UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED March 31, 2005
Securities and Exchange Commission
File Number 000-26369
Reality Wireless Networks, Inc.
(Exact name of registrant as specified in its charter)
- --------------------------------------------------------------------------------
Nevada 88-0422026
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
- --------------------------------------------------------------------------------
4906 Point Fosdick Dr., Suite 102
Gig Harbor, Washington 98335
(Address of principal executive offices, including zip code)
(253) 853-3632
(Registrant's Telephone Number, Including Area Code)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
requirements for the past 90 days.
YES |X| NO |_|
The number of issued and outstanding shares of the Registrants Common Stock,
$0.001 par value, as of May 5, 2005, was 270,624,707 issued and 159,782,404
outstanding
Reality Wireless Networks, Inc.
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements:
Consolidated Balance Sheet at March 31, 2005 (Unaudited)
Consolidated Statements of Operations for the three and six months
ended March 31, 2005 and 2004 (Unaudited)
Consolidated Statements of Cash Flows for the six months ended
March 31, 2005 and 2004 (Unaudited)
Notes to Consolidated Financial Statements (Unaudited)
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
Item 3. Controls and Procedures
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
Item 2. Changes in Securities.
Item 3. Defaults Upon Senior Securities.
Item 4. Submission of Matters to a Vote of Security Holders
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K.
Signatures
2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements-
REALITY WIRELESS NETWORKS, INC.
CONSOLIDATED BALANCE SHEET
March 31,
2005
(unaudited)
------------
ASSETS
Current assets:
Cash $ 0
------------
Total current assets 0
Investment in non-marketable securities 21,375
------------
TOTAL ASSETS $ 21,375
============
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable $ 320,127
Accounts payable, related party 168,770
Accrued payroll 190,196
Accrued payroll taxes 251,830
Accrued interest 271,580
Accrued expenses 18,633
Notes payable 1,188,788
------------
Total current liabilities 2,409,924
------------
Stockholders' deficit:
Preferred stock, $.001 par value, 100,000,000 shares
authorized: none issued and outstanding 0
Series A Preferred stock, $.001 par value, 5,000,000
authorized: 51,020 issued and outstanding 51
Common stock, $.001 par value, 500,000,000 shares authorized:
270,624,707 shares issued and 159,782,404 outstanding 159,781
Common stock issuable (1 share) --
Additional paid in capital 14,277,907
Subscription Receivable Promissory Note and Interest (102,002)
Deferred Expense (1,144,934)
Accumulated deficit (15,579,352)
------------
Total stockholders' deficit (2,388,549)
------------
Total Liabilities and stockholders' Defecit $ 21,375
============
See accompanying summary of accounting policies and notes to financials
3
REALITY WIRELESS NETWORKS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three months ended Six months ended
------------------ ----------------
March 31, March 31, March 31, March 31,
2005 2004 2005 2004
------------ ------------ ------------ ------------
Revenue $ -- $ 20,386 $ -- $ 44,216
Cost of sales -- 20,727 -- 42,932
------------ ------------ ------------ ------------
Gross margin -- (341) -- 1,284
Engineering and development -- 787 -- 1,574
General and administrative 67,882 92,934 118,998 125,171
Consulting 458,994 1,887,005 808,054 2,464,091
Legal 129,459 131,103 728,697 573,722
------------ ------------ ------------ ------------
Total Operating expenses 656,335 2,111,829 1,655,749 3,164,558
------------ ------------ ------------ ------------
Loss from operations (656,335) (2,112,170) (1,655,749) (3,163,274)
Other income (expense):
Gain on disposition of assets -- -- -- 3,989
Impairment of non-marketable securities (10,688) (10,688)
Settlement Loss (9,814) (31,785) (9,814) (31,785)
Interest income 493 3,949 997 3,949
Interest expense (47,461) (211,708) (79,005) (237,154)
------------ ------------ ------------ ------------
Total other income (expenses) (67,470) (239,544) (98,510) (261,001)
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Net Loss $ (723,805) $ (2,351,714) $ (1,754,259) $ (3,424,275)
============ ============ ============ ============
Basic and diluted net loss per common
share $ (0.57) $ (1.41) $ (2.17) $ (3.33)
============ ============ ============ ============
Weighted Average Shares 1,268,882 1,665,466 807,428 1,028,286
============ ============ ============ ============
See accompanying summary of accounting policies and notes to financials
4
REALITY WIRELESS NETWORKS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Six months ended March 31,
--------------------------
2005 2004
------------ ------------
Cash flows from operating activities:
Net loss (1,754,259) (3,424,274)
Adjustments to reconcile net income to net cash
used in operating activities:
Depreciation and amortization -- 1,573
Impairment loss on investment 10,688 --
Settlement loss 9,814 --
Beneficial conversion and debt issue cost amortization 23,266 177,795
Common stock issued for services 1,582,276 3,146,858
Settlement of accounts payable in legal expense (140,674) (160,000)
Interest income on subscription receivable (997) --
Loss on debt settlement -- 31,785
Company expense paid by other than Company 10,086 79,753
Changes in operating assets and liabilities
Prepaids and other current assets -- (13,047)
Accounts payable 20,450 8,987
Accounts payable, related party 170,571 62,252
Accrued interest 50,688 45,815
Accrued payroll and payroll taxes 18,091 15,666
------------ ------------
Net cash used in operating activities -- (26,837)
------------ ------------
Cash flows from investing activities:
Loan disbursement on note receivable (147,500)
Disbursement of deposit (100,000)
------------ ------------
Net cash used in investing activities -- (247,500)
------------ ------------
Cash flows from financing activities:
Proceeds from convertible debenture, net -- 350,000
Proceeds from notes payable -- --
Contributed capital -- --
Principal payments notes payable and capital leases -- (77,200)
------------ ------------
Net cash provided by financing activities -- 272,800
------------ ------------
Net increase in cash and cash equivalents -- (1,537)
Cash and cash equivalents at beginning of period -- 2,148
------------ ------------
Cash and cash equivalents at end of period -- 611
============ ============
Cash paid for:
Interest -- --
Taxes -- --
Schedule of non cash investing and financing activites:
Settlement of debt and accrued interest with contributed capital 65,186 --
See accompanying summary of accounting policies and notes to financials
5
REALITY WIRELESS NETWORKS
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1:Basis of Presentation and Summary of Significant Accounting Policies
The accompanying unaudited interim financial statements of Reality Wireless
Networks, Inc. ("Reality") have been prepared in accordance with the rules of
the Securities and Exchange Commission ("SEC"), and should be read in
conjunction with the audited financial statements and notes thereto contained in
the Company's Annual Report filed with the SEC on Form 10-KSB for the year ended
September 30, 2004. In the opinion of management, all adjustments, consisting of
normal recurring adjustments, necessary for a fair presentation of financial
position and the results of operations for the interim periods presented have
been reflected herein. The results of operations for interim are not necessarily
indicative of the results to be expected for the full year. Notes to the
financial statements which would substantially duplicate the disclosure
contained in the audited financial statements for fiscal year end September 30,
2004 as reported in the 10-KSB have been omitted.
Principles of Consolidation
The financial statements include the accounts of Reality's inactive wholly-owned
Canadian subsidiary, 527403 B.C. Limited. All significant intercompany balances
and transactions have been eliminated in the consolidated financial statements.
..
Note 2 - Going Concern
The financial statements have been prepared assuming that Reality will continue
as a going concern. Reality has a significant accumulated deficit and working
capital deficiency at March 31, 2005, is not active, is in default on all notes
payable and is unable to meet its obligations as they come due, all of which
raise substantial doubt about Reality's ability to continue as a going concern.
In addition, preferred stock and related subscription note receivable is being
cancelled in May 2005. The financial statements do not include any adjustments
relating to the recoverability and classification of recorded asset amounts or
to the amounts and classification of liabilities that might be necessary should
Reality be unable to continue as a going concern.
The continued support of Reality's creditors, lenders and shareholders is
required in order for Reality to continue as a going concern. Management's plans
to support Reality's operations include borrowing additional funds, raising
additional capital and pursuing plans with one or more merger candidates. (See
Note 3 for merger agreement). Reality's inability to obtain additional capital
or obtain such capital on favorable terms could have a material adverse effect
on its financial position, results of operations and its ability to continue
operations.
Note 3 -Commitments and Contingencies
On November 10, 2004 the Company and Genesis Electronics, Inc. ("Genesis")
entered into an agreement to merge Genesis with and into Reality Wireless
Networks and to rename the Company Genesis Electronics, Inc. (the "reverse
merger"). The agreement provides that all of the shares of common stock of
Genesis issued and outstanding at the time the merger becomes effective under
applicable state law (the "Effective Time") will be converted into common stock
of Registrant such that the current holder of Genesis common stock will hold 97%
of all shares of Registrant's common stock outstanding immediately after the
closing of this merger transaction. The obligation of Genesis to close is
conditioned on, among other things, the satisfactory completion of due diligence
review and the reduction of Registrant's liabilities to $50,000 or less. The
agreement may be terminated at any time prior to the Effective Time by written
agreement; by Genesis for breach of any of the representations and warranties or
covenants of Registrant if such breach is not cured within thirty days of
written notice; by Registrant for breach of any Genesis representations and
warranties or covenants if such breach is not cured within thirty days of
written notice.
6
On July 16, 2004 counsel to Reality received Notices of Hearing and Amended
Complaints from the State of California, Department of Industrial Relations,
Division of Labor Standards Enforcement, for State Case Number 12-54273 JM, in
which plaintiff claims that Reality owes (1) unpaid wages in the amount of
$1,240, (2) unpaid reimbursable business expenses of $950.00, and (3) additional
wages accrued as a penalty of up to $155.00 per day for "an indeterminate number
of days not to exceed thirty days." Reality subsequently failed to reach a
settlement and, at hearing on July 16, 2004, judgment was entered against
Reality in an amount that has not yet been disclosed but is expected to be
approximately $6,840.00.
On October 13, 2004, a note holder of the Company, filed a complaint in the
Superior Court of the State of California, Los Angeles County, alleging that the
Company breached its contract under a promissory note. In March of 2005 the
Company completed and met its obligations in connection with the settlement and
as of March 31, 2005 no additional amounts are owed on this note. The settlement
paid off $50,186 in notes payable and $15,000 of accrued interest. The
settlement was not paid by the Company, but was paid on behalf of the Company
and resulted in a settlement loss of $9,814. The payment of $75,000 was recorded
in additional paid in capital.
On January 13, 2005, a note holder of the Company, filed a complaint in the
Superior Court of the State of Washington, Kings County, alleging that the
Company breached its contract under a $209,252 promissory note to be paid in
twenty four monthly installments commencing June 2004, to date one payment has
been applied. The Company is contesting the claim and is currently engaged in
the discovery portion of the litigation.
Note 4 - Accounts Payable - related party
Approximately $150,000 and $160,000 was applied during the six months ended
March 31, 2005 and March 31, 2004, respectively, against outstanding accounts
payable balance with a related party legal services vendor. The payments were
applied through stock issued to the vendor and, upon liquidation of stock, the
vendor applied net sale proceeds against outstanding balance. The party is
related as a principal shareholder.
Note 5 - Debt
Convertible Debentures
As of March 31, 2005, 15,892,696 shares have been issued for conversion of
debentures totaling $550,000, with 14,609,631 of these issued during the six
months ended March 31, 2005 for $43,526 of debenture principal. As of March 31,
2005 all debentures sold have been converted. The Convertible Debenture Purchase
Agreement entered into on October 27, 2003 allowed for $1,000,000 in debentures
to be issued/sold by the Company, $450,000 has not yet been issued/sold (the
"Convertible Debentures").
Amortization of debt discount and of debt issue costs for the six months ended
March 31, 2005 were $17,238 and $6,028, respectively.
Note 6 -Common Stock
On February 23, 2005, 50,000,000 shares of common stock were issued for
consulting services, employment agreements and legal work. The value of the
stock, based on the quoted trading price of $.0014 on the grant date, was
$70,000 in total of which $34,300 was expensed for legal work and $2,975 was
expensed for consulting and employment services. The remaining $32,725 is on the
balance sheet as a contra-equity deferred expense and will be expensed over the
life of the various consulting agreements. These shares are registered pursuant
to the Company's Registration Statement on Form S-8.
During the six months ended March 31, 2005, amortization of deferred fees that
existed at September 30, 2004 was $304,251 with $329,458 remaining deferred at
March 31, 2005 and amortization of deferred fees for stock grants granted in
2005 was $1,278,025 with $815,476 remaining deferred at March 31, 2005.
Therefore, the total amortization expense for the six months ended March 31,
2005 of existing and current year deferred fees was $1,582,276 with $1,144,934
remaining deferred at March 31, 2005.
7
From October 1, 2003 through March 31, 2005, 125,885,000 shares have been issued
to escrow for convertible debenture discussed in Note 5. Of the 125,885,000
shares, 15,892,696 have been converted and 109,992,304 remain in an escrow
account to be issued upon conversion at a later date, and are not included in
earnings per share. As discussed in Note 5, there are currently no Convertible
Debentures owed or available for conversion.
Note 7 - Subscription Receivable Promissory Note
On August 23, 2004 the Company signed a promissory note with Nelana Holdings,
Ltd., for $100,000. The maker promised to pay $10,000 to the Company by October
15, 2004 and $7,500, plus any accrued interest, by the 5th of each month
thereafter, in exchange for 51,020,041 newly issued Series A Convertible
Preferred Stock. To date no payments have been received by the Company. As the
Company deems collection unlikely, effective May 12, 2005 the Board authorized
the cancellation of the Series A Convertible Preferred Stock. The subscription
receivable promissory note will be reversed out of equity section of balance
sheet. The net effect on income statement will be approximately $1,200 in
interest income reversed.
Note 8 - Subsequent Events
On April 14, 2005, the Company issued 105,000,000 shares of common stock for
consulting services and legal work. The services will be valued at the stock
price on the date granted and recognized over the services period. These shares
are registered pursuant to the Company's Registration Statement on Form S-8.
On May 12, 2005 the Board authorized the cancellation of the Series A
Convertible Preferred Stock. The subscription receivable promissory note will be
reversed out of equity section of balance sheet. The net effect on income
statement will be approximately $1,200 in interest income reversed.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
Forward-looking Statements
Certain statements in this Quarterly Report on Form 10-QSB, as well as
statements made by Reality Wireless Networks, Inc. ("Reality" or "the Company")
in periodic press releases, oral statements made by the company's officials to
analysts and shareholders in the course of presentations about the company
constitute "forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995. Such forward-looking statements
involve known and unknown risks, uncertainties, and other factors that may cause
the actual results, performance or achievements of the company to be materially
different from any future results, performance or achievements expressed or
implied by the forward looking statements. Such factors include, among other
things, (1) general economic and business conditions; (2) interest rate changes;
(3) the relative stability of the debt and equity markets; (4) competition; (5)
demographic changes; (6) government regulations; (7) required accounting
changes; (8) the Company's ability to meet its debt obligations; and (9) other
factors over which Reality has little or no control.
GENERAL OVERVIEW
Reality was incorporated in the state of Nevada on March 17, 1999. On March 5,
2002 the Company entered into an asset purchase agreement with Reality Networks,
Inc., a Delaware corporation.
Until September 2004, the Company was a service provider of fixed, wireless,
high-speed, broadband Internet access to principally residential homes and small
businesses. The Company provided this service as an alternative to digital
subscriber line ("DSL") or cable Internet access service. The Company provided
its service primarily in geographical areas of northern California where DSL and
cable services are not available.
8
In September 2004, the Company changed its strategy due to poor operating
conditions and poor operating results coupled with difficulties in raising
capital through debt and equity sources. The Company adopted a new strategy
during the fiscal fourth quarter of 2004 that committed to the shutting down of
its current business and to seek a merger or acquisition transaction with a
Company having better financial resources as well as advise such small, private
companies on conducting due diligence, strategic positioning and valuation
analysis for newly developing businesses. As of September 2004, the Company
ceased providing services to customers and has disposed of most of its assets.
The Company has entered a new development phase, while formulating a plan to
improve its financial position.
On November 10, 2004 the Company and Genesis Electronics, Inc. ("Genesis"),
entered into an agreement to merge Genesis with and into Reality Wireless
Networks and to rename the Company Genesis Electronics, Inc., (the "reverse
merger"). The agreement provides that all of the shares of common stock of
Genesis issued and outstanding at the time the merger becomes effective under
applicable state law (the "Effective Time"), will be converted into common stock
of Registrant such that the current holder of Genesis common stock will hold 97%
of all shares of Registrant's common stock outstanding immediately after the
closing of this merger transaction. The obligation of Genesis to close is
conditioned on, among other things, the satisfactory completion of due diligence
review and the reduction of Registrant's liabilities to $50,000 or less. The
agreement may be terminated at any time prior to the Effective Time by written
agreement; by Genesis for breach of any of the representations and warranties or
covenants of the Company if such breach is not cured within thirty days of
written notice; by the Company for breach of any Genesis representations and
warranties or covenants if such breach is not cured within thirty days of
written notice.
RESULTS OF OPERATIONS
Retail sales for the three months ended March 31, 2005 and 2004 were $0 and
$20,386, respectively. Retail sales for the six months ended March 31, 2005 and
2004 were $0 and $44,216, respectively. Effective August 31, 2004, the Company
no longer provides services to customers, and therefore, no revenue has been
collected since this date.
The Company's cost of sales for the three months ended March 31, 2005 and 2004
were $0 and $20,727, respectively. Cost of sales for the six months ended March
31, 2005 and 2004 were $0 and $42,932, respectively. No cost of sales were
incurred in the current fiscal year due to cessation of services provided to
customers.
Gross margin for the three months ended March 31, 2005 and 2004 was $0 and
$(341), respectively. Gross margin for the six months ended March 31, 2005 and
2004 was $0 and $1,284, respectively Until the merger with Genesis is closed,
gross margin will be $0, as there are currently no cost of sales on related
inactivity of services provided to customers.
Engineering and development costs for the three months ended March 31, 2005 and
2004 were $0 and $787, respectively. Engineering and development costs for the
six months ended March 31, 2005 and 2004 were $0 and $1,574, respectively. 2004
costs were exclusively depreciation of node head end and bandwidth software. All
assets were written-off as abandoned as of September 1, 2004, and therefore, no
depreciation was incurred in 2005 fiscal year.
Operating expenses for the three months ended March 31, 2005 and 2004 were
$656,335 and $2,111,829, respectively. 50,000,000 shares valued at $70,000, fair
market value on grant date of $.0014/share, were issued in the three months
ended March 31, 2005 of which as of March 31, 2005, $37,275 has been expensed.
Operating expenses for the six months ended March 31, 2005 and 2004 were
$1,655,749 and $3,164,558, respectively. 140,500,000 shares valued at
$2,093,500, fair market value on grant date of $.007-$.08/share, were issued in
the six months ended March 31, 2005 of which as of March 31, 2005, $1,278,025
has been expensed. The total amount expensed on deferred contracts in the first
two quarters of 2005 was $1,582,276 on remaining balance of $2,727,209, leaving
$1,144,933 to be expensed over life of contracts and is recorded on balance
sheet as a contra-equity. Legal expenses was reduced by $140,674 and $160,000 in
the six months ended March 31, 2005 and 2004, respectively, due to sale of stock
issued to related party legal services vendor. At the time of issuance, legal
expenses were increased for the value of stock issued, then, at time of stock
sale, legal expenses were decreased and payment applied against outstanding
account payable balance.
9
Interest expense for the three months ended March 31, 2005 and 2004 was $47,461
and $211,708, respectively. Interest expense for the six months ended March 31,
2005 and 2004 was $79,005 and $237,154, respectively The first two quarters of
2005 expense included $11,079 accrual for interest on outstanding payroll taxes
and $17,238 amortization of debt discount expense. The remaining $50,687 was
accrual of interest on outstanding notes payable. The first two quarters of 2004
expense included $9,594 accrual for interest on outstanding payroll taxes and
$177,796 beneficial conversion expense related to conversion of $350,000 in
cumulative debenture conversions. The remaining $49,764 was accrual of interest
on outstanding notes payable.
Settlement loss for the three and six months ended March 31, 2005 was $9,814 The
settlement loss was recorded in conjunction with reducing notes payable
liability. See Note 3 to financials.
Interest income for the three months ended March 31, 2005 and 2004 was $493 and
$3,949, respectively and represented accrued interest on subscription receivable
and in 2004 I-Element note receivable. Interest income for the six months ended
March 31, 2005 and 2004 was $997 and $3,949 and represented accrued interest on
subscription receivable and I-Element note receivable, respectively.
Net loss for the three months ended March 31, 2005 and 2004 was $723,805 and
$2,351,714, respectively. Net loss for the six months ended March 31, 2005 and
2004 was $1,754,259 and $3,424,275, respectively.
Liquidity and Capital Resources
At March 31, 2005, the Company had negative working capital of $1.19 million.
$1.24 million of this is attributable to bridge financing short-term notes, of
which the Company hopes the majority will convert into equity upon funding.
Net cash used in investing activities was $0 and $247,500 for the six months
ended March 31, 2005 and 2004, respectively. The $247,500 represents a note
receivable and deposit from IElement, a privately held corporation, in
conjunction with potential merge, that has been subsequently terminated and in
August 2004 shares related to this deposit were converted into 120,230 shares of
I-Element, who later merged with a publicly held company, Mailkey Corporation.
Net cash provided by financing activities was $0 and $272,800 for the six months
ended March 31, 2005 and 2004, respectively. The $272,800 represents $350,000
received from sale/issuance of convertible debentures, less $77,200 payment on
notes and leases. The Company has been funding business operations through
bridge financing. Management is actively pursuing significant funding to allow
for execution of business plan. The Company hopes the majority of bridge loans
will convert to equity at time of funding.
Critical Accounting Policies
Impairment
The Company records impairment losses on long-lived assets used in operations
when indicators of impairment are present and the undiscounted cash flows
estimated to be generated by those assets are less than the assets' carrying
amount.
Beneficial Conversion Feature in Convertible Debentures and Convertible
Preferred Stock
In accordance with EITF Issue 98-5, as amended by EITF 00-27, we must evaluate
the potential effect of any beneficial conversion terms related to convertible
instruments such as convertible debt or convertible preferred stock. The Company
has issued convertible debentures and convertible preferred stock. A beneficial
conversion may exist if the holder, upon conversion, may receive instruments
that exceed the value of the convertible instrument. Valuation of the benefit is
10
determined based upon various factors including the valuation of equity
instruments, such as warrants, that may have been issued with the convertible
instruments, conversion terms, value of the instruments to which the convertible
instrument is convertible, etc. Accordingly, the ultimate value of the
beneficial feature is considered an estimate due to the partially subjective
nature of valuation techniques.
Accounting for Stock-Based Compensation
The Company accounts for stock options and warrants issued to employees in
accordance with Accounting Principles Board Opinion No. 25, Accounting for Stock
issued to Employees. For financial statement disclosure purposes and issuance of
options and warrants to non-employees for services rendered, the Company follows
statement of Financial Accounting Standards No. 123, Accounting for Stock-Based
Compensation.
Factors That May Affect Future Results
Dependence Upon External Financing: The Company has been building its business
through revenues generated from operations supplemented by the sale of its
common stock. The ability of the Company to continue its growth and expand its
business is dependent upon the ability of the Company to raise additional
financing either through the issuance of additional stock or the incurrence of
debt.
Ability to Meet Outstanding Debt Obligations: The substantial debt obligations
pose risks to the Company and to the stockholders by:
o making it more difficult for the Company to satisfy our obligations;
o requiring the Company to dedicate a substantial portion of cash flow
to principal and interest payments on debt obligations of the
Company, thereby reducing the availability of our cash flow to fund
working capital, capital expenditures and other corporate
requirements;
o impeding the Company from obtaining additional financing in the
future for working capital, capital expenditures and general
corporate purposes; and
o making the Company more vulnerable to a downturn in its business and
limiting flexibility to plan for, or react to, changes in business.
The financial statements do not include any adjustments to reflect
the possible effects on recoverability and classification of assets
or the amounts and classification of liabilities, which may result
from the inability of the Company to continue as a going concern.
Item 3. CONTROLS AND PROCEDURES
The Company maintains disclosure controls and procedures that are designed to
ensure that information required to be disclosed in the Company's Exchange Act
reports is recorded, processed, summarized and reported within the time periods
specified in the SEC's rules and forms, and that such information is accumulated
and communicated to the Company's management, including its Chief Executive
Officer/Chief Financial Officer, as appropriate, to allow timely decisions
regarding required disclosure based closely on the definition of "disclosure
controls and procedures" in Rule 13a-14(c). In designing and evaluating the
disclosure controls and procedures, management recognized that any controls and
procedures, no matter how well designed and operated, can provide only
reasonable assurance of achieving the desired control objectives, and management
necessarily was required to apply its judgment in evaluating the cost-benefit
relationship of possible controls and procedures.
At the end of the period covered by this Quarterly Report, the Company carried
out an evaluation, under the supervision and with the participation of the
11
Company's management, including the Company's Chief Executive Officer/Chief
Financial Officer, of the effectiveness of the design and operation of the
Company's disclosure controls and procedures. Based on the foregoing, the
Company's Chief Executive Officer and Chief \Financial Officer concluded that
the Company's disclosure controls and procedures were effective to ensure that
all material information required to be filed in this Quarterly Report has been
made known to them in a timely fashion.
There have been no significant changes in the Company's internal controls or in
other factors that could significantly affect the internal controls subsequent
to the date the Company completed its evaluation.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
On July 16, 2004 counsel to Reality received Notices of Hearing and Amended
Complaints from the State of California, Department of Industrial Relations,
Division of Labor Standards Enforcement, for State Case Number 12-54273 JM, in
which, Mr. Arnaud Guerrand ("Mr. Guerrand") claims that Reality owes (1) unpaid
wages in the amount of $1,240, (2) unpaid reimbursable business expenses of
$950.00, and (3) additional wages accrued as a penalty of up to $155.00 per day
for "an indeterminate number of days not to exceed thirty days." Reality
subsequently failed to reach a settlement and, at hearing on July 16, 2004,
judgment was entered against Reality in an amount that has not yet been
disclosed but is expected to be approximately $6,840.00.
On October 13, 2004, Lyn Rowbotham-Ameche, note holder of the Company, filed a
complaint in the Superior Court of the State of California, Los Angeles County,
alleging that the Company breached its contract under a promissory note. In
March of 2005 the Company completed and met its obligations in connection with a
settlement with Ms. Rowbotham-Ameche.
On January 13, 2005, Brent M. Haines, note holder of the Company, filed a
complaint in the Superior Court of the State of Washington, Kings County,
alleging that the Company breached its contract under a promissory note. The
Company is contesting the claim and is currently engaged in the discovery
portion of the litigation.
Item 2. Changes in Securities.
On September 22, 2004, the Company sold 5,102,041 shares of newly designated
Series A Convertible Preferred Stock to one purchaser in a transaction exempt
from registration under section 4 (2) of the Securities Act. On October 4, 2004,
the Company reverse-split the Company's issued and outstanding common stock,
options, warrants, and any other securities convertible, bringing the total of
outstanding preferred shares from 5,102,041 to 51,020 shares.
On October 1, 2003, the Company entered into agreements with HEM Mutual
Assurance, LLC to secure certain financing for the Company: (i) Agreement and
Plan of Merger, (ii) Convertible Debenture Purchase Agreement, and (iii) 1%
Convertible Debentures in the aggregate amount of Nine Hundred Ninety Four
Thousand Dollars ($994,000). The Company chose to amend the Agreements to
provide for the issuance of an additional 600,000 shares (adjusted as per
October 4, 2004 reverse stock split), thereby increasing the number of shares
from 600,00 to 1,200,000 (adjusted as per October 4, 2004 reverse stock split),
to HEM Mutual Assurance, LLC and to secure additional financing for the Company
(the "Amendments"). Copies of the Amendments are made exhibits to the 10-QSB
filed May 24, 2004. These securities were issued on May 6, 2004, pursuant to the
exemption provided by section 3(a)(9) of the Securities Act of 1933. On December
2, 2004, the Company issued an additional 340,000,000 shares to HEM Mutual
Assurance, LLC to provide for the conversion of the outstanding Convertible
Debentures as provided in the Convertible Debenture Agreement.
Item 3. Defaults Upon Senior Securities.
None
Item 4. Submission of Matters to a Vote of Security Holders.
12
None.
Item 5. Other Information.
The following actions were taken by the Board of Directors of the Company (the
"Board") during the period ended March 31, 2005. Where agreements are
referenced, such agreements are incorporated herein by reference.
On February 18, 2005, the Board ratified a existing consulting agreements with
Terry Byrne, and Bradford Van Siclen, ratified an existing employment agreement
with Steve Careaga, and ratified an existing engagement agreement with The Otto
Law Group, PLLC, for legal services rendered to the company, and authorized
issuance of 12,250,000 shares, 12,250,000, 1,000,000 shares, and 24,500,000
shares, respectively, of common stock the Company of Form S-8 to Terry Byrne,
Bradford Van Siclen, Steve Careaga and David M. Otto of The Otto Law Group,
respectively.
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Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
- ------------------------------------------------------------------------------------------------------
Exhibit Number Title of Document Location of Document
- ------------------------------------------------------------------------------------------------------
3 Articles of Incorporation Incorporated by reference to the 10-SB
Filed on June 15, 1999
- ------------------------------------------------------------------------------------------------------
3.1 Bylaws Incorporated by reference to the 10-SB
Filed on June 15, 1999
- ------------------------------------------------------------------------------------------------------
3.2 Certificate of Amendment to Articles Incorporated by reference to the 10-KSB
of Incorporation Filed on April 15, 2002
- ------------------------------------------------------------------------------------------------------
3.3 Certificate of Amendment to Articles Incorporated by reference to the 8-K
of Incorporation Filed on May 3, 2002
- ------------------------------------------------------------------------------------------------------
3.4 Certificate of Amendment to Articles Incorporated by reference to the 10-QSB
of Incorporation filed on August 25,2003
- ------------------------------------------------------------------------------------------------------
4.5 Amendment No. 10 to Consulting Incorporated by reference to the S8 filed
Services Agreement between February 22, 2005
Bartholomew International Investments
and Reality Wireless Networks, Inc.
- ------------------------------------------------------------------------------------------------------
4.6 Amendment No. 1 to Consulting Incorporated by reference to the S8 filed
Services Agreement between Steve February 22, 2005
Careaga and Reality Wireless
Networks, Inc.
- ------------------------------------------------------------------------------------------------------
4.7 Amendment No. 2 to Consulting Incorporated by reference to the S8 filed
Services Agreement between Bradford February 22, 2005
Van Siclenand Reality Wireless
Networks, Inc.
- ------------------------------------------------------------------------------------------------------
31.1 Certification by Principal Executive Attached
Officer
- ------------------------------------------------------------------------------------------------------
31.2 Certification by Principal Financial Attached
Officer
- ------------------------------------------------------------------------------------------------------
32 Certification Pursuant to 906 Attached
- ------------------------------------------------------------------------------------------------------
14
(b) Reports on Form 8-K.
During the period ended March 31, 2005, the Company filed the following reports
on Form 8-K:
None
- -------------------------- -----------------------------
Date of Event Reported Items Reported
- -------------------------- -----------------------------
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Company
has duly caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
REALITY WIRELESS NETWORKS, INC.
Dated: May 13, 2005 /s/ Steve Careaga
----------------------
By: Steve Careaga
Its: Chief Executive Officer, Principal Financial
Officer/Acting Chief Financial Officer, Director
15