SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-QSB
[X] Quarterly Report under Section 13 or 15(d) of the Securities Exchange
Act of 1934
For quarterly period ended March 31, 2002.
[ ] Transition report under section 13 or 15(d) of the securities
exchange act of 1934
For the transition period from ________________ to _______________
Commission file number: 000-33263
Worldwide Medical Corporation
-----------------------------
(Name of Small Business Issuer in Its Charter)
Delaware 33-0601331
-------- ----------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
13 Spectrum Pointe Drive, Lake Forest, California 92630
- ------------------------------------------------- -----
(Address of principal executive offices) (Zip Code)
(949) 598-8378
--------------
(Issuer'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 [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date 15,108,704 as of May 14, 2002.
TRANSITIONAL SMALL BUSINESS DISCLOSURE FORMAT
Yes [ ] No [ X ]
TABLE OF CONTENTS
PART I
Item 1 Financial Statements
Item 2 Management's Discussion and Analysis or Plan of Operations
PART II
Item 1 Legal Proceedings
Item 2 Changes in Securities
Item 3 Defaults Upon Senior Securities
Item 4 Submission of Matters to a Vote of Security Holders
Item 5 Other Information
Item 6 Exhibits and Reports on Form 8-K
PART I - Financial Information
Item 1. Unaudited Consolidated Financial Statements
Worldwide Medical Corporation
CONSOLIDATED BALANCE SHEET
(Unaudited)
ASSETS March 31, 2002
Current assets:
Cash ............................................................ $ 112
Accounts receivable - trade, net of allowance of $13,524 ........ 598,180
Inventories ..................................................... 748,030
Prepaid expenses ................................................ 90,671
Other receivables:
Note receivable from former officer ............................. 7,749
Due from Pyxis .................................................. 57,940
Employee advances and other ..................................... 524
-----------
Total current assets ...................................... 1,503,206
Property and equipment, net ......................................... 178,780
Investments in and advances to Spectrum Analytics, Inc. ............. 7,673
Other assets ........................................................ 26,954
-----------
TOTAL ASSETS ............................................................. $ 1,716,613
===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Lines of credit - financial institutions ............................ $ 468,026
Accounts payable - trade ............................................ 1,001,730
Accrued payroll and payroll taxes ................................... 38,150
Accrued commissions - related party ................................. 169,154
Accrued expenses .................................................... 126,354
Accrued interest .................................................... 34,957
Accrued interest, related parties ................................... 1,300
Accrued settlement obligations, current portion ..................... 448,650
Capital lease obligations - financial institutions, current portion . 21,449
Notes payable, related parties, current portion ..................... 498,000
-----------
Total current liabilities ...................................... $ 2,807,770
Capital lease obligations - financial institutions, net of current portion 53,311
Note payable, related party, net of current portion ...................... 319,524
Accrued settlement obligations, noncurrent ............................... 367,500
-----------
TOTAL LIABILITIES ........................................................ 3,548,105
-----------
STOCKHOLDERS' DEFICIT
Common stock ($0.01 par value, 30,000,000 shares authorized, 15,058,704
shares issued and outstanding) ......................................... 150,587
Additional paid-in capital ............................................... 4,289,800
Accumulated deficit ...................................................... (6,190,718)
Common stock receivables - officers ...................................... (72,366)
Common stock receivables - others ........................................ (8,795)
-----------
TOTAL SHAREHOLDERS' DEFICIT .............................................. (1,831,492)
-----------
TOTAL LIABILITIES AND SHAREHOLDERS' DEFICIT .............................. $ 1,716,613
===========
(The accompanying notes are an integral part of the consolidated financial statements)
Worldwide Medical Corporation
CONSOLIDATED STATEMENT OF OPERATIONS
(Unaudited)
Three months ended March 31,
2002 2001
------------ ------------
Net Sales .......................................................... $ 1,121,352 $ 838,693
Cost of sales ...................................................... 391,538 355,993
------------ ------------
Gross Profit ....................................................... 729,814 482,700
------------ ------------
Operating expenses:
Selling ............................................................ 246,674 224,926
General and administrative ......................................... 182,574 109,900
Professional fees .................................................. 147,722 32,583
Bad debt expense ................................................... (1,000) 13,882
Depreciation and amortization ...................................... 19,090 16,767
Settlement expense ................................................. 17,500 3,571
Settlement expense - related party ................................. -- 157,440
------------ ------------
Total operating expense ............................................ 612,560 559,069
------------ ------------
------------ ------------
Income (loss) from operations ..................................... 117,254 (76,369)
------------ ------------
Other expense:
Interest expense ................................................... (19,018) (6,912)
Interest expense, related parties .................................. (19,338) (14,970)
------------ ------------
(39,356) (21,882)
------------ ------------
------------ ------------
Equity in losses of Spectrum Analytics, Inc. ....................... (71,841) (55,488)
------------ ------------
Net income before provision for income taxes and extraordinary item: 6,057 (153,739)
Provision for income taxes ......................................... (620) (327)
------------ ------------
Net income (loss) before extraordinary item ........................ 5,437 (154,066)
Extraordinary gain on settlement of debt, net of tax effect of $0 .. -- 45,161
------------ ------------
NET INCOME (LOSS) .................................................. $ 5,437 $ (108,905)
============ ============
NET INCOME (LOSS) PER SHARE, BASIC AND DILUTED .................... $ 0.00 $ (0.01)
Weighted average shares outstanding ................................ 14,828,101 11,807,701
(The accompanying notes are an integral part of the consolidated financial statements)
Worldwide Medical Corporation
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three months ended March 31,
2002 2001
NET CASH PROVIDED BY OPERATING ACTIVITIES ............ $ 267,677 $ 42,975
NET CASH (USED IN) PROVIDED BY INVESTING ACTIVITIES .. (78,406) (70,177)
NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES .. (190,743) 219,773
--------- ---------
NET CHANGE IN CASH AND CASH EQUIVALENTS .............. (1,472) 192,571
CASH AT BEGINNING OF THE PERIOD ...................... 1,584 15,824
--------- ---------
--------- ---------
CASH AT END OF PERIOD ................................ $ 112 $ 208,395
========= =========
(The accompanying notes are an integral part of the consolidated
financial statements)
Worldwide Medical Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2002
1. BASIS OF PRESENTATION
The consolidated financial statements included herein have been prepared by
Worldwide Medical Corporation (the "Company"), without audit, pursuant to the
rules and regulations of the Securities and Exchange Commission ("SEC"). These
consolidated financial statements should be read in conjunction with the
Company's Amended Annual Report on Form 10-KSB/A for the fiscal year ended
December 31, 2001.
In the opinion of management, the unaudited consolidated financial statements
contain all adjustments (consisting only of normal recurring adjustments)
necessary for a fair presentation of the Company's financial position and
results of operations. The results for the three month period ended March 31,
2002 are not necessarily indicative of the results expected for the full fiscal
year.
2. INVESTMENT
The Company has a 50% interest in Spectrum Analytics, Inc. ("Spectrum"), a
diagnostic testing laboratory, which has been accounted for on the equity method
since its inception in January 2001. Spectrum's only customer to date has been
the Company for which it has provided confirmatory testing for home drug tests.
The Company received credit for approximately $40,000 of the pre-organization
costs it incurred and contributed fixed assets with a book value of
approximately $10,000 for its 50% interest, while Drs. Rojas and Moretti each as
to 25% (the other 50% investors who are employees of Spectrum) contributed
laboratory equipment with a fair value of $50,000. The Company advanced
additional funds to Spectrum during the three months ending March 31, 2002 while
the other 50% investor was not obligated to nor did it provide additional
financial support. Therefore, the Company's operations for the three months
ending March 31, 2002 and 2001 include losses of $71,841 and $55,488
respectively, which represent 100% of the loss experienced by Spectrum for the
periods.
3. STOCK TRANSACTIONS
In March of 2002, we privately sold two and a half units of our securities; each
unit consists of an aggregate of 12,500 shares of our common stock and one or
more convertible debentures in the aggregate principal amount of $25,000,
convertible into an aggregate of 50,000 shares of the Company's common stock.
The initial term of each debenture is six months, subject to an extension of six
months, at an annual interest rate of 10 percent. The conversion ratio for each
debenture is initially set at $0.50 per share. Exemption from registration for
each such transaction is claimed under Rule 504 under Regulation D of the
Securities Act. The proceeds have been allocated to the securities involved
based on the relative values of the instruments with any discount being
amortized over the period in which the debt instrument first becomes
convertible.
In March of 2002, we privately sold one unit of our securities; such unit
consists of an aggregate of 250,000 shares of our common stock and one
convertible debenture in the principal amount of $250,000, convertible into an
aggregate of 500,000 shares of the Company's common stock. The initial term of
the debenture is six months, subject to an extension of six months, at an annual
interest rate of 10 percent. The conversion ratio for the debenture is initially
set at $0.50 per share. Exemption from registration for such transaction is
claimed under Rule 504 under Regulation D of the Securities Act. The proceeds
have been allocated to the securities involved based on the relative values of
the instruments with any discount being amortized over the period in which the
debt instrument first becomes convertible.
4. CUSTOMER ALLOWANCES
From time to time, the Company offers various allowances to its customers
relating to promotions or incentives offered in order to secure new product
distribution. The Company accounts for theses allowances over the period in
which the related benefit is expected to be realized.
5. SUBSEQUENT EVENTS
Acquisition of Spectrum Analytics, Inc.
On April 3, 2002, the Company purchased the remaining 50% of Spectrum's equity
from Drs. Rojas and Moretti. The Company gave 50,000 shares of its common stock
with an estimated fair market value of $21,500 and forgave $57,940 due from an
entity owned by Dr. Moretti through which she held her ownership of Spectrum. As
a result, Spectrum is a wholly owned subsidiary and the transaction will be
recorded during the second quarter of 2002 at the value of the shares given and
the amount forgiven.
Settlement of Regulatory Matters
In February 2001, the FDA filed an administrative civil penalties action against
the Company and certain of its current and former officers (the "individuals")
that sought penalties in the amount of $1,000,000 from the Company and a total
of $2,290,000 from the individuals. In April 2002, the Company, the individuals,
and the FDA agreed to enter into a settlement agreement (the "settlement") that
resolves all FDA claims concerning the introduction of the Company's drug test
products into interstate commerce during the period from July 1999 through June
2000. In May of 2002, a settlement document was signed by all parties. The
settlement resolves all known FDA actions previously pending against the
Company. The settlement document provides that none of its provisions shall be
construed as an admission of liability by the Company and the individuals.
The settlement requires the Company to pay a total of $150,000 with $50,000 due
within 45 days of the filing of the settlement within the public records. The
Company must make two additional payments of $50,000. The first of the payments
is due no later than one year after the filing of the settlement, and the second
$50,000 payment is due no later than two years after the filing of the
settlement. In addition, the individual who is a former officer of the Company
must pay a total of $100,000 with $20,000 due within two years and the
additional $80,000 due within three years from the filing of the settlement.
Interest shall accrue and be paid on all settlement amounts, except for the
initial payment made by the Company, from the settlement filing date. The
interest rate will be equal to the weekly average one-year constant maturity
treasury yield for the first calendar week preceding the date of the filing of
the settlement. The settlement document has not been filed as of the report
date, and the applicable interest rate is approximately 2.61% per annum.
The proposed settlement provides for the Company to guarantee the payment
obligation of the former officer. Accordingly, the Company has recorded its
obligation along with the former officer's payment obligation as a liability.
The Company has not recorded an amount due from the same individual, as the
former officer's future payments are contingent. If the individual makes any
future payments on the FDA liability or repays the Company for payments it makes
on his behalf, the Company will recognize income at that time
If the Company or the individual who have payment liabilities fails to make the
necessary payments as described in the settlement, the interest rate doubles
effective as of the settlement default date. Upon receipt of all payments under
the settlement, the FDA will dismiss the administrative complaint. The other two
individuals involved in the February 2001 FDA administrative penalties action
are not obligated to make any payments under the settlement.
Item 2. Management's Discussion and Analysis
FORWARD LOOKING STATEMENTS
This Quarterly Report on Form 10-QSB contains forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933, and Section 21E of the
Securities Exchange Act of 1934. These statements relate to future events or the
Company's future financial performance. The Company has attempted to identify
forward-looking statements by terminology including "anticipates," "believes,"
"expects," "can," "continue," "could," "estimates," "expects," "intends," "may,"
"plans," "potential," "predicts," "should" or "will" or the negative of these
terms or other comparable terminology. These statements are only predictions,
and forward-looking statements, and involve known and unknown risks,
uncertainties and other factors, including the risks outlined under "Risk
Factors" contained in Part I of this Quarterly Report that may cause the
Company's actual results, levels of activity, performance or achievements to be
materially different from any future results, levels or activity, performance or
achievements expressed or implied by these forward-looking statements. For all
of these predictions and forward-looking statements, we claim the protection of
the safe harbor for forward-looking statements contained in the Private
Securities Litigation Reform Act of 1995.
Although the Company believes that the expectations reflected in the
forward-looking statements are reasonable, the Company cannot guarantee future
results, levels of activity, performance, or achievements. The Company's
expectations are as of the date this Form 10-QSB is filed, and the Company does
not intend to update any of the forward-looking statements after the date this
Quarterly Report on Form 10-QSB is filed to conform these statements to actual
results, unless required by law.
GENERAL
Worldwide Medical Corporation ("Worldwide," the "Company," or "we"), is engaged
in the marketing and distribution of accurate and confidential diagnostic tests
that deliver immediate and preliminary results for detection of drugs of abuse
and other medical conditions in humans, including, but not limited to, hidden
blood in the stool, alcohol breath scans, and home screening for cholesterol.
Products are sold under our trademark "First Check(R)" and promoted with our
motto: "When the need to know is NOW." Our other diagnostic assays include
fertility tests to detect pregnancy and ovulation and assays for certain
infections and sexually transmitted diseases. In medicine, an "assay" is the
means of measuring a substance of clinical interest. The results of the
measurement are either qualitative, "yes/no," or quantitative, i.e. the number
of an item, for example, red blood cells, in a sample. Sales of our ovulation
and infectious disease diagnostic products have not been significant to, date;
primarily because of the limited resources we have available to market the
products, competitive market-place issues, and the current lack of required
governmental approval for those products.
RESULTS OF OPERATIONS
Three Months Ended March 31, 2002 Compared to the Three Months Ended March 31,
2001
Net Sales. Net sales for the three months ending March 31, 2002 and 2001 were
$1,121,352 and $838,693, respectively. The increase of $282,659, or 33.7% can be
primarily attributed to the Company securing additional customers and
distribution channels, as well as obtaining additional product placements with
some of its current customer base. The increase can also be attributed to the
Company expanding its marketing efforts on cholesterol screening and the
introduction of digital alcohol screening products. Further, during the three
months ended March 31, 2002, the Company experienced significantly lower sales
discounts and allowances compared to the three month period ended March 31, 2001
($39,724 in 2002 compared to $242,849 in 2002). The higher than normal returns
and allowances granted in 2001 were primarily a result of FDA-related voluntary
returns in order to phase out old and non-compliant packaging.
Cost of Sales. Cost of sales for the three months ending March 31, 2002 and 2001
were $391,538 and $355,993, respectively. The primary reason for the increase in
cost of sales is the increase in sales as discussed above. As a percentage of
gross sales, cost of sales was 33.7% for the three months ended March 31, 2002
compared to 32.9% for the three months ended March 31, 2001. The change in cost
of sales as a percentage of gross sales is primarily related to product mix of
sales between the periods.
Selling Expenses. Selling expenses increased $21,748, to $246,674 for the three
months ending March 31, 2002 compared to $224,926 for the three months ending
March 31, 2001. This increase of 9.7% is primarily due to the Company incurring
retail promotion expense at a higher rate in 2002 due to new programs with its
expanding customer base. The increases in retail promotion expenses in 2002 were
somewhat offset by reduced expenditures related to the printing of marketing and
sales promotion material.
General and Administrative Expenses. General and Administrative expenses for the
three months ending March 31, 2002 and 2001 were $182,574 and $109,900,
respectively. This increase of $72,674, or 66.1% was related to additional
headcount at the corporate office, general salary and wage increases, and higher
than normal travel in 2002 in an effort to secure new distribution of the
Company's products.
Professional Fees. Professional fees for the three months ending March 31, 2002
were $147,722, a 353.4% increase compared to professional fees for the three
months ending March 31, 2001 of $32,583. The increase in professional fees is
attributable to the Company registering its stock and filing its first 10-KSB in
March of 2002 (the Company was not required to file an annual report in 2001),
and to the settlement of various legal actions during the first quarter of 2002.
See further discussion of legal proceedings in PART II, Item 1.
Bad Debt Expense. The Company experienced a recovery of a bad debt in the amount
of $1,000 during the three months ending March 31, 2002. Bad debt expense for
the three months ending March 31, 2001 was $13,882. Following the Company's
change in management in early 2000, the Company adopted a policy to reduce the
uncollectible receivables by reducing sales to non-consumer oriented retailers.
As such, management has not provided a reserve for uncollectible receivables on
the consolidated balance sheet included in the accompanying financial
statements.
Settlement Expense. Settlement expense of $17,500 was significantly lower for
the three months ending March 31, 2002, compared to the three months ending
March 31, 2001 as legal proceedings which were settled during the first quarter
of 2002 were accrued and included in the results of operations for the twelve
months ending December 31, 2001. During the three months ending March 31, 2001,
the Company incurred settlement expenses amounting to $161,011. The majority of
the settlement expense incurred during the first quarter of 2001 relates to the
cost of warrants granted a related party as part of a settlement with such
individual. The total cost associated with the warrants was $157,440.
Interest Expense. Interest expense increased by $12,106, to $19,018 for the
three months ending March 31, 2002, from $6,912 for the three months ending
March 31, 2001. The increase in interest expense is associated with the
Company's increase in the balance of its lines of credit which were utilized to
help finance the Company's operations. The total balances owed under the
Company's lines of credit were $468,026 as of March 31, 2002 compared with a
total balance of $277,253 as of March 31, 2001.
Interest Expense - Related Parties. Interest expense associated with obligations
to related parties increased by $4,368 to $19,338 for the three months ending
March 31, 2002, compared to $14,970 for the three months ending March 31, 2001.
The increase is primarily associated with the Company's short-term notes payable
to related parties issued in March of 2002. For the three months ending March
31, 2001, there was only one outstanding note payable to a related party. As the
note is a non-interest bearing note, the Company has imputed interest expense
over the term of the note payable. The amount of imputed interest amortized
decreases each period, consistent with the payments on the note.
Extraordinary Item - Gain on Settlement of Debt. During the three months ending
March 31, 2001, the Company settled certain vendor obligations for cash payment
of $24,877. Prior to settlement, the obligations totaled $70,038. As a result,
the Company recorded an extraordinary gain on the settlement of debt in the
amount of $45,161 for the three months ending March 31, 2001.
Equity Interest - Loss on equity interest in Spectrum Analytics increased by
$16,353 for the three months ending March 31, 2002 compared to $55,488 for the
three months ending March 31, 2001. The increase in loss is primarily due to
Spectrum incurring higher overhead costs during the first quarter of 2002. See
Note 2 for further discussion of the Company's Investment in Spectrum Analytics.
LIQUIDITY AND CAPITAL RESOURCES
To date, we have financed our activities principally through cash flow from
operations, debt financing and equity issuances, and advances from related
parties. Our auditor's report for our 2000 and 2001 fiscal years contains a
"going concern" opinion. We have negative working capital, our current
liabilities are approximately $1.6 million larger than our current assets, and
our total liabilities are approximately $1.9 million larger than our total
assets. Since the change in management in the first half of 2000, the Company
initially focused on solving the issues raised in the FDA warning letter,
negotiating term agreements with its customers, and stabilizing the distribution
network of its products. Further, management attended to obtaining availability
of term and revolving debt, as discussed below. Finally, management attempted to
increase the number of distributors and retail channels that sold the Company's
products. As a result of these efforts, management believes that the stability
of the Company's financial affairs and the outlook for its business prospects
have improved during the preceding two years. However, the Company currently
does not have any material, additional sources of liquidity available, whether
from internal or external sources.
In July of 2000, we entered into a line of credit agreement with Citadel and
Larry Osaki. The agreement provided us with a line of credit in an amount up to
$250 thousand. In September of 2001, and in substitution therefor, we also
executed our $250 thousand promissory note in favor of Citadel Capital
Management Group, the name Citadel adopted in April of 2001. Interest accrues on
the promissory note at the rate of 10 percent simple interest per annum and we
may prepay any or all of the obligation without penalty. In September of 2001,
we granted a warrant to purchase 100,000 shares of our common stock at a
exercise price of $.20 per share to Citadel in connection with their accepting
our promissory note in the amount of $250 thousand. The exercise price of the
warrants was $.20 per share. In October of 2001, Citadel exercised such warrant
through an offset of $20 thousand of our promissory obligations to them. As of
the date of this Quarterly Report, we owe Citadel approximately $330 thousand
pursuant to the terms of the note and a consensual $80 thousand over-advance,
without penalty.
On February 20, 2001, we entered into a Loan and Security Agreement with Camel
Financial, Inc. ("Camel"), and a Subordination Agreement with Citadel and Camel.
The Loan and Security Agreement initially provided us with up to $250 thousand
of advances against our available accounts receivable. During our 2001 fiscal
year, Camel verbally amended the Loan and Security Agreement to increase our
line of credit to $275 thousand. The Loan and Security Agreement expired on
March 1, 2002, subject to automatic annual renewals, unless otherwise terminated
in writing by either Camel or us not later than 30 days prior to the end of an
annual term. For outstanding balances under $100 thousand, interest accrues at
the rate of three percent per month; for outstanding balances in excess of $100
thousand, interest accrues at the rate of two and one-half percent per month; in
no event shall the monthly interest be less than $2,500. The interest rate is
subject to change by an amount equivalent to a change in the prime rate, as
published in the Wall Street Journal. As of March 31, 2002, the interest rate
was approximately two and one-half percent per month and our outstanding balance
due to Camel was $138 thousand. In connection with the Loan and Security
Agreement, Camel, Citadel, and we executed a Subordination Agreement, on
February 20, 2001, pursuant to which Citadel subordinated its first position
security interest in our assets to Camel.
As of March 31, 2002, we had cash and cash equivalents of $112 and negative
working capital of $1.3 million. Cash provided by operating activities for the
three months ended March 31, 2002, amounted to $268 thousand. Cash used in
investing activities for the three months ended March 31, 2002, amounted to $78
thousand, primarily related to amounts invested in and advanced to Spectrum
Analytics. Cash used in financing activities for the three months ended March
31, 2002, amounted to $191 thousand and consisted primarily of repayments of
long-term obligations.
We have sustained significant losses during our 2001 and 2000 fiscal years, have
experienced negative cash flows from operations since inception, have had
difficulties generating sufficient cash flow to meet obligations and sustain our
operations, and have a stockholders' capital deficiency that raises substantial
doubt about our ability to continue as a going concern. Our ability to meet our
obligations in the ordinary course of business is dependent upon our ability to
raise additional financing through public or private equity or debt financings
and to operate profitably. While management believes that such funding will be
available, the ability to obtain and the adequacy of such funding, if any, are
uncertain. Further, the terms of our May 2001 debt settlement with PBM restrict
our ability to borrow from banks or other institutional lenders, as PBM is not
obligated to subordinate its priority to such lenders for our obligations in
excess of $300 thousand.
The Company's plan for its 2002 fiscal year includes an increased level of
sales, both to our current customers and to certain additional, similarly
situated customers. Management believes that the Company's relations with its
current customers, and the results of management's meaningful discussions with
various additional potential customers, warrants that level of optimism. Of
course, no assurance can be provided that such additional sales will occur, that
they will provide sufficient margins to provide positive cash flow, or that the
Company will be able to afford to produce and ship that increased level of our
products. The Company also believes that the sales and debt trends established
by current management subsequent to the receipt of the 510(k) OTC clearances
from the FDA will provide the Company with the flexibility to reduce the current
level of its debt or to re-finance such debt on terms that are more favorable to
the Company, such as an increased level of credit availability and lower costs.
No assurance can be provided that the Company's lenders will agree with
management on the Company's potential prospects or that the lenders will provide
such expanded financial availability. As discussed above, if we are unable to
increase our levels of equity or debt and to operate profitably, we will face
difficulties in continuing our business operations.
RISK FACTORS
Ownership of our common stock involves a high degree of risk. You should
consider carefully the factors set forth below, as well as other information
contained in this Quarterly Report and information previously filed on form
10-KSB.
RISKS RELATED TO OUR BUSINESS AND OUR MARKETPLACE
Limited Operating History. We have a limited history as a provider of
confidential diagnostic tests for drugs of abuse and other medical conditions.
We introduced our First Check family of diagnostic tests at the American
Association of Clinical Chemistry annual convention in August of 1995.
Commercial sales were first generated in December of 1995. We were considered a
development-stage enterprise prior to 1996. We received our FDA 510(k) OTC
clearances between June and October of 2000. As a result, it is difficult to
evaluate our business and prospects.
Recurring Losses. We have never generated an annual profit. We cannot be certain
that we can generate a profit on a quarterly or annual basis. If we do not
achieve profitability, we cannot be certain that we can continue to operate as a
going concern. Although management believes that our business plan is now
generating revenues in an amount sufficient to generate "operational
profitability," our "overall profitability," and our cash flow, continued to be
adversely affected by certain historical items, e.g., obtaining 510(k) OTC
clearance for certain of our products from the FDA, settlement of the FDA's
administrative complaint, payment of certain sums to Costco Wholesale
Corporation, and the PBM Note.
Dependence on Principal Products. We depend on sales of a limited number of
products for our revenues. Historically, we have generated substantially all of
our net revenues from our drugs of abuse tests. For our 2001 fiscal year, our
drugs of abuse tests were responsible for approximately 82 percent of our net
revenues, with the balance allocated between our alcohol breath scan and
colorectal screening tests. Commencing late in our 2000 fiscal year, we began to
increase our marketing attention for our colorectal screening test. As a result,
that test was responsible for approximately 14 percent of our net revenues
during the year ended December 31, 2001.
Concentration of Customers. Our revenues are generated from a limited number of
customers; our customer base is concentrated; and the loss of one or more of our
customers could cause our business to suffer. A substantial portion of our
revenues has been, and is expected to continue to be, generated from a limited
number of customers with large financial commitments. Two of our customers
accounted for 75 percent of our sales for the year ended December 31, 2001. Two
of our customers accounted for 87 percent of our accounts receivable balance at
December 31, 2001. No other customers of ours individually accounted for 10
percent or more of our total revenues in 2001 or our accounts receivable
balances at the end of such year. As a result, if a large contract is canceled
or deferred or an anticipated contract does not materialize, our business would
be harmed.
Competition. Many of our competitors may have advantages over us, including:
- - longer operating histories;
- - larger customer bases;
- - manufacturing capabilities;
- - substantially greater financial, technical, sales and marketing resources
and infrastructure; and
- - greater name recognition.
If we fail to provide our customers with compelling business reasons to purchase
products from us, rather than from our competitors, some of who are also our
suppliers, our business and financial performance will suffer.
Limited Financing. We may need additional financing. Increases in our sales and
the related expansion of our production will require significant expenditures.
In addition, we will require significant funds to conclude the payment of our
obligations to the FDA and certain of our other creditors. If we are not able to
generate such capital thorough operating cash flow, we may seek to obtain such
additional funds through public or private equity or debt financings. Such
financings may result in dilution to current stockholders. There can be no
assurance that such additional financings, if required, can be obtained on terms
acceptable to us, if at all. If additional funds are not available, we may be
required to curtail significantly or to eliminate some or all of our marketing
programs and expected revenue growth. Currently, we have a limited
receivable-based financing arrangement, but no other established bank credit
arrangements. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations -- Liquidity and Capital Resources."
Quarterly Fluctuations in Results. Our revenues and operating results may vary
significantly from period to period due to a number of factors. In future
periods, our operating results may be below the expectations of public market
analysts, if any, and of our investors, and the price of our common stock may
fall. We believe that period-to-period comparisons of our overall and operating
results may not provide an accurate indication of our future performance.
Factors that could cause periodic fluctuations include:
- - the timing and volume of orders for our products;
- - changes in our pricing policies or in our cost of goods;
- - the timing of releases of new products or pricing policies by competitors;
and
- - the entry into the market of new competitors.
Reliance on Vendors. We purchase the components for our products from outside
vendors. Any significant interruption in the availability of the components for
our products, or a significant increase in their cost, could harm our sales or
adversely affect our margins unless and until we can secure alternative sources.
However, management believes that each of the components utilized in our
products will be available from alternative sources on acceptable terms and
conditions.
Intellectual Property. We depend on our intellectual property, and litigation
regarding our intellectual property could harm our business. Unauthorized use or
misappropriation of our intellectual property could seriously harm our business.
Our major intellectual property consists of our trademarks, which are important
to the protection of our company and product names. These trademarks discourage
unauthorized use of our product names and provide us with a method to enforce
our rights in the event that an unauthorized use were to occur. However, third
parties may infringe upon our intellectual property rights, and we may be unable
to detect this unauthorized use or effectively enforce our rights. In addition,
any legal action that we may bring to protect our intellectual property rights
could be expensive and distract management from day-to-day operations of our
business.
Claims. Claims by others that we infringe upon their intellectual property could
divert our resources, result in unexpected license fees, and harm our business.
We purchase all of the proprietary components of our products and have received
assurances from our suppliers that such components do not infringe any otherwise
unaffiliated third-party's intellectual property. Nevertheless, a third-party
claim that our current or future products or technology infringes their
proprietary rights could seriously harm our business and could distract our
management from the operation of our business even if the claim is invalid.
Furthermore, a judgment against us, even if we have indemnification claims
against our suppliers, could require us to pay substantial damages and could
also include an injunction or other court order that could prevent us from
selling our products. If we faced a claim relating to proprietary technology, we
might seek to license such technology, or develop our own, but we might not be
able to do so. Our failure to obtain the necessary licenses or other rights or
to develop non-infringing technology could prevent us from selling our products
and could seriously harm our business.
RISKS RELATED TO OWNING OUR STOCK
We have received a "going concern" opinion from our auditor for the year ended
December 31, 2001. Kelly & Co., in its independent auditors' report, expressed
"substantial doubt" as to our ability to continue as a going concern. We have
negative working capital, our current liabilities are approximately $1.3 million
larger than our current assets, and our total liabilities are approximately $1.8
million larger than our total assets. Since the change in management in the
first half of 2000, the Company initially focused on to solving the issues
raised in the FDA warning letter, negotiating term agreements with its
customers, and stabilizing the distribution network of its products. Further,
management attended to obtaining availability of term and revolving debt.
Finally, management attempted to increase the number of distributors and retail
channels that sold the Company's products. As a result of these efforts,
management believes that the stability of the Company's financial affairs and
the outlook for its business prospects has improved. However, the Company
currently does not have any material, additional sources of liquidity available,
whether from internal or external sources.
Future sales of our common stock may depress our stock price. A significant
number of shares of our common stock are freely tradable. If any of our
stockholders sell substantial amounts of our common stock in the public market,
the market price of our common stock could fall. In addition, such sales could
create the perception in the public of difficulties or problems with our
products and services. As a result, these sales also might make it more
difficult for us to sell equity or equity-related securities in the future at a
time and price that we deem appropriate.
We do not intend to pay dividends; you will not receive funds without selling
shares. We have never declared or paid any cash dividends on our capital stock
and do not intend to pay dividends in the foreseeable future. We intend to
invest our future earnings, if any, to fund our growth. Therefore, you will not
receive any funds without selling your shares.
Our management controls a substantial percentage of our common stock. Our
executive officers and directors beneficially own or control, directly or
indirectly, outstanding shares of common stock, which in the aggregate represent
approximately 21.7 percent of the outstanding shares of common stock, or
approximately 30.3 percent of shares outstanding if all currently vested
warrants and options and all presently convertible securities are exercised or
converted. As a result, if some of these persons or entities act together, they
may have the ability to control all matters submitted to our stockholders for
approval, including the election and removal of directors and the approval of
any business combination. This may delay or prevent an acquisition or cause the
market price of our stock to decline. Some of these persons or entities may have
interests different than yours. For example, they may be more interested in
selling the Company to an acquirer than other investors or may want us to pursue
strategies that are different from the wishes of other investors.
Provisions in our charter documents and Delaware law may delay or prevent an
acquisition of the Company. Our charter documents contain provisions that could
make it harder for a third party to acquire us without the consent of our board
of directors. An acquirer would not be able to cumulate votes at a meeting,
which would require the acquirer to hold more shares to gain representation on
the board of directors than if cumulative voting were permitted. In addition,
Section 203 of the Delaware General Corporation Law limits business combination
transactions with 15 percent stockholders that have not been approved by the
board of directors. These provisions and other similar provisions make it more
difficult for a third party to acquire us without negotiation. Furthermore, our
board of directors could choose not to negotiate with an acquirer that it did
not feel was in our strategic interests. If the acquirer were discouraged from
offering to acquire us or prevented from successfully completing a hostile
acquisition by the anti-takeover measures, you could lose the opportunity to
sell your shares at a favorable price.
For more than the preceding two years through May 13, 2002, prices for our
common stock have been quoted by market makers in the Pink Sheets, which through
its Electronic Quotation Service, provides an Internet-based, real-time
quotation service for OTC equities and bonds for market makers and brokers. The
Pink Sheets is separate and distinct from the OTC Bulletin Board, the Nasdaq
Stock Market, or any other stock exchange. On May 14, 2002, NASD Regulation,
Inc. provided formal clearance for one of our market makers to submit unpriced
quotations on the OTC Bulletin Board for Worldwide Medical Corporation Common
Stock. The OTC Bulletin Board is a regulated quotation service operated by the
National Association of Securities Dealers, Inc. ("NASD") that displays
real-time quotes, last sale prices, and volume information in over-the-counter
equity securities like our common stock. The OTC Bulletin Board is separate and
distinct from the Nasdaq Stock Market or any other stock exchange. We will not
be required to meet or maintain any qualitative or quantitative standards for
our common stock to be quoted on the OTC Bulletin Board.
Our common stock does not presently meet the minimum listing standards for
listing on the Nasdaq Stock Market or any national securities exchange, which
could affect our stockholders' ability to access trading information about our
common stock.
Our common stock is subject to penny stock rules, which may make it more
difficult for our stockholders to sell their common stock. Broker-dealer
practices in connection with transactions in "penny stocks" are regulated by
certain penny stock rules adopted by the Securities and Exchange Commission.
Penny stocks generally are equity securities with a price of less than $5.00 per
share. The penny stock rules require a broker-dealer, prior to a purchase or
sale of a penny stock not otherwise exempt from the rules, to deliver to the
customer a standardized risk disclosure document that provides information about
penny stocks and the risks in the penny stock market. The broker-dealer also
must provide the customer with current bid and offer quotations for the penny
stock, the compensation of the broker-dealer and its salesperson in the
transaction, and monthly account statements showing the market value of each
penny stock held in the customer's account. In addition, the penny stock rules
generally require that prior to a transaction in a penny stock the broker-dealer
make a special written determination that the penny stock is a suitable
investment for the purchaser and receive the purchaser's written agreement to
the transaction. These disclosure requirements may have the effect of reducing
the level of trading activity in the secondary market for a stock that becomes
subject to the penny stock rules.
PART II - OTHER INFORMATION
Item 1- Legal Proceedings
Settlement of Litigation
In August 2000, a former chief financial officer of the Company filed suit
against the Company alleging breach of employment contract, wrongful
termination, failure to pay compensation when due and violation of a California
Labor Code Section. In October 2000, the Company filed a response denying the
allegations. In February 2002, the parties entered into a memorandum of
agreement to settle the lawsuit whereby the Company will pay the former employee
a total of $27,000 in four installments during the first 90 days following the
execution of the more formal settlement document. After the payment of the last
$6,750 of the $27,000, the Company will then make fourteen consecutive monthly
payments of $3,425. The Company will also issue 88,500 restricted shares of its
common stock to the former employee. If the value of these shares in one year is
not equal to $88,500, such additional shares will be issued or shares will be
returned as is necessary until the then value of the shares equal this amount.
In summary, the Company recognized a litigation settlement expense of $183,540
in the year ended December 31, 2001 including $20,090 related to the fair value
of the shares provided for the Company's benefit by the former officer
(president).
Amendment to Settlement with Customer
In June 2001, the Company settled a claim with a customer wherein the Company
agreed to pay certain amounts followed by periodic payments over approximately
two years. Since then, the Company has been unable to make the agreed payments
as scheduled, and at December 31, 2001, the Company owed the customer $350,000.
As a result, in April 2002, the Company and the customer agreed to modify the
payment terms of the original agreement to provide for a one time estimated
interest charge and the issuance of default warrants if the Company fails to
make any of the required monthly payments. The modification requires the Company
to pay $50,000 on May 15, 2002, and the $12,500 per month starting May 1, 2002
until $317,500 has been paid. Each warrant will not reduce the amount owed by
the Company and expires two years after the date of issuance. These default
warrants are exercisable at 75% of the average closing share price of the
Company's common stock 10 days prior to the due date of the monthly payment in
respect to which the Company is in default. In addition, the Company agreed to
replace the stipulated judgment documentation with such other substitute
documentation to permit the customer to seek and obtain from the court a
judgment for $467,500 (which includes a $100,000 default penalty) less any
payments made by the Company.
Item 2 - Changes in Securities
In March of 2002, we privately sold two and a half units of our securities; each
unit consists of an aggregate of 12,500 shares of our common stock and one or
more convertible debentures in the aggregate principal amount of $25,000,
convertible into an aggregate of 50,000 shares of the Company's common stock.
The initial term of each debenture is six months, subject to an extension of six
months, at an annual interest rate of 10 percent. The conversion ratio for each
debenture is initially set at $0.50 per share. Exemption from registration for
each such transaction is claimed under Rule 504 under Regulation D of the
Securities Act. The proceeds have been allocated to the securities involved
based on the relative values of the instruments with any discount being
amortized over the period in which the debt instrument first becomes
convertible.
In March of 2002, we privately sold one unit of our securities; such unit
consists of an aggregate of 250,000 shares of our common stock and one
convertible debenture in the principal amount of $250,000, convertible into an
aggregate of 500,000 shares of the Company's common stock. The initial term of
the debenture is six months, subject to an extension of six months, at an annual
interest rate of 10 percent. The conversion ratio for the debenture is initially
set at $0.50 per share. Exemption from registration for such transaction is
claimed under Rule 504 under Regulation D of the Securities Act. The proceeds
have been allocated to the securities involved based on the relative values of
the instruments with any discount being amortized over the period in which the
debt instrument first becomes convertible.
Item 3 - Defaults Upon Senior Securities
None
Item 4 - Submission of Matters to a Vote of Security Holders
None
Item 5 - Other Information
None
Item 6 - Exhibits and Reports on Form 8-K
(a) Exhibits
None
(b) Reports on Form 8-K
None
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.
WORLDWIDE MEDICAL CORPORATION
Date: May 20, 2002 By: /s/ Daniel G. McGuire
- ------------------ -------------------------
Daniel G. McGuire
President, Chief Executive Officer
Date: May 20, 2002 By: /s/ Kevin J. Gadawski
- ------------------ -------------------------
Kevin J. Gadawski
Chief Operating Officer
Date: May 20, 2002 By: /s/ Jeffrey C. Burke
- ------------------ ------------------------
Jeffrey C. Burke
Chief Financial Officer, Principal
Accounting Officer