As filed with the Securities and Exchange Commission on October 1, 2003
Registration No.
================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM SB-2REGISTRATION STATEMENT
UNDERTHE SECURITIES ACT OF 1933
QT 5, INC.
(Exact Name of Registrant as Specified in Its Charter)
DELAWARE 72-7148906
(State or Other Jurisdiction of (Primary Standard Industrial (I.R.S. Employer Identification No.)
Incorporation or Organization) Classification Code Number)
5655 LINDERO CANYON ROAD, SUITE 120
WESTLAKE VILLAGE, CALIFORNIA 91362
TELEPHONE: (818) 338-1500
(Address, Including Zip Code, and Telephone Number,
Including Area Code, of Registrant's Principal Executive Offices)
STEVEN REDER
PRESIDENT
QT 5, INC.
5655 LINDERO CANYON ROAD, SUITE 120
WESTLAKE VILLAGE, CALIFORNIA 91362
TELEPHONE: (818) 338-1500
(Name, Address, Including Zip Code, and Telephone Number, Including Area Code,
of Agent for Service)
COPIES OF COMMUNICATIONS TO:
MARY ANN SAPONE, ESQ.
Richardson & Patel LLP
10900 Wilshire Boulevard, Suite 500
Los Angeles, California 90024
Telephone: (310) 208-1182
Telecopier: (310) 208-1154
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this Registration Statement.
If any of the securities being registered on this form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. |X|
If this form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, please check the following box and list
the Securities Act registration statement number of the earlier effective
registration statement for the same offering. |_|
If this form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. |_|
If this form is a post-effective amendment filed pursuant to Rule 462(d) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. |_|
If delivery of the prospectus is expected to be made pursuant to Rule 434, check
the following box. |_|
CALCULATION OF REGISTRATION FEE
===================================================================================================================
PROPOSED MAXIMUM PROPOSED
OFFERING PRICE MAXIMUM
TITLE OF EACH CLASS OF AMOUNT TO BE PER UNIT AGGREGATE AMOUNT OF
SECURITIES TO BE REGISTERED REGISTERED OFFERING PRICE REGISTRATION FEE
(1)
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Common stock, $0.15 par value(1) 5,270,854 $0.16 $842,336 $68.23
-------------------------------------------------------------------------------------------------------------------
Common stock, $0.15 par value, issuable
upon conversion of warrants at $0.40 per 750,000 $0.40 $300,000 $24.27
share(2)
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Common stock, $0.15 par value, issuable
upon conversion of warrants at $0.75 per 750,000 $0.75 $562,500 $45.51
share(2)
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Common stock, $0.15 par value, issuable
upon conversion of warrants at $0.075 12,500,000 $0.16 $2,000,000 $161.80
per share(2)
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Common stock, $0.15 par value, issuable
upon conversion of debentures(2) 34,666,666 $0.16 $5,546,667 $448.73
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Common stock, $0.15 par value, issuable
for the payment of interest accrued on
debentures(2) 6,240,000 $0.16 $998,400 $80.77
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TOTAL 60,177,520 $14,649,167 $829.31
===================================================================================================================
(1) Calculated pursuant to Rule 457(c) under the Securities Act of 1933, as amended.
(2) Calculated pursuant to Rule 457(g) under the Securities Act of 1933, as amended.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE
OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS. WE HAVE
NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH INFORMATION THAT IS DIFFERENT. THIS
PROSPECTUS MAY BE USED ONLY WHERE IT IS LEGAL TO SELL THESE SECURITIES.
INFORMATION MAY HAVE CHANGED SINCE THAT DATE.
QT 5, INC.
60,177,520 SHARES OF COMMON STOCK
This prospectus covers the resale by selling shareholders of up to
60,177,520 shares of our common stock, $0.15 par value. The selling shareholders
are offering
5,270,854 shares of common stock,
53,406,666 shares of common stock underlying our 6% Convertible
Debentures (including interest) and the warrants issued in conjunction with
them, and
1,500,000 shares of common stock underlying warrants that were not
granted in conjunction with our 6% Convertible Debentures.
These securities are more fully described in the section of this
prospectus titled "Description of Securities to be Registered".
The selling shareholders will sell in accordance with the terms
described in the section of this prospectus titled "Plan of Distribution". We
will not receive any of the proceeds from the sale of the shares by the selling
shareholders.
Our common stock is listed on the Over-The-Counter Bulletin Board. Our
trading symbol is "QTFV."
AN INVESTMENT IN OUR SECURITIES INVOLVES A HIGH DEGREE OF RISK. YOU
SHOULD PURCHASE OUR SECURITIES ONLY IF YOU CAN AFFORD A COMPLETE LOSS OF YOUR
INVESTMENT. SEE "RISK FACTORS" BEGINNING AT PAGE 2.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED THESE SECURITIES OR DETERMINED IF THIS
PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
The date of this prospectus is October 1, 2003.
QT 5, INC.
TABLE OF CONTENTS
Page No.
Prospectus Summary 1
Risk Factors 2
Forward Looking Statements 8
Description of Securities to be Registered 8
Selling Shareholders 10
Plan of Distribution 11
Use of Proceeds 13
Directors, Executive Officers, Promoters and Control Persons 13
Security Ownership of Certain Beneficial Owners and Management 14
Disclosure of Commission Position on Indemnification for
Securities Act Liabilities 16
Organization 18
Our Business 18
Description of Property 22
Legal Proceedings 22
Management's Discussion and Analysis of Financial Condition
and Results of Operations 22
Financial Statements F-1 through F-27
Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure 29
Certain Relationship and Related Transactions 29
Market for Common Equity and Related Shareholder Matters 31
Executive Compensation 34
Experts 37
PROSPECTUS SUMMARY
THIS SUMMARY HIGHLIGHTS IMPORTANT INFORMATION ABOUT OUR BUSINESS AND ABOUT THIS
OFFERING. BECAUSE IT IS A SUMMARY, IT DOES NOT CONTAIN ALL THE INFORMATION YOU
SHOULD CONSIDER BEFORE INVESTING IN OUR SECURITIES. PLEASE READ THE ENTIRE
PROSPECTUS.
QT 5, INC.
On April 7, 2002 we entered into an Agreement for the Assignment of
Patent Rights to U.S. Patent No. 6,268,386 relating to the formulation of
nicotine water-based products. We refer to this patent throughout this
prospectus as the "NICO Patent". The agreement was effective upon the execution
and delivery of the assignment of patent. The assignment of the patent was
executed and delivered to us on June 26, 2002. Our first water-based homeopathic
nicotinum (nicotine) product is NICOWater(TM), an odorless and tasteless
water-based product that is designed to relieve the self-diagnosed symptoms of
tobacco cravings. In May 2003 we began shipping NICOWater(TM). We recently
launched a nationwide rollout of NICOWater(TM), which can now be purchased from
2,600 Eckerd retail locations as well as from certain independent pharmacies.
HOW TO CONTACT US
We maintain our principal offices at 5655 Lindero Canyon Road, Suite
120, Westlake Village, California 91362. Our telephone number at that address is
(818) 338-1500 and our facsimile number is (818) 338-1551.
THE OFFERING
We are registering 60,177,520 shares of our common stock for sale by
the shareholders identified in the section of this prospectus titled "Selling
Shareholders". The shares included in the table identifying the selling
shareholders include 5,270,854 shares of our common stock plus an additional
53,406,666 shares of common stock that have not yet been, but that may be,
issued to designated selling shareholders upon the conversion of our 6%
Convertible Debentures, the payment of interest accrued thereon or the exercise
of warrants. Of that amount, 34,666,666 shares are being registered for
conversion of the 6% Convertible Debentures, 6,240,000 shares are being
registered to cover the interest accrued on the 6% Convertible Debentures,
12,500,000 shares are being registered to cover the common stock underlying the
warrants that were issued in conjunction with the 6% Convertible Debentures, and
1,500,000 shares are being registered to cover the common stock underlying other
warrants that were not issued in conjunction with our 6% Convertible Debentures.
Information regarding the debentures and the warrants is included in the section
of this prospectus titled "Description of Securities to be Registered".
RISK FACTORS
AN INVESTMENT IN OUR SECURITIES IS VERY SPECULATIVE AND INVOLVES A HIGH DEGREE
OF RISK. YOU SHOULD CAREFULLY CONSIDER THE FOLLOWING RISK FACTORS, ALONG WITH
THE OTHER MATTERS REFERRED TO IN THIS PROSPECTUS, BEFORE YOU DECIDE TO BUY OUR
SECURITIES. IF YOU DECIDE TO BUY OUR SECURITIES, YOU SHOULD BE ABLE TO AFFORD A
COMPLETE LOSS OF YOUR INVESTMENT.
RISKS ASSOCIATED WITH OUR BUSINESS
WE ARE CURRENTLY IN A DISPUTE WITH THE FORMER OWNER OF THE NICO PATENT. IF WE
WERE TO LOSE OUR RIGHTS TO THIS PATENT, IT WOULD MATERIALLY ADVERSELY EFFECT OUR
BUSINESS, REVENUES AND RESULTS OF OPERATIONS.
We are currently focusing all of our efforts and capital toward the
advertising, distribution and marketing of NICOWater(TM). In May 2003 we
received notice from Marshall Anlauf Thompson, the inventor of the process by
which we make NICOWater(TM) and the assignor of the rights to the NICO Patent,
that he believed that we were in breach of the agreement by which we acquired
the NICO Patent. Specifically, he alleges that we have failed to meet certain
performance requirements included in that agreement and that he has a right to
terminate the agreement and obtain a return of the NICO Patent. We have
commenced an arbitration proceeding, as required by the agreement, to resolve
this dispute. If the arbitrators were to rule against us and we lost the NICO
Patent, it would have a material adverse effect on our business, revenues and
results of operations.
WE ARE A RECENTLY FORMED BUSINESS WITH VERY LITTLE OPERATING HISTORY, THEREFORE
YOU HAVE NO BASIS ON WHICH TO DETERMINE IF WE CAN BE SUCCESSFUL.
In January 2003 we merged with Moneyzone.com, Inc. in a reverse
acquisition. We have a very short history of operations, and we only began the
marketing of our first product, NICOWater(TM), in May 2003. We are not certain
that our products will generate significant revenues. During the year ended June
30, 2003, we incurred a net loss of $6,410,216 and had only $9,042 of revenues.
Because we have a short operating history, you will have no basis upon which to
accurately forecast our future operations, including sales, or to judge our
ability to develop our business. If you purchase our securities, you may lose
your entire investment.
BECAUSE WE HAVE EARNED VERY LITTLE IN REVENUES, THE SUCCESS OF OUR BUSINESS
REQUIRES CONTINUED FUNDING. IF WE CANNOT RAISE THE MONEY WE NEED TO SUPPORT OUR
OPERATIONS UNTIL WE EARN SIGNIFICANT REVENUES, WE MAY BE REQUIRED TO CURTAIL OR
TO CEASE OUR OPERATIONS AND YOU COULD LOSE YOUR ENTIRE INVESTMENT.
Our ability to develop our business depends upon our receipt of money
to continue our operations while we introduce our product and a market for it
develops. If this funding is not received as needed, it is unlikely that we
could continue our business, in which case you would lose your entire
investment.
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In August 2003 we received gross proceeds of $1,000,000 in financing
with a commitment for an additional $1,000,000 in gross proceeds to be received
following the effective date of this registration statement, which we are
required to file in conjunction with receipt of the financing. We believe that
the proceeds from this financing, in conjunction with the financing of our
accounts receivable which we are currently negotiating, will allow us to
continue our operations for a period of approximately 12 months. However, we
cannot assure you that we will be successful in obtaining accounts receivable
financing.
To the extent that we need more money than has been committed to us, we
cannot assure you that additional financing will be available to us when needed,
on commercially reasonable terms, or at all. If we are unable to obtain
additional financing as needed, we may be required to curtail the manufacturing
and marketing of our product and possibly cease our operations.
Our independent accountants have included an explanatory paragraph in
their report on our financial statements set forth in this prospectus stating
that because of our significant losses and our working capital deficit there is
substantial doubt that we can continue as a going concern.
WE ARE SUBJECT TO THE RISKS AND UNCERTAINTIES INHERENT IN NEW BUSINESSES. IF WE
FAIL TO ACCURATELY FORECAST OUR CAPITAL NEEDS OR IF OUR PRODUCT DOES NOT EARN
SIGNIFICANT REVENUES OUR BUSINESS COULD FAIL AND YOU COULD LOSE YOUR ENTIRE
INVESTMENT.
We are subject to the risks and uncertainties inherent in new
businesses, including the following:
o Our projected capital needs may be inaccurate, and we may not have
enough money to develop our business and bring our products to market
as we planned;
o We may experience unanticipated development or marketing expenses,
which may make it more difficult to develop our business and bring our
products to market;
o Even if we are able to develop our products and bring them to market,
we may not earn enough revenues from the sales of our products to cover
the costs of operating our business.
If we are unsuccessful in our efforts to develop our business and if
the product we provide does not produce revenues as we project, we are not
likely to ever become profitable and we may be required to curtail some or all
of our operations. If that happened you could lose your entire investment.
WE ARE DEPENDENT FOR OUR SUCCESS ON A FEW EMPLOYEES. THE LOSS OF ONE OR MORE OF
THESE EMPLOYEES COULD HAVE AN ADVERSE EFFECT ON OUR OPERATIONS.
Our future success will depend, to a significant degree, on the
continued services of our Chief Executive Officer, Timothy J. Owens, our
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President, Steven Reder, and our Chief Financial Officer, Norman A. Kunin. Loss
of the services of Messrs. Owens, Reder and Kunin would have a material adverse
effect on our business and operations.
WE CANNOT GUARANTEE YOU THAT A MARKET WILL DEVELOP FOR OUR PRODUCT. IF A MARKET
FOR OUR PRODUCT DOES NOT DEVELOP, YOU MAY LOSE YOUR ENTIRE INVESTMENT.
To our knowledge, there are no other water-based products available
that are used to satisfy a self-diagnosed craving for tobacco. We must be able
to successfully differentiate our product from other products that contain
nicotine, so that smokers become aware of its benefits. We cannot assure you
that we can develop a market for our product. Our inability to successfully
develop a market for our product will have a material adverse effect on our
business, operating results and financial condition and would render your
investment worthless.
WE CURRENTLY HAVE ONLY ONE PRODUCT AND IT IS MARKETED TO SMOKERS. A NUMBER OF
DIFFERENT ORGANIZATIONS, INCLUDING GOVERNMENT AND MEDICAL ORGANIZATIONS, ARE
TRYING TO CURTAIL THE USE OF CIGARETTES, PARTICULARLY BY CHILDREN. IF THE NUMBER
OF SMOKERS DECLINES, THE MARKET FOR OUR PRODUCT WILL ALSO DECLINE. THIS WILL
HAVE A MATERIAL ADVERSE EFFECT ON OUR BUSINESS.
Our product is marketed to smokers. In recent years campaigns to stop
cigarette smoking, particularly among children, have increased. Currently, many
state governments provide funds for programs designed to educate the public to
the dangers of smoking. Schools and medical organizations are also active in
alerting students and patients to the health risks associated with smoking. If
these campaigns are successful and the number of smokers declines significantly,
the need for our product will also decline. A significant decline in the number
of smokers will have a material adverse effect on our business.
WE CANNOT ASSURE YOU THAT WE WILL BE SUCCESSFUL IN DEVELOPING AND
COMMERCIALIZING OTHER PRODUCTS. IF WE DO NOT DEVELOP AND COMMERCIALIZE OTHER
PRODUCTS, AND IF NICOWATER(TM) CANNOT BE SUCCESSFULLY MARKETED, YOU MAY LOSE
YOUR ENTIRE INVESTMENT.
Our ability to successfully develop any additional products is
uncertain. Our research and development programs with respect to certain of our
potential products are at an early stage. Potential new products may require
additional research, development, testing, regulatory approval and additional
investment prior to their commercialization, which may not be successful. There
can be no assurance that we can develop commercially successful products. This
means that the value of your investment would be dependent upon whether or not
NICOWater(TM) is commercially successful and generates substantial revenues. We
cannot assure you this will happen. If NICOWater(TM) is not commercially
successful and we have no other products to market, you could lose your entire
investment.
4
WE COULD BE SUBJECT TO PRODUCT LIABILITY CLAIMS. OUR INSURANCE MAY NOT BE
ADEQUATE TO PAY SUCH CLAIMS. IF WE WERE REQUIRED TO PAY A CLAIM, OUR BUSINESS
AND FINANCIAL CONDITION COULD BE ADVERSELY EFFECTED AND YOUR INVESTMENT MAY
DECLINE IN VALUE.
Liability might result from claims made by consumers who purchase
NICOWater(TM). We presently carry product liability insurance in amounts that we
believe to be adequate, but we can give no assurance that such insurance will
remain available at a reasonable cost or that any insurance policy would offer
coverage sufficient to meet any liability arising as a result of a claim. The
obligation to pay any product liability claim could have a material adverse
effect on our business and financial condition and could cause the value of your
investment to decline.
WE MAY NOT BE ABLE TO ADEQUATELY PROTECT OUR PATENTS OR OTHER INTELLECTUAL
PROPERTY OR WE COULD BECOME INVOLVED IN LITIGATION WITH OTHERS REGARDING OUR
INTELLECTUAL PROPERTY. EITHER OF THESE EVENTS COULD HAVE A MATERIAL ADVERSE
EFFECT ON OUR BUSINESS.
We rely on a combination of patent laws, nondisclosure, trade secret
and other contractual and technical measures to protect our proprietary rights
in our product. However, we cannot assure you that these provisions will be
adequate to protect our proprietary rights. In addition, the laws of certain
foreign countries do not protect intellectual property rights to the same extent
as the laws of the United States.
Although we believe that our intellectual property does not infringe
upon the proprietary rights of third parties, others may claim that we have
infringed on their products.
If we were to become involved in disputes regarding the use or
ownership of intellectual property rights, we could incur substantial costs in
defending or prosecuting any such action and the defense or prosecution of the
action would likely result in a diversion of management resources. In addition,
in order to settle such an action we could be required to acquire licenses from
others or to give licenses to others on terms that are not beneficial to us. Any
dispute relating to our intellectual property, including our dispute with
Marshall Anlauf Thompson relating to our right to use the NICO Patent,
could have a material adverse effect on our business.
OUR PRODUCTS ARE REGULATED BY THE FDA AND, IN THE WORLDWIDE MARKET, GOVERNMENT
AGENCIES LIKE THE FDA. WE MAY BE UNSUCCESSFUL IN OBTAINING REGULATORY APPROVALS
FOR OUR PRODUCTS, EVEN THOUGH WE MAY INVEST A SIGNIFICANT AMOUNT OF TIME AND
MONEY INTO SEEKING SUCH APPROVALS. IF OUR PRODUCTS DO NOT RECEIVE THE REGULATORY
APPROVALS WE NEED TO SELL THEM, OUR REVENUES AND OPERATING RESULTS COULD BE
ADVERSELY EFFECTED AND THE VALUE OF YOUR INVESTMENT MAY DECLINE.
The manufacture, sale, promotion and marketing of our current product,
NICOWater(TM), and possibly our future products, are subject to regulation by
the FDA and similar government regulatory bodies in other countries.
As we develop or obtain new products, we will be required to determine
what regulatory requirements, if any, are required to market and sell our
products in the United States and worldwide. The process of obtaining regulatory
5
approval could take years and be very costly, if approval can be obtained at
all. If we failed to comply with such a requirement, we could be subjected to an
FDA enforcement action. Such an action could take the form of a warning letter,
an injunction to stop us from marketing the product at issue or a possible
seizure of our assets.
We intend to work diligently to assure compliance with all applicable
regulations that impact our business. We cannot assure you, however, that we
will be able to obtain regulatory approval for all of our products or that, in
the future, additional regulations will not be enacted which might adversely
impact our operations. In either case, our revenues and operating results could
be adversely effected and the value of your investment may decline.
RISKS ASSOCIATED WITH OWNERSHIP OF OUR SECURITIES
WE HAVE NOT PAID CASH DIVIDENDS AND IT IS UNLIKELY THAT WE WILL PAY CASH
DIVIDENDS IN THE FORESEEABLE FUTURE.
We plan to use all of our earnings, to the extent we have earnings, to
fund our operations. We do not plan to pay any cash dividends in the foreseeable
future. We cannot guarantee that we will, at any time, generate sufficient
surplus cash that would be available for distribution as a dividend to the
holders of our common stock. You should not expect to receive cash dividends on
our common stock.
WE HAVE THE ABILITY TO ISSUE ADDITIONAL SHARES OF OUR COMMON STOCK WITHOUT
ASKING FOR SHAREHOLDER APPROVAL, WHICH COULD CAUSE YOUR INVESTMENT TO BE
DILUTED.
Our Certificate of Incorporation currently authorizes the Board of
Directors to issue up to 100,000,000 shares of common stock. Shareholders owning
a majority of our common stock have approved an amendment to our Certificate of
Incorporation that will increase the number of shares of authorized common stock
to 300,000,000. After the amendment is filed with the Delaware Secretary of
State, the Board of Directors may generally issue shares of common stock or
warrants or options to purchase shares of common stock without further approval
by our shareholders. Accordingly, any additional issuance of our common stock
may have the effect of further diluting your investment.
WE MAY RAISE ADDITIONAL CAPITAL THROUGH A SECURITIES OFFERING THAT COULD DILUTE
YOUR OWNERSHIP INTEREST.
We require substantial working capital to fund our business. If we
raise additional money through the issuance of equity, equity-related or
convertible debt securities, those securities may have rights, preferences or
privileges senior to those of the holders of our common stock. The issuance of
additional common stock or securities convertible into common stock by our
management will also have the effect of further diluting the proportionate
equity interest and voting power of holders of our common stock.
OUR SECURITIES ARE THINLY TRADED, SO YOU MAY BE UNABLE TO LIQUIDATE THEM IF YOU
NEED MONEY.
Our common stock trades sporadically on the Over-The-Counter Bulletin
Board. In the past, there have been periods of several days or more when there
were no trades of our common stock. It is not likely that an active market for
our common stock will develop or be sustained in the foreseeable future. If you
6
needed to liquidate your common stock because you needed money, it may be
difficult or impossible to do so.
WE ARE SUBJECT TO THE PENNY STOCK RULES AND THESE RULES MAY ADVERSELY EFFECT
TRADING IN OUR COMMON STOCK.
Our common stock is considered a "low-priced" security under rules
promulgated under the Securities Exchange Act of 1934. In accordance with these
rules, broker-dealers participating in transactions in low-priced securities
must first deliver a risk disclosure document which describes the risks
associated with such stocks, the broker-dealer's duties in selling the stock,
the customer's rights and remedies and certain market and other information.
Furthermore, the broker-dealer must make a suitability determination approving
the customer for low-priced stock transactions based on the customer's financial
situation, investment experience and objectives. Broker-dealers must also
disclose these restrictions in writing to the customer, obtain specific written
consent from the customer, and provide monthly account statements to the
customer. The effect of these restrictions will likely be a decrease in the
willingness of broker-dealers to make a market in our common stock, decreased
liquidity of our common stock and increased transaction costs for sales and
purchases of our common stock as compared to other securities.
7
FORWARD LOOKING STATEMENTS
The federal securities laws provide a safe harbor for certain
forward-looking statements. This safe harbor protects us from liability in a
private action arising under either the Securities Act of 1933 or the Securities
Exchange Act of 1934 for forward-looking statements that are identified as such
and accompanied by meaningful cautionary statements, or are immaterial.
This prospectus contains forward-looking statements that involve
risks and uncertainties, such as statements about our plans, objectives,
expectations, assumptions, or future events. In some cases, you can identify
forward-looking statements by terminology such as "anticipate," "estimate,"
"plan," "project," "predict," "potential," "continue," "ongoing," "expect,"
"believe," "intend," "may," "will," "should," "could," or the negative of these
terms or other comparable terminology. These statements involve estimates,
assumptions, known and unknown risks, uncertainties and other factors that could
cause our actual results to differ materially from any future results,
performances, or achievements expressed or implied by the forward-looking
statements. Actual future results and trends may differ materially from those
made in or suggested by any forward-looking statements due to a variety of
factors, including for example, our inability to successfully market
NICOWater(TM), the passage of unfavorable federal or state regulations governing
NICOWater(TM) with which it may be difficult to comply, the loss of our ability
to use the patent for NICOWater(TM), our inability to obtain financing when and
if we need it and other factors, many of which may be outside our control.
Consequently, you should not place undue reliance on these forward-looking
statements. We discuss many of these and other risks and uncertainties in
greater detail under the sections titled, "Risk Factors" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations" in
this prospectus.
The forward-looking statements speak only as of the date on which
they are made and, except as required by law, we undertake no obligation to
update any forward-looking statement to reflect events or circumstances after
the date on which the statement is made or to reflect the occurrence of
unanticipated events. In addition, we cannot assess the impact of each factor on
our business or the extent to which any factor, or combination of factors, may
cause actual results to differ materially from those contained in any
forward-looking statements.
DESCRIPTION OF SECURITIES TO BE REGISTERED
COMMON STOCK AND RIGHTS OF COMMON SHAREHOLDERS
The securities being offered by the selling shareholders are shares of
our common stock. We are authorized by our Articles of Incorporation to issue
100,000,000 shares of common stock, $0.15 par value. Our common stock is traded
on the Over-The-Counter Bulletin Board.
Holders of our common stock are entitled to one vote per share on all
matters subject to shareholder vote. If the Board of Directors were to declare a
dividend out of funds legally available therefore, all of the outstanding shares
of common stock would be entitled to receive such dividend. We have never
declared dividends and we do not intend to declare dividends in the foreseeable
8
future. If we were liquidated or dissolved, holders of shares of our common
stock would be entitled to share ratably in assets remaining after satisfaction
of our liabilities. Holders of our common stock do not have cumulative voting
rights.
6% CONVERTIBLE DEBENTURES
On August 22, 2003 we obtained gross proceeds of $2,000,000 in
financing upon the issuance of 6% Convertible Debentures to six investors who
participated in a private offering of our securities. The funds will be received
and the debentures will be issued in two closings. The first closing, pursuant
to which we received gross proceeds of $1,000,000 in financing, took place on
August 22, 2003. The second closing, pursuant to which we will receive an
additional $1,000,000 in gross proceeds, will take place immediately after this
registration statement is declared effective. The debentures have a term of
three years. Interest is payable quarterly. We may choose to pay the interest
with shares of our common stock, so long as there is an effective registration
statement covering the sale of the common stock issued for the interest payment,
our common stock is listed on a Principal Market, as defined in the debenture,
and we have enough authorized but unissued shares of common stock available to
issue all the shares that could be issued in conjunction with the placement of
the debentures. At any time after the original issue date, the debenture may be
convertible into shares of our common stock at the option of the holder. The
number of shares of common stock issuable upon a conversion is determined by the
quotient obtained by dividing the outstanding principal amount of the debenture
to be converted by the Set Price. The Set Price is defined as $0.075 for those
debentures that were issued at the first closing and the lesser of $0.075 and
the average of the five closing prices of our common stock immediately prior to
the second closing for those debentures that will be issued at the second
closing. We have reserved 40,906,666 shares of our common stock to cover the
conversion of the debentures and the payment of interest.
We have no other debentures outstanding.
WARRANTS CONVERTIBLE INTO COMMON STOCK
In conjunction with the 6% Convertible Debentures that were offered in
the private offering dated August 22, 2003 we also issued warrants, which we
will refer to in this prospectus as the "Debenture Warrants". The Debenture
Warrants were issued at the first closing and were immediately exercisable
following the first closing at a price of $0.075 per share. The Debenture
Warrants expire five years from the date of issuance. By exercising the
Debenture Warrants, each holder of the 6% Convertible Debentures is entitled to
purchase a number of shares of common stock equal to one-half of the number of
shares of common stock into which the shareholder may convert the debenture.
Including the warrant issued to HPC Capital Management, which arranged the
financing, up to 20,000,000 shares of our common stock may be purchased through
the exercise of the Debenture Warrants. Of that amount, we are currently
registering 12,500,000 shares.
9
On June 9, 2003 we issued a common stock purchase warrant to Platinum
Partners Global Macro Fund L.P., which we will refer to in this prospectus as
the "Platinum Partners Warrant". The term of the Platinum Partners Warrant is
five years. Pursuant to the Platinum Partners Warrant, the warrant holder may
purchase, during the term, 750,000 shares of our common stock at $0.40 per share
and 750,000 shares of our common stock at $0.75 per share. If the fair market
value of our common stock is greater than the exercise price on the date the
warrant holder chooses to exercise, in lieu of exercising the Platinum Partners
Warrant, the warrant holder may elect to receive shares of common stock equal to
the value of the Platinum Partners Warrant.
SELLING SHAREHOLDERS
The following table sets forth the names of the selling shareholders
who may sell their shares using this prospectus.
The following table also sets forth certain information as of the
date of this prospectus regarding the ownership of our common stock by the
selling shareholders. Because the selling shareholders can offer all, some or
none of their shares of our common stock, we have no way of determining the
number they will hold after this offering. Therefore, we have prepared the table
below on the assumption that the selling shareholders will sell all shares
covered by this prospectus.
- ----------------------------------- ------------------- --------------------- --------------------- ------------------
SHARES HELD SHARES HELD AFTER PERCENTAGE OWNED
SELLING BEFORE THE SHARES BEING OFFERED THE OFFERING AFTER THE
SHAREHOLDER OFFERING OFFERING
- ----------------------------------- ------------------- --------------------- --------------------- ------------------
- ----------------------------------- ------------------- --------------------- --------------------- ------------------
Jerry Cox 34,188 34,188 0 0
- ----------------------------------- ------------------- --------------------- --------------------- ------------------
Platinum Partners Global Macro
Fund LP(1) 3,166,666 3,166,666 0 0
- ----------------------------------- ------------------- --------------------- --------------------- ------------------
Michael H. Weiss 400,000 400,000 0 0
- ----------------------------------- ------------------- --------------------- --------------------- ------------------
Ted L. Collins 100,000 100,000 0 0
- ----------------------------------- ------------------- --------------------- --------------------- ------------------
William Ritger 1,000,000 1,000,000 0 0
- ----------------------------------- ------------------- --------------------- --------------------- ------------------
SBI USA, LLC 3,347,171 1,720,000 1,627,171 3.5%
- ----------------------------------- ------------------- --------------------- --------------------- ------------------
Shai Stern 250,000 250,000 0 0
- ----------------------------------- ------------------- --------------------- --------------------- ------------------
Stern & Co. 100,000 100,000 0 0
- ----------------------------------- ------------------- --------------------- --------------------- ------------------
10
- ----------------------------------- ------------------- --------------------- --------------------- ------------------
Palisades Master Fund L.P(2). 12,999,999 11,437,499 1,562,500 3.4%
- ----------------------------------- ------------------- --------------------- --------------------- ------------------
Crescent International Ltd(2). 12,999,999 11,437,499 1,562,500 3.4%
- ----------------------------------- ------------------- --------------------- --------------------- ------------------
Alpha Capital AG(3) 10,400,001 9,150,001 1,250,000 2.7%
- ----------------------------------- ------------------- --------------------- --------------------- ------------------
Bristol Investment Fund Ltd.(4) 7,800,000 6,862,500 937,500 2.1%
- ----------------------------------- ------------------- --------------------- --------------------- ------------------
Ellis International Ltd.(5) 5,199,999 4,574,999 625,000 1.4%
- ----------------------------------- ------------------- --------------------- --------------------- ------------------
Zenny Trading Limited(6) 2,600,001 2,287,501 312,500 *
- ----------------------------------- ------------------- --------------------- --------------------- ------------------
HPC Capital Management(7) 2,666,667 1,416,667 1,250,000 2.7%
- ----------------------------------- ------------------- --------------------- --------------------- ------------------
(1) Includes 1,500,000 shares of common stock to be issued upon the exercise of
the Platinum Partners Warrant. The exercise price is $0.40 per share as to
750,000 shares of common stock and $0.75 per share as to 750,000 shares of
common stock.
(2) Includes 8,666,666 shares of common stock to be issued upon the conversion
of a debenture and 4,333,333 shares of common stock to be issued upon the
exercise of a Debenture Warrant. The Debenture Warrant exercise price is
$0.075 per share.
(3) Includes 6,933,334 shares of common stock to be issued upon the conversion
of a debenture and 3,466,667 shares of common stock to be issued upon the
exercise of a Debenture Warrant. The Debenture Warrant exercise price is
$0.075 per share.
(4) Includes 5,200,000 shares of common stock to be issued upon the conversion
of a debenture and 2,600,000 shares of common stock to be issued upon the
exercise of a Debenture Warrant. The Debenture Warrant exercise price is
$0.075 per share.
(5) Includes 3,466,666 shares of common stock to be issued upon the conversion
of a debenture and 1,733,333 shares of common stock to be issued upon the
exercise of a Debenture Warrant. The Debenture Warrant exercise price is
$0.075 per share.
(6) Includes 1,733,334 shares of common stock to be issued upon the conversion
of a debenture and 866,667 shares of common stock to be issued upon the
exercise of a Debenture Warrant. The Debenture Warrant exercise price is
$0.075 per share.
(7) Includes 2,666,667 shares of common stock to be issued upon the exercise of
a warrant. The warrant exercise price is $0.075 per share. The warrant was
issued to HPC Capital Management in connection with the placement of our
debentures.
* Less than 1%.
We will pay all expenses to register the shares. The selling
shareholders will pay any underwriting and brokerage discounts, fees and
commissions.
PLAN OF DISTRIBUTION
We are registering a total of 60,177,520 shares of our common stock
that are being offered by the selling shareholders. As used in this prospectus,
"selling shareholders" includes the pledgees, donees, transferees or others who
may later hold the selling shareholders' interests in the common stock. We will
pay the costs and fees of registering the common shares, but the selling
shareholders will pay any brokerage commissions, discounts or other expenses
relating to the sale of the common shares. We will not receive the proceeds from
the sale of the shares by the selling shareholders. However, some of the shares
we are registering will be issued upon the exercise of warrants held by the
selling shareholders. Although the selling shareholders are not required to
exercise the warrants, if they do so we will receive the proceeds from the
exercise.
11
The selling shareholders and any of their pledgees, assignees and
successors-in-interest may, from time to time, sell any or all of their shares
of common stock on any stock exchange, market or trading facility on which the
shares are traded or in private transactions. These sales may be at fixed or
negotiated prices. The selling shareholders may use any one or more of the
following methods when selling shares:
o ordinary brokerage transactions and transactions in which the
broker-dealer solicits purchasers;
o block trades in which the broker-dealer will attempt to sell the shares
as agent but may position and resell a portion of the block as
principal to facilitate the transaction;
o purchases by a broker-dealer as principal and resale by the
broker-dealer for its account;
o an exchange distribution in accordance with the rules of the applicable
exchange;
o privately negotiated transactions;
o broker-dealers may agree with the selling shareholders to sell a
specified number of such shares at a stipulated price per share;
o a combination of any such methods of sale; and
o any other method permitted pursuant to applicable law.
The selling shareholders may also sell shares under Rule 144 under the
Securities Act, if available, rather than under this prospectus. Broker-dealers
engaged by the selling shareholders may arrange for other brokers-dealers to
participate in sales. Broker-dealers may receive commissions or discounts from
the selling shareholders (or, if any broker-dealer acts as agent for the
purchaser of shares, from the purchaser) in amounts to be negotiated. The
selling shareholders do not expect these commissions and discounts to exceed
what is customary in the types of transactions involved.
The selling shareholders may from time to time pledge or grant a
security interest in some or all of the shares or common stock or warrants owned
by them and, if they default in the performance of their secured obligations,
the pledgees or secured parties may offer and sell the shares of common stock
from time to time under this prospectus, or under an amendment to this
prospectus under Rule 424(b)(3) or other applicable provision of the Securities
Act of 1933, amending the list of selling stockholders to include the pledgee,
transferee or other successors in interest as selling stockholders under this
prospectus.
The selling shareholders also may transfer the shares of common stock
in other circumstances, in which case the transferees, pledgees or other
successors in interest will be the selling beneficial owners for purposes of
this prospectus.
The selling shareholders and any broker-dealers or agents that are
involved in selling the shares may be deemed to be "underwriters" within the
meaning of the Securities Act in connection with such sales. In such event, any
commissions received by such broker-dealers or agents and any profit on the
resale of the shares purchased by them may be deemed to be underwriting
commissions or discounts under the Securities Act. The selling shareholders have
informed us that none of them have any agreement or understanding, directly or
indirectly, with any person to distribute the common stock.
12
We are required to pay all fees and expenses incurred by us incident to
the registration of the shares. We have agreed to indemnify the selling
shareholders against certain losses, claims, damages and liabilities, including
liabilities under the Securities Act.
USE OF PROCEEDS
We will not receive any proceeds from the sale of the common stock
offered by the selling shareholders.
DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS
The name, age and a description of the positions held by our directors,
executive officers and key employees are as follows:
NAME AGE POSITION(S)
Timothy J. Owens 48 Chief Executive Officer and Director
Steven H. Reder 45 President and Director
Norman A. Kunin 65 Chief Financial Officer
There are no family relationships between any directors and executive
officers.
The size of our Board of Directors is currently fixed at two members.
Members of the Board serve until the next annual meeting of shareholders and
until their successors are elected and qualified. Officers are appointed by and
serve at the discretion of the Board.
None of our directors or executive officers has, during the past five
years,
o had any bankruptcy petition filed by or against any business of
which such person was a general partner or executive officer,
either at the time of the bankruptcy or within two years prior to
that time,
o been convicted in a criminal proceeding and none of our directors
or executive officers is subject to a pending criminal
proceeding,
o been subject to any order, judgment, or decree not subsequently
reversed, suspended or vacated of any court of competent
jurisdiction, permanently or temporarily enjoining, barring,
suspending or otherwise limiting his involvement in any type of
business, securities, futures, commodities or banking activities,
or
o been found by a court of competent jurisdiction (in a civil
action), the Securities and Exchange Commission or the Commodity
Futures Trading Commission to have violated a federal or state
13
securities or commodities law, and the judgment has not been
reversed, suspended, or vacated.
TIMOTHY J. OWENS. Chief Executive Officer and Director. Mr. Owens is
our founder and has been Chief Executive Officer since our inception. From March
1994 to January 1999, Mr. Owens served as Chief Executive Officer of Job
Services, Inc., a privately held company. Mr. Owens received his Masters of
Science Degree in Finance from LaSalle University in Louisiana. Mr. Owens also
received letters of academic excellence in engineering from President Gerald R.
Ford and President James Carter in 1976 and 1978.
STEVEN H. REDER. President and Director. Mr. Reder has been President
and a member of our Board of Directors since January 2002. Mr. Reder also acted
as our Chief Financial Officer from January 2002 until the appointment of Norman
A. Kunin on August 8, 2003. From February 1994 to January 2002, Mr. Reder was
President, Chief Executive Officer and majority stockholder of Friends Industry,
Inc. (dba Graphix Press), a specialty printer, packaging and point of purchase
display company. Prior to his employment with Graphix Press, Mr. Reder was the
Chief Financial Officer for Delta Lithograph Company, a Bertelsmann company.
NORMAN A. KUNIN. Chief Financial Officer. Norman A. Kunin joined us in
August 2003 as Chief Financial Officer after having been a consultant since May
2003. Mr. Kunin's professional career encompasses over thirty years of
diversified financial management expertise, beginning as a certified public
accountant. Approximately 30 years ago Mr. Kunin and his partners sold their
accounting firm to a predecessor to Deloitte and Touche. Thereafter, Mr. Kunin
continued his career as a financial executive and consultant for a variety of
private and publicly held companies. From September 1998 to August 2003, Mr.
Kunin was employed by Kunin Business Consulting, a division of Ace Investors,
LLC located in Santa Maria, California. His consulting engagements included
financial forecasting, business planning and providing temporary services as a
chief financial officer and/or financial executive. Mr. Kunin earned his
Bachelor of Business degree with major in Accounting at New York's City College
and is a member of the American Institute of Certified Public Accountants.
14
SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of the date of this prospectus,
information regarding the beneficial ownership of our common stock before the
offering with respect to each of our executive officers, each of our directors,
each person known by us to own beneficially more than 5% of our common stock,
and all of our directors and executive officers as a group. The term "executive
officer" is defined as the Chief Executive Officer, President and the Chief
Financial Officer. Each individual or entity named has sole investment and
voting power with respect to shares of common stock indicated as beneficially
owned by them, subject to community property laws, where applicable, except
where otherwise noted.
- ----------------------- ----------------------------------------- ----------------- ---------------
Number of Percentage
Shares Ownership
Title of Class of Beneficially
Security Name and Address(1) Owned(2)
- ----------------------- ----------------------------------------- ----------------- ---------------
Common Stock Timothy J. Owens(2)(3)(4)(5) 6,749,520(8) 15.2%
Common Stock Steven H. Reder(2)(3)(4)(5) 5,096,780(9) 11.5%
Common Stock Norman Kunin(2)(3) 1,045,000 2.4%
Common Stock Fred DeLuca(5) 3,399,480 7.7%
Common Stock Federico Cabo(5) 3,491,250(10) 7.9%
Common Stock Platinum Partners Global Macro Fund LP(6) 3,166,666 7.1%
Common Stock Shelly Singhal(5)(7) 2,528,421 5.7%
Common Stock Palisades Master Fund L.P.(12) 12,999,999(11)(13) 22.7%
Common Stock Crescent International Ltd.(12) 12,999,999(11)(13) 22.7%
Common Stock Alpha Capital AG(12) 10,400,001(11)(13) 19.0%
Common Stock Bristol Investment Fund Ltd.(12) 7,800,000(11)(13) 14.9%
Common Stock Ellis International Ltd.(12) 5,199,999(11)(13) 10.5%
Common Stock HPC Capital Management 2,666,667 5.6%
Common Stock Zenny Trading Limited 2,600,001 5.5%
All Officers and Directors (3 persons) 12,916,300 29.1%
- ----------------------- ----------------------------------------- ----------------- ---------------
(1) The address for Mr. Owens, Mr. Reder, Mr. Kunin and Mr. DeLuca is c/o QT 5,
Inc., 5655 Lindero Canyon Road, Suite 120, Westlake Village, California 91362;
the address for Federico Cabo is P. O. Box 10007, Newport Beach, California
92658; and the address for Shelly Singhal is c/o SBI, USA, 2361 Campus Drive,
Suite 210, Irvine, California 92612.
(2) As required by Rule 13d-3 of the Securities Exchange Act of 1934, included
in this calculation are 1,280,000 shares deemed beneficially owned by Timothy J.
Owens, 1,280,000 shares deemed beneficially owned by Steven H. Reder and 750,000
shares deemed beneficially owned by Norman A. Kunin by virtue of their right to
acquire them within 60 days of the date of this prospectus. These shares
represent warrants granted to Messrs. Owens, Reder and Kunin in conjunction with
their employment.
(3) Executive Officer.
(4) Director.
(5) 5% Shareholder.
(6) As required by Rule 13d-3 of the Securities Exchange Act of 1934, included
in this calculation are 1,500,000 shares represented by a warrant that are
deemed beneficially owned by the shareholder by virtue of its right to acquire
them within 60 days of the date of this prospectus.
(7) This information was acquired from a filing made with the Securities and
Exchange Commission.
(8) Includes 52,750 shares of common stock registered to Melissa Owens, 171,250
shares of common stock registered to Zach Owens and 2,399,320 shares of common
stock registered to TMZ Group LLC.
(9) Includes 59,530 shares owned by Bill Reder, 99,750 shares owned by Geoffrey
Reder, 86,450 shares owned by Michael Reder and 66,500 shares owned by Anne
Reder.
(10) Includes 2,660,000 shares issued to OCIF-OBAC-SA de CV that are currently
held in escrow. This transaction is described in the section of this prospectus
titled "Certain Relationships and Related Transactions."
(11) As required by Rule 13d-3 of the Securities Exchange Act of 1934, all of
the common stock shown is deemed to be beneficially owned by this shareholder by
virtue of its right to acquire the common stock reported within 60 days of the
date of this prospectus as a result of the conversion of our 6% Convertible
Debentures or the exercise of the Debenture Warrants issued in conjunction
therewith.
(12) The address for this shareholder is c/o HPC Capital Management, 200
Mansell Court East, Suite 550, Roswell, Georgia 30076.
(13) The shareholder may not exercise the right to convert the 6% Convertible
Debentures or to exercise the Debenture Warrant to the extent that such
conversion or exercise would result in the shareholder beneficially owning more
than 4.9% of the common stock outstanding at the time of the conversion or
exercise.
15
DISCLOSURE OF COMMISSION POSITION ON
INDEMNIFICATION FOR SECURITIES ACT LIABILITIES
As permitted by Section 102(b)(7) of the General Corporation Law of the
State of Delaware, Article Ninth of our Certificate of Incorporation includes a
provision that eliminates the personal liability of each of our directors for
monetary damages for breach of such director's fiduciary duty as a director,
except for liability: (i) for any breach of the director's duty of loyalty to us
or our stockholders; (ii) for acts or omissions not in good faith or which
involve intentional misconduct or a knowing violation of the law; (iii) under
Section 174 of the General Corporation Law; or (iv) for any transaction from
which the director derived an improper personal benefit. If the General
Corporation Law is amended to authorize the further elimination or limitation of
the liability of directors, then the liability of a director shall be limited to
the fullest extent allowed by the amendment. However, any repeal or modification
of the indemnity provided by the General Corporation Law shall not adversely
affect any limitation on the personal liability of our directors.
Our Certificate of Incorporation requires us, to the extent and in the
manner provided by the General Corporation Law, to indemnify any person against
expenses, (including attorneys' fees), judgments, fines and amounts paid in
settlement, that are actually and reasonably incurred in connection with any
threatened, pending or completed action, suit or proceeding to which such person
was or is a party or is threatened to be made a party by reason of the fact that
such person is or was one of our directors or officers.
Our Bylaws provide that we must, to the fullest extent permitted by
Section 145 of the Delaware General Corporation Law, indemnify our directors and
officers for actions they took in good faith and in a manner reasonably believed
to be in, or not opposed to, our best interests. With respect to any criminal
action or proceeding, the officer or director must have had no reasonable cause
to believe that his conduct was unlawful. We are required by our Bylaws to
advance, prior to the final disposition of any proceeding, promptly following
request therefore, all expenses incurred by any officer or director in
connection with such proceeding. If the General Corporation Law is amended to
provide narrower rights to indemnification than are available under our Bylaws,
such amendment shall not apply to alleged actions or omissions that precede the
effective date of such amendment. Our Bylaws permit us to indemnify our
employees and agents to the fullest extent permitted by the General Corporation
Law.
Section 145 of the General Corporation Law of the State of Delaware
permits indemnification of a corporation's agents (which includes officers and
directors) because he is a party (or he is threatened to be made a party) to any
action or proceeding by reason of the fact that the person is or was an agent of
the corporation or because he is a party (or he is threatened to be made a
party) to any action or proceeding brought by or on behalf of a corporation. If
the agent is successful on the merits in defense of any action or proceeding,
the corporation must indemnify the agent against expenses actually and
reasonably incurred by the agent in such defense. Indemnification must be
authorized in the specific case upon a determination that indemnification is
proper because the person has met the applicable standard of conduct to require
indemnification. This provision of the General Corporation Law of the State of
16
Delaware is not exclusive of any other rights to which persons seeking
indemnification may be entitled under any bylaw, agreement, vote of shareholders
or disinterested directors or otherwise.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to our directors, officers and controlling persons
pursuant to the foregoing provisions, or otherwise, we have been advised that in
the opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Securities Act of 1933 and is,
therefore, unenforceable.
17
ORGANIZATION
QT 5, Inc. (referred to in this prospectus as "we", "us", or "our") was
formed on April 4, 1989 under the name Chelsea Atwater, Inc. On March 19, 1997
we changed our name to Cerx Entertainment Corporation, and on March 23, 1998 we
changed our name to Cerx Venture Corporation. Prior to 1999 we had limited
operations while we were seeking a business to acquire. On July 15, 1999, we
effected a merger with EBonlineinc.com, Inc., a Delaware corporation, and
changed our name to MoneyZone.com, Inc. (referred to in this prospectus as
"MoneyZone"). On July 18, 2002, we announced that we had entered into a Merger
Agreement with QuickTest 5, Inc., a Delaware corporation.
Effective January 9, 2003, pursuant to the terms of the Merger and Plan
of Reorganization between MoneyZone.com, Inc. and QuickTest 5, Inc., Quicktest
merged with and into MoneyZone, the separate corporate existence of Quicktest
ceased, and MoneyZone continued as the surviving entity and changed its name to
"QT 5, Inc." and its symbol on the Over The Counter Bulletin Board to "QTFV".
Prior to the merger, our Board of Directors and the holders of a
majority of the outstanding shares of common stock authorized and approved by
written consent an amendment to our Certificate of Incorporation increasing the
total number of shares of our authorized common stock from 25,000,000 shares to
100,000,000 shares. Prior to the merger but also effective on January 9, 2003,
we effectuated a 5 for 1 forward split of our outstanding shares of common
stock. All shares reported in this prospectus reflect the forward stock split
unless otherwise noted.
On February 7, 2003 we formed Nico International, Inc., our wholly
owned subsidiary.
OUR BUSINESS
On April 7, 2002 we entered into an Agreement for the Assignment of
Patent Rights to U.S. Patent No. 6,268,386 (the Patent "Agreement") relating to
the formulation of nicotine beverages, referred to in this prospectus as the
"NICO Patent". The Patent Agreement was effective only upon the execution and
delivery of the assignment of patent. The assignment of patent was executed and
delivered on June 26, 2002. Our first nicotine beverage product is NICOWater(TM)
which, as the name implies, is a water based nicotine product. Currently, we are
using our resources to introduce and market NICOWater(TM). NICOWater(TM) is used
by individuals who are unable, temporarily, to smoke because of short-term
impediments, such as being present in a non-smoking facility or in social
gatherings where smoking may be discouraged, such as in the presence of
children.
NICOWater(TM) is a homeopathic formula that may be used by adult
smokers to relieve the symptoms of tobacco cravings.
18
NICOWATER(TM)
According to the United States Food and Drug Administration (referred
to in this discussion as the "FDA"), homeopathy is a medical theory and practice
that developed in reaction to the harsh procedures used in conventional medicine
as it was practiced more than 200 years ago. Homeopathic products are normally
based on natural ingredients. Because they are diluted into minuscule doses,
they are generally without side effects. The FDA regulates homeopathic remedies
differently from drugs, because homeopathic products contain little or no active
ingredients.
NICOWater(TM) is a homeopathic formula developed for adult smokers who
suffer from the self-diagnosed symptoms of tobacco cravings. It is made from
purified water, purchased from bottlers registered as drug manufacturers with
the FDA, and nicotinum (nicotine), which is prepared by a licensed homeopathic
manufacturer. Both purified water and nicotinum are readily available from
numerous suppliers.
NICOWater(TM) is colorless, odorless and tasteless. NICOWater(TM) is
available in 16.9 oz (500 ml) bottles that can be conveniently carried or packed
in purses, briefcases or other small totes. NICOWater(TM) has been formulated to
be used by adult smokers who find themselves in environments where smoking is
prohibited or unwelcome, such as in airplanes or in the presence of children. In
order to relieve the symptoms of tobacco cravings, the user sips NICOWater(TM).
The directions on the bottle state that no more than one bottle of NICOWater(TM)
should be consumed in an hour and no more than eight bottles of NICOWater(TM)
should be consumed in a day. Although NICOWater(TM) is a highly diluted form of
nicotinum (nicotine) and is marketed to adult smokers who possess a tolerance to
nicotine, it is possible to overdose on nicotine and to suffer symptoms such as
nausea, vomiting, dizziness, diarrhea, weakness, palpitations and rapid
heartbeat. To our knowledge no one who has used NICOWater(TM) as directed has
experienced nicotine overdose.
Presently, NICOWater(TM) is our only product.
OUR MARKET
NICOWater(TM) has been developed for adult smokers who suffer from the
symptoms of tobacco cravings and find themselves in situations or environments
where smoking is prohibited or discouraged. Public smoking has been increasingly
restricted by government regulation due to the health risks associated with
second hand smoke. In the United States alone, we believe there are over 47
million smokers, many of whom will be impacted by these regulations or will find
themselves in social situations where they'd like to smoke, but can't.
Although it is our belief that we are not required to do so, we have
decided to limit the marketing of NICOWater(TM) solely to individuals who are 18
years or older. We require our retailers to verify proof of age. For this
reason, NICOWater(TM) is not sold in vending machines or in any other location
where proof of age is not required.
19
DISTRIBUTION METHODS
Currently we sell NICOWater(TM) to national pharmacy chains and through
major distributors. We are also promoting NICOWater(TM) to retail chain
pharmacies. In July 2003 we entered into an agreement with Eckerd Drug Stores to
sell NICOWater(TM). Eckerd Drug Stores is a chain of approximately 2,600 stores
in 21 states along the eastern seaboard and in the southern portion of the
United States. We anticipate that, in the future, we will also place
NICOWater(TM) in convenience stores. Sales of NICOWater(TM) have begun just
recently and, as of June 30, 2003 we earned only $9,042 in revenues. Since we
are in the early stages of developing our sales, we are not currently dependent
on one or a few major customers.
We advertise NICOWater(TM) in newspapers and on the radio. The product,
upon completion of its manufacture, is shipped in cases containing six 4-pack
carriers to its destination via trucks.
THE EFFECT OF GOVERNMENT REGULATION ON OUR BUSINESS
The FDA regulates homeopathic drugs, however the regulation is
significantly different from non-homeopathic drugs. Because homeopathic products
contain little or no active ingredients, manufacturers are deferred from
submitting new drug applications and their products are exempt from good
manufacturing practice requirements related to expiration dating and from
finished product testing for identity and strength.
However, in order to comply with FDA regulations, homeopathic drugs
generally must satisfy standards of strength, quality and purity that are
articulated in the Homeopathic Pharmacopoeia of the United States. They must
also conform with the FDA's good manufacturing practices for drug products (with
the exception of expiration dating and testing for identity and strength).
We believe that we are currently in compliance with applicable FDA
regulations and we intend to work diligently to assure compliance with current
and future regulations that impact our business. We cannot assure you, however,
that future regulations relating to homeopathic products will not be enacted
which might adversely impact our operations.
LICENSES AND OTHER INTELLECTUAL PROPERTY
On April 7, 2002 we entered into the Agreement for the Assignment of
Patent Rights to U.S. Patent No. 6,268,386 relating to the formulation of
nicotine beverages. The Patent Agreement was effective only upon the execution
and delivery of the assignment of patent. The assignment of patent was executed
and delivered on June 26, 2002. The patent will expire in 17 years. In exchange
for the patent, we issued to Marshall Anlauf Thompson, the inventor and the
holder of the NICO Patent, 133,000 shares of our common stock and agreed to pay
a royalty to the patent holder and related third parties in the amount of $1.20
per case for every case of NICOWater(TM) sold. We agreed to sell a minimum of
500,000 cases of NICOWater(TM) during the first year following the first
distribution of the nicotine based products that utilize Mr. Thompson's patent,
and a minimum of 1,000,000 cases of NICOWater(TM) during each of the following
years. We also agreed to provide sufficient funds and adequate personnel to
20
market NICOWater(TM), in order to meet the performance goals. If we fail to meet
the performance goals, we could lose the patent. In June 2002, Mr. Thompson
agreed to accept a prepayment of royalties in the amount of $150,000, which we
paid by issuing 399,000 shares of our common stock. We are currently involved in
a dispute with Mr. Thompson as to whether or not we are still entitled to
develop and sell products based on the NICO Patent. This dispute is described in
the section of this prospectus titled "Legal Proceedings".
We are in the process of reviving our application to register the mark,
"NICO" with the United States Patent and Trademark Office. We believe that, as
we grow, the name recognition and image that we develop in our market will
significantly enhance customer response to our product. Accordingly, our
trademark is important to our business.
Other than the foregoing, we have no licenses, franchises or
concessions and we have not entered into labor contracts.
COMPETITION
To our knowledge, NICOWater(TM) is the only product that is
manufactured solely for the purpose of providing nicotine to smokers who are
temporarily unable to smoke. Although we believe that there are 47 million
smokers in the United States, we do not know if they will find our product
helpful if they are unable to smoke, if they will decline to use our product
because of the price, or if our advertising and promotion will be successful in
reaching our target market.
COMPLIANCE WITH ENVIRONMENTAL LAWS
Our manufacturing and distribution is outsourced to third parties. To
our knowledge, federal, state or local environmental laws do not effect our
operations and we have not spent any funds to comply with any such laws.
STATUS OF THE LAUNCH OF NICOWATER(TM)
Notwithstanding positive market response to the launch of
NICOWater(TM), our initial product, we have experienced some formidable
challenges to our national product rollout resulting in slower than expected
product placement.
Shortly after NICOWater(TM) was first made available in a major retail
chain (Brooks Pharmacy), legislation was introduced in the State of Maine that
would have immediately banned the sale of NICOWater(TM) there. The proposed
legislation has been tabled until the 2004 legislative session, however the
negative publicity which surrounded this event caused Brooks Pharmacy to suspend
its sale of NICOWater(TM) until we make further progress in securing broad
distribution.
In addition, an allegation was made by the original patent inventor,
Marshall Anlauf Thompson, and his associates that we are in default of the
Patent Agreement. In response we initiated an arbitration proceeding in
accordance with
21
the terms of the Patent Agreement. We intend to aggressively defend and assert
our rights under the Patent Agreement.
These issues have slowed certain aspects of the national rollout of our
product. Although we have been successful in opening major regional and national
accounts, we are currently assessing the impact of above mentioned events and
delays in terms of the effect on our initial business plan.
EMPLOYEES
We have 8 full-time employees.
ITEM 2. DESCRIPTION OF PROPERTY
Our office facilities are located at 5655 Lindero Canyon Road, Suite
120, Westlake Village, California 91362. We lease this 7,200 square foot
facility at market rates. Our current rent is $7,888 per month. The lease
provides for a rent increase in the amount of $0.05 per square foot for the
second and third year of the term. The lease expires on April 30, 2005. We have
an option to renew the lease for an additional three year term. We believe that
this space is sufficient for our needs for the foreseeable future.
LEGAL PROCEEDINGS
On November 15, 2002, Fidelity Mortgage, Inc. filed a lawsuit against
us in the Supreme Court of the State of New York alleging that we breached a
sublease. Fidelity is seeking $156,400 in damages plus interest, costs and
attorneys' fees. We are defending this litigation.
We are currently involved in a dispute with Marshall Anlauf Thompson,
the former owner of the NICO Patent, and Platinum Products, LLC regarding our
rights to the NICO Patent. In May 2003 Mr. Thompson notified us of our alleged
failure to meet the performance goals required by the Patent Agreement. Platinum
Products, LLC alleges that it has obtained the rights to use the NICO Patent. On
June 4, 2003 we initiated an arbitration proceeding with the American
Arbitration Association, as required by the Patent Agreement, to seek a finding
that no breach has occurred and that we have retained our rights to the NICO
Patent.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Effective January 9, 2003, we completed a merger with Quicktest 5, Inc.
In conjunction with the merger, our Board of Directors changed our fiscal year
from December 31st to June 30th.
22
In May 2003 we began the distribution and sale of our first product,
NICOWater(TM). NICOWater(TM) is an odorless and tasteless water based
homeopathic nicotinum (nicotine) adult product designed to relieve the symptoms
of self-diagnosed tobacco cravings. NICOWater(TM) is marketed and sold to adults
over the age of 18.
Since our acquisition of the NICO Patent, we have focused our efforts
on manufacturing, marketing and selling this product. Other than NICOWater(TM),
we have not developed nor do we have the right to market any other products.
However, we are in negotiations to acquire licenses for certain intellectual
property rights and the associated research and development efforts and FDA
approvals relating to an HIV 1 and 2 professional use test kit, a retail and
professional "in vitro" drug test kit and a mobile professional cardiac
pulmonary test kit.
Notwithstanding positive market response to the launch of
NICOWater(TM), our initial product, we have experienced some formidable
challenges to our national product rollout resulting in slower than expected
product placement.
Shortly after NICOWater(TM) was first made available in a major retail
chain (Brooks Pharmacy), legislation was introduced in the State of Maine that
would have immediately banned the sale of NICOWater(TM) there. The proposed
legislation has been tabled until the 2004 legislative session, however the
negative publicity which surrounded this event caused Brooks Pharmacy to suspend
its sale of NICOWater(TM) until we make further progress in securing broad
distribution.
In addition, an allegation was made by the original patent inventor,
Marshall Anlauf Thompson, and his associates that we are in default of the
Patent Agreement. In response we initiated an arbitration proceeding in
accordance with the terms of the Patent Agreement. We intend to aggressively
defend and assert our rights under the Patent Agreement.
These issues have slowed certain aspects of the national rollout of our
product. Although we have been successful in opening major regional and national
accounts, we are currently assessing the impact of above mentioned events and
delays in terms of the effect on our initial business plan.
GENERAL OVERVIEW
The following discussion and analysis of our financial condition and
results of operations should be read in conjunction with our audited balance
sheet as of June 30, 2003 and the audited statements of operations and cash
flows for the fiscal years ended June 30, 2003 and 2002, and the related notes
thereto. These statements have been prepared in accordance with accounting
principles generally accepted in the United States of America. These principles
require management to make certain estimates, judgments and assumptions that
affect the reported amounts of assets, liabilities, revenues and expenses, and
related disclosure of contingent assets and liabilities. On an on-going basis,
we evaluate our estimates based on historical experience and various other
assumptions that are believed to be reasonable under the circumstances, the
results of which form the basis for making judgments about the carrying values
23
of assets and liabilities that are not readily apparent from other sources.
Actual results may differ from these estimates under different assumptions or
conditions.
The important facts and factors described in this discussion and
elsewhere in this document sometimes have effected, and in the future could
effect, our actual results, and could cause our actual results to differ
materially from those expressed in any forward-looking statements made by us or
on our behalf.
As reported in the Independent Auditors' Report on our June 30, 2003
financial statements, we have incurred losses from operations and we have not
generated significant net sales revenue.
Our success is dependent upon numerous factors, including the
successful outcome of the arbitration proceeding relating to our ownership of
the NICO Patent, successful development of effective marketing strategies so
that customers understand our product and its uses, the availability of cash
when and as we need it until the revenues we earn sustain our operations, and
the agreement of our executive officers to continue providing services to us. In
August 2003 we obtained additional capital to launch our product by issuing
6% convertible debentures with a face value of $2 million. We received $1
million in gross proceeds from this financing in August 2003 and we will receive
the additional $1 million in gross proceeds following the effective date of this
registration statement. In addition, we are currently negotiating a credit
facility for accounts receivable financing. However, we cannot assure you that
we will obtain the credit facility. Furthermore, even if we received all of
these proceeds, we cannot assure you that the proceeds will generate sufficient
cash to satisfy our need for all the additional capital necessary for us to
become profitable. If we require more financing, we cannot assure you that it
will be available to us on satisfactory terms or at all.
These factors, among others, raise substantial doubt about our ability
to continue as a going concern. The accompanying consolidated financial
statements do not include any adjustments relating to the recoverability and
classification of asset carrying amounts or the amount and classification of
liabilities that might result from the outcome of these uncertainties.
CRITICAL ACCOUNTING POLICIES
In preparing our financial statements, we make estimates, assumptions
and judgments that can have a significant effect on our revenues, income or loss
from operations, and net income or net loss, as well as on the value of certain
assets on our balance sheet. We believe that there are several accounting
policies that are critical to an understanding of our historical and future
performance as these policies affect the reported amounts of revenues, expenses,
and significant estimates and judgments applied by management. While there are a
number of accounting policies, methods and estimates affecting our financial
statements, the following policies are considered critical. In addition, you
should refer to Note 1 to the accompanying consolidated financial statements for
further discussion of our accounting policies.
24
STOCK-BASED COMPENSATION. We account for non-employee stock-based
compensation under Statement of Financial Accounting Standards ("SFAS") No. 123,
"Accounting For Stock-Based Compensation." SFAS No. 123 defines a fair value
based method of accounting for stock-based compensation. However, SFAS No. 123
allows an entity to continue to measure compensation cost related to stock and
stock options issued to employees using the intrinsic method of accounting
prescribed by Accounting Principles Board Opinion No. 25, as amended ("APB 25"),
"Accounting for Stock Issued to Employees." Under APB 25, compensation cost, if
any, is recognized over the respective vesting period based on the difference,
on the date of grant, between the fair value of our common stock and the grant
price. Entities electing to remain with the accounting method of APB 25 must
make pro forma disclosures of net income and earnings per share, as if the fair
value method of accounting defined in SFAS No. 123 had been applied. We have
elected to account for its stock-based compensation to employees under APB 25.
REVENUE RECOGNITION. We recognize revenue at the time of shipment of
our products to customers. We were in our initial stage of selling our new
product line to customers or distributors as of June 30, 2003. Pursuant to Staff
Accounting Bulletin No. 101, we deferred sales and the related costs to certain
distributors as the payment terms are contingent upon customer sell-through of
product, and therefore collectibility is not reasonably assured.
RESULTS OF OPERATIONS
During the fiscal year ended June 30, 2003 we had revenues of $9,042
as compared to no revenues during the fiscal year ended June 30, 2002. Revenues
were earned during the fiscal year ended June 30, 2003 due to the introduction
to the market of our product, NICOWater(TM). Cost of sales for the fiscal year
ended June 30, 2003 was $3,708 as compared to no cost of sales for the fiscal
year ended June 30, 2002. Cost of sales included the purchase of nicotinum, four
pack carriers, labels, costs related to bottling the product and costs related
to repacking. General and administrative expenses for the fiscal year ended June
30, 2003 totaled $6,138,072 as compared to general and administrative expenses
of $3,775,560 for the fiscal year ended June 30, 2002. The increase in general
and administrative expense for the fiscal year ended June 30, 2003 was due
primarily to
o the increase in consulting fees totaling approximately
$1,382,000, which included establishing protocols for developing
and marketing our current homeopathic liquid nicotine produce and
future products that may be derived therefrom;
o the increase in legal and professional fees totaling
approximately $417,000 which were associated with completing the
merger and making the appropriate filings under the Securities
Act of 1934;
o the increase in salaries totaling approximately $328,000
resulting from the start-up of our operations; and
o an increase of approximately $137,800 attributable to increases
in expenses related to investor relations support, insurance and
rent expenses.
Other income (expense) for the fiscal year ended June 30, 2003 was made
up of $106,407 in amortization of debt discount, $151,382 of interest and
$19,689 of other expense representing losses on settlement of accounts payable.
As a result of the above, we incurred a net loss of $6,410,216 for the
fiscal year ended June 30, 2003 as compared to a net loss of $3,775,560 for the
fiscal year ended June 30, 2002. Our net loss for the fiscal year ended June 30,
2002 was attributable to our development stage activities.
25
LIQUIDITY AND CAPITAL RESOURCES
Our capital requirements, particularly as they relate to the
introduction and launch of our product and our continued testing and improvement
of our product, have been and will continue to be significant. Our future cash
requirements and the adequacy of available funds will depend on many factors,
including the pace at which we are able to launch NICOWater(TM), whether or not
a market develops for NICOWater(TM) and, if a market develops, the pace at which
it develops.
While we have recently begun to earn revenues from the sale of
NICOWater(TM), the revenues we have generated to date are not sufficient to fund
our operations. In August 2003 we obtained additional capital to roll-out our
product by issuing 6% convertible debentures with a face value of $2 million. We
received gross proceeds of $1 million from this financing in August 2003 and we
will receive the additional $1 million in gross proceeds following the effective
date of this registration statement. In addition, we are currently negotiating a
credit facility for accounts receivable financing. However, we cannot assure you
that we will obtain the credit facility. Furthermore, even if we received all of
these proceeds, we cannot assure you that they will provide all the additional
capital necessary for us to become profitable. During the next 12 months, if we
fail to earn revenues in an amount sufficient to fund our operations and we do
not obtain the credit facility, we intend to raise capital through an offering
of our securities or from additional loans. We cannot guarantee that financing
will be available to us, on acceptable terms or at all. If we do not earn
revenues sufficient to support our business and we fail to obtain other
financing, either through an offering of our securities or by obtaining
additional loans, we may be unable to maintain our operations.
As of June 30, 2003 we had $67,316 in cash, $95,226 in accounts
receivable (or $9,042 after considering deferred revenue), and inventory valued
at $88,563 consisting primarily of finished products. During the fiscal year
ended June 30, 2003 we incurred $428,957 in non-cash prepaid expense related to
the issuance of shares of our common stock for consulting services that will be
rendered in subsequent periods and $3,580,022 in non-cash expense related to the
issuance of shares of our common stock for medical, administrative, executive,
marketing and product development consulting services. During the fiscal year
ended June 30, 2003, we paid our consultants with our common stock in order to
conserve cash. Our liabilities at June 30, 2003 included accounts payable and
26
accrued expenses of $770,333, a liability in the amount of $156,400 for unpaid
lease payments on a lease we assumed from Moneyzone, and notes payable of
$282,500. The amount of $67,500 in notes payable was due to parties related to
us.
We had an operating loss of $6,132,738 for the fiscal year ended June
30, 2003 as opposed to an operating loss of $3,775,560 for the fiscal year ended
June 30, 2002. The increase in operating loss is attributable to the costs
associated with the development of our business following the merger. We had a
net loss of $6,410,216 for the fiscal year ended June 30, 2003.
Net cash used in operating activities was $1,386,824. The primary use
of cash for the fiscal year ended June 30, 2003 was to fund our net loss, offset
by $106,407 for amortization of debt discount and non-cash interest expense,
$572,352 representing the fair market value of options and warrants issued
during the fiscal year and $3,580,022 for common stock and options issued to
consultants and employees for services rendered. At this time, to conserve cash,
we outsource the manufacture and distribution of our product and, during the
last fiscal year, we paid some consultant and employee salaries with our common
stock. During the next 12 months, if we cannot generate sufficient funds to
operate our business from product sales, we may be required to sell additional
debt or equity securities or borrow funds from related parties. We cannot be
certain that we will be successful in obtaining financing if we need it.
Cash flows from investing activities for the fiscal year ended June 30,
2003 consisted of $60,000 representing the collection of a note receivable while
$8,451 was used in the purchase of property and equipment for net cash provided
by investing activities of $51,549. Cash flows from investing activities for the
year ended June 30, 2002 consisted of $9,427 spent on the purchase of property
and equipment.
Net cash provided by financing activities for the fiscal year ended
June 30, 2003 included proceeds from the sale of common stock in the amount of
$331,000, proceeds from notes payable to related parties in the amount of
$100,000, proceeds from notes payable to unrelated parties in the amount of
$385,000, a capital contribution in the amount of $300,000 from Moneyzone which
was made on the effective date of the merger, and proceeds from the exercise of
options in the amount of $270,200. We also made payments on notes payable in the
amount of $46,000, resulting in net cash provided by financing activities for
the fiscal year ended June 30, 2003 in the amount of $1,340,200. During the
fiscal year ended June 30, 2002, net cash provided by financing activities
totaled $199,750 and resulted from proceeds from the sale of our common stock.
Due to the very specific and unusual nature of NICOWater(TM), its
manufacture and sale is an unproven business model that may not be successful
and will ultimately depend on demand for the product. At this time it is
impossible for us to predict the degree to which demand for our product will
evolve or whether any potential market will be large enough to provide any
meaningful revenue or profit for us.
27
NEW ACCOUNTING STANDARDS
In November 2002, the Financial Accounting Standards Board issued
Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for
Guarantees, Including Guarantees of Indebtedness of Others," ("FIN 45"). FIN 45
requires us to recognize, at the inception of a guarantee, a liability for the
fair value of the obligation undertaken in the issuance of the guarantee. FIN 45
is effective for guarantees issued or modified after December 31, 2002. The
disclosure requirements effective for the year ending December 31, 2002 expand
the disclosures required by a guarantor about its obligations under a guarantee.
The adoption of the disclosure requirements of this statement did not impact our
financial position, results of operations or cash flows.
In December 2002, Statement of Financial Accounting Standards No.
148, "Accounting for Stock-Based Compensation - Transition and Disclosure,"
("SFAS 148") was issued. SFAS 148 amends Statement of Financial Accounting
Standards No. 123, "Accounting for Stock-Based Compensation," ("SFAS 123") to
provide alternative methods of transition for a voluntary change to the fair
value method of accounting for stock-based employee compensation. In addition,
SFAS 148 amends the disclosure requirements of SFAS 123 to require prominent
disclosures in both annual and interim financial statements about the method of
accounting for stock-based employee compensation and the effect of the method
used on the reported results. The provisions of SFAS 148 are effective for
financial statements for fiscal years ending after December 15, 2002 and interim
periods beginning after December 15, 2002. The adoption of the disclosure
requirements of this statement did not impact our financial position, results of
operations or cash flows.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity." SFAS
No. 150 establishes standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equity. It
requires that an issuer classify a financial instrument that is within its scope
as a liability (or an asset in some circumstances). SFAS No. 150 is effective
for financial instruments entered into or modified after May 31, 2003, and
otherwise is effective at the beginning of the first interim period beginning
after June 15, 2003. It is to be implemented by reporting the cumulative effect
of a change in an accounting principle for financial instruments created before
the issuance date of SFAS No. 150 and still existing at the beginning of the
interim period of adoption. Restatement is not permitted. We do not expect the
adoption of SFAS No. 150 to have a material impact upon our financial position,
cash flows or results of operations.
28
INDEPENDENT AUDITORS' REPORT
Board of Directors and Stockholders
QT 5, Inc.
We have audited the accompanying consolidated balance sheet of QT 5,
Inc. (the "Company") as of June 30, 2003, and the related consolidated
statements of operations, stockholders' equity (deficit) and cash flows for each
of the years in the two-year period then ended. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the consolidated financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of the Company
as of June 30, 2003, and the results of its operations and its cash flows for
each of the years in the two-year period then ended, in conformity with
accounting principles generally accepted in the United States of America.
The accompanying consolidated financial statements have been prepared
assuming the Company will continue as a going concern. During the year ended
June 30, 2003, the Company incurred a net loss of $6,410,216, with only $9,042
of revenue. The Company also had an accumulated deficit of $10,185,776 and
negative working capital of $736,273, with only $67,316 of cash at June 30,
2003. In addition, the Company is in arbitration with the patent holder of its
only actively marketed product to resolve various allegations made by the patent
holder against the Company. These factors, among others, as discussed in Note 1
to the consolidated financial statements, raise substantial doubt about the
Company's ability to continue as a going concern. Successful completion of the
Company's transition to the attainment of profitable operations is dependent
upon its obtaining adequate financing to fulfill its development activities and
achieving a level of sales adequate to support the Company's cost structure.
Management's plans in regard to these matters are also described in Note 1. The
consolidated financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
CORBIN & COMPANY, LLP
Irvine, California
August 19, 2003, except for Note 11, as to which the date is September 5, 2003
QT 5, INC.
CONSOLIDATED BALANCE SHEET
================================================================================
ASSETS JUNE 30, 2003
-------------------
Current assets:
Cash $ 67,316
Accounts receivable 95,226
Inventories 88,563
Deferred costs 21,551
Prepaid expenses 157,888
Notes receivable 139,500
----------------
Total current assets 570,044
Property and equipment, net of accumulated depreciation of $5,507 29,871
Patent, net of accumulated amortization of $3,676 46,324
Other assets 8,107
----------------
$ 654,346
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable and accrued expenses $ 770,333
Lease liability 156,400
Notes payable 215,000
Notes payable to related parties 67,500
Deferred revenue 86,184
Deferred rent expense 10,900
----------------
Total current liabilities 1,306,317
----------------
Commitments and contingencies
Stockholders' deficit:
Common stock, $0.15 par value; 100,000,000 shares authorized;
40,821,552 shares issued and outstanding 6,123,233
Additional paid-in capital 3,839,529
Prepaid consulting expense (428,957)
Accumulated deficit (10,185,776)
----------------
Total stockholders' deficit (651,971)
----------------
$ 654,346
- --------------------------------------------------------------------------------
See independent auditors' report and
accompanying notes to financial statements
F-2
QT 5, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
================================================================================
FOR THE YEAR ENDED FOR THE YEAR ENDED
JUNE 30, 2003 JUNE 30, 2002
-------------------- ---------------------
Revenue $ 9,042 $ -
Costs and expenses:
Cost of sales 3,708 -
General and administrative 6,138,072 3,775,560
--------------- ----------------
Operating loss (6,132,738) (3,775,560)
Other income (expense):
Amortization of debt discount (106,407) -
Interest (151,382) -
Other, net (19,689) -
---------------- ----------------
Net loss $ (6,410,216) $ (3,775,560)
=============== ================
Net loss available to common stockholders per common share:
Basic and diluted $ (0.26) $ (0.60)
============== ===============
Weighted average shares outstanding:
Basic and diluted 24,828,564 6,257,985
=============== ================
- --------------------------------------------------------------------------------
See independent auditors' report and
accompanying notes to financial statements
F-3
QT 5, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE YEARS ENDED JUNE 30, 2003 AND 2002
================================================================================
Additional Pre-paid
Common Stock Paid-in Consulting Accumulated
Shares Amount Capital Expense Deficit Total
------ ------ ------- ------- ------- -----
Balance July 1, 2001 7,847,000 $1,177,050 $(1,177,050) $ --- $ --- $ ---
Issuance of common stock to founders for no
consideration 133,000 19,950 (19,950) --- --- ---
Issuance of common stock for cash 531,335 79,700 120,050 --- --- 199,750
Issuance of common stock for services 9,312,660 1,396,899 2,104,101 --- --- 3,501,000
Issuance of common stock for patent 133,000 19,950 30,050 --- --- 50,000
Issuance of common stock for pre-paid royalties 399,000 59,850 90,150 --- --- 150,000
Net loss --- --- --- --- (3,775,560) (3,775,560)
---------- -------- ---------- ---------- ------------ ------------
Balance at June 30, 2002 18,355,995 2,753,399 1,147,351 --- (3,775,560) 125,190
Issuance of shares to Moneyzone in
recapitalization of the Company 3,000,000 450,000 (150,000) --- --- 300,000
Issuance of common stock for services 7,201,085 1,080,163 2,853,690 (428,957) --- 3,504,896
Issuance of common stock as additional
interest expense on notes payable 308,116 46,217 60,190 --- --- 106,407
Shares issued but held in escrow pending
negotiation of transaction 3,660,160 549,024 (549,024) --- --- ---
Issuance of common stock for exercise of
options 3,394,731 509,210 (224,010) --- --- 285,200
Issuance of common stock for cash 2,200,854 330,128 872 --- --- 331,000
Shares committed to be issued to employees for
services 300,000 45,000 30,126 --- --- 75,126
Issuance of common stock for conversion of
convertible promissory note 1,720,000 258,000 (86,000) --- --- 172,000
Issuance of common stock for settlement of
accounts payable 680,610 102,092 34,342 --- --- 136,434
Estimated fair market value of options and warrants
Granted to consultants for services --- --- 572,352 --- --- 572,352
Estimated value of beneficial conversion
feature on convertible promissory note --- --- 149,640 --- --- 149,640
Net loss --- --- --- --- (6,410,216) (6,410,216)
---------- ---------- ---------- ---------- ------------ ------------
Balance June 30, 2003 40,821,551 6,123,233 $3,839,529 $ (428,957) $(10,185,776) $ (651,971)
========== ========== ========== ========== ============ ============
See independent auditors' report and
accompanying notes to financial statements
F-4
QT 5, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
================================================================================
FOR THE YEAR ENDED FOR THE YEAR ENDED
JUNE 30, 2003 JUNE 30, 2002
-------------------- ---------------------
Cash flows from operating activities:
Net loss $ (6,410,216) $ (3,775,560)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 7,779 1,404
Amortization of debt discount and non-cash interest
expense 106,407 -
Loss on issuance of shares for settlement of accounts
payable 23,689 -
Fair market value of options and warrants issued 572,352 -
Gain on extinguishment of debt (2,000) -
Stocks and options issued for services 3,580,022 3,501,000
Imputed interest expense on convertible debentures 149,640 -
Changes in operating assets and liabilities:
Accounts receivable (95,226) -
Inventories (88,563) -
Deferred costs (21,551) -
Prepaid expenses (7,888) -
Other assets - (8,107)
Accounts payable and accrued expenses 712,848 142,130
Deferred revenue 86,184 -
Deferred rent expense (301) 11,201
--------------- ----------------
Net cash used in operating activities (1,386,824) (127,932)
--------------- ----------------
Cash flows from investing activities:
Collection on notes receivable 60,000 -
Purchases of property and equipment (8,451) (9,427)
--------------- ----------------
Net cash provided by (used in) investing activities 51,549 (9,427)
--------------- ----------------
Cash flows from financing activities:
Proceeds from sale of stock 331,000 199,750
Proceeds from notes payable to related parties 100,000 -
Proceeds from notes payable 385,000 -
Payments on notes payable (46,000) -
Capital contribution 300,000 -
Proceeds from exercise of options 270,200 -
--------------- ----------------
Net cash provided by financing activities 1,340,200 199,750
--------------- ----------------
F-5
QT 5, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS - Continued
================================================================================
FOR THE YEAR ENDED FOR THE YEAR ENDED
JUNE 30, 2003 JUNE 30, 2002
-------------------- ---------------------
Net increase in cash 4,925 62,391
Cash, beginning of year 62,391 -
--------------- ----------------
Cash, end of year $ 67,316 $ 62,391
=============== ================
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest $ - $ -
=============== ================
Income taxes $ - $ -
=============== ================
Promissory notes receivable entered into as a
consideration for the assumption of lease liability
and other accounts payable $ 199,500 $ -
=============== ===============
Common stock issued for prepaid consulting services $ 428,957 $ -
=============== ===============
Furniture purchased under a note payable to related
party $ 17,500 $ -
=============== ===============
Common stock issued to third parties for patent and
prepaid royalties valued at $50,000 and $150,000,
respectively $ - $ 200,000
=============== ===============
Common stock issued for settlement of accounts
payable $ 112,745 $ -
=============== ================
Exercise of options for reduction of accounts payable $ 15,000 $ -
=============== ===============
Conversion of related party convertible
promissory note to 1,720,000 shares of common stock $ 172,000 $ -
=============== ===============
Notes payable directly refinanced by related party
lender $ 122,000 $ -
=============== ===============
- --------------------------------------------------------------------------------
See independent auditors' report and
accompanying notes to financial statements
F-6
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES
BACKGROUND AND ORGANIZATION
On April 7, 2002, the Company entered into an Agreement for the Assignment of
Patent Rights to U.S. Patent No. 6,268,386 (the "Agreement") relating to the
formulation of nicotine beverages (the "Nico Patent"). The Agreement was
effective only upon the execution and delivery of the assignment of patent. The
assignment of patent was executed and delivered on June 26, 2002. The Company's
first nicotine water-based product is NICOWater(TM). In acquiring the patent,
the Company re-allocated its resources from focusing on the licensing and joint
developing of medical testing devices and other pharmaceutical products to
successfully launching its nicotine product line. In May 2003, the Company
commenced shipping NICOWater(TM), its water-based Homeopathic Nicotinum
(nicotine) product, designed to relieve the symptoms of tobacco cravings. As a
result, the Company is no longer considered a development stage enterprise as
defined in Statement of Financial Accounting Standards ("SFAS") No. 7,
"Accounting and Reporting by Development Stage Enterprises."
The Company's future plans include continuing its efforts to license small
medical device(s) and pharmaceutical products together with its continued
development for the professional and retail consumer markets. Other than its
nicotine-based line of products, the Company has not currently developed nor
does it have the definitive rights to market any other products; however, the
Company is in negotiations to acquire a license for certain intellectual
property rights and related associated research and development efforts and FDA
approvals on an H.I.V. test kit, in-vitro drug test kit and a cardiac pulmonary
test kit.
Effective January 9, 2003, pursuant to the terms of the Agreement and Plan of
Reorganization (the "Merger Agreement") between Moneyzone.com, Inc.
("Moneyzone"), and QuickTest 5, Inc. ("Quicktest") (the "Merger"), Quicktest
merged with and into Moneyzone, the separate corporate existence of Quicktest
ceased, and Moneyzone continued as the surviving entity and changed its name to
"QT 5, Inc." and its symbol on the Over the Counter Bulletin Board to "QTFV."
The original stockholders of Moneyzone retained 3,000,000 shares of common
stock. In connection with the Merger, the Company issued an aggregate 25,000,000
shares of its common stock to Quicktest stockholders resulting in the Company
having 28,000,000 shares of common stock issued and outstanding immediately
following the Merger.
F-7
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES, CONTINUED
As the Quicktest shareholders retained control of the combined entity after the
Merger was completed, this transaction was accounted for as a "reverse
acquisition." Under reverse acquisition accounting, Quicktest is considered the
accounting acquirer and Moneyzone is considered the accounting acquiree; thus,
the 3,000,000 shares of previously outstanding common stock of Moneyzone was
accounted for as an issuance of shares in a recapitalization of the Company and
valued at $300,000, representing monies advanced to Quicktest by Moneyzone prior
to the Merger that were contributed to the Company upon consummation of the
merger. In addition, the historical financial statements of Quicktest became
those of the Company. The source of consideration used by the stockholders of
Quicktest for the Merger were shares of common stock of Quicktest owned or held
beneficially prior to the Merger that were acquired by the Company upon
consummation of the Merger in exchange for the same number of similar securities
issued by the Company.
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of QT 5,
Inc. and its wholly owned subsidiary. All significant intercompany transactions
and balances have been eliminated in consolidation.
GOING CONCERN
The accompanying consolidated financial statements have been prepared in
conformity with accounting principles generally accepted in the United States of
America, which contemplate continuation of the Company as a going concern. The
Company incurred a net loss of $6,410,216, with only $9,042 of revenue during
the year ended June 30, 2003. The Company also had an accumulated deficit of
$10,185,776 and negative working capital of $736,273, with only $67,316 in cash
at June 30, 2003. In addition, the Company is in arbitration with the patent
holder of its only actively marketed product to resolve various allegations made
by the patent holder against the Company (see Note 7). Management recognizes
that the Company must obtain additional funding for the eventual achievement of
sustained profitable operations. The Company's success is dependent upon
numerous items, including the successful development of effective marketing
strategies to customers in a competitive market coupled with faster service and
a variety of options. The Company's new product line entered the market in May
2003 and management believes that this product will have a significant effect on
future profitability. In August 2003, management successfully obtained
additional capital through a $2 million sale and issuance of 6% convertible
debentures, from which the Company received initial gross proceeds of $1 million
with receipt of the second $1 million scheduled to occur following the effective
date of a registration statement to be filed with the Securities and Exchange
Commission
F-8
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES, CONTINUED
covering the common stock underlying the debentures (see Note 11). In addition,
the Company has received a proposal for a credit facility for accounts
receivable financing and anticipates a definitive agreement in the near term.
However, no assurance can be given that the above mentioned credit facility and
additional $1 million convertible debenture funding will be consummated as
contemplated or will generate sufficient cash to satisfy the Company's need for
additional capital or that other debt or equity financing will be available to
the Company on satisfactory terms.
These factors, among others, raise substantial doubt about the Company's ability
to continue as a going concern. The accompanying consolidated financial
statements do not include any adjustments relating to the recoverability and
classification of asset carrying amounts or the amount and classification of
liabilities that might result from the outcome of these uncertainties.
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the respective reporting period. Actual results could differ from those
estimates. Significant estimates made by management are, among others, the
realization of prepaid royalties and long-lived assets, collectibility of
receivables, and the valuation allowance on deferred tax assets.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying values of the Company's financial instruments as of June 30, 2003,
including cash, accounts receivable, notes receivable, accounts payable and
accrued expenses, and notes payable, approximate their respective fair values
due to their short maturities. The fair value of notes payable to related
parties is not determinable as these transactions are with related parties.
CONCENTRATION OF CREDIT RISK
The financial instrument which potentially subjects the Company to concentration
of credit risk is cash. The Company maintains cash balances at certain high
quality financial institutions, and at times such balances may exceed the
Federal Deposit Insurance Corporation $100,000 insurance limit. As of June 30,
2003, there was approximately $1,000 of uninsured cash balances.
F-8
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES, CONTINUED
ACCOUNTS RECEIVABLE
The Company extends credit to its customers and performs ongoing credit
evaluations of such customers. The Company does not obtain collateral to secure
its accounts receivable. At June 30, 2003, the Company recorded $86,184 of
accounts receivable as deferred revenue, as the payment terms are contingent
upon customer sell-through of product and therefore collectibility is not
reasonably assured.
PROPERTY AND EQUIPMENT
Property and equipment is stated at cost. Depreciation is computed using the
straight-line method over the estimated useful lives of the related assets,
which range from three to seven years. Repairs and maintenance are charged to
expense as incurred while significant improvements are capitalized. Upon
retirement or other disposition of property and equipment, the accounts are
relieved of the cost and the related accumulated depreciation, with any
resulting gain or loss included in the consolidated statements of operations.
PATENT
Patent is recorded at the fair value of the stock issued to acquire the patent
(see Note 6) and is amortized using the straight-line method over its estimated
remaining useful life of 17 years. Amortization expense for the years ended June
30, 2003 and 2002 was $2,941 and $735, respectively. Legal fees and other costs
incurred in protecting patents are expensed as incurred.
IMPAIRMENT OF LONG-LIVED ASSETS
Long-lived assets and certain identifiable intangibles to be held and used by an
entity are reviewed by the management of the Company for impairment whenever
events or changes in circumstances indicate that the carrying value of an asset
may not be recoverable. As of June 30, 2003, management of the Company believes
that no impairment has been indicated. There can be no assurances, however, that
market conditions will not change or demand for the Company's products will
develop which could result in impairment of long-lived assets in the future.
CONVERSION AND STOCK SPLIT
On January 9, 2003, the Company's stockholders approved an increase in the
number of authorized common stock shares to 100,000,000. Also, pursuant to the
terms of the Merger, the shares of Quicktest's common stock were converted into
1.33 shares of Moneyzone's common stock.
F-9
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES, CONTINUED
All references in the consolidated financial statements and the accompanying
notes referring to common shares, share prices, per share amounts, and stock
plans have been adjusted to give retroactive effect to a conversion into 1.33
shares of Moneyzone's common stock.
REVENUE RECOGNITION
The Company recognizes revenue at the time of shipment of its products to
customers. The Company was in its initial stage of selling the new product line
to customers or distributors as of June 30, 2003. Pursuant to Staff Accounting
Bulletin No. 101, the Company deferred $86,184 of its sales and the related
costs of $21,551 to certain distributors as the payment terms are contingent
upon customer sell-through of product and therefore collectibility is not
reasonably assured.
ADVERTISING
The Company expenses the cost of advertising when incurred as general and
administrative expense. Advertising expense was approximately $72,000 and
$70,000 for the years ended June 30, 2003 and 2002, respectively, and is
included in general and administrative expenses in the accompanying consolidated
statements of operations.
STOCK-BASED COMPENSATION
The Company uses the intrinsic value method of accounting for stock-based
compensation to employees in accordance with Accounting Principles Board Opinion
("APB") No. 25, "Accounting for Stock Issued to Employees." The Company accounts
for non-employee stock-based compensation under SFAS No. 123, "Accounting for
Stock-Based Compensation." At June 30, 2003, the Company has two stock-based
employee compensation plans, which are described more fully in Note 6. During
the year ended June 30, 2003 and 2002, $0 and $0, respectively, of compensation
expense was recognized in the accompanying consolidated statements of operations
for options issued to employees pursuant to APB 25, as all options granted in
fiscal 2003 under those plans had exercise prices equal to the market value of
the underlying common stock on the date of grant. The following table
illustrates the effect on net loss and loss per share if the Company had applied
the fair value recognition provisions of SFAS No. 123, to stock-based
compensation:
F-10
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES, CONTINUED
YEAR ENDED JUNE 30,
----------------------------------------
2003 2002
---------------- ----------------
Net loss as reported $ (6,410,216) $ (3,775,560)
Deduct:
Total stock-based employee compensation
expense under APB 25 0 0
Add:
Total stock-based employee compensation
under fair value based method for all
awards, net of related tax effects (268,820) 0
---------------- ----------------
Pro forma net loss $ (6,679,036) $ (3,775,560)
=============== ================
Basic and diluted loss per share - as reported $ (0.26) $ (0.60)
=============== ===============
Basic and diluted loss per share - pro forma $ (0.27) $ (0.60)
=============== ===============
INCOME TAXES
The Company recognizes deferred tax liabilities and assets for the expected
future tax consequences of events that have been recognized in the Company's
financial statements or tax returns. Under this method, deferred tax assets and
liabilities are determined based on the difference between the financial
statement carrying amounts and tax bases of assets and liabilities at each
period end based on enacted tax laws and statutory tax rates applicable to the
periods in which the differences are expected to affect taxable income. A
valuation allowance is provided for significant deferred tax assets when it is
more likely than not that such assets will not be recovered.
LOSS PER SHARE
Basic loss per share is computed by dividing loss available to common
stockholders by the weighted-average number of common shares outstanding.
Diluted loss per share is computed similar to basic loss per share except that
the denominator is increased to include the number of additional common shares
that would have been outstanding if the potential common shares had been issued
and if the additional common shares were dilutive. All potentially dilutive
shares, 56,471 and 0 as of June 30, 2003 and 2002, respectively, have been
excluded from dilutive loss per share, as their effect would be anti-dilutive
for fiscal 2003 and 2002.
F-11
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES, CONTINUED
COMPREHENSIVE INCOME
Comprehensive income is not presented in the Company's consolidated financial
statements since the Company did not have any items of comprehensive income in
any period presented.
SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION
As the Company operates in one segment, the Company has not made segment
disclosures in the accompanying consolidated financial statements.
NEW ACCOUNTING PRONOUNCEMENTS
In November 2002, the Financial Accountings Standards Board ("FASB") issued
Interpretation No. 45 ("FIN 45"), "Guarantor's Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of
Others." FIN 45 elaborates on the disclosures to be made by a guarantor in its
interim and annual financial statements about its obligations under certain
guarantees that it has issued. It also clarifies that a guarantor is required to
recognize, at the inception of a guarantee, a liability for the fair value of
the obligation undertaken in issuing the guarantee. The initial recognition and
initial measurement provisions of FIN 45 are effective for financial statements
of interim or annual periods ending after December 15, 2002. The Company adopted
FIN 45 in fiscal 2003 and there was no effect on its financial statements.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure - an amendment of FASB Statement No.
123." SFAS No. 148 amends SFAS No. 123 to provide alternative methods of
transition for a voluntary change to the fair value based method of accounting
for stock-based employee compensation. In addition, SFAS No. 148 amends the
disclosure requirements of SFAS No. 123 to require prominent disclosures in both
annual and interim financial statements about the method of accounting for
stock-based employee compensation and the effect of the method used on reported
results. The transition guidance and annual disclosure provisions of SFAS No.
148 are effective for financial statements issued for fiscal years ending after
December 15, 2002. The interim disclosure provisions are effective for financial
reports containing financial statements for interim periods beginning after
December 15, 2002. The Company has applied the disclosure provisions in SFAS No.
148 in its consolidated financial statements and the accompanying notes.
F-12
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES, CONTINUED
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity." SFAS No. 150
establishes standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equity. It
requires that an issuer classify a financial instrument that is within its scope
as a liability (or an asset in some circumstances). SFAS No. 150 is effective
for financial instruments entered into or modified after May 31, 2003, and
otherwise is effective at the beginning of the first interim period beginning
after June 15, 2003. It is to be implemented by reporting the cumulative effect
of a change in an accounting principle for financial instruments created before
the issuance date of SFAS No. 150 and still existing at the beginning of the
interim period of adoption. Restatement is not permitted. The Company does not
expect the adoption of SFAS No. 150 to have a material impact upon its financial
position, cash flows or results of operations.
NOTE 2 - NOTES RECEIVABLE
On January 1, 2003, the Company entered into promissory notes receivable in the
total amount of $199,500 with two former stockholders of Moneyzone. These notes
accrue interest at a rate of 4% per annum and are payable on January 1, 2004.
The notes were entered into as consideration for a contingent liability and
assumed defense costs relating to Moneyzone's lease liability resulting from
abandoned office space (see Note 7) and other remaining accounts payable of
Moneyzone assumed in the Merger (see Note 1). Pursuant to the terms of the
notes, the amount of the notes shall be automatically adjusted to the amount of
actual liability and defense costs incurred by the Company related to the
litigation, and shall also be reduced by any amounts of Moneyzone's outstanding
accounts payable which the Company does not actually pay within one year or
which are forgiven or negotiated to lower amounts. These notes are secured by
399,000 shares of the Company's common stock owned by former stockholders.
During the year ended June 30, 2003, the Company received $60,000 advance
payment on the promissory notes receivable, resulting in the remaining notes
receivable balance of $139,500 as of June 30, 2003.
NOTE 3 - PROPERTY AND EQUIPMENT
Property and equipment consist of the following at June 30, 2003:
Furniture and fixtures $ 19,307
Computer equipment and software 16,071
Less: accumulated depreciation (5,507)
---------------
$ 29,871
===============
F-13
NOTE 4 - PATENT AND ROYALTY FEE
On April 7, 2002, the Company entered into the Agreement relating to the
formulation of nicotine beverages (see Note 1). The Agreement was effective only
upon the execution and delivery of the assignment of patent. The assignment of
patent was executed and delivered on June 26, 2002. In consideration thereof,
the Company issued 133,000 shares of its common stock valued at $50,000 (or
$0.376 per share, which was management's estimate of the fair market value of
its common stock on the date the patent was assigned). The cost of the patent is
being amortized over the patent's remaining useful life of 17 years. In
addition, the Company agreed to pay the original patent holder royalties of
$1.20 per case, quarterly, for every case sold (consisting of 24 bottles per
case) of the Company's products which utilize the patent, for the remaining life
of the patent. The royalty payments will begin on the first day of the calendar
quarter commencing at such time as the Company makes a first distribution. The
Company has agreed to the following performance goals: (1) during the first year
following the first distribution, the Company will sell a minimum of 500,000
cases of the patented product, and (2) during any year thereafter for the
duration of this Agreement, the Company will sell a minimum of 1,000,000 cases
of the patented product each year. In June 2002, the Company prepaid royalties
through the issuance of 399,000 shares of its stock valued at $150,000 (or
$0.376 per share which was management's estimate of the fair market value of its
common stock on the date the shares were issued) in lieu of meeting the minimum
performance requirement of the first year. This amount will be amortized to
expense at the rate of $1.20 per case sold.
The Company has filed for arbitration to resolve a dispute with the parties of
this Agreement (see Note 7). During the year ended June 30, 2003, the Company
recorded approximately $5,400 of royalty expense in the accompanying
consolidated statements of operations related to this Agreement.
NOTE 5 - NOTES PAYABLE
In October 2002, the Company entered into a non-interest bearing convertible
promissory note with a third party for $150,000. Unless earlier converted by the
lender, the principal was due at the earlier of (1) four months from the
effective date of the Schedule 14C of Moneyzone (but in no event later than
March 31, 2003), or (2) a financing in which the Company receives net proceeds
of $1 million. At the election of the holder, the outstanding principal of the
note was convertible into shares of the Company's common stock at $0.75 per
share (subject to standard adjustments on recapitalization, stock split, etc.).
Pursuant to the terms of the promissory note, the Company issued 99,750 shares
of the common stock valued at $30,000 (which was management's estimate of the
fair market value of its common stock on the date the shares were issued) to the
lender as additional consideration, which was recorded as a discount on the note
F-14
NOTE 5 - NOTES PAYABLE, CONTINUED
and amortized to interest expense ratably through the earliest estimated due
date of the note. In February 2003, the note was amended to extend the maturity
date, unless earlier converted by the lender, to the earlier of (1) April 30,
2003, or (2) a financing in which the Company receives net proceeds of $1
million.
In December 2002 and January 2003, the Company entered into three non-interest
bearing convertible promissory notes with third parties totaling $235,000.
Unless earlier converted by the lenders, the principal was due at the earlier of
(1) April 30, 2003, or (2) a financing in which the Company receives net
proceeds of either $1.5 or $2 million, as defined in the individual notes. At
the election of the holder, the outstanding principal of the note was
convertible into shares of the Company's common stock at $0.75 per share
(subject to standard adjustments on recapitalization, stock split, etc.).
Pursuant to the terms of the promissory note, the Company issued a total of
208,366 shares of the common stock valued at $76,407 (which was management's
estimate of the fair market value of its common stock on the date the shares
were issued) to one of its lenders as additional consideration, which was
recorded as a discount on the notes and amortized to interest expense ratably
through the earliest estimated due date of the note.
During the year ended June 30, 2003 and 2002, the Company recorded interest
expense of $106,407 and $0, respectively, from the amortization of discount on
the above convertible promissory notes. During June 2003, the Company reduced
the principal balance on these convertible promissory notes by a cash payment of
$46,000, a direct refinancing payment from related party lender of $122,000 and
by recording of a gain on extinguishment of debt of $2,000.
All of these convertible promissory notes also contained certain penalty
provisions under a default. In June 2003 the Company entered into a Settlement
Agreement and Mutual General Releases with each of the above referenced note
holders and with the related parties holding a total of $50,000 bridge loan
promissory notes (see Note 8), mutually releasing all parties from any and all
claims arising out of or related to the above referenced notes (the "Previous
Notes"), and executed and delivered new Secured Notes and Security Agreements
(the "New Notes") in the aggregate principal amount of $265,000. The New Notes
supersede the Previous Notes, bearing interest at the rate of 12% per annum with
the entire amount, including principal and accrued interest, due and payable on
December 1, 2003. The New Notes were secured by a pledge and first and second
priority security interest in all of the tangible and intangible assets of the
Company, and included certain non-financial covenants and events of default,
among other items, such as the Company's failure to ship in any calendar month
at least 10,000 cases of NICOWater(TM) and generate gross sales of at least
$280,000 from the sale of NICOWater(TM) in any month.
F-15
NOTE 5 - NOTES PAYABLE, CONTINUED
In August 2003, the Company prepaid the entire principal and accrued interest
due and payable under all the New Notes in the aggregate amount of $270,760 and
has received full collateral releases from the noteholders.
NOTE 6 - STOCKHOLDERS' DEFICIT
common stock
In October 2001, the Company issued 133,000 shares of common stock to various
founders, which were recorded at $0 value as the Company had not commenced
operations.
During the fiscal year ended June 30, 2002, the Company:
(i) sold 531,335 shares of common stock at $0.376 per share for
$199,750 in cash;
(ii) issued 9,312,660 shares of common stock valued at $3,501,000 (or
$0.376 per share, which was the estimated fair market value of the
common stock on the date the services were performed) as payment for
consulting services to related parties and other third parties (see
Note 8); and
(iii) issued 133,000 and 399,000 shares of common stock to third
parties for patent and prepaid royalties, respectively, valued at
$50,000 and $150,000 (or $0.376 per share, which was the estimated fair
market value of the common stock on the date the shares were issued),
respectively (see Note 4).
On January 9, 2003, the 3,000,000 shares of previously outstanding common stock
of Moneyzone were accounted for as an issuance of shares in a recapitalization
of the Company for $300,000 as part of the Merger (see Note 1).
During the fiscal year ended June 30, 2003, the Company:
(i) issued 2,751,093 shares of common stock for consulting services
valued at $1,034,247 (or $0.376 per share, which was the estimated fair
market value of the common stock on the date the shares were issued)
and 2,200,000 restricted shares of common stock for consulting services
valued at $1,571,728 (or $0.71 per share, which was the weighted
average fair market value of its common stock on the dates of
issuance), of which $60,959 was recorded as prepaid consulting expense
to be amortized over the respective service periods and $2,545,016 was
recorded as general and administrative expense in the accompanying
consolidated statements of operations;
(ii) issued 308,116 shares as additional interest expense pursuant to
the terms of the convertible promissory notes payable valued at
$106,407 as discussed in Note 5;
F-16
NOTE 6 - STOCKHOLDERS' DEFICIT, CONTINUED
(iii) issued 3,660,160 shares valued at $0 as the shares were issued
but held in escrow pending negotiation of certain transactions;
(iv) issued 1,100,000 shares for consulting services under the 2000
Plan, valued at $1,118,213, (or $1.02 per share, which was the weighted
average fair market value on the dates of issuance), of which $259,650
was recorded as prepaid consulting expense to be amortized over the
respective service periods and $858,563 was recorded as general and
administrative expense in the accompanying consolidated statements of
operations;
(v) issued 1,149,992 shares for consulting services under the 2003
Plan, valued at $209,665, (or $0.18 per share, which was the weighted
average fair market value on the dates of issuance), of which $108,348
was recorded as prepaid consulting expense to be amortized over the
respective service periods, and $214,063 was recorded as general and
administrative expense in the accompanying consolidated statements of
operations. In addition, the Company issued 680,610 shares under the
2003 Plan valued at $136,434 (or $0.20 per share, which was the
weighted average fair market value on the dates of issuance) for the
settlement of certain accounts payable totaling $112,745, recording a
loss of $23,689 on the settlement of this accounts payable balance in
other income (expense) in the accompanying consolidated statement of
operations;
(vi) issued 3,394,731 shares in connection with the exercise of options
for $270,200 cash and $15,000 as a reduction of accounts payable;
(vii) sold 2,200,854 shares of restricted common stock at a weighted
average price of $0.15 per share and warrants to purchase 1,900,000
shares of common stock at a weighted average exercise price of $0.58
per share for which the Company received aggregate net cash proceeds of
$331,000;
(viii) committed to issue 300,000 shares of restricted common stock to
employees in connection with their initial employment. The Company
recorded salary expense of $75,126 (or $0.25 per share, which was the
weighted average fair market value of its common stock on the
employment agreement dates) in general and administrative expense in
the accompanying consolidated statement of operations; and
(ix) issued 1,720,000 shares of common stock for the conversion of a
$172,000 related party note payable (see Note 8) (or $0.10 per share,
which was the stated conversion price).
Certain common stock purchase agreements with certain investors include a
provision in which if for a period of six months from the purchase of shares the
Company's common stock closing price for 5 consecutive trading days will be
below $0.15 per share, the Company will issue to the investors additional
shares, whereby the number of shares purchased and the additional shares,
multiplied by $0.10 would be equal to the aggregate purchase price paid. For the
year ended June 30, 2003, the aggregate purchase price paid by these investors
totaled $310,000 and no additional shares were required to be issued.
F-17
NOTE 6 - STOCKHOLDERS' DEFICIT, CONTINUED
Stock Options
The Company has a stock option plan (the "2000 Plan"), as amended, that
authorized the issuance of options and shares to acquire up to 2,533,330
registered shares of common stock to officers, employees, directors and
consultants. On February 12, 2003, the Company increased the number of
registered shares reserved for issuance pursuant to the Plan Amendment to
4,233,330 shares. The Plan allows for the issuance of either incentive stock
options (which can only be granted to employees) and non-qualified stock
options, pursuant to Section 422 of the Internal Revenue Code. Options vest at
the discretion of the Board of Directors as determined at the grant date, but no
longer than a ten-year term. Under the Plan, the exercise price shall not be
less than fair market value on the date of grant for the incentive stock
options, and not less than 50% of the fair market value on the date of grant for
non-qualified stock options. The number of options under the Plan available for
grant at June 30, 2003 was 2,655,830.
On April 21, 2003, the Company adopted an incentive equity stock plan (the "2003
Plan") that authorized the issuance of options, right to purchase common stock
and stock bonuses up to 10,000,000 shares, of which 5,000,000 shares were
registered on April 25, 2003. The Plan allows for the issuance of incentive
stock options (which can only be granted to employees), non-qualified stock
options, stock awards, or stock bonuses pursuant to Section 422 of the Internal
Revenue Code. Options vest at the discretion of the Board of Directors as
determined at the grant date, but no longer than a ten-year term. Under the
Plan, the exercise price shall not be less than fair market value on the date of
grant for the incentive stock options, and not less than 85% of the fair market
value on the date of grant for non-qualified stock options. The number of
options under the 2003 Plan available for grant at June 30, 2003 was 5,252,167.
Options to purchase 477,500 shares of the Company's common stock under the 2000
Plan at prices ranging from $0.13 per share to $0.30 per share (below the fair
market value on the date of grant) were issued to consultants during the year
ended June 30, 2003. All of these options were exercised during the year ended
June 30, 2003 for cash of $90,200.
Options to purchase 2,917,231 shares of the Company's common stock under the
2003 Plan at prices ranging from $0.03 per share to $0.22 per share (below the
fair market value on the date of grant) were issued to consultants during the
year ended June 30, 2003. All of these options were exercised during the year
ended June 30, 2003 for cash of $180,000 and reduction of an accounts payable of
$15,000.
The Company has no options outstanding as of June 30, 2003. The general and
administrative expense recognized in the accompanying consolidated statements of
operations pursuant to SFAS No. 123 for the options issued to non-employees was
$362,337 during the year ended June 30, 2003. No options were issued or
outstanding during the year ended June 30, 2002.
F-18
NOTE 6 - STOCKHOLDERS' DEFICIT, CONTINUED
The fair value of each option granted during the year ended June 30, 2003 was
estimated using the Black-Scholes option pricing model on the date of grant
using the following assumptions: (i) no dividend yield, (ii) average volatility
of 167.80 percent (iii) weighted average risk free interest rate of
approximately 1.23 percent, and (iv) average expected life of 1 year.
The Black-Scholes option valuation method was developed for use in estimating
the fair value of traded options which have no vesting restrictions and are
fully transferable. In addition, option valuation models require the input of
highly subjective assumptions including the expected stock price volatility.
Because the Company's stock options have characteristics significantly different
from those of traded options, and because changes in the subjective input
assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its stock options.
Warrants
From time to time, the Company issues warrants pursuant to various employment,
consulting and third party agreements.
During the fiscal year ended June 30, 2003, the Company:
(i) issued warrants to purchase 2,560,000 shares of the Company's
common stock at $0.17 per share (the fair market value on the date of
grant) to two of its officers in connection with their employment
agreements and recorded $0 of compensation expense as the warrants had
exercise prices equal to the market value of the underlying common
stock on the date of grant;
(ii) issued warrants to purchase 2,060,000 shares of the Company's
common stock at prices ranging from $0.01 per share to $0.17 per share
(at or below the fair market value on the dates of grant) to
consultants. 2,000,000 of these warrants vest immediately and 60,000 of
these warrants vest upon the Company's share price reaching certain
fair market values. The Company recorded general and administrative
expense of $210,015 during the year ended June 30, 2003 for these
warrants; and
(iii) issued warrants to purchase 1,900,000 shares of the Company's
common stock to certain third-party investors for $0.58 per share (see
"common stock" section above).
Certain common stock purchase warrant agreements with certain investors include
a right by the Company to call any or all shares of the common stock issued
under warrant agreement from the warrant holder for (i) $2.00 per share for the
first 950,000 shares and (ii) $3.00 per share for the remaining 950,000 shares
through June 9, 2004. This call right can by exercised by the Company only if
the Company's common stock has a closing price above the call price for 7
consecutive trading days prior to execution of the call right.
F-19
NOTE 6 - STOCKHOLDERS' DEFICIT, CONTINUED
No warrants were issued or outstanding during the year ended June 30, 2002.
The following represents a summary of the warrants outstanding for the year
ended June 30, 2003:
WEIGHTED AVERAGE
EXERCISE PRICE
NUMBER OF WARRANTS PER SHARE
-------------------- -----------------
Outstanding at July 1, 2002 - $ -
Granted 6,520,000 0.29
Exercised - -
Canceled - -
--------------- -----------------
Outstanding at June 30, 2003 6,520,000 $ 0.29
=============== =================
Exercisable at June 30, 2003 6,460,000
===============
The following summarizes information about warrants outstanding at June 30,
2003:
Warrants Outstanding Warrants Exercisable
------------------------------------------------------ -------------------------------
Weighted
Average Weighted Weighted
Number of Remaining Average Number of Average
Range of Shares Contractual Exercise Shares Exercise
Exercise Prices Outstanding Life (Years) Price Exercisable Price
------------------- --------------- ---------------- --------------- ------------- --------------
$0.01 60,000 4.8 $ 0.01 - $ -
$0.17 4,560,000 4.9 $ 0.17 4,560,000 $ 0.17
$0.40-$0.75 1,900,000 4.9 $ 0.57 1,900,000 $ 0.57
------------ ---------- ----------- -----------
6,520,000 $ 0.29 6,460,000 $ 0.29
============ ========== =========== ===========
The fair value of each warrant granted during the year ended June 30, 2003 to
consultants and employees is estimated using the Black-Scholes option pricing
model on the date of grant using the following assumptions: (i) no dividend
yield, (ii) average volatility of 173.90 percent (iii) weighted average risk
free interest rate of approximately 1.23 percent, and (iv) average expected life
of 1 year.
F-20
NOTE 7 - COMMITMENTS AND CONTINGENCIES
LEASE COMMITMENT
The Company leases its facility under an operating lease agreement expiring
April 30, 2005. Under the lease, the Company pays $7,669 per month through March
31, 2003, $7,888 per month through March 31, 2004, and $8,107 per month
thereafter. The total amount of rent paid during the year ended June 30, 2003
and 2002 was $96,161 and $28,828, respectively. The Company records rent expense
on a straight-line basis, resulting in deferred rent and additional rent expense
(income) of $(301) and $11,201 as of June 30, 2003 and 2002, respectively.
The future minimum annual lease payments under this lease agreement at June 30,
2003 are as follows:
YEARS ENDING
JUNE 30,
-----------------------------
2004 $ 95,000
2005 73,000
---------------
$ 168,000
===============
EMPLOYMENT AGREEMENTS
In June 2003, the Company entered into employment agreements with two of its
officers. The agreements are for a five-year term through June 2008 and provide
for a combined base salary of $600,000 per annum through October 2003, $720,000
per annum through October 2004, and an annual increase of at least 10%
thereafter until the termination date. The agreements also provide for a
combined sign-up bonus of $200,000, annual combined net profit bonus of 4% of
the Company's net income, issuance of incentive stock options, and warrants to
acquire a total of 2,560,000 shares of the Company's common stock (see Note 6).
Additionally, the agreements provide for a combined payment of $1,440,000 upon
sale or merger of the Company, and severance payment of one year of base salary,
as defined.
LITIGATION
On November 15, 2002, Fidelity Mortgage, Inc. ("Fidelity") filed a lawsuit
against the Company in the Supreme Court of the State of New York alleging that
the Company breached a sublease with Fidelity. Fidelity is seeking $156,400 in
damages plus interest, costs and attorneys' fees. The Company is in the process
defending this litigation and has recorded a liability of $156,400 in the
accompanying consolidated balance sheet.
F-21
NOTE 7 - COMMITMENTS AND CONTINGENCIES, CONTINUED
As of May 6, 2003, the Company responded to what it believes are unfounded
allegations regarding the assignment of patent rights agreement between the
patent inventor and the Company. The Company filed for arbitration on June 6,
2003. The Company believes that the patent inventor's claims lack any merit. The
Company intends to vigorously pursue its claims in the arbitration.
Nevertheless, arbitration is uncertain, and the Company may not prevail in the
arbitration and can express no opinion as to its ultimate outcome. The Company
is, from time to time, involved in various legal and other proceedings which
arise in the ordinary course of operating its business. In the opinion of
management, the amount of ultimate liability, if any, with respect to these
actions will not materially affect the consolidated financial position or
results of operations of the Company.
INDEMNITIES AND GUARANTEES
During the normal course of business, the Company has made certain indemnities
and guarantees under which it may be required to make payments in relation to
certain transactions. These indemnities include certain agreements with the
Company's officers, under which the Company may be required to indemnify such
person for liabilities arising out of their employment relationship. The
duration of these indemnities and guarantees varies and, in certain cases, is
indefinite. The majority of these indemnities and guarantees do not provide for
any limitation of the maximum potential future payments the Company could be
obligated to make. Historically, the Company has not been obligated to make
significant payments for these obligations and no liabilities have been recorded
for these indemnities and guarantees in the accompanying consolidated balance
sheet.
NOTE 8 - RELATED PARTY TRANSACTIONS
During the years ended June 30, 2003 and 2002, the Company paid or accrued
approximately $571,250 and $235,500, respectively, and issued shares valued at
approximately $712,425 and $3,409,000, respectively, to various related parties,
including officers and/or stockholders of the Company for consulting and other
administrative services.
During the year ended June 30, 2003, the Company issued options to a related
party to purchase 3,344,731 shares. Pursuant to SFAS No. 123, the Company
recorded general and administrative expense of $347,514 in the accompanying
consolidated statements of operations. During the year ended June 30, 2003, all
of these options were exercised for cash of $270,200.
F-22
NOTE 8 - RELATED PARTY TRANSACTIONS, CONTINUED
Moneyzone advanced cash of $300,000 in July 2002 to the Company. Upon
consummation of the Merger, the inter-company advance was eliminated in
consolidation and recorded as a capital contribution (see Notes 1 and 6).
In September 2002, the Company entered into bridge loan promissory notes
("Notes") with two majority stockholders of Moneyzone for a total of $50,000
with interest at 10% per annum. The principal and interest were due on the
closing of collective funding by the Company of not less than $250,000. Pursuant
to the terms of the Notes, the Company could not be sold or otherwise merged
into any other entity except Moneyzone, unless the Notes holders were repaid.
These Notes were conditionally guaranteed by the CEO of the Company if the
Company would not meet its covenants. In June 2003 the Company entered into a
Settlement Agreement and Mutual General Releases with each of these Notes
holders, mutually releasing all parties from any and all claims arising out of
or related to the above referenced notes (the "Previous Notes"), and executed
and delivered new Secured Notes and Security Agreements (the "New Notes") in the
aggregate principal amount of these notes of $50,000 (see Note 5). The notes
were paid in full subsequent to June 30, 2003 (see Note 5).
In November 2002, the Company entered into a non-interest bearing note, due on
demand, for a purchase of certain office furniture from one of its officers for
$17,500. This note was repaid subsequent to June 30, 2003.
On June 11, 2003, the Company entered into a convertible promissory note
agreement with one of its shareholders for $172,000 with 1% interest per annum,
convertible at $0.10 per share to shares of the Company's common stock. On June
23, 2003, the note was converted to 1,720,000 shares of the Company's common
stock. The Company recorded interest expense of $120,400 in the accompanying
consolidated financial statements related to the beneficial conversion feature
in the convertible promissory note.
F-23
NOTE 9 - INCOME TAXES
No current provision for federal income taxes is required for the year ended
June 30, 2003 and 2002, since the Company incurred net operating losses through
June 30, 2003.
The tax effect of temporary differences that give rise to significant portions
of the deferred tax asset at June 30, 2003 are presented below:
Deferred tax asset:
Net operating loss carryforward $3,840,000
Stock options and warrants 230,000
Reserves and accruals 26,000
---------------
4,096,000
Deferred tax liability:
Deferred income (34,000)
---------------
4,062,000
Less valuation allowance (4,062,000)
----------------
Net deferred tax assets $ -
===============
The valuation allowance increased by $2,552,000 and $1,510,000 during the years
ended June 30, 2003 and 2002, respectively.
The provision for income taxes for the years ended June 30, 2003 and 2002
differs from the amount computed by applying the U.S. Federal income tax rate of
34% to income before income taxes primarily as a result of state income taxes
and changes in the valuation allowance.
As of June 30, 2003, the Company had net operating loss carryforwards of
approximately $9,600,000 available to offset future taxable federal and state
income. The federal and state carryforward amounts expire in varying amounts
through 2023 and 2010, respectively.
F-24
NOTE 10 - BASIC AND DILUTED LOSS PER COMMON SHARE
The following is a reconciliation of the numerators and denominators of the
basic and diluted loss per common share computations for the years ended June
30, 2003 and 2002:
2003 2002
------------- -----------
Numerator for basic and diluted loss per
common share - net income (loss) $ (6,410,216) $ (3,775,560)
============= ============
Denominator for basic and diluted loss per
common share - weighted average shares 24,828,564 6,257,985
============= ============
Basic and diluted income (loss) per common share $ (0.26) $ (0.60)
============= ============
NOTE 11 - SUBSEQUENT EVENTS
In July 2003, the Company issued 1,000,000 shares of common stock for cash of
$150,000 and a warrant to purchase 1,000,000 shares of the Company's common
stock at $0.50 per share to a third party. The warrant expires in 5 years and
vests immediately. The warrant agreement also includes a right by the Company to
call any or all shares of the common stock issued under the warrant agreement
from the warrant holder for (i) $2.00 per share for the first 500,000 shares and
(ii) $3.00 per share for the remaining 500,000 shares through July 9, 2004. This
call right can by exercised by the Company only if the Company's common stock
has a closing price above the call price for 5 consecutive trading days prior to
execution of the call right.
On August 22, 2003, the Company entered into a Securities Purchase Agreement
with certain investors pursuant to which the Company issued 6% convertible
debentures in the total principal amount of $2,000,000. The first payment of
$1,000,000 in gross proceeds was provided at the first closing, as defined, and
up to $1,000,000 at the second closing, as defined. The debenture is payable on
August 22, 2006. The interest of 6% per annum is payable quarterly, plus an
additional interest of 15% per annum will accrue daily if all accrued interest
is not paid in full when due. The debenture is convertible at the option of the
holder into shares of the Company's common stock at $0.075 with a forced
conversion option by the Company if certain closing prices are attained, as
defined. The Company is required to register the shares that might be issued
under the agreement and is subject to liquidated damages if agreed upon
timetables are not met, as defined. In connection with the Securities Purchase
Agreement, the Company also issued warrants to purchase 13,333,333 shares of the
Company's common stock at an exercise price of $0.075 per share. In connection
with the issuance of detachable warrants and the beneficial conversion feature
of the debentures, the Company will record a debt discount of $1,000,000 and
amortize the discount using the effective interest method through August 2006.
F-25
NOTE 11 - SUBSEQUENT EVENTS, CONTINUED
In July 2003, the Company issued 270,430 shares of the Company's common stock,
valued at $79,629 (or $0.29 per share, which is the fair market value of the
stock on the date of issuance), to a consultant for services to be performed in
the future.
In August 2003, the Company issued 206,000 shares of the Company's common stock
valued at $48,320 (or $0.23 per share, which is the fair market value of the
stock on the dates of issuance), to two consultants for services to be performed
in the future.
In August 2003, the Company issued 283,590 shares of the Company's common stock,
valued at $79,405 (or $0.28 per share, which is the fair market value of the
stock on the date of issuance), for settlement of accounts payable.
In September 2003, the Company issued 170,773 shares of the Company's common
stock for consulting services rendered, valued at $32,447 (or $0.19 per share,
which is the fair market value of the stock on the date of issuance).
In August 2003, the Company prepaid notes payable and notes payable to related
parties with maturity dates of December 1, 2003 in the principal amounts of
$215,000 and $50,000, respectively, plus interest of $5,760 for an aggregate
payment of $270,760, and has received full collateral releases from the
noteholders (see Note 5).
In August 2003, the Company entered into employment agreement with one of its
officers. The agreement is for a five-year term through July 31, 2008 and
provides for a base salary of $250,000 per annum through October 1, 2003,
$300,000 per annum through October 1, 2004, and an increase of at least 10%
annually until the termination date. The agreement also provides for a sign-up
bonus of $75,000 payable over a seven month period, annual net profit bonus of
1.25% of the Company's net income, issuance of incentive stock options, and
warrant to issue 750,000 shares of the Company's common stock at $0.24 per share
(fair market value of the stock on the date of issuance). Additionally, the
agreement provides for a payment of $500,000 upon sale or merger of the Company,
and severance payment of one year of base salary.
In August 2003, the Company issued 1,500,000 shares of its restricted common
stock to one of its shareholders in full payment of a non-interest bearing
demand promissory note of $112,500 dated July 25, 2003. Based on the estimated
fair value of the stock issued, the Company will recognize a loss on debt
settlement of $155,250 in its quarter ended September 30, 2003.
F-26
NOTE 11 - SUBSEQUENT EVENTS, CONTINUED
In August 2003, the Company issued 127,171 shares of its restricted common stock
to one of its shareholders valued at $25,452 (or $0.20 per share, which was the
weighted average fair market value on the dates the services were performed) for
settlement of consulting fees payable totaling $22,500. The Company will record
a loss of $2,952 on the settlement of this accounts payable balance in its
quarter ended September 30, 2003.
F-27
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
Effective January 1, 2003, certain principals of Corbin & Wertz
("C&W"), our independent auditors, formed Corbin & Company LLP ("C&C"), as a
successor public accounting firm and transferred substantially all of C&W's
audit and attest clients to C&C. As a result, on February 7, 2003, the Board of
Directors approved the engagement of C&C as our independent auditors for the
fiscal year ending June 30, 2003.
C&W did not resign or decline to stand for reelection, but were
dismissed on February 7, 2003 to allow the appointment of C&C.
During the past two fiscal years ending June 30, 2002, C&W's audit
opinion on our financial statements did not contain an adverse opinion or a
disclaimer of opinion, nor was it modified as to audit scope or accounting
principles. C&W's report was modified to include an explanatory paragraph where
they expressed substantial doubt about our ability to continue as a going
concern.
There were no disagreements with C&W during the past two most recent
fiscal years and through the date of their dismissal on any matter of accounting
principals or practices, financial statement disclosure or auditing scope or
procedure. Additionally, there were no other reportable matters as defined in
Item 304(a)(1)(iv) of Regulation S-B for small business issuers, during that
period of time.
CERTAIN RELATIONSHIPS AND
RELATED TRANSACTIONS
Moneyzone advanced cash of $300,000 to us in July 2002. Upon
consummation of our merger with Moneyzone, the inter-company advance was
eliminated in consolidation and recorded as a capital contribution.
In September 2002, we entered into bridge loan promissory notes
("Notes") with two majority stockholders of Moneyzone for a total of $50,000
with interest at 10% per annum. The principal and interest were due to be paid
on the closing of collective funding of not less than $250,000. These Notes were
conditionally guaranteed by Timothy J. Owens, our Chief Executive Officer, in
the event that we did not pay the Notes in accordance with their terms. In June
2003 we entered into a Settlement Agreement and Mutual General Releases with
each of the holders of the Notes, mutually releasing all parties from any and
all claims arising out of or related to the Notes, and executed and delivered
new Secured Notes and Security Agreements (the "New Notes") in the aggregate
principal amount of $50,000. The New Notes were paid in full subsequent to the
fiscal year ended June 30, 2003.
In November 2002, we executed a non-interest bearing note, due on
demand, for a purchase of certain office furniture from Steven H. Reder for
$17,500. This note was repaid subsequent to June 30, 2003, the end of our last
fiscal year.
29
During the 2003 and 2002 fiscal years and prior to their employment
with us, we retained the services of Timothy J. Owens and Steven H. Reder as
consultants. During these periods, we paid or accrued consulting fees of
$177,500 and $113,500 to Mr. Owens and consulting fees of $177,500 and $105,000
to Mr. Reder.
During the 2003 and 2002 fiscal years, we retained the consulting
services of Federico Cabo, a 5% shareholder, and we paid or accrued consulting
fees of $122,500 and $3,000 during these periods, respectively. We also retained
consulting services of other parties related to the officers and we paid or
accrued consulting fees of $93,750 and $14,000 during these periods,
respectively.
In January and February 2003, we issued to the following parties an
aggregate of 1,351,650 shares of our common stock in connection with consulting
services having a total value of $685,425:
NAME DESCRIPTION NO. OF SHARES $ VALUE
- --------------------------------------------------------------------------------
Federico Cabo 5% shareholder 399,000 $ 199,500
Timothy Owens Officer/Director/5% shareholder 186,200 $ 93,100
Zachariah Owens Related to Officer/Director 104,750 $ 56,125
Melissa Owens Related to Officer/Director 104,750 $ 56,125
Geoffrey Reder Related to Officer/Director 99,750 $ 48,225
Richard Cabo Related to 5% shareholder 99,750 $ 49,875
Gregory Cabo Related to 5% shareholder 66,500 $ 33,250
Diane Cabo Related to 5% shareholder 66,500 $ 33,250
Federico Cabo, Jr. Related to 5% shareholder 66,500 $ 33,250
Michael Reder Related to Officer/Director 86,450 $ 43,225
Anne Reder Related to Officer/Director 66,500 $ 33,250
Willie Reder Related to Officer/Director 5,000 $ 6,250
As part of the negotiations to purchase a non-controlling interest in a
bottling facility in Mexico from OCIF-OBAC-SA de CV, an entity owned and
controlled by Federico Cabo, a 5% shareholder, we authorized and issued to
escrow 2,660,000 shares of our common stock until a definitive agreement could
be reached. At present, a definitive agreement has not been reached. The shares
are still issued and held subject to a cancellation fee equal to 15% of the
shares of stock held in escrow unless a definitive agreement can be reached.
In March 2003, we issued to Shelly Singhal, a 5% stockholder, 50,000
shares of our common stock in exchange for $14,500.
In April 2003, we issued to Shelly Singhal, a 5% stockholder, 890,893
shares of our common stock in exchange for $118,200.
In May 2003, we issued to Shelly Singhal, a 5% stockholder, 2,403,838
shares of our common stock in exchange for $137,500.
30
In May 2003, before he was retained as our Chief Financial Officer, we
issued to Norman A. Kunin 320,000 shares of our common stock as payment for
consulting services provided by Kunin Business Consulting, a division of Ace
Investors LLC, valued at $32,000.
In June 2003 we issued to SBI USA, LLC, an affiliate of Shelly Singhal,
1,720,000 shares of our common stock pursuant to the terms of a convertible
promissory note in the principal amount of $172,000.
On August 29, 2003 we issued a total of 1,627,171 shares of our common
stock to SBI-USA, LLC, an affiliate of Shelly Singhal. Of this amount, 1,500,000
shares were issued in settlement of a demand promissory note for a loan in the
amount of $112,500 and 127,171 shares were issued in payment of amounts due in
connection with the termination of a financial advisory agreement dated June 2,
2003.
MARKET FOR COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
MARKET INFORMATION
Our common stock trades on the NASD OTC Bulletin Board. Since January
9, 2003, it has traded under the symbol QTFV. Prior to that date, our common
stock traded on the NASD OTC Bulletin Board under the symbol MOZN.
The table below sets forth the range of high and low bid quotes of our
common stock for each quarter for the last two fiscal years as reported by Yahoo
Finance. The bid prices represent inter-dealer quotations, without adjustments
for retail mark-ups, markdowns or commissions and may not necessarily represent
actual transactions. The following prices reflect the 5 for 1 stock split that
was effected on January 9, 2003.
------------------------------ --------------------------------------
QUARTER ENDED 2003
------------------------------ ------------------- ------------------
High Low
------------------------------ ------------------- ------------------
September 30, 2002 $1.20 $0.20
------------------------------ ------------------- ------------------
December 31, 2002 $1.20 $0.21
------------------------------ ------------------- ------------------
March 31, 2003 $2.00 $0.40
------------------------------ ------------------- ------------------
June 30, 2003 $2.00 $0.65
------------------------------ ------------------- ------------------
$0.50 $0.08
------------------------------ --------------------------------------
2002
------------------------------ ------------------- ------------------
High Low
------------------------------ ------------------- ------------------
September 30, 2001 $0.60 $0.40
------------------------------ ------------------- ------------------
December 31, 2001 $1.00 $0.20
------------------------------ ------------------- ------------------
March 31, 2002 * *
------------------------------ ------------------- ------------------
June 30, 2002 * *
------------------------------ ------------------- ------------------
*No trades of our common stock were made during the third and fourth quarters of
the June 30, 2002 fiscal year.
31
There were approximately 371 holders of our common stock of record as
of September 10, 2003.
DIVIDENDS
We have never declared or paid cash dividends on our common stock, and
our present policy is not to pay cash dividends on our common stock. Any payment
of cash dividends in the future will be wholly dependent upon our earnings,
financial condition, capital requirements and other factors deemed relevant by
our board of directors. It is not likely that cash dividends will be paid in the
foreseeable future.
SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY INCENTIVE PLANS
Set forth in the table below is information regarding awards made
through compensation plans or arrangements through June 30, 2003, the most
recently completed fiscal year.
- ----------------------------- -------------------------- -------------------------- --------------------------
Number of securities
remaining available for
future issuance under
Number of securities to Weighted average equity compensation
be issued upon exercise exercise price of plans (excluding
of outstanding options, outstanding options, securities reflected in
Plan Category warrants and rights warrants and rights column 2)
- ----------------------------- -------------------------- -------------------------- --------------------------
- ----------------------------- -------------------------- -------------------------- --------------------------
Equity Compensation Plans
Approved by Security Holders N/A N/A N/A
- ----------------------------- -------------------------- -------------------------- --------------------------
- ----------------------------- -------------------------- -------------------------- --------------------------
Equity Compensation Plans
Not Approved by Security
Holders 6,520,000 $0.29 7,907,997
- ----------------------------- -------------------------- -------------------------- --------------------------
- ----------------------------- -------------------------- -------------------------- --------------------------
Our 2000 Stock Option Plan (the "2000 Plan"), as amended, authorizes
the issuance of options and common stock to officers, employees, directors and
consultants. We initially reserved 2,533,330 shares of our common stock for
awards to be made under the 2000 Plan. On February 12, 2003, we increased the
number of shares of common stock reserved for issuance to 4,233,330 shares,
pursuant to a Plan Amendment. The common stock reserved for issuance pursuant to
the 2000 Plan has been registered on an S-8 Registration Statement. The 2000
Plan allows for the issuance of either incentive stock options (which, pursuant
to Section 422 of the Internal Revenue Code, can only be granted to employees)
or non-qualified stock options. The 2000 Plan is administered by a committee of
two or more members of the Board of Directors or, if no committee is appointed,
then by the Board of Directors. The committee, or the Board of Directors if
there is no committee, determines the type of option granted, the exercise
price, the option term, which may be no more than ten years, terms and
conditions of exercisability and methods of exercise. Options must vest within
ten-years. Under the 2000 Plan, the exercise price may not be less than fair
market value on the date of grant for incentive stock options, and not less than
50% of the fair market value on the date of grant for non-qualified stock
options. The 2000 Plan also allows for the granting of Stock Appreciation Rights
32
in conjunction with all or part of any stock option granted. No Stock
Appreciation Rights have been granted. The number of options under the Plan
available for grant at June 30, 2003 was 2,655,830.
On April 21, 2003 our Board of Directors adopted the 2003 Incentive
Equity Stock Plan (the "2003 Plan"). The 2003 Plan authorizes the issuance of
options, right to purchase common stock and stock bonuses to officers,
employees, directors and consultants. We reserved 10,000,000 shares of our
common stock for awards to be made under the 2003 Plan. On April 25, 2003 we
filed a registration statement on Form S-8 to register 5,000,000 of these
shares. The 2003 Plan is administered by a committee of two or more members of
the Board of Directors or, if no committee is appointed, then by the Board of
Directors. The 2003 Plan allows for the issuance of incentive stock options
(which can only be granted to employees), non-qualified stock options, stock
awards, or stock bonuses. The committee, or the Board of Directors if there is
no committee, determines the type of option granted, the exercise price, the
option term, which may be no more than ten years, terms and conditions of
exercisability and methods of exercise. Options must vest within ten-years.
Under the 2003 Plan, the exercise price may not be less than fair market value
on the date of grant for the incentive stock options, and not less than 85% of
the fair market value on the date of grant for non-qualified stock options. The
number of options under the 2003 Plan available for grant at June 30, 2003 was
5,252,167.
DIVIDENDS
We have not paid any cash dividends and we currently intend to
retain any future earnings, to the extent we have such earnings, to fund the
development and growth of our business. Any future determination to pay
dividends on our common stock will depend upon our results of operations,
financial condition and capital requirements, applicable restrictions under any
credit facilities or other contractual arrangements and such other factors
deemed relevant by our Board of Directors.
WHERE YOU CAN FIND FURTHER INFORMATION ABOUT US
We are subject to the informational requirements of the Securities
Exchange Act of 1934 and must file reports, proxy statements and other
information with the Securities and Exchange Commission. The reports,
information statements and other information we file with the Commission can be
inspected and copied at the Commission at the Public Reference Room, 450 Fifth
Street, N.W. Washington, D.C. 20549. You may obtain information on the operation
of the Public Reference Room by calling the SEC at (800) SEC-0330. The
Commission also maintains a Web site (http://www.sec.gov) that contains reports,
proxy, and information statements and other information regarding registrants,
like us, which file electronically with the Commission.
This prospectus constitutes a part of a registration statement on Form
SB-2 filed by us with the Commission under the Securities Act of 1933. As
permitted by the rules and regulations of the Commission, this prospectus omits
certain information that is contained in the registration statement. We refer
you to the registration statement and related exhibits for further information
with respect to us and the securities offered. Statements contained in the
33
prospectus concerning the content of any documents filed as an exhibit to the
registration statement (or otherwise filed with the Commission) are not
necessarily complete. In each instance you may refer to the copy of the filed
document. Each statement is qualified in its entirety by such reference.
No person is authorized to give you any information or make any
representation other than those contained or incorporated by reference in this
prospectus. Any such information or representation must not be relied upon as
having been authorized. Neither the delivery of this prospectus nor any sale
made hereunder shall, under any circumstances, create any implication that there
has been no change in our affairs since the date of the prospectus.
EXECUTIVE COMPENSATION
REMUNERATION OF DIRECTORS AND OFFICERS
The following tables and discussion set forth information with respect
to all compensation, including incentive stock option plan and non-plan
compensation awarded to, earned by or paid to the President and Chief Executive
Officer for all services rendered in all capacities to us for each of our last
three completed fiscal years. No disclosure has been made for any executive
officer, other than the Chief Executive Officer and President, because, during
the last three completed fiscal years, there were no other executive officers.
SUMMARY COMPENSATION TABLE
LONG TERM COMPENSATION
----------------------
ANNUAL COMPENSATION AWARDS PAYOUTS
--------------------------------------------------------------------------------------
Other Restricted All Other
Annual Stock Securities LTIP Compen-
Name and Salary Bonus Compensation Awards Underlying Payout sation
Principal Position Year (Note 1) (Note 2) (Note 3) ($) Options/SARs ($) ($)
($) ($) ($)
Timothy J. Owens, 2003 16,750 100,000 177,500 0 1,280,000 0 0
Chief Executive 2002 0 0 113,500 0 0 0 0
Officer 2001 0 0 0 0 0 0 0
Steven H. Reder 2003 16,750 100,000 177,500 0 1,280,000 0 0
President 2002 0 0 105,000 0 0 0 0
2001 0 0 0 0 0 0 0
Note 1 - These salaries are accrued and unpaid for the period June 9 through
June 30, 2003.
Note 2 - These bonuses are accrued pursuant to employment agreements dated June
9, 2003, but have not been paid.
Note 3 - Represent total amounts due to these executive officers pursuant to
consulting agreements that pre-dated their employment. Cash payments
made to Timothy J. Owens for the years 2003 and 2002 were $177,500 and
$113,500, respectively. Cash payments made to Steven Reder for the
years 2003 and 2002 were $177,500 and $105,000, respectively.
34
STOCK OPTIONS
The following tables set forth certain information concerning the
granting and exercise of stock options during the last completed fiscal year by
each of the named executive officers and the fiscal year-end value of
unexercised options on an aggregated basis:
OPTION/SAR GRANTS FOR LAST
FISCAL YEAR-INDIVIDUAL GRANTS(1)
--------------------------------
Number of % of Total
Securities Options/SARs Granted
Underlying to Employees in
Options/SARs Fiscal Year Exercise Price ($/sh)
Name Granted (#) Expiration Date
- -------------------------- -------------------- ---------------------- ---------------------- ----------------------
Timothy J. Owens 1,280,000 50% $0.17/share June 9, 2008
Steven H. Reder 1,280,000 50% $0.17/share June 9, 2008
- -------------------------- -------------------- ---------------------- ---------------------- ----------------------
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR
AND FY-END OPTION/SAR VALUES(1)
---------------------------------------------------
Value of
Number of Unexercised
Unexercised In-the-Money
Options/SARs Options/SARs
at FY-End (#) at FY-End ($)(2)
Shares Acquired Value Realized(1) Unexercisable/ Unexercisable/
Name on Exercise (#) ($) Exercisable Exercisable
- -------------------------- -------------------- ---------------------- ---------------------- ----------------------
Timothy J. Owens -0- -0- 0/1,280,000 $0/$0
Steven H. Reder -0- -0- 0/1,280,000 $0/$0
(1) Value realized is determined by calculating the difference between the
aggregate exercise price of the options and the aggregate fair market value of
the common stock on the date the options are exercised.
(2) The value of unexercised options is determined by calculating the difference
between the fair market value of the securities underlying the options at fiscal
year end and the exercise price of the options.
DIRECTOR COMPENSATION
There is no standard or individual compensation package for any of
the directors.
35
EMPLOYMENT CONTRACTS
In June 2003 we entered into an employment agreement with Timothy J.
Owens to employ him as Chief Executive Officer. The agreement is for a five year
term, through June 8, 2008, and provides for a base salary of $300,000 per year
through October 1, 2003, $360,000 per year through October 1, 2004, and an
increase of at least 10% annually until the termination date. The agreement also
provides for a one-time signing bonus of $100,000, payable in four equal
payments of $25,000 each on July 1 and October 1, 2003 and January 1 and April
1, 2004, a bonus computed annually totaling 2.00% of net income, issuance of
incentive stock options and a warrant to purchase 1,280,000 shares of our common
stock at an exercise price of $0.17 per share, the fair market value of the
common stock on the date of issuance. Additionally, the agreement provides for a
payment of $720,000 upon certain transactions, such as a sale of substantially
all of our assets or a merger, and a severance benefit of one year's base
salary. As of the date of filing this prospectus, Mr. Owens has not been paid
any of the signing bonus and has received partial advances against his base
salary in the aggregate amount of $30,000.
In June 2003 we entered into an employment agreement with Steven H.
Reder to employ him as President. The agreement is for a five year term, through
June 8, 2008, and provides for a base salary of $300,000 per year through
October 1, 2003, $360,000 per year through October 1, 2004, and an increase of
at least 10% annually until the termination date. The agreement also provides
for a one-time signing bonus of $100,000, payable in four equal payments of
$25,000 each on July 1 and October 1, 2003 and January 1 and April 1, 2004, a
bonus computed annually totaling 2.00% of net income, issuance of incentive
stock options and a warrant to purchase 1,280,000 shares of our common stock at
an exercise price of $0.17 per share, the fair market value of the common stock
on the date of issuance. Additionally, the agreement provides for a payment of
$720,000 upon certain transactions, such as a sale of substantially all of our
assets or a merger, and a severance benefit of one year's base salary. As of the
date of filing this prospectus, Mr. Reder has not been paid any of his signing
bonus and has received partial advances against his base salary in the aggregate
amount of $12,500.
In August 2003 we entered into an employment agreement with Norman A.
Kunin. The agreement is for a five year term, through July 31, 2008, and
provides for a base salary of $250,000 per year through October 1, 2003,
$300,000 per year through October 1, 2004, and an increase of at least 10%
annually until the termination date. The agreement also provides for a one-time
signing bonus of $75,000, payable in three equal payments of $25,000 each on
August 4 and November 1, 2003 and February 1, 2004, a bonus computed annually
totaling 1.25% of net income, issuance of incentive stock options and a warrant
to purchase 750,000 shares of our common stock at an exercise price of $0.24 per
share, the fair market value of the common stock on the date of issuance.
Additionally, the agreement provides for a payment of $500,000 upon certain
corporation transactions, such as a sale of substantially all of our assets or a
merger, and a severance benefit of one year's base salary. As of the date of
filing this prospectus, Mr. Kunin has received his salary when due and a partial
advance against his signing bonus in the amount of $17,500.
36
EXPERTS
Corbin & Company, LLP audited our financial statements at June 30, 2003
and June 30, 2002, as set forth in their report which includes an emphasis
paragraph relating to our ability to continue as a going concern. We have
included our financial statements in the prospectus and elsewhere in the
registration statements in reliance on the report of Corbin & Company, LLP,
given on their authority as experts in accounting and auditing.
Richardson & Patel LLP has given us an opinion relating to the due
issuance of the common stock being registered.
37
QT 5, INC.
PROSPECTUS
45,137,521 Shares of Common Stock
October 1, 2003
No person is authorized to give any information or to make any representation
other than those contained in this prospectus, and if made such information or
representation must not be relied upon as having been given or authorized. This
prospectus does not constitute an offer to sell or a solicitation of an offer to
buy any securities other than the securities offered by this prospectus or an
offer to sell or a solicitation of an offer to buy the securities in any
jurisdiction to any person to whom it is unlawful to make such offer or
solicitation in such jurisdiction.
The delivery of this prospectus shall not, under any circumstances, create any
implication that there has been no changes in the affairs of QT 5, Inc. since
the date of this prospectus. However, in the event of a material change, this
prospectus will be amended or supplemented accordingly.
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS
As permitted by Section 102(b)(7) of the General Corporation Law of the
State of Delaware, Article Ninth of the registrant's Certificate of
Incorporation includes a provision that eliminates the personal liability of
each of its directors for monetary damages for breach of such director's
fiduciary duty as a director, except for liability: (i) for any breach of the
director's duty of loyalty to the registrant or its stockholders; (ii) for acts
or omissions not in good faith or which involve intentional misconduct or a
knowing violation of the law; (iii) under Section 174 of the General Corporation
Law; or (iv) for any transaction from which the director derived an improper
personal benefit. If the General Corporation Law is amended to authorize the
further elimination or limitation of the liability of directors, then the
liability of a director shall be limited to the fullest extent allowed by the
amendment. However, any repeal or modification of the indemnity provided by the
General Corporation Law shall not adversely affect any limitation on the
personal liability of the registrant's directors.
The registrant's Certificate of Incorporation requires it, to the
extent and in the manner provided by the General Corporation Law, to indemnify
any person against expenses, (including attorneys' fees), judgments, fines and
amounts paid in settlement, that are actually and reasonably incurred in
connection with any threatened, pending or completed action, suit or proceeding
to which such person was or is a party or is threatened to be made a party by
reason of the fact that such person is or was one of the registrant's directors
or officers.
The registrant's Bylaws provide that it must, to the fullest extent
permitted by Section 145 of the Delaware General Corporation Law, indemnify its
directors and officers for actions they took in good faith and in a manner
reasonably believed to be in, or not opposed to, the registrant's best
interests. With respect to any criminal action or proceeding, the officer or
director must have had no reasonable cause to believe that his conduct was
unlawful. The registrant is required by its Bylaws to advance, prior to the
final disposition of any proceeding, promptly following request therefore, all
expenses incurred by any officer or director in connection with such proceeding.
If the General Corporation Law is amended to provide narrower rights to
indemnification than are available under the registrant's Bylaws, such amendment
shall not apply to alleged actions or omissions that precede the effective date
of such amendment. The registrant's Bylaws permit it to indemnify its employees
and agents to the fullest extent permitted by the General Corporation Law.
Section 145 of the General Corporation Law of the State of Delaware
permits indemnification of a corporation's agents (which includes officers and
directors) because he is a party (or he is threatened to be made a party) to any
action or proceeding by reason of the fact that the person is or was an agent of
the corporation or because he is a party (or he is threatened to be made a
party) to any action or proceeding brought by or on behalf of a corporation. If
the agent is successful on the merits in defense of any action or proceeding,
the corporation must indemnify the agent against expenses actually and
reasonably incurred by the agent in such defense. Indemnification must be
authorized in the specific case upon a determination that indemnification is
proper because the person has met the applicable standard of conduct to require
indemnification. This provision of the General Corporation Law of the State of
Delaware is not exclusive of any other rights to which persons seeking
indemnification may be entitled under any bylaw, agreement, vote of shareholders
or disinterested directors or otherwise.
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The estimated expenses of the offering, all of which are to be borne by the
registrant, are as follows:
SEC Filing Fee $ 781.69
Printing Expenses* $ 1,000.00
Registrar and Transfer Agent Fee* $ 350.00
Legal Fees $ 35,000.00
Accounting Fees* $ 12,500.00
Miscellaneous* $ 100.00
-------------------------------------------------
Total* $ 49,731.69
* Estimated
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES
During the last three years the registrant sold securities that were
not registered under the Securities Act of 1933. The transactions are as
follows:
On August 22, 2003 the registrant received $1,000,000 in gross
proceeds at the first closing from an aggregate $2 million sale and issuance of
6% convertible debentures convertible into the registrant's common stock. This
offer and sale was made solely to accredited investors. The debentures sold at
the first closing are due and payable on August 22, 2006. Related to the
financing was the issuance of warrants to purchase one share of common stock for
every two shares underlying the debentures. The exercise price for the warrant
stock is $0.075 per share and the term of the warrants is five years. The
second $1,000,000 closing is scheduled to occur following the effective date of
this registration statement. This transaction was exempt from registration
pursuant to Regulation D of the Securities Act of 1933.
As part of the negotiations to purchase a non-controlling interest in a
bottling facility in Mexico from OCIF-OBAC-SA de CV, the registrant authorized
and issued to escrow 2,660,000 shares of its common stock until a definitive
agreement could be reached. At present, a definitive agreement has not been
reached. The shares are still issued and held in escrow subject to a
cancellation fee equal to 15% of the shares of the escrowed common stock, unless
a definitive agreement can be reached. The registrant also entered into
negotiations with the developers and patent holders of certain rapid test
medical devises for an exclusive right to market these devices, at the
registrant's option. At present 1,000,160 shares of the registrant's common
stock have been authorized and issued into escrow as a partial payment for the
right to market, if a definitive agreement is reached. At present, a definitive
agreement has not been reached. If the registrant does not complete these
acquisitions, it will return the common stock to treasury. If the common stock
is transferred to OCIF-OBAC-SA de CV and the developers and patent holders of
the rapid test medical devices, the transactions will be exempt from
registration pursuant to Section 4(2) of the Securities Act of 1933.
During the month of June 2003 the registrant sold 2,200,854 shares of
common stock at a price of $0.15 per share (which was the weighted average
price paid by the investors for the stock issuance) in five separate sales
transactions to accredited investors. The sales included, in the aggregate,
warrants to purchase 1,900,000 shares of common stock for a weighted average
exercise price of $0.58 per share. The warrants have a term of five years. The
registrant received aggregate net cash proceeds of $331,000 in these offerings.
These transactions were exempt from registration pursuant to Regulation D
promulgated under the Securities Act of 1933.
In April and June 2003 the registrant committed to issue 300,000 shares
of its common stock to employees in connection with their initial employment.
The weighted average fair market value of this common stock was $75,126 or $0.25
per share. These transactions were exempt from registration pursuant to Section
4(2) of the Securities Act of 1933.
On June 23, 2003 the registrant issued 1,720,000 shares of its common
stock at a price of $0.10 per share for total proceeds of $172,000 to SBI-USA
LLC pursuant to the terms of a convertible promissory note. This transaction was
exempt from registration pursuant to Section 4(2) of the Securities Act of 1933.
In April, May and June 2003 the registrant issued 690,000 shares of its
common stock to various consultants for services provided to the registrant.
These transactions were exempt from registration pursuant to Section 4(2) of the
Securities Act of 1933.
On January 9, 2003, the registrant consummated a reverse merger with
MoneyZone.com, Inc., wherein the registrant issued to stockholders of Quicktest
5, Inc. 25,000,000 shares of common stock in exchange for all the issued and
outstanding shares of Quicktest 5, Inc. This transaction was exempt from
registration pursuant to Section 4(2) of the Securities Act of 1933.
ITEM 27. EXHIBITS.
a. The following Exhibits are filed as part of this Registration Statement
pursuant to Item 601 of Regulation S-B:
2.1 Agreement and Plan of Merger, dated as of June 28, 1999, by and
among the registrant, EBonlineinc.com, Inc., and John D. Brasher, Jr.,
incorporated by reference to our Current Report on Form 8-K (File No.
000-25022), dated as of July 15, 1999.
2.2 Amendment No. 1 to the Agreement and Plan of Merger, dated as of
June 28, 1999, by and among the registrant, EBonlineinc.com, Inc., and John D.
Brasher, Jr., incorporated by reference to our Current Report on Form 8-K (File
No. 000-25022), dated as of July 15, 1999.
2.3 Letter Agreement between MoneyZone.com and Global Capital Partners
Inc. dated as of March 7, 2001, incorporated by reference to our Current Report
on Form 8-K (File No. 000-25022), dated as of March 7, 2001.
2.4 Agreement and Plan of Merger, dated as of July 15, 2002, by and
among the registrant and QuickTest 5, Inc., incorporated by reference to Exhibit
10.2 of our Schedule 14C (File No. 000-25022), filed with the Commission on
December 11, 2002 (the "Schedule 14C").
2.5 Certificate of Merger, dated as of January 9, 2003, between the
registrant and Quicktest 5, Inc., incorporated by reference to Exhibit 10.1 of
the Schedule 14C.
3.1 Certificate of Incorporation, dated as of April 4, 1989,
incorporated by reference to Registration Statement on Form 10-SB (File No.
0-25022), dated as of October 27, 1994.
3.2 Certificate of Amendment to Certificate of Incorporation, dated as
of November 8, 1990, incorporated by reference to Registration Statement on Form
10-SB (File No. 0-25022), dated as of October 27, 1994.
3.3 Certificate of Amendment to Certificate of Incorporation, dated as
of October 26, 1994, incorporated by reference to Registration Statement on Form
10-SB (File No. 0-25022), dated as of October 27, 1994.
3.4 Certificate of Increase in Number of Authorized Shares of Common
Stock, dated as of July 8, 1996, amending the Certificate of Incorporation,
incorporated by reference to our Annual Report on Form 10-KSB (File No.
000-25022), dated as of March 30, 2000.
3.5 Certificate of Amendment to Certificate of Incorporation, dated as
of March 12, 1997, incorporated by reference to our Annual Report on Form 10-KSB
(File No. 000-25022), dated as of March 30, 2000.
3.6 Certificate of Amendment to Certificate of Incorporation, dated as
of March 20, 1998, incorporated by reference to our Annual Report on Form 10-KSB
(File No. 000-25022), dated as of April 14, 1998.
3.7 Certificate of Amendment to Certificate of Incorporation, dated as
of March 31, 1998, incorporated by reference to our Annual Report on Form 10-KSB
(File No. 000-25022), dated as of April 14, 1998.
3.8 Certificate of Amendment to Certificate of Incorporation, dated as
of July 8, 1999, incorporated by reference to our Annual Report on Form 10-KSB
(File No. 000-25022), dated as of March 30, 2000.
3.9 Certificate of Amendment to Certificate of Incorporation, dated as
of July 22, 1999, incorporated by reference to our Annual Report on Form 10-KSB
(File No. 000-25022), dated as of March 30, 2000.
3.10 Certificate of Amendment to Certificate of Incorporation, dated as
of December 17, 1999, incorporated by reference to our Annual Report on Form
10-KSB (File No. 000-25022), dated as of March 30, 2000.
3.11 By-Laws of MoneyZone.com, Inc., incorporated by reference to
Registration Statement on Form 10-SB (File No. 0-25022), dated as of October 27,
1994.
4.1 Form of Registration Rights Agreement, dated as of October 1, 1999,
by and among EBonlineinc.com, and each of the investors listed on Exhibit A
thereto, incorporated by reference to our Annual Report on Form 10-KSB (File No.
000-25022), dated as of March 30, 2000.
4.2 Convertible Debenture Purchase and Exchange Agreement dated as of
September 15, 2000, incorporated by reference to our Current Report on Form 8-K
(File No. 000-25022), dated as of September 15, 2000.
4.3 6% Convertible and Exchangeable Debenture, incorporated by
reference to our Current Report on Form 8-K (File No. 000-25022), dated as of
September 15, 2000.
4.4 Common Stock Purchase Warrant, incorporated by reference to our
Current Report on Form 8-K (File No. 000-25022), dated as of September 15, 2000.
4.5 Registration Rights Agreement, incorporated by reference to our
Current Report on Form 8-K (File No. 000-25022), dated as of September 15, 2000.
4.6 Registration Rights Agreement by and among registrant and NDMS
Investments, L.P. and NDMS Investments, L.P. assignees incorporated by reference
to our Annual Report on Form 10-KSB (File No. 000-25022) dated as of April 15,
2003.
4.7 $150,000 Promissory Note dated September 30, 2002, between the
registrant and NDMS Investments, L.P. incorporated by reference to our Annual
Report on Form 10-KSB (File No. 000-25022) dated as of April 15, 2003.
4.8 Amendment No. 1 to $150,000 Promissory Note dated February 28, 2003
incorporated by reference to our Annual Report on Form 10-KSB (File No.
000-25022) dated as of April 15, 2003.
4.9 Registration Rights Agreement dated September 30, 2002, between the
registrant and NDMS Investments, L.P. incorporated by reference to our Annual
Report on Form 10-KSB (File No. 000-25022) dated as of April 15, 2003.
5. Opinion on legality from Richardson & Patel LLC, filed herewith.
10.1 Office Building Lease dated March 15, 2002 between the registrant
and Village Green Officer Park incorporated by reference to our Annual Report on
Form 10-KSB (File No. 000-25022) dated as of April 15, 2003.
10.2 Agreement for the Assignment of Patent Rights, dated April 7,
2002, by and between the registrant and Marshall Anlauf Thompson, incorporated
by reference to Exhibit 99.1 of the registrant's Form 8-K as filed with the
Commission on January 24, 2003.
10.3 2000 Stock Option Plan, incorporated by reference to Exhibit 10.1
of the registrant's Form S-8 (File No. 333-92236) filed with the Commission on
July 11, 2002 (the "Form S-8").
10.4 Amendment No. 1 to the 2000 Stock Option Plan, incorporated by
reference to Exhibit 10.2 of the Form S-8.
10.5 Amendment No. 2 to the 2000 Stock Option Plan, incorporated by
reference to Exhibit 10.3 of the registrant's Form S-8 (File No. 333-103208)
filed with the Commission on February 14, 2003.
10.6 Issuance Agreement dated September 30, 2002, by and between the
registrant and NDMS Investments, L.P. incorporated by reference to our Annual
Report on Form 10-KSB (File No. 000-25022) dated as of April 15, 2003.
10.7 Issuance Agreement, dated December 31, 2002, by and between the
registrant and NDMS Investments, L.P. incorporated by reference to our Annual
Report on Form 10-KSB (File No. 000-25022) dated as of April 15, 2003.
10.8 2003 Incentive Equity Stock Plan, incorporated by reference to
Exhibit 10.1 of the registrant's Form S-8 (File No. 333-104740) filed with the
Commission on April 25, 2003.
10.9 Employment Agreement dated June 9, 2003 between the registrant and
Timothy J. Owens, incorporated by reference to our Annual Report on Form 10-KSB
(File No. 000-25022) dated as of September 19, 2003.
10.10 Employment Agreement dated June 9, 2003 between the registrant
and Steven H. Reder, incorporated by reference to our Annual Report on Form
10-KSB (File No. 000-25022) dated as of September 19, 2003.
10.11 Employment Agreement dated August 4, 2003 between the registrant
and Norman Kunin, incorporated by reference to our Annual Report on Form 10-KSB
(File No. 000-25022) dated as of September 19, 2003.
10.12 Common Stock Purchase Warrant dated June 9, 2003 issued to
Timothy J. Owens, incorporated by reference to our Annual Report on Form 10-KSB
(File No. 000-25022) dated as of September 19, 2003.
10.13 Common Stock Purchase Warrant dated June 9, 2003 issued to Steven
Reder, incorporated by reference to our Annual Report on Form 10-KSB (File No.
000-25022) dated as of September 19, 2003.
10.14 Common Stock Purchase Warrant dated August 4, 2003 issued to
Norman A. Kunin, incorporated by reference to our Annual Report on Form 10-KSB
(File No. 000-25022) dated as of September 19, 2003.
10.15 Securities Purchase Agreement dated August 19, 2003 between the
registrant and various holders of the registrant's convertible debentures,
incorporated by reference to our Annual Report on Form 10-KSB (File No.
000-25022) dated as of September 19, 2003.
10.16 Registration Rights Agreement dated August 19, 2003 between the
registrant and various holders of the registrant's convertible debentures,
incorporated by reference to our Annual Report on Form 10-KSB (File No.
000-25022) dated as of September 19, 2003.
10.17 Warrant dated August 19, 2003 between the registrant and various
holders of the registrant's convertible debentures, incorporated by reference to
our Annual Report on Form 10-KSB (File No. 000-25022) dated as of September 19,
2003.
10.18 6% Convertible Debenture entered into by the registrant and
various holders on August 22, 2003, incorporated by reference to our Annual
Report on Form 10-KSB (File No. 000-25022) dated as of September 19, 2003.
16. Letter on change in certifying accountant, incorporated by
reference to the Current Report on Form 8-K (File No. 000-25022) dated February
12, 2003.
21 Subsidiaries of the registrant, incorporated by reference to our
Annual Report on Form 10-KSB (File No. 000-25022) dated as of September 19,
2003.
22.1 Information Statement on Schedule 14C, incorporated by reference
to Schedule 14C (File No. 000-25022), dated as of March 20, 2000.
22.2 Information Statement on Schedule 14C, incorporated by reference
to Schedule 14C (File No. 000-25022), dated as of December 11, 2002.
23 Consent of Corbin & Company LLC, dated October 1, 2003, filed
herewith
ITEM 28. UNDERTAKINGS.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the registrant pursuant to the foregoing provisions, or otherwise, the
registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the registrant of expenses
incurred or paid by a director, officer or controlling person of the registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
The undersigned registrant hereby undertakes:
1. To file, during any period in which offers or sales are being made,
a post-effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a)(3) of
the Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events which,
individually or together, represent a fundamental change in the
information in the registration statement;
(iii) To include any additional or changed material
information on the plan of distribution.
2. That, for the purpose of determining any liability under the
Securities Act of 1933, each post-effective amendment shall be deemed to be a
new registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
3. To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the termination of
the offering.
4. Insofar as indemnification for liabilities arising under the
Securities Act of 1933 (the "Act") may be permitted to directors, officers and
controlling persons of the registrant pursuant to the foregoing provisions, or
otherwise, the registrant has been advised that in the opinion of the Securities
and Exchange Commission such indemnification is against public policy as
expressed in the Act and is, therefore, unenforceable. In the event that a claim
for indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Securities
Act and will be governed by the final adjudication of such issue.
SIGNATURES
Pursuant to the requirements of the 1933 Securities Act, the registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form SB-2 and has duly caused this Registration
Statement on Form SB-2 to be signed on its behalf by the undersigned thereunto
duly authorized, in the City of Los Angeles, State of California on the 1st day
of October 2003.
QT 5, Inc.
a Delaware corporation
By: /s/ Timothy J. Owens
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Timothy J. Owens, Chief Executive Officer
/s/ Norman A. Kunin
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Norman A. Kunin, Chief Financial Officer
Pursuant to the requirements of the 1933 Securities Act, this Form SB-2
Registration Statement has been signed by the following persons in the
capacities with QT 5, Inc. and on the dates indicated.
Dated: October 1, 2003
/s/ Timothy J. Owens
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Timothy J. Owens, Chief Executive Officer
and Director
Dated: October 1, 2003
/s/ Steven Reder
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Steven Reder, President and Director
Dated: October 1, 2003
/s/ Norman A. Kunin
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Norman A. Kunin, Chief Financial Officer