UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington D. C. 20549
FORM 10-QSB
(X) Quarterly report pursuant to Section 13 or 15(d) of the Securities and
Exchange Act of 1934.
For the quarterly period ended July 31, 2004.
( ) Transition report pursuant to Section 13 or 15(d) of the Exchange Act for
the transition period from ___________ to ____________ .
Commission File Number:0-32033SKYWAY COMMUNICATIONS HOLDING CORP.
(Exact name of registrant as specified in charter)
Florida65-0881662
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
6021 - 142nd Avenue North, Clearwater, FL33760
(Address of principal executive offices)
727.535.8211
(Registrant's Telephone Number, Including Area Code)
Check 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 filing requirements for the past
90 days.
YES (X) NO ( )
State the number of shares outstanding of each of the issuer's classes of common
equity, as of August 31, 2004: 149,933,270.
149,933,270
Transitional Small Business Disclosure Format:
YES ( ) NO (X)
1
SKYWAY COMMUNICATIONS HOLDING CORP.
INDEX TO FORM 10-QSB
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements (unaudited)Consolidated Balance Sheet as of July 31, 2004...................... 3
Consolidated Statements of Operations for the three months
ended July 31, 2004 and 2003 and for the period April 24, 2002
(date of inception) through July 31, 2004........................... 5
Consolidated Statements of Cash Flows for the three months ended
July 31, 2004 and 2003 and for the period April 24, 2002 (date
of inception) through July 31, 2004................................. 6
Notes to Consolidated Financial Statements.......................... 8
Management's Discussion and Analysis of Financial Condition and
Item 2. Results of Operations (including cautionary statement).............. 15
Item 3. Controls and Procedures............................................. 19
PART II. OTHER INFORMATION
Item 1. Legal Proceedings................................................... 20
Item 2. Changes in Securities............................................... 20
Item 3. Defaults Upon Senior Securities..................................... 21
Item 4. Submission of Matters to a Vote of Securities Holders............... 21
Item 5. Other Information .................................................. 21
Item 6. Exhibits and Reports on Form 8-K.................................... 21
Signatures 21
2
PART I
SKYWAY COMMUNICATIONS HOLDING CORP. AND SUBSIDIARY(A Development Stage Company)CONSOLIDATED BALANCE SHEET AS OF JULY 31, 2004
(UNAUDITED)
________________________________________________________________________________
ASSETS
Cash $ 142,018
Accounts receivable, net 274,780
Employee advance 36,277
Prepaid expense 316,999
Receivable due from related party 10,833
Other receivable 5,530
Notes receivable 325,000
Total Current Assets 1,111,437
PROPERTY AND EQUIPMENT, net 1,198,267
OTHER ASSETS:
Property and equipment in progress 4,296,660
Deposits and other 504,642
Total Other Assets 4,801,302 TOTAL $ 7,111,006
=============
Continued
3
SKYWAY COMMUNICATIONS HOLDING CORP. AND SUBSIDIARY(A Development Stage Company)
CONSOLIDATED BALANCE SHEET AS OF JULY 31, 2004 (Continued)
(UNAUDITED)
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 2,501,042
Accrued payroll 85,643
Accrued interest 1,386
Due to SkyWay Global 258,869
Due to related party 1,444,284
Sales tax payable 114,243
Notes payable 1,503,600
Deferred rent 162,288
Other accrued expenses payable in stock 120,000
Total Current Liabilities 6,191,355 STOCKHOLDERS' EQUITY:
Preferred stock, $.0001 par value, 10,000,000 shares
authorized:
Series A convertible preferred stock,
1,000,000 shares issued and outstanding 100
Series B convertible preferred stock,
1,000,000 shares issued and outstanding 100
Series C convertible preferred stock,
2,412,000 shares issued and outstanding 241
Series D convertible preferred stock,
85,000 shares issued and outstanding 9
Common stock, $.0001 par value, 2,500,000,000 shares
authorized, 145,528,926 shares issued and outstanding 14,553
Subscription Receivable (260,000)
Warrant Receivable (235,873)
Deferred Stock Compensation (564,777)
Capital in excess of par value 31,336,324
Deficit accumulated during the development stage (29,371,026)
Total Stockholders' Equity 919,651 TOTAL $ 7,111,006
============
________________________________________________________________________________
See notes to consolidated financial statements.
4
SKYWAY COMMUNICATIONS HOLDING CORP. AND SUBSIDIARY(A Development Stage Company)
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
________________________________________________________________________________________
For the period
April 24, 2002
For the three For the three (date of
months ended months ended incorporation) to
July 31, 2004July 31, 2003July 31, 2004REVENUES
Products $ 264,140 $ - $ 264,140
Services 23,470 - 74,475
Total Revenues 287,610 - 338,615
COST OF GOODS SOLD (203,052) - (203,052)
GROSS PROFIT 84,558 - 135,563
EXPENSES:
Selling 919,745 47,602 1,246,938
Selling - stock based compensation 120,000 - 5,153,992
General and administrative 1,608,815 344,167 8,290,466
General and administrative - stock
based compensation 1,627,165 2,961,285 9,507,806
Impairment of technology rights - - 1,023,800
Impairment of property and equipment - - 235,750
Research and development 2,059,875 209,335 4,027,493
Total expenses 6,335,600 3,562,389 29,486,245
OPERATING LOSS (6,251,042) (3,562,389) (29,350,682)
OTHER INCOME (EXPENSE):
Rental Income - Related Party - - 26,927
Interest Expense (19,971) (537) (47,271)
Total Other Income (Expense) (19,971) (537) (20,344)
LOSS BEFORE INCOME TAXES (6,271,013) (3,562,926) (29,371,026)
INCOME TAX EXPENSE (BENEFIT) - - - NET LOSS $ (6,271,013) $ (3,562,926) $ (29,371,026)
============= ============= ==============
NET LOSS PER SHARE - Basic and diluted $ (.04) $ (.12)
============= =============
Weighted average number of shares
outstanding 139,574,900 29,835,852
============= =============
________________________________________________________________________________________
See notes to consolidated financial statements.
5
SKYWAY COMMUNICATIONS HOLDING CORP. AND SUBSIDIARY(A Development Stage Company)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
__________________________________________________________________________________________________
For the period
April 24, 2002
For the three For the three (date of
months ended months ended incorporation)
July 31, 2004July 31, 2003to July 31, 2004CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (6,271,013) $ (3,562,926) $ (29,371,026)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation 69,777 20,263 195,279
Impairment of technology rights - - 1,023,800
Impairment of property and equipment - - 235,750
Purchased research and development 1,338,500 - 1,338,500
Loss on sale of property and equipment 12,718 - 36,320
Provision for bad debts 959 - 1,459
Non-cash services rendered for stock and
warrants 1,747,165 2,961,285 14,661,798
Non-cash other - - 296,303
Changes in assets and liabilities:
(Increase)/Decrease in:
Accounts receivable (266,760) - (276,239)
Employee advances, net (8,752) - (36,326)
Prepaid expenses (204,472) 7,125 (316,999)
Receivable due from related party, net - - (10,833)
Other receivable 6,375 - (5,531)
Deposits and other (108,783) - (504,643)
Increase/(Decrease) in:
Accounts payable 1,662,508 253,164 2,370,500
Accrued payroll (33,734) 71,907 85,644
Accrued interest (12,893) 537 1,386
Sales tax payable (2,584) - 114,243
Deferred rent (11,592) - 162,288
Other accrued expenses - - 991,984 NET CASH USED IN OPERATING ACTIVITIES (2,082,581) (248,645) (9,006,343)CASH FLOWS FROM INVESTING ACTIVITIES:
Payment for technology rights - - (1,000,000)
Payments for property and equipment in
progress (520,409) - (2,796,658)
Proceeds from sale of property and equipment 68,706 - 104,706
Payments for property and equipment (442,926) (72,149) (1,770,325)
Notes receivable (315,904) - (315,904)NET CASH USED IN INVESTING ACTIVITIES (1,210,533) (72,149) (5,778,181)CASH FLOWS FROM FINANCING ACTIVITIES:
Advances from related party converted to
preferred stock - 247,069 1,564,015
Advances from related parties, net 1,439,205 (23,382) 1,703,152
Proceeds from issuance of common stock 175,000 400,000 10,641,870
Proceeds from exercise of stock warrants 147,500 - 1,338,808
Payments on notes payable (25,000) (250,000) (275,000)
Payments of stock offering costs - - (46,303)NET CASH PROVIDED BY FINANCING ACTIVITIES 1,736,705 373,687 14,926,542 NET (DECREASE) INCREASE IN CASH (1,556,409) 52,893 142,018
CASH AT BEGINNING OF PERIOD 1,698,427 741 - CASH AT END OF PERIOD $ 142,018 $ 53,634 $ 142,018
============= ============= ==============
See notes to consolidated financial statements. Continued
6
SKYWAY COMMUNICATIONS HOLDING CORP. AND SUBSIDIARY(A Development Stage Company)
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(UNAUDITED)
For the period
April 24, 2002
For the three For the three (date of
months ended months ended incorporation)
July 31, 2004July 31, 2003to July 31, 2004SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION - Interest paid $ 30,672 $ - $ 43,783
============= ============= ==============
__________________________________________________________________________________________________
Supplemental Schedule of Non-cash Investing and Financing Activities:
For the period from inception on April 24, 2002 through July 31, 2004:
During May and June 2004, warrants were exercised for 425,540 shares of common
stock resulting in an increase in warrant receivable to $235,873 from $1,826 for
an increase of $234,047.
During May 2004 $991,084 of accrued expenses were converted into 3,626,667
shares of common stock.
On January 16, 2004, the Company signed a six (6) month promissory note in the
amount of $1,500,000 with United Bank and Trust for a used Boeing DC-9, which is
currently classified as "property and equipment in progress" in the accompanying
balance sheet. The note was renewed for an additional six (6) months and is due
January 16, 2005.
In June 2003, Parent acquired Subsidiary pursuant to an Amended and Restated
Agreement and Plan of Merger which has been accounted for as a recapitalization
of Subsidiary in a manner similar to a reverse purchase [See Note 1].
Immediately prior to the recapitalization of Subsidiary, Parent had no assets
and $161,295 of liabilities ($132,695 in accounts payable and $28,600 in notes
payable) and 46,819,507 shares of common stock outstanding. An additional
2,680,493 shares of common stock were issued as finder's fees in the
transaction.
In June 2003, the Company issued 1,000,000 shares of preferred stock for payment
of $1,564,015 in debt.
In March 2003, the Company issued 1,360 shares of common stock for an amended
license agreement valued at $23,800.
In January 2003, the Company recorded an installment payable of $250,000 for the
remaining purchase price under an Asset Purchase Agreement. The Company also
expensed $250,000 of the purchase price which was for ground-site lease contact
information and a temporary restriction on the transfer of certain patent
rights. Subsequently, all fees have been written off as an impairment to
property and equipment.
________________________________________________________________________________
See notes to consolidated financial statements.
7
SKYWAY COMMUNICATIONS HOLDING CORP. AND SUBSIDIARY(Development Stage Company)NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
________________________________________________________________________________
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization
SkyWay Communications Holding Corp. ("Parent"), formerly known as i-TeleCo.com
Inc. and Mastertel Communications Corp., was organized under the laws of the
State of Florida on December 16, 1998. In April 2003, Parent changed its name to
SkyWay Communications Holding Corp.
On May 30, 2003, Parent and Sky Way Aircraft Inc. ("Subsidiary") entered into an
Agreement and Plan of Merger. On June 19, 2003, Parent and Subsidiary entered
into an Amended and Restated Agreement and Plan of Merger (which closed on June21, 2003) whereby Parent agreed to acquire 100% of Subsidiary in a stock for
stock exchange. The agreement called for Parent to issue 1,000,000 shares of
Series B convertible preferred stock to the former shareholders of Subsidiary
for 100% of the outstanding shares of Subsidiary's common stock and for Parent
to issue 1,000,000 shares of Series A convertible preferred stock to the holder
of $1,564,015 in debt of the Subsidiary. Voting control of the Company passed to
the former shareholders of Subsidiary. The Company has accounted for the
acquisition as a recapitalization of Subsidiary in a manner similar to a reverse
purchase. Accordingly, the equity transactions have been restated to reflect the
recapitalization of Subsidiary and the operations of Parent prior to the date of
acquisition have been eliminated. At the date of acquisition the Parent had no
assets and $161,295 in liabilities. The financial statements reflect the
operations of Subsidiary from its inception. Prior to the recapitalization of
Subsidiary, Parent had 46,819,507 shares of common stock previously outstanding.
An additional 2,680,493 shares of common stock were issued as finder's fees in
the transaction.
All references to the number of shares and par value in the accompanying
consolidated financial statements have been adjusted for all periods presented
to reflect the recapitalization of Subsidiary and to reflect a 1.8516-for-1
forward stock split that Subsidiary affected on March 11, 2003.
SkyWay Communications Holding Corp. and Subsidiary ("the Company") plan to
provide security and other services for the airline industry through
applications of their high-speed, broadband wireless communications technology.
The Company has not yet generated any significant revenues from their planned
principal operations and is considered a development stage company as defined in
Statement of Financial Accounting Standards No.7. The Company has, at the
present time, not paid any dividends and any dividends that may be paid in the
future will depend upon the financial requirements of the Company and other
relevant factors.
Basis of Presentation
Our accompanying unaudited consolidated financial statements have been prepared
in accordance with accounting principles generally accepted in the United States
of America for interim financial information and the instructions to Form 10-QSB
and Rule 10-1 of Regulation S-X of the Securities and Exchange Commission (the
"SEC"). Accordingly, these consolidated financial statements do not include all
of the footnotes required by accounting principles generally accepted in the
United States of America. In the opinion of management, all adjustments
8
(consisting of normal recurring adjustments) considered necessary for a fair
presentation have been included.
Operating results for the three months ended July 31, 2004 are not necessarily
indicative of the results that may be expected for the year ended April 30,2005. The accompanying consolidated financial statements and the notes thereto
should be read in conjunction with our audited consolidated financial statements
as of and for the year ended April 30, 2004 contained in our Form 10-KSB.
Reclassification
The financial statements for periods prior to July 31, 2004 have been
reclassified to conform to the headings and classifications used in the July 31,2004 financial statements.
Consolidation
The consolidated financial statements include the accounts of Parent and
Parent's wholly owned Subsidiary. All significant intercompany transactions have
been eliminated in consolidation.
Use of Estimates
The preparation of consolidated financial statements in accordance with
accounting principles generally accepted in the United States of America
requires us to make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosures of contingent assets and liabilities
at the date of the consolidated financial statements. The reported amounts of
revenues and expenses during the reporting period may be affected by the
estimates and assumptions we are required to make. Actual results could differ
significantly from our estimates.
Revenue Recognition
In general, the Company records revenue when persuasive evidence of an
arrangement exists, services have been rendered or product delivery has
occurred, the sales price to the customer is fixed or determinable, and
collectability is reasonably assured. The following policies reflect specific
criteria for the various revenue streams of the Company.
The Company's primary sources of operating revenue at this time is earned from
the sale to airlines of equipment (SkyWay Media Servers and spares) which
distributes entertainment content consisting of on demand movies/video and
audio, infomercials and sponsor supported advertising and commercials, and
wireless connection services. Revenue is recorded at the completion of the
services for wireless connection services, and at the time the equipment is
shipped for sales of media servers to an airline customer. For contracts which
exceed one month, revenue is recognized on a straight-line basis over the term
of the contract as services are provided. Revenues applicable to future periods
are classified as deferred revenue until earned.
Stock-Based CompensationThe Company has adopted Statement of Financial Accounting Standards No. 148
"Accounting for Stock-Based Compensation - Transition and Disclosure". This
statement amends FASB statement No. 123, "Accounting for Stock Based
Compensation". It provides alternative methods of transition for an entity that
voluntarily changes to the fair value based method of accounting for employee
stock based compensation. It also amends the disclosure provision of FASB
statement No. 123 to require prominent disclosure about the effects on reported
9
net income of an entity's accounting policy decisions with respect to
stock-based employee compensation. As permitted by SFAS No. 123 and amended by
SFAS No. 148, we continue to apply the intrinsic value method under Accounting
Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to
Employees," to account for our stock-based employee compensation arrangements.
Had our compensation expense for stock-based compensation plans been determined
based upon fair values at the grant dates for awards under this plan in
accordance with SFAS No. 123, "Accounting for Stock-Based Compensation," our net
loss and pro forma net loss per share amounts would not have been materially
different.
Net Loss per ShareThe Company has adopted SFAS No. 128 "Earnings per Share". Basic loss per share
is computed by dividing the loss available to common shareholders by the
weighted-average number of common shares outstanding. Diluted loss per share is
computed in a manner similar to the basic loss per share, except that the
weighted-average number of shares outstanding is increased to include all common
shares, including those with the potential to be issued by virtue of warrants,
options, convertible debt and other such convertible instruments. Diluted
earnings per share contemplate a complete conversion to common shares of all
convertible instruments only if they are dilutive in nature with regards to
earnings per share. Since the Company has incurred net losses for all periods,
basic loss per share and diluted loss per share are the same.
NOTE 2 - GOING CONCERN
Our consolidated financial statements were prepared using accounting principles
generally accepted in the United States of America applicable to a going
concern, which contemplates the realization of assets and liquidation of
liabilities in the normal course of business. We have incurred significant
losses since our inception, have negative working capital and have experienced
and continue to experience negative cash flows from operations. In addition, we
expect to have ongoing requirements for additional capital investment to
implement our business plan. These factors raise substantial doubt about the
ability of the Company to continue as a going concern. In this regard,
management is proposing to raise any necessary additional funds not provided by
operations through loans, through additional sales of the Company's common
stock, or other financing activities. There is no assurance that the Company
will be successful in raising this additional capital or in achieving profitable
operations. The financial statements do not include any adjustments that might
result from the outcome of these uncertainties.
NOTE 3 - ACQUISITION OF ASSETS
On May 21, 2004the Company purchased from WEMS selected intellectual assets and
rights to service contracts with one airline for use in an in-flight
entertainment system. The cost of this transaction was 1,150,000 shares of the
Company's common stock valued at $1,000,500 (based on the market price of shares
at the date of acquisition), $100,000 and 550,000 warrants, at prices of $.59 -
$.79 per share. The warrants are exercisable within one (1) year of closing
date, which can be extended for another year if a certain quantity of warrants
are exercised. The total cost of the transaction was $1,438,500 and has been
expensed in the first quarter as "purchased research and development."
10
NOTE 4 - EQUITY
Common StockThe Company has authorized 2,500,000,000 shares of common stock with a par value
of $.0001.
During the periods covered by these financial statements the Company issued
shares of common stock without registration under the Securities Act of 1933.
Although the Company believes that the sales did not involve a public offering
of its securities and that the Company did comply with the "safe harbor"
exemptions from registration, it could be liable for rescission of the sales if
such exemptions were found not to apply and this could have a material negative
impact on the Company's financial position and results of operations.
In the first quarter of fiscal year end 2005, the Company issued 693,722 shares
of common stock for $381,547 due to the exercising of warrants. The Company
received cash proceeds of $147,500 from the warrant exercises and recorded
$234,047 as warrants receivable. In addition the Company issued 650,000 shares
of common stock for $175,000 in cash.
In May 2004 the Company issued 1,150,000 shares of common stock for the purcahse
of intellectual assets and rights to service contracts with one airline for use
in an in-flight entertainment system. The shares of common stock were valued at
$1,000,500. In addition, the Company issued 550,000 warrants, at prices of $.59
- $.79 per share valued at $338,000. The warrants are exercisable within one (1)
year of closing date, which can be extended for another year if a certain
quantity of warrants are exercised (see Note 3).
In June 2004, the Company issued 3,626,667 shares of common stock as payment of
$991,984 of accrued expenses.
In July 2004, the Company issued 4,000,000 shares of common stock due to a
related party's conversion of 400,000 shares of Preferred "C" stock.
Stock Options
In July 2004 the Company entered into a consulting agreement with a newly
appointed board member with a minimum 1 year term starting July 1, 2004. Either
party can terminate the agreement with 30 days notification. The consultant
shall receive a monthly retainer for services performed in the amount of $8,334,
provided he dedicates an average of 12 to 15 hours per week supporting the
Company. In addition to the monthly retainer, he was awarded a total of 100,000
stock options at $.68 per share which will vest as of July 1, 2005. The options
will expire July 1, 2009.
Estimated Fully Diluted Equity Information
As of July 31, 2004, the company has the following number of potentially
convertible shares of common stock related to convertible preferred stock,
warrants, and stock options:
For conversion of series A preferred stock 100,000,000
For conversion of series B preferred stock 200,000,000
For conversion of series C preferred stock 24,120,000
For conversion of series D preferred stock 8,500,000
Outstanding Warrants 20,867,906
Outstanding Options 728,333
Common shares issuable upon conversions and exercises 354,216,239
Shares outstanding as of July 31, 2004 145,528,926
Estimated common shares after conversions and exercises 499,745,165
============
11
NOTE 5- OTHER COMMITMENTS AND CONTINGENCIES
Escrow and Lease AgreementsThe company has notified the lessor of the building of their intent to purchase
the building and has deposited $40,000 under the terms of the revised lease
agreement. The revised terms increased the price of the building to $5.1 million
and extended the option to purchase until February 28, 2005. The company
continues to actively pursue financing.
Airplane Commitment
In May 2004, the Company deposited $100,000 for a 747 aircraft. Terms are
currently being negotiated but the estimated final price of the plane will be in
the range of $10-$12 million. The plane is to be used for developing and
providing a flying operations center for a Mideast customer, if the Company can
procure an agreement. At this time, no formal proposal exists.
Automobile Commitment
In April 2004, the Company committed to purchase four (4) vehicles for $222,800.
During July and August 2004 the Company traded in two Company owned vehicles and
took delivery of the four new vehicles.
Lease Agreements
During the first quarter of 2005, the Company entered into several additional
lease agreements for tower sites utilized in its network. Additional future
minimum rental payments under these agreements aggregate approximately $46,000.
Litigation Matters
A claim for monies owed in the amount of $126,501 for telecommunications usage
services, $44,524 for termination charges, plus interest, costs and attorneys
fees was filed against SkyWay Aircraft by XO Communications Inc. in the United
States District Court for the Eastern District of Virginia in 2004. The lawsuit
relates to a communications agreement with XO to provide the Company
telecommunications services including critical rights to specific locations for
use in its network build out. Due to XO's inability to provide the building
rights for the specified locations and other breaches, the Company terminated
its agreement. XO subsequently filed suit against SkyWay Aircraft. Management
believes the suit is without merit and intends to defend the action. The lawsuit
is in discovery.
A claim for monies owed in the amount of $77,207 plus interests, costs,
attorneys fees and related amounts was filed against the Company and
Transdigital Communications Corporation by The Living Earth, Inc. in the United
States District Court, District of Montana in 2004. The lawsuit relates to
amounts claimed to be owed to Plaintiff by Transdigital that Plaintiff contends
were assumed by the Company incident to its purchase of various assets formerly
owned by Transdigital. The Company is attempting to negotiate a settlement of
this matter.
12
NOTE 6 - OTHER RELATED PARTY TRANSACTIONS
Advances from Related Party
During the first quarter of 2005, the Company borrowed funds from aggregating
$1,429,205 from its President to meet its short-term cash needs. These amounts
were advanced without interest and are due on demand. At July 31, 2004 the
Company owed the President $1,387,484.
During the first quarter of 2005, the Company borrowed funds from other Officers
of the corporation aggregating $10,000. These amounts were advanced without
interest and are due on demand. At July 31, 2004the Company owed these other
Officers $56,800.
Receivable due from Related Party
In connection with the acquisition of the aircraft, the Company overpaid, by
$10,833, a guarantor-shareholder for the deposit associated with the purchase.
This amount was still outstanding as of July 31, 2004.
Note Receivable
In May 2004, the Company issued a note in the amount of $325,000 to Bruce Baker
for prepayment of services to the company. The note bears 6% annual interest and
is due on December 31, 2004.
NOTE 7 - SUBSEQUENT EVENTS
Stock Issuances
From August 1, 2004 through September 1, 2004:
o The Company issued 426,140 shares of common stock at $.55 per
share, for aggregate consideration of $234,377, from warrants
previously provided through an S-8 filing.
o The Company sold 1,000,000 shares of common stock for $200,000.
o The Company issued an additional 4,433,974 shares of common stock
related to previous common stock purchases, whereby the number of
shares were underissued as a result of recalculating the number
of shares to be issued, due to a change in the market price of
the shares.
o The Company cancelled 1,455,770 shares of common stock previously
issued due to the funds received actually being a loan from a
related party, rather than a sale of the Company's common stock.
Notes Payable
During August 2004, the Company received a $900,000 loan from a related party.
The note is due August 1, 2006 and bears interest at an annual rate of 14%.
Subscription Agreement
During August 2004 the Company entered into a stock subscription agreement with
an accredited investor to purchase 31,818,180 shares of common stock at $.22 per
share, or $7,000,000, over the period September 6, 2004 - October 18, 2004. At
13
September 10, 2004the Company has not received any funds and is currently
negotiating revised terms.
14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS
FORWARD-LOOKING STATEMENTS
This Form 10-QSB, press releases and certain information provided periodically
in writing or orally by our officers or our agents contain statements which
constitute forward-looking statements within the meaning of Section 27A of the
Securities Act, as amended; Section 21E of the Securities Exchange Act of 1934;
and the Private Securities Litigation Reform Act of 1995. The words "may",
"would", "could", "will", "expect", "estimate", "anticipate", "believe",
"intend", "plan", "goal", and similar expressions and variations thereof are
intended to specifically identify forward-looking statements. These statements
appear in a number of places in this Form 10-QSB and include all statements that
are not statements of historical fact regarding the intent, belief or current
expectations of us, our directors or our officers, with respect to, among other
things: (i) our liquidity and capital resources; (ii) our financing
opportunities and plans; (iii) trends affecting our future financial condition
or results of operations; (iv) our growth strategy and operating strategy; and
(v) the declaration and payment of dividends.
Investors and prospective investors are cautioned that any such forward-looking
statements are not guarantees of future performance and involve risks and
uncertainties, and that actual results may differ materially from those
projected in the forward-looking statements as a result of various factors. The
factors that might cause such differences include, among others, the following:
(i) We have incurred significant losses since our inception, have negative
working capital and have experienced and continue to experience negative cash
flows from operations. (see Note 2 to the financial statements); (ii) any
material inability of us to successfully internally develop our products; (iii)
any adverse effect or limitations caused by Governmental regulations; (iv) any
adverse effect on our cash flow or on our ability to obtain acceptable financing
in connection with our growth plans; (v) any increased competition in our
business; (vi) any inability of us to successfully conduct our business in new
markets; and (vii) other risks including those identified in our filings with
the Securities and Exchange Commission. We undertake no obligation to publicly
update or revise the forward looking statements made in this Form 10-QSB to
reflect events or circumstances after the date of this Form 10-QSB or to reflect
the occurrence of unanticipated events.
Overview
The following discussion should be read in conjunction with the financial
statements for the period ended July 31, 2004 included with this Form 10-QSB.
Operating results for the three months ended July 31, 2004 are not necessarily
indicative of the results that may be expected for the year ended April 30,2005. The accompanying consolidated financial statements and the notes thereto
should be read in conjunction with our audited consolidated financial statements
as of and for the year ended April 30, 2004 contained in our Form 10-KSB.
Information prior to June 21, 2003 (the date of the reverse acquisition) related
to our predecessor entity, i-Teleco.com, has been omitted. On April 17, 2003,
the Company filed a Certificate of Amendment changing the name of the Company to
SkyWay Communications Holding Corp. ("Skyway Holding"). On June 20, 2003, SWYC
Acquisition Corporation, a Florida corporation and our wholly owned subsidiary,
merged, pursuant to an Amended and Restated Agreement and Plan of Merger, dated
as of June 19, 2003, with and into Sky Way Aircraft, Inc., a Nevada corporation.
From a legal perspective, Skyway Holding was the surviving company and thus
continues its public reporting obligations. However, from an accounting
perspective, Sky Way Aircraft is treated as though it acquired Skyway Holding.
15
Therefore, all financial information presented in this 10-QSB includes Sky Way
Aircraft's standalone results from the period April 24, 2002 (date of
incorporation) to June 21, 2003 and the consolidated companies' results from
June 2003 to July 31, 2004.
We plan to provide security and other services for the airline industry through
applications of our high-speed, broadband wireless communications technology. We
have not yet generated any significant revenues from our planned principal
operations and are considered a development stage company as defined in
Statement of Financial Accounting Standards No.7.
Critical Accounting Policies
Our critical accounting policies, including the assumptions and judgments
underlying them, are disclosed in the Notes to the Financial Statements. We have
consistently applied these policies in all material respects. At this stage of
our development, these policies primarily address matters of expense
recognition, in particular the recognition of impairment losses on certain
equipment and intellectual property and the estimate of compensation expense
related to the issuance of preferred stock, common stock and warrants to
purchase common stock. Although we anticipate that revenue recognition issues
will become critical in future years, the small amount of revenue that we have
earned at this stage minimizes the impact of any judgments regarding revenue
recognition. Management does not believe that our operations to date have
involved uncertainty of accounting treatment, subjective judgment, or estimates,
to any significant degree.
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED JULY 31, 2004 VS. THE THREE
MONTHS ENDED JULY 31, 2003
During the three months ended July 31, 2004 and July 31, 2003 we generated
revenues of approximately $287,600 ($264,100 was due to sales of equipment and
$23,500 was due to wireless and DSL services) and $0, respectively. During
August 2004 we continued to generate revenues which were approximately $33,000.
During the three months ended July 31, 2004 we incurred selling, general and
administrative expenses approximating $4,276,000 of which $1,747,000 were
non-cash compensation from the value of stock and warrants issued to employees
and consultants. The remainder of these expenses consisted of advertising
including product research and development, marketing and sales, trade shows,
consulting fees, payroll, rent, travel, accounting and legal fees that allowed
us to continue developing our infrastructure and industry contacts necessary for
our services. During the three months ended July 31, 2003, selling, general and
administrative expenses approximated $3,353,000. The increase of approximately
$923,000 or 28% was the result of significant funding that we raised through the
issuance of common stock that allowed us to dedicate resources to our
development plans.
Our research and development costs related to the development of our data
center, ground networks and airborne DC9 testing platform approximated
$2,060,000 during the three months ended July 31, 2004. During the three months
ended July 31, 2003 we incurred approximately $209,000 in research and
development costs. The increase of approximately $1,851,000 or 886% was the
result of the issuance of common stock valued at approximately $1,339,000 for
the purchase of certain in process research and development that allowed us to
dedicate resources to our development plans.
As a result of the above our net loss for the three months ended July 31, 2004
was approximately $6,271,000, an increase of approximately $2,708,000 or 76%
from our loss for the three months ended July 31, 2003 of approximately
$3,563,000.
16
LIQUIDITY AND CAPITAL RESOURCES
From our inception on April 24, 2002 to July 31, 2004, we incurred operating
losses of approximately $29,400,000. This loss principally consisted of the
following non-cash operating expenses: approximately $14,900,000 was from stock
based compensation expense and other non-cash expenses, $1,340,000 was from
purchased research and development and $1,260,000 was due to the impairment of
both technology rights and property and equipment. At July 31, 2004 we had a net
working capital deficit of approximately $5,100,000. Net cash used in operating
activities for the period from April 24, 2002 to July 31, 2004 was approximately
$9,000,000. Net cash used from investing activities from our inception on April24, 2002 to July 31, 2004 was approximately $5,800,000 and principally consisted
of the following: approximately $4,567,000 was for the purchase of property and
equipment, and property and equipment in progress, $1,000,000 was for the
purchase of technology rights and $316,000 was paid to Bruce Baker for
prepayment of services to the Company on a note receivable. The note bears 6%
annual interest and is due December 31, 2004. We funded these needs primarily
through the sale of common stock and advances from related parties
(approximately $1,565,000 of which was converted to common stock) which have
provided us approximately $15,200,000.
During August 2004, we received a $900,000 loan from a related party. The note
is due August 1, 2006 and bears interest at an annual rate of 14%.
As a result of the above, as of July 31, 2004, we had a cash position of
approximately $142,000.
After paying other operating items, funding additional equipment purchases, and
receiving funding as discussed above from August 1, 2004 through August 31,2004, we currently have $189,600 cash on hand.
During August 2004 we entered into a stock subscription agreement with an
accredited investor to purchase 31,818,180 shares of common stock at $.22 per
share, or $7,000,000, over the period September 6, 2004 - October 18, 2004. At
September 10, 2004 we have not received any funds and are currently negotiating
revised terms.
We do not have the cash available at this time to satisfy our cash requirements
over the next month based upon our current rate of expenses. We will need to
secure a minimum of $12,000,000 to satisfy requirements for the next 12 months
of operations, which includes a minimum of $5,000,000 to finance our planned
expansion (6-9 months) efforts. Funds will be used for product development,
capital procurement and personnel. In order to become profitable we may still
need to secure additional debt or equity funding. We have no source of funding
identified except for $7,000,000 identified above. Our failure to secure
additional funds could impair or delay our ability to implement our business
plan.
We entered into a Purchase Agreement dated as of February 20, 2004, by and
between us, Sky Way Global, LLC, a Nevada Limited Liability Company, an
affiliate of which Mr. Brent Kovar and Ms. Joy Kovar are principals, and Brent
Kovar, under which we acquired all right, title and interest to United States
patent number 6587887, granted July 1, 2003, and entitled "Digital data
transmission utilizing vector coordinates within a hyperbola model." We paid to
Global the sum of $1,000,000 cash, subject to reclassification. The Parties
agreed to work in good faith to secure as soon as practical a written valuation
of the U.S. Patent from a mutually agreeable, third party, independent,
recognized expert with expertise in areas relating to the U.S. Patent and its
value. The valuation need only state the value to be in excess of $1,000,000 or
not in excess of $1,000,000; provided, however if not in excess of $1,000,000,
the expert shall state a specific dollar valuation. The expert must state all
17
reasons for the valuation in detail. If the valuation is less than $1,000,000,
the difference shall be reclassified on our books and reported to the IRS and
SEC as compensation to Global and thus Global's affiliates.
In January 2004, we signed a loan agreement for $1,500,000 for the procurement
of a DC-9 to use to for research and development and marketing. This was funded
with a $1,500,000 six (6) month promissory note from the United Bank and Trust
Company, with interest based upon the Bank Prime Rate plus 0.5%. The note was
subsequently extended for an additional six (6) months and is currently due
January 16, 2005. The loan is guaranteed by the President of the Company, two
other shareholders of the Company and a company controlled by one of the
shareholders. In connection with the guarantee of the loan by one of our
shareholders, a company related to this guarantor-shareholder is listed as the
co-owner of the asset. This co-ownership is only effective for the period of the
guarantee. We have voting control of all matters related to the aircraft.
Through July 31, 2004 we have incurred approximately $1,470,000 for the
installation and testing of equipment on the plane and the upgrade of the cabin
facilities for demonstration and marketing purposes. We estimate we will spend
an additional $500,000 to finalize our test and to complete the desired upgrades
and enhancements.
We may experience problems, delays, expenses, and difficulties sometimes
encountered by an enterprise in our stage of development, many of which are
beyond our control. These include, but are not limited to, unanticipated
problems relating to the development of the system, production and marketing
problems, additional costs, funding and expenses that may exceed current
estimates, and competition.
Future Plans
We plan to accomplish the following in the future. We need additional funds to
finance our business development in the next 12 months, as set forth below, but
we are not committed to make any of these expenditures. As previously indicated,
we do not have sufficient funding to complete this work. We hope to be able to
raise additional funds from an offering of our stock or other investment options
available to us in the future. However, this stock offering may not occur, or if
it occurs, may not raise the desired funding. If we fail to secure adequate
funds to accomplish the objectives outlined below, we will be able to conduct
only limited operations. However, we believe that if we secure the required
funding on a timely basis, we can accomplish these objectives within the
projected time frames.
EVENT OR MILESTONETIME FRAME FOR IMPLEMENTATIONMETHOD OF ACHIEVEMENTESTIMATED COST
[Low/High]
Complete leasing activating and
Engineering upgrades of tower Aug 1, 2004 - April 30, 2005 Contact owners and complete $1,200,000-$1,500,000
network negotiations; conduct site
survey, equipment install
Identify, test and upgrade Aug 1, 2004 - April 30, 2005 Identify airlines, execute $700,000-$950,000
equipment in aircraft agreement, install, service,
FAA aproval
Build out and equip operations Aug 1, 2004 - November 30, 2004 Construct and test all $500,000-$750,000
center operations
Continue research and testing of Aug 1, 2004 - November 30, 2004 Continue research and testing $500,000-$750,000
aircraft network
Hire additional employees to Aug 1, 2004 - February 28, 2005 Interview and hire $750,000-$900,000
operate network
Identify, test and upgrade Aug 1, 2004 - April 30, 2005 Identify equipment, execute $700,000-$850,000
equipment for repair facility agreements, secure contracts
for services
We have no sources of financing identified except those identified above and in
the notes to our financial statements. Even if we identify sources for such
financing:
18
o Additional financing may not be available on commercially
reasonable terms or available at all;
o Additional financing may result in dilution to existing and
future equity holders; and
o If we issue debt instruments, we will be subject to increased
debt obligations that will impose a greater financial strain upon
our operations.
If we do not secure the required funding, the major expansion planned milestones
may not be achieved within the anticipated time period, if at all. We believe
that future plans will be achieved if we receive the necessary funding.
Furthermore, in the event that the level of funding is less that we have
anticipated, this may also result in a delay in our ability to generate revenues
or a reduced amount of revenues being generated.
Item 3. Controls and Procedures
The Corporation maintains and is currently undertaking actions to improve
disclosure controls and procedures designed to ensure that information required
to be disclosed in reports filed under the Securities Exchange Act of 1934, as
amended, is recorded, processed, summarized and reported within the specified
time periods. As of the end of the period covered by this report, the
Corporation's Chief Executive Officer and Chief Financial Officer evaluated the
effectiveness of the Corporation's disclosure controls and procedures. Based on
the evaluation, which disclosed no significant deficiencies or material
weaknesses that are not being addressed in the actions currently being taken to
improve our disclosure controls and procedures, particularly in areas such as
contract, securities sales, expense and press release review and authorization,
the Corporation's Chief Executive Officer and Chief Financial Officer concluded
that the Corporation's disclosure controls and procedures are effective as of
the end of the period covered by this report in that information required to be
disclosed in reports filed under the Securities Exchange Act of 1934, as
amended, has been recorded, processed, summarized and reported within the
current fiscal quarter. There were no changes in the Corporation's internal
control over financial reporting that occurred during the Corporation's most
recent fiscal quarter that have materially affected, or are reasonably likely to
materially affect, the Corporation's internal control over financial reporting.
19
PART II. - OTHER INFORMATION
Item 1. Legal Proceedings
A claim for monies owed in the amount of $126,501.15 for telecommunications
usage services, $44,523.58 for termination charges, plus interest, costs and
attorneys fees was filed against our subsidiary by XO Communications Inc. ("XO")
in the United States District Court for the Eastern District of Virginia in
2004. The lawsuit relates to a communications agreement with XO to provide us
telecommunications services including critical rights to specific locations for
use in our network build out. Due to XO's inability to provide the building
rights for the specified locations and other breaches, we terminated our
agreement. XO subsequently filed suit against our subsidiary. Management
believes the suit is without merit and intends to defend the action. The lawsuit
is in discovery.
A claim for monies owed in the amount of $77,207.00 plus interests, costs,
attorneys fees and related amounts was filed against us and Transdigital
Communications Corporation by The Living Earth, Inc. in the United States
District Court, District of Montana in 2004. The lawsuit relates to amounts
claimed to be owed to Plaintiff by Transdigital that Plaintiff contends were
assumed by us incident to our purchase of various assets formerly owned by
Transdigital. We are attempting to negotiate a settlement of this matter.
Item 2. Changes in Securities
During the quarter May 1, 2004 to July 31, 2004, we issued to one (1) individual
693,722 shares of common stock for $381,547 due to the exercising of warrants at
$.55 per share. We also issued to one individual 650,000 shares of common stock
at $.27 per share for $175,000 cash.
In May 2004, we issued to three (3) individuals and two (2) entities 1,150,000
shares of common stock at $.87 per share in connection with the purchase of
certain research and development.
In June 2004, we issued to one individual 3,626,667 shares of common stock at
$.27 per share as payment of $991,984 of accrued expenses.
In July 2004, we issued 4,000,000 shares of common stock due to a related
party's conversion of 400,000 shares of Preferred "C" stock.
We relied upon Section 4(2) of the Securities Act of 1933, as amended for the
above issuances. We believed that Section 4(2) was available because:
o None of these issuances involved underwriters, underwriting
discounts or commissions;
o We placed restrictive legends on all certificates issued;
o No sales were made by general solicitation or advertising;
o Sales were made only to accredited investors or investors who
were sophisticated enough to evaluate the risks of the
investment.
In connection with the above transactions, although some of the investors may
have also been accredited, we provided the following to all investors:
o Access to all our books and records.
o Access to all material contracts and documents relating to our
operations.
20
o The opportunity to obtain any additional information, to the
extent we possessed such information, necessary to verify the
accuracy of the information to which the investors were given
access.
Item 3. Defaults Upon Senior Securities
NONE
Item 4. Submission of Matters to a Vote of Securities Holders
NONE
Item 5. Other Information
NONE
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
The following exhibits are filed as part of this Form 10-QSB.
31.1 Rule 13a-14(a)/15d-14(a) Certification of Chief Financial
Officer, James Kent
32.1 Section 1350 Certification, James Kent
(b) Reports on Form 8-K.
8K filed July 28, 2004, reporting change of accountant
8K filed July 28, 2004, reporting appointment of board member
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
SKYWAY COMMUNICATIONS HOLDING CORP.
Date: September 13, 2004/s/ James KentJAMES KENT
Chief Executive and
Chief Financial Officer
(Principle Financial and Accounting Officer)
Dates Referenced Herein and Documents Incorporated by Reference
