Skyway Communications Holding (SWYC) Inactive
Filed: 23 Mar 05, 12:00am
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington D. C. 20549
FORM 10-QSB
(X) Quarterly report pursuant to Section 13 or 15(d) of the Securities and
Exchange Act of 1934.
For the quarterly period ended January 31, 2005.
( ) Transition report pursuant to Section 13 or 15(d) of the Exchange Act for
the transition period from ___________ to _____________ .
Commission File Number: 0-32033
SKYWAY COMMUNICATIONS HOLDING CORP.
(Exact name of registrant as specified in charter)
Florida 65-0881662
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
6021 - 142nd Avenue North, Clearwater, FL 33760
(Address of principal executive offices)
727.535.8211
(Registrant's Telephone Number, Including Area Code)
Check whether the registrant: (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 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 ( )
State the number of shares outstanding of each of the issuer's classes of common
equity, as of March 1, 2005: 294,161,629
Transitional Small Business Disclosure Format:
YES ( ) NO (X)
1
SKYWAY COMMUNICATIONS HOLDING CORP.
INDEX TO FORM 10-QSB
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements (unaudited)
Consolidated Balance Sheet as of January 31, 2005.................. 3
Consolidated Statements of Operations for the three
and nine months ended January 31, 2005 and 2004 and
for the period April 24, 2002 (date of inception) through
January 31, 2005................................................... 5
Consolidated Statements of Cash Flows for the nine months
ended January 31, 2005 and 2004 and for the period April 24,
2002 (date of inception) through January 31, 2005.................. 6
Notes to Consolidated Financial Statements January 31, 2005........ 8
Management's Discussion and Analysis or Plan of Operations
Item 2. (including cautionary statement)................................... 18
Item 3. Controls and Procedures............................................ 23
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.................................................. 26
Item 2. Changes in Securities.............................................. 26
Item 3. Defaults Upon Senior Securities.................................... 27
Item 4. Submission of Matters to a Vote of Securities Holders.............. 27
Item 5. Other Information ................................................. 28
Item 6. Exhibits and Reports on Form 8-K................................... 28
Signatures ........................................................ 28
2
PART I
SKYWAY COMMUNICATIONS HOLDING CORP. AND SUBSIDIARY
(A Development Stage Company)
CONSOLIDATED BALANCE SHEET AS OF JANUARY 31, 2005
(UNAUDITED)
ASSETS
Cash $ 121,180
Accounts receivable, net 54,026
Employee advances 40,284
Prepaid expenses 260,379
Other receivables 16,417
Notes receivable 325,000
Total Current Assets 817,286
PROPERTY AND EQUIPMENT, net 1,070,697
OTHER ASSETS:
Property and equipment in progress 4,140,646
Deposits and other 419,857
Total Other Assets 4,560,503
TOTAL ASSETS $ 6,448,486
=============
Continued
3
SKYWAY COMMUNICATIONS HOLDING CORP. AND SUBSIDIARY
(A Development Stage Company)
CONSOLIDATED BALANCE SHEET AS OF JANUARY 31, 2005 (Continued)
(UNAUDITED)
LIABILITIES AND STOCKHOLDERS' (DEFICIT)
CURRENT LIABILITIES:
Accounts payable $ 2,820,551
Accrued payroll and related taxes 1,052,906
Accrued interest 50,784
Due to SkyWay Global 240,117
Due to related party 1,746,501
Note payable - related party 900,000
Sales tax payable 114,309
Notes payable 1,503,600
Other loans payable 125,800
Deferred rent 226,355
Current portion of capital lease obligation 12,409
Other accrued expenses payable in stock 16,320
Other current liabilities 4,755
Total Current Liabilities 8,814,407
LONG TERM CAPITAL LEASE:
Capital lease obligation, less current portion 30,136
Total long-term capital lease 30,136
Total Liabilities 8,844,543
STOCKHOLDERS' (DEFICIT):
Preferred stock, $.0001 par value, 10,000,000 shares
authorized:
Series A convertible preferred stock;
770,000 shares issued and outstanding 77
Series B convertible preferred stock;
1,000,000 shares issued and outstanding 100
Series C convertible preferred stock;
97,000 shares issued and outstanding 10
Series D convertible preferred stock;
85,000 shares issued and outstanding 9
Common stock, $.0001 par value, 2,500,000,000 shares
authorized; 245,278,113 shares issued and outstanding 24,527
Common stock subscribed (5,880,000)
Warrant receivable (470,251)
Deferred stock compensation (84,000)
Capital in excess of par value 43,477,941
(Deficit) accumulated during the development stage (39,464,470)
Total Stockholders' (Deficit) (2,396,057)
TOTAL LIABILITIES AND STOCKHOLDERS' (DEFICIT) $ 6,448,486
==============
________________________________________________________________________________
See notes to consolidated financial statements.
4
SKYWAY COMMUNICATIONS HOLDING CORP. AND SUBSIDIARY
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
____________________________________________________________________________________________________________________________________
Cumulative from
For the For the For the nine For the nine Inception
three months three months months ended months ended (April 24, 2002)
ended January ended January January 31, January 31, Through
31, 2005 31, 2004 2005 2004 January 31, 2005
REVENUES
Products $ - $ - $ 309,670 $ - $ 309,670
Services 44,603 15,398 111,580 15,398 162,585
Total Revenues 44,603 15,398 421,250 15,398 472,255
COST OF GOODS SOLD (7,631) - 216,319 - 216,319
GROSS PROFIT 52,234 15,398 204,931 15,398 255,936
EXPENSES:
Research and development 66,003 229,410 1,951,005 758,457 3,918,624
Selling 12,858 150,422 1,556,856 230,071 6,918,040
General and administrative 3,665,578 5,149,913 12,208,678 10,499,657 26,770,970
Impairment of technology rights - - - - 1,023,800
Impairment of property and equipment 137,496 - 137,496 - 373,246
Impairment of property and equipment in
progress - - 433,000 - 433,000
Total expenses 3,881,935 5,529,745 16,287,035 11,488,185 39,437,680
(LOSS) FROM OPERATIONS (3,829,701) (5,514,347) (16,082,104) (11,472,787) (39,181,744)
OTHER INCOME (EXPENSE):
Rental Income - Related Party - - - - 26,927
Interest Expense (140,812) (2,220) (282,353) (9,559) (309,653)
Stock Discount Expense - (741,724) - (1,844,251)
Total Other Income (Expense) (140,812) (743,944) (282,353) (1,853,810) (282,726)
(LOSS) BEFORE INCOME TAXES (3,970,513) (6,258,291) (16,364,457) (13,326,597) (39,464,470)
PROVISION FOR INCOME TAXES - - - - -
NET (LOSS) $ (3,970,513) $ (6,258,291) $ (16,364,457) $(13,326,597) $ (39,464,470)
============== ============= ============== ============= ==============
NET (LOSS) PER SHARE - Basic and diluted $ (.02) $ (.07) $ (.09) $ (.19)
============== ============= ============== =============
Weighted average number of shares
outstanding 225,501,200 92,677,100 172,991,300 71,477,900
============== ============= ============== =============
____________________________________________________________________________________________________________________________________
See notes to consolidated financial statements.
5
SKYWAY COMMUNICATIONS HOLDING CORP. AND SUBSIDIARY
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
____________________________________________________________________________________________________________
Cumulative from
For the nine For the nine Inception
months ended months ended (April 24, 2002)
January 31, January 31, through
2005 2004 January 31, 2005
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) $ (16,364,457) $ (13,326,597) $ (39,464,470)
Adjustments to reconcile net (loss) to net
cash used in operating activities:
Depreciation 227,045 93,472 352,547
Impairment of technology rights - - 1,023,800
Impairment of property and equipment 137,496 - 373,246
Impairment of property and equipment in progress 433,000 - 433,000
Purchased research and development 1,338,500 - 1,338,500
(Loss) on sale of property and equipment 64,956 - 88,558
Provision for bad debts 5,764 1,928 6,264
Non-cash services rendered for stock and warrants 7,305,807 8,094,834 20,220,440
Non-cash other 124,439 1,107,138 420,742
Changes in assets and liabilities:
Accounts receivable (50,811) (7,711) (60,290)
Employee advances, net (12,760) (15,800) (40,334)
Prepaid expenses (147,851) (45,615) (260,378)
Other receivable (4,511) - (16,417)
Deposits and other (23,997) - (419,857)
Accounts payable 2,442,546 317,629 3,150,538
Accrued payroll 933,528 133,733 1,052,906
Accrued interest 36,505 3,005 50,784
Sales tax payable (2,517) - 114,310
Deferred rent 52,475 185,382 226,355
Other accrued expenses 4,755 - 996,739
NET CASH USED IN OPERATING ACTIVITIES (3,500,088) (3,458,602) (10,413,017)
CASH FLOWS FROM INVESTING ACTIVITIES:
Payment for technology rights - - (1,000,000)
Payments for property and equipment in progress (1,005,130) (774,778) (3,281,379)
Proceeds from sale of property and equipment 68,706 - 104,706
Payments for property and equipment (563,313) (609,067) (1,890,712)
NET CASH USED IN INVESTING ACTIVITIES (1,499,737) (1,383,845) (6,067,385)
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on capital lease obligations (4,262) - (4,262)
Advances from related party converted to preferred
stock - - 1,564,015
Advances from related parties, net 1,741,423 338,187 2,005,370
Receivable due from related party, net 10,833 (10,833) -
Notes receivable (315,904) - (315,904)
Proceeds from notes payable, related party 900,000 - 900,000
Proceeds from other loans payable 125,800 - 125,800
Proceeds from issuance of common stock 400,000 6,299,556 10,866,870
Proceeds from exercise of stock warrants 598,652 - 1,789,960
Payments on notes payable (25,000) (250,000) (275,000)
Payments on due to SkyWay Global (8,964) - (8,964)
Payments of stock offering costs - - (46,303)
NET CASH PROVIDED BY FINANCING ACTIVITIES 3,422,578 6,376,910 16,601,582
NET (DECREASE) INCREASE IN CASH (1,577,247) 1,534,463 121,180
CASH AT BEGINNING OF PERIOD 1,698,427 741 -
CASH AT END OF PERIOD $ 121,180 $ 1,535,204 $ 121,180
============== ============== ==============
Continued
6
SKYWAY COMMUNICATIONS HOLDING CORP. AND SUBSIDIARY
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(UNAUDITED)
Cumulative from
For the nine For the nine Inception
months ended months ended (April 24, 2002)
January 31, January 31, through
2005 2004 January 31, 2005
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION - Interest paid $ 60,148 $ - $ 73,169
============== ============== ==============
____________________________________________________________________________________________________________
See notes to consolidated financial statements.
7
SKYWAY COMMUNICATIONS HOLDING CORP. AND SUBSIDIARY
(Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JANUARY 31, 2005
(UNAUDITED)
________________________________________________________________________________
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization
SkyWay Communications Holding Corp. ("Parent"), formerly known as i-TeleCo.com
Inc. and Mastertel Communications Corp., was organized under the laws of the
State of Florida on December 16, 1998. In April 2003, Parent changed its name to
SkyWay Communications Holding Corp.
On May 30, 2003, Parent and Sky Way Aircraft Inc. ("Subsidiary", incorporated on
April 24, 2002) entered into an Agreement and Plan of Merger. On June 19, 2003,
Parent and Subsidiary entered into an Amended and Restated Agreement and Plan of
Merger (which closed on June 21, 2003) whereby Parent agreed to acquire 100% of
Subsidiary in a stock for stock exchange. The agreement called for Parent to
issue 1,000,000 shares of Series B convertible preferred stock to the former
shareholders of Subsidiary for 100% of the outstanding shares of Subsidiary's
common stock and for Parent to issue 1,000,000 shares of Series A convertible
preferred stock to the holder of $1,564,015 in debt of the Subsidiary. Voting
control of the Company passed to the former shareholders of Subsidiary. The
Company has accounted for the acquisition as a recapitalization of Subsidiary in
a manner similar to a reverse purchase. Accordingly, the equity transactions
have been restated to reflect the recapitalization of Subsidiary and the
operations of Parent prior to the date of acquisition have been eliminated. At
the date of acquisition the Parent had no assets and $161,295 in liabilities.
The financial statements reflect the operations of Subsidiary from its
inception. Prior to the recapitalization of Subsidiary, Parent had 46,819,507
shares of common stock previously outstanding. An additional 2,680,493 shares of
common stock were issued as finder's fees in the transaction.
All references to the number of shares and par value in the accompanying
consolidated financial statements have been adjusted for all periods presented
to reflect the recapitalization of Subsidiary and to reflect a 1.8516-for-1
forward stock split that Subsidiary affected on March 11, 2003.
SkyWay Communications Holding Corp. and Subsidiary ("the Company") plan to
provide security and other services for the airline industry through
applications of their high-speed, broadband wireless communications technology.
The Company has not yet generated any significant revenues from their planned
principal operations and is considered a development stage company as defined in
Statement of Financial Accounting Standards No.7. The Company has, at the
present time, not paid any dividends and any dividends that may be paid in the
future will depend upon the financial requirements of the Company and other
relevant factors.
Basis of Presentation
The accompanying unaudited consolidated financial statements have been prepared
in accordance with accounting principles generally accepted in the United States
of America for interim financial information and the instructions to Form 10-QSB
and Rule 10-1 of Regulation S-X of the Securities and Exchange Commission (the
"SEC"). Accordingly, these consolidated financial statements do not include all
8
of the disclosures required by accounting principles generally accepted in the
United States of America. In the opinion of management, all adjustments
(consisting of normal recurring adjustments) considered necessary for a fair
presentation have been included.
Consolidated operating results for the three and nine months ended January 31,
2005 are not necessarily indicative of the results that may be expected for the
year ended April 30, 2005. The accompanying consolidated financial statements
and the notes thereto should be read in conjunction with the Company's audited
consolidated financial statements as of and for the year ended April 30, 2004
contained in its Annual Report on Form 10-KSB.
Reclassification
Certain amounts in the consolidated financial statements for periods prior to
January 31, 2005 have been reclassified to conform to the headings and
classifications used in the January 31, 2005 consolidated financial statements.
Consolidation
The consolidated financial statements include the accounts of Parent and
Parent's wholly owned Subsidiary. All significant intercompany transactions have
been eliminated in consolidation.
Use of Estimates
The preparation of consolidated financial statements in accordance 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 disclosures of contingent assets and
liabilities at the date of the consolidated financial statements. The reported
amounts of revenues and expenses during the reporting period may be affected by
the estimates and assumptions management is required to make. Actual results
could differ significantly from management's estimates.
Revenue Recognition
In general, the Company records revenue when persuasive evidence of an
arrangement exists, services have been rendered or product delivery has
occurred, the sales price to the customer is fixed or determinable, and
collectibility is reasonably assured. The following policies reflect specific
criteria for the various revenue streams of the Company.
The Company's current primary source of operating revenue is from the sale to
airlines of equipment (SkyWay Media Servers and spares) which is intended to
distribute entertainment content consisting of on demand movies/video and audio,
infomercials and sponsor supported advertising and commercials, and wireless
connection services. Revenue is recorded at the completion of the services for
wireless connection services, and at the time the equipment is shipped for sales
of media servers to an airline customer. For contracts which exceed one month,
revenue is recognized on a straight-line basis over the term of the contract as
services are provided. Revenues applicable to future periods are classified as
deferred revenues until earned.
Property and Equipment in Progress
Statement of Financial Accounting Standards 144, "Accounting for the Impairment
or Disposal of Long-Lived Assets" requires that long-lived assets, including
certain identifiable intangibles, be reviewed for impairment whenever events or
changes in circumstances indicate that the carrying value of the assets in
question may not be recoverable. As of January 31, 2005 the Company's management
evaluated the long-lived assets and determined that approximately $570,500 of
property and equipment was impaired and was written off.
9
Stock-Based Compensation
The Company has adopted Statement of Financial Accounting Standards No. 148
"Accounting for Stock-Based Compensation - Transition and Disclosure". This
statement amends FASB statement No. 123, "Accounting for Stock Based
Compensation". It provides alternative methods of transition for an entity that
voluntarily changes to the fair value based method of accounting for employee
stock based compensation. It also amends the disclosure provision of FASB
statement No. 123 to require prominent disclosure about the effects on reported
net income of an entity's accounting policy decisions with respect to
stock-based employee compensation. As permitted by SFAS No. 123 and amended by
SFAS No. 148, the Company continues to apply the intrinsic value method under
Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued
to Employees," to account for its stock-based employee compensation
arrangements. Had the Company's compensation expense for stock-based
compensation plans been determined based upon fair values at the grant dates for
awards under this plan in accordance with SFAS No. 123, "Accounting for
Stock-Based Compensation," its net loss and pro forma net loss per share amounts
would not have been materially different.
Net Loss per Share
The Company has adopted SFAS No. 128 "Earnings per Share". Basic loss per share
is computed by dividing the loss available to common shareholders by the
weighted-average number of common shares outstanding during the period. Diluted
loss per share is computed in a manner similar to the basic loss per share,
except that the weighted-average number of shares outstanding is increased to
include all common shares, including those with the potential to be issued by
virtue of warrants, options, convertible debt and other such convertible
instruments. Diluted earnings per share contemplate a complete conversion to
common shares of all convertible instruments only if they are dilutive in nature
with regards to earnings per share. Since the Company has incurred net losses
for all periods, basic loss per share and diluted loss per share are the same.
NOTE 2 - DEVELOPMENT STAGE AND GOING CONCERN
The Company plans to provide security and other services to the airline industry
through applications of its high-speed, broadband wireless communications
technology. It has not yet generated any significant revenues from planned
principal operations, and is considered a development stage company.
The Company's consolidated financial statements were prepared using accounting
principles generally accepted in the United States of America applicable to a
going concern, which contemplates the realization of assets and liquidation of
liabilities in the normal course of business. The Company has incurred
significant losses since its inception, has negative working capital, has
experienced and continues to experience negative cash flows from operations, and
is currently not meeting its operating obligations. In addition, the Company
expects to have ongoing requirements for additional capital investment to
implement its business plan. These factors raise substantial doubt about the
ability of the Company to continue as a going concern. In this regard,
management is proposing to raise any necessary additional funds not provided by
operations through loans, through additional sales of the Company's common
stock, or other financing activities. There is no assurance that the Company
will be successful in raising this additional capital or in achieving profitable
operations. The financial statements do not include any adjustments that might
result from the outcome of these uncertainties.
NOTE 3 - ACQUISITION OF ASSETS
On May 21, 2004 the Company purchased from WEMS selected intellectual assets and
rights to service contracts with one airline for use in an in-flight
entertainment system. The cost of this transaction was 1,150,000 shares of the
Company's common stock valued at $1,000,500 (based on the market price of shares
at the date of acquisition), $100,000, and 550,000 warrants, at prices of $.59 -
$.79 per share. The warrants are exercisable within one (1) year of closing
date, which can be extended for another year if a certain quantity of warrants
are exercised. The total cost of the transaction was $1,438,500 and has been
10
expensed in the first quarter of fiscal 2005 as "purchased research and
development."
NOTE 4 - EQUITY
Common Stock
The Company has authorized 2,500,000,000 shares of common stock with a par value
of $.0001.
On January 21, 2005, the Company amended the 2004 Stock Award Plan (the "Plan")
and filed an S-8 registration statement for the issuance of common stock to
various individuals for services. The plan allows for an additional 35,000,000
million shares to be issued. Through January 2005, under this registration
statement, the Company issued 3,711,944 shares of common stock with a fair
market value of $377,903 for services. As of March 1, 2005, the Company has
issued a total of 24,662,127 shares and has 10,337,873 shares remaining. The
Plan terminates on April 30, 2005.
On September 29, 2004, the Company filed an S-8 registration statement for the
issuance of common stock to various individuals for services. The Plan allows
for 15,000,000 million shares to be issued, and through January 2005, the
Company issued 14,904,958 shares of common stock with a fair market value of
$2,779,617 for services of $2,474,582 and accrued expenses of $305,035. Of this
amount, $84,000 remains in prepaid expenses at January 31, 2005 and is
classified as deferred stock compensation on the accompanying balance sheet. As
of February 15, 2005, the Company has issued a total of 14, 904,958 shares and
has 95,042 shares remaining.
In January 2005, the Company issued 100,000 shares of restricted common stock to
ECI Telecom, Inc. in connection with lease defaults. The shares do not represent
a payment of rent nor a cure or waiver of any lease defaults.
In December 2005, the Company issued 23,000,000 shares of common stock due to
the conversion of 230,000 shares of Series A Preferred stock.
In December 2004, the Company issued to an individual 352,941 shares of
restricted common stock. These shares were issued pursuant to a settlement
agreement relating to a subscription agreement associated with an affiliate in
November 2003. The fair market value of the shares issued on the date of issue
was approximately $.20 per share, or $70,600, which was recorded as an amount
due from the affiliate.
In November 2004, the Company issued and placed in escrow 28,000,000 shares of
restricted common stock in connection with the duPont subscription agreement
noted below.
In November 2004, we sold 125,000 shares of restricted stock for cash of $25,000
or $.20 per share, to a related party.
In November 2004, the Company issued 8,850,000 shares of common stock related to
the conversion of 885,000 shares of Preferred "C" stock.
In the second quarter of fiscal year 2005, the Company issued 426,140 shares
of common stock related to the exercise of warrants. The Company recorded
$234,377 as warrants receivable. In addition, the Company issued 2,000,000
shares of common stock due to the exercising of warrants issued for consulting
services and expensed $2,125,000 related to these services.
11
In October 2004, the Company issued 14,300,000 shares of common stock related to
the conversion of 1,430,000 shares of Preferred "C" stock.
During August 2004, the Company issued an additional 4,433,974 shares of common
stock related to previous common stock purchases, whereby the number of shares
were under issued as a result of recalculating the number of shares to be
issued, due to an adjustment in the market price of the shares.
During August 2004, the Company issued 1,000,000 shares of common stock for
$200,000 in cash.
During August 2004, the Company cancelled 1,455,770 shares of common stock
previously issued due to the funds received actually being a loan from a related
party, rather than a sale of the Company's common stock.
In the first quarter of fiscal year 2005, the Company issued 693,722 shares of
common stock for $381,547 related to the exercising of warrants. The Company
received cash proceeds of $147,500 from the warrants and recorded $234,047 as
warrants receivable. In addition the Company issued 650,000 shares of common
stock for $175,000 in cash.
In May 2004, the Company issued 1,150,000 shares of common stock for the
purchase of intellectual assets and rights to service contracts with one airline
for use in an in-flight entertainment system. The shares of common stock were
valued at $1,000,500. In addition, the Company issued 550,000 warrants, at
prices of $.59 - $.79 per share valued at $338,000. The warrants are exercisable
within one (1) year of closing date, which can be extended for another year if a
certain quantity of warrants are exercised (see Note 3).
In June 2004, the Company issued 3,626,667 shares of common stock as payment of
$991,984 of accrued expenses.
In July 2004, the Company issued 4,000,000 shares of common stock due to a
related party's conversion of 400,000 shares of Preferred "C" stock.
For the nine-month period ended January 31, 2005, the Company recorded
amortization of deferred compensation related to stock issuances in the prior
year aggregating $2,451,942.
Stock Issuances
From February 1, 2005 through March 1, 2005:
o The Company issued 2,550,000 shares of common stock in connection with
employees exercising stock options under the 2004 Non-Qualified Stock
Award Plan (see below).
o The Company issued 9,900,183 shares of common stock, under a
previously registered Form S-8 filing, as payment of $1,121,394 of
accrued expenses.
o The Company issued 8,500,000 shares of common stock, under a
previously registered Form S-8 filing, to a related party, as payment
of $510,000 of consulting fees. This related party consultant also
loaned to the Company $900,000 in August 2004, which amount is a
current libility of the Company (see Note 6).
Stock Options
During the third quarter of fiscal year 2005, in connection with the Plan, the
board of directors approved the issuance of 4.4 million stock options (to
various employees) to purchase 4.4 million shares of common stock. These shares
were deemed to be registered under previous S-8 filings. The options are
12
exercisable at an exercise price equal to the 90% of the lowest bid price on the
date of exercise and vest immediately. On February 14, 2005 the board of
directors approved the issuance of an additional 1 million options under the
Plan. As of March 1, 2005, all 5.4 million shares had been exercised.
Subscription Agreement
During August 2004, the Company entered into a stock subscription agreement with
duPont Investment Fund #57289 ("duPont"), an affiliate, to purchase 31,818,180
shares of common stock at $.22 per share, or $7,000,000, over the period from
September 6, 2004 through October 18, 2004. During November 2004, the terms of
this agreement were revised and are currently being finalized. Under the revised
terms, the Company has issued and placed in escrow 28,000,000 shares of
restricted stock to be exchanged for a DC9 aircraft, estimated to be valued at
$5,880,000, based on the fair market value of the shares on the date of issue.
Should the transaction be completed and the Company receive the aircraft, it
will be recorded at the fair market value of the common shares issued adjusted
for any reduction caused by the fair market value of the aircraft being less
than the value of the common shares issued. Any difference between fair value of
the shares issued and fair value of the plane will be charged to operations. At
January 31, 2005 the Company had not received any funds or assets under this
agreement.
Consulting Agreement
During September 2004, the Company entered into a consulting agreement with
duPont. duPont is to be compensated with 5,000,000 shares of common stock that
is to be registered in a future Registration Statement on Form S-8. The term of
the agreement is two (2) years and may be terminated at any time by either
party. As of January 31, 2005, no services had been provided under this
agreement and no stock had been issued.
Estimated Fully Diluted Equity Information
As of January 31, 2005, the company has the following number of potentially
convertible shares of common stock related to convertible preferred stock,
warrants, and stock options:
For conversion of series A preferred stock 77,000,000
For conversion of series B preferred stock 200,000,000
For conversion of series C preferred stock 970,000
For conversion of series D preferred stock 8,500,000
Outstanding Warrants 18,441,766
Outstanding Options 628,333
Stock to be issued under S-8 filing dated 9-28-04 95,042
Stock to be issued under S-8 filing dated 1-21-05 21,387,873
Common shares issuable upon conversions and exercises 327,023,014
Shares outstanding as of January 31, 2005 245,278,113
Estimated common shares after conversions and exercises 572,301,127
=============
NOTE 5- OTHER COMMITMENTS AND CONTINGENCIES
During the period covered by these financial statements, the Company issued
shares of common stock without registration under the Securities Act of 1933.
13
Although the Company believes that the sales did not involve a public offering
of its securities and that the Company did comply with the "safe harbor"
exemptions from registration, it could be liable for rescission of the sales if
such exemptions were found not to apply. This could have a material negative
impact on the Company's financial position and results of operations. In
addition, the Company issued shares of common stock pursuant to Form S-8
registration statements. The Company believes that it complied with the
requirements of Form S-8 in regard to these issuances. However, if it were
determined that there were violations of the provisions of Form S-8, the Company
could be subject to enforcement proceedings by the SEC or other regulatory
bodies.
During the periods covered by these financial statements certain officers and
directors sold shares of common stock and did not file on a timely basis all of
the required reports with the Securities and Exchange Commission.
Capital Lease Agreement
During September 2004, the Company entered into a capital lease agreement for
equipment used in its operations. The lease contains a bargain purchase option
to acquire the equipment at the end of the lease term for $1. Future minimum
lease payments under this agreement are as follows:
April 30
2005 $ 5,142
2006 20,566
2007 20,566
2008 11,006
Total minimum lease payments 57,280
Less amount representing interest (14,735)
Present value of future minimum lease payments 42,545
Less current maturities (12,409)
Capital lease obligations, net of current maturities $ 30,136
============
Depreciation expense under this capital lease was $2,187 and $3,645 for the
three and nine months ended January 31, 2005, repsectively.
Operating Lease Agreements
During the third quarter of fiscal 2005, the Company entered into twenty-three
additional lease agreements for tower sites utilized in its network. We
currently have approximately 75 leases. The lease terms for these agreements
range from two-years to ten-years, have renewal terms ranging from month to
month to nine three-year terms, and require monthly payments of $175 to $1,200.
Additional future minimum rental payments under these agreements aggregate
approximately $709,000.
Consulting Commitment
During October 2004, the Company entered into an agreement with a non related
party to provide investor relations consulting services commencing in November
2004. Monthly fees for these services approximate $22,500. The term of this
agreement is one (1) year and during the first six (6) months, the compensation
is to be paid in free trading common stock, valued at the average closing price
for the preceding five (5) days, discounted 10%. After the first six (6) months
of this agreement, the compensation package will be reformulated based on the
Company's cash position. These shares were to be issued monthly commencing in
November 2004. The agreement was cancelled in January 2005.
14
Notes Payable
In January 2004, the Company signed a loan agreement for $1,500,000 for the
procurement of a DC-9 aircraft to use for research, development, and marketing
purposes. The loan was funded with a $1,500,000 six (6) month promissory note
from the United Bank and Trust Company, with interest based upon the Bank Prime
Rate plus 0.5%. The note was extended, and is now due on June 16, 2005. The loan
is guaranteed by the President of the Company, two other shareholders of the
Company, and a company controlled by one of the shareholders. In connection with
the guarantee of the loan by one of the shareholders, a company related to this
guarantor-shareholder is listed as the co-owner of the asset. This co-ownership
is only effective for the period of the guarantee. The Company will maintain
voting control of all matters related to the aircraft.
Other Loans Payable
During the third quarter of fiscal 2005, the Company received $13,600 from an
individual as a short-term loan. The loan was provided without interest is due
on demand.
Litigation Matters
A claim for monies owed in the amount of $126,501 for telecommunications usage
services, $44,524 for termination charges, plus interest, costs and attorneys
fees was filed against SkyWay Aircraft by XO Communications Inc. in the United
States District Court for the Eastern District of Virginia in 2004. The lawsuit
relates to a communications agreement with XO to provide the Company
telecommunications services including critical rights to specific locations for
use in its network build out. Due to XO's inability to provide the building
rights for the specified locations and other breaches, the Company terminated
its agreement. XO subsequently filed suit against SkyWay Aircraft. Management
believes the suit is without merit and intends to defend the action. The lawsuit
is in the discovery stage.
On December 14, 2004, a lawsuit was filed against Skyway, James Kent, CEO and
CFO, and Brent Kovar, President, in U.S. Federal District Court, Eastern
District of Arkansas, by Nazar Talib, individually and on behalf of certain
Company shareholders. Mr. Talib is a stockbroker that was involved in the
solicitation of certain foreign investors of the Company. The complaint alleges
that the Company (i) engaged in the sale of unregistered securities; (ii) made
certain misrepresentations regarding the investment in the Company's securities;
(iii) breached the provisions of the Arkansas Securities Act; and (iv) breached
its contractual obligations to the plaintiffs. In addition, the complaint
alleges that Messrs. Kovar and Kent breached their fiduciary duties to the
Company. The plaintiffs have alleged that they are entitled to rescission of
their investment as an equitable remedy and have further sought damages from the
Company and Messrs. Kovar and Kent. The Company vigorously denies the
allegations in the complaint and believes that the allegations have no merit.
The Company intends to undertake a vigorous defense against the lawsuit.
Escrow and Lease Agreements
On December 16, 2004, the Company agreed to a second lease addendum for its
building. Included in the addendum is the Company's acknowledgement it had
breached the lease for failing to pay certain rent amounts due, totaling
$223,712. In connection with this agreement, the Company issued 100,000 shares
of restricted common stock to ECI Telecom, Inc. ("ECI"). These shares do not
15
represent a payment of rent nor a cure or waiver of any lease defaults. The
Company also agreed to pay ECI $223,712 by December 31, 2004. If the amount is
not paid, it is stated that the lease will terminate, the Company shall quit the
property by January 31, 2005, and waive all claims against ECI for the return of
the security deposit, prepaid rents, option fees and/or escrows. The amount of
prepaid items included in the accompanying balance sheet total $207,500. In
addition, if the lease is terminated, the landlord shall retain its statutory
landlord lien against any and all furniture, fixtures, machinery, equipment,
inventory and supplies located within the property, the possession of which
shall be relinquished to the landlord along with possession of the property. As
of February 15, 2005, the amount had not been paid, and the Company is still
occupying the building. If the Company is evicted and loses its deposits and
prepaid amounts, and the landlord retains all furniture, fixtures, machinery,
equipment, inventory and supplies located within the property, the Company
estimates it will sustain a loss of approximately $1,484,500.
In connection with the $223,712 in rent amounts due, an affiliated entity of the
Company SkyWay Global, LLC ("Global"), provided to ECI 2,000,000 shares of the
Company's common stock from its holdings. The shares were provided as collateral
on the amounts due, whereby if ECI sells the stock, the Company agrees to make
up any price difference between the fair market value at the date of the sale of
the stock and the past due rent amounts. Thus, the $223,712 owed to ECI
continues to be included as part of accounts payable in the accompanying
consolidated balance sheet as of January 31, 2005.
The Company notified the lessor of the building of its intent to purchase the
building and deposited $40,000 under the terms of the revised lease agreement,
dated August 9, 2004. The revised terms increased the price of the building to
$5.1 million, and extended the option to purchase until February 28, 2005. The
Company continues to actively pursue financing to acquire the building, and is
in the process of establishing a closing date.
Airplane Commitment
In May 2004, the Company deposited $100,000 for the purchase of a 747 aircraft.
The Company no longer intends to purchase the aircraft, and is currently
negotiating a refund of the deposit.
Manufacturing Agreement
In January 2005, the Company entered into an agreement with IBISES
International, Inc. ("IBISES") whereby the Company will provide manufacturing
services for in-cabin entertainment systems on certain Lion Air MD-80 aircraft.
The Company agreed to provide manufacturing services for five (5) ship sets,
beginning March 1, 2005, and will be paid $1,000,000 as compensation.
Compensation for any future orders has not yet been determined. The term of the
agreement is five (5) years with automatic one year renewals, and is cancelable
at any time upon mutual written agreement, or upon various other conditions
being met.
Also in January 2005, an affiliated entity of the Company, Global, entered into
a licensing agreement with IBISES whereby Global will pay IBISES $2,000,000
which will be paid through the issuance of shares of the Company that Global
owns.
NOTE 6 - OTHER RELATED PARTY TRANSACTIONS
Advances from Related Party
During the first nine months of fiscal 2005, the Company borrowed funds
amounting to $1,637,521 from its President to meet its short-term cash needs.
These amounts were advanced without interest, and are due on demand. Interest at
an annual rate of 12% is being accreted to additional paid in capital as
contractually no interest will be paid. As of January 31, 2005 the Company owed
its President $1,488,796.
During the first nine months of fiscal 2005, the Company borrowed funds from
other Officers aggregating $215,666. These amounts were advanced without
interest, and are due on demand. As of January 31, 2005 the Company owed these
Officers $208,539.
16
Note Receivable
In May 2004, the Company issued a note in the amount of $325,000 to Bruce Baker,
a related party. The note bears 6% annual interest and was due on December 31,
2004. On January 3, 2005, the terms were revised to extend the due date to June
30, 2005.
Notes Payable/Consulting Fees
During August 2004, the Company received a $900,000 loan from a related party.
The note is due August 1, 2006 and bears interest at an annual rate of 12%. In
February, the Company issued 8,500,000 shares of common stock, under a
previously registered Form S-8 filing, to this person to pay $510,000 of
consulting fees, which will be earned and expensed, over the next twelve months.
NOTE 7 - OTHER SUBSEQUENT EVENTS
On February 15, 2005, the Company began a best-efforts (minimum/maximum) capital
formation activity through the private placement of units (minimum placement of
5 units, and a maximum placement of up to 100 units), with each unit consisting
of (i) one unsecured $10,000 Senior Convertible Promissory Note (the "Note" or
"Notes"), and (ii) one warrant to purchase common stock of the Company according
to a formula for exercise. As such, the minimum offering of the units, if
successful, would yield net proceeds to the Company of $43,500 (net of placement
fees and expenses of $6,500), and a maximum of $870,000 (net of placement fees
and expenses of $130,000).
Under the terms of the private placement subscription agreement, the minimum
unit participation is one unit, which may be adjusted at the discretion of the
Company. The Notes issued for the units state a maturity date of January 31,
2007, and carry an interest rate of 10 percent per annum, payable on the last
business day of each month. The Notes are convertible into common stock of the
Company under a value formula that may not provide more than 200,000 shares of
common stock per unit converted. The number of warrants exercisable by each
purchaser of units is determined under a value formula based on the number of
units held by each purchaser, and the market value of the Company's common
stock.
The offering under the private placement activity will terminate on May 1, 2005,
unless extended by the Company to a date not later than June 1, 2005.
17
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS
FORWARD-LOOKING STATEMENTS
This quarterly report on Form 10-QSB, press releases and certain information
provided periodically in writing or orally by our officers or our agents contain
statements which constitute forward-looking statements within the meaning of
Section 27A of the Securities Act, as amended; Section 21E of the Securities
Exchange Act of 1934; and the Private Securities Litigation Reform Act of 1995.
The words "may", "would", "could", "will", "expect", "estimate", "anticipate",
"believe", "intend", "plan", "goal", and similar expressions and variations
thereof are intended to specifically identify forward-looking statements. These
statements appear in a number of places in this Form 10-QSB and include all
statements that are not statements of historical fact regarding the intent,
belief or current expectations of us, our directors or our officers, with
respect to, among other things: (i) our liquidity and capital resources; (ii)
our financing opportunities and plans; (iii) trends affecting our future
financial condition or results of operations; (iv) our growth strategy and
operating strategy; and (v) the declaration and payment of dividends.
Investors and prospective investors are cautioned that any such forward-looking
statements are not guarantees of future performance and involve risks and
uncertainties, and that actual results may differ materially from those
projected in the forward-looking statements as a result of various factors. The
factors that might cause such differences include, among others, the following:
(i) We have incurred significant losses since our inception, have negative
working capital, have experienced and continue to experience negative cash flows
from operations, and are not able to meet our current obligations. (see Note 2
to the financial statements); (ii) any material inability of us to successfully
internally develop our products; (iii) any adverse effect or limitations caused
by Governmental regulations; (iv) any adverse effect on our cash flow or on our
ability to obtain acceptable financing in connection with our growth plans; (v)
any increased competition in our business; (vi) any inability of us to
successfully conduct our business in new markets; and (vii) other risks
including those identified in our filings with the Securities and Exchange
Commission. We undertake no obligation to publicly update or revise the forward
looking statements made in this Form 10-QSB to reflect events or circumstances
after the date of this Form 10-QSB or to reflect the occurrence of unanticipated
events.
Overview
The following discussion should be read in conjunction with the consolidated
financial statements and notes thereto, as of and for the period ended January
31, 2005 included with this Form 10-QSB.
Operating results for the three and nine months ended January 31, 2005 are not
necessarily indicative of the results that may be expected for the year ending
April 30, 2005. The accompanying consolidated financial statements and the notes
thereto should be read in conjunction with our audited consolidated financial
statements as of and for the year ended April 30, 2004 contained in the
Company's Form 10-KSB.
Information prior to June 21, 2003 (the date of the reverse acquisition) related
to our predecessor entity, i-Teleco.com, has been omitted. On April 17, 2003,
the Company filed a Certificate of Amendment changing the name of the Company to
SkyWay Communications Holding Corp. ("Skyway Holding"). On June 20, 2003, SWYC
Acquisition Corporation, a Florida corporation and a wholly owned subsidiary,
merged, pursuant to an Amended and Restated Agreement and Plan of Merger, dated
as of June 19, 2003, with and into Sky Way Aircraft, Inc., a Nevada corporation.
From a legal perspective, the Company was the surviving entity and thus
continues its public reporting obligations. However, from an accounting
perspective, Sky Way Aircraft is treated as though it acquired the Company.
Therefore, all financial information presented in this 10-QSB includes Sky Way
18
Aircraft's standalone results for the period from April 24, 2002 (date of
incorporation) through June 21, 2003 and the consolidated companies' results
from June 2003 through January 31, 2005.
The Company plans to provide security and other services to the airline industry
through applications of its high-speed, broadband wireless communications
technology. It has not yet generated any significant revenues from planned
principal operations, and is considered a development stage company as defined
in Statement of Financial Accounting Standards No.7.
Critical Accounting Policies
Our critical accounting policies, including the assumptions and judgments
underlying them, are disclosed in the Notes to the Financial Statements. We have
consistently applied these policies in all material respects. At this stage of
our development, these policies primarily address matters of expense
recognition, in particular the recognition of impairment losses on certain
equipment and intellectual property and the estimate of compensation expense
related to the issuance of preferred stock, common stock and warrants to
purchase common stock. Although we anticipate that revenue recognition issues
will become critical in future years, the small amount of revenue that we have
earned at this stage minimizes the impact of any judgments regarding revenue
recognition. Management does not believe that our operations to date have
involved uncertainty of accounting treatment, subjective judgment, or estimates,
to any significant degree.
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED JANUARY 31, 2005 VS. THE THREE
MONTHS ENDED JANUARY 31, 2004
During the three months ended January 31, 2005 and January 31, 2004 we generated
revenues of approximately $44,600 ($5,000 was due to sales and testing of
equipment and $24,800 was due to wireless and DSL services) and $15,400,
respectively. During February 2005, we continued to generate revenues which were
approximately $23,200.
During the three months ended January 31, 2005 we incurred selling, general and
administrative expenses approximating $3,678,400. These expenses consisted of
advertising including marketing and sales, trade shows, consulting fees,
payroll, rent, travel, accounting and legal fees that allowed us to continue
developing our infrastructure and industry contacts necessary for our services.
During the three months ended January 31, 2004, selling, general and
administrative expenses approximated $5,300,300. The decrease of approximately
$1,621,900 or 31% was the result of reduced staffing levels through attrition as
the lack of adequate cash resources prevented us from meeting our payroll
obligations.
During the three months ended January 31, 2005 and 2004, we determined that
approximately $137,500 and $0, respectively, of our property and equipment in
progress was impaired.
Our research and development costs related to the development of our data
center, ground networks and airborne DC9 testing platform approximated $66,000
during the three months ended January 31, 2005. During the three months ended
January 31, 2004 we incurred approximately $229,400 in research and development
costs.
As a result of the above, our net loss for the three months ended January 31,
2005 was approximately $3,970,500. This represented a decrease of approximately
$2,287,800 or 37% from our loss for the three months ended January 31, 2004 of
approximately $6,258,300.
19
RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED JANUARY 31, 2005 VS. THE NINE
MONTHS ENDED JANUARY 31, 2004
During the nine months ended January 31, 2005 and January 31, 2004 we generated
revenues of approximately $421,300 ($314,700 was due to sales of equipment and
$89,900 was due to wireless and DSL services) and $15,400, respectively.
During the nine months ended January 31, 2005 we incurred selling, general and
administrative expenses approximating $13,765,500. These expenses consisted of
advertising including marketing and sales, trade shows, consulting fees,
payroll, rent, travel, accounting and legal fees that allowed us to continue
developing our infrastructure and industry contacts necessary for our services.
During the nine months ended January 31, 2004, selling, general and
administrative expenses approximated $10,729,700. The increase of approximately
$3,035,800 or 28% was the result of significant funding that we raised through
the issuance of common stock that allowed us to dedicate resources to our
development plans.
During the nine months ended January 31, 2005 and 2004, we determined that
approximately $570,500 and $0, respectively, of our property and equipment in
progress was impaired.
Our research and development costs related to the development of our data
center, ground networks and airborne DC9 testing platform approximated
$1,951,000 during the nine months ended January 31, 2005. During the nine months
ended January 31, 2004 we incurred approximately $758,500 in research and
development costs. The increase of approximately $1,192,500 or 157% was the
result of significant funding that we raised through the issuance of common
stock that allowed us to dedicate resources to our development plans.
As a result of the above our net loss for the nine months ended January 31, 2005
was approximately $16,364,500, an increase of approximately $3,037,900 or 23%
from our loss for the nine months ended January 31, 2004 of approximately
$13,326,600.
LIQUIDITY AND CAPITAL RESOURCES
From our inception on April 24, 2002 through January 31, 2005, we incurred
operating losses of approximately $39,464,500. This loss principally consisted
of the following non-cash operating expenses: approximately $20,641,000 was from
stock based compensation expense and other non-cash expenses, $1,339,000 was
from purchased research and development and $1,830,000 was due to the impairment
of technology rights, and property and equipment and property and equipment in
progress. At January 31, 2005 we had a net working capital deficit of
approximately $7,997,100. We are currently not able to meet our payroll needs or
pay our current liabilities in a timely manner. Net cash used in operating
activities for the period from April 24, 2002 through January 31, 2005 was
approximately $10,413,000. Net cash used from investing activities from our
inception on April 24, 2002 through January 31, 2005 was approximately
$6,067,400 and principally consisted of the following: approximately $5,172,000
was for the purchase of property and equipment, and property and equipment in
progress, and $1,000,000 was for the purchase of technology rights. We funded
these needs primarily through the sale of common stock, notes and advances from
related parties (approximately $1,564,000 of which was converted to common
stock), and proceeds from the exercise of stock options, which have provided us
approximately $16,601,600.
As a result of the above, as of January 31, 2005, we had a cash position of
approximately $121,200.
20
After paying other operating items, funding additional equipment purchases, and
receiving funding as discussed above from February 1, 2005 through March 1,
2005, we currently have $62,663 cash on hand.
During August 2004 we entered into a stock subscription agreement with duPont
Investment Fund #57289 ("duPont"), an affiliate, to purchase 31,818,180 shares
of common stock at $.22 per share, or $7,000,000, over the period from September
6, 2004 through October 18, 2004. At January 31, 2005, we have not received any
funds under this agreement. During November 2004, the terms of this agreement
were revised and are currently being finalized. Under the revised terms the
Company has issued and placed in escrow 28,000,000 shares of restricted stock to
be exchanged for a DC9 aircraft, estimated to be valued at $5,880,000 based on
the fair market value of the shares on the date of issue.
We do not have the cash available at this time to satisfy our cash requirements
over the next month based upon our current rate of expenses. We will need to
secure a minimum of $25,000,000 to satisfy projected requirements for the next
12 months of operations, which includes a minimum of $5,000,000 to finance our
planned expansion (6-9 months) efforts. Funds will be used for product
development, capital procurement and personnel. In order to become profitable,
we may still need to secure additional debt or equity funding. We have no source
of funding identified. Our failure to secure additional funds could impair or
delay our ability to implement our business plan.
We entered into a Purchase Agreement dated as of February 20, 2004, by and
between us, Sky Way Global, LLC, a Nevada Limited Liability Company, an
affiliate of which Mr. Brent Kovar and Ms. Joy Kovar are principals, under which
we acquired all right, title and interest to United States patent number
6587887, granted July 1, 2003, and entitled "Digital data transmission utilizing
vector coordinates within a hyperbola model." We paid to Global the sum of
$1,000,000 cash, subject to reclassification. The Parties agreed to work in good
faith to secure as soon as practical a written valuation of the U.S. Patent from
a mutually agreeable, third party, independent, recognized expert with expertise
in areas relating to the U.S. Patent and its value. The valuation need only
state the value to be in excess of $1,000,000 or not in excess of $1,000,000;
provided, however if not in excess of $1,000,000, the expert shall state a
specific dollar valuation. The expert must state all reasons for the valuation
in detail. If the valuation is less than $1,000,000, the difference shall be
reclassified on our books and reported to the IRS and SEC as compensation to
Global and thus Global's affiliates. At the current time, the valuation has not
been completed.
In January 2004, we signed a loan agreement for $1,500,000 for the procurement
of a DC-9 aircraft to use to for research, development, and marketing. This was
funded with a $1,500,000 six (6) month promissory note from the United Bank and
Trust Company, with interest based upon the Bank Prime Rate plus 0.5%. The note
has been extended and is now due June 16, 2005. The loan is guaranteed by the
President of the Company, two other shareholders of the Company, and a company
controlled by one of the shareholders. In connection with the guarantee of the
loan by one of our shareholders, a company related to this guarantor-shareholder
is listed as the co-owner of the asset. This co-ownership is only effective for
the period of the guarantee. We have voting control of all matters related to
the aircraft. Through January 31, 2005, we have incurred approximately
$1,909,000 for the installation and testing of equipment on the plane, and the
upgrade of the cabin facilities for demonstration and marketing purposes. We
estimate we will spend an additional $750,000 to finalize our aircraft testing
and to complete the desired equipment and systems upgrades and enhancements.
We may experience problems, delays, expenses, and difficulties sometimes
encountered by an enterprise in our stage of development, many of which are
beyond our control. These include, but are not limited to, unanticipated
problems relating to the development of the system, production and marketing
problems, additional costs, funding and expenses that may exceed current
estimates, and competition.
21
During the period covered by these financial statements the Company issued
shares of common stock without registration under the Securities Act of 1933.
Although the Company believes that the sales did not involve a public offering
of its securities and that the Company did comply with the "safe harbor"
exemptions from registration, it could be liable for rescission of the sales if
such exemptions were found not to apply and this could have a material negative
impact on the Company's financial position and results of operations. In
addition, the Company issued shares of common stock pursuant to Form S-8
registration statements. The Company believes that it complied with the
requirements of Form S-8 in regard to these issuances, however if it were
determined that there were violations of the provisions of Form S-8 the Company
could be subject to enforcement proceedings.
During the period covered by these financial statements the Company issued
several press releases and filed Form 8-K's related to certain financing
transactions and the projected valuation of the Company. The Company believes
that certain statements made in those press releases need to be clarified and
updated and need to include additional and current information for fair
disclosure. In addition, the Company did not timely file with the corresponding
8-K filings, or amend its 8-K filings to include when immediately available,
certain material agreements or documentation underlying the disclosure made in
those press releases or 8-K filings. See Item 3 for a discussion of Controls and
Procedures.
Prior to this Quarterly Report on Form 10QSB, the Company amended its 8-K
filings to include all material documentation it has, and where necessary, to
amend certain statements included in the original 8-K filings. Although the
Company believes it has undertaken corrective actions with respect to the filing
of appropriate 8-K reports and exhibits, the Commission could review these
filings and undertake enforcement proceedings against the Company if it
concluded that such action was warranted. See Item 3 for a discussion of
Controls and Procedures.
During the periods covered by these financial statements certain officers and
directors sold shares of common stock, and did not file all of the required
reports with the Securities and Exchange Commission. See Item 3 for a discussion
of Controls and Procedures.
Future Plans
We plan to accomplish the following in the future. We need additional funds to
finance our business development in the next 12 months, as set forth below, but
we are not committed to make any of these expenditures. As previously indicated,
we do not have sufficient cash resources to complete this work. We hope to be
able to raise additional cash resources from an offering of our stock or other
investment options available to us in the future. However, this stock offering
may not occur, or if it occurs, may not raise the desired funding. If we fail to
secure adequate funds to accomplish the objectives outlined below, we will be
able to conduct only limited operations. However, we believe that if we secure
the required funding on a timely basis, we can accomplish these objectives
within the projected time frames.
- -------------------------------------- -------------------------------- ------------------------------ ------------------
EVENT OR MILESTONE TIME FRAME FOR IMPLEMENTATION METHOD OF ACHIEVEMENT ESTIMATED COST
[Low/High]
- -------------------------------------- -------------------------------- ------------------------------ ------------------
Complete leasing activating and
Engineering upgrades of tower April 1, 2005 - Oct 31, 2005 Contact owners and complete $1,200,000-$1,500,000
network negotiations; conduct site
survey, equipment install
- -------------------------------------- -------------------------------- ------------------------------ ------------------
Identify, test and upgrade equipment April 1, 2005 - Oct 31, 2005 Identify airlines, execute $700,000-$950,000
in aircraft agreement, install, service,
FAA approval
- -------------------------------------- -------------------------------- ------------------------------ ------------------
Build out and equip operations April 1, 2005 - Oct 31, 2005 Construct and test all $1,000,000-$1,500,000
center operations
- -------------------------------------- -------------------------------- ------------------------------ ------------------
Continue research and testing of April 1, 2005 - Oct 31, 2005 Continue research and testing $500,000-$750,000
aircraft network
22
- -------------------------------------- -------------------------------- ------------------------------ ------------------
Hire additional employees to operate April 1, 2005 - Aug 31, 2005 Interview and hire $900,000-$1,200,000
network
- -------------------------------------- -------------------------------- ------------------------------ ------------------
Identify, test and upgrade equipment April 1, 2004 - Aug 31, 2005 Identify equipment, execute $700,000-$850,000
for repair facility agreements, secure contracts
for services
- -------------------------------------- -------------------------------- ------------------------------ ------------------
Total Estimated Cost [Low / High] $5,000,000 - $6,750,000
We have no sources of financing identified except those identified above and in
the notes to our consolidated financial statements. Even if we identify sources
for such financing:
o Additional financing may not be available on commercially reasonable
terms or available at all;
o Additional financing may result in dilution to existing and future
equity holders; and
o If we issue debt instruments, we will be subject to increased debt
obligations that will impose a greater financial strain upon our
operations.
If we do not secure the required funding, the major expansion planned milestones
may not be achieved within the anticipated time period, if at all. We believe
that future plans will be achieved if we receive the necessary funding.
Furthermore, in the event that the level of funding is less that we have
anticipated, this may also result in a delay in our ability to generate revenues
or may result in a reduced amount of revenues generated.
In May 2004, we entered into a sales and marketing agreement with The Titan
Corporation. We have been notified that on December 31, 2004, Titan cancelled
the agreement under its current terms. As of December 31, 2004, neither party
has provided any services under the contract.
In January 2005, the Company entered into an agreement with IBISES
International, Inc. ("IBISES") whereby the Company will provide manufacturing
services for in-cabin entertainment systems on certain Lion Air MD-80 aircraft.
The Company agreed to provide manufacturing services for five (5) ship sets,
beginning March 1, 2005, and will be paid $1,000,000 as compensation.
Compensation for any future orders has not yet been determined. The term of the
agreement is five (5) years with automatic one year renewals, and is cancelable
at any time upon mutual written agreement, or upon various other conditions
being met.
Also, in January 2005 an affiliated entity of the Company, Global, entered into
a licensing agreement with IBISES whereby Global will pay IBISES $2,000,000
which will be paid through the issuance of shares of the Company that Global
owns.
Item 3. Controls and Procedures
We maintain and are currently undertaking actions to improve disclosure controls
and procedures designed to ensure that information required to be disclosed in
reports filed under the Securities Exchange Act of 1934, as amended, is
recorded, processed, summarized and reported within the specified time periods.
As of the end of the period covered by this report, the Corporation's Chief
Executive Officer and Chief Financial Officer ("CEO/CFO" evaluated the
effectiveness of the Corporation's disclosure controls and procedures. Based on
the evaluation, our CEO/CFO has discovered a potential material weakness in our
disclosure controls as they relate to press releases and 8K filings (see below).
Our CEO/CFO's evaluation also continued to find weaknesses in the areas of
securities sales and expense and contract review and authorization. Our CEO/CFO
believes that the weaknesses, other than in the area of press releases and 8K
disclosure, are not yet significant due to controls put in place during the
previous quarter and compensating controls, such as the detailed review of these
areas during the preparation of our quarterly report.
These weaknesses are currently being addressed in the actions currently being
taken to improve our disclosure controls and procedures and our CEO/CFO
concluded that our disclosure controls and procedures, combined with
compensating controls are effective as of the end of the period covered by this
report in that information required to be disclosed in this 10QSB has been
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recorded, processed, summarized and reported within the current fiscal quarter.
Although there was a change in our internal controls over press releases and 8-K
disclosure during the quarter, there were no changes in our internal control
over financial reporting that occurred during our most recent fiscal quarter
that have materially affected, or are reasonably likely to materially affect,
our internal control over financial reporting.
The following is a summary of the weaknesses and deficiencies that have been
identified:
o Material weakness related to inadequate or ineffective policies for
disclosing and documenting transactions. We identified a material weakness
in our controls relating to certain non-accounting disclosure and
documentation. We discovered instances where certain corporate documents
were not filed on Form 8-K or otherwise properly processed. There were
instances where press releases and 8-K disclosures were lacking in full
disclosure and certain documentation following the reported financing
arrangements was not completed and/or filed in connection with the
respective filings. Furthermore, although Management believes that it made
certain forward looking statements in good faith at the time of the
disclosure, those statements may not have been strong enough to effectively
communicate the risks if such financing arrangements were not completed.
Related to this weakness, there was an instance where selective disclosure was
made in connection with a valuation report paid for by one of our investors. We
are filing those portions of the valuation report that were selectively
disclosed in an amended 8-K/A filed on December 17, 2004 amending the original
8-K filed on December 1, 2004.
Other amended 8-K filings as a result of this weakness:
o Form 8-K originally filed November 15, 2004 - This reported a press release
titled " The duPont Investment Fund 57289, Inc. Satifies $7 Million Funding
Agreement with SkyWay Communications Holding Corp." We amended our Form 8-K
filing to state that, although the shares and asset involved in this
agreement are in escrow, the final agreements have not been completed and
signed, and that upon completion we will file the agreements in an amended
8-K. This amended Form 8-K was filed on December 17, 2004.
o Form 8-K originally filed November 17, 2004 - This reported a press release
titled "Lantax Prepared To Fund SkyWay Communications Holding Corp. With
$24 Million." We amended the Form 8-K to state that, although we believed
those statements to be true at the time: 1) There is no assurance that we
will agree to or meet any of the milestones that will be required to recive
the funding and 2) There are no obligations for Lantx to fund the loan
amounts. Although we are close to finalizing the milestones required to
receive funding, funding cannot be expected until sometime in 2005 and
there are no assurance the the conditions or the funding itself will take
place. This amended Form 8-K was filed on December 17, 2004.
o Form 8-K originally filed August 23, 2004 -This reported a press release
titled " Skyway Communication Holding Corp. Receives Funding of $900,000."
This press release stated that an unrelated individual made the loan to the
Company. Subsequent to this release we determined and were advised that the
person was related to the Company. We filed an 8-K/A on December 17, 2004
to properly report that the person identified is a related person.
o During the quarter there was an instance where we may have failed to
disclose information related to a transaction between Skyway Global, LLC
and one of our new vendors with whom we recently entered into a contract
with to provide services and hardware. At the time, we did not believe
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Skyway Global was an affiliate because its manager, who is also one of our
directors, had resigned. We have learned that this action did not get
recorded with the state of Nevada, and upon further review we now believe
that the ownership of common and preferred shares by Skyway Global makes
them a related party at the minimum, and therefore we have undertaken to
consult with counsel regarding this matter. Should we determine additional
disclosure is required, we will do so immediately.
o Deficiencies related to the documentation, review and approval of stock
based compensation agreements. At our most recent year end, we previously
identified deficiencies in controls related to documentation, review and
approval of stock based expenses for certain aspects of our operations,
such deficiencies primarily resulted in agreements that may have provided
significant compensation in excess of the services provided. In addition,
these deficiencies resulted in the inability of accounting personnel to
properly classify the expenses during monthly closing.
o Defienciencies related to non-accounting control matters involving sales of
securities by directors and affiliates of the Company. Subsequent to the
most recent quarter end but before the filing of this 10QSB, certain
directors, who are also officers, sold a portion of their holdings in the
Company and failed to timely file the appropriate reports under Sections
16(a) and 23(a) of the Securities Exchange Act of 1934. Failure to receive
information of these sales may affect the Company's ability to make the
required disclosures concerning delinquent filers. The Company has
implemented a formal trading policy and discussed additional procedures to
assist in assuring that known individuals required to file reports do so in
the appropriate time period.
o Potential deficiencies related to the internal control environment. We have
determined that for the quarterly periods ended July 31, 2004 and October
31, 2004, that a subsequent review of these internal controls may find that
we incurred deficiencies due to inadequate staffing in our accounting
department, and the lack of a full-time chief financial officer. We plan to
hire a full time chief financial officer and add accounting personnel when
funds become available. Inadequate staffing remains an ongoing issue that
we will need to address.
As a result of the findings above, we initiated the following actions which have
not yet been fully implemented:
o We have established a Code of Ethics.
o We have established a Trading Policy for the entire company.
o We have established a Disclosure Committee and a Corporate Disclosure
Control Policy .
o We have engaged outside resources to supplement our financial and
accounting personnel to support the preparation of financial statements and
reports to be filed with the SEC.
o We are establishing procedures to improve our review and processing of
non-accounting documentation and contracts.
o We intend to engage additional outside consultants to advise our management
on additional enhancements to our internal controls.
o Our management is committed to a sound internal control environment. We
have committed considerable resources to the aforementioned reviews and
remedies. We believe that we are making progress addressing the issues
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identified above, and we believe that we are in the process of further
improving our infrastructure, personnel, processes and controls to help
ensure that we are able to produce accurate disclosures and financial
statements on a timely basis.
PART II. - OTHER INFORMATION
Item 1. Legal Proceedings
A claim for monies owed in the amount of $126,501.15 for telecommunications
usage services, $44,523.58 for termination charges, plus interest, costs and
attorneys fees was filed against our subsidiary by XO Communications Inc. ("XO")
in the United States District Court for the Eastern District of Virginia in
2004. The lawsuit relates to a communications agreement with XO to provide us
telecommunications services including critical rights to specific locations for
use in our network build out. Due to XO's inability to provide the building
rights for the specified locations and other breaches, we terminated our
agreement. XO subsequently filed suit against our subsidiary. Management
believes the suit is without merit and intends to defend the action. The lawsuit
is in the discovery stage.
On December 14, 2004 a lawsuit was filed against Skyway, James Kent, CEO and
CFO, and Brent Kovar, President, in U.S. Federal District Court, Eastern
District of Arkansas, by Nazar Talib, individually and on behalf of certain
Company shareholders. Mr. Talib is a stockbroker that was involved in the
solicitation of certain foreign investors of the Company. The complaint alleges
that the Company (i) engaged in the sale of unregistered securities; (ii) made
certain misrepresentations regarding the investment in the Company's securities;
(iii) breached the provisions of the Arkansas Securities Act; and (iv) breached
its contractual obligations to the plaintiffs. In addition, the complaint
alleges that Messrs. Kovar and Kent breached their fiduciary duties to the
Company. The plaintiffs have alleged that they are entitled to rescission of
their investment as an equitable remedy and have further sought damages from the
Company and Messrs. Kovar and Kent. The Company vigorously denies the
allegations in the complaint and believes that the allegations have no merit.
The Company intends to undertake a vigorous defense against the lawsuit.
Item 2. Changes in Securities
On January 21, 2005, the Company amended the 2004 Stock Award Plan (the "Plan")
and filed an S-8 registration statement for the issuance of common stock to
various individuals for services. The plan allows for an additional 35,000,000
million shares to be issued. Through January 2005, under this registration
statement, the Company issued 3,711,944 shares of common stock with a fair
market value of $377,903 for services. As of March 1, 2005, the Company had
issued a total of 24,662,127 shares, and has 10,337,873 shares remaining to be
issued. The Plan terminates on April 30, 2005.
On September 29, 2004, the Company filed an S-8 registration statement for the
issuance of common stock to various individuals for services. The Plan allows
for 15,000,000 million shares to be issued, and through January 2005, the
Company issued 14,904,958 shares of common stock with a fair market value of
$2,779,617 for services of $2,474,582 and accrued expenses of $305,035. Of this
amount, $84,000 remains in prepaid expenses at January 31, 2005 and is
classified as deferred stock compensation on the accompanying consolidated
balance sheet. As of February 15, 2005, the Company had issued a total of 14,
904,958 shares and has 95,042 shares remaining.
26
In January 2005, the Company issued 100,000 shares of restricted common stock to
ECI Telecom, Inc. in connection with lease defaults. The shares do not represent
a payment of rent nor a cure or waiver of any lease defaults.
In December 2004, the Company issued 23,000,000 shares of common stock due to
the conversion of 230,000 shares of Series A Preferred stock.
In December 2004, the Company issued to an individual 352,941 shares of
restricted common stock. These shares were issued pursuant to a settlement
agreement relating to a subscription agreement associated with an affiliate in
November 2003. The fair market value of the shares issued on the date of issue
was approximately $.20 per share, or $70,600, which was recorded as an amount
due from the affiliate.
In November 2004, the Company issued and placed in escrow 28,000,000 shares of
restricted common stock in connection with the duPont subscription agreement.
In November 2004, we sold 125,000 shares of restricted stock for cash of $25,000
or $.20 per share, to a related party.
In November 2004, the Company issued 8,850,000 shares of common stock due to the
conversion of 885,000 shares of Series C Preferred stock.
We relied upon Section 4(2) of the Securities Act of 1933, as amended for the
above issuances. We believed that Section 4(2) was available because:
o None of these issuances involved underwriters, underwriting discounts or
commissions;
o We placed restrictive legends on all certificates issued;
o No sales were made by general solicitation or advertising;
o Sales were made only to accredited investors or investors who were
sophisticated enough to evaluate the risks of the investment.
In connection with the above transactions, although some of the investors may
have also been accredited, we provided the following to all investors:
o Access to all our books and records.
o Access to all material contracts and documents relating to our operations.
o The opportunity to obtain any additional information, to the extent we
possessed such information, necessary to verify the accuracy of the
information to which the investors were given access.
Item 3. Defaults Upon Senior Securities
NONE
Item 4. Submission of Matters to a Vote of Securities Holders
NONE
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Item 5. Other Information
NONE
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
The following exhibits are filed as part of this Form 10-QSB.
31.1 Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer,
James Kent
32.1 Section 1350 Certification, James Kent
(b) Reports on Form 8-K.
Form 8K filed November 2, 2004 reporting on Item 9.01
Form 8K filed November 10, 2004 reporting on Item 9.01
Form 8K filed November 15, 2004 reporting on Item 9.01
Form 8K filed November 17, 2004 reporting on Item 9.01
Form 8K filed December 1, 2004 reporting on Item 9.01
Form 8K filed December 6, 2004 reporting on Items 5.02 and 9.01
Form 8K filed December 9, 2004 reporting on Item 9.01
Form 8K/A filed December 20, 2004 reporting on Item 8.01
Form 8K/A filed December 20, 2004 reporting on Items 8.01 and 9.01
Form 8K/A filed December 20, 2004 reporting on Items 8.01 and 9.01
Form 8K/A filed December 20, 2004 reporting on Items 8.01 and 9.01
Form 8K filed December 23, 2004 reporting on Item 8.01
Form 8K filed January 13, 2005 reporting on Item 9.01
Form 8K filed January 27, 2005 reporting on Item 9.01
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
SKYWAY COMMUNICATIONS HOLDING CORP.
Date: March 22, 2005 /s/ James Kent
JAMES KENT
Chief Executive and
Chief Financial Officer
(Principle Financial and Accounting
Officer)
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