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 June 30, 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
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(Name of Small Business Issuer in Its Charter)
Delaware 33-0601331
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(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
13 Spectrum Pointe Drive, Lake Forest, California 92630
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(Address of principal executive offices) (Zip Code)
(949) 598-8378
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(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 17,157,278 as of August 13, 2002.
TRANSITIONAL SMALL BUSINESS DISCLOSURE FORMAT
Yes [ ] No [ X ]
TABLE OF CONTENTS
PART I
Item 1 Financial Statements F-1
Item 2 Management's Discussion and Analysis or Plan of Operations 2
PART II
Item 1 Legal Proceedings 11
Item 2 Changes in Securities 11
Item 3 Defaults Upon Senior Securities 12
Item 4 Submission of Matters to a Vote of Security Holders 12
Item 5 Other Information 12
Item 6 Exhibits and Reports on Form 8-K 12
i
PART I - Financial Information
Item 1. Unaudited Consolidated Financial Statements
Worldwide Medical Corporation
CONSOLIDATED BALANCE SHEET
(Unaudited)
ASSETS June 30,
2002
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Current assets:
Cash .................................................. $ 245
Accounts receivable - trade, net of allowance of $0 ... 855,280
Inventories ........................................... 457,167
Prepaid expenses
71,752
Other receivables:
Note receivable from former officer ................... 7,749
Other short term notes receivable ..................... 25,145
-----------
Total current assets ............................ 1,417,338
Property and equipment, net ............................... 199,450
Goodwill .................................................. 38,661
Other assets .............................................. 68,600
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TOTAL ASSETS ................................................... $ 1,724,049
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LIABILITIES AND STOCKHOLDERS' EQUITY............................
Current liabilities:
Lines of credit - financial institutions .................. $ 402,705
Accounts payable - trade .................................. 1,052,181
Accrued payroll and payroll taxes ......................... 76,270
Accrued commissions - related party ....................... 34,216
Accrued expenses .......................................... 81,147
Accrued interest .......................................... 37,254
Accrued interest - related parties ........................ 7,213
Accrued settlement obligations, current portion ........... 378,415
Capital lease obligations - financial institutions,
current portion .......................................... 21,449
Notes payable, related parties, current portion ........... 603,384
-----------
Total current liabilities ............................ $ 2,694,234
Capital lease obligations - financial institutions, net
of current portion ........................................... 42,958
Note payable, related party, net of current portion ............ 319,524
Accrued settlement obligations, noncurrent ..................... 342,500
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TOTAL LIABILITIES .............................................. 3,399,216
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STOCKHOLDERS' DEFICIT
Common stock ($0.01 par value, 30,000,000 shares authorized,
16,916,028 shares issued and outstanding) ..................... 169,160
Additional paid-in capital ..................................... 4,894,272
Accumulated deficit ............................................ (6,657,438)
Common stock receivables - officers ............................ (72,366)
Common stock receivables - others .............................. (8,795)
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TOTAL SHAREHOLDERS' DEFICIT .................................... (1,675,167)
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TOTAL LIABILITIES AND SHAREHOLDERS' DEFICIT .................... $ 1,724,049
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(The accompanying notes are an integral part of
the consolidated financial statements)
F-1
Worldwide Medical Corporation
CONSOLIDATED STATEMENT OF OPERATIONS
(Unaudited)
Three Months Ending June 30, Six Months Ending June 30,
2002 2001 2002 2001
------------ ------------ ------------ ------------
Net Sales ............................... $ 839,011 $ 928,831 $ 1,960,362 $ 1,767,525
Cost of sales ........................... 391,435 333,468 782,971 687,572
------------ ------------ ------------ ------------
Gross Profit ............................ 447,576 595,363 1,177,391 1,079,953
------------ ------------ ------------ ------------
Operating expenses:
Selling ................................. 222,920 224,588 467,585 434,180
General and administrative .............. 424,861 101,966 670,399 229,090
Professional fees ....................... 166,984 79,690 322,147 112,273
Bad debt expense ........................ -- -- (1,000) 13,882
Depreciation and amortization ........... 19,090 17,096 40,825 33,863
Settlement expense ...................... 4,973 -- 22,473 3,571
Settlement expense - related party ...... -- -- -- 157,440
------------ ------------ ------------ ------------
Total operating expense .............. 838,828 423,340 1,522,429 984,299
------------ ------------ ------------ ------------
Income (loss) from operations ........... (391,252) 172,023 (345,038) 95,654
------------ ------------ ------------ ------------
Other expense:
Interest expense ........................ (21,067) (19,272) (47,217) (26,184)
Interest expense - related parties ...... (53,602) (13,846) (65,808) (28,816)
Equity in losses of Spectrum Analytics .. -- (61,851) -- (117,339)
------------ ------------ ------------ ------------
Net income (loss) before provision for
income taxes and extraordinary item ..... (465,920) 77,054 (458,063) (76,684)
------------ ------------ ------------ ------------
Provision for income taxes .............. (800) (800) (2,220) (1,127)
------------ ------------ ------------ ------------
Net income (loss) before extraordinary
item .................................... (466,720) 76,254 (460,283) (77,811)
Extraordinary gain on settlement of debt,
net of tax effect of $0 ................. -- 16,350 -- 61,511
------------ ------------ ------------ ------------
(466,720) 92,604 (460,283) (16,300)
------------ ------------ ------------ ------------
Net income (loss) per share, basic and
diluted ................................. (0.03) 0.01 (0.03) (0.00)
Weighted average shares outstanding ..... 15,490,959 12,107,701 15,160,811 12,107,701
(The accompanying notes are an integral part of
the consolidated financial statements)
F-2
Worldwide Medical Corporation
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three months ended June 30,
2002 2001
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NET CASH (USED IN) OPERATING ACTIVITIES $(123,517) $ (2,488)
NET CASH (USED IN) INVESTING ACTIVITIES (2,646) (140,366)
NET CASH PROVIDED BY FINANCING ACTIVITIES 124,824 127,642
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NET CHANGE IN CASH AND CASH EQUIVALENTS (1,339) (15,212)
CASH AT BEGINNING OF THE PERIOD 1,584 15,824
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CASH AT END OF PERIOD $ 245 $ 612
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(The accompanying notes are an integral part of
the consolidated financial statements)
F-3
Worldwide Medical Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 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 and six month periods ended
June 30, 2002 are not necessarily indicative of the results expected for the
full fiscal year.
2. ACQUISITION OF SPECTRUM ANALYTIC'S, INC.
On April 3, 2002, the Company purchased the remaining 50% interest in Spectrum
Analytics, Inc. ("Spectrum"). For the three and six months periods ended June
30, 2002, the results of the Company, and its wholly owned subsidiary are
presented on a consolidated basis. For the three and six month periods ending
June 30, 2001, the Company had a 50% interest in Spectrum, which was accounted
for under the equity method. The acquisition is not considered material and, as
such, pro-forma disclosures are not considered necessary as the impact would be
immaterial to the previously reported results of operations.
3. STOCK TRANSACTIONS
From May 21, 2002 thru June 30, 2002 the Company privately sold 1,244,000 shares
of its restricted common stock for total proceeds of $311,000. As the shares
were sold at $0.25 per share, the Company incurred discounts on private
placements in the amount of $97,832, and incurred fees associated with the
private placement which totaled $17,500 in cash and 16,400 shares of restricted
common stock.
In June of 2002, the Company issued 427,172 shares of its restricted common
stock as satisfaction of $106,793 in commissions due a related party.
Also in June 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,
with total proceeds of $62,500. 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. 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.
F-4
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
Stock Transactions
In July of 2002, the Company privately sold 200,000 shares of its restricted
common stock to two accredited investors for total proceeds of $50,000. The
shares were sold at $0.25 per share. Exemption from registration for such
transaction is claimed under Rule 506 under Regulation D of the Securities Act.
Settlement of Regulatory Matters
As part of the settlement agreement executed with the FDA in May of 2002, the
Company was required to remit an initial payment in the amount of $50,000 within
45 days of the filing of the settlement document within the public records. As
of the date of this Quarterly Report, such payment has not yet been remitted by
the Company, although such payment is now due and owing.
Customer Settlement
As part of the amended settlement with one of its customers, the Company was
obligated to pay monthly payments in the amount of $12,500 beginning in May of
2002. The Company remitted the May payment late and has not yet remitted either
the July or August payments, resulting in the issuance of three default warrants
per the settlement agreement (for the purchase of an aggregate of approximately
142,500 shares at an average exercise price of approximately $0.275 per share).
The Company has reached a verbal agreement with the customer to settle the
entire amount outstanding with a one-time discounted cash payment and the
issuance of shares of the Company's restricted common stock. The Company and the
customer are currently formalizing this agreement which is contingent on the
Company's ability to procure the required funds to make the lump-sum payment.
Settlement with Supplier
During the second quarter of 2002, the Company did not make the May or June
payments called for in their agreement with a past supplier (nor has the Company
made any further payments up thru the date of this filing). The Company has
received verbal confirmation from a representative to the supplier to allow for
a suspension of payments until September of 2002. As of the filing of this
Quarterly Report, the Company is working on formalizing this agreement with the
supplier.
Settlement of Litigation
During the second quarter of 2002, the Company executed an amended settlement
agreement with a past employee. As of the date of this Quarterly Report, the
Company has remitted the first payment per the settlement agreement in the
amount of $6,750. The second and third payments ($6,750 each), and the first two
scheduled monthly payments thereafter ($3,428.58 each), all of which are also
due now, have not been remitted by the Company. The Company is currently
F-5
in discussions with the other party regarding options for amending the
settlement agreement, which may include a one-time discounted cash payment as
payment in full should the Company succeed in procuring funds to make such
payment.
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 June 30, 2002 Compared to the Three Months Ended June 30,
2001
Net Sales. Net sales for the three months ending June 30, 2002 and 2001 were
$839,011 and $928,831, respectively. The decrease of $89,820, or 9.6% can be
primarily attributed to the timing of shipments as the Company had some
significant shipments in early July of 2002 (subsequent to the end of the
2
quarter - approximately $75 thousand). In addition, the 2001 numbers include
approximately $175 thousand in revenue related to a former customer that went
bankrupt in the third quarter of 2001. The Company's sales volume to national
retailer customers continued to grow between the periods. Further, during the
three months ended June 30, 2002, the Company experienced significantly lower
sales discounts and allowances compared to the three month period ended June 30,
2001. 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 June 30, 2002 and 2001
were $391,435 and $333,468, respectively. The primary reason for the increase in
cost of sales is a shift in product mix (cost of sales related to the Company's
digital alcohol products are higher than for the Company's drugs of abuse -
nearly double). During the three months ended June 30, 2002, the Company had a
higher percentage of sales relating to its digital alcohol products as compared
to the same period a year ago based on filling initial distribution orders with
a national retailer. Digital alcohol sales to this retailer were approximately
$335 thousand during the period. In addition, the Company recorded an inventory
adjustment based on the results of its physical count as of June 30, 2002 which
were required based on inventory shrink and slow moving product. As a percentage
of gross sales, cost of sales was 44.2% for the three months ended June 30, 2002
compared to 31.1% for the three months ended June 30, 2001.
Selling Expenses. Selling expenses decreased slightly ($1,668), to $222,920 for
the three months ending June 30, 2002 compared to $224,588 for the three months
ending June 30, 2001. For the three months ended June 30, 2002, the Company
incurred retail promotion expense of $126,475, compared to retail promotion
expense of $70,255 for the prior period. This increase was due to the Company
investing in new business distribution during 2002. This increase was somewhat
offset by reduced costs associated with advertising and marketing, $15,039 in
2002 compared to $48,011 in 2001.
General and Administrative Expenses. General and Administrative expenses for the
three months ending June 30, 2002 and 2001 were $424,861 and $101,966,
respectively. This increase of $322,895, or 316.7% was related to increased
costs associated with the issuance of the Company's common stock in private
placements (approximately $150,000 relating to discounts on stock issued and
other costs associated with the private placement), additional headcount at the
corporate office resulting in increased payroll costs, general salary and wage
increases, and higher than normal travel in 2002 in an effort to secure new
distribution of the Company's products. In addition, the general and
administrative expenses of Spectrum Analytics, Inc., a wholly owned subsidiary
of the Company as of April 3, 2002, are included in the general and
administrative expenses for the three months ended June 30, 2002. In the prior
year, the Company's investment in Spectrum was accounted for under the equity
method and thus expenses incurred by Spectrum were not included in consolidated
general and administrative expenses.
Professional Fees. Professional fees for the three months ending June 30, 2002
were $166,984, a 109.5% increase compared to professional fees for the three
months ending June 30, 2001 of $79,690. The increase in professional fees is
attributable to (i) increased legal and accounting fees related to the Company's
public filings (the Company became subject to filing periodic reports subsequent
to its second quarter in the prior year), and (ii) the settlement of various
legal actions during the second quarter of 2002. In addition, the company
incurred fees in 2002 relating to investor relations which were not incurred in
2001. See further discussion of legal proceedings in PART II, Item 1.
Settlement Expense. During the three months ended June 30, 2002, the Company
incurred settlement expenses of $4,973 relating to default warrants issued a
customer for late payments made to the customer based on the amended settlement
agreement.
Interest Expense. Interest expense increased by $1,795, to $21,067 for the three
months ending June 30, 2002, from $19,272 for the three months ending June 30,
2001. The slight increase is related to changes in the Company's lines of credit
with financial institutions. The total balances owed under the Company's lines
of credit were $402,705 as of June 30, 2002 compared with a total balance of
$222,417 as of June 30, 2001.
3
Interest Expense - Related Parties. Interest expense associated with obligations
to related parties increased by $39,756, to $53,602 for the three months ending
June 30, 2002, from $13,846 for the three months ending June 30, 2001. The
primary increase in interest expense is associated with the Company's debentures
issued in March of 2002. The debentures accrue interest at a rate of 10% per
annum. In addition, the Company issued stock to each holder of the debentures.
The value of such stock is being amortized over the term of the debentures (six
months) and recorded as interest expense in the Company's consolidated statement
of operations. For the three months ending June 30, 2001, there was only one
outstanding note payable to a related party. As the note was a non-interest
bearing note, the Company imputed interest expense over the term of the note
payable.
Extraordinary Item - Gain on Settlement of Debt. During the three months ending
June 30, 2001, the Company settled certain vendor obligations resulting in gains
of $16,350. The Company settled the obligations with cash from operations, and
recorded an extraordinary gain on the settlement of debt in the amount of
$16,350 in the consolidated statement of operations.
Equity Interest - On April 3, 2002, the Company purchased the remaining 50%
interest in Spectrum. Spectrum became a wholly owned subsidiary on that date and
the results of their operations are included in the consolidated statement of
operations for the three months ended June 30, 2002. In the prior year, the
Company had a 50% interest in Spectrum which was accounted for under the equity
method. Thus, for the three months ended June 30, 2001, the Company's loss on
equity interest in Spectrum was shown as a separate line item in the amount of
($61,851).
Six Months Ended June 30, 2002 Compared to the Six Months Ended June 30, 2001
Net Sales. Net sales for the six months ending June 30, 2002 and 2001 were
$1,960,362 and $1,767,525, respectively. The increase of $192,837, or 10.9% 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 digital
alcohol screening products. In addition, the 2001 numbers include approximately
$310 thousand in revenues relating to a customer who is no longer in business
and $295 thousand of 1999 shipments, not recognized as revenue until 2001 based
on the nature of the shipments (consigned inventory). Thus, the actual increase
in revenue on the continuing "base business" was significantly higher for the
six months ended June 30, 2002 compared with the six months ended June 30, 2001.
Further, during the six months ended June 30, 2002, the Company experienced
significantly lower sales discounts and allowances compared to the six month
period ended June 30, 2001. 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 six months ending June 30, 2002 and 2001
were $782,971 and $687,572, 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 were 38.3% for the six months ended June 30, 2002
compared to 31.9% for the six months ended June 30, 2001. The change in cost of
sales as a percentage of gross sales is primarily related to product mix of
sales between the periods, as the Company shipped approximately $335 thousand of
Digital Alcohol product as an initial order to a national retailer. Cost of
sales for the Company's Digital Alcohol product is significantly higher than the
cost of sales related to the Company's Drugs of Abuse Tests. In addition, the
company recorded inventory adjustments during the six months eneded June 30,
2002 based on the physical inventory counts as of that date related to inventory
shrink and slow moving product.
Selling Expenses. Selling expenses increased $33,405, to $467,585 for the six
months ending June 30, 2002 compared to $434,180 for the six months ending June
30, 2001. This increase of 7.8% is primarily due to the Company incurring retail
promotion expense at a higher rate in 2002 due to new programs with its
4
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
six months ending June 30, 2002 and 2001 were $670,399 and $229,090,
respectively. This increase of $441,309, or 192.6% was related to one time
charges associated with the Company's private placements in 2002 (approximately
$150,000), the inclusion of Spectrum Analytics Inc. general and administrative
expenses as a wholly owned subsidiary (approximately $140,000), 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 for the
Company's products.
Professional Fees. Professional fees for the six months ending June 30, 2002
were $322,147, a 186.9% increase compared to professional fees for the six
months ending June 30, 2001 of $112,273. 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 six months 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 six months ending June 30, 2002. Bad debt expense for the
six months ending June 30, 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
based on the history of no write-offs over the last two years.
Depreciation Expense. Depreciation expense increased by $6,962 primarily due to
the inclusion of depreciation related to assets of Spectrum. Their were no
significant purchases or write-offs off property plant and equipment in either
period.
Settlement Expense. Settlement expense of $22,473 was significantly lower for
the six months ending June 30, 2002, compared to the six months ending June 30,
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 six months ending June 30, 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 company.
The total cost associated with the warrants was $157,440.
Interest Expense. Interest expense increased by $21,033, to $47,217 for the six
months ending June 30, 2002, from $26,184 for the six months ending June 30,
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 $402,705 as of June 30, 2002 compared with a total balance of
$222,417 as of June 30, 2001.
Interest Expense - Related Parties. Interest expense associated with obligations
to related parties increased by $36,992 to $65,808 for the six months ending
June 30, 2002, compared to $28,816 for the six months ending June 30, 2001. The
increase is primarily associated with the Company's short-term notes payable to
related parties issued in March of 2002. For the six months ending June 30,
2001, there was only one outstanding note payable to a related party. As the
note was a non-interest bearing note, the Company 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.
5
Extraordinary Item - Gain on Settlement of Debt. During the six months ending
June 30, 2001, the Company settled certain vendor obligations with cash payments
from operations in the amount of $39,374. Prior to settlement, the obligations
totaled $100,885. As a result, the Company recorded an extraordinary gain on the
settlement of debt in the amount of $61,511 for the six months ending June 30,
2001.
Equity Interest - On April 3, 2002, the Company purchased the remaining 50%
interest in Spectrum. Spectrum became a wholly owned subsidiary on that date and
the results of their operations are included in the consolidated statement of
operations for the six months ended June 30, 2002. In the prior year, the
Company had a 50% interest in Spectrum which was accounted for under the equity
method. Thus, for the six months ended June 30, 2001, the Company's loss on
equity interest in Spectrum was shown as a separate line item in the amount of
($117,339).
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 $1.3 million larger than our current assets, and
our total liabilities are approximately $1.7 million larger than our total
assets. The Company currently does not have any active lines of credit with
financial institutions. The Company is currently pursuing a financing
arrangement with an SBA lender whereby the Company would receive a five year
loan which would allow the Company to significantly improve its current cash
position by executing payoffs on current "cash-draining" debt obligations. In
addition, the prospective loan would provide funds for operations to allow the
Company to stabilize its cash flow and have funds available to invest in
generating new business. No assurances can be given that management will be
successful in securing such a financing vehicle, however, the Company is
actively pursuing various potential financing options with several lenders.
As of June 30, 2002, we had cash and cash equivalents of $245 and negative
working capital of $1.3 million. Cash used by operating activities for the six
months ended June 30, 2002, amounted to $124 thousand, primarily due to the net
loss from operations, compared to $2 thousand for the prior period. Cash used in
investing activities for the six months ended June 30, 2002, amounted to $3
thousand compared to $140 thousand for the prior period. Cash provided by
financing activities for the six months ended June 30, 2002 and 2001, amounted
to $125 thousand and $127 thousand, respectively. Cash provided by financing
activities in 2002 consisted primarily of proceeds from private placements
offset somewhat by repayments of amounts due on lines of credit. Cash provided
by financing activities in 2001 was primarily related to proceeds received from
the Company's lines of credit with financial institutions.
We have sustained significant losses, 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 Princeton BioMeditech Corporation ("PBM"), a
former supplier to us and a major stockholder of ours, both directly and through
its owner and one of our directors, Dr. Jemo Kang, 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. Management believes that should such financing be arranged, PBM would
cooperate with the Company in subordinating its priority position.
6
The Company has settled various litigation, which settlements have resulted in
the Company agreeing to significant settlement payments in the future. As of the
date of this filing, the Company has not made the July or August payments due
Costco ($12,500 each), and was late on the May payment due Costco, resulting in
the issuance of three default warrants per the settlement agreement (for the
purchase of an aggregate of approximately 142,500 shares at an average exercise
price of approximately $0.275 per share), has made neither the second and third
payments due Vivian Younger nor the first two scheduled monthly payments
thereafter ( for an aggregate of $20,357 owing), the first payment due the FDA
($50,000), the first payment due to Dr. and Mrs. Niccole ($5,000), or the
balance of the stipulated judgment due IBC ($20,000).
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. The
Company has made progress to date securing additional distribution with such
national retailers as CVS/pharmacy Drug Stores and Target Stores, Inc. Of
course, no assurance can be provided that such other 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, Vivian Younger, IBC and the PBM Note.
7
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, our alcohol
breath scan and colon screening test. As a result, these tests have steadily
increased as a percentage of our overall revenues.
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. For the three and six months ended June 30,
2002, three of our customers represented 75% and 80% of our total sales,
respectively. As of June 30, 2002, these three customers represented
approximately 85% of our accounts receivable balance. 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 do not have any established
bank credit arrangements.
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;
8
- - 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 $1.7
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,
9
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 23.6 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. The OTC
Bulletin Board is not a "Market" per se, but rather a quotation service for
market makers. 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. In 2003, a new market called the BBX will take the OTC Bulletin Board's
place. The BBX will not have minimum share price, income or asset requirements.
The BBX will utilize a new automatic electronic trading system which should
facilitate faster, more efficient trades, more accurate data collection and
greater ability to observe trading patterns.
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.
10
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
On May 22, 2002, the Company was named in an action, styled International Cancer
Alliance For Research and Education a.k.a. International Cancer Alliance vs.
Worldwide Medical Corporation; and DOES 1-100, inclusive, Orange County Superior
Court, Case Number 02CC066662. Plaintiffs complaint is for breach of contract,
open book account, unjust enrichment, specific performance, accounting,
injunctive relief and declaratory relief. Plaintiffs allege that the Company
breached its contract and failed to pay plaintiff amounts equal to $0.50 per kit
sold beginning with the period August 6, 1988. Plaintiffs seek general
compensatory and consequential damages in a sum to be established according to
proof. The Company filed an answer to the complaint on June 28, 2002, in which
the Company denied all the allegations contained therein.
On May 22, 2002, the Company was named in an action, styled James Diederich vs.
Worldwide Medical Corporation; and Does 1-100, inclusive, Orange County Superior
Court, Case Number 02CC06663. Plaintiffs complaint is for breach of contract
(failure to pay commissions), breach of contract (failure to tender stock),
quantum meruit, unjust enrichment, specific performance and accounting.
Plaintiff alleges that the Company failed to compensate him for services
provided and seeks monetary damages in the minimum principal amount of $350,000
and 145,000 shares of the Company's common stock. The Company filed an answer to
the complaint on July 3, 2002, in which the Company denied all the allegations
contained therein.
Item 2 - Changes in Securities
From May 21, 2002 thru June 30, 2002 the Company privately sold 1,244,000 shares
of its restricted common stock for total proceeds of $311,000. As the shares
were sold at $0.25 per share, the Company incurred discounts on private
placements in the amount of $97,832, and incurred fees associated with the
private placement which totaled $17,500 in cash and 16,400 shares of restricted
common stock. Exemption from registration for such transaction is claimed under
Rule 506 under Regulation D of the Securities Act.
In June of 2002, the Company issued 427,172 shares of its common stock as
satisfaction of $106,753 in commissions due a related party. Exemption from
registration for such transaction is claimed under Section 4(2) of the
Securities Act.
11
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
12
Signatures
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
WORLDWIDE MEDICAL CORPORATION
Date: August 19, 2002 By: /s/ Daniel G. McGuire
---------------- --------------------------------
Daniel G. McGuire
President, Chief Executive
Officer
Date: August 19, 2002 By: /s/ Kevin J. Gadawski
---------------- --------------------------------
Kevin J. Gadawski
Chief Operating Officer,
Chief Financial Officer,
Principal Accounting
Officer
13