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 September 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
-----------------------------
(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)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (949) 598-8378
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 20,393,408 as of November 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
1
WORLDWIDE MEDICAL CORPORATION
CONSOLIDATED BALANCE SHEET
(UNAUDITED)
ASSETS. . . . . . . . . . . . . . . . . . . . . . . . . . September 30,2002
Current assets:
Cash . . . . . . . . . . . . . . . . . . . . . . $ 7,868
Restricted Cash. . . . . . . . . . . . . . . . . 416,666
Accounts receivable - trade, net of
allowance of $0. . . . . . . . . . . . . . . . 807,510
Inventories. . . . . . . . . . . . . . . . . . . 469,956
Prepaid expenses . . . . . . . . . . . . . . . . 23,099
Payroll advance to officer . . . . . . . . . . . 17,718
Other receivables:
Note receivable from former officer. . . . . . . 7,749
Note receivable from officer .. . . . . . . . . 25,000
Other. . . . . . . . . . . . . . . . . . . . . . 145
--------------
Total current assets . . . . . . . . . . . 1,775,711
Property and equipment, net. . . . . . . . . . . . . 180,959
Goodwill.. . . . . . . . . . . . . . . . . . . . . . 38,661
Other assets . . . . . . . . . . . . . . . . . . . . 66,907
--------------
TOTAL ASSETS. . . . . . . . . . . . . . . . . . . . . . . $ 2,062,238
--------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable - trade . . . . . . . . . . . . . . $ 687,241
Accrued payroll and payroll taxes. . . . . . . . . . 117,214
Accrued commissions - related party. . . . . . . . . 74,764
Accrued interest . . . . . . . . . . . . . . . . . . 44,467
Accrued expenses . . . . . . . . . . . . . . . . . . 108,803
Accrued settlement obligations, current portion. . . 107,525
Capital lease obligations - financial institutions,
current portion . . . . . . . . . . . . . . . . . 21,449
Notes payable, related parties, current portion. . . 328,052
--------------
Total current liabilities . . . . . . . . . . . $ 1,489,515
Capital lease obligations - financial institutions,
net of current portion. . . . . . . . . . . . . . . . . 32,205
Note payable, net of current portion. . . . . . . . . . . 1,650,000
Unamortized discount, long-term notes payable . . . . . . (428,505)
Unamortized loan issue costs. . . . . . . . . . . . . . . (196,879)
Accrued settlement obligations, noncurrent. . . . . . . . 150,000
--------------
TOTAL LIABILITIES . . . . . . . . . . . . . . . . . . . . 2,696,336
--------------
STOCKHOLDERS' DEFICIT
Common stock ($0.01 par value, 30,000,000
shares authorized, 19,456,900 shares issued
and outstanding). . . . . . . . . . . . . . . . . . . . 194,569
Additional paid-in capital. . . . . . . . . . . . . . . . 5,923,503
Accumulated deficit . . . . . . . . . . . . . . . . . . . (6,671,009)
Common stock receivables - officers . . . . . . . . . . . (72,366)
Common stock receivables - others . . . . . . . . . . . . (8,795)
--------------
TOTAL SHAREHOLDERS' DEFICIT . . . . . . . . . . . . . . . (634,098)
--------------
TOTAL LIABILITIES AND SHAREHOLDERS' DEFICIT . . . . . . . $ 2,062,238
--------------
(The accompanying notes are an integral part of the consolidated financial
statements)
2
WORLDWIDE MEDICAL CORPORATION
CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED)
Three Months Ending September 30, Nine Months Ending September 30,
2002 2001 2002 2001
Net Sales. . . . . . . . . . . . . . . . . $ 727,696 $ 562,673 $ 2,684,110 $ 2,330,198
Cost of sales. . . . . . . . . . . . . . . 309,017 295,933 1,089,730 983,243
---------------- ---------------- ---------------- ----------------
Gross Profit . . . . . . . . . . . . . . . 418,679 266,740 1,594,380 1,346,955
---------------- ---------------- ---------------- ----------------
Operating expenses:
Selling. . . . . . . . . . . . . . . . . . 213,708 170,338 667,109 648,544
General and administrative . . . . . . . . 318,940 261,239 1,002,081 373,212
Professional fees. . . . . . . . . . . . . 122,238 89,595 445,435 212,885
Bad debt expense . . . . . . . . . . . . . - - (1,000) 13,882
Depreciation and amortization. . . . . . . 19,090 17,273 59,915 51,136
Settlement expense . . . . . . . . . . . . 31,293 10,204 53,766 13,775
Settlement expense - related party . . . . - - - 157,440
---------------- ---------------- ---------------- ----------------
Total operating expense . . . . . . . . 705,269 548,649 2,227,306 1,470,874
---------------- ---------------- ---------------- ----------------
Income (loss) from operations. . . . . . . (286,590) (281,909) (632,926) (123,919)
---------------- ---------------- ---------------- ----------------
Other expense:
Interest expense . . . . . . . . . . . . . (16,813) (21,998) (64,030) (48,172)
Interest expense - related parties . . . . (44,475) (12,695) (109,033) (41,511)
Equity in losses of Spectrum Analytics . . - (67,143) - (184,482)
Net income (loss) before provision
for income taxes and extraordinary
item . . . . . . . . . . . . . . . . . . . (347,878) (383,745) (805,989) (398,084)
---------------- ---------------- ---------------- ----------------
Provision for income taxes . . . . . . . . - 408 (2,219) (1,535)
---------------- ---------------- ---------------- ----------------
Net income (loss) before extraordinary
item . . . . . . . . . . . . . . . . . . . (347,878) (383,337) (808,208) (399,619)
---------------- ---------------- ---------------- ----------------
Extraordinary gain on settlement of debt,
net of tax effect of $0. . . . . . . . . . 334,354 62,511 334,354 62,511
---------------- ---------------- ---------------- ----------------
Net income (loss). . . . . . . . . . . . . $ (13,524) $ (320,826) $ (473,854) (337,108)
---------------- ---------------- ---------------- ----------------
Net income (loss) per share, basic and
diluted. . . . . . . . . . . . . . . . . . (0.00) (0.02) (0.03) (0.03)
Weighted average shares outstanding. . . . 17,423,109 13,383,525 15,765,710 12,334,907
(The accompanying notes are an integral part of the consolidated financial
statements)
3
WORLDWIDE MEDICAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Nine months ended September 30,
2002 2001
NET CASH (USED IN) OPERATING ACTIVITIES. . $ (1,318,177) $(443,023)
NET CASH PROVIDED BY (USED IN) INVESTING
ACTIVITIES . . . . . . . . . . . . . . . . 15,844 (156,188)
NET CASH PROVIDED BY FINANCING ACTIVITIES. 1,725,283 583,522
NET CHANGE IN CASH AND CASH EQUIVALENTS. . 422,950 (15,689)
------------- ----------
CASH AT BEGINNING OF THE PERIOD. . . . . . 1,584 15,824
------------- ----------
CASH AT END OF PERIOD. . . . . . . . . . . $ 424,534 $ 135
------------- ----------
(The accompanying notes are an integral part of the consolidated financial
statements)
4
WORLDWIDE MEDICAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 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 nine month periods ended
September 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. For the three and nine month periods ended September 30, 2002,
the results of the Company, and its wholly owned subsidiary are presented on a
consolidated basis. For the three and nine month periods ending September 30,
2001, the Company had a 50% interest in Spectrum Analytics 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
In July and August of 2002, the Company privately sold 300,000 shares of its
restricted common stock to four accredited investors for total proceeds of
$75,000. Exemption from registration for such transaction is claimed under rule
504 under Regulation D of the Securities Act.
In July and September of 2002, the Company converted approximately $258,333 of
the March 2002 debentures into 1,133,332 shares of its common stock. Exemption
from registration is claimed under Section 4(2) of the Securities Act.
Also in September of 2002, the Company issued 20,000 shares of its restricted
common stock as satisfaction of approximately $5,000 in earned and unpaid
compensation to one of its officers. Exemption from registration is claimed
under Section 4(2) of the Securities Act.
In September of 2002, in conjunction with the Ziegler financing, the Company
issued an aggregate of 1,274,000 shares of its common stock as additional
consideration to four creditors whom either executed a discounted settlement in
full with the Company or executed a forbearance agreement with the Company for
any remaining obligation the Company has to the creditor. In connection with
the financing, the Company issued to Ziegler warrants to acquire 2,598,053
shares of common stock, subject to anti-dilution protection as to price and as
to the number of shares generally, at an exercise price of $0.10 per share, but
the warrants may not be exercised unless the price of the Company's common stock
equals or exceeds $0.20. The warrants are exercisable beginning in one year from
closing. Exemption from registration is claimed under Section 4(2) of the
Securities Act.
5
Also in September of 2002, the Company issued 643,750 shares as collateral
against $105,000 of promissory notes issued to three accredited investors. The
Company further issued 350,000 shares as collateral against the $62,500
debenture due December 15, 2002. Exemption from registration is claimed under
Section 4(2) of the Securities Act.
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. LONG-TERM FINANCING
On September 18, 2002, Worldwide Medical Corporation closed on $1,650,000 of
financing with Ziegler Healthcare Fund I, L.P. ("Ziegler.") The financing is a
five year note, bearing interest at the rate of 14% with interest-only
payments in year one and secured by a first priority lien on all of the
Company's tangible and intangible assets. The note is fully amortized at the
end of year five. The note allows for pre-payment with a penalty of between 1%
and 5% depending on when the pre-payment occurs. In connection with the
financing, the Company issued to Ziegler warrants to acquire 2,598,053 shares of
common stock, subject to anti-dilution protection as to price and as to the
number of shares generally, at an exercise price of $0.10 per share, but the
warrants may not be exercised unless the price of the Company's common stock
equals or exceeds $0.20. The warrants are exercisable beginning one year from
the closing.
Net loan proceeds to the Company, after costs and fees of approximately
$187,000, were $1,463,000. The proceeds will be utilized by the Company as
follows: approximately $453,000 (plus approximately $199,000 in Company common
stock) was used to retire approximately $987,000 in liabilities; $450,000 was
used to pay down approximately $772,000 in liabilities, and the creditors
holding the balance of these liabilities executed forbearance agreements in
which they have agreed to refrain from bringing any claims against the Company
for failure by the Company to pay its debt to such creditor when due and to
receive monthly payments based on a cash flow formula that allows the Company to
pay Ziegler and its current operating expenses and to maintain certain financial
covenants prior to paying any of such creditors; $50,000 was utilized to make
the Company's scheduled payment due the FDA; $416,666 has been deposited in a
restricted account for use in investing in new business opportunities and
certain other purposes, all as approved by Ziegler from time to time during the
term of the financing; and the remaining approximately $93,000 was used for
working capital.
6. SUBSEQUENT EVENTS
Stock Transactions
In October of 2002, the Company issued 250,000 shares of its common stock
registered under form S-8 to consultants for services provided to the Company.
Also in October 2002, the Company issued 350,000 total shares of its common
stock registered under form S-8 to its three executive officers based on
employment contracts executed with each of these officers effective October 1,
2002 (100,000 shares to Kevin Gadawski, CFO, 100,000 shares to Dr. Francisco
Rojas, CSO, and 150,000 shares to Daniel McGuire, President & CEO).
6
In November of 2002, the Company issued 51,470 shares to Kevin Gadawski, CFO
based on earned and unpaid compensation as a consultant prior to the execution
of Mr. Gadawski's employment contract effective October 1, 2002.
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 September 30, 2002 Compared to the Three Months Ended
September 30, 2001
Net Sales. Net sales for the three months ending September 30, 2002 and 2001
were $727,696 and $562,673, respectively. The increase of $165,023, or 29.3%
can be primarily attributed to expanded distribution both in terms of additional
product placements with the Company's base customers, and product placements
with new customers, such as CVS, Pharmacy. Further, in 2001, the Company
experienced higher than normal returns and allowances primarily due to the
phasing out of non-compliant packaging.
7
Cost of Sales. Cost of sales for the three months ending September 30, 2002 and
2001 were $309,017 and $295,933, respectively. As a percentage of gross sales,
cost of sales were 40.0% and 45.5% for the periods ending September 30, 2002 and
2001, respectively. Fluctuations in cost of sales as a percentage of gross
sales are primarily a result of shifts in product mix (cost of sales for
the Company's drugs of abuse tests are lower than the cost of sales for
the Company' s alcohol breath scan or cholesteral and colorectal screening
products).
Selling Expenses. Selling expenses increased by $43,370, to $213,708 for the
three months ending September 30, 2002 compared to $170,338 for the three months
ending September 30, 2001. The increase is primarily associated with the
increased level of sales for the period ending September 30, 2002, compared to
the period ending September 30, 2001. The Company has invested in new business
distribution during 2002. These costs have been somewhat offset by reduced
costs associated with advertising and marketing.
General and Administrative Expenses. General and Administrative expenses for
the three months ending September 30, 2002 and 2001 were $318,940 and $261,239,
respectively. This increase of $57,701, or 22.1% was related to increased costs
associated with the issuance of the Company's common stock in private placements
(approximately $22,000 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 September 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 September 30,
2002 were $122,238, a 36.4% increase compared to professional fees for the three
months ending September 30, 2001 of $89,595. The increase in professional fees
is primarily attributable to the Company incurring costs relating to investor
relations which were not incurred in 2001. The Company has significantly
reduced the cost of legal services incurred during the first half of the year
relating to various litigation issues and to the Company becoming current on all
of its filings to fully reporting status.
Settlement Expense. During the three months ended September 30, 2002, the
Company incurred settlement expenses of $31,293 relating to the final amount
issued to Interactive Business Channel to satisfy the obligation in full and
common stock warrants issued to Costco Wholesale as part of the total
consideration remitted to Costco to satisfy the Company's obligation in full.
Interest Expense. Interest expense decreased by $5,185, to $16,813 for the
three months ending September 30, 2002, from $21,998 for the three months ending
September 30, 2001. The slight decrease is related to changes in the Company's
lines of credit with financial institutions.
Interest Expense - Related Parties. Interest expense associated with obli-
gations to related parties increased by $31,780, to $44,475 for the three months
ending September 30, 2002, from $12,695 for the three months ending September
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.
8
Extraordinary Item - Gain on Settlement of Debt. During the three months ending
September 30, 2002, the Company settled certain vendor obligations resulting in
gains of $334,354. The Company settled the obligations as part of the Ziegler
financing, by issuing cash and stock to certain creditors as payment in full on
amounts owed those creditors. The value of the extraordinary gain recorded in
the consolidated financial statements equates to the total amount of liabilities
settled, less total cash and total value of stock issued by the Company. For
the three months ended September 30, 2001, the Company settled certain other
vendor obligations and recorded a gain on settlement in the amount of $62,511.
The Company used cash from operations to settle the obligations.
Equity Interest - On April 3, 2002, the Company purchased the remaining 50%
interest in Spectrum Analaytic's Inc. 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 September 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
September 30, 2001, the Company's loss on equity interest in Spectrum Analytics
was shown as a separate line item in the amount of ($67,143).
Nine Months Ended September 30, 2002 Compared to the Nine Months Ended September
30, 2001
Net Sales. Net sales for the nine months ending September 30, 2002 and 2001
were $2,684,110 and $2,330,198, respectively. The increase of $353,912, or
15.2% 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
nine months ended September 30, 2002 compared with the nine months ended
September 30, 2001. Further, during the nine months ended September 30, 2002,
the Company experienced significantly lower sales discounts and allowances
compared to the nine month period ended September 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 nine months ending September 30, 2002 and
2001 were $1,089,730 and $983,243, 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 38.7% for the nine months ended
September 30, 2002 compared to 35.0% for the nine months ended September 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 during the nine months
ending September 2002, 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.
Selling Expenses. Selling expenses increased $18,565, to $667,109 for the nine
months ending September 30, 2002 compared to $648,544 for the nine months ending
September 30, 2001. This increase of 2.8% 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.
9
General and Administrative Expenses. General and Administrative expenses for
the nine months ending September 30, 2002 and 2001 were $1,002,081 and $373,212,
respectively. This increase of $628,869, or 168.5% 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 $165,000), 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 nine months ending September 30,
2002 were $445,435, a 109.2% increase compared to professional fees for the nine
months ending September 30, 2001 of $212,885. 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 nine
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 nine months ending September 30, 2002. Bad debt
expense for the nine months ending September 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 $8,779 primarily due to
the inclusion of depreciation related to assets of Spectrum Analytics, Inc.
There were no significant purchases or write-offs of property plant and
equipment in either period.
Settlement Expense. Settlement expense of $53,766 was significantly lower for
the nine months ending September 30, 2002, compared to the nine months ending
September 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 nine months ending September
30, 2001, the Company incurred settlement expenses amounting to $161,011. The
majority of the settlement expense incurred during the nine months ending
September 30, 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 $15,858, to $64,030 for the
nine months ending September 30, 2002, from $48,172 for the nine months ending
September 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. As of September 30, 2002, the Company
has completely paid off all balances under lines of credit with financial
institutions.
Interest Expense - Related Parties. Interest expense associated with obli-
gations to related parties increased by $67,522 to $109,033 for the nine months
ending September 30, 2002, compared to $41,511 for the nine months ending
September 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
nine 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.
10
Extraordinary Item - Gain on Settlement of Debt. During the nine months ending
September 30, 2002, the Company settled certain vendor obligations resulting in
gains of $334,354. The Company settled the obligations as part of the Ziegler
financing, by issuing cash and stock to certain creditors as payment in full on
amounts owed those creditors. The value of the extraordinary gain recorded in
the consolidated financial statements equates to the total amount of liabilities
settled, less total cash and total value of stock issued by the Company. For
the nine months ended September 30, 2001, the Company settled certain other
vendor obligations and recorded a gain on settlement in the amount of $62,511.
The Company used cash from operations to settle the obligations
Equity Interest - On April 3, 2002, the Company purchased the remaining 50%
interest in Spectrum Analaytic's Inc. 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 nine months ended September 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 nine months ended
September 30, 2001, the Company's loss on equity interest in Spectrum Analytics
was shown as a separate line item in the amount of ($184,482).
LIQUIDITY AND CAPITAL RESOURCES
On September 18, 2002, the Company completed a financing transaction with
Ziegler Healthcare Fund I, L.P. ("Ziegler."). The Company issued a note for
$1,650,000, at an annual interest rate of 14%. The note requires interest only
payments in year one and is fully amortized after five years. The Company used
approximately $953,000 of the proceeds to significantly improve the balance
sheet by executing payoffs on current "cash-draining" debt obligations. In
addition, over $400,000 of the proceeds have been set aside in a restricted
account to be utilized to invest in new business. In connection with the
financing, the Company issued to Ziegler warrants to acquire 2,598,053 shares of
common stock, subject to anti-dilution protection as to price and as to the
number of shares generally, at an exercise price of $0.10 per share, but the
warrants may not be exercised unless the price of the Company's common stock
exceeds $0.20. The warrants are exercisable beginning one year from the
closing.
As of September 30, 2002, we had cash, cash equivalents, and restricted cash
of $424,534 and our current assets exceed our current liabilities by $ 286,195.
Cash used by operating activities for the nine months ended September 30,
2002, amounted to $1,318,177, compared to $443,023 for the prior period. Cash
provided by investing activities for the nine months ended September 30, 2002,
amounted to $15,844 compared to cash used in investing activities of $156,188
for the prior period. Cash provided by financing activities for the nine
months ended September 30, 2002 and 2001, amounted to $1,725,283 and $583,522,
respectively. Cash provided by financing activities in 2002 consisted primarily
of proceeds from private placements proceeds from the issuance of a long-term
note payable, offset somewhat by repayments on the Company's lines of credit
with financial institutions. 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 and have had difficulties generating sufficient cash
flow to meet obligations and sustain our operations. We 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 continue to increase our level of
sales.
11
The Company has settled various litigation, that in the past had required the
Company to make significant payments on a regular basis. In connection with the
Ziegler financing, the Company has completely satisfied its obligations to
Costco, Vivian Younger, IBC, and its first scheduled payment to the FDA. The
next payment due the FDA is not due until the second quarter of 2003. The
Company has not yet made the first payment due to Dr. and Mrs. Niccole ($5,000),
even though that payment is now due and owing.
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.
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 sales or 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 con-
sidered 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.
Dependence on Principal Products. We depend on the 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,
cholesteral and colorectal screening tests.
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.
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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 expendi-
tures. 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;
- - 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.
13
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. Our
total liabilities are approximately $634 thousand 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. 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.
Future sales of our common stock may depress our stock price. A signi-
ficant 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 11.0 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 stock-
holders 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.
14
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.
15
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On October 9, 2002, the Company was named in an action, styled Rawhide Internet
Services, Inc vs. Worldwide Medical Corporation and James G. Barrons; Toledo
Municipal Court, Lucas County, Ohio, Case Number CVF-02019152. Plaintiffs
complaint is for breach of contract. Plaintiffs allege that the Company
breached its contract and are requesting damages in the amount of $8,000,
together with attorneys' fees, judgment interest as required by law, and costs
incurred herein. The Company believes the case is without merit and intends to
defend the allegations contained therein.
ITEM 2. CHANGES IN SECURITIES
In July and August of 2002, the Company privately sold 300,000 shares of its
restricted common stock to four accredited investors for total proceeds of
$75,000. Exemption from registration for such transaction is claimed under rule
504 under Regulation D of the Securities Act.
In July and September of 2002, the Company converted approximately $258,333 of
the March 2002 debentures into 1,133,332 shares of its common stock. Exemption
from registration is claimed under Section 4(2) of the Securities Act.
Also in September of 2002, the Company issued 20,000 shares of its restricted
common stock as satisfaction of approximately $5,000 in earned and unpaid
compensation to one of its officers. Exemption from registration is claimed
under Section 4(2) of the Securities Act.
In September of 2002, in conjunction with the Ziegler financing, the Company
issued an aggregate of 1,274,000 shares of its common stock as additional
consideration to four creditors whom either executed a discounted settlement in
full with the Company or executed a forbearance agreement with the Company for
any remaining obligation the Company has to the creditor. In connection with
the financing, the Company issued to Ziegler warrants to acquire 2,598,053
shares of common stock, subject to anti-dilution protection as to price and as
to the number of shares generally, at an exercise price of $0.10 per share, but
the warrants may not be exercised unless the price of the Company's common stock
equals or exceeds $0.20. The warrants are exercisable beginning in one year from
closing. Exemption from registration is claimed under Section 4(2) of the
Securities Act.
Also in September of 2002, the Company issued 643,750 shares as collateral
against $105,000 of promissory notes issued to three accredited investors. The
Company further issued 350,000 shares as collateral against the $62,500
debenture due December 15, 2002. Exemption from registration is claimed under
Section 4(2) of the Securities Act.
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
99.1 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Sections 302 and 906 of the Sarbanes-Oxley
Act of 2002
99.2 Certification Pursuant to 18 U.S.C Section 1350, as Adopted
Pursuant to Sections 302 and 906 of the Sarbanes-Oxley
Act of 2002
(b) Reports on Form 8-K
None
16
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: November 19, 2002 By: /s/ Daniel G. McGuire
-----------------------------------
Daniel G. McGuire
President, Chief Executive Officer
Date: November 19, 2002 By: /s/ Kevin J. Gadawski
-----------------------------------
Kevin J. Gadawski
Chief Operating Officer, Chief
Financial Officer, Principal
Accounting Officer
17