As filed with the Securities and Exchange Commission on February 24, 2004
Registration No. 333-
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM SB-2REGISTRATION STATEMENT
UNDER THE 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:
DARRIN M. OCASIO, ESQ.
Sichenzia Ross Friedman Ference LLP
1065 Avenue of Americas
New York, New York 10018
Telephone: (212) 930-9700
Telecopier: (212) 930-9725
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)
- -------------------------------------------------------------------------------------------------------------------
Common stock, $0.001 par value, issuable
upon conversion of debentures at $0.01 134,508,958 $0.025 $3,242,729.95 $410.85
per share(1)
-------------------------------------------------------------------------------------------------------------------
Common stock, $0.001 par value, issuable
upon conversion of warrants(1) 50,100,000 $0.025 $1,252,500.00 $158.69
-------------------------------------------------------------------------------------------------------------------
TOTAL 184,608,958 $4,495,229.95 $569.54
===================================================================================================================
(1) 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.
184,608,958 SHARES OF COMMON STOCK
This prospectus covers the resale by selling shareholders of up to 184,608,958
shares of our common stock, $0.001 par value. The selling shareholders are
offering
134,508,958 shares of common stock underlying our 6% Convertible Debentures, and
50,100,000 shares of common stock underlying warrants.
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 February 24, 2004
QT 5, INC.
TABLE OF CONTENTS
Page No.
Prospectus Summary 1
Risk Factors 2
Forward Looking Statements 5
Description of Securities to be Registered 5
Selling Shareholders 6
Plan of Distribution 7
Use of Proceeds 7
Directors, Executive Officers, Promoters and Control Persons 8
Security Ownership of Certain Beneficial Owners and Management 9
Disclosure of Commission Position on Indemnification for
Securities Act Liabilities 9
Organization 11
Our Business 11
Description of Property 13
Legal Proceedings 13
Management's Discussion and Analysis of Financial Condition
and Results of Operations 14
Financial Statements F-1 through F-42
Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure 30
Certain Relationship and Related Transactions 30
Market for Common Equity and Related Shareholder Matters 20
Executive Compensation 23
Experts 26
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.
We are currently the licensee of various quick test devices and quantitative
testing analyzers which we are preparing to bring to market. In October 2003 we
entered into a License Agreement of Intellectual Property with VMM, LLC. Under
this agreement, we licensed the exclusive right, worldwide, to sell and
distribute, under our brand name, specific point of care quick-test devices and
quantitative testing analyzers to the retail, professional and governmental
healthcare markets. These include an FDA cleared urine specimen drug screening
test and a disease testing target system platform to identify Rubella, Herpes,
Roravirus, Strep Group A, Infectious Mononucleosis, Myoglobin, CK-MB, Cardiac
Troponin and Pregnancy. In addition, an HIV 1&2 test is pending phase 3
clearance by the FDA. During the next 12 months, we expect to submit tests for
Hepatitis, Prostate PSA count, West Nile Virus and SARS to the FDA for
clearance.
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 patent was executed and delivered to
us on June 26, 2002. Our first water-based homeopathic nicotinum (nicotine)
product was 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).
In May 2003 Mr. Marshall Anluaf Thompson, owner of the NICO Patent, alleged that
he was entitled to terminate the assignment of the NICO Patent based upon our
failure to meet certain conditions required by the assignment agreement,
including performance conditions. The dispute was heard by a panel of
arbitrators who, on January 8, 2004, concluded that Mr. Thompson was entitled to
terminate the assignment agreement. Immediately following the decision we
stopped marketing NICOWater(TM). While we have acquired other products,
NICOWater(TM) was the only product we sold.
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 184,608,958 shares of our common stock for sale by the
shareholders identified in the section of this prospectus titled "Selling
Shareholders". The shares have not yet been, but that may be, issued to
designated selling shareholders upon the conversion of our 6% Convertible
Debentures, and/or the exercise of warrants. Information regarding the
debentures and the warrants is included in the section of this prospectus titled
"Description of Securities to be Registered".
1
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 HAVE LOST OUR RIGHTS TO THE NICO PATENT AND ARE NO LONGER ABLE TO SELL NICO
WATER. THE LOSS OF THESE RIGHTS HAS MATERIALLY ADVERSELY EFFECTED OUR BUSINESS,
REVENUES AND RESULTS OF OPERATIONS.
NICOWater(TM) was the only product we sold. In May 2003 we received notice from
Marshall Anlauf Thompson, the inventor of the process by which we made
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 alleged that we failed to meet certain performance
requirements included in that agreement and that he had a right to terminate the
agreement and obtain a return of the NICO Patent. We commenced an arbitration
proceeding, as required by the agreement, to resolve this dispute. On January 8,
2004, the arbitrators ruled against us and we lost the NICO Patent.
Because NICOWater(TM) was the only product we sold, our loss of the NICO Patent
will 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. At this time we have no products that
are ready to be marketed and, even if we are successful in introducing any of
our products, we are not certain that they will generate significant revenues.
During the year ended June 30, 2003 and the six months ended December 31, 2003,
we incurred a net loss of $6,410,216 and $5,391,291, respectively, with revenues
of only $9,042 and $190,404, respectively. Because of the loss of the NICO
Patent, we no longer have a product that generates 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 products and a market for them
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.
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 a registration statement, which we were required
to file in conjunction with receipt of the financing. The registration statement
was declared effective on November 12, 2003, and we received the remaining
$1,000,000 of gross proceeds in October and November 2003. Also, in November
2003 we completed an accounts receivable financing facility with AeroFund
Financial that will enable us to finance approved customer invoices to a maximum
of $1,500,000 at any given time. As of the date of this filing, AeroFund has
advanced approximately $21,500 against factored accounts receivable of $61,500.
We are currently in default of this financing agreement caused by the loss of
the NICO Patent and non-payment of certain NICO customers. We intend to cure
this default and anticipate utilizing this accounts receivable financing
facility, if appropriate, in connection with future sales of our new product.
Without the ability to sell NICOWaterTM, which was our only current product, and
given that we are just beginning to bring other products to market, we are
dependent upon obtaining additional financing to fund our continued operations.
2
To the extent that we need more funds, 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 cease our operations. Our independent auditors 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 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 ASSURE YOU THAT WE WILL BE SUCCESSFUL IN COMMERCIALIZING OUR PRODUCTS.
IF WE DO NOT DEVELOP AND COMMERCIALIZE OUR PRODUCTS, YOU MAY LOSE YOUR ENTIRE
INVESTMENT.
Our ability to successfully commercialize any of the products we have acquired
is uncertain. Although some of the products we are currently licensed to sell
need no further regulatory clearance, some will require additional research,
development, testing, regulatory clearance or investment prior to their
commercialization. We cannot assure you that we can develop commercially
successful products. If we do not develop commercially successful products, you
could lose your entire investment.
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.
We have obtained the rights to sell specific point of care quick-test devices
and quantitative testing analyzers to the retail, professional and governmental
healthcare markets. These include an FDA cleared urine specimen drug screening
test and a disease testing target system platform to identify Rubella, Herpes,
Roravirus, Strep Group A, Infectious Mononucleosis, Myoglobin, CK-MB, Cardiac
Troponin and Pregnancy. When we begin marketing these products, liability might
result from claims made by consumers or professionals who purchase them. Our
product liability insurance policy was cancelled in January 2004 as a result of
our loss of the NICO Patent and our inability to sell NICOWater. We anticipate
obtaining new product liability insurance covering the sale of our new products.
We can give no assurance that such insurance will be 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
products. 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 could have a material adverse
effect on our business.
3
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 AFFECTED AND THE VALUE OF YOUR INVESTMENT MAY DECLINE.
The manufacture, sale, promotion and marketing of some of 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. Although we have not yet been required to spend
significant sums of money to obtain FDA or other clearances or approvals for our
products, the expense relating to obtaining such approvals could grow.
Furthermore, we cannot predict the time frame for any clearance or approval
because all required approvals are subject to independent governmental agencies
over which we have no control. Delays in obtaining government clearances or
approvals of our products, or failure to obtain required government clearances
or approvals, will prevent us from marketing them, which, in turn, will prevent
us from recouping their acquisition costs.
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 clearance or 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 affected 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 300,000,000 shares of common stock. 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
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 AFFECT
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.
4
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 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, as amended, to
issue 300,000,000 shares of common stock, $0.001 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
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 received a commitment to obtain gross proceeds of
$2,000,000 upon the issuance of 6% Convertible Debentures to six investors who
participated in a private offering of these securities. The funds were to be
received and the debentures were to be issued in two closings. The first
closing, pursuant to which we received gross proceeds of $1,000,000, took place
on August 22, 2003.
On October 15, 2003 we and the investors agreed that the investors would advance
$200,000 of the remaining $1,000,000 in gross proceeds prior to the date they
were required to do so. In November 2003 we received the remaining $800,000 in
gross proceeds due at the second closing. 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. There is not an effective registration statement covering the
sale of common stock to be issued for any interest payment. At any time after
the original issue date, the debentures may be converted 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 debentures 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 were issued at the second closing. We have registered
34,666,666 shares of our common stock to cover the conversion of the debentures.
The debentures also require that, in the event that we lose our patent relating
to NICOWater(TM), the conversion price shall thereafter equal the lesser of (A)
the Set Price and (B) 60% of the average of the 5 Closing Prices for the 5
Trading Days immediately prior to the applicable Conversion Date. We and the
investors have agreed that such price will be fixed at $0.01 per share.
Additional shares of Common Stock were registered in a separate Registration
Statement to cover such additional conversion shares.
In November and December 2003 and January and February 2004, a total of
$1,790,667 of the convertible debentures were converted into 49,821,747 shares
of our common stock. This prospectus relates to the resale of up to 29,708,958
shares of common stock underlying the above-referenced securities.
On February 12, 2004, we entered into a Securities Purchase Agreement with
several accredited institutional investors for the issuance of an aggregate of
$1,000,000 principal amount 6% convertible debentures with an original issue
discount of 20%. As of February 12, 2004, we closed on an aggregate principal
amount of $437,500 of convertible debentures and received gross proceeds of
$350,000. We anticipate closing on an additional $187,500 by the end of
February. The last tranche of $375,000 in principal amount of convertible
debentures will be issued within 5 days of effectiveness of this registration
statement underlying these securities. The debentures are due two years from the
date of issuance. The debentures are convertible at the option of the holders
into our shares of common stock at a fixed conversion price of $0.01 per share.
Furthermore we entered into a Registration Rights Agreement in order to register
the above-referenced securities. We paid a finders fee of 9% and issued 100,000
warrants to such finder. This prospectus covers the resale of up to 100,100,000
shares of common stock underlying these debentures.
WARRANTS CONVERTIBLE INTO COMMON STOCK
The Debenture Warrants issued in connection with the August 2003 debentures are
exercisable at a price of $0.075 per share. These 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 it may convert the debenture. Including the warrant issued to HPC
Capital Management, which arranged the financing, 16,000,000 shares of our
common stock may be purchased through the exercise of the Debenture Warrants and
we have registered 20,000,000 shares of our common stock to cover the exercise
of these Debenture Warrants.
On October 15, 2003, we and the investors agreed that the investors would
advance $200,000 of the remaining $1,000,000 in gross proceeds prior to the date
they were required to do so under our agreement. In exchange for the advance, we
agreed to reduce the exercise price of the Debenture Warrants (including the
warrant issued to HPC Capital Management) from $0.075 to $0.01 and, for a period
of 12 months, to refrain from issuing to employees, officers or directors, from
any stock option plan or employee incentive plan or agreement, stock or options
in excess of 50,000 shares per month without the prior written consent of the
investors.
In November and December 2003 and January and February 2004, 13,333,333 shares
of our common stock were purchased by certain holders of our 6% Convertible
Debentures through the exercise of their Debenture Warrants at an exercise price
of $0.01.
The Debenture Warrants issued in connection with the February 2004 debentures
are exercisable at a price of $0.01 per share. These 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 it may convert the debenture. Including the warrant issued to HPC
Capital Management, which arranged the financing, 50,100,000 shares of our
common stock may be purchased through the exercise of these Debenture Warrants.
This prospectus relates to the resale of up to 50,100,000 shares of common stock
underlying the Debenture Warrants issued in February 2004.
5
SELLING SHAREHOLDERS
The following table sets forth the names of the selling shareholders who may
sell their shares using this prospectus. No selling shareholder has, or within
the past three years has had, any position, office or other material
relationship with us or with any of our predecessors or affiliates.
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.
- -------------------------------- ------------------- -------------- ------------ --------------- ------------ --------------
Total Shares of Percentage
Common Stock of Common Shares of Beneficial
Issuable Upon Stock, Common Stock Beneficial Percentage of Ownership
Conversion of Assuming Included in Ownership Common Stock After the
Name Debentures Full Prospectus Before the Owned Before Offering
and/or Warrants Conversion Offering Offering (7)
- -------------------------------- ------------------- -------------- ------------ --------------- ------------ --------------
Palisades Master Fund L.P(1) 37,500,000 24.5% 37,500,000 5,756,224 4.99% 0
- -------------------------------- ------------------- -------------- ------------ --------------- ------------ --------------
Crescent International Ltd(2) 44,875,626 28.0% 44,875,626 5,756,224 4.99% 0
- -------------------------------- ------------------- -------------- ------------ --------------- ------------ --------------
Alpha Capital AG (3) 44,933,332 28.0% 44,933,332 5,756,224 4.99% 0
- -------------------------------- ------------------- -------------- ------------ --------------- ------------ --------------
Bristol Investment Fund Ltd.(4) 42,200,000 26.8% 42,200,000 5,756,224 4.99% 0
- -------------------------------- ------------------- -------------- ------------ --------------- ------------ --------------
Zenny Trading Limited(5) 15,000,000 11.5% 15,000,000 5,756,224 4.99% 0
- -------------------------------- ------------------- -------------- ------------ --------------- ------------ --------------
HPC Capital Management(6) 100,000 * 100,000 5,756,224 4.99% 0
- -------------------------------- ------------------- -------------- ------------ --------------- ------------ --------------
Total 184,608,958
- ----------------
* less than 1%
The number and percentage of shares beneficially owned is determined in
accordance with Rule 13d-3 of the Securities Exchange Act of 1934, and the
information is not necessarily indicative of beneficial ownership for any other
purpose. Under such rule, beneficial ownership includes any shares as to which
the selling stockholder has sole or shared voting power or investment power and
also any shares, which the selling stockholder has the right to acquire within
60 days. However each of the selling stockholders has contractually agreed to
restrict its ability to convert or exercise their securities and receive shares
of our common stock such that the number of shares of common stock held by it
and its affiliates after such conversion or exercise does not exceed 4.99% of
the then issued and outstanding shares of common stock.
(1) Represents (i) 25,000,000 shares underlying the February 2004 convertible
debenture financing and (ii) 12,500,000 shares underlying a common stock
purchase warrant issued in connection with the February 2004 financing
exercisable at $0.01 per share.
(2) Represents (i) 20,000,000 shares underlying our February 2004 convertible
debenture financing; (ii) 10,000,000 shares underlying a common stock purchase
warrant issued in connection with the February 2004 financing exercisable at
$0.01 per share; and (iii) 14,875,626 shares underlying our August 2003
convertible debenture financing.
(3) Represents (i) 20,000,000 shares underlying our February 2004 convertible
debenture financing; (ii) 10,000,000 shares underlying a common stock purchase
warrant issued in connection with the February 2004 financing exercisable at
$0.01 per share; and (iii) 14,933,332 shares underlying our August 2003
convertible debenture financing.
(4) Represents (i) 25,000,000 shares underlying our February 2004 convertible
debenture financing; (ii) 12,500,000 shares underlying a common stock purchase
warrant issued in connection with the February 2004 financing exercisable at
$0.01 per share; and (iii) 4,700,000 shares underlying our August 2003
convertible debenture financing.
(5) Represents (i) 10,000,000 shares underlying the February 2004 convertible
debenture financing and (ii) 5,000,000 shares underlying a common stock purchase
warrant issued in connection with the February 2004 financing exercisable at
$0.01 per share.
(6) Represents 100,000 shares underlying a common stock purchase warrant issued
in connection with the February 2004 financing exercisable at $0.01 per share.
(7) Assumes all securities are sold.
6
PLAN OF DISTRIBUTION
We are registering a total of 184,608,958 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.
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.
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. We will receive proceeds of $0.01 per share from
the exercise of warrants by the selling shareholders.
7
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 49 Chief Executive Officer and Director
Steven H. Reder 45 President and Director
Norman A. Kunin 66 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 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.
8
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(1)(2)(3)(4)(5) 6,749,520(6) 5.8%
Common Stock Steven H. Reder(1)(2)(3)(4)(5) 5,096,780(7) 4.4%
Common Stock Norman Kunin(1)(2)(3) 1,045,000 0.9%
All Officers and Directors (3 persons) 12,891,300 11.2%
- ------------------- ----------------------------------------- ----------------- --------------
(1) The address for Mr. Owens, Mr. Reder, and Mr. Kunin is c/o QT 5, Inc., 5655
Lindero Canyon Road, Suite 120, Westlake Village, California 91362.
(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) 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.
(7) 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.
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.
9
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
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.
10
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
In October 2003 we entered into a License Agreement of Intellectual Property
with VMM, LLC. Under this agreement, we licensed the exclusive right, worldwide,
to sell and distribute, under our brand name, specific point of care quick-test
devices and quantitative testing analyzers to the retail, professional and
governmental healthcare markets. These include an FDA cleared urine specimen
drug screening test and a disease testing target system platform to identify
Rubella, Herpes, Roravirus, Strep Group A, Infectious Mononucleosis, Myoglobin,
CK-MB, Cardiac Troponin and Pregnancy. In addition, an HIV 1&2 test is pending
phase 3 clearance by the FDA. During the next 12 months, we expect to submit
tests for Hepatitis, Prostate PSA count, West Nile Virus and SARS to the FDA for
clearance.
The term of the agreement is one year, although so long as we meet certain
proposed sales projections, the agreement will be extended for four additional
one year terms. After this period, if neither party terminates the agreement, it
will be extended for an additional five year term. The term of the agreement
will become effective four months after all required regulatory clearances have
been obtained for certain of the licensed products and after VMM, LLC has
obtained a manufacturer to manufacture the products in accordance with the terms
of the agreement, which requires the manufacturing to be at or below a certain
price for the various products. We are not certain that VMM, LLC will be able to
obtain the required regulatory clearances or if it will be able to find a
manufacturer who can manufacture the products within the parameters of the terms
included in the agreement. We released 3,260,760 shares of our common stock,
which had been placed in escrow, to the licensor in consideration for this
agreement.
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 by the patent holder, Mr. Marshall Anlauf Thompson.
NICOWater(TM), our nicotine beverage product which was formulated using the NICO
Patent, was a water based nicotine product. NICOWater(TM) was the only product
we sold. Through January 8, 2004, we used our resources to introduce and market
NICOWater(TM).
In May 2003, Mr. Thompson alleged that he was entitled to terminate the
assignment of the NICO Patent based upon our failure to meet certain conditions
required by the assignment agreement, including performance conditions.
On January 8, 2004, the panel in the arbitration proceeding titled In the matter
of QT 5, Inc. vs. Marshall Thompson and Platinum Products, determined that Mr.
Thompson was entitled to terminate the Patent Agreement and take back the NICO
Patent. As a result of the decision, we immediately ceased marketing
NICOWater(TM)
THE MARKET FOR TEST KITS
The continuing growth of health care costs is a crucial issue in the United
States. Health care costs are growing dramatically due to a number of factors,
including the use of cutting-edge technologies, demand by patients for more and
better health care services, advances in prescription drugs, government
regulation and insurance fraud and abuse. Consumers and insurers are looking for
ways to control these costs. Due to the rise in health care costs, we believe
that the market for simple, rapid, cost-effective drug and disease test kits is
significant and expanding.
11
Furthermore, as the outbreak of SARS made apparent, we believe that there is an
expanding global need to rapidly test for diseases and medical conditions in
order to identify where and when they exist, thereby enabling the medical
community to act upon such information.
Test kits are currently used to screen for illegal drugs in the workplace by
government, correctional and law enforcement agencies, and are used outside the
employment environment by rehabilitation centers, clinics, physicians and
hospitals and by consumers. Likewise, HIV/AIDS home tests, which were opposed
when first proposed, are endorsed now by the Centers for Disease Control,
clinicians, gay activists and advocates for AIDS patients. These and other home
disease screens provide an easy, private, inexpensive way for consumers to
undergo testing. We believe that these factors may encourage high-risk
individuals, or those who are simply "too busy" to make an appointment with a
physician, to use the home test kits.
THE EFFECT OF GOVERNMENT REGULATION ON OUR BUSINESS
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 will not be enacted which might adversely impact our operations.
The Medical Device Amendments of 1976" (the "Medical Device Act"), a section of
the Federal Food, Drug & Cosmetic Act, establishes complex procedures for
compliance based upon FDA regulations that designate devices as Class I (general
controls, such as compliance with labeling and record-keeping requirements),
Class II (performance standards in addition to general controls) or Class III
(pre-market approval application before commercial marketing).
A medical device that is substantially equivalent to a directly related medical
device previously in commerce may be eligible for the FDA's abbreviated
pre-market notification "510(k) review" process. FDA 510(k) clearance is a
"grandfather" process. As such, FDA clearance does not imply that the safety,
reliability and effectiveness of the medical device has been approved or
validated by the FDA, but merely means that the medical device is substantially
equivalent to a previously cleared commercially-related medical device. The
review period and FDA determination as to substantial equivalence should be made
within 90 days of submission of a 510(k) application, unless additional
information or clarification or clinical studies are requested or required by
the FDA. As a practical matter, the review process and FDA determination often
take significantly longer than 90 days.
Our current diagnostic products (products available for distribution under our
License Agreement of Intellectual Property) are Class I and Class II products.
With the exception of the HIV 1 and 2 test , these products have been approved
by the FDA for sale in the professional market. The HIV 1 and 2 test is
currently in the final Phase 3 (ease of use) approval process with the FDA. We
cannot be certain that this product will receive approval from the FDA in the
near future or at all.
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 on June 26, 2002, upon the
execution and delivery of the assignment of patent. We lost the right to use the
NICO Patent on January 8, 2004.
In October 2003 we entered into a License Agreement of Intellectual Property
with VMM, LLC. Under this agreement, we licensed the exclusive worldwide right
to sell and distribute, under our brand name, specific point of care quick-test
devices and quantitative testing analyzers to the retail, professional and
governmental healthcare markets. These include an FDA cleared urine specimen
drug screening test and a disease testing target system platform to identify
Rubella, Herpes, Roravirus, Strep Group A, Infectious Mononucleosis, Myoglobin,
CK-MB, Cardiac Troponin and Pregnancy. The drug screening product is a
self-regulating specimen test using the latest on-site drug screening technology
to detect and identify the presence of cocaine, marijuana, morphine, heroin and
other opiates, amphetamines and angel dust. These products are covered by U.S.
patents numbered 4,748,042, 4,797,260, 5,036,569, 5,137,691, and 5,334,538, and
a pending patent, application number 20020085953. In addition, the license
covers an HIV 1&2 test which is currently in the Phase 3 (ease of use) approval
process as well as tests to be submitted to the FDA for Hepatitis, Prostate PSA
Ct., West Niles and SARS. The term of the agreement will become effective four
months after all required regulatory clearances have been obtained for certain
of the licensed products and after VMM, LLC has obtained a manufacturer to
manufacture the products in accordance with the terms of the agreement, which
requires the manufacturing to be at or below a certain price for the various
products. We are not certain that VMM, LLC will be able to obtain the required
regulatory clearances or if it will be able to find a manufacturer who can
manufacture the products within the parameters of the terms included in the
agreement.
We were in the process of reviving our application to register the mark, "NICO"
with the United States Patent and Trademark Office. We intend to abandon this
application.
Other than as described above, we have no licenses, franchises or concessions
and we have not entered into labor contracts.
COMPETITION
The diagnostic industry is a multi-billion dollar international industry and is
intensely competitive. Many of our competitors, such as Roche Diagnostics and
Prionics, Orasure Technologies, Inc. and Trinity Biotech, are substantially
larger and have greater financial, research, manufacturing, and marketing
resources.
Important competitive factors for diagnostic products include product quality,
price, ease of use, customer service, and reputation. We are not certain that
our products, when they are introduced to the market, will be competitive.
12
We expect competition to intensify as technological advances are made and become
more widely known, and as new products reach the market. Furthermore, new
testing methodologies could be developed in the future that render our products
impractical, uneconomical or obsolete. We cannot assure you that our competitors
will not succeed in developing or marketing technologies and products that are
more effective than those we develop or that would render our technologies and
products obsolete or otherwise commercially unattractive. In addition, we cannot
assure you that our competitors will not succeed in obtaining regulatory
approval for these products, or introduce or commercialize them before we can do
so. These developments could have a material adverse effect on our business,
financial condition and results of operations.
COMPLIANCE WITH ENVIRONMENTAL LAWS
We do not engage in manufacturing or other operations that impact the
environment, therefore, we have not spent any money to comply with federal,
state or local environmental laws.
EMPLOYEES
We have 9 full-time employees.
DESCRIPTION OF PROPERTY
Our office facilities are located at 5655 Lindero Canyon Road, Suite 120,
Westlake Village, California 91362. We lease this 4,300 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 were 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. On January 8, 2004 an arbitration panel agreed that Mr. Thompson was
entitled to terminate our rights in the NICO Patent. We are obligated to pay
costs and legal fees, and the parties are currently negotiating these costs and
fees.
In October 2003 Thomas A. Slamecka and Michael T. Pieniazek filed a lawsuit
against us for specific performance in the Circuit Court of Cook County,
Illinois. The plaintiffs allege that we asked them to provide management
consulting and advisory services to us in exchange for warrants to purchase
2,000,000 shares of our common stock. The plaintiffs allege that the services
were provided, and have asked the Court to order us to issue the common stock.
Other than attorneys fees and costs, the plaintiffs have not asked for monetary
damages. We are defending this action.
13
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.
In May 2003 we began the distribution and sale of our first product,
NICOWater(TM). We lost the right to distribute NICOWater on January 8, 2004.
From the period between May 2003 and January 8, 2004, we focused our primary
efforts on manufacturing, marketing and selling this product.
In October 2003 we acquired 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. We
expect to begin marketing these products once VMM, LLC, the licensee, has
obtained all regulatory clearances and after VMM, LLC has obtained a
manufacturer to manufacture the products in accordance with the terms of the
agreement, which requires the manufacturing to be at or below a certain price
for the various products. We are not certain that VMM, LLC will be able to
obtain the required regulatory clearances or if it will be able to find a
manufacturer who can manufacture the products within the parameters of the terms
included in the agreement.
GENERAL OVERVIEW
The following discussion and analysis of our financial condition and results of
operations should be read in conjunction with the unaudited consolidated balance
sheet as of December 31, 2003, the unaudited consolidated statements of
operations for the three and six-months ended December 31, 2003, and the
unaudited consolidated statements of cash flows for the six-months ended
December 31, 2002 and the related notes thereto.
The Company cautions readers that important facts and factors described in this
Management's Discussion and Analysis of Financial Condition and Results of
Operations and elsewhere in this document sometimes have affected, and in the
future could affect, the Company's actual results, and could cause the Company's
actual results during fiscal 2004 and beyond to differ materially from those
expressed in any forward-looking statements made by, or on behalf of, the
Company.
As reported in the Independent Auditors' Report on our June 30, 2003 financial
statements, the Company has incurred losses from operations that raised
substantial doubt about our ability to continue as a going concern.
GOING CONCERN
As a result of an arbitration decision concerning our right to retain patent
rights, on January 8, 2004 we lost the patent rights for our only
revenue-generating product (see Note 1 to Financial Statements). Although we are
now commencing the marketing and sales of our new specific point of care
quick-test products, management recognizes that the we must generate additional
resources to fund overhead and for the eventual achievement of revenue and
sustained profitable operations. Our success is dependent upon numerous items,
including the successful development of effective marketing strategies to
customers in a competitive market for new products. We anticipate that certain
products in our new product line may enter the market in the second calender
quarter of 2004 and management believes that revenues generated by these
products will lead to future profitability. Although we completed an accounts
receivable financing facility in November 2003 with AeroFund Financial which
enables us to finance approved customer invoices to a maximum of $1,500,000 at
any given time, we are currently in default of this financing agreement caused
by the loss of the NICOWater patent and non-payment by certain Nico customers.
We intend to cure the default and anticipate utilizing this financing, when and
if required, in connection with future sales of new products. Also, in February
2004 management successfully obtained additional capital through a $1 million
sale and issuance of 6% convertible debentures,with an original issuance
discount of 20% from which the Company received initial gross proceeds of
$350,000 on February 12, 2004 with $150,000 anticipated by February 20, 2004 and
the $300,000 balance of which is scheduled to be paid following the effective
date of this registration statement covering the common stock underlying
the debentures and related warrants. However, no assurance can be given that the
accounts receivable financing facility will remain available and the balance of
the convertible debenture funding will be consummated as contemplated or will
generate sufficient cash to satisfy our need for additional capital or that
other debt or equity financing will be available to us on satisfactory terms.
These factors, among others, raise substantial doubt about our ability to
continue as a going concern. The consolidated financial statements included
elsewhere in this Registration Statement 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/loss from
operations, and net income/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, policies that are particularly significant are stock-based
compensation and revenue recognition. In addition, please refer to Note 1 to the
consolidated financial statements included elsewhere in this Registration
Statement for further discussion of our significant accounting policies.
14
STOCK-BASED COMPENSATION. The Company accounts 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 the Company's 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.
The Company has 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.
During the six-month period ended December 31, 2003 we were still in our initial
stages of selling NICOWater(TM), our only product to customers or distributors.
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
We are currently the licensee of various specific point of care quick test
devices and quantitative testing analyzers which we are preparing to bring to
market. In October 2003, we entered into a License Agreement of Intellectual
Property with VMM, LLC. Under this agreement we licensed the exclusive right,
worldwide, to sell and distribute, under its brand name, all of the licensor's
products including, but not limited to, specific point of care quick-test
devices and quantitative testing analyzers to the retail, professional and
governmental healthcare markets. These include an FDA cleared urine specimen
drug screening test and a disease testing target system platform to identify
Rubella, Herpes, Roravirus, Strep Group A, Infectious Mononucleosis, Myoglobin,
CK-MB, Cardiac Troponin and Pregnancy. In addition, an HIV 1&2 test is pending
phase 3 clearance by the FDA. During the next 12 months, we expect to submit
tests for Hepatitis, Prostate PSA count, West Nile Virus and SARS to the FDA for
clearance. The term of the License Agreement is one year, although so long as we
meet certain proposed sales projections, the agreement will be extended for four
additional one-year terms. After this period, if neither party terminates the
License Agreement, it will be extended for an additional five-year term. The
term of the License Agreement will become effective four months after all
required regulatory clearances have been obtained for certain of the licensed
products and after the licensor has obtained a manufacturer to manufacture the
products in accordance with the terms of the License Agreement, which requires
the manufacturing to be at or below a certain price for the various products.
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. This patent is referred to as the "NICO Patent." The
agreement was effective 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 water-based homeopathic nicotinum (nicotine) product was
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). In May 2003 Mr. Marshall Anluaf Thompson, owner of the
NICO Patent, alleged that he was entitled to terminate the assignment of the
NICO Patent based upon our failure to meet certain conditions required by the
assignment agreement, including performance conditions. The dispute was heard by
a panel of arbitrators who, on January 8, 2004, concluded that Mr. Thompson was
entitled to terminate the assignment agreement. Immediately following the
decision we stopped marketing NICOWater(TM). Although we have acquired other
products, NICOWater(TM) was the only product sold. We previously reported that
our revenues reflected a slower than anticipated entrance and expansion into the
marketplace with our initial product. During the quarter ended December 31,
2003, due to the indecision of the outcome of the arbitration proceeding, sales
were at a minimum. Based upon the arbitration result and the cessation of
NICOWater(TM) sales on January 9, 2004, as of December 31, 2003 we credited
customers for unsalable merchandise and wrote off certain accounts receivable,
all of the NICOWater (TM) inventory, unamortized patent rights and prepaid
patent royalties, all of which have been reflected in impairment loss in the
accompanying condensed consolidated statement of operations.
Three Months Ended December 31, 2003 As Compared to Three Months Ended
December 31, 2002
- ----------------------------------------------------------------------
Although we believe in the marketability of our new products, there can be no
assurance that our operations will be profitable or that we will be able to
obtain financing when we need it or, if we obtain financing, that such financing
will have terms satisfactory to us. Our products, to the extent that they may be
deemed medical devices or biologics, are governed by the Federal Food, Drug and
Cosmetics Act and by the regulations of various state and foreign governmental
agencies. There can be no assurance that we will maintain or obtain the
appropriate regulatory approvals required to market our products.
During the three-months ended December 31, 2003, we had revenues of $44,937 and
incurred a net loss of $3,396,688 compared to $0 revenue and a net loss of
$384,546 during the three-months ended December 31, 2002. Cost of sales for the
three-month period ended December 31, 2003 was $27,841 compared to $0 during the
development stage three-month period ended December 31, 2002. General and
administrative expenses for the three-months ended December 31, 2003 were
$1,674,050 compared to $384,546 for the three-months ended December 31, 2002.
The increase in expenses of $1,289,504 for the current three-month period were
due substantially to non-cash medical, marketing and other advisory consulting
fees of $219,443, legal and accounting fees of $95,444, salaries and commissions
of $376,174, insurance of $73,017, advertising and marketing of $287,904 and
15
other operating expenses of approximately $237,522. During the three-month
period ended December 31, 2003, we issued 4,409,774 shares of common stock for
legal, medical, marketing and other advisory consulting services pursuant to
consulting agreements and 20,000 shares of common stock to employees as
additional compensation. On the date of issuance the fair market value of the
common stock was $388,645 and $1,600, respectively. Also during the three-month
period ended December 31, 2003, we issued 17,333,332 shares of common stock to
holders of our 6% convertible debentures for conversions of principal debt in
the amounts of $1,300,000 and exercises of 8,000,001 warrants. During the
three-months ended December 31, 2003 and 2002, we recorded interest expense of
$1,044,666 and $0, respectively, representing accrued interest and amortization
of a discount on convertible debentures. Also, on December 31, 2003 we wrote-off
$37,075 of accounts receivable from certain customers, $294,039 of inventory,
$44,854 of unamortized intellectual property, $135,023 of prepaid royalties,
$58,459 in sales and $31,802 in cost of sales, and $150,000 of accrued legal
fees all in connection with the loss of our NICOWater(TM) patent which occurred
as a result of a binding arbitration decision rendered January 8, 2004.
Six Months Ended December 31, 2003 As Compared to Six Months Ended
December 31, 2002
- ------------------------------------------------------------------
During the six-months ended December 31, 2003, we had revenues of $190,404 and
incurred a net loss of $5,391,291 compared to $0 revenue and a net loss of
$703,083 during the six-months ended December 31, 2002. Additional shipments to
certain pharmacies in the amount of $269,100 during the current six-month
period, not included as revenue and reflected as deferred revenue, have been
reversed against accounts receivable in our December 31, 2003 balance sheet. The
six-month period ended December 31, 2002 was part of our development stage
activities.
Cost of sales for the six-month period ended December 31, 2003 was $108,362
compared to $0 during the development stage six-month period ended December 31,
2002. General and administrative expenses for the six-months ended December 31,
2003 were $3,416,060 compared to $703,083 for the six-months ended December 31,
2002. The increase in expenses of $2,712,977 for the current six-month period
were due substantially to non-cash medical, marketing and other advisory
consulting fees of $755,530, legal and accounting fees of $259,579, salaries and
commissions of $723,481, insurance of $222,902, advertising and marketing of
$364,727 and other operating expenses of approximately $386,758. During the
six-month period ended December 31, 2003, we issued 5,434,148 shares of common
stock for medical, marketing and other advisory consulting services pursuant to
consulting agreements and 20,000 shares of common stock to employees as
additional compensation. On the date of issuance the fair market value of the
common stock was $618,134. Also during the six-month period ended December 31,
2003, we issued 17,333,332 shares of common stock to holders of our 6%
convertible debentures for conversions of principal debt in the amounts of
$1,300,000 and exercises of 8,000,001 warrants. During the six-months ended
December 31, 2003 and 2002, we recorded interest expense of $1,139,206 and $0,
respectively, representing accrued interest and amortization of a discount on
convertible debentures. Also, on December 31, 2003 we wrote wrote-off $37,075 of
accounts receivable from certain customers, $294,039 of inventory, $44,854 of
unamortized intellectual property, $135,023 of prepaid royalties, $58,459 in
sales and $31,802 in cost of sales, and $150,000 of accrued legal fees all in
connection with the loss of our NICOWater(TM) patent which occurred as a result
of a binding arbitration decision rendered January 8, 2004.
FISCAL YEAR ENDED JUNE 30, 2003 AS COMPARED TO THE FISCAL YEAR ENDED JUNE 30,
2002.
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 former 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.
LIQUIDITY AND CAPITAL RESOURCES
Our capital requirements, particularly as they relate to the acquisition,
introduction and launch of our products and our continued testing and
improvement of our products, have been and will continue to be significant. Our
future cash requirements and the adequacy of available funds will depend on many
factors, including costs of acquiring new products, costs to bring new products
to market, the pace at which we are able to launch products we may acquire,
whether or not a market develops for any product we acquire and, if a market
develops, the pace at which it develops.
While we had begun to earn revenues from the sale of NICOWater(TM), the revenues
we had generated to date were not sufficient to fund our operations and will
cease entirely in the future due to the loss of the Nico Patent. We must,
therefore, rely upon bringing to market and selling our point of care quick test
devices and quantitative testing products. In February 2004, we obtained
additional capital to roll-out our new products by entering into a financing for
the issuance of $1 million of 6% convertible debentures with an original
issuance discount of 20%. We received gross proceeds of $350,000 from this
financing on February 12, 2004. We anticipate receiving $150,000 by February 20,
2004 and the remaining $300,000 in gross proceeds following the effective date
of this registration statement registering the common stock underlying the
debentures, although there is no assurance that the registration statement will
ever be declared effective. Even if we receive all the proceeds from the
placement of our convertible debentures, there is no assurance that we will not
need additional capital to become profitable. During the next 12 months, if we
do not have sufficient capital to fund our operations, we would have to seek
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.
At December 31, 2003, we had $58,478 in cash, of which $25,025 collateralizes a
letter of credit issued in favor of an insurance company, $10,842 in accounts
receivable, $30,000 receivable from an insurance company in connection with our
cancellation of product liability insurance and $1,043 in prepaid expenses. We
have written off $131,592 of prepaid royalties pertaining to NICOWater(TM)
sales and expensed the $100,000 previously recorded prepayment for the
production of in store display racks for NICOWater(TM). An additional $38,194
of prepaid expense, representing consulting services to be rendered in
subsequent periods pursuant to consulting agreements for which we issued shares
of common stock, is reflected as a reduction of stockholders' equity. Also
reflected are two promissory notes receivable in the net amount of $69,750
representing consideration for the assumption of a lease liability. We have
written off deferred costs in the amount of $78,628 which represented the cost
of sales attributable to the $264,165 of product shipments that were reflected
as deferred revenue. Also, in connection with our 6% convertible debentures, we
have deferred financing costs of $462,435 net of accumulated amortization of
$67,184.
16
Current liabilities in the amount of $1,644,357 include accounts payable and
accrued expenses of $745,780,accrued salaries of $584,755, a lease liability of
$156,400 related to assumed pre-merger Moneyzone liabilities, deferred rent of
$7,422 and $150,000 of accrued legal fees in connection with the Nico Patent
arbitration. Convertible debentures payable in the amount of $462,568 represent
the gross $700,000 outstanding principal balance, net of unamortized debt
discount of $237,432,related to our placement of convertible debentures. We have
written off deferred revenue in the amount of $264,165 which represented
shipments to certain pharmacies during the current six-month period designated
as consigned sales and not included as revenue. We had negative working capital
in the amount of $1,474,244 at December 31, 2003.
During the six-months ended December 31, 2003, our net cash position decreased
by $8,838 from a beginning balance of $67,316 as of June 30, 2003. As of
December 31, 2003, we had cash of $58,478. During the six months ended
December 31, 2003 and 2002, we had a net loss of $5,391,291 and $703,083,
respectively. Also, during the six-months ended December 31, 2003 we had no cash
flows from investing activities and net cash flows provided by financing
activities were $1,776,070. During this period, our operating activities
utilized net cash of $1,784,908.
Also during the six-months ended December 31, 2003, our trade accounts payable
and accrued expenses increased by $474,923, due primarily to our transition from
a development stage to an operating company, and our notes payable decreased by
$282,500, due to our utilization of the convertible debenture funding, as
compared to an increase of $39,480 and an increase of $350,000, respectively,
during the same period in 2002.
The Company does not currently have any material commitments for capital
expenditures in the short term other than those expenditures incurred in the
ordinary course of business.
Since inception, our operating and investing activities have used all cash
generated from our financing activities. We anticipate continued revenues from
sales of our products, however, we will have an ongoing need to raise additional
capital to meet working capital requirements in order to fund the growth and
development of the business.
SIGNIFICANT EVENTS DURING THE CURRENT THREE-MONTH PERIOD
NEW LICENSE AGREEMENT AND LOSS OF NICO PATENT
The Company is currently the licensee of various point of care quick test
devices and quantitative testing analyzers which it is preparing to bring to
market. In October 2003 we entered into a License Agreement of Intellectual
Property with VMM, LLC. Under this agreement the we licensed the exclusive
right, worldwide, to sell and distribute, under its brand name, all of the
licensor's products including, but not limited to, specific point of care
quick-test devices and quantitative testing analyzers to the retail,
professional and governmental healthcare markets. These include an FDA cleared
urine specimen drug screening test and a disease testing target system platform
to identify Rubella, Herpes, Roravirus, Strep Group A, Infectious Mononucleosis,
Myoglobin, CK-MB, Cardiac Troponin and Pregnancy. In addition, an HIV 1&2 test
is pending phase 3 clearance by the FDA. During the next 12 months, the Company
expects to submit tests for Hepatitis, Prostate PSA count, West Nile Virus and
SARS to the FDA for clearance. In consideration for the License Agreement, the
Company released 3,260,760 previously issued shares of its common stock from
escrow. The term of the License Agreement is one year, although so long as the
Company meets certain proposed sales projections, the agreement will be extended
for four additional one-year terms. After this period, if neither party
terminates the License Agreement, it will be extended for an additional
five-year term. The term of the License Agreement will become effective four
months after all required regulatory clearances have been obtained for certain
of the licensed products and after the licensor has obtained a manufacturer to
manufacture the products in accordance with the terms of the License Agreement,
which requires the manufacturing to be at or below a certain price for the
various products.
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. This patent is referred to as the "NICO Patent." The
agreement was effective 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 water-based homeopathic nicotinum (nicotine) product was
NICOWater(TM), an odorless and tasteless water-based product that is designed to
relieve the self-diagnosed symptoms of tobacco cravings. In May 2003 the Company
began shipping NICOWater(TM). In May 2003 Mr. Marshall Anluaf Thompson, owner of
the NICO Patent, alleged that he was entitled to terminate the assignment of the
NICO Patent based upon the Company's failure to meet certain conditions required
by the assignment agreement, including performance conditions. The dispute was
heard by a panel of arbitrators who, on January 8, 2004, concluded that Mr.
Thompson was entitled to terminate the assignment agreement. Immediately
following the decision the Company stopped marketing NICOWater(TM). Although the
Company has acquired other products, NICOWater(TM) was the only product sold.
We have transitioned from a development stage enterprise to an operating company
and have, at the beginning of our current fiscal year, begun to generate
revenues from sales of our initial product NICOWater(TM), notwithstanding the
fact that in January 2004 we lost the Nico Patent and all rights to sell that
product. All losses accumulated from inception through our last fiscal year
ended June 30, 2003 have been considered as part of our development stage
activities. Although we anticipate increased revenue from the sale of new
products, we will require substantial additional financing for sales and
marketing, general business overhead, continuing research and development and
obtaining regulatory approval for and the commercialization of products. There
can be no assurances that our operations will be profitable or that we will be
able to obtain sufficient additional financings when they are needed, or that
such financings will be obtainable on terms satisfactory to us. Our products, to
the extent they may be deemed medical devices or biologics, are governed by the
17
Federal Food, Drug and Cosmetics Act and by the regulations of various state and
foreign governmental agencies. There can be no assurance that we will maintain
or obtain the appropriate regulatory approvals required to market our products.
INCREASE IN AUTHORIZED COMMON SHARES
On October 8, 2003, we filed a Definitive Form 14C with the Securities and
Exchange Commission stating that our Board of Directors and shareholders of
record as of the close of business on September 22, 2003 holding a majority of
the total number of outstanding shares consented to increase the number of
shares of authorized common stock from 100,000,000 to 300,000,000. The par value
of each such share of common stock was changed to $0.001 per share. The
Certificate of Amendment of Certificate of Incorporation has been filed with the
Secretary of the State of Delaware.
18
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.
19
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
F-1
QT5, 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
Common Stock Paid-in
Shares Amount Capital
------------ ------------ ------------
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
Issuance of common stock for services 9,312,660 1,396,899 2,104,101
Issuance of common stock for patent 133,000 19,950 30,050
Issuance of common stock for prepaid royalties 399,000 59,850 90,150
Net loss -- -- --
------------ ------------ ------------
Balance, June 30, 2002 18,355,995 2,753,399 1,147,351
Issuance of shares to Moneyzone in
recapitalization of the Company 3,000,000 450,000 (150,000)
Issuance of common stock for services 7,201,085 1,080,163 2,853,690
Issuance of common stock as additional
interest expense on notes payable 308,116 46,217 60,190
Shares issued but held in escrow pending
negotiations of Transactions 3,660,160 549,024 (549,024)
Issuance of common stock for exercise of
options 3,394,731 509,210 (224,010)
Issuance of common stock for cash 2,200,854 330,128 872
Shares committed to be issued to employees for
services 300,000 45,000 30,126
Issuance of common stock for conversion of
convertible promissory note 1,720,000 258,000 (86,000)
Issuance of common stock for settlement of
accounts Payable 680,610 102,092 34,342
Estimated fair market value of options and
warrants granted to consultants for services -- -- 572,352
Estimated value of beneficial conversion
feature on convertible promissory note -- -- 149,640
Net loss -- -- --
------------ ------------ ------------
Balance, June 30, 2003 40,821,551 $ 6,123,233 $ 3,839,529
============ ============ ============
Pre-paid
Consulting Accumulated
Expense Deficit Total
------------ ------------ ------------
Balance, July 1, 2001 $ -- $ -- $ --
Issuance of common stock to founders for no
Consideration -- -- --
Issuance of common stock for cash -- -- 199,750
Issuance of common stock for services -- -- 3,501,000
Issuance of common stock for patent -- -- 50,000
Issuance of common stock for prepaid royalties -- -- 150,000
Net loss -- (3,775,560) (3,775,560)
------------ ------------ ------------
Balance, June 30, 2002 -- (3,775,560) 125,190
Issuance of shares to Moneyzone in
recapitalization of the Company -- -- 300,000
Issuance of common stock for services (428,957) -- 3,504,896
Issuance of common stock as additional
interest expense on notes payable -- -- 106,407
Shares issued but held in escrow pending
negotiations of Transactions -- -- --
Issuance of common stock for exercise of
options -- -- 285,200
Issuance of common stock for cash -- -- 331,000
Shares committed to be issued to employees for
services -- -- 75,126
Issuance of common stock for conversion of
convertible promissory note -- -- 172,000
Issuance of common stock for settlement of
accounts Payable -- -- 136,434
Estimated fair market value of options and
warrants granted to consultants for services -- -- 572,352
Estimated value of beneficial conversion
feature on convertible promissory note -- -- 149,640
Net loss -- (6,410,216) (6,410,216)
------------ ------------ ------------
Balance, June 30, 2003 $ (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
--------------- ----------------
See independent auditors' report and accompanying notes to financial statements
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-9
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-10
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-11
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-12
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-13
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-14
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-15
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-16
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-17
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-18
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-19
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-20
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-21
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-22
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. The Company indemnifies its directors, officers, employees
and agents to the maximum extent permitted under the laws of the State of
Delaware. In connection with a certain facility lease, the Company has
indemnified its lessor for certain claims arising from the use of the
facilities. 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-23
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-24
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-25
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-26
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-27
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-28
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
QT 5, Inc.
Consolidated Balance Sheet
December 31, 2003
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 58,478
Accounts receivable, net of allowance for doubtful
accounts of $9,415 10,842
Notes receivable, net of allowance of $69,750 69,750
Other prepaid expenses 31,043
------------
Total current assets 170,113
------------
Property and equipment, net of accumulated depreciation
of $7,485 27,893
Deferred financing cost, net of accumulated amortization
of $67,184 462,435
License 358,684
Other assets 15,537
------------
Total assets $ 1,034,662
============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 745,780
Accrued salaries 584,755
Lease liability 156,400
Accrued legal fees 150,000
Deferred rent expense 7,422
------------
Total current liabilities 1,644,357
Convertible debentures payable, net of unamortized
debt discount of $237,432 462,568
------------
Total liabilities 2,106,925
------------
Commitments and contingencies
Stockholders' equity (deficit):
Common stock; $0.001 par value; 300,000,000 shares
authorized; 76,533,436 shares issued and
outstanding 76,553
Additional paid-in capital 14,466,445
Prepaid consulting expense (38,194)
Accumulated deficit (15,577,067)
------------
Total stockholders' equity (deficit) (1,072,263)
------------
$ 1,034,662
============
See accompanying notes to unaudited consolidated financial statements.
F-29
QT 5, Inc.
Consolidated Statements of Operations
(Unaudited)
Three Months Ended Six Months Ended
December 31, December 31,
------------------------------ ------------------------------
2003 2002 2003 2002
------------ ------------ ------------ ------------
Revenue $ 44,937 $ -- $ 190,404 $ --
Costs and expenses:
Cost of sales 27,841 -- 108,362 --
General and administrative 1,674,050 384,546 3,416,060 703,083
Impairment loss 687,648 -- 687,648 --
------------ ------------ ------------ ------------
Loss from operations (2,344,602) (384,546) (4,021,666) (703,083)
Other expense:
Interest expense (1,044,666) -- (1,341,706) --
Other (7,420) -- (27,919) --
------------ ------------ ------------ ------------
Net loss $ (3,396,688) $ (384,546) $ (5,391,291) $ (703,083)
============ ============ ============ ============
Basic and diluted net loss per common share $ (0.06) $ (0.02) $ (0.11) $ (0.04)
============ ============ ============ ============
Basic and diluted weighted average shares
outstanding 56,346,891 18,455,745 49,601,771 18,405,597
============ ============ ============ ============
See accompanying notes to unaudited consolidated financial statements.
F-30
QT 5, Inc.
Consolidated Statements of Cash Flows
(Unaudited)
For the Six Months
Ended December 31,
----------------------------
2003 2002
----------- -----------
(Unaudited) (Unaudited)
Cash flows from operating activities
Net loss $(5,391,291) $ (703,083)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 3,448 3,548
Amortization of debt discount and deferred
financing cost 1,104,419 --
Amortization of prepaid compensation 42,932 --
Loss on issuance of shares for settlement
of accounts payable 27,919 --
Interest expense on issuance of shares for
settlement of note payable to a related party 202,500 --
Stocks and options issued for services 873,668 --
Write-off of note receivable - related party 69,750 --
Write-off of inventory and intellectual property
and accrued legal fees 488,893 --
Changes in operating assets and liabilities:
Accounts receivable 84,384 --
Inventories (205,476) --
Deferred costs 21,551 --
Prepaid expenses and other assets 175,879 --
Accounts payable and accrued expenses 474,923 39,480
Accrued salaries 331,255 --
Deferred revenue (86,184) --
Deferred rent expense (3,478) (301)
----------- -----------
Net cash used in operating activities (1,784,908) (660,356)
----------- -----------
Cash flows used in investing activities
Purchase of property and equipment -- (8,451)
----------- -----------
Cash flows from financing activities
Proceeds from sale of stock 150,000 --
Proceeds from exercise of warrants 80,000 --
Payments on notes payable to related parties (67,500) --
Payments on notes payable (215,000) --
Payments on installment financing (46,930) --
Proceeds from notes payable -- 300,000
Proceeds from convertible debentures, net of
cash costs of $237,000 1,763,000 --
Proceeds from notes payable to related
parties 112,500 50,000
Capital contribution -- 300,000
----------- -----------
Net cash provided by financing
activities 1,776,070 650,000
----------- -----------
Net decrease in cash (8,838) (18,807)
Cash, beginning of period 67,316 62,391
----------- -----------
Cash, end of period $ 58,478 $ 43,584
=========== ===========
See accompanying notes to unaudited consolidated financial statements.
F-31
QT 5, Inc.
Consolidated Statements of Cash Flows (continued)
For the Six Months
Ended December 31,
---------------------------------
2003 2002
-------------- --------------
(Unaudited) (Unaudited)
Supplemental disclosure of cash flow information:
Installment financing payable and prepaid
insurance recorded for insurance premium
financed $ 431,908 $ --
============== ==============
Common stock issued as prepaid consulting
services $ 9,240 $ --
============== ==============
Cancellation of financed insurance $ 375,444 $ --
============== ==============
Amortization of prepaid consulting expense $ 400,003 $ --
============== ==============
Debt discount recognized related to
convertible debentures $ 1,274,667 $ --
============== ==============
Common stock issued for settlement of
accounts payable $ 255,510 $ --
============== ==============
Common stock issued for settlement of
note payable to a related party $ 112,500 $ --
============== ==============
Common stock issued in connection with
deferred financing cost $ 16,000 $ --
============== ==============
Warrant issued in connection with deferred
financing cost $ 276,619 $ --
============== ==============
Common stock issued in connection with license
agreement $ 358,684 $ --
============== ==============
Furniture purchased under a note payable
to related party $ -- $ 17,500
============== ==============
See accompanying notes to unaudited consolidated financial statements.
F-32
QT 5, Inc.
Notes to Unaudited Consolidated Financial Statements December 31, 2003
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BACKGROUND AND ORGANIZATION
The Company is currently the licensee of various quick test devices and
quantitative testing analyzers which it is preparing to bring to market. In
October 2003, the Company entered into a License Agreement of Intellectual
Property with VMM, LLC. Under this agreement, the Company licensed the exclusive
right, worldwide, to sell and distribute, under its brand name, all of the
licensor's products including, but not limited to, specific point of care
quick-test devices and quantitative testing analyzers to the retail,
professional and governmental healthcare markets. These include an FDA cleared
urine specimen drug screening test and a disease testing target system platform
to identify Rubella, Herpes, Roravirus, Strep Group A, Infectious Mononucleosis,
Myoglobin, CK-MB, Cardiac Troponin and Pregnancy. In addition, an HIV 1&2 test
is pending phase 3 clearance by the FDA. During the next 12 months, the Company
expects to submit tests for Hepatitis, Prostate PSA count, West Nile Virus and
SARS to the FDA for clearance. In consideration for the License Agreement, the
Company released 3,260,760 previously issued shares of its common stock from
escrow. The term of the License Agreement is one year, although so long as the
Company meets certain proposed sales projections, the agreement will be extended
for four additional one-year terms. After this period, if neither party
terminates the License Agreement, it will be extended for an additional
five-year term. The term of the License Agreement will become effective four
months after all required regulatory clearances have been obtained for certain
of the licensed products and after the licensor has obtained a manufacturer to
manufacture the products in accordance with the terms of the License Agreement,
which requires the manufacturing to be at or below a certain price for the
various products (see Note 5).
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 water-based products. This patent is referred to as the
"NICO Patent." The agreement was effective 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 water-based homeopathic nicotinum (nicotine)
product was NICOWater(TM), an odorless and tasteless water-based product that is
designed to relieve the self-diagnosed symptoms of tobacco cravings. In May 2003
the Company began shipping NICOWater(TM).
In May 2003, Mr. Marshall Anluaf Thompson, owner of the NICO Patent, alleged
that he was entitled to terminate the assignment of the NICO Patent based upon
the Company's failure to meet certain conditions required by the assignment
agreement, including performance conditions. The dispute was heard by a panel of
arbitrators who, on January 8, 2004, concluded that Mr. Thompson was entitled to
terminate the assignment agreement. Immediately following the decision, the
Company stopped marketing NICOWater(TM). Although the Company has acquired other
products, NICOWater(TM) was the only product sold.
BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have been
prepared by the management of the Company pursuant to the rules and regulations
of the Securities and Exchange Commission and in accordance with accounting
principles generally accepted in the United States of America for interim
financial information. The information furnished herein reflects all adjustments
(consisting of normal recurring accruals and adjustments) which are, in the
opinion of management, necessary to fairly represent the financial position and
operating results for the respective periods. Certain information and footnote
disclosures normally present in the annual financial statements prepared in
accordance with accounting principles generally accepted in the United States of
America have been omitted pursuant to such rules and regulations. It is
suggested that these unaudited condensed consolidated financial statements be
read in conjunction with the audited consolidated financial statements and notes
thereto for the year ended June 30, 2003, included in the Company's Annual
Report on Form 10-KSB filed with the Securities and Exchange Commission on
September 23, 2003. The results of the three and six months ended December 31,
2003 are not necessarily indicative of the results to be expected for the full
year ending June 30, 2004.
PRINCIPLES OF CONSOLIDATION
The accompanying condensed 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 unaudited condensed 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 $3,396,688 and $5,391,291
during the three and six months ended December 31, 2003, respectively, only had
$44,937 and $190,404 of revenue during the three months and six months ended
December 31, 2003 respectively, and had a cash balance of $58,478 at December
31, 2003. In addition, the Company had an accumulated deficit of $15,577,067 and
negative working capital of $1,474,244 and on January 8, 2004 has lost its NICO
patent rights for its only revenue-generating product (see Note 5) at December
31, 2003. The Company is now commencing the marketing and sales of its new
disease and drug quick-test products and management recognizes that the Company
must generate additional resources to fund overhead and for the eventual
achievement of revenue and 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 for its
new products. The Company anticipates that certain of its new product line may
enter the market in second calendar quarter of 2004 and management believes that
revenues generated by this product could lead to future profitability. Also, in
November 2003, the Company completed an accounts receivable financing facility
with AeroFund Financial which enables it to finance approved customer invoices
to a maximum of $1,500,000 at any given time. Although the Company is currently
in default of this financing agreement, caused by the loss of its NICO patent
and non-payment by certain customers, the Company intends to cure the default
and anticipates utilizing this financing, when and if required, in connection
with future sales of new product. Also, in February 2004 management successfully
obtained additional capital through a $1 million sale and issuance of 6%
convertible debentures with an original issuance discount of 25%, from which the
Company received initial gross proceeds of $350,000 on February 12 , 2004 with
an additional $150,000 anticipated on or about February 20, 2004 and the
$250,000 balance of which is scheduled to be paid following the effective date
of a registration statement (which the Company anticipates filing with the
Securities and Exchange Commission in February 2004) covering the common stock
underlying the debentures and related warrants. However, no assurance can be
given that the accounts receivable financing facility will remain available and
the balance of the 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.
F-33
These factors, among others, raise substantial doubt about the Company's ability
to continue as a going concern. The accompanying condensed 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
realizability of inventories, deferred costs, license agreement, and long-lived
assets, collectibility of receivables, and the valuation allowance on deferred
tax assets.
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 December
31, 2003, there was no uninsured cash balance.
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 December 31, 2003, management of the Company has
written off the unamortized value of Intellectual Property Rights totaling
$44,854 (see Note 6) related to the NICO Patent which was lost on January 8,
2004.
INCREASE IN AUTHORIZED SHARES AND CHANGE IN PAR VALUE
On October 8, 2003, the Company filed a Definitive Form 14C with the Securities
and Exchange Commission stating that the Company's Board of Directors and
shareholders of record as of the close of business on September 22, 2003,
holding a majority of the total number of outstanding shares, have consented to
increase the number of shares of authorized common stock from 100,000,000 to
300,000,000. The par value of each such common stock shall be $0.001 per share.
The Company filed the Certificate of Amendment of Certificate of Incorporation
with the Secretary of the State of Delaware, in accordance with federal security
laws, on November 3, 2003, and these changes have been reflected in the
accompanying December 31, 2003 consolidated financial statements.
REVENUE RECOGNITION
The Company recognizes revenue at the time of shipment of its products to
customers. The Company was still in its initial stages of selling the new
product line to customers or distributors as of December 31, 2003. Pursuant to
Staff Accounting Bulletin No. 101, the Company was deferring its sales and
corresponding cost of sales to certain distributors as the payment terms were
contingent upon customer sell-through of product and therefore collectibility of
these receivables was not reasonably assured. As all sales activity was
terminated due to the loss of the Company's NICO Patent on January 8, 2004, the
Company reversed all deferred sales of $269,100 against accounts receivable and
the corresponding cost of sales of $80,109 against inventory during the three
months ended December 31, 2003. The Company also wrote off sales and cost of
sales of $58,459 and $31,802, respectively, to impairment loss in the
accompanying consolidated statements of operations for the three months ended
December 31, 2003.
ADVERTISING
The Company expenses the cost of advertising when incurred as general and
administrative expense. Advertising expense was approximately $237,000 and
$31,000 for the three months ended December 31, 2003 and 2002, respectively, and
$376,000 and $72,000 for the six months ended December 31, 2003 and 2002,
respectively.
F-34
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 Statement of Financial
Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based
Compensation." At December 31, 2003, the Company has two stock-based employee
compensation plans, which are described more fully in Note 9. During the three
and six months ended December 31, 2003 and 2002, no compensation expense was
recognized in the accompanying consolidated statements of operations for options
or warrants issued to employees pursuant to APB 25, as all options or warrants
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:
Three Months Ended Six Months Ended
December 31, December 31,
---------------------------- ----------------------------
2003 2002 2003 2002
----------- ----------- ----------- -----------
Net loss as reported $(3,396,688) $ (384,546) $(5,391,291) $ (703,083)
Deduct:
Total stock-based employee
compensation expense under
APB 25 -- -- -- --
Add:
Total stock-based employee
compensation under fair value
based method for all awards, net
of related tax effects (111,185) -- (111,185) --
----------- ----------- ----------- -----------
Pro forma net loss $(3,507,873) $ (384,546) $(5,502,476) $ (703,083)
=========== =========== =========== ===========
Basic and diluted loss per share,
as reported $ (0.06) $ (0.02) $ (0.11) $ (0.04)
=========== =========== =========== ===========
Basic and diluted loss per share,
pro forma $ (0.06) $ (0.02) $ (0.11) $ (0.04)
=========== =========== =========== ===========
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, 16,035,613 and 0 as of December 31, 2003 and 2002, respectively, have
been excluded from dilutive loss per share, as their effect would be
anti-dilutive for the periods ended December 31, 2003 and 2002.
COMPREHENSIVE INCOME
Comprehensive income is not presented in the Company's condensed 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 condensed consolidated financial statements.
F-35
ACCOUNTING PRONOUNCEMENTS
In May 2003, the Financial Accounting Standards Board ("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 adoption of SFAS No. 150 did not have a material impact on the
Company's financial position, cash flows or results of operations.
NOTE 2 - ACCOUNTS RECEIVABLE AND INVENTORIES
Due to the Company's loss of the NICO Patent and the Company's subsequent
decision to stop marketing NICOWater(TM) (see Note 1), the Company's product
NICOWater(TM) could no longer be sold and the Company wrote off accounts
receivable from certain customers and its inventories of raw materials and
finished goods in the aggregate amount of $37,075 and $294,039, respectively, to
impairment loss which is reflected in the accompanying condensed statements of
operations for the three months ended December 31, 2003.
NOTE 3 - DUE FROM INSURANCE COMPANIES
The Company financed its product liability insurance premiums totaling $431,908
in August 2003. The principal amounts had interest at 7.85% per annum and were
payable in equal monthly installments totaling $46,930 through May 1, 2004. The
related product liability policies were cancelled effective October 31, 2003, in
favor of one replacement policy at a substantially reduced annual premium,
resulting in recording a receivable balance from the insurance companies of
$30,000 in other prepaid expenses in the accompanying balance sheet as of
December 31, 2003. The cancellation resulted in an elimination of the financing
payable and related prepaid expense of $375,444. The replacement policy premium
was collaterized by a letter of credit, which required the Company to maintain a
restricted cash balance of $25,000, which is reflected in cash and cash
equivalents in the accompanying balance sheet as of December 31, 2003. This
policy was also cancelled in January 2004 as a result of the Company's loss of
the NICO Patent and the inability to sell NICOWater(TM). The Company anticipates
obtaining new product liability insurance covering the sale of its new products
when they are brought to market.
NOTE 4 - 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.com, Inc.
("Moneyzone"), an entity that the Company merged with and into in January 2003.
These notes accrue interest at a rate of 4% per annum and were 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 10) and other remaining accounts
payable of Moneyzone assumed in the merger. 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 amount. These notes are secured by 399,000
shares of the Company's common stock owned by former stockholders. As the
collection of the notes is not reasonably assured, the Company reserved $69,750
of the notes receivable balance during the three months ended December 31, 2003.
Thus, the remaining balance of notes receivable as of December 31, 2003 is
$69,750.
NOTE 5 - LICENSE
In October 2003, the Company entered into a License Agreement of Intellectual
Property (the "License") with VMM, LLC (see Note 1). In consideration for the
License, the Company released 3,260,760 previously issued shares of its common
stock from escrow valued at $358,684 (or $0.11 per share, which was the fair
market value of the stock on the date of the License Agreement). The term of the
License Agreement is one year, although so long as the Company meets certain
proposed sales projections, the License Agreement will be extended for four
additional one-year terms. After this period, if neither party terminates the
License Agreement, it will be extended for an additional five-year term. The
term of the License Agreement will become effective four months after all
required regulatory clearances have been obtained for certain of the licensed
products and after the licensor has obtained a manufacturer to manufacture the
products in accordance with the terms of the License Agreement. The Company will
begin the amortization of the License at the time the required regulatory
clearances will be obtained and the License Agreement becomes effective. The
Company anticipates to amortize the License over the estimated useful life of
five years using a straight-line method.
NOTE 6 - PATENT AND ROYALTY FEE
On April 7, 2002, the Company entered into an Agreement relating to the
formulation of nicotine water-based products (see Note 1). The Agreement was
effective 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 had been 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. In June 2002, the Company prepaid royalties
through the issuance of 399,000 shares of its common 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. The Company's first
water-based homeopathic nicotinum (nicotine) product was NICOWater(TM), an
odorless and tasteless water-based product that is designed to relieve the
self-diagnosed symptoms of tobacco cravings, which the Company began shipping in
May 2003.
F-36
During the three and six months ended December 31, 2003, the Company recorded
$(3,431) and $9,534 respectively, of royalty expense in the accompanying
condensed consolidated statements of operations. Due to the Company's loss of
the NICO Patent (see Note 1), the Company wrote off the unamortized portion of
the Intellectual Property Rights related to the NICO Patent of $44,854 and the
balance of prepaid royalties of $135,023 to impairment loss in the accompanying
condensed statements of operations for the three months ended December 31, 2003.
NOTE 7 - NOTES PAYABLE
In June 2003, the Company entered into a Settlement Agreement and Mutual General
Releases with certain third party note holders and related parties, mutually
releasing all parties from any and all claims arising out of or related to
certain convertible promissory notes and bridge loan (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 superseded
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.
In August 2003, the Company prepaid the notes payable and notes payable to
related parties in the entire principal amounts of $215,000 and $50,000,
respectively, plus accrued interest of $5,760 for an aggregate amount of
$270,760 and has received full collateral releases from the noteholders.
NOTE 8 - CONVERTIBLE DEBENTURES
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. On
October 15, 2003, the holders advanced $200,000 of the remaining $1,000,000 in
gross proceeds prior to the date they were required to do so. In November 2003,
the Company received the remaining $800,000 in gross proceeds due at the second
closing. The debenture is payable on August 22, 2006. The interest of 6% per
annum is payable quarterly in cash or shares of the Company's common stock, at
the option of the Company, 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. The debentures also
require that, in the event that the Company loses its patent relating to
NICOWater(TM), the conversion price shall thereafter equal the lesser of (A) the
Set Price and (B) 60% of the average of the 5 closing prices for the 5 trading
days immediately prior to the applicable conversion date. The holders have
agreed that such price will be fixed at $0.01 per share. The Company intends to
register additional shares of common stock to cover such additional conversion
shares. As of December 31, 2003, a total of $1,300,000 of the convertible
debentures was converted into 17,333,332 shares of the Company's common stock.
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 (see Note 9). On October 15, 2003, as a
consideration to receiving an early advance of $200,000, the Company reduced the
exercise price of the warrants to purchase 13,333,333 shares of the Company's
common stock and a warrant to purchase 2,666,667 shares of the Company's common
stock issued as part of the commission fee in connection with the convertible
debenture financing (see below) from $0.075 to $0.01. In addition, the Company
granted to the convertible debenture purchasers a continuing security interest
in substantially all of the Company's assets and agreed to refrain from issuing
shares or granting options to the Company's employees, officers or directors in
excess of 50,000 shares per month for a period of 12 months, without the prior
written consent of the convertible debenture purchasers. So long as the Company
is in compliance with their obligations under the debentures, the convertible
debenture purchasers agreed to subordinate their security interests to a factor
lien as was required for the Company to factor its accounts receivable.
In connection with the issuance of detachable warrants and the beneficial
conversion feature of the debentures, the Company has recorded a debt discount
of $1,274,667. The Company is amortizing the discount using the effective
interest method through August 2006 and immediately recording the corresponding
unamortized debt discount as interest expense when the related debenture is
converted into the Company's common stock. During the three and six months ended
December 31, 2003, the Company recorded interest expense related to the
amortization of the debt discount and conversion of debentures totaling
$67,184 and $1,037,235, respectively.
F-37
On August 19, 2003, the Company also issued warrants to purchase 2,666,667
shares of the Company's common stock as part of the commission fee in connection
with the convertible debentures. The warrants had an exercise price of $0.075
per share and expire in five years. The Company recorded the value of the
warrant of $596,938 (under the Black-Scholes pricing model) as an issuance cost,
which was included in the deferred financing cost in the accompanying condensed
consolidated balance sheet. On October 15, 2003 as a consideration to receiving
an early advance of $200,000, the Company reduced the exercise price from $0.075
to $0.01. As a result, the Company recorded a decrease in issuance cost of
$320,319 (under the Black-Scholes pricing model) from the original value of the
warrant of $596,938 during the quarter ended December 31, 2003. During the six
months ended December 31, 2003, the Company incurred other issuance costs
totaling $237,000 and an additional $16,000 related to the issuance of the
Company's common stock for finders fees (see Note 9), which were all recorded as
deferred financing cost in the accompanying condensed consolidated balance
sheet. The Company is amortizing the deferred financing cost using the
straight-line method, adjusted prospectively for the reduction in the warrant
value as discussed above, through August 2006 and recorded interest expense
related to the amortization of the deferred financing cost of $40,118 and
$67,184 during the three and six months ended December 31, 2003, respectively.
NOTE 9 - STOCKHOLDERS' DEFICIT
COMMON STOCK
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 (see further discussion in the Warrants section below) to a third party.
In July 2003, the Company issued 270,430 shares of the Company's common stock
under the 2003 Plan, valued at $81,130 (or $0.30 per share, which is the fair
market value of the stock on the date of issuance), to a consultant for services
performed.
In August 2003, the Company issued 206,000 shares of the Company's common stock
under the 2003 Plan, 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 performed.
In August 2003, the Company issued 283,590 shares of the Company's common stock
under the 2003 Plan, 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. The Company recorded a loss on settlement of accounts payable of
$19,142 other expense in the accompanying condensed consolidated statements of
operations for the six months ended December 31, 2003.
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 (see Note 11). Based on
the estimated fair value of the stock issued, the Company recognized interest
expense of $202,500 in the accompanying consolidated statements of operations
during the six months ended December 31, 2003.
In August 2003, the Company issued 127,171 shares of its restricted common stock
to one of its shareholders valued at $26,706 (or $0.21 per share, which is the
weighted average fair market value on the dates the services were performed) for
consulting services performed.
In September 2003, the Company issued 670,773 shares of the Company's common
stock under the 2003 Plan, valued at $113,333 (or $0.17 per share, which is the
fair market value of the stock on the dates of issuance) for consulting services
rendered.
In September 2003, the Company issued 542,513 shares of the Company's common
stock under the 2003 Plan, valued at $70,527 (or $0.13 per share, which is the
fair market value of the stock on the date of issuance), for settlement of
accounts payable. The Company recorded a loss on settlement of accounts payable
of $1,357 in other expense in the accompanying condensed consolidated statement
of operations for the six months ended December 31, 2003.
In September 2003, the Company committed to issue 100,000 shares of the
Company's common stock valued at $16,000 (or $0.16 per share) to a third party
for finders fees related to the convertible debentures, which was recorded as
part of deferred financing costs (see Note 8). The Company issued the shares in
November 2003.
In November 2003, the Company issued 381,829 shares of the Company's common
stock under the 2003 Plan, valued at $32,948 (or $0.09 per share, which is the
fair market value of the stock on the date of issuance), for settlement of
accrued legal fees. The Company recorded a loss on settlement of accounts
payable of $6,761 in other expense in the consolidated statement of operations
in the three months ended December 31, 2003.
Certain common stock purchase agreements with certain investors included 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. As of
December 31, 2003, the aggregate purchase price paid by these investors totaled
$310,000. For the five consecutive trading days ended October 3, 2003, the
Company's common stock closing price fell below $0.15 per share, requiring the
Company to issue the 1,033,334 shares of common stock to those investors, which
were issued in November 2003. Such shares represent the maximum number of shares
required to be issued by the Company under the provisions of these common stock
purchase agreements.
In November 2003, the Company issued 1,945,476 shares of the Company's common
stock under the 2003 Plan and 93,750 shares of the Company's restricted common
stock, valued at a total of $183,138 (or $0.09 per share, which is the fair
market value of the stock on the dates of issuance), to consultants for services
performed.
In November 2003, the Company issued 83,136 shares of the Company's restricted
common stock , valued at $6,651 ( or $0.08 per share, which is the fair market
value of the stock on the date of issuance), in satisfaction of an accounts
payable in the amount of $20,656. The Company recorded a gain on settlement of
accounts payable of $14,005 in other expense in its accompanying condensed
statement of operations.
F-38
In November 2003, the Company issued 9,883,333 shares of the Company's
previously registered common stock, valued at $741,250 (or $0.075 per share,
which is the conversion rate pursuant to the terms of the 6% convertible
debentures), to holders of the Company's 6% convertible debentures (see Note 8).
In November 2003, the Company issued 666,667 shares of the Company's previously
registered common stock for $6,667 in cash in connection with the exercise of
warrants which were issued in connection with the Securities Purchase Agreement
(see Note 8).
In December 2003, the Company issued 7,449,999 shares of the Company's
previously registered common stock, valued at $558,750 (or $0.075 per share
which is the conversion rate pursuant to the terms of the 6% convertible
debentures), to holders of the Company's 6% convertible debentures (see Note 8).
In December 2003, the Company issued 7,333,334 shares of the Company's
previously registered common stock for $73,333 in cash in connection with the
exercise of warrants which were issued in connection with the Securities
Purchase Agreement (see Note 8).
In December 2003, the Company issued 663,408 shares of the Company's common
stock under the 2003 Plan and 760,322 shares of the Company's restricted common
stock, valued at a total of $113,898 (or $0.08 per share, which is the fair
market value of the stock on the date of issuance), for legal retainer and
settlement of accrued legal fees. The Company recorded a loss on settlement of
accounts payable of $14,664 in other expense in the consolidated statement of
operations in the three months ended December 31, 2003.
In December 2003, the Company issued 596,818 shares of the Company's common
stock under the 2003 Plan and 100,000 shares of the Company's restricted common
stock, valued at a total of $51,609 (or $0.07 per share, which is the fair
market value of the stock on the dates of issuance), to consultants for services
performed.
In December 2003, the Company issued 20,000 shares of the Company's common stock
under the 2003 Plan, valued at $1,600 (or $0.08 per share, which is the fair
market value of the stock on the date of issuance), to an employee as additional
compensation.
During the three and six months ended December 31, 2003, the Company amortized
$105,224 and $462,295, respectively, of prepaid consulting expense which is
being amortized over the respective service periods.
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 2000 Plan amendment to
4,233,330 shares. The 2000 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 2000 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 2000 Plan available
for grant at December 31, 2003 was 2,055,830.
On April 21, 2003, the Company adopted an incentive equity stock plan (the "2003
Plan") that authorized the issuance of up to 10,000,000 shares of common stock
in the form of options, rights to purchase common stock and stock bonuses, of
which 5,000,000 shares were registered on April 25, 2003 and 5,000,000 shares
were registered on June 25, 2003. 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 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
2003 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 December 31, 2003 was
271,330.
No options were issued or outstanding during the six months ended December 31,
2003.
WARRANTS
From time to time, the Company issues warrants pursuant to various employment,
consulting and third party agreements.
During the six months ended December 31, 2003, the Company:
(i) issued 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 common stock purchase warrant agreement also includes 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
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.
F-39
(ii) issued a warrant to purchase 750,000 restricted shares of the Company's
common stock at $0.24 per share (the fair market value of the stock on the date
of grant) to one of its officers in connection with his employment agreement and
recorded $0 of compensation expense as the warrant had an exercise price equal
to the market value of the underlying common stock on the date of grant.
(iii) issued, pursuant to the Securities and Purchase Agreement and in
connection with the convertible debenture financing (see Note 8), warrants to
purchase one share of the Company's common stock for every two shares underlying
the debentures (or 13,333,333 shares of the Company's common stock as of
December 31, 2003) at $0.075 per share (below the fair market value on the date
of grant), expiring in five years. The fair value of the warrants was recorded
as a deferred financing cost (see Note 8). On October 15, 2003, as a
consideration to receiving an early advance of $200,000, the Company reduced the
exercise price of these warrants from $0.075 to $0.01 (see Note 8).
(iv) issued a warrant to purchase 2,666,667 shares of the Company's common stock
as part of the commission fee in connection with the convertible debenture
financing (see Note 8). The warrant had an exercise price of $0.075 per share
(below the fair market value on the date of grant), expires in five years, and
is valued at $596,938 using the Black-Scholes option pricing model. On October
15, 2003 as a consideration to receiving an early advance of $200,000, the
Company reduced the exercise price of this warrant from $0.075 to $0.01. As a
result, the Company recorded a decrease in issuance cost of $320,319 from the
original value of the warrant of $596,938 during the quarter ended December 31,
2003 (see Note 8).
Certain common stock purchase warrant agreements issued prior to the six months
ended December 31, 2003 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.
NOTE 10 - COMMITMENTS AND CONTINGENCIES
EMPLOYMENT AGREEMENT
In August 2003, the Company entered into an 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 grant). 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.
LITIGATION
On November 15, 2002, Fidelity Mortgage, Inc. ("Fidelity") filed a lawsuit
against the Company 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 of defending this litigation and has
recorded a liability of $156,400 in the accompanying consolidated balance sheet.
On April 7, 2002 the Company 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. This patent is referred to as the "NICO Patent."
The agreement was effective 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 water-based homeopathic nicotinum (nicotine) product was
NICOWater(TM), an odorless and tasteless water-based product that is designed to
relieve the self-diagnosed symptoms of tobacco cravings. In May 2003 the Company
began shipping NICOWater(TM).
In May 2003 Mr. Marshall Anluaf Thompson, owner of the NICO Patent, alleged that
he was entitled to terminate the assignment of the NICO Patent based upon the
Company's failure to meet certain conditions required by the assignment
agreement, including performance conditions. The dispute was heard by a panel of
arbitrators who, on January 8, 2004, concluded that Mr. Thompson was entitled to
terminate the assignment agreement. Immediately following the decision the
Company stopped marketing NICOWater(TM). Although the Company has acquired other
products, NICOWater(TM) was the only product sold. The Company is in the process
of negotiating the settlement as a result of the arbitration and is liable for
reimbursement of the opposing party's attorneys fees, an amount which has not
yet been determined. The Company accrued legal fees of $150,000 which is an
estimate of fees related to the arbitration and is reflected in impairment loss
in the accompanying consolidated statement of operations for the three months
ended December 31, 2003.
In October 2003, two individuals filed a lawsuit against the Company in
connection with a consulting agreement and a common stock warrant purchase
agreement they allegedly entered into with the Company. Attorneys for the
Company have responded disavowing the validity of referenced agreements and the
Company intends to have any and all claims in connection with the lawsuit
dismissed.
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.
F-40
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. The Company indemnifies its directors, officers employees
and agents to the maximum extent permitted under the laws of the State of
Delaware. In connection with a certain facility lease, the Company has
indemnified its lessor for certain claims arising from the use of the
facilities. 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 11 - RELATED PARTY TRANSACTIONS
During the six months ended December 31, 2002, the Company recorded expense of
approximately $135,000 related to various related parties, including officers
and /or stockholders of the Company, for consulting and other administrative
services and expenses. No such expenses were incurred during the six months
ended December 31, 2003, mainly because these related parties became employees
of the Company under employment agreements.
Also, during the six months ended December 31, 2003, the Company issued 127,171
shares of its common stock to a stockholder for consulting services valued at
$26,706.
In July 2003, the Company entered into a non-interest bearing promissory note
for $112,500 with one of its shareholders, which was due on demand. In August
2003, the Company issued 1,500,000 shares of its restricted common stock to the
shareholder for a full payment of this promissory note. Based on the estimated
fair value of the stock issued, the Company recognized interest expense of
$202,500 during the six months ended December 31, 2003 in the accompanying
condensed consolidated statement of operations.
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. The Company repaid this note in full in August 2003.
NOTE 12 - 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 three and six
months ended December 31, 2003 and 2002:
Three Months Ended Six Months Ended
December 31, December 31,
------------------------------ ------------------------------
2003 2002 2003 2002
------------ ------------ ------------ ------------
Numerator for basic and diluted loss
per common share - net loss $ (3,396,688) $ (384,546) $ (5,391,291) $ (703,083)
============ ============ ============ ============
Denominator for basic and diluted loss
per common share - weighted
average shares 56,346,891 18,455,745 49,601,771 18,405,597
============ ============ ============ ============
Basic and diluted loss per common
share $ (0.06) $ (0.02) $ (0.11) $ (0.04)
============ ============ ============ ============
NOTE 13 - SUBSEQUENT EVENTS
On February 12, 2004, the Company entered into a financing with several
investors for the issuance of up to $1,000,000 in 6% Convertible Debentures with
an original issuance discount of 25%. The funds will be received and the
debentures will be issued in two closings. The first closing, pursuant to which
the Company received gross proceeds of $350,000 in financing, took place on
February 12, 2004 with $150,000 anticipated by February 20, 2004. The second
closing, pursuant to which the Company will receive an additional $250,000 in
gross proceeds, will take place immediately after a registration statement
registering the shares in connection with the financing is declared effective.
The debentures have a term of two years. Interest is payable quarterly. The
Company may choose to pay the interest with shares of its common stock, so long
as there is an effective registration statement covering the sale of the common
stock issued for the interest payment, the Company's common stock is listed on a
Principal Market, as defined in the debenture, and has 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 the
Company's 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 $0.01. The Company has reserved
100,000,000 shares of its common stock to cover the conversion of the
debentures.
F-41
In conjunction with the 6% Convertible Debentures that were offered in the
private offering dated February 12, 2004 we also issued warrants (the "Debenture
Warrants"). The Debenture Warrants were issued at the first closing and were
immediately exercisable following the first closing at a price of $0.01 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. The Company has reserved 50,000,000 shares of our common stock, the
number of shares that may be purchased through the exercise of the Debenture
Warrants. In connection with the issuance of detachable warrants and the
beneficial conversion feature of the debentures, the Company anticipates to
record a debt discount up to the amount of proceeds received.
On February 3, 2004, the Company received a letter of default and demand for
reimbursement in the sum of $26,870 from AeroFund Financial, with whom the
Company has an accounts receivable financing agreement. The default was caused
by non-payment of invoices to certain customers against which AeroFund had
advanced funds to the Company. The non-payment, in turn, was caused by the
Company's loss of the NICO Patent and the inability of that product to be sold.
The Company intends to cure the default by reimbursing AeroFund for their
advances including related fees. The Company recorded an accrued liability of
$21,496 as of December 31, 2003 in the accounts payable and accrued liabilities
in the accompanying balance sheet related to the reimbursement.
On January 20, 2004, the Company registered an additional 10,000,000 shares
under the 2003 Plan.
In January 2004, the Company issued 4,596,558 shares of the Company's previously
registered common stock, valued at $150,000 (or $0.033 per share, which is the
conversion rate pursuant to the terms of the 6% convertible debentures), to
holders of the Company's 6% convertible debentures pursuant to Notices of
Conversion of Convertible Debenture debt to the Company's common stock.
In January 2004, the Company issued 3,333,333 shares of the Company's previously
registered common stock, valued at $33,333 (or $0.01 per share, which is the
exercise price of warrants issued related to the 6% Convertible Debentures), to
holders of the Company's 6% convertible debentures and related warrants pursuant
to Notices to Exercise such warrants. The Company received $33,333, the exercise
price for the warrants.
In January 2004, the Company issued 1,000,000 shares of the Company's common
stock under the 2003 Plan, valued at $20,000 (or $0.02 per share, which is the
fair market value of the stock on the date of issuance), to a consultant for
services performed.
In February 2004, the Company issued 8,772,282 and 9,000,000 shares of the
Company's previously registered and restricted common stock, respectively,
valued at $215,667 (or $0.012 per share, which is the conversion rate pursuant
to the verbal mutual understanding of the terms of the 6% Convertible
Debentures), to holders of the Company's 6% convertible debentures pursuant to
Notices of Conversion of Convertible Debenture debt to the Company's common
stock.
In February 2004, the Company issued 2,000,000 shares of the Company's
previously registered common stock, valued at $20,000 (or $0.01 per share, which
is the exercise price of warrants issued related to the 6% Convertible
Debentures), to holders of the Company's 6% convertible debentures and related
warrants pursuant to Notices to Exercise such warrants. The Company received
$20,000, the exercise price for the warrants.
F-42
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 2004
- ------------------------------ ------------------- ------------------
High Low
- ------------------------------ ------------------- ------------------
December 31, 2003 $0.14 $0.14
September 30, 2003 $0.36 $0.13
- ------------------------------ --------------------------------------
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
- ------------------------------ ------------------- ------------------
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.
20
There were approximately 1,325 holders of our common stock of record as of
December 16, 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
21
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. On June 18, 2003 we filed a
post-effective amendment to the registration statement and on January 20, 2004
we filed a registration statement registering an additional 5,000,000 and
10,000,000 shares, respectively, to the 2003 plan. 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
22
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 $162,500 and $32,500,
respectively. Cash payments made to Steven Reder for the years 2003 and 2002
were $162,500 and $35,000, respectively.
23
STOCK OPTIONS
The following tables set forth certain information concerning the granting and
exercise of stock options during the last completed fiscal year by each of the
named executive officers and the fiscal year-end value of unexercised options on
an aggregated basis:
OPTION/SAR GRANTS FOR LAST
FISCAL YEAR-INDIVIDUAL GRANTS(1)
Number of % of Total
Securities Options/SARs Granted
Underlying to Employees in
Options/SARs Fiscal Year Exercise Price ($/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.
24
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.
25
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
statement in reliance on the report of Corbin & Company, LLP, given on their
authority as experts in accounting and auditing.
Sichenzia Ross Friedman Ference LLP has given us an opinion relating to the due
issuance of the common stock being registered.
26
QT 5, INC.
PROSPECTUS
184,608,958 Shares Common Stock
February 24, 2004
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.
27
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
28
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 $ 600.00
Legal Fees $ 20,000.00
Accounting Fees* $ 12,400.00
- -------------------------------------------------
Total* $ 33,000.00
* 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
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.
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.
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. These shares were issued in November 2003.
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. These purchase agreements included a provision in which,
if for a period of six months from the date of purchase, the closing price of
the registrant's common stock falls below $0.15 per share for a period of five
consecutive trading days, the registrant must issue to these investors
additional shares. The registrant's common stock closing price fell below $0.15
per share for five consecutive trading days ended October 3, 2003. Therefore,
the registrant is required to issue an additional 1,033,334 shares of common
stock to these investors. These shares were issued in November 2003. This
issuance is 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 July 2003, the registrant issued 1,000,000 shares of its common stock for
cash of $150,000 and a warrant to purchase 1,000,000 shares of the registrant's
common stock to William J. Ritger, an accredited individual. The warrant term is
five years and the exercise price is $0.50 per share. These securities were
issued pursuant to an exemption from registration provided by Section 4 (2) of
the Securities Act of 1933.
29
In August 2003, the registrant issued 1,500,000 shares of its common stock to
SBI USA LLC, one of its shareholders in full payment of a non-interest bearing
demand promissory note of $112,500 dated July 25, 2003. These securities were
issued pursuant to an exemption from registration provided by Section 4 (2) of
the Securities Act of 1933.
In August 2003, the registrant issued 127,171 shares of its common stock to SBI
USA LLC, one of its shareholders in exchange for services rendered. The value of
the services received was determined by the Board of Directors to be $26,706 (or
$0.21 per share), which was the weighted average fair market value on the dates
the services were performed. These securities were issued pursuant to an
exemption from registration provided by Section 4 (2) of the Securities Act of
1933.
In August 2003, the registrant committed to issue 100,000 shares of its common
stock to Shai Stern for services rendered in connection with the convertible
debenture financing. The value of the common stock was determined by the Board
of Directors to be $0.08 per share. These shares were issued in November 2003
pursuant to an exemption from registration provided by Section 4 (2) of the
Securities Act of 1933.
In August 2003, the registrant entered into a Securities Purchase Agreement with
certain accredited institutional investors pursuant to which the registrant
issued 6% convertible debentures in the total principal amount of $2,000,000.
The debentures are due to be paid on August 22, 2006. The debentures are
convertible at the option of the holders into shares of the registrant's common
stock at $0.075 with a forced conversion option by the Company if certain
closing prices are attained. In connection with the Securities Purchase
Agreement, we also issued warrants to purchase 13,333,333 shares of the
registrant's common stock at an exercise price of $0.075 per share to these
investors. The warrant exercise price was reduced to $0.01 in October 2003. The
term of the warrants is five years. These securities were issued pursuant to an
exemption from registration provided by Section 4 (2)of the Securities Act of
1933.
In August 2003, the registrant also issued a warrant to HPC Capital Management
to purchase 2,666,667 shares of the registrant's common stock as part of the
commission fee paid in connection with the placement of the convertible
debentures. The warrant had an exercise price of $0.075 per share, which was
reduced to $0.01 per share in October 2003, and expires in five years. These
securities were issued pursuant to an exemption from registration provided by
Section 4 (2) of the Securities Act of 1933.
In August 2003, the registrant issued a warrant to purchase 750,000 shares of
the registrant's common stock at $0.24 per share (the fair market value of the
stock on the date of grant) to Norman A. Kunin, the registrant's Chief Financial
Officer in connection with his employment agreement. The term of the warrant is
five years. These securities were issued pursuant to an exemption from
registration provided by Section 4 (2) 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 were 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 was
reached. No definitive agreement was reached, therefore the registrant
terminated negotiations and transferred 399,400 shares of its common stock to
OCIF-OBAC-SA de CV. The balance of the common stock was returned to the
treasury. The registrant also entered into a license agreement of intellectual
property 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, issued and released from escrow as a partial payment for the right
to market. As an additional payment, the registrant has also issued 2, 260,600
shares of the registrant's common stock. The common stock that has been
transferred to OCIF-OBAC-SA de CV and to the developers and patent holders of
the rapid test medical devices were exempt from registration pursuant to Section
4(2) of the Securities Act of 1933.
In November 2003, the registrant issued 93,750 shares of its common stock to
Donald Cramer in exchange for services rendered and to be rendered valued at
$0.08 per share (the fair market value of the stock on the date of issue). These
securities were issued pursuant to an exemption from registration provided by
Section 4 (2) of the Securities Act of 1933.
30
In November 2003, the registrant issued 83,136 shares of its common stock to
Asset & Equity Corporation in payment of accounts payable in the amount of
$8,729. The shares were valued at $0.08 per share (the fair market value of the
stock on the date of issue). These securities were issued pursuant to an
exemption from registration provided by Section 4 (2) of the Securities Act of
1933.
In November 2003, the registrant issued 760,322 shares of its common stock to
Erick E. Richardson in exchange for services rendered. The value of the common
stock was determined by the Board of Directors to be $0.07 per share. These
securities were issued pursuant to an exemption from registration provided by
Section 4 (2) of the Securities Act of 1933.
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
our common stock closing price for 5 consecutive trading days falls below $0.15
per share, we 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. As of December 31, 2003, the
aggregate purchase price paid by these investors totaled $310,000. Our common
stock closing price fell below $0.15 per share for the 5 consecutive trading
days ended October 3, 2003, requiring the us to issue an additional 1,033,334
shares of common stock to those certain investors. Such shares were issued in
November 2003 and are exempt from registration pursuant to Section 4 (2) of the
Securities Act of 1933.
In November 2003, the Company issued 83,136 shares of the Company's restricted
common stock , valued at $6,651 ( or $0.08 per share, which is the fair market
value of the stock on the date of issuance), in satisfaction of an account
payable in the amount of $20,656. The Company recorded a gain on settlement of
accounts payable of $14,005 in general and administrative expense in its
accompanying condensed statement of operations. These securities were issued
pursuant to an exemption from registration provided by Section 4 (2) of the
Securities Act of 1933.
In November 2003, the Company issued 93,750 shares of the Company's restricted
common stock , valued at $7,500 ( or $0.08 per share, which is the fair market
value of the stock on the date of issuance), to a consultant for services
performed. These securities were issued pursuant to an exemption from
registration provided by Section 4 (2) of the Securities Act of 1933.
In December 2003, the Company issued 760,322 shares of the Company's restricted
common stock, valued at $60,826 ( or $0.08 per share, which is the fair market
value of the stock on the date of issuance), for legal services performed. These
securities were issued pursuant to an exemption from registration provided by
Section 4 (2) of the Securities Act of 1933.
In December 2003, the Company issued 100,000 shares of the Company's restricted
common stock, valued at $9,000 ( or $0.09 per share, which is the fair market
value of the stock on the date of issuance), to a consultant for services
performed. These securities were issued pursuant to an exemption from
registration provided by Section 4 (2) of the Securities Act of 1933.
In February 2004, we entered into a Securities Purchase Agreement with several
accredited institutional investors for the issuance of an aggregate of
$1,000,000 principal amount 6% convertible debentures with an original issue
discount of 20%. As of February 12, 2003, we closed on an aggregate principal
amount of $437,500 of convertible debentures and received gross proceeds of
$350,000. We anticipate closing on an additional $187,500 by the end of
February. The last tranche of $375,000 in principal amount of convertible
debentures will be issued within 5 days of effectiveness of the registration
statement underlying these securities. The debentures are due two years from the
date of issuance. The debentures are convertible at the option of the holders
into our shares of common stock at a fixed conversion price of $0.01 per share.
In connection with the Securities Purchase Agreement, we also issued warrants to
purchase 50,000,000 shares of our common stock at an exercise price of $0.01 per
share to these investors. The term of the warrants is five years. Furthermore we
entered into a Registration Rights Agreement in order to register the
above-referenced securities. We paid a finders fee of 9% and issued 100,000
warrants to such finder. These securities were issued pursuant to an exemption
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.
31
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.
32
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").
33
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.
34
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.
10.19 6% Convertible Debenture entered into by the registrant and various
holders on February 12, 2004, incorporated by reference to our Quarterly Report
on Form 10-QSB (File No. 000-25022) filed on February 17, 2004.
10.19 Securities Purchase Agreement for 6% Convertible Debentures entered into
by the registrant and various holders on February 12, 2004, incorporated by
reference to our Quarterly Report on Form 10-QSB (File No. 000-25022) filed on
February 17, 2004.
10.19 Registration Rights for 6% Convertible Debentures entered into by the
registrant and various holders on February 12, 2004, incorporated by reference
to our Quarterly Report on Form 10-QSB (File No. 000-25022) filed on February
17, 2004.
10.19 Warrants for 6% Convertible Debentures entered into by the registrant and
various holders on February 12, 2004, incorporated by reference to our Quarterly
Report on Form 10-QSB (File No. 000-25022) filed on February 17, 2004.
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 February 23, 2004 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;
35
(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.
36
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 24th day
of February 2004.
QT 5, Inc.
a Delaware corporation
By: /s/ Timothy J. Owens
-------------------------------------------
Timothy J. Owens, Chief Executive Officer
/s/ Norman A. Kunin
-------------------------------------------
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: February 24, 2004
/s/ Timothy J. Owens
- -------------------------------------------
Timothy J. Owens, Chief Executive Officer
and Director
Dated: February 24, 2004
/s/ Steven Reder
- -------------------------------------------
Steven Reder, President and Director
Dated: February 24, 2004
/s/ Norman A. Kunin
- -------------------------------------------
Norman A. Kunin, Chief Financial Officer
37