Beijing, China for its products and technology
to be sold into the Chinese domestic market, which is equal in size to the U.S.
market.
The Company is currently developing retail products for consumers who have
TV's and do not have a NUWAVE enabled product but want to improve the picture
quality of their home viewing. The Company's CWave Division will market these
products. The Company has determined that the most effective way to introduce
this product into the retail marketplace during 1999 is to work through
distributors who will manufacture and sell to retailers, including those with
whom they are currently doing business. The Company is in the process of
identifying a qualified distributor with whom it hopes to establish a strategic
partnership to help expedite the introduction of the retail products to the
market in 1999. During 1997, the Company formed its ProWave Division for sales
and marketing of the ProWave NVP 2.2 and related products to the professional
video market (e.g., security surveillance systems) and began selling limited
quantities (primarily for demonstration purposes until the ASIC chip is
available to replace the more expensive PC board) of its first commercial
product, the ProWave NVP 2.2.
12
<PAGE>
During 1997, the Company contracted with professional sales consultants to
establish the development of the Company's sales organization managed by the
Vice President of Sales. In this regard, the Company has contracted with
Competitive Technologies, Inc. ("CTI") to assist it in the development of
NUWAVE's OEM business. CTI, for over twenty six years, has been in the business
of taking R&D and technology companies and introducing them to the major
companies specializing in their respective markets. The Company also has
contracts with several individuals and organizations that will act in a
commissioned sales representation capacity regarding the Company's products.
During 1997, the Company had contracted with a professional marketing
communications firm to assist in the development and implementation of a program
to develop market awareness and commercialization of its products. This program
included development of Company and product brochures and press kits, product
specification sheets, development of a Company booth for use at trade shows,
attendance at key trade shows, mailers, the production of corporate videos for
use at sales presentations, development of and placement of advertisements in
key industry journals, etc. The developmental costs relating to these programs
were substantially incurred during 1997 and as a result such expenditures for
the first nine months of 1998 were reduced by approximately $364,027 compared to
the first nine months of 1997. During the nine-month period ended September 30,
1998 costs included $21,204 for professional sales and marketing consultants
compared to $218,887 for the nine-month period ended September 30, 1997; $99,853
for advertising and public relations compared to $298,014 for the nine months
ended September 30, 1997; $8,283 for trade shows compared to $53,761 for the
nine months ended September 30, 1997; and $77,294 relating to the offices in
Japan and China opened in 1998. The Company is continually reviewing its needs
with a view to maximizing efficiency while conserving its resources.
Research and Development
For a discussion of the Company's research and development activities
carried out by its Advanced Engineering Group, see "Management's Discussion and
Analysis or Plan of Operation - General".
Research and development activity with respect to the Company's Initial
Products was carried out by Rave prior to July 21, 1995, the date upon which the
Company and Rave entered into the License Agreement and the Development
Agreement. The Company's Initial Products were based on technology originated by
Rave prior to the Company's organization and licensed to the Company by Rave
pursuant to the License Agreement. Although it was the Company's intention to
utilize Rave as its primary source for research and development activities, the
Company has become dissatisfied with Rave's performance under the Development
Agreement and has found it necessary to utilize its Advanced Engineering Group
as its primary means for product development. On October 1, 1998 the three year
term of the Development Agreement between the Company and Rave expired. The
Company paid Rave an aggregate of (i) $2,731,906 for development services
("Development Service Payments"), (ii) $505,878 for equipment which was
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supposed to be used in conjunction with development services which were required
and (iii) $125,913 for materials intended to be used in conjunction with the
development services. The Company has also guaranteed an additional $109,632 for
related equipment lease payments to be made on Rave's behalf.
Concurrent with the research and development undertaken by the Advanced
Engineering Group, the Company retained patent counsel in 1996 to prosecute a
patent application on the video clarity circuit provided by Rave ( the "Rave
Clarity Circuit"), which, of the Initial Products, the Company had identified as
the most likely candidate for immediate commercial exploitation and for which
Rave had claimed proprietary rights as a basis for the License Agreement. The
Company was informed in January, 1998, that (a) such application had been
rejected, and (b) such initial rejections by the United States Patent and
Trademark Office ("Patent office") are not uncommon. The claims in the
application were modified and the application was resubmitted twice. Both times
it was again rejected by the Patent Office on the grounds that the Rave Clarity
Circuit was identical to a circuit that was the subject of a prior United States
patent issued to a third party (the "Prior Art"). The Company acquired the
exclusive rights to the Prior Art in August 1998. The Company has determined not
to proceed with further prosecution of the patent application on the Rave
Clarity Circuit.
In July 1998, the Company's representatives conducted a "Technical Audit"
of the consulting and development services (not limited to the Rave Clarity
Circuit) that Rave was to have performed under the License Agreement and the
Development Agreement. The Company concluded, on the basis of the Technical
Audit and the information regarding the Prior Art, that Rave had not performed
the required services and misled the Company about its ability to perform them,
and about Rave's ownership of the technology licensed to the Company.
The Development Service Payments also satisfied the Company's payment
obligations under the License Agreement between the Company and Rave which gave
the Company exclusive rights to the "Licensed Technology" (as defined therein)
for the three year term of the Development Agreement. Commencing October 1,
1998, the Company did not pay Rave $65,000 per month under the License Agreement
thereby giving Rave the right, which was exercisable by giving notice to the
Company prior to November 2, 1998, to convert the Company's rights to the
Licensed Technology into that of a non-exclusive licensee. Rave failed to give
such notice in the specified time and the Company believes it retains exclusive
rights to the Licensed Technology.
On November 13, 1998, pursuant to the provisions of the License Agreement
and the Development Agreement, the Company commenced an arbitration proceeding
under the American Arbitration Association Rules of Patent Arbitration against
Rave and Randy Burnworth. Such proceeding seeks (a) damages for the injuries to
the Company caused by Rave's and Burnworth's breaches of their contractual and
common law obligations to the Company, including but not limited to those
referred to above, and (b) a declaration that, among other things, Rave is not
entitled to any royalties or other payments with respect to the Company's
technology and that the Company has exclusive rights to the Licensed Technology.
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<PAGE>
Manufacturing
The Company does not contemplate that it will directly manufacture any of
its products. It intends to contract with third parties to manufacture its
proposed NVP and Softsets. It also may license to third parties the rights to
manufacture the products, either through direct licensing, OEM arrangements or
otherwise.
The Company intends to produce the NVP ASIC chip in accordance with the
customer's specific application requirements supported by firm commitments
rather than producing and inventorying ASIC chips in anticipation of
applications required by customers in the future. In this regard, the Company
contracted with Adaptive to provide necessary technical support and manage this
process under the Company's direction, contracted with TEC to complete the
design work necessary to convert the Company's current NVP PC board design to
ASIC specifications and contracted with ZMD for production of the ASIC. The
Company anticipates producing the initial ASIC in April 1999 and believes that
this initial ASIC will not only meet the requirements of the Thomson supply
agreement but also be readily adaptable to other customer specifications, if
required.
Employees
The Company has eleven full-time employees and, depending on its level of
business activity, expects to hire additional employees in the next 12 months,
as needed, to support marketing and sales, manufacturing and research and
development.
Liquidity and Capital Resources
From its inception until the IPO, the Company relied for all of its
funding ($2,900,000 in cash plus the cancellation of the notes in the principal
amount of $350,000) on private sales of its debt and equity securities (the
"Private Financings"). In July 1996, the Company completed its IPO and received
net proceeds of $9,538,428. The Company used $2,073,652 of the net proceeds of
the IPO to repay the principal and interest on the outstanding notes issued to
investors in connection with the Private Financings.
See Note 2 ("Capital Transactions") to the Condensed Financial Statements
for information as to certain transactions whereby the Company raised equity
capital in 1998.
As indicated earlier, the Company has developed products and technology
independent of the "Licensed Products and Technology" covered by the License
Agreement with Rave and believes that a substantial portion of its future sales
will not include "Licensed Products and Technology". Pursuant to the terms of
the Agency Agreement between the Company and Prime, Prime will receive 35% of
net sublicensing fees received by the Company with respect to the first
$50,000,000 of aggregate net sales of Licensed Products and Technologies made by
the Company's sublicensees, after subtracting any royalty payments made to Rave
pursuant to the License Agreement, and any other licensing expenses, and
thereafter 45%. Prime will also receive up to an
15
<PAGE>
additional $1,500,000 of which (i) $400,000 has been paid in accordance with the
terms of the Agency Agreement, (ii) $400,000 is payable out of the Company's
first sublicensing fees of Licensed Products and Technologies, and (iii)
$700,000 is payable out of the Company's portion of sublicensing royalties when
net sublicensing sales of Licensed Products and Technologies exceed
$200,000,000.
The Company has determined to concentrate its resources and product
strategy on the sale of its Softsets and NVP products and therefore the Company
anticipates that its available cash will be sufficient to satisfy its
contemplated cash requirements for at least through the next twelve months.
Plan of Operation
The Company's plan of operation over the next 12 months focuses primarily
on the final phase of the development of its ASIC chip, marketing and sales of
its Softsets and NVP products in the OEM, professional video and retail markets
and the continued effort necessary to support the sales and marketing of these
products.
The Company anticipates, based on its current proposed plans and
assumptions relating to its operations, that it has sufficient cash to satisfy
the estimated cash requirements of the Company for the next 12 months. In the
event of unanticipated expenses, delays or other problems beyond this period,
the Company might be required to seek additional funding . In addition, in the
event that the Company receives a larger than anticipated number of initial
purchase orders upon introduction of Softsets and the NVP products, it may
require resources greater than its available cash or than are otherwise
available to the Company. In such event the Company may be required to raise
additional capital. There can be no assurance that such additional capital will
be available to the Company if needed, on commercially reasonable terms or at
all.
The Company's future performance will be subject to a number of business
factors, including those beyond the Company's control, such as economic
downturns and evolving industry needs and preferences, as well as the level of
competition and the ability of the Company to successfully market its products
and technology. There can be no assurance that the Company will be able to
successfully implement a marketing strategy, generate significant revenues or
achieve profitable operations. In addition, because the Company has had only
limited operations to date, there can be no assurance that its estimates will
prove to be accurate or that unforeseen events will not occur.
Year 2000
The Company is currently addressing a universal situation commonly
referred to as the "Year 2000 Problem". The Year 2000 Problem relates to the
inability of certain computer software programs to properly recognize and
process date-sensitive information relative to the year 2000 and beyond. During
1998, the Company is devoting the necessary resources to identify and modify
systems impacted by the Year 2000 Problem, or implement new systems to become
year 2000 compliant in a timely manner. The cost of executing this plan is not
expected to have a material impact on the Company's results of operations or
financial condition. In addition the Company is contacting its major
16
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suppliers and vendors to ensure their awareness of the Year 2000 Problem. If the
Company, its suppliers or vendors are unable to resolve issues related to the
year 2000 on a timely basis, it could result in a material financial risk.
17
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
On November 13, 1998, pursuant to the provisions of the License Agreement
and the Development Agreement, the Company commenced an arbitration proceeding
under the American Arbitration Association Rules of Patent Arbitration against
Rave and Randy Burnworth. Such proceeding seeks (a) damages for the injuries to
the Company caused by Rave's and Burnworth's breaches of their contractual and
common law obligations to the Company, including but not limited to those
referred to under "Management's Discussion and Analysis or Plan of Operation -
Research and Development", and (b) a declaration that, among other things, Rave
is not entitled to any royalties or other payments with respect to the Company's
technology and that the Company has exclusive rights to the Licensed Technology.
Item 2. Changes in Securities
Not applicable
Item 3. Defaults upon Senior Securities
Not applicable
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable
Item 5. Other Information
Not applicable
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
27. Financial data schedule
18
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SIGNATURES
In accordance with the requirements of the Exchange Act, the Registrant
has caused this Quarterly Report to be signed on its behalf by the undersigned,
thereunto duly authorized in the City of Fairfield in the State of New Jersey on
November 16, 1998.
NUWAVE TECHNOLOGIES, INC.
(Registrant)
DATE: November 16, 1998 By: /s/ Gerald Zarin
------------------------------
Gerald Zarin
Chief Executive Officer and
Chairman of the Board
DATE: November 16, 1998 By: /s/ Jeremiah F. O'Brien
------------------------------
Jeremiah F. O'Brien
Chief Financial Officer
(Principal Financial Officer)
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