<PAGE> 1
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 EXCHANGE
SECURITIES ACT OF 1934.
For the quarterly period ended September 30, 1998.
-------------------
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE EXCHANGE ACT.
For the transition period from to
---------------- -----------------
Commission file number: 0-16919
--------------
WAVEMAT INC.
- --------------------------------------------------------------------------------
(Exact name of small business issuer as specified in its charter)
DELAWARE 38-2512387
- --------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
44191 PLYMOUTH OAKS BLVD, STE. 100, PLYMOUTH, MICHIGAN 48170
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(313) 454-0020
- --------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act 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
---------- -----------
As of October 28, 1998, the registrant had 16,165,068 shares of its
Common Stock, $.01 par value outstanding.
<PAGE> 2
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
WAVEMAT INC.
STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
1998 1997 1998 1997
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
OPERATING REVENUE:
Microwave processing system sales $ 6,537 $ 22,013 $ 67,760 $ 135,607
Contract research and development 2,500 - 2,500 -
Contract research and development
- affiliate - 50,000 124,400 100,000
------------ ------------ ------------ ------------
Total operating revenue 9,037 72,013 194,660 235,607
------------ ------------ ------------ ------------
OPERATING COSTS AND EXPENSES:
Cost of sales 42,822 42,884 120,369 136,826
Research and development 29,731 16,307 134,398 57,780
Selling, general and administrative 72,963 143,308 265,589 440,971
Royalty expense - affiliate - - 4,298 5,583
------------ ------------ ------------ ------------
Total operating costs and expenses 145,516 202,499 524,654 641,160
------------ ------------ ------------ ------------
Operating loss (136,479) (130,486) (329,994) (405,553)
OTHER INCOME (EXPENSE):
Miscellneous income 2,100 1,688 106,300 5,085
Interest income 14 37 51 76
Interest expense (5,597) (6,408) (9,558) (5,802)
Interest expense - affiliate (25,303) (50,397) (79,425) (144,962)
------------ ------------ ------------ ------------
Other expense, net (28,786) (55,080) 17,368 (145,603)
------------ ------------ ------------ ------------
NET LOSS ($165,265) ($185,566) ($312,626) ($551,156)
============ ============ ============ ============
NET LOSS PER SHARE OF
COMMON STOCK ($0.01) ($0.02) ($0.02) ($0.05)
============ ============ ============ ============
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING 16,165,068 10,182,125 14,105,343 10,182,125
============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these statements.
2
<PAGE> 3
WAVEMAT INC.
STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
For the Nine Months
Ended September 30,
----------------------
1998 1997
--------- ---------
<S> <C> <C>
CASH, BEGINNING OF PERIOD $ --- $ ---
--------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss (312,626) (551,156)
Adjustments to reconcile net loss
to net cash provided by (used in) operating
activities:
Depreciation and amortization 39,325 41,138
Changes in current assets and liabilities:
Accounts receivable 37,810 7,163
Inventory 55,248 (153,323)
Prepaid expenses 3,778 (540)
Bank overdraft (6,874) (61,783)
Accounts payable 43,773 178,837
Accounts payable - affiliate 6,488 7,207
Accrued liabilities 362,167 217,760
Customer deposits 19,167 (4,149)
Customer deposits - affiliate (74,400) (25,600)
--------- ---------
Net cash provided by (used in) operating activities 173,856 (344,446)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of equipment and leasehold
improvements (29,203) (12,862)
Increase in deferred patent costs --- (13,292)
--------- ---------
Net cash used in investing activities (29,203) (26,154)
CASH FLOWS FROM FINANCING ACTIVITIES:
Short-term borrowings --- 125,000
Short-term borrowings - affiliate (144,653) 245,600
--------- ---------
Net cash provided by (used in) financing activities (144,653) 370,600
--------- ---------
INCREASE (DECREASE) IN CASH --- ---
--------- ---------
CASH, END OF PERIOD $ --- $ ---
========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest payments $ 686 $ 1,139
========= =========
</TABLE>
The accompanying notes are an integral part of these statements.
3
<PAGE> 4
WAVEMAT INC.
STATEMENT OF FINANCIAL POSITION
(Unaudited)
<TABLE>
<CAPTION>
ASSETS SEPTEMBER 30,
1998
------------
<S> <C>
CURRENT ASSETS:
Accounts receivable $ 8,519
Inventory 49,183
Prepaid expenses 905
-----------
Total current assets 58,607
EQUIPMENT AND LEASEHOLD IMPROVEMENTS, net of accumulated
depreciation and amortization of $592,701 88,125
LICENSE AGREEMENT, net of accumulated amortization
of $22,758 13,513
PURCHASED TECHNOLOGY, net of accumulated amortization
of $121,646 196,354
DEFERRED PATENT COSTS -affiliate 192,209
OTHER ASSETS 18,504
-----------
Total assets $ 567,312
===========
LIABILITIES AND SHAREHOLDERS' DEFICIT
CURRENT LIABILITIES:
Bank overdraft $ 3,832
Short-term borrowings - affiliate 958,397
Accounts payable 377,524
Accounts payable - affiliate 5,516
Accrued liabilities 465,288
Customer deposits 27,980
Customer deposits - affiliate 3,243
-----------
Total current liabilities 1,841,780
SHAREHOLDERS' DEFICIT:
Preferred stock, $.10 par value, 1,000,000 shares authorized and 4,000 shares
($399,600 aggregate liquidation preference)
issued and outstanding 400,000
Common stock, $.01 par value, 20,000,000 shares authorized and
16,165,068 shares issued and outstanding 161,651
Additional paid-in capital 5,633,124
Accumulated deficit (7,469,243)
-----------
Shareholders' deficit (1,274,468)
-----------
Total liabilities and shareholders' deficit $ 567,312
===========
</TABLE>
The accompanying notes are an integral part of these statements.
4
<PAGE> 5
WAVEMAT, INC.
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
(1) GENERAL
Except as the context otherwise indicates the term the "Company" refers
to Wavemat Inc.
In the opinion of management, all adjustments (consisting primarily of
normal recurring accruals) considered necessary for a fair presentation
have been included. For further information, refer to the financial
statements and footnotes thereto included in the Company's Annual
Report on Form 10-KSB/A for the year ended December 31, 1997.
(2) DETAILS TO STATEMENTS OF FINANCIAL POSITION
Inventory consisted of the following:
September 30, 1998
------------------
Raw materials 37,474
Work-in-process 11,710
-------
$49,184
=======
A summary of Accrued Liabilities follows:
September 30, 1998
------------------
Accrued legal & audit $ 39,013
Accrued Interest-affiliate 50,202
Royalties - affiliate 37,807
Commissions 79,950
Accrued Payroll 139,243
Deferred compensation 56,354
Other 62,719
---------
$ 465,288
=========
(3) RESEARCH AND DEVELOPMENT
During the first quarter of 1998, the Company entered into a Research
and development agreement with Michigan State University ("MSU"). As of
September 30, 1998, the Company had recognized $124,400 in revenue and
$76,514 in related resarch and development expense.
(4) SHORT TERM BORROWINGS - AFFILIATE
On January 4, 1995, the Company entered into a line of credit
arrangement evidenced by a promissory note with Growth. The amounts
borrowed pursuant to this line of credit are payable on demand. The
Company has drawn
5
<PAGE> 6
WAVEMAT, INC.
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
$801,811 on this line of credit as of September 30, 1998. The
applicable interest rate is 2 percentage points above the prime rate of
a major bank with such interest rates ranging from 10.25 percent per
annum to 11.00 percent per annum for the period from January 4, 1995
through September 30, 1998. In December, 1997, $578,745 of this
revolving line of credit obligation was written off of Wavemat's book
by Growth because of the Company's continuing inability to extinguish
this debt. On March 31, 1998, $166,650 of accrued interest relating to
the above note was extinguished as a result of the exercise of a
1,300,000 and 2,000,000 stock warrant(s) to purchase common stock by
Growth. (See note 6 to the financial statements). In addition, on March
31, 1998 $127,098 of the remaining accrued interest relating to the
above note was included in a contribution of capital to the Company.
On April 15, 1998, an additional $244,953 of this revolving line of
credit was extinguished related to a private placement of common stock
(See Note 6 to the financial statements). On September 30, 1998, the
Company had accrued $81,845 of additional interest relating to the
above remaining line of credit.
On December 3, 1996, the Company entered into a $25,000 line of credit
arrangement evidenced by a promissory note with Growth. The amounts
borrowed pursuant to the line of credit are payable by the Company on
demand. The Company had drawn $25,000 on this line of credit in 1996.
The applicable interest rate is at 2 percentage points above the prime
rate rate of a major bank with such interest rate ranging from 10.25
percent per annum to 10.50 percent per annum for the period from
December 3, 1996 through September 30, 1998. On March 31, 1998 $3,528
of accrued interest relating to the above note was included in a
contribution of capital to the Company. On September 30, 1998, the
Company had accrued $1,334 of additional interest relating to the above
obligation.
On December 20, 1996, the Company entered into $3,500 line of credit
arrangement evidenced by a promissory note with Growth. The amounts
borrowed pursuant to the line of credit are payable by the Company on
demand. The Company had utilized $3,500 of the line of credit in 1996.
The applicable interest rate is at 2 percentage points above the prime
rate of a major bank with such interest rate ranging from 10.25 percent
per annum to 10.50 percent per annum for the period from December 20,
1996 through September 30, 1998. On March 31, 1998 accrued interest of
$474 relating to
6
<PAGE> 7
WAVEMAT, INC.
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
the above note was included in a contribution of capital to the
Company. (See note 6 to the financial statements). On September 30,
1998, the Company had accrued $187 of additional interest relating to
the above obligation.
On January 9, 1997, the Company entered into a $3,500 line Of credit
arrangement evidenced by a promissory note with Growth. The amounts
borrowed pursuant to the line of credit are payable by the Company on
demand. The Company had utilized $3,500 of the line of credit by March
31, 1997. The applicable interest rate is at 2 percentage points above
the prime rate of a major bank with such interest rate ranging from
10.25 percent per annum to 10.50 percent per annum through September
30, 1998. Accrued interest of $455 relating to the above note was
included in a contribution of capital to the Company on March 31, 1998.
On September 30, 1998, the Company had accrued $187 of additional
interest relating to the above obligation.
On August 18, 1994, the Company issued a Convertible Debenture
("Debenture") to Growth, for the principal amount of $724,575 with the
interest accruing on the outstanding balance at a rate of 2 percent
above the prime rate of a major bank with such rate ranging from 9.75
percent per annum to 11.00 percent per annum for the period from August
18, 1994 through September 30,1998. The Debenture amount of $724,575
represents amounts owed by the Company to Venture in relation to a
promissory note($125,000), plus related accrued interest ($23,603),
deferred compensation ($261,139), accrued royalties ($212,591), and
other miscellaneous liabilities ($102,242). The Debenture has an
exercise price of $.5630 per share of common stock.
On October 27, 1995, by resolution of the Board of Directors, the
exercise price of the Debenture issued to Growth on August 18, 1994 was
reduced from $.5630 to $.1563 per share of common stock, the average of
the bid-ask price of the Company's common stock on that date in
consideration for financing and contributions of capital provided to
the Company during 1995. On the same date, $600,000 of the debt owed
Growth under the Debenture was converted to 3,838,772 shares of the
Company's common stock. There remains a balance due of $124,574 under
the Convertible Debenture.
On March 31, 1998 by resolution of the Board of Directors, the exercise
price was reduced from $.1563 per share of common stock, to $.0505 per
share of common stock, the
7
<PAGE> 8
WAVEMAT, INC.
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
average of the bid-ask price of the Company's common stock on that date
in consideration for additional financings and contribution of capital
provided to the Company.
On March 31, 1998, accrued interest of $52,254 related to the above was
included in a contribution of capital to the Company. (See note 6 to
the financial statements). On September 30, 1998, the Company had
accrued $6,649 additional interest relating to the above obligation.
(5) SHAREHOLDER'S DEFICIT
On April 15, 1998, the Company issued and transferred 2,682,943 shares
of it's common stock, $.01 par value at $.0913 per share under a
private placement to Balckshaw Limited. The private placement was
transferred for investment and not for distribution. The proceeds of
this placement were used to extinguish debt obligations entered into by
the Company with Growth Funding, Ltd. On September 1, 1998 the
Directors of Wavemat, acting without a meeting resolved, affirmed and
ratified the above conveyance of common stock.
(6) COMMITMENTS AND CONTINGENCIES
GOING CONCERN
The Company has incurred operating losses and generated cash flow
deficits from operating activities since inception, therefore, the
Company's ability to continue as a going concern is contingent upon its
ability to raise additional funds to support its activities.
The Company is relying on sales of its microwave processing systems to
provide additional working capital. The Company is also continuously
evaluating acquisitions of technologies and/or entities owning such
technologies which are compatible to the Company's business strategies
with the intention of increasing the Company's revenue generating
capabilities. In addition, the Company is continuing to seek capital
from various sources of funding such as additional term loans, lines of
credit, corporate partners and sales of equity securities. However,
there is no assurance that the required amount of additional funds can
be raised.
8
<PAGE> 9
WAVEMAT, INC.
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
RESULTS OF OPERATIONS
THE THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO THE THREE
MONTHS AND NINE MONTHS ENDED SEPTEMBER 30,1997
Operating loss declined significantly during the 1998 three and nine month
periods as a result of a substantial decline in operating costs and expenses,
more than off-setting the decline in revenue. Operating revenue decreased
because of significant declines in the company's microwave processing system
sales.
The decline in operating expenses was attributable to lower cost of sales and
significantly lower selling, general and administrative expenses, although
off-set by higher research and development activities. The decline in cost of
sales was attributable to lower microwave processing system sales as mentioned
above. The increase in research and development activities were primarily the
result of higher non-sponsored research activities performed by the company
related to further enhancement of the company's product lines.
The decline in selling, general and administrative expenses are primarily
attributable to lower consulting and salary expenses and the reflection of a
gain on the disposal of a company asset being reflected during the quarter
ending of September 30, 1998.
Net loss decreased significantly for the three and nine month period as a result
of the recognition of income as a result of Growth Funding, Ltd., payment of an
indebtedness to the Company's landlord and significantly lower interest expense
- - affiliate attributable to prior debt extinguishment on April 15,1998 and
December 31, 1997 which resulted in significantly lower borrowing costs. (See
note 4 to the financial statements).
FINANCIAL CONDITION
SEPTEMBER 30, 1998 COMPARED TO DECEMBER 31, 1997
The Company continued to have difficulty meeting its cash requirements and
obligations during the nine months of 1998. Deferred compensation costs of the
Company amounted to $ 56,354
9
<PAGE> 10
WAVEMAT, INC.
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
as of September 30, 1998. The Company was also in arrears pertaining to other
obligations in the amount of $142,600 as of September 30, 1998.
Obligations which the Company met during the nine months of 1998 were satisfied
through sales of the Company's microwave processing systems and contracted
research and development activities, customer deposits, lines of credit and
short-term borrowings.
As indicated in Note 6 to the Financial Statements, the Company has incurred
operating losses and generated cash flow deficits from operating activities
since its inception, therefore, the Company's ability to continue as a going
concern is contingent upon its ability to raise additional funds to support its
activities. At September 30, 1998, the Company had a negative working capital
position of $1,783,173 compared to a negative working capital position of
$2,496,450 at December 31, 1997.
The Company is attempting to generate working capital through the sale of its
microwave processing systems and through its contract research and development
activities. As of September 30, 1998, the Company had a backlog of open sales
orders or $ 109,352, net, of customer deposits. Subject to various
qualifications and assuming no change in delivery dates or in the shipment of
orders in the normal course of business, management expects, although there can
be no assurance, to ship all of the above mentioned backlog and collect the
applicable cash proceeds during 1998 or early 1999.
The Company must increase its backlog of open sales orders substantially and
obtain additional product development assistance to adequately support its
activities. The Company is continuously evaluating acquisitions of technologies
and/or entities owning such technologies which are compatible to the Company's
business strategies with the intention of increasing the Company's revenue
generating capabilities. In addition, the Company is continuing to seek funding
from various other sources such as additional term loans, lines of credit,
corporate partners and equity financing. However, there is no assurance that the
required amount of additional funds can be raised.
The Company is working to resolve the potential impact of the year 2000 on the
ability of the Company's computerized information systems to accurately process
information that may be date-sensitive. Any of the Company's programs that
recognize a date using "00" as the year 1900 rather than the year 2000 could
result in errors or system failures. The Company utilizes a
10
<PAGE> 11
number of computer programs across its entire operation. The Company has not
completed its assessment, but currently believes that costs of addressing this
issue will not have a material adverse impact on the Company's financial
position. However, if the Company and third parties upon which it relies are
unable to address this issue in a timely manner, it could result in a material
financial risk to the Company. In order to assure that this does not occur, the
Company plans to devote all resources required to resolve any significant year
2000 issues in a timely manner.
ITEM 5.
On August 4, 1998, Raymond F. Decker resigned as a director of the Company to
devote more time to other business interests.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits - Ex. 27 Financial Data Schedule Period
ended 9/30/98
Ex. 27.1 Financial Data Schedule Period
ended 6/30/98 restated
(b) Reports on Form 8-K:
No reports on Form 8-K have been filed during the
Quarter ended September 30, 1998.
11
<PAGE> 12
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
WAVEMAT INC.
REGISTRANT
Date: November 23, 1998 BY: /s/ Monis Schuster
--------------------
Monis Schuster, Chairman of the
Board and Chief Executive Officer
(Principal Operating Officer)
Date: November 23, 1998 BY: /s/ Sharon K. Zitnik
-----------------------
Sharon K. Zitnik, Vice President,
Treasurer, Secretary and Chief Financial
Officer (Principal Financial Officer)
12
<PAGE> 13
INDEX TO EXHIBITS
EXHIBIT NO. DESCRIPTION
- ----------- -----------
Ex-27 Financial Data Schedule Period Ended 9/30/98
Ex-27.1 Financial Data Schedule Period Ended 6/30/98 Restated
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 8,519
<ALLOWANCES> 0
<INVENTORY> 49,183
<CURRENT-ASSETS> 58,607
<PP&E> 680,826
<DEPRECIATION> 592,701
<TOTAL-ASSETS> 567,312
<CURRENT-LIABILITIES> 1,841,780
<BONDS> 0
0
400,000
<COMMON> 161,651
<OTHER-SE> (1,836,119)
<TOTAL-LIABILITY-AND-EQUITY> 567,312
<SALES> 194,660
<TOTAL-REVENUES> 194,660
<CGS> 120,369
<TOTAL-COSTS> 524,654
<OTHER-EXPENSES> 17,368
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 88,983
<INCOME-PRETAX> 0
<INCOME-TAX> 0
<INCOME-CONTINUING> (312,626)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (312,626)
<EPS-PRIMARY> (.02)
<EPS-DILUTED> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<RESTATED>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 7,048
<ALLOWANCES> 0
<INVENTORY> 49,274
<CURRENT-ASSETS> 61,055
<PP&E> 677,309
<DEPRECIATION> 584,854
<TOTAL-ASSETS> 581,394
<CURRENT-LIABILITIES> 1,690,597
<BONDS> 0
0
400,000
<COMMON> 161,651
<OTHER-SE> (1,670,854)
<TOTAL-LIABILITY-AND-EQUITY> 581,394
<SALES> 185,623
<TOTAL-REVENUES> 185,623
<CGS> 77,547
<TOTAL-COSTS> 379,138
<OTHER-EXPENSES> 46,154
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 58,083
<INCOME-PRETAX> (147,361)
<INCOME-TAX> 0
<INCOME-CONTINUING> (147,361)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (147,361)
<EPS-PRIMARY> (.01)
<EPS-DILUTED> 0
</TABLE>
