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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 June 30,
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)
4916 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 August 13, 2005, was 385,460,212
issued and 385,185,321 outstanding
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Reality Wireless Networks, Inc.
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements:
Consolidated Balance Sheet at June 30, 2005 (Unaudited)
Consolidated Statements of Operations for the three and nine months
ended June 30, 2005 and 2004 (Unaudited)
Consolidated Statements of Cash Flows for the nine months June 30, 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
June 30,
2005
(unaudited)
--------------
ASSETS
Current assets:
Cash $ --
--------------
Total current assets --
Investment in non-marketable securities 21,375
--------------
TOTAL ASSETS $ 21,375
==============
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable $ 334,298
Accounts payable, related party 359,584
Accrued payroll 190,196
Accrued payroll taxes 260,876
Accrued interest 296,923
Accrued expenses 18,633
Notes payable 1,188,788
--------------
Total current liabilities 2,649,298
--------------
Stockholders' deficit:
Preferred stock, $.001 par value, 100,000,000 shares
authorized: none issued and outstanding --
Series A Preferred stock, $.001 par value, 5,000,000
authorized: no shares issued and outstanding --
Common stock, $.001 par value, 500,000,000 shares
authorized: 161,640,133 shares issued and 161,365,152
outstanding 161,364
Common stock issuable (1 share) --
Additional paid in capital 37,582,138
Deferred expense (17,778,695)
Accumulated deficit (22,592,730)
--------------
Total stockholders' deficit (2,627,923)
--------------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $ 21,375
==============
See accompanying summary of accounting policies and notes to financials
F-1
REALITY WIRELESS NETWORKS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three months ended Nine months ended
------------------ -----------------
June 30, June 30, June 30, June 30,
2005 2004 2005 2004
------------ ------------ ------------ ------------
Revenue $ -- $ 12,296 $ -- $ 56,512
Cost of sales -- 12,296 -- 55,228
------------ ------------ ------------ ------------
Gross margin -- -- -- 1,284
Engineering and development -- 787 -- 2,360
General and administrative 1,064,958 63,350 1,183,957 188,521
Consulting 1,461,721 1,801,369 2,269,775 4,265,460
Legal 4,455,815 587,324 5,184,511 1,161,047
------------ ------------ ------------ ------------
Total operating expenses 6,982,494 2,452,830 8,638,243 5,617,388
------------ ------------ ------------ ------------
Loss from operations (6,982,494) (2,452,830) (8,638,243) (5,616,104)
Other income (expense):
Gain on disposition of assets -- -- -- 3,989
Impairment of non-marketable securities -- -- (10,688) --
Settlement loss -- (23,667) (9,814) (55,452)
Interest income -- 3,085 997 7,035
Interest expense (30,884) (197,983) (109,889) (435,137)
------------ ------------ ------------ ------------
Total other income (expenses) (30,884) (218,565) (129,394) (479,565)
------------ ------------ ------------ ------------
Net loss $ (7,013,378) $ (2,671,395) $ (8,767,637) $ (6,095,669)
============ ============ ============ ============
Basic and diluted net loss per common share $ (0.39) $ (362.75) $ (1.43) $ (1,291.94)
============ ============ ============ ============
Weighted average shares outstanding 17,936,227 7,364 6,135,782 4,718
============ ============ ============ ============
See accompanying summary of accounting policies and notes to financials
F-2
REALITY WIRELESS NETWORKS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine months ended June 30,
--------------------------
2005 2004
------------ ------------
Cash flows from operating activities:
Net loss (8,767,637) (6,095,669)
Adjustments to reconcile net income to net cash
used in operating activities:
Depreciation and amortization -- 2,360
Impairment loss on investment 10,688 --
Settlement loss 9,814 --
Beneficial conversion and debt issue cost amortization 23,266 348,278
Common stock issued for services 8,332,264 5,307,896
Settlement of accounts payable in legal expense (150,000) --
Interest income on subscription receivable 208 --
Loss on debt settlement -- 55,451
Company expense paid by other than Company 32,100 78,266
Common stock subscription receivable uncollectable 797 --
Changes in operating assets and liabilities
Prepaids and other current assets -- (19,390)
Accounts payable 34,621 189,231
Accounts payable, related party 370,711 (87,239)
Accrued interest 76,031 44,323
Accrued payroll and payroll taxes 27,137 44,609
------------ ------------
Net cash used in operating activities -- (131,884)
------------ ------------
Cash flows from investing activities:
Loan disbursement on note receivable -- (320,300)
Disbursement of deposit -- (99,500)
------------ ------------
Net cash used in investing activities -- (419,800)
------------ ------------
Cash flows from financing activities:
Proceeds from convertible debenture, net -- 550,000
Proceeds from notes payable -- --
Contributed capital -- 50,000
Principal payments notes payable and capital leases -- (50,464)
------------ ------------
Net cash provided by financing activities -- 549,536
------------ ------------
Net decrease in cash and cash equivalents -- (2,148)
Cash and cash equivalents at beginning of period -- 2,148
------------ ------------
Cash and cash equivalents at end of period -- --
============ ============
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
F-3
REALITY WIRELESS NETWORKS
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2005
(Unaudited)
Note 1- Basis of Presentation and Summary of Significant Accounting Policies
The accompanying unaudited interim financial statements of Reality Wireless
Networks, Inc. ("Reality", "the Company", "we", "us", "our") 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 June 30, 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 was
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.
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 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 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 promissory note to be paid in twenty four
monthly installments commencing June 2004, to date one payment has been applied.
In July of 2005 the Court entered judgment in favor of note holder in the amount
of $209,251.57 plus interest. The Company is actively working to satisfy the
judgment.
Note 4 - Related Party Transactions
$150,000 and $208,370 was applied during the nine months ended June 30, 2005 and
June 30, 2004, respectively, against outstanding accounts payable balance with a
related party legal services vendor and the amounts were credited to legal
expenses at the date they were applied. 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.
4
There are Company expenses that have been paid for by principal shareholders,
who are also consultants to the Company. The expenses are recorded and expensed
as incurred. Payments reduce accounts payable for vendors paid and are treated
as contributed capital. Consultants who are related party principal shareholders
are issued common stock registered on Forms S-8 (see Note 6).
Note 5 - Debt
Convertible Debentures
As of June 30, 2005, 39,731 shares have been issued for conversion of debentures
totaling $550,000, with 36,524 of these issued during the nine months ended June
30, 2005 for $43,526 of debenture principal. As of June 30, 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"). On March 31, 2005 the Board authorized the cancellation of 544,313
shares previously held in escrow for HEM Mutual Assurance, LLC. These shares
were issued in December 2004 per the Convertible Debenture Purchase Agreement
that obligates the Company to maintain a sufficient amount of common stock of
the Company in escrow to ensure conversion of the debentures for the benefit of
HEM Mutual Assurance, LLC. In anticipation of modifications to the terms for
additional financing to reduce the shares provided for convertible debentures,
both parties agreed to the return of escrowed shares.
Amortization of debt discount and of debt issue costs for the nine months ended
June 30, 2005 were $17,238 and $6,028, respectively. No debt discount or debt
issue costs were expensed in the three months ended June 30, 2005 as the last
outstanding note was converted in January 2005.
Note 6 -Common Stock
On April 15, 2005, 262,500 shares of common stock were issued for consulting
services and legal work. The value of the stock, based on the quoted trading
price of $.72-$.92 on the grant date, was $156,500 in total of which $55,000 was
expensed for legal work and $25,375 was expensed for consulting services. The
remaining $76,125 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.
On April 13, 2005 the Board of Directors of Reality Wireless authorized the
issuance of 150,000 shares of unregistered treasury issue section 144 common
stock for consulting services provided to the Company by director, CEO. The
value of the stock, based on the quoted trading price of $.4 on the grant date,
was $60,000 in total of which $15,000 was expensed for employment services. The
remaining $45,000 is on the balance sheet as a contra-equity deferred expense
and will be expensed over the life of the consulting agreement. Consulting
agreement was filed on April 18, 2005 with Securities and Exchange Commission on
Form 8-K.
On May 18, 2005 the Board of Directors of Reality Wireless authorized a
one-for-four hundred stock split of the Reality Wireless common stock. On May
27, 2005, stockholders of record received one share for every four hundred
shares of common stock held of record on May 27, 2005. The stock split has been
reflected retroactively in the accompanying financial statements, and all
applicable reference as to the number of common shares and per share information
has been restated.
On May 27, 2005 the Board of Directors of Reality Wireless authorized the
issuance of 17,000,000 shares of unregistered section 144 common stock for
consulting services provided to the Company by director, CEO. The value of the
stock, based on the quoted trading price of $.67 on the grant date, was
$11,390,000 in total of which $949,167 was expensed for employment services. The
remaining $10,440,833 is on the balance sheet as a contra-equity deferred
expense and will be expensed over the life of the consulting agreement.
5
On May 27, 2005, 10,000,000 shares of common stock were issued for consulting
services and legal work. The value of the stock, based on the quoted trading
price of $.72-$.88 on the grant date, was $8,000,000 in total of which
$3,600,000 was expensed for legal work and $733,333 was expensed for consulting
services. The remaining $3,666,667 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.
On June 15, 2005, 21,250,000 shares of common stock were issued for consulting
services and legal work. The value of the stock, based on the quoted trading
price of $.04-$.24 on the grant date, was $3,100,000 in total of which $400,000
was expensed for legal work and $225,000 was expensed for consulting and
employment services. The remaining $2,475,000 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.
On June 30, 2005, 112,300,000 shares of common stock were issued for consulting
services and legal work. The value of the stock, based on the quoted trading
price of $.04-$.24 on the grant date, was $677,250 in total of which $210,000
was expensed for legal work and $38,938 was expensed for consulting services.
The remaining $428,312 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 nine months ended June 30, 2005, amortization of deferred fees that
existed at September 30, 2004 was $456,376 with $177,333 remaining deferred at
June 30, 2005 and amortization of deferred fees for stock grants granted in 2005
was $2,901,588 with $17,601,362 remaining deferred at June 30, 2005. Therefore,
the total amortization expense for the nine months ended June 30, 2005 of
existing and current year deferred fees was $3,357,964 with $17,778,695
remaining deferred at June 30, 2005.
From October 1, 2003 through June 30, 2005, 314,713 shares, net of rescission
discussed in Note 5, have been issued to escrow for the remaining convertible
debenture. Of the 314,713 shares, 39,732 have been converted and 274,981 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 - Preferred Stock
On September 22, 2004, the Company sold 51,020 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. These preferred shares
were sold in conjunction with the issuance of a promissory note with Nelana
Holdings, LTD. On May 12, 2005, the Company deemed the promissory note
uncollectible and therefore, cancelled preferred stock and reversed subscription
receivable promissory note (see Note 8.)
Note 8 - 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 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 (see Note 7). The
subscription receivable promissory note was reversed out of the equity section
of the balance sheet. The net effect on income statement was approximately
$1,200 in interest income reversed.
Note 9 - Subsequent Events
On July 21, 2005 the Company and Arabian Recab For Trading Co., ("Arabian")
entered into an agreement to merge Arabian with and into Reality Wireless
Networks. The agreement provides that all of the shares of common stock of
Arabian issued and outstanding at the time of the share exchange, in connection
with the merger, becomes effective under applicable state law and SEC rules and
regulations including, among other sections, Regulation 14C (the "Effective
Time") will be converted into common stock of Registrant such that the current
holder of Arabian common stock will hold 98% of all shares of Registrant's
common stock outstanding immediately after the closing of this merger
transaction. The agreement may be terminated at any time prior to the Effective
Time by written agreement; by Arabian 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 Arabian
representations and warranties or covenants if such breach is not cured within
thirty days of written notice.
6
In the beginning of July 2005, the Company settled with two outstanding note
holders to convert combined outstanding notes payable in the amount of $116,000
into restricted shares of common stock.
On July 21 2005, the Company issued 224,000,000 shares of common stock for
consulting services and legal work. The value of the stock, based on the quoted
trading price of $.0015-$.0035 on the grant date, was $424,000. The services
will be recognized over the services period. These shares are registered
pursuant to the Company's Registration Statement on Form S-8.
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) the ability of the Company to comply with 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.
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 "Genesis
Merger Agreement "). The agreement provided that all of the shares of common
stock of Genesis issued and outstanding at the time the merger becomes effective
under applicable state law, would be converted into common stock of the Company
such that the current holder of Genesis common stock would hold 97% of all
shares of the Company's common stock outstanding immediately after the closing
of the merger transaction.
7
Based on the Company's and Genesis' subsequent due diligence assessments and on
the Company's opportunity to pursue a merger agreement with Arabian Recab For
Trading Co. (as detailed in the paragraph immediately below), Reality and
Genesis have restructured the Genesis Merger Agreement such that the Company
shall transfer the opportunity to merge with Genesis Electronics, Inc., to Gaq,
a wholly-owned subsidiary of the Company, in contemplation of a future merger of
GAq with and into Genesis (the "Revised Merger") followed by a distribution of
three percent (3%) of the common stock of Genesis Electronics, Inc., to the
shareholders of the Company existing at the time immediately prior to the merger
between Reality Acquisition, Inc. and Arabian Recab for Trading Co., on a pro
rata basis, which distribution shall be conditioned upon Genesis filing a
registration statement including such shares and upon the SEC declaring such
registration statement effective (the "Distribution"). Concurrent with the
filing of the registration statement, Genesis will file a Form 15c2-11 to post a
quotation and obtain a trading symbol for the shares of Genesis on the Over-The
Counter Bulletin Board. As with the Genesis Merger Agreement, the obligation of
Genesis to close is conditioned on, among other things, the satisfactory
completion of due diligence review. The Revised Merger may also be terminated at
any time prior to the Distribution 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.
On July 21, 2005 the Company and Arabian Recab For Trading Co., ("Recab
International"), entered into an agreement to merge a wholly owned subsidiary of
the Company with into Recab International and to rename the Company "Recab
International Inc," (the "reverse merger"). The agreement provides that all of
the shares of common stock of Recab International issued and outstanding at the
time of the share exchange, in connection with the merger, becomes effective
under applicable state law and SEC rules and regulations including, among other
sections, Regulation 14C (the "Effective Time"), will be converted into common
stock of the Company such that the current holders of Arabian Recab common stock
will hold 98% of all shares of the Company 's common stock outstanding
immediately after the share exchange. The agreement may be terminated at any
time prior to the Effective Time by written agreement; by Arabian Recab 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 Arabian Recab representations and warranties or covenants if
the breach is not cured within thirty days of written notice; by either party
upon completion of due diligence.
RESULTS OF OPERATIONS
Retail sales for the three months ended June 30, 2005 and 2004 were $0 and
$12,296, respectively. Retail sales for the nine months ended June 30, 2005 and
2004 were $0 and $56,512, respectively. Effective August 31, 2004, the Company
no longer provides wireless broadband services to customers, and therefore, no
revenue has been collected since this date.
The Company's cost of sales for the three months ended June 30, 2005 and 2004
were $0 and $12,296, respectively. Cost of sales for the nine months ended June
30, 2005 and 2004 were $0 and $55,228, 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 June 30, 2005 and 2004 was $0 for both
periods. Gross margin for the nine months ended June 30, 2005 and 2004 was $0
and $1,284, respectively Until the articles of merger with Recab International
are filed, 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 June 30, 2005 and
2004 were $0 and $787, respectively. Engineering and development costs for the
nine months ended June 30, 2005 and 2004 were $0 and $2,360, 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.
8
Operating expenses for the three months ended June 30, 2005 and 2004 were
$6,982,494 and $2,542,830, respectively. 160,962,500 shares valued at
$23,383,750, fair market value on grant dates of $.0042 - $.92/share, were
issued in the three months ended June 30, 2005 of which, as of June 30, 2005,
$6,251,813 has been expensed. Operating expenses for the nine months ended June
30, 2005 and 2004 were $8,638,243 and $5,617,388, respectively. 161,313,750
shares valued at $25,477,250, fair market value on grant dates of
$.0042-$32/share, were issued in the nine months ended June 30, 2005 of which as
of June 30, 2005, $7,875,888 has been expensed. The total amount expensed on
deferred contracts and stock issued for legal services in the first three
quarters of 2005 was $8,332,264 on remaining balance of $26,110,959, leaving
$17,778,695 to be expensed over life of contracts and is recorded on balance
sheet as a contra-equity. Legal expenses was reduced by $150,000 and $160,000 in
the nine months ended June 30, 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.
Interest expense for the three months ended June 30, 2005 and 2004 was $30,884
and $197,983, respectively. Interest expense for the nine months ended June 30,
2005 and 2004 was $109,889 and $435,137, respectively. The first three quarters
of 2005 expense included $16,619 accrual for interest on outstanding payroll
taxes and $17,238 amortization of debt discount expense. The remaining $76,032
was accrual of interest on outstanding notes payable. The first three quarters
of 2004 expense included $14,391 accrual for interest on outstanding payroll
taxes and $348,278 beneficial conversion expense related to conversion of
$550,000 in cumulative debenture conversions. The remaining $72,468 was accrual
of interest on outstanding notes payable.
Settlement loss for the three and nine months ended June 30, 2005 was $0 and
$9,814, respectively. The settlement loss was recorded in conjunction with
reducing notes payable liability.
Interest income for the three months ended June 30, 2005 and 2004 was $0 and
$3,085, respectively and represented accrued interest on subscription receivable
and in 2004 I-Element note receivable. Interest income for the nine months ended
June 30, 2005 and 2004 was $997 and $7,035 and represented accrued interest on
subscription receivable and I-Element note receivable, respectively.
Net loss for the three months ended June 30, 2005 and 2004 was $7,013,378 and
$2,671,395, respectively. Net loss for the nine months ended June 30, 2005 and
2004 was $8,767,637 and $6,095,669, respectively.
Liquidity and Capital Resources
At June 30, 2005, the Company had negative working capital of $2.6 million. $1.5
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 $419,800 for the nine months
ended June 30, 2005 and 2004, respectively. The $419,800 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 $549,536 for the nine
months ended June 30, 2005 and 2004, respectively. The $549,536 represents a
note receivable and deposit from IElement, a privately held corporation, in
conjunction with potential merger that was subsequently in August 2004 converted
into 178,864 shares 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
9
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
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 ability of the Company to continue 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.
10
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
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 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. In July
of 2005 the Court entered judgment in favor of Mr. Haines in the amount of
$209,251.57 plus interest. The Company is actively working to satisfy the
judgment.
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. Due failure of the
purchaser to tender payment in full pursuant to the promissory note given in
consideration for the preferred shares, the Company demanded and received return
of such preferred shares and, on May 10, 2005, the Company cancelled these
preferred shares.
Item 3. Defaults Upon Senior Securities.
None
Item 4. Submission of Matters to a Vote of Security Holders.
In April of 2005, the Company provided an Information Statement to its
stockholders indicating consents had been obtained in sufficient number to
authorize the board of directors to effect a 1 for 400 reverse stock split of
the common stock. The Company is currently authorized to issue 500,000,000
shares of its common stock of which approximately 434,774,707 shares were issued
and outstanding as of May 18, 2005. Shareholders holding in excess of 50% of
voting capital stock consented in writing to the proposal. The reverse split,
effective May 20, 2005, on a 1 for 400 basis reduced the number of issued and
outstanding shares to approximately 1,086,927 shares, but did not reduce the
number of authorized shares of common stock. The reverse split did not have any
effect on the stated par value of the common stock.
11
Item 5. Other Information.
The following actions were taken by the Board of Directors of the Company (the
"Board") during the period ended June 30, 2005. Where agreements are referenced,
such agreements are incorporated herein by reference.
On April 11, 2005, the Board ratified a existing consulting agreements with
Terry Byrne, Kevin Evans, and Bradford Van Siclen, and ratified an existing
engagement agreement with The Otto Law Group, PLLC, for legal services rendered
to the company, and authorized the issuance of 25,000,000 shares, 5,000,000
shares, 25,000 shares and 50,500,000 shares, respectively, of common stock of
the Company on Form S-8 to Terry Byrne, Kevin Evans, Bradford Van Siclen, and
David M. Otto of The Otto Law Group, respectively.
On May 27, 2005 the Board ratified a existing consulting agreements with Terry
Byrne, Bradford Van Siclen and Seth Elliot and ratified an existing engagement
agreement with The Otto Law Group, PLLC, for legal services rendered to the
company, and authorized the issuance of 1,666,667 shares, 1,666,666 shares,
1,666,667 shares and 5,000,000 shares, respectively, of common stock of the
Company on Form S-8 to Terry Byrne, Bradford Van Siclen, Seth Elliot, and David
M. Otto of The Otto Law Group, respectively.
On June 8, 2005 the Board ratified a existing consulting agreements with Terry
Byrne, Bradford Van Siclen, Seth Elliot and Kevin Evans, 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 the issuance of 3,333,334 shares, 3,333,333 shares,
3,333,333 shares, 1,000,000 shares, 250,000 shares and 10,000,000 shares,
respectively, of common stock of the Company on Form S-8 to Terry Byrne,
Bradford Van Siclen, Seth Elliot, and David M. Otto of The Otto Law Group,
respectively.
On June 28, 2005 the Board ratified a existing consulting agreements with Terry
Byrne, Bradford Van Siclen, Seth Elliot, Arthur Feldman, Keith McNally, Joe
Artusa, Don Gross and Timothy Fostick, and ratified an existing engagement
agreement with The Otto Law Group, PLLC, for legal services rendered to the
company, and authorized the issuance of 16,666,667 shares, 16,666,667 shares,
16,666,666 shares, 2,300,000 shares, 2,300,000 shares, 2,300,00 shares,
2,300,000 shares, 3,100,000 shares and 50,000,000 shares, respectively, of
common stock of the Company on Form S-8 to Terry Byrne, Bradford Van Siclen,
Seth Elliot, Arthur Feldman, Keith McNally, Joe Artusa, Don Gross, Timothy
Fostick, Anthony John Doyle, and David M. Otto of The Otto Law Group,
respectively.
On July 14, 2005 the Board ratified a existing consulting agreements with Terry
Byrne, Bradford Van Siclen, Seth Elliot, Kevin Evans, Arthur Feldman, Keith
McNally, Joe Artusa, Timothy Fostick and Anthony John Doyle, and ratified an
existing engagement agreement with The Otto Law Group, PLLC, for legal services
rendered to the company, and authorized the issuance of 30,000,000 shares,
30,000,000 shares, 30,000,000 shares, 4,000,000 shares, 2,300,000 shares,
2,300,00 shares, 2,300,000 shares, 2,300,000 shares, 3,100,000 shares and
50,000,000 shares, respectively, of common stock of the Company on Form S-8 to
Terry Byrne, Bradford Van Siclen, Seth Elliot, Kevin Evans, Arthur Feldman,
Keith McNally, Joe Artusa, Timothy Fostick, Anthony John Doyle, and David M.
Otto of The Otto Law Group, respectively.
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
- ------------------------------------------ --------------------------------------- -------------------------------------------
12
- ------------------------------------------ --------------------------------------- -------------------------------------------
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. 11 to Consulting Incorporated by reference to the S8 filed
Services Agreement between April 14, 2005
Bartholomew International Investments
and Reality Wireless Networks, Inc.
- ------------------------------------------ --------------------------------------- -------------------------------------------
4.6 Amendment No. 5 to Consulting Incorporated by reference to the S8 filed
Services Agreement between Kevin April 14, 2005
Evans and Reality Wireless Networks,
Inc.
- ------------------------------------------ --------------------------------------- -------------------------------------------
4.7 Amendment No. 3 to Consulting Incorporated by reference to the S8 filed
Services Agreement between Bradford April 14, 2005
Van Siclen and Reality Wireless
Networks, Inc.
- ------------------------------------------ --------------------------------------- -------------------------------------------
4.8 Amendment No. 12 to Consulting Incorporated by reference to the S8 filed
Services Agreement between May 27, 2005
Bartholomew International Investments
and Reality Wireless Networks, Inc.
- ------------------------------------------ --------------------------------------- -------------------------------------------
4.9 Amendment No. 4 to Consulting Incorporated by reference to the S8 filed
Services Agreement between Bradford May 27, 2005
Van Siclen and Reality Wireless
Networks, Inc.
- ------------------------------------------ --------------------------------------- -------------------------------------------
4.10 Consulting Services Agreement between Incorporated by reference to the S8 filed
Seth Elliot and Reality Wireless May 27, 2005
Networks, Inc.
- ------------------------------------------ --------------------------------------- -------------------------------------------
4.11 Amendment No. 13 to Consulting Incorporated by reference to the S8 filed
Services Agreement between June 15, 2005
Bartholomew International Investments
and Reality Wireless Networks, Inc.
- ------------------------------------------ --------------------------------------- -------------------------------------------
4.12 Amendment No. 5 to Consulting Incorporated by reference to the S8 filed
Services Agreement between Bradford June 15, 2005
Van Siclen and Reality Wireless
Networks, Inc.
- ------------------------------------------ --------------------------------------- -------------------------------------------
4.13 Amendment No. 1 to Consulting Incorporated by reference to the S8 filed
Services Agreement between Seth June 15, 2005
Elliot and Reality Wireless Networks,
Inc.
- ------------------------------------------ --------------------------------------- -------------------------------------------
4.14 Amendment No. 2 to Consulting Incorporated by reference to the S8 filed
Services Agreement between Steve June 15, 2005
Careaga and Reality Wireless
Networks, Inc.
- ------------------------------------------ --------------------------------------- -------------------------------------------
4.15 Amendment No. 6 to Consulting Incorporated by reference to the S8 filed
Services Agreement Kevin Evans and June 15, 2005
Reality Wireless Networks, Inc.
- ------------------------------------------ --------------------------------------- -------------------------------------------
4.16 Amendment No. 14 to Consulting Incorporated by reference to the S8 filed
Services Agreement between 30, 2005
Bartholomew International Investments
and Reality Wireless Networks, Inc.
- ------------------------------------------ --------------------------------------- -------------------------------------------
13
- ------------------------------------------ --------------------------------------- -------------------------------------------
4.17 Amendment No. 6 to Consulting Incorporated by reference to the S8 filed
Services Agreement between Bradford June 30, 2005
Van Siclen and Reality Wireless
Networks, Inc.
- ------------------------------------------ --------------------------------------- -------------------------------------------
4.18 Amendment No. 2 to Consulting Incorporated by reference to the S8 filed
Services Agreement between Seth June 30, 2005
Elliot and Reality Wireless Networks,
Inc.
- ------------------------------------------ --------------------------------------- -------------------------------------------
4.19 Consulting Services Agreement between Incorporated by reference to the S8 filed
Arthur Feldman and Reality Wireless June 30, 2005
Networks, Inc.
- ------------------------------------------ --------------------------------------- -------------------------------------------
4.20 Consulting Services Agreement between Incorporated by reference to the S8 filed
Keith McNally and Reality Wireless June 30, 2005
Networks, Inc.
- ------------------------------------------ --------------------------------------- -------------------------------------------
4.21 Consulting Services Agreement between Incorporated by reference to the S8 filed
Joe Artusa and Reality Wireless June 30, 2005
Networks, Inc.
- ------------------------------------------ --------------------------------------- -------------------------------------------
4.22 Consulting Services Agreement between Incorporated by reference to the S8 filed
Timothy Fostick and Reality Wireless June 30, 2005
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 June 30, 2005, the Company filed the following reports
on Form 8-K:
- ---------------------------------------- ---------------------------------------
Date of Event Reported Items Reported
- ---------------------- --------------
- ---------------------------------------- ---------------------------------------
April 13, 2005 Items 3.02, 3.03 and 9.01
- ---------------------------------------- ---------------------------------------
April 21, 2005 Items 8.01 and 9.01
- ---------------------------------------- ---------------------------------------
- ---------------------------------------- ---------------------------------------
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: August 29, 2005 /s/ Steve Careaga
-----------------------
By: Steve Careaga
Its: Chief Executive Officer, Principal
Financial Officer/Acting Chief Financial
Officer, Director
15