UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-QSB
Amended
[X] Quarterly Report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the quarterly period ended September 30, 1999
[ ] Transition Report pursuant to 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from to
Commission File Number 001-14297
MW Medical, Inc.
----------------
(Exact name of Small Business Issuer as specified in its charter)
Nevada 86-0907471
- ------------------------------ ------------------
(State or other jurisdiction of (IRS Employer
incorporation ) Identification No.)
6955 East Caballo Drive
Paradise Valley, Arizona 85253
- ------------------------ ------------------
(Address of principal executive offices) (Zip Code)
Issuer's telephone number, including area code: (480) 483-8700
Indicate by a check mark whether the issuer (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or
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. [X] Yes [ ] No
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
Class Outstanding as November 1, 1999
---------- -------------------------------
$.001 par value Class 17,925,670 shares
A Common Stock
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
BASIS OF PRESENTATION
General
The accompanying unaudited financial statements have been prepared
in accordance with the instructions to Form 10-QSB and, therefore,
do not include all information and footnotes necessary for a
complete presentation of financial position, results of operations,
cash flows, and stockholders' equity in conformity with generally
accepted accounting principles. In the opinion of management, all
adjustments considered necessary for a fair presentation of the
results of operations and financial position have been included and
all such adjustments are of a normal recurring nature. Operating
results for the nine months ended September 30, 1999, are not
necessarily indicative of the results that can be expected for the
year ending December 31, 1999.
2
MW Medical, Inc.
CONSOLIDATED BALANCE SHEETS
September 30, December 31,
1999 1998
----------- -----------
(Unaudited) (Restated)
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 2,032,427 $ 890,283
Restricted cash 500,000
Accounts receivable 139,200 -
Receivable - P & H sale, net - 183,125
Inventory 84,401 -
Other receivable 12,515 2,000
Prepaid expenses and other current
Assets 911,261 61,282
----------- -----------
Total current assets 3,679,804 1,136,690
PROPERTY, PLANT AND EQUIPMENT 10,584 67,392
OTHER ASSETS
Deferred debt issuance costs 15,542 -
Organization costs 340 400
----------- -----------
15,882 400
----------- -----------
$ 3,706,270 $ 1,204,482
----------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 245,917 $ 70,766
Short-term debt, net
of discount 348,080 -
Line of Credit 425,000
Income taxes payable 800 1,600
Accrued expenses 1,038
Deposits 20,000 -
Accrued expenses -
related party 132,058 132,714
----------- -----------
Total current liabilities 1,171,855 206,118
STOCKHOLDERS' EQUITY
Common stock $.001 par value;
authorized - 100,000,000
shares issued and outstanding
19,110,679 and 15,723,929 in 1999
and 1998, respectively 19,111 15,724
Additional paid-in capital 8,132,999 3,425,803
Note receivable from former parent (150,000) (200,000)
Accumulated deficit (5,467,695) (2,243,163)
----------- -----------
2,534,415 998,364
----------- -----------
Total stockholders' equity $ 3,706,270 $ 1,204,482
----------- -----------
The accompanying notes are an integral part of these statements.
F-1
MW Medical, Inc.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three months ended Nine months ended
September 30, September 30,
-------------------- ---------------------
1999 1998 1999 1998
--------- ---------- --------- ---------
(Restated) (Restated)
Revenue $ 139,200 $ - $ 139,200 $ -
Cost of sales 49,800 - 49,800 -
--------- --------- --------- -----------
Gross Profit 89,400 - 89,400 -
Selling, general and
administrative expenses 644,178 157,762 1,121,498 241,550
Depreciation and
amortization 12,498 21,112 61,842 71,676
Research and development 239,781 88,484 501,932 440,424
---------- --------- --------- -----------
Net operating loss (807,057) (267,358) (1,595,872) (753,650)
Interest income (expense) (1,641,500) 5,707 (1,627,860) 6,334
---------- -------- ---------- -----------
Net loss from
continuing operations
before income taxes (2,448,557) (261,651) (3,223,732) (747,316)
Income tax expense - - 800 800
---------- -------- ---------- ----------
Net loss before
discontinued
operations (2,448,557) (261,651) (3,224,532) (748,116)
Discontinued operations
Sale of subsidiary - - - (477,862)
Operations of subsidiary
sold April 1, 1998 - 590 - (193,468)
--------- -------- ----------- --------
- 590 - 671,330)
--------- -------- ----------- --------
NET LOSS $(2,448,557) $(261,061) $(3,224,532) $(1,419,446)
=========== ========= =========== ===========
Net loss per weighted
average share $ (0.15) $ (0.02) $ (0.19) $ (0.10)
=========== ========= =========== ===========
Weighted average number
of common shares
used to compute
net loss per weighted
average share 16,852,846 14,223,929 16,852,846 14,223,929
=========== ========== ========== ==========
The accompanying notes are an integral part of these statements.
F-2
MW Medical, Inc.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
Nine months ended September 30, 1999 (Unaudited)
Note Retained Total
Additional Receivable Earnings Stock-
Common Stock Paid-in from Former(Accumulated holders'
Shares Amount Capital Parent Deficit) Equity
---------- -------- ---------- -------- ---------- -----------
BALANCE,
December
31, 1998,
as
previously
stated 15,723,929 $ 15,724 $1,055,997 $ - $ 126,643 $ 1,198,364
Restatement
(Note ___) 2,369,806 (200,000)(2,369,806) (200,000)
---------- -------- ---------- -------- ---------- -----------
BALANCE,
December
31, 1998,
as
restated 15,723,929 $ 15,724 $3,425,803 (200,000) (2,243,163) 998,364
Issuance of
common stock,
net of
issuance
costs 1,000,000 1,000 685,100 - - 686,100
Beneficial
Conversion
feature in
debt - - 1,000,000 - - 1,000,000
Convertible
debentures converted
to common
stock, 2,386,750 2,387 2,606,490 - - 2,608,877
Issuance of
stock warrants
for
services - - 163,606 - - 163,606
Issuance of stock
warrants in
connection
with debt - - 252,000 - - 252,000
Capital contribution
by former
parent - - - 50,000 - 50,000
Net loss - - - - (3,224,532)(3,224,532)
---------- -------- ---------- -------- ---------- -----------
BALANCE,
September
30, 1999 19,110,679 $ 19,111 $8,132,999 (150,000)$(5,467,695)$2,534,415
---------- -------- ---------- -------- ---------- -----------
The accompanying notes are an integral part of these statements.
F-3
MW Medical, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine months ended September 30,
----------- -----------
1999 1998
----------- -----------
(Restated)
Cash flows from operating activities
Net loss $(3,224,532) $(1,419,446)
Adjustments to reconcile net
loss to cash used in
operating activities:
Depreciation 61,842 71,676
Gain/loss on sale of subsidiary - 477,862
Amortization of discount on
convertible debt 1,208,830 -
Non-monetary compensation 148,064 -
Bad debt expense 183,125 -
Changes in assets and liabilities
Increase (decrease) in accounts
Receivable (139,200) 9,606
Increase (decrease) in inventories (84,401) 80,636
Increase in other receivable (10,515) (4,068)
Increase in prepaid expenses
and other (849,979) (47,971)
Increase (decrease) in accounts
payable and accrued expenses 173,461 (27,456)
Increase in restricted cash (500,000) -
Increase in deposits 20,000 -
Decrease in income taxes payable (800) (11,401)
----------- -----------
Net cash used in operating
Activities (3,014,105) (870,562)
----------- -----------
Cash flows from investing activities
Proceeds from the disposal of
Subsidiary - 410,543
Purchase of equipment (4,851) -
Proceeds from the disposal of
fixed assets - 30,259
----------- -----------
Net cash used in investing activities (4,851) 440,802
----------- -----------
The accompanying notes are an integral part of these statements.
F-4
MW Medical, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS continued
(Unaudited)
Nine months ended September 30,
----------- -----------
1999 1998
----------- -----------
(Restated)
Cash flows from financing activities
Borrowings - former parent - 170,000
Borrowings - loans payable - 101,450
Capital contribution from former parent 50,000 -
Proceeds from debenture offering 3,000,000 -
Proceeds from line of credit 425,000 -
Sale of common stock 686,100 1,012,500
----------- -----------
Net cash provided by
financing activities 4,161,100 1,283,950
----------- -----------
Increase (decrease) in cash
and cash equivalents 1,142,144 854,190
Cash and cash equivalents at beginning
of period 890,283 387,982
----------- -----------
Cash and cash equivalents at end of
period $ 2,032,427 $ 1,242,172
----------- -----------
Supplemental information
Cash paid for interest $ 9,613 $ 9,824
Cash paid for income taxes $ 1,600 $ 800
The accompanying notes are an integral part of these statements.
F-5
MW Medical, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS - Continued
September 30,1999 (Unaudited)
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of presentation
The accompanying consolidated financial statements have been
prepared in accordance with generally accepted accounting
principles ("GAAP") for interim financial information and with
the instructions to Form 10Q and Rule 10-01 of Regulation S-X.
Accordingly, they do not include all of the information and
footnotes required by generally accepted auditing principles
for complete financial statements. In the opinion of
management, all adjustments (consisting of normal and recurring
adjustments) considered necessary for a fair presentation, have
been included. The results of operations for the three and
nine month periods ended September 30, 1999 are not necessarily
indicative of the results that may be expected for the entire
fiscal year.
The December 31, 1998 balance sheet was adjusted for the debt
cancellation related to its former parent and a receivable due
from a former parent. In 1998, the former parent agreed to
cancel the Company's payable of $2,169,806 and the Company
recognized it in earnings for the year ended December 31, 1998.
The Company determined that the debt cancellation from parent
was in essence a capital transaction and decreased net income
by $2,169,806 and increased additional paid in capital by a
like amount. Additionally, the Company reduced its net income
and assets by $200,000 related to a receivable from the former
parent. The former parent agreed to pay the Company $200,000
to help in the start-up of the Company. The Company determined
that this receivable is in essence a capital transaction and
decreased net income by $200,000 and reclassified the
receivable into stockholders' equity.
Revenue Recognition
- -------------------
Revenues are recognized as product is delivered.
Prepaids
- --------
Prepaids consist of advance payments made on products and
services that are expected to be delivered in future periods.
F-6
MW Medical, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS - Continued
September 30,1999 (Unaudited)
NOTE B - STOCKHOLDERS' EQUITY AND CONVERTIBLE DEBENTURES
On July 14, 1999, the Company entered into a convertible
debenture agreement in which it agreed to sell to certain named
investors a total of $3,500,000 worth of 8% Convertible
Debentures due July 31, 2000. The first closing of $3,000,000
occurred on July 23, 1999. Three of the investors have agreed
to purchase the balance of $500,000 of convertible debentures
upon the registration of the common stock as required by a
registration rights agreement signed by all of the parties at
the same time.
The convertible debentures were convertible upon issuance into
registered shares of common stock at 75% of the fair market
value of the stock, when converted or $2.75 per share,
whichever is lower. The debt matures and the conversion option
expires in July 2000. Substantially all of the debentures
were converted shortly after issuance.
In connection with the agreement, the Company granted stock
purchase warrants to the investors of the debentures to acquire
up to 350,000 shares of common stock at a price of $2.75 per
share. At September 30, 1999, no warrants have been exercised.
These warrants expire in July 2002.
The Company allocated a portion of the convertible debentures
to the embedded beneficial conversion feature in the
convertible debentures and stock purchase warrants and charged
to paid-in capital. The portion allocated to the beneficial
conversion feature was charged to interest expense at the date
of issuance. The amount charged to interest expense was
$1,000,000.
The Company also granted stock purchase warrants to the
underwriters to purchase up to 250,000 shares of common stock
at a price of $3.3125 per share. As of September 30, 1999, no
warrants have been exercised. These warrants expire in July
2002. The Company recorded debt issuance costs of $163,606 of
which $148,064 was charged to operations upon conversion of the
convertible debt.
F-7
MW Medical, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS - Continued
September 30,1999 (Unaudited)
NOTE C - RECEIVABLES
The following table sets forth information about receivables as
of September 30, 1999 and December 31, 1998:
September December
30, 1999 31, 1998
-------- --------
Receivable - P&H sale
Other $243,125 $243,125
12,515 2,000
-------- --------
255,640 245,125
Less: Allowance for bad debt (243,125) (60,000)
-------- --------
$ 12,515 $185,125
NOTE D - NET IN LOSS PER SHARE
Basic loss per share is computed by dividing net loss available
to common stockholders by the weighted average number of common
shares outstanding during the periods presented. The Company's
loss per share does not include any common stock equivalents,
as their effect is antidilutive.
NOTE E - EVENTS SUBSEQUENT TO SEPTEMBER 30, 1999
Effective November 2, 1999 the Company filed a registration
statement on Form S-1 to register shares of common stock
related to the convertible debentures and warrants issued on
July 14, 1999 as part of a registration rights agreement.
F-8
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.
MW Medical, Inc. (the "Company") is in the business of designing and
developing microwave technologies for dermatological applications
through its wholly owned subsidiary, Microwave Medical Corporation
("MMC"). The Company is a Nevada corporation and was incorporated
on December 4, 1997.
Default on Note Payment by Purchaser of P&H
The Company sold the business of P&H Laboratories, Inc. ("P&H") to
Microwave Communication Corporation ("MCC") on March 9, 1998.
Pursuant to the agreement of sale, MCC signed a promissory note
payable to P&H in which it was obligated to pay $250,000 to P&H on
August 1, 1998 and $243,125 on March 31, 1999. P&H later assigned
its rights under this note to the Company.
The payment due on March 31, 1999 has not been received. The
Company re-negotiated a new payment schedule, but MCC defaulted on
this obligation in July. The Company is currently considering its
future course of action in collecting this debt.
Recent Activities of Microwave Medical Corporation
The Company's wholly owned subsidiary, MMC, has developed
proprietary technology relating to the use of microwave energy for
medical applications. MMC has a patent pending entitled, "Method
and Apparatus for Treating Subcutaneous Histological Features",
which focuses on the application of microwave energy in the
treatment of spider veins and for use in hair removal. The use of
microwave for hair removal is based upon the selective heating of
hair follicles while cooling the surface of the skin to protect the
epidermis. MMC has used computer modeling and laboratory studies to
optimize its system for hair removal.
On October 25, 1999, MMC's microwave system for non-facial hair
removal received written approval from the U.S. Department of Health
and Human Services, Food and Drug Administration (FDA) to begin
marketing. The device has been classified into Class II (Special
Controls). The Company may, therefore, market this device subject to
the general controls provisions of the Act, including requirements
for annual registration, listing of devices, good manufacturing
practice, labeling, and prohibitions against misbranding and
adulteration, and the additional controls mandated by the Class II
classification.
In May 1999, the Company received Investigational Review Board
approval from Independent Review Consulting, Inc. to conduct Phase
II clinical trials for the treatment of spider veins
(telangiectasias) in the legs using the Company's microwave delivery
system. Since this phase of the clinical trial is nearing
completion, the Company is preparing an IRB submission for the next
Phase of testing. With sufficient data, the Company expects to
proceed with an FDA submission for this application.
On July 14, 1999, the Company entered into a Convertible Debenture
and Warrant Purchase Agreement in which it agreed to sell to certain
named investors a total of $3,500,000 worth of 8% Convertible
Debentures due July 31, 2000. The first closing of $3,000,000
occurred on July 23, 1999. Under this Purchase Agreement, the
purchasers also obtained warrants for the purchase of 350,000 shares
of the Company's common stock at a price of $2.75 per share, along
with certain registration rights. Shortly after the completion of the
first sale, investors converted 87% of their debentures into
3
the Company's common stock. The shares issued pursuant to this
agreement were registered with the Securities and Exchange Commission,
effective November 3, 1999. Thereafter, the investors converted their
remaining debentures into common stock.
The Company is currently increasing internal and external capacity
for its components to reach higher production levels in order to
meet anticipated demand for its Microwave Delivery System (MDS) in
the fourth quarter of 1999. Additional orders for critical
components and materials have been placed to secure the Company's
ability to meet anticipated demand in the first quarter, 2000.
The Company is currently implementing a marketing plan to increase
awareness of its MDS hair removal product among medical specialties
in the US and around the world. Sales distribution agreements are
in-place to help create this awareness.
Financial condition
ASSETS
- ------
Total assets of the Company increased from $1,204,482 on December
31, 1998 to $3,706,270, an increase of $2,501,788 or 207%. The net
change resulted primarily from increased cash and cash equivalents,
accounts receivable, inventory and prepaid expenses. $1,142,144 or
128% of the increase was from cash and cash equivalents resulting
from the sale of $3,000,000 in convertible debentures in July. The
Company's accounts receivable balance was higher due to the sale of
two MMC-300 systems in the third quarter. Inventory was higher due
to the initiation of commercial production of MMC-300 systems.
Prepaid expenses increased $849,979 or 1387% primarily from advance
payments made toward the production of future MMC-300 systems.
LIABILITIES AND STOCKHOLDERS EQUITY
- -----------------------------------
All of the Company's asset growth during the nine months ended
September 30, 1999 was funded by increased stockholders' equity and
short-term borrowings. Stockholders' equity was $2,534,415 as of
September 30, 1999 compared to $998,364 as of December 31, 1998.
The net increase in stockholders' equity resulted from the sale of
$4,760,583 worth of common stock less the $3,224,532 loss from
operations for the nine month period ended September 30, 1999.
Common stock and additional paid in capital increased to $8,002,110
as of September 30, 1999 up from $3,241,527 as of December 31, 1998.
This was due primarily to the sale and conversion of debentures into
shares of common stock. In July 1999, the Company sold convertible
debentures for $3,000,000 to a number of investors. The debentures
were convertible at the option of the debt holder based on 75% of
the fair market value of the Company's common stock when converted
(as defined in the Debenture Agreement) or $2.75 per share,
whichever is less. Shortly after issuance, 87% of the debentures
were converted into shares of common stock of the Company.
Other short-term borrowings increased to $773,080 as of September
30, 1999 from $0 as of December 31, 1998. The increase was
attributable to the Company's borrowing against a line of credit and
the issuance of the convertible debentures.
PRIOR PERIOD ADJUSTMENTS
- ------------------------
In 1998, the Company's former parent, Dynamic Associates, Inc., as
part of its spin-off of MW, agreed
4
to cancel MMC's debt of
$2,169,806. MW recognized this discharge of indebtedness as
earnings for the year ended December 31, 1998. After careful
review, the Company changed this entry on its books to a capital
transaction, and thus decrease net income by $2,169,806 and
increased additional paid in capital by a like amount.
Additionally, as part of the spin off, Dynamic agreed to pay the
Company $200,000 to help in its start-up. MW originally entered
this item as a receivable on its books. After careful review, the
Company changed this entry to a capital transaction, thereby
decreasing net income by $200,000 and reclassifying the receivable
into stockholders' equity.
Results of Operations
Revenues increased to $139,200 or 100% for the quarter and nine
months ended September 30, 1999 from $0 for the quarter ended and
nine months ended September 30, 1998. The increase for the quarter
and nine months ended were the result of the sale of two MMC-300
machines. Furthermore, the gross profit and cost of sales increases
of $89,000 and $49,800, respectively, were directly related to the
sale of these same two machines.
Selling, general and administrative expenses increased $486,416 or
308% to $644,178 for the quarter ended September 30, 1999, up from
$157,762 for the quarter ended September 30, 1998. Selling, general
and administrative increased $879,948 or 364% to $1,121,498 for the
nine months ended September 30, 1999, up from $241,550 for the nine
months ended September 30, 1998. The increases for the quarter and
nine months ended September 30, 1999 were primarily due to the
Company ramping up for production and expansion. Selling, general
and administrative expenses were higher primarily from increases in
salaries and marketing for the quarter and nine months ended
September 30, 1999.
Research and development expenses for the quarter ended September
30, 1999 were $239,781 compared to $88,484 for the quarter ended
September 30, 1998, an increase of $151,297 or 171%. Research and
development expenses for the nine months ended September 30, 1999
were $501,932 compared to 440,424 for the nine months ended
September 30, 1998, an increase of $61,508. The increases for the
quarter and nine months ended September 30, 1999 were the result of
greater investment in the development of the Company's products.
Net interest expense was $1,641,500 for the quarter ended September
30, 1999 compared to $5,707 for the quarter ended September 30,
1998. Net interest expense was $1,627,860 for the nine months
ended September 30, 1999 compared to $6,334 for the nine months
ended September 30, 1998. The increases in interest expense for the
quarter and nine months ended September 30, 1999 resulted primarily
from a discount related to the convertible debentures. The discount
was comprised of a beneficial conversion feature, detachable
warrants and debt issuance costs incurred in connection with the
debentures.
Net loss increased to $2,448,557 for the quarter ended September 30,
1999 compared to $260,471 for the quarter ended September 30, 1998.
Net loss increased to $3,224,532 for the nine months ended September
30, 1999 compared to $2,090,766 for the nine months ended September
30, 1998. The increases were primarily related to the development
of the Company's infrastructure incurred while ramping up for
production of its product.
5
Liquidity and Capital Resources
The Company used cash of $3,014,045 from its operating activities
during the nine months ended September 30, 1999 and $870,567 from
its operating activities during the nine months ended September 30,
1998. This change resulted primarily from variations in net loss,
accounts receivable, inventories, prepaid expenses and other assets,
accounts payable, and accrued liabilities.
The Company had a net outflow of cash from its investing activities
for the nine months ended September 30, 1999 due to the purchase of
property and equipment, investment in certificates of deposit and
other deposits.
The Company had a net inflow from its financing activities for the
nine months ended September 30, 1999 primarily due to its issuance
of convertible debentures and other short-term borrowings.
The Company has been primarily involved in organization and product
development. Since, however, the Company has recently begun the
production of its product, it will require additional financing in
the future for working capital and expansion.
Impact of the Year 2000 Issue
The "Year 2000 problem" arose because many computer programs used
only the last two digits to refer to a year. Therefore, these
computer programs could not properly recognize a year that begins
with "20" instead of the familiar "19". If not corrected, many
computer applications could fail or create erroneous results. The
extent of the potential impact of the Year 2000 problem is not yet
known, and if not timely corrected, it could affect the global
economy. The Company believes that its computer programs are Y2K
compliant and does not expect to be adversely affected by the
potential problem. The Company is presently identifying and
assessing the year 2000 readiness of its key suppliers that it
believes to be significant to the Company's business operations. At
this point in time, the Company's one possible worst case scenario
would be that certain of the Company's material suppliers or vendors
experience business disruptions due to the year 2000 issue and are
unable to provide materials and services to the Company on time.
This could result in delays in delivering product to customers or
even a loss in sales.
6
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Financial Data Schedule
(b) Reports on Form 8-K
None.
7
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of
1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
DATED: November 22, 1999
MW Medical, Inc.
\s\ Grace Sim
______________________________________
Grace Sim, Secretary/Treasurer and
Director