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 October 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 December 1, 2004: 216,532,058
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 October 31, 2004............... 3
Consolidated Statements of Operations for the three and
six months ended October 31, 2004 and 2003 and for the
period April 24, 2002 (date of inception) through October 31,2004............................................................ 5
Consolidated Statements of Cash Flows for the six months ended
October 31, 2004 and 2003 and for the period April 24, 2002
(date of inception) through October 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).......... 17
Item 3. Controls and Procedures......................................... 22
PART II. OTHER INFORMATION
Item 1. Legal Proceedings............................................... 25
Item 2. Changes in Securities........................................... 25
Item 3. Defaults Upon Senior Securities................................. 26
Item 4. Submission of Matters to a Vote of Securities Holders........... 26
Item 5. Other Information .............................................. 26
Item 6. Exhibits and Reports on Form 8-K................................ 26
Signatures ............................................................. 27
2
PART I
SKYWAY COMMUNICATIONS HOLDING CORP. AND SUBSIDIARY(A Development Stage Company)CONSOLIDATED BALANCE SHEET AS OF OCTOBER 31, 2004
(UNAUDITED)
________________________________________________________________________________
ASSETS
Cash $ 15,917
Accounts receivable, net 89,986
Employee advance 41,062
Prepaid expense 343,106
Other receivable 10,973
Notes receivable 325,000
Total Current Assets 826,044
PROPERTY AND EQUIPMENT, net 1,284,130
OTHER ASSETS:
Property and equipment in progress 4,323,570
Deposits and other 420,007
Total Other Assets 4,743,577 TOTAL $ 6,853,751
==============
Continued
3
SKYWAY COMMUNICATIONS HOLDING CORP. AND SUBSIDIARY(A Development Stage Company)CONSOLIDATED BALANCE SHEET AS OF OCTOBER 31, 2004
(UNAUDITED)LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES:
Accounts payable $ 2,166,767
Accrued payroll 349,777
Accrued interest 23,085
Due to SkyWay Global 319,669
Due to related party 1,378,174
Sales tax payable 114,482
Notes payable 1,503,600
Other loans payable 112,200
Deferred rent 185,596
Current portion of capital lease obligation 11,449
Other current liabilities 4,755
Total Current Liabilities 6,169,554
CAPITAL LEASE OBLIGATION 28,718
NOTE PAYABLE- RELATED PARTY 900,000
Total Liabilities 7,098,272 STOCKHOLDERS' DEFICIT:
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,
982,000 shares issued and outstanding 98
Series D convertible preferred stock,
85,000 shares issued and outstanding 9
Common stock, $.0001 par value, 2,500,000,000 shares
authorized, 175,120,024 shares issued and outstanding 17,512
Warrant Receivable (470,250)
Deferred Stock Compensation (162,000)
Capital in excess of par value 35,863,867
Deficit accumulated during the development stage (35,493,957)
Total Stockholders' Deficit (244,521)TOTAL $ 6,853,751
==============
________________________________________________________________________________
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
For the three For the three For the six For the six April 24, 2002
months ended months ended months ended months ended (date of
October 31, October 31, October 31, October 31, incorporation) to
2004200320042003October 31, 2004REVENUES
Products $ 45,530 $ - $ 309,670 $ - $ 309,670
Services 43,507 - 66,978 - 117,982
Total Revenues 89,037 - 376,648 - 427,652
COST OF GOODS SOLD (20,899) - (223,951) - (223,951)
GROSS PROFIT 68,138 - 152,697 - 203,701
EXPENSES:
Selling 1,351,418 32,047 1,543,998 79,649 6,905,183
General and administrative 4,459,955 2,044,293 8,543,101 5,349,744 23,105,392
Impairment of technology rights - - - - 1,023,800
Impairment of property and equipment - - - - 235,750
Impairment of property and equipment in
progress 433,000 - 433,000 - 433,000
Research and development (174,874) 319,712 1,885,001 529,047 3,852,619
Total expenses 6,069,499 2,396,052 12,405,100 5,958,440 35,555,744
OPERATING LOSS (6,001,361) (2,396,052) (12,252,403) (5,958,440) (35,352,043)
OTHER INCOME (EXPENSE):
Rental Income - Related Party - - - - 26,927
Interest Expense (121,570) (1,109,329) (141,541) (1,109,866) (168,841)
Total Other Income (Expense) (121,570) (1,109,329) (141,541) (1,109,866) (141,914)
LOSS BEFORE INCOME TAXES (6,122,931) (3,505,381) (12,393,944) (7,068,306) (35,493,957)
INCOME TAX EXPENSE (BENEFIT) - - - - - NET LOSS $ (6,122,931) $ (3,505,381) $ (12,393,944) $ (7,068,306) $ (35,493,957)
============== ============== =============== ============= ===============
NET LOSS PER SHARE - Basic and diluted $ (.04) $ (.05) $ (.08) $ (.15)
============== ============== =============== =============
Weighted average number of shares outstanding 153,897,700 64,837,900 146,736,300 47,188,376
============== ============== =============== =============
____________________________________________________________________________________________________________________________________
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
For the six For the six April 24, 2002
months ended months ended (date of
October 31, October 31, incorporation) to
20042003October 31, 2004CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (12,393,944) $ (7,068,306) $ (35,493,957)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation 148,047 49,737 273,549
Impairment of technology rights - - 1,023,800
Impairment of property and equipment - - 235,750
Impairment of property and equipment in progress 433,000 - 433,000
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 5,557 - 6,057
Non-cash services rendered for stock and warrants 6,078,233 4,362,644 18,992,866
Non-cash other 63,455 296,303 359,758
Changes in assets and liabilities:
Accounts receivable (86,564) - (96,043)
Employee advances, net (13,537) (500) (41,111)
Prepaid expenses (230,578) (51,580) (343,105)
Receivable due from related party, net 10,833 - -
Other receivable 932 - (10,974)
Deposits and other (24,147) - (420,007)
Accounts payable 1,633,268 (8,652) 2,341,260
Accrued payroll 230,400 189,666 349,778
Accrued interest 8,806 1,771 23,085
Sales tax payable (2,345) - 114,482
Deferred rent 11,716 197,055 185,596
Other accrued expenses 4,755 - 996,739 NET CASH USED IN OPERATING ACTIVITIES (2,770,895) (2,031,862) (9,694,657)CASH FLOWS FROM INVESTING ACTIVITIES:
Advances to related party, net - (51,382) -
Payment for technology rights - - (1,000,000)
Payments for property and equipment in progress (980,321) - (3,256,570)
Proceeds from sale of property and equipment 68,706 - 104,706
Payments for property and equipment (563,313) (445,507) (1,890,712)
Notes receivable (315,904) - (315,904)NET CASH USED IN INVESTING ACTIVITIES (1,790,832) (496,889) (6,358,480)CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on capital lease obligations (3,578) - (3,578)
Advances from related party converted to
preferred stock - - 1,564,015
Advances from related parties, net 1,373,095 247,069 1,637,042
Proceeds from notes payable, related party 900,000 - 900,000
Proceeds from other loans payable 112,200 - 112,200
Proceeds from issuance of common stock 375,000 2,573,329 10,841,870
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 2,879,217 2,570,398 16,069,054 NET (DECREASE) INCREASE IN CASH (1,682,510) 41,647 15,917
CASH AT BEGINNING OF PERIOD 1,698,427 741 - CASH AT END OF PERIOD $ 15,917 $ 42,388 $ 15,917
============== ============= ==============
Continued
6
SKYWAY COMMUNICATIONS HOLDING CORP. AND SUBSIDIARY(A Development Stage Company)
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(UNAUDITED)
For the period
For the six For the six April 24, 2002
months ended months ended (date of
October 31, October 31, incorporation) to
20042003October 31, 2004SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION - Interest paid $ 61,762 $ - $ 74,783
============== ============= ==============
_______________________________________________________________________________________________________
See notes to consolidated financial statements.
7
SKYWAY COMMUNICATIONS HOLDING CORP. AND SUBSIDIARY(Development Stage Company)NOTES TO CONSOLIDATED FINANCIAL STATEMENTSOCTOBER 31, 2004
(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
The 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
(consisting of normal recurring adjustments) considered necessary for a fair
presentation have been included.
8
Operating results for the three and six months ended October 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 the Company's audited consolidated
financial statements as of and for the year ended April 30, 2004 contained in
their Form 10-KSB.
Reclassification
The financial statements for periods prior to October 31, 2004 have been
reclassified to conform to the headings and classifications used in the October31, 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 management 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 management is required to make. Actual results
could differ significantly from management's 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
collectibility 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 is
intended to distribute 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.
Property and Equipment in Progress
Statement of Financial Accounting Standards 144, "Accounting for the Impairment
or Disposal of Long-Lived Assets" requires that long-lived assets, including
certain identifiable intangibles, be reviewed for impairment whenever events or
changes in circumstances indicate that the carrying value of the assets in
question may not be recoverable. At October 31, 2004the Company's management
evaluated their long-lived assets and determined that $433,000 of property and
equipment in progress was impaired and was written off.
9
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
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, the Company continues to apply the intrinsic value method under
Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued
to Employees," to account for its stock-based employee compensation
arrangements. Had the Company's 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," its 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 CONCERNThe Company's 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. The Company has incurred
significant losses since its inception, has negative working capital, has
experienced and continues to experience negative cash flows from operations, and
is currently not meeting its operating obligations. In addition, the Company
expects to have ongoing requirements for additional capital investment to
implement its 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
10
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 of fiscal 2005 as "purchased research and
development."NOTE 4 - EQUITY
Common StockThe Company has authorized 2,500,000,000 shares of common stock with a par value
of $.0001.
On September 29, 2004, the Company filed an S-8 registration statement for the
issuance of common stock to various individuals for services. The plan allows
for 15,000,000 million shares to be issued, and through October 2004, the
Company issued 8,886,754 shares of common stock with a fair market value of
$1,968,327 for services of $1,663,292 and accrued expenses of $305,035. Of this
amount, $162,000 remains in prepaid expenses at October 31, 2004 and is
classified as deferred stock compensation on the accompanying balance sheet. As
of December 1, 2004, the Company has issued a total of 10,723,788 shares and
reserved 4,181,170 shares for specific future issuances and has 95,042 shares
remaining.
In the second quarter of fiscal year end 2005, the Company issued 426,140 shares
of common stock due to the exercising of warrants. The Company recorded $234,377
as warrants receivable. In addition, the Company issued 2,000,000 shares of
common stock due to the exercising of warrants issued for consulting services
and expensed $2,125,000 related to these services.
In October 2004, the Company issued 14,300,000 shares of common stock due to the
conversion of 1,430,000 shares of Preferred "C" stock.
During August 2004, 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 an adjustment in the market price of the shares.
During August 2004, the Company issued 1,000,000 shares of common stock for
$200,000 in cash.
During August 2004, 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.
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 purchase
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.
11
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.
For the six month period ended October 31, 2004, the Company recorded
amortization of deferred compensation related to stock issuances in the prior
year aggregating $2,451,942.
Stock Issuances
From November 1, 2004 through December 1, 2004:
o The Company issued 2,600,000 shares of common stock in connection with
employees exercising stock options under the 2004 Non-Qualified Stock
Award Plan (Note 7).
o The Company issued 125,000 shares of restricted stock to a related
party for $25,000.
o The Company issued 8,850,000 shares of common stock in connection with
the conversion of 885,000 shares of Preferred C stock.
o The Company issued 1,837,034 shares of common stock, under a
previously registered Form S-8 filing, to pay $332,394 of accrued
expenses.
o The Company issued and placed in escrow 28,000,000 shares of
restricted stock in connection with the duPont subscription agreement
noted below.
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. On November 30, 2004 this board member resigned, and
as the stock options were not yet vested they were voided.
Subscription Agreement
During August 2004 the Company entered into a stock subscription agreement with
duPont Investment Fund #57289 ("duPont"), an affiliate, 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 October 31, 2004the Company had not
received any funds under this agreement. During November 2004, the terms of this
agreement were revised and are currently being finalized. Under the revised
terms the Company has issued and placed in escrow 28,000,000 shares of
restricted stock to be exchanged for a DC9 aircraft, estimated to be valued at
$5,880,000, based on the fair market value of the shares on the date of issue.
Should the transaction be completed and the Company receive the aircraft, it
will be recorded at the fair market value of the common shares issued adjusted
for any reduction caused by the fair market value of the aircraft being less
than the value of the common shares issued being charged to operations as
purchased research and development.
Consulting Agreement
During September 2004, the Company entered into a consulting agreement with
duPont. duPont is to be compensated with 5,000,000 shares of common stock that
is to be registered in a future Form S-8 Registration Statement. The term of the
agreement is two (2) years and may be terminated at any time by either party. As
of October 31, 2004 no services have been provided under this agreement and no
stock has been issued.
12
Estimated Fully Diluted Equity Information
As of October 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 9,820,000
For conversion of series D preferred stock 8,500,000
Outstanding Warrants 18,441,766
Outstanding Options 728,333
Stock to be issued under S-8 filing dated 9-28-04 6,113,246
Common shares issuable upon conversions and exercises 343,603,345
Shares outstanding as of October 31, 2004 175,120,024
Shares issued in escrow subsequent to October 31, 2004 28,000,000
Estimated common shares after conversions and exercises 546,723,369
===========
NOTE 5- OTHER COMMITMENTS AND CONTINGENCIES
During the period 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
addition, the Company issued shares of common stock pursuant to Form S-8
registration statements. The Company believes that it complied with the
requirements of Form S-8 in regard to these issuances, however if it were
determined that there were violations of the provisions of Form S-8 the Company
could be subject to enforcement proceedings.
During the period covered by these financial statements the Company issued
several press releases and filed Form 8-K's related to certain financing
transactions and the projected valuation of the Company. The Company believes
that certain statements made in those press releases need to be clarified and
updated and need to include additional and current information for fair
disclosure. In addition, the Company did not timely file with the corresponding
8-K filings, or amend its 8-K filings to include when immediately available,
certain material agreements or documentation underlying the disclosure made in
those press releases or 8-K filings.
Prior to this 10QSB, the Company has amended its 8-K filings to include all
material documentation it has and where necessary to amend certain statements
included in the original 8-K filings. Although the Company believes that it has
undertaken corrective actions with respect to the filings of appropriate 8-K
reports and exhibits, the Commission could review these filings and undertake
enforcement proceedings against the Company if it concluded that such action was
warranted.
During the periods covered by these financial statements certain officers and
directors sold shares of common stock and did not file all of the required
reports with the Securities and Exchange Commission.
13
Capital Lease Agreement
During September 2004, the Company entered into a capital lease agreement for
equipment used in its operations. The lease contains an option to purchase the
equipment at the end of the lease term for $1. Future minimum lease payments
under this agreement are as follows:
April 30
2005 $ 9,588
2006 19,176
2007 19,176
2008 6,392
Total minimum lease payments 54,332
Less amount representing interest (14,165)
Present value of future minimum lease payments 40,167
Less current maturities (11,449)
Capital lease obligations, net of current maturities $ 28,718
============
Depreciation under this capital lease was $1,458 for the six months ended
October 31, 2004.
Operating Lease Agreements
During the second 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 $515,000.
Consulting Commitment
During October 2004, the Company entered into an agreement with a non related
party to provide them with investor relations consulting services commencing in
November 2004. Monthly fees for these services approximate $22,500. The term of
this agreement is one (1) year and during the first six (6) months the
compensation is to be paid in free trading common stock, valued at the average
closing price for the preceding five (5) days, discounted 10%. After the first
six (6) months of this agreement, the compensation package will be reformulated
based on the Company's cash position. These shares will be issued monthly
commencing in November 2004.
Other Loans Payable
During the second quarter 2005, the Company received $112,200 from various
individuals as short-term loans. The loans were provided without interest and
are due on demand.
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.
14
A claim for monies owed in the amount of $77,207 plus interests, costs,
attorney's 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. On November 17, 2004, the Company negotiated a settlement
of this matter and paid Living Earth with 54,348 shares of common stock valued
at $12,500.
On December 15, 2004, the Company was notified by unrelated legal counsel that a
complaint had been filed on December 14, 2004 against Skyway, James Kent, CEO
and CFO, and Brent Kovar, President, in U.S. Federal District Court, Eastern
District of Arkansas, File #2004CV00405. We have not been able to obtain a copy
of the complaint but once we have reviewed it we will provide an update on form
8K. We intend to vigorously defend our self and our officers in this matter."
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.
NOTE 6 - OTHER RELATED PARTY TRANSACTIONS
Advances from Related Party
During the first six months of 2005, the Company borrowed funds 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. Interest at an annual rate
of 12% is being accreted to additional paid in capital as contractually no
interest will be paid. At October 31, 2004the Company owed the President
$1,269,105.
During the first six months of 2005, the Company borrowed funds from other
Officers of the corporation aggregating $60,062. These amounts were advanced
without interest and are due on demand. At October 31, 2004the Company owed
these other Officers $54,902.
Note Receivable
In May 2004, the Company issued a note in the amount of $325,000 to Bruce Baker.
The note bears 6% annual interest and is due on December 31, 2004. The terms of
the note are currently being revised to extend the due date until June 30, 2005.
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 12%.
15
NOTE 7 - SUBSEQUENT EVENTS
Stock Options
During November 2004, the board of directors approved the 2004 Non-Qualified
Stock Award Plan ("the Plan"). These shares were deemed to be registered under
the September 28, 2004 S-8 filing. The Plan provided 2.6 million stock options
(to four employees) to purchase 2.6 million shares of common stock. The options
are exercisable at an exercise price equal to the 90% of the lowest bid price on
the date of exercise. The options vest immediately, and as of December 1, 2004,
all have been exercised.
16
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, have experienced and continue to experience negative cash flows
from operations, and are not able to meet our current obligations. (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 October 31, 2004 included with this Form 10-QSB.
Operating results for the three and six months ended October 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.
Therefore, all financial information presented in this 10-QSB includes Sky Way
17
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 October 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 OCTOBER 31, 2004 VS. THE THREE
MONTHS ENDED OCTOBER 31, 2003
During the three months ended October 31, 2004 and October 31, 2003 we generated
revenues of approximately $89,000 ($49,100 was due to sales and testing of
equipment and $39,900 was due to wireless and DSL services) and $0,
respectively. During November 2004 we continued to generate revenues which were
approximately $19,600.
During the three months ended October 31, 2004 we incurred selling, general and
administrative expenses approximating $5,811,400. 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 October 31, 2003,
selling, general and administrative expenses approximated $2,076,300. The
increase of approximately $3,735,100 or 180% 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. In addition, the Company recorded
approximately $4,331,000 in non-cash stock compensation in 2004.
During the three months ended October 31, 2004 and 2003, we determined that
approximately $433,000 and $0, respectively, of our property and equipment in
progress was impaired.
Our research and development costs related to the development of our data
center, ground networks and airborne DC9 testing platform resulted in a negative
expense approximating $174,900 during the three months ended October 31, 2004.
The negative expense was due to a change in estimate resulting from an over
accrual at the end of the first quarter. The over accrual amounted to $300,000
and was related to two vendors whose invoices we did not receive prior to
reporting on the first quarter. The change in estimate is not material to our
net loss and therefore we are not amending the first quarter 10QSB. During the
three months ended October 31, 2003 we incurred approximately $319,700 in
research and development costs.
18
As a result of the above our net loss for the three months ended October 31,2004 was approximately $6,122,900, an increase of approximately $2,617,500 or
75% from our loss for the three months ended October 31, 2003 of approximately
$3,505,400.
RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED OCTOBER 31, 2004 VS. THE SIX
MONTHS ENDED OCTOBER 31, 2003
During the six months ended October 31, 2004 and October 31, 2003 we generated
revenues of approximately $376,600 ($309,700 was due to sales of equipment and
$67,000 was due to wireless and DSL services) and $0, respectively.
During the six months ended October 31, 2004 we incurred selling, general and
administrative expenses approximating $10,087,100. 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 six months ended October 31, 2003,
selling, general and administrative expenses approximated $5,429,400. The
increase of approximately $4,657,700 or 86% 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. In addition, the Company recorded
approximately $6,078,000 in non-cash stock compensation in 2004.
During the six months ended October 31, 2004 and 2003, we determined that
approximately $433,000 and $0, respectively, of our property and equipment in
progress was impaired.
Our research and development costs related to the development of our data
center, ground networks and airborne DC9 testing platform approximated
$1,885,000 during the six months ended October 31, 2004. During the six months
ended October 31, 2003 we incurred approximately $529,000 in research and
development costs. The increase of approximately $1,356,000 or 256% 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.
As a result of the above our net loss for the six months ended October 31, 2004
was approximately $12,393,900, an increase of approximately $5,325,600 or 75%
from our loss for the six months ended October 31, 2003 of approximately
$7,068,300.
LIQUIDITY AND CAPITAL RESOURCES
From our inception on April 24, 2002 to October 31, 2004, we incurred operating
losses of approximately $35,494,000. This loss principally consisted of the
following non-cash operating expenses: approximately $19,353,000 was from stock
based compensation expense and other non-cash expenses, $1,339,000 was from
purchased research and development and $1,693,000 was due to the impairment of
technology rights, and property and equipment and property and equipment in
progress. At October 31, 2004 we had a net working capital deficit of
approximately $5,344,000. We are currently not able to meet our payroll needs or
pay our current liabilities in a timely manner. Net cash used in operating
activities for the period from April 24, 2002 to October 31, 2004 was
approximately $9,695,000. Net cash used from investing activities from our
inception on April 24, 2002 to October 31, 2004 was approximately $6,359,000 and
principally consisted of the following: approximately $5,147,000 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 advanced
to Bruce Baker for 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, notes and advances from related parties (approximately $1,564,000
19
of which was converted to common stock), and proceeds from the exercise of stock
options, which have provided us approximately $12,200,000.
As a result of the above, as of October 31, 2004, we had a cash position of
approximately $16,000.
After paying other operating items, funding additional equipment purchases, and
receiving funding as discussed above from November 1, 2004 through December 1,2004, we currently have $176,000 cash on hand.
During August 2004 we entered into a stock subscription agreement with duPont
Investment Fund #57289 ("duPont"), an affiliate, 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 October 31, 2004 we have not received any funds
under this agreement. During November 2004, the terms of this agreement were
revised and are currently being finalized. Under the revised terms the Company
has issued and placed in escrow 28,000,000 shares of restricted stock to be
exchanged for a DC9 aircraft, estimated to be valued at $5,880,000 based on the
fair market value of the shares on the date of issue.
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 $20,000,000 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. 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, 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 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. At the current time, the valuation has not
been completed.
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 October 31, 2004 we have incurred approximately $1,909,000 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
20
an additional $750,000 to finalize our aircraft testing and to complete the
desired equipment and systems 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.
During the period 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
addition, the Company issued shares of common stock pursuant to Form S-8
registration statements. The Company believes that it complied with the
requirements of Form S-8 in regard to these issuances, however if it were
determined that there were violations of the provisions of Form S-8 the Company
could be subject to enforcement proceedings.
During the period covered by these financial statements the Company issued
several press releases and filed Form 8-K's related to certain financing
transactions and the projected valuation of the Company. The Company believes
that certain statements made in those press releases need to be clarified and
updated and need to include additional and current information for fair
disclosure. In addition, the Company did not timely file with the corresponding
8-K filings, or amend its 8-K filings to include when immediately available,
certain material agreements or documentation underlying the disclosure made in
those press releases or 8-K filings. See Item 3 for a discussion of Controls and
Procedures.
Prior to this 10QSB, the Company has amended its 8-K filings to include all
material documentation it has and where necessary to amend certain statements
included in the original 8-K filings. Although the Company believes it has
undertaken corrective actions with respect to the filing of appropriate 8-K
reports and exhibits, the Commission could review these filings and undertake
enforcement proceedings against the Company if it concluded that such action was
warranted. See Item 3 for a discussion of Controls and Procedures.
During the periods covered by these financial statements certain officers and
directors sold shares of common stock and did not file all of the required
reports with the Securities and Exchange Commission. See Item 3 for a discussion
of Controls and Procedures.
On December 15, 2004, the Company was notified by unrelated legal counsel that a
complaint had been filed on December 14, 2004 against Skyway, James Kent, CEO
and CFO, and Brent Kovar, President, in U.S. Federal District Court, Eastern
District of Arkansas, File #2004CV00405. We have not been able to obtain a copy
of the complaint but once we have reviewed it we will provide an update on form
8K. We intend to vigorously defend our self and our officers in this matter."
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 Dec 1, 2004 - June 30, 2005 Contact owners and complete $1,200,000-$1,500,000
network negotiations; conduct site
survey, equipment install
Identify, test and upgrade equipment Dec 1, 2004 - June 30, 2005 Identify airlines, execute $700,000-$950,000
in aircraft agreement, install, service,
FAA approval
Build out and equip operations center Dec 1, 2004 - June 30, 2005 Construct and test all $1,000,000-$1,500,000
operations
Continue research and testing of Dec 1, 2004 - June 30, 2005 Continue research and testing $500,000-$750,000
aircraft network
Hire additional employees to operate Dec 1, 2004 - April 30, 2005 Interview and hire $900,000-$1,200,000
network
Identify, test and upgrade equipment Dec 1, 2004 - April 30, 2005 Identify equipment, execute $700,000-$850,000
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:
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.
In May 2004 we entered into a sales and marketing agreement with The Titan
Corporation. We have been notified that on December 31, 2004 Titan will cancel
the agreement under its current terms. As of December 15, 2004, neither party
has provided any services under the contract.
21
Item 3. Controls and Procedures
We maintain and are 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 ("CEO/CFO"evaluated the
effectiveness of the Corporation's disclosure controls and procedures. Based on
the evaluation, our CEO/CFO has discovered a potential material weakness in our
disclosure controls as they relate to press releases and 8K filings (see below).
Our CEO/CFO's evaluation also continued to find weaknesses in the areas of
securities sales and expense and contract review and authorization. Our CEO/CFO
believes that the weaknesses, other than in the area of press releases and 8K
disclosure, are not yet significant due to controls put in place during the
previous quarter and compensating controls, such as the detailed review of these
areas during the preparation of our quarterly report.
These weaknesses are currently being addressed in the actions currently being
taken to improve our disclosure controls and procedures and our CEO/CFO
concluded that our disclosure controls and procedures, combined with
compensating controls are effective as of the end of the period covered by this
report in that information required to be disclosed in this 10QSB has been
recorded, processed, summarized and reported within the current fiscal quarter.
Although there was a change in our internal controls over press releases and 8-K
disclosure during the quarter, there were no changes in our internal control
over financial reporting that occurred during our most recent fiscal quarter
that have materially affected, or are reasonably likely to materially affect,
our internal control over financial reporting.
22
The following is summary of the weaknesses and deficiencies that have been
identified:
o Material weakness related to inadequate or ineffective policies for
disclosing and documenting transactions. We identified a material weakness
in our controls relating to certain non-accounting disclosure and
documentation. We discovered instances where certain corporate documents
were not filed on Form 8-K or otherwise properly processed. There were
instances where press releases and 8-K disclosures were lacking in full
disclosure and certain documentation following the reported financing
arangments was not completed and/or filed in connection with the respective
filings. Furthermore, although Management believes that it made certain
forward looking statements in good faith at the time of the disclosure
those statements may not have been strong enough to effectively
communicate the risks if such financing arrangements were not completed.
Related to this weakness there was an instance where selective disclosure
was made in connection with a valuation report paid for by one of our
investors. We are filing those portions of the valuation report that were
selectively disclosed in an amended 8-K/A filed on December 20, 2004
amending the original 8-K filed on December 1, 2004.
Other amended 8-K filings as a result of this weakness:
o Form 8-K originally filed November 15, 2004 - This reported a press
release titled " The duPont Investment Fund 57289, Inc. Satisfies $7
Million Funding Agreement with SkyWay Communications Holding Corp." We
amended our Form 8-K filing to state that, although the shares and
asset involved in this agreement are in escrow, the final agreements
have not been completed and signed and that upon completion we will
file the agreements in an amended 8-K. This amended Form 8-K was filed
on December 20, 2004.
o Form 8-K originally filed November 17, 2004 - This reported a press
release titled "Lantax Prepared To Fund SkyWay Communications Holding
Corp. With $24 Million." We amended the Form 8-K to state that,
although we believed those statements to be true at the time: 1) There
is no assurance that we will agree to or meet any of the milestones
that will be required to receive the funding and 2) There are no
obligations for Lantex to fund the loan amounts. Although we are close
to finalizing the milestones required to receive funding, funding
cannot be expected until sometime in 2005 and there are no assurance
the conditions or the funding itself will take place. This amended
Form 8-K was filed on December 20, 2004.
o Form 8-K originally filed August 23, 2004 - This reported a press
release titled " Skyway Communication Holding Corp. Receives
Funding of $900,000." This press release stated that an unrelated
individual made the loan to the Company. Subsequent to this
release we determined and were advised that the person was
related to the Company. We filed an 8-K/A on December 20, 2004 to properly
report that the person identified is a related person.
o Deficiencies related to the documentation, review and approval of
stock based compensation agreements. At our most recent year end, we
previously identified deficiencies in controls related to
documentation, review and approval of stock based expenses for certain
aspects of our operations, such deficiencies primarily resulted in
agreements that may have provided significant compensation in excess
23
of the services provided. In addition, these deficiencies resulted in
the inability of accounting personnel to properly classify the
expenses during monthly closing.
o Defiencies related to non-accounting control matters involving sales of
securities by directors and affiliates of the Company. Subsequent to the
most recent quarter but before the filing of this 10QSB, certain directors,
who are officers, sold a portion of their holdings in the Company and
failed to timely file the appropriate reports under Sections 16(a) and
23(a) of the Securities Exchange Act of 1934. Failure to receive
information of these sales may affect the Company's ability to make the
required disclosures concerning delinquent filers. The Company has
implemented a formal trading policy and discussed additional procedures to
assist in assuring that known individuals required to file reports do so in
the appropriate time period.
o Potential deficiencies related to the internal control environment. We have
determined that for the quarterly periods ended July 31, 2004 and October31, 2004, that a subsequent review of these internal controls may find that
we incurred deficiencies due to inadequate staffing in our accounting
department and the lack of a full-time chief financial officer. While we
plan to hire a full time chief financial officer and add accounting
personnel when funds become available, inadequate staffing remains an
ongiong issue that we will need to address.
As a result of the findings above, we have implemented and will continue to
implement the following actions:
o We have established a Code of Ethics.
o We have established a Trading Policy for the entire company.
o We have established a Disclosure Committee and a Corporate Disclosure
Control Policy .
o We have engaged outside resources to supplement our financial and accounting
personnel to support the preparation of financial statements and reports to
be filed with the SEC.
o We are establishing procedures to improve our review and processing of
non-accounting documentation and contracts.
o We intend to engage additional outside consultants to advise our management
on additional enhancements to our internal controls.
Our management is committed to a sound internal control environment. We have
committed considerable resources to the aforementioned reviews and remedies. We
believe that we have addressed the issues identified above, and we believe that
we are in the process of further improving our infrastructure, personnel,
processes and controls to help ensure that we are able to produce accurate
disclosures and financial statements on a timely basis.
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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,
attorney's 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. On November 17, 2004, the Company negotiated a settlement of this
matter and paid Living Earth with 54,348 shares of common stock valued at
$12,500.
On December 15, 2004, the Company was notified by unrelated legal counsel that a
complaint had been filed on December 14, 2004 against Skyway, James Kent, CEO
and CFO, and Brent Kovar, President, in U.S. Federal District Court, Eastern
District of Arkansas, File #2004CV00405. We have not been able to obtain a copy
of the complaint but once we have reviewed it we will provide an update on form
8K. We intend to vigorously defend our self and our officers in this matter."
Item 2. Changes in Securities
During the quarter August 1, 2004 to October 31, 2004, we issued to one (1)
individual 426,140 shares of common stock for $234,377 due to the exercising of
warrants at $.55 per share. We also issued to one individual 1,000,000 shares of
common stock at $.20 per share for $200,000 cash.
During October 2004 in connection with a previous S-8 filing, we issued to
twelve (12) individuals 8,886,754 shares of common stock for accrued expenses
and services of $1,968,327.
In October 2004, we issued 14,300,000 shares of common stock due to conversions
of 1,430,000 shares of Preferred "C" stock.
In September 2004, we issued to one (1) entity 2,000,000 warrants for shares of
common stock at $1.00 - $1.15 per share as payment of $2,125,000 of services.
During August 2004, 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 an adjustment in the market price of the shares.
During August 2004, 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.
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.
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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.
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.
Form 8K filed August 5, 2004 reporting on Item 5
Form 8K filed August 18, 2004 reporting on Item 5
Form 8K/A filed August 20, 2004 reporting on Item 5
Form 8K filed October 13, 2004 reporting on Item 9.01
Form 8K filed October 19, 2004 reporting on Item 9.01
Form 8K filed October 26, 2004 reporting on Items 8.01 and 9.01
Form 8K filed October 28, 2004 reporting on Item 9.01
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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: December 20, 2004/s/ James KentJAMES KENT
Chief Executive and
Chief Financial Officer
(Principal Financial and
Accounting Officer)
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Dates Referenced Herein and Documents Incorporated by Reference
