UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-KSB
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED
FOR THE YEAR ENDED DECEMBER 31, 2005
COMMISSION FILE NUMBER 0-28606
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EMERGE CAPITAL CORP.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 22-3387630
(STATE OR OTHER JURISDICTION (IRS EMPLOYER IDENTIFICATION NO.)
OF INCORPORATION OR ORGANIZATION)
109 NORTH POST OAK LANE, SUITE 422
HOUSTON, TEXAS 77024
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(713) 621-2737
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
Securities registered pursuant to Section 12(b) of the Act:
NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK PAR VALUE $0.001 PER SHARE
(TITLE OF CLASS)
Indicate by check mark whether the issuer is not required to file reports
pursuant to Section 13 or 15(d) of the Exchange Act.
Yes |_| No [X]
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Exchange Act during the preceding
twelve (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 ninety (90) days.
Yes [X] No [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-B is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB. ( )
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes [_] No [X]
Indicate by check mark whether the registrant is a share company (as defined in
Rule 12b-2 of the Exchange Act.
Yes [_] No [X]
The Company's revenues for its most recent fiscal year equal $591,608.
The aggregate market value of the voting stock held by nonaffiliates of the
registrant as of March 31, 2006 was $1,906,865 based on a value of $0.08 per
share.
The number of shares of common stock, par value $0.001 per share, outstanding as
of March 31, 2006: 23,835,816
EMERGE CAPITAL CORP.
FORM 10-KSB
FOR THE YEAR ENDED DECEMBER 31, 2005
INDEX
PAGE
PART I ----
Item 1. Description of Business 1
Item 2. Description of Property 2
Item 3. Legal Proceedings 2
Item 4. Submission of Matters to a Vote of Security Holders 2
PART II
Item 5. Market for Common Equity and Related Shareholder Matters Data 3
Item 6. Management's Discussion and Analysis or Plan of Operation 4
Item 7. Financial Statements 8
Item 8. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure 8
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act 11
Item 10. Executive Compensation 12
Item 11. Security Ownership of Certain Beneficial Owners and Management
and Related Shareholder Matters 13
Item 12. Certain Relationships and Related Transactions 15
Item 13. Exhibits 15
Item 14. Principal Accountant Fees and Services 18
Signatures 19
PART I
ITEM 1. DESCRIPTION OF BUSINESS
In this Annual Report the words "Emerge", "Emerge Capital", "Emerge Capital
Corp.", the "Company", "we", "our" and "us" refer to Emerge Capital Corp.,
collectively with our consolidated subsidiaries, unless the context indicates
otherwise. Our fiscal year ends on December 31st.
On August 31, 2005, NuWave Technologies, Inc. ("NuWave") entered into a merger
agreement with Corporate Strategies, Inc. ("Corporate Strategies") and the
shareholders of Corporate Strategies. The transaction is being reflected as a
reverse acquisition since control of the Company has passed to the shareholders
of Corporate Strategies. Subsequent to the merger, the Company changed its name
to Emerge Capital Corp.
During August 2005, the shares of the equipment leasing subsidiary of Corporate
Strategies were distributed to its shareholders. The mortgage brokerage
subsidiary was sold in December 2005. Subsequent to year end, the Company sold
its real estate development subsidiary. The Company disposed of these
subsidiaries in order to focus primarily on the business activities of Corporate
Strategies going forward.
The Company is an established provider of restructuring strategies, turnaround
execution and business development services for emerging and re-emerging public
companies. The Company markets its services to individual public companies,
hedge funds, institutional investors and banks that have significant exposure in
troubled micro-cap public companies. These companies are typically either in
operational or financial difficulty and may be in default of lending or equity
agreements, and as a result, they may be facing bankruptcy or liquidation if
their operations are not turned around.
The Company is generally compensated with a combination of cash payments on a
monthly or quarterly basis, and outright grants of equity in the form of common
stock and/or warrants for purchasing common stock. We believe this compensation
plan aligns our interests with the client company's shareholders because our
ultimate compensation is maximized by successfully increasing shareholder value.
This performance based compensation arrangement clearly demonstrates that our
interests are consistent with both our clients and their shareholders.
The Company minimizes risk from our restructuring / turnaround clients by
implementing the following policies:
o The Company will not assume the financial obligations of the client
company in any circumstance. In most cases, the financial
institution with the greatest risk has referred the Company to the
transaction.
o The Company requires the client or their investor to provide the
client company with working capital necessary to execute the
turnaround plan.
o The Company requires the client to fully indemnify the Company
against any actions, with the exception of gross negligence or
malfeasance.
o If the client has officer and director insurance, we require the
client to add the Company or any of the Company's contractors as
insured parties under the policy.
o Should the Company consider altering any of the policies above, it
will require a vote of the Board of Directors to waive them and
agree to the maximum amount of risk that the Company will assume.
Competition for the services we provide comes mainly from turnaround management
and restructuring firms, financial advisory firms, business consulting firms and
crisis management groups, many of which have substantially more capital
resources than the Company.
1
Due to the large amount of capital provided by institutional funds into the
sector over the last three (3) years, the Company is optimistic that business
conditions should result in significant growth opportunities for companies
positioned in the restructuring and turnaround management sector.
To date, a significant portion of our business has come from an institutional
fund (Cornell Capital Partners) that invests primarily in micro-cap companies.
The Company currently has five (5) full time employees and employs the services
of two (2) others on a contract basis.
ITEM 2. DESCRIPTION OF PROPERTY
Emerge Capital maintains its headquarters in Houston, Texas through a five (5)
year lease effective February, 2005 which provides 2,644 square feet of office
space. Emerge Capital believes that its property is adequate and suitable for
Emerge Capital's current needs.
At the time of the August 2005 merger the Company acquired a residential
property consisting of land and a residential building in Jersey City, New
Jersey for a total purchase price of $122,000. The purchase price was paid with
$113,000 in cash and $9,000 in the form of a deposit. The property was sold in
December, 2005 for $165,000 and the Company took a mortgage note in the amount
of $148,500 due December 1, 2006 secured by a mortgage on the property.
Also at the time of the merger, Emerge Capital, through its wholly
owned-subsidiary Lehigh Acquisition Corp. ("Lehigh"), acquired a five acre
parcel of un-developed acreage in Cranford, New Jersey. Emerge Capital intended
to develop the property into a 55 and over residential community. In February
2006, the Company sold Lehigh to Cornell Capital Partners LP for total proceeds
of approximately $5,556,000, including cash of $93,000, repayment of $ 4,881,000
promissory notes and $400,000 convertible debentures to Cornell Capital and
payment of $182,000 of payables. The transaction resulted in a gain of
approximately $1,155,000 in February 2006.
ITEM 3. LEGAL PROCEEDINGS
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On or about December 13, 2005, the Company furnished a Definitive Information
Statement to all holders of shares of common stock and Series B Preferred stock
of record at the close of business on December 9, 2005 with respect to the
intent of a majority of the shareholders to approve (a) an amendment to the
Company's Certificate of Incorporation (as amended) to change the name of the
Company from NuWave Technologies, Inc. to Emerge Capital Corp., (b) an amendment
to the Company's Certificate of Incorporation (as amended) to increase the
number of authorized Common Stock from One Hundred Forty Million (140,000,000)
shares to Nine Hundred Million (900,000,000) shares and (c) the adoption of the
Emerge Capital Corp. 2005 Stock Incentive Plan. The Company filed the Definitive
Information Statement with the SEC on Schedule 14C on December 13, 2005. The
proposals were approved and the Definitive Information Statement became
effective on or about Janaury 3, 2006.
2
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
Market Information
Emerge Capital's common stock, par value $0.001 per share, is traded on the
Over-the-Counter Bulletin Board (OTCBB) Market under the symbol EMGC.OB. The
OTCBB is a regulated quotation service that displays real-time quotes, last-sale
prices and volume information in over-the-counter equity securities. The
following table sets forth the range of high and low closing bid prices for our
common stock as reported on the OTCBB during each of the quarters presented. The
quotations set forth below are inter-dealer quotations, without retail mark-ups,
mark-downs or commissions and do not necessarily represent actual transactions.
BID PRICE PER SHARE
-------------------
HIGH LOW
------ ------
Three Months Ended March 31, 2003 (2) $0.014 $0.003
Three Months Ended June 30, 2003 (2) $0.007 $0.002
Three Months Ended September 30, 2003 (2) $0.300 $0.010
Three Months Ended December 31, 2003 (2) $0.190 $0.110
Three Months Ended March 31, 2004 (2) $0.180 $0.090
Three Months Ended June 30, 2004 (2) $0.160 $0.040
Three Months Ended September 30, 2004 (2) $0.085 $0.065
Three Months Ended December 31, 2004 (2) $0.070 $0.065
Three Months Ended March 31, 2005 (2) $0.065 $0.080
Three Months Ended June 30, 2005 (2) $0.095 $0.020
Three Months Ended September 30, 2005 (1) $0.180 $0.050
Three Months Ended December 31,2005 $0.230 $0.060
(1) The August 2005 merger by and among NuWave Technologies, Inc and Corporate
Strategies and its shareholders took place on August 31, 2005 (the Merger Date).
Any common stock data transactions which occurred prior to the Merger Date
pertain to NuWave Technologies, Inc.
(2) On July 21, 2003, NuWave Technologies Inc effected a 1:50 reverse stock
split, as previously approved by shareholders. All closing sales prices above
have been restated retroactively for the effect of the reverse stock split.
As of December 31, 2005, there were approximately ninety-nine (99) holders of
record of the Company's common stock. This number does not include beneficial
owners of the common stock whose shares are held in the names of various
dealers, clearing agencies, banks, brokers and other fiduciaries.
The Company has never declared or paid any cash dividends on its common shares.
In August of 2005, Corporate Strategies, Inc. entered into a share exchange
agreement whereby it exchanged all of the common stock of its subsidiary, CSI
Business Finance, for 100,000 restricted shares of Series A Convertible
Preferred stock of Health Express USA Inc. (HEXS.OB) - subsequently renamed CSI
Business Finance Inc. (CSIB.OB). The preferred stock shares acquired in this
transaction were distributed to the shareholders of Corporate Strategies in the
form of a dividend.
The Company currently intends to retain any future earnings to finance the
growth and development of its business and future operations, and therefore does
not anticipate paying any cash dividends in the foreseeable future.
Securities Authorized for Issuance under Equity Compensation Plans
On December 13, 2005, the Emerge Capital Corp. 2005 Stock Incentive Plan (the
"Plan") was adopted and approved by shareholders. On a calendar year basis, an
amount of shares of Common Stock equivalent to fifteen percent (15%) of the
fully diluted shares outstanding on January 2 of any such calendar year (without
taking into account outstanding Awards as defined in the Plan at the end of the
prior calendar year) may be allocated, at the discretion of the Administrator,
to be granted as Awards under the Plan, less Awards outstanding at the end of
the prior calendar year. In no event shall the number of shares which may be
allocated as Awards under the Plan be less than Ten Million (10,000,000) shares
of Common Stock for a given calendar year. At present, there are no outstanding
options.
3
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Results of Operations
On August 31, 2005, NuWave Technologies, Inc. ( "NuWave") entered into a merger
agreement (the "Agreement") with Corporate Strategies. The Company was
subsequently renamed Emerge Capital Corp. The transaction is being accounted for
as a reverse acquisition since control of the merged group has passed to the
shareholders of the acquired company (Corporate Strategies).
The financial statements include the results of operations of Corporate
Strategies since its inception and the results of operations of Nuwave and its
subsidiaries beginning August 31, 2005, the date of the Agreement. During August
2005, Corporate Strategies distributed the shares of its business finance
subsidiary to shareholders. On December 31, 2005, the Company sold its mortgage
brokerage subsidiary for a convertible debenture. Accordingly the business
finance and mortgage brokerage segments are reported as discontinued operations.
RESULTS OF OPERATIONS FROM CONTINUING OPERATIONS FOR THE YEAR ENDED DECEMBER 31,
2005 COMPARED TO THE YEAR ENDED DECEMBER 31, 2004
REVENUES
Discount income decreased by approximately $32,000 to $153,108 in 2005,
reflecting decreased business volume for the major customer (now in bankruptcy)
and the loss of two other customers. Management does not anticipate generating
any significant new business in this area.
Consulting revenue increased by approximately $30,000 to $183,000 in 2005.
Consulting revenues are generally one-time fees related to specific events, or
contracts covering services to be rendered over a period of time. The Company
enters into contracts to provide strategic consulting services, including
general business development, mergers, acquisitions, management advisory, and
restructuring services. There were four (4) such contracts at December 31, 2005.
The contracts generally provide for a base payment equal to $6,000 - $12,000 per
month, which may be payable in stock, with additional fees for consulting
services beyond a preset amount. Some contracts include warrants or success
fees.
The marketable securities gain decreased by $243,103 from $323,613 in 2004 to
$80,600 in 2005. In the fourth quarter of 2004, the Company recorded a
substantial gain of approximately $260,000 on the trade of marketable securities
for a convertible debenture of another public entity. The Company accepts both
compensation for its services and invests in micro cap marketable securities.
Most of these securities are in companies defined as penny stocks and are
volatile, trading substantially up or down in any given quarter. Management is
investigating additional procedures to mitigate this risk in the future,
including the use of covered puts and calls, but cannot assure investors at this
time that this risk can or will be eliminated or even minimized.
Fee income represents brokerage fees of $175,000 received in 2005 on loans we
referred to an affiliated company, CSI Business Finance Inc. There were no such
fees in 2004.
4
GENERAL AND ADMINISTRATIVE EXPENSES
Salaries and benefits increased by approximately $334,000 to $516,496 in 2005.
The Company added new administrative personnel to improve the Company's
infrastructure and support for growth and operations as a public company.
Business development, travel and entertainment more than doubled to $134,465 in
2005. The Company's changing focus to turnarounds and management restructuring
of public companies resulted in additional travel to call on hedge funds,
institutional investors and banks throughout the country.
Rent more than doubled to $71,819 in 2005, reflecting the addition of a new
location to support the improved infrastructure. The original location will be
excluded in 2006, since the related lease was assumed by the mortgage brokerage
subsidiary which was sold in December 2005.
Professional fees increased by approximately $117,000 to $366,754 in 2005.
Approximately $60,000 of the increase represents the amortization of deferred
issuance costs on the issuance of convertible debt of Corporate Strategies. The
remainder primarily relates to increased accounting, consulting and printing
fees associated with increased complexities for Corporate Strategies as the
chief operating subsidiary of a public company. Fiscal year 2004 includes no
such costs (Corporate Strategies was not a public entity prior to the
Agreement).
Bad debt expense decreased by $309,000 in 2005 to $78,787. Bad debt expense in
2004 included the write-off of a $335,000 debenture from a factoring/consulting
client.
OTHER INCOME AND EXPENSE
Interest expense increased by approximately $147,000 to $192,543 in 2005,
representing a full year of interest on Corporate Strategies indebtedness, and 4
months of interest on the significant indebtedess from NuWave. The significant
reduction of debt during the first quarter of 2006 should reduce interest
expense in 2006.
The financial statements for 2004 have been restated to record derivatives
related to convertible debt (previously reflected as beneficial conversion
features). Derivative expense (gain) represents the change in the fair value of
the net derivative liability at year end, using a layered discounted
probability-weighted cash flow approach. Interest expense derivatives represents
the amortization of discount on the initial valuation of the derivatives, or the
amortization of the change after any modification of debt. The change represents
a full year of amortization for Corporate Strategies in 2005 and four (4) months
of amortization of debt discount for NuWave entities.
Certain convertible debt was modified in November 2005, primarily extending the
maturity dates. The modifications were determined to be substantial and the
Company accounted for the modification as an extinguishment of debt under ITF
96-19, recognizing a debt modification gain of $392,017 in 2005.
Merger expenses of $3,434,943 in 2005 primarily represents liabilities assumed
in excess of assets acquired in the August 2005 merger.
DISCONTINUED OPERATIONS
During August 2005, Corporate Strategies distributed the shares of its business
finance subsidiary (CSI Business Finance, Inc.) to its shareholders. On December
31, 2005, the Company sold its mortgage brokerage subsidiary for a convertible
debenture. Based on a review for collectibility at the transaction date, it was
determined that collectibility was improbable and, accordingly no proceeds were
recognized from the sale. Since the mortgage brokerage subsidiary had negative
equity at the sale date, the Company recognized a profit to the extent of net
liabilities assumed by the purchaser.
Revenues from discontinued operations were approximately $932,000 in 2005 and
$1,152,000 in 2004. Decreasing revenues and continued losses at the mortgage
banking segment contributed to the decision to dispose of that segment of
business. Revenues from the leasing segment was immaterial in both years.
5
RESULTS OF OPERATIONS FROM CONTINUING OPERATIONS FOR THE YEAR ENDED DECEMBER 31,
2004 COMPARED TO THE YEAR ENDED DECEMBER 31, 2003
REVENUES
Discount income decreased by approximately $99,000 to $185,226 in 2004,
reflecting the loss of a major customer, partially offset by increased business
volume for another significant customer (now in bankruptcy), and the Company is
no longer pursuing new business in this sector.
Consulting revenue increased by approximately $150,000 to $153,000 in 2004.
Consulting revenues are generally one-time fees related to specific events, or
contracts covering services to be rendered over a period of time. There was only
one minor contract in 2003.
The marketable securities gain decreased from $719,126 in 2003 to $323,613 in
2004. Fiscal 2003 included significant realized gains on trading of stock
received for settlement of certain client obligations. In the fourth quarter of
2004, the Company recorded a substantial gain of approximately $260,000 on the
trade of marketable securities for a convertible debenture of another public
entity.
GENERAL AND ADMINISTRATIVE EXPENSES
Salaries and benefits decreased by approximately $26,000 to $183,000 in 2004.
Increases of $90,000 in executive salaries was more than offset by increased
allocation of costs to now discontinued subsidiaries.
Advertising decreased by $220,000 to $42,949 in 2004. In 2003, the Company
incurred significant costs in marketing and brand development which was not
repeated in 2004.
Professional fees increased by approximately $160,000 to $250,000 in 2004.
Included in 2004 were increased accounting and legal costs related to an
abandoned registration statement and non deferrable costs associated with
debentures and notes issued during the period.
Bad debt expense increased by $258,000 to $388,000 in 2004. Bad debt expense in
2004 included the write-off of a $335,000 debenture from a factoring/consulting
client.
Other expense increased by $63,000 to $129,000 in 2004. Included in 2004 is an
expense of $68,565 related to redemptions of preferred shares from the
controlling shareholder.
OTHER INCOME AND EXPENSE
Interest expense derivatives of $36,514 and derivative gain of $131,860 appeared
for the first time in fiscal 2004. Financial instruments with derivatives
originated in 2004; there were no similar instruments previously for Corporate
Strategies. The financial statements for 2004 have been restated to record
derivatives related to convertible debt (previously reflected as beneficial
conversion features). Derivative expense (gain) represents the change in the
fair value of the net derivative liability at year end from the initial fair
value, using a layered discounted probability-weighted cash flow approach.
Interest expense derivatives represents the amortization of discount on the
initial valuation of the derivatives. The change represents amortization of debt
discount for Corporate Strategies in 2004.
Bad debt recoveries increased by $115,000 in 2004 to $115,000. The Company
recovered $115,000 from accounts receivable written off in 2003.
DISCONTINUED OPERATIONS
During August 2005, Corporate Strategies distributed the shares of its business
finance subsidiary (CSI Business Finance, Inc.) to shareholders. On December 31,
2005, the Company sold its mortgage brokerage subsidiary. Accordingly, the two
(2) segments have been reported in discontinued operations.
6
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Management's discussion and analysis of our financial condition and results of
operations are based upon our Consolidated Financial Statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States of America. The preparation of these Consolidated Financial
Statements requires that we make estimates and judgments that affect the
reported amounts of assets, liabilities, revenues and expenses, and related
disclosure of contingent assets and liabilities. At each balance sheet date,
management evaluates its estimates, including but not limited to, those related
to accrued liabilities and the valuation allowance offsetting deferred income
taxes. The Company also reviews its investments in marketable securities, notes
receivable, land held for development and fixed assets for possible impairment
whenever events indicate that their carrying value may not be recoverable. We
base our estimates on historical experience and on various other assumptions
that are believed to be reasonable under the circumstances. Actual results may
differ from these estimates under different assumptions or conditions. The
estimates and critical accounting policies that are most important in fully
understanding and evaluating our financial condition and results of operations
include those listed above.
CRITICAL ACCOUNTING POLICIES
DERIVATIVE FINANCIAL INSTRUMENTS
The derivatives issued from 2003 through 2005 have been accounted for in
accordance with SFAS 133 and EITF No. 00-19, "Accounting for Derivative
Financial Instruments Indexed to, and Potentially Settled in, a Company's Own
Stock."
The Company has identified the above debentures have embedded derivatives. These
embedded derivatives have been bifurcated from their respective host debt
contracts and accounted for as derivative liabilities in accordance with EITF
00-19. When multiple derivatives exist within the Convertible Notes, they have
been bundled together as a single hybrid compound instrument in accordance with
SFAS No. 133 Derivatives Implementation Group Implementation Issue No. B-15,
"Embedded Derivatives: Separate Accounting for Multiple Derivative Features
Embedded in a Single Hybrid Instrument".
The embedded derivatives within the Convertible Notes have been recorded at fair
value at the date of issuance; and are marked-to-market each reporting period
with changes in fair value recorded to the Company's income statement as "Net
change in fair value of derivative liabilities". The Company has utilized a
third party valuation firm to fair value the embedded derivatives using a
layered discounted probability-weighted cash flow approach.
The fair value of the derivative liabilities are subject to the changes in the
trading value of the Company's common stock, as well as other factors. As a
result, the Company's financial statements may fluctuate from quarter-to-quarter
based on factors, such as the price of the Company's stock at the balance sheet
date and the amount of shares converted by note holders. Consequently, our
financial position and results of operations may vary from quarter-to-quarter
based on conditions other than our operating revenues and expenses.
REVENUE RECOGNITION
The Company follows the guidance of the SEC's Staff Accounting Bulletin No. 104
for revenue recognition. 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.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 2005, the Company had a working capital deficit of $119,132
including $378,399 of unrestricted cash. The deficit includes a computed
liability for the fair value of derivatives of $836,628, which will only be
realized on the conversion of the derivatives, or settlement of the debentures.
The Company at its option can force conversion of $1,700,000 of convertible
debentures into the Company's common stock at maturity date.
7
In February 2006, the Company sold its wholly-owned subsidiary Lehigh to Cornell
Capital for total proceeds of approximately $5,556,000 including cash of
$93,000, repayment of $ 4,881,000 promissory notes and $ 400,000 convertible
debenture to Cornell, and payment of $182,000 of payables. The transaction
resulted in a gain of approximately $1,155,000 in February 2006.
NuWave has a Standby Equity Distribution Agreement "SEDA" with Cornell Capital
under which the Company may, at its discretion, periodically sell to Cornell
Capital registered shares of the Company's common stock for a total purchase
price of up to $30 million. For each share of common stock purchased under the
SEDA, Cornell Capital will pay NuWave ninety-nine percent (99%) of the volume
weighted average price on the Over-the-Counter Bulletin Board or other principal
market on which its common stock is traded for the five (5) days immediately
following the notice date. Further, Cornell Capital will retain a fee of ten
percent (10%) of each advance under the SEDA.
The amount of each advance is limited to a maximum draw down of $1,000,000 every
seven (7) trading days up to a maximum of $4,000,000 in any thirty (30) day
period. The Company's ability to request advances is conditioned upon the
Company having enough shares of common stock registered pursuant to the SEC
rules and regulations. In addition, the Company may not request advances if the
shares to be issued in connection with such advances would result in Cornell
owning more than 9.9% of the Company's outstanding common stock.
This amount of net available working capital plus anticipated cash flow from
operations and potential proceeds from the shelf registration statement should
be sufficient to satisfy the Company's need for working capital for the
immediate future.
ITEM 7. FINANCIAL STATEMENTS
The Consolidated Financial Statements of Emerge Capital required by Item 310(a)
of Regulation S-B are attached to this Annual Report. Reference is made to Item
13 below for an Index to such Consolidated Financial Statements.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
(A) Previous Independent Accountants:
(1) (i) Effective November 2, 2005, the Company dismissed Weiser LLP ("Weiser")
as its independent registered public accounting firm.
(ii) Weiser's report on the Company's financial statements for the past two (2)
fiscal years, which includes Weiser's sole report for the fiscal year ended
December 31, 2004, did not contain an adverse opinion or a disclaimer of
opinion, and was not qualified as to uncertainty, audit scope, or accounting
principles; however, the report included an explanatory paragraph wherein Weiser
expressed substantial doubt about the Registrant's ability to continue as a
going concern.
(iii) The change of independent registered public accountants was approved by
the Company's Board on November 2, 2005.
8
(iv) During the Company's most recent two (2) fiscal years, which includes
Weiser's sole report on the Registrant's financial statements for the fiscal
year ended December 31, 2004, as well as the subsequent interim period through
November 2, 2005, there were no disagreements on any matter of accounting
principles or practices, financial statement disclosure, or auditing scope or
procedures, which disagreements if not resolved to their satisfaction would have
caused them to make reference in connection with their opinion to the subject
matter of the disagreement.
(v) During the Company's most recent two (2) fiscal years, which includes
Weiser's sole report on the Registrant's financial statements for the fiscal
year ended December 31, 2004, as well as the subsequent interim period through
November 2, 2005, Weiser did not advise the Company of any of the matters
identified in Item 304(a)(1)(iv)(B) of Regulation S-B.
(B) New Independent Accountants:
On November 2, 2005, the Company engaged Thomas Leger & Co., L.L.P. ("Thomas
Leger") as its independent registered public accounting firm to audit the
Company's financial statements. The Company did not consult Thomas Leger on any
matters described in Item 304(a)(2)(i) or (ii) of Regulation S-B during the
Company's two (2) most recent fiscal years or any subsequent interim period
prior to engaging Thomas Leger. Thomas Leger were previously the auditors of
Corporate Strategies, Inc.
(C) The merger was treated as a reverse acquisition, with Corporate Strategies
the surviving entity. The name of the Company was subsequently changed to Emerge
Capital Corp.
ITEM 8A. CONTROLS AND PROCEDURES
As of the end of the period covered by this report, we have evaluated the
effectiveness of the design and operation of our disclosure controls and
procedures under the supervision and with the participation of our Chief
Executive Officer ("CEO") and Chief Financial Officer.
In connection with the audit of our Consolidated Financial Statements for the
fiscal year ended December 31, 2005, our independent registered public
accounting firm informed us that we had significant deficiencies constituting
material weaknesses as defined by the standards of the Public Company Accounting
Oversight Board, some of which had previously been identified in connection with
the audit of our Consolidated Financial Statements for the fiscal year ended
December 31, 2004 and continued to exist at December 31, 2005.
The weaknesses in question were detected during the audit of our financial
statements for the fiscal year ended December 31, 2004, which audit occurred in
February through March 2005, and during the audit of our Consolidated Financial
Statements for the fiscal year ended December 31, 2005, which audit occurred in
February through March, 2006.
The weaknesses were detected in the routine course of the audit review of
accounting for certain non-routine transactions.
The specific problems identified by the auditor were (1) lack of segregation of
duties necessary to maintain proper checks and balances between functions, (2)
failure of internal personnel to adequately communicate the scope and nature of
non-routine transactions and (3) application of improper accounting principles
to financial derivatives. The absence of qualified full time accounting
personnel was a contributing factor to the problems identified by the auditor.
The specific circumstances giving rise to the weaknesses include utilizing the
services of contract accountants on a part time basis in the absence of internal
accounting personnel. As a result of the absence of full time in-house
accounting personnel and the failure of in-house personnel to adequately
communicate information to the outside contract accountants, certain journal
entries required during 2004 and 2005 were not made until the time of the audit
when the need for such entries was identified by the auditor.
9
As a result of our review of the items identified by our auditors, we have
concluded that our previous derivative accounting policies were incorrect and a
communication failure resulted in not properly discounting a note receivable and
reserving an account receivable balance.
In light of the above , we have determined to restate our financial statements
for the quarters in 2004 and 2005 and for the years ending December 31, 2004 and
2005 to correct our accounting for derivatives.
Further, based on the material weaknesses described herein, we concluded that
our disclosure controls and procedures were not effective at the reasonable
assurance level at December 31, 2005. More specifically, our failure to maintain
effective controls over the selection, application and monitoring of our
accounting policies to assure that certain transactions were accounted for in
conformity with generally accepted accounting principles resulted in a failure
during 2004 and 2005 to record an appropriate derivative liability, deemed
interest expense associated with the derivative liability and related charges
associated with changes in the value of embedded derivatives, arising from the
issuance during 2004, 2005 and from the merged companies of convertible notes
that included embedded derivatives; and a failure during the last quarter of
2005 to properly discount the notes receivable from the sale of the subsidiary
and to properly provide an allowance for bad debts on an accounts receivable
balance.
The Company has taken the following steps to address the specific problems
identified by the auditors:
1) Our current Chief Financial Officer is a part time, contract
employee. Due to family health issues he is unable to devote full
time to this position and will resign as Chief Financial Officer and
become a part time controller. We have authorized the hiring of a
Chief Financial Officer and a full-time bookkeeper to allow us to
properly implement the segregation of duties necessary to maintain
checks and balances between functions of our accounting manager,
controller, and Executive functions.
2) All non-routine transactions will be reviewed by our Chief Financial
Officer, controller and accounting manager before they are
completed.
3) Our Chief Financial Officer will monitor our accounting policies to
assure proper accounting of financial derivatives and other unusual
transactions on an ongoing basis.
During the quarter ended December 31, 2005 a full time accounting manager was
hired by the Company. We believe that in conjunction with the hiring of a full
time bookkeeper we will be able to materially improve our internal controls over
financial reporting.
10
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
WITH SECTION 16(A) OF THE EXCHANGE ACT
The Company is not aware of any legal proceedings in which any director,
executive officer, affiliate or any owner of record or beneficial owner of more
than five percent (5%) of any class of voting securities of the Company, or any
associate of any such director, executive officer or affiliate of the Company or
security holder is a party adverse to the Company or any of its subsidiaries or
has a material interest adverse to the Company or any of its subsidiaries.
The following table sets forth the names and ages of the current directors and
executive officers of the Company and the positions held by each person at the
Company. The executive officers of the Company are elected annually by the Board
of Directors (the "Board") . The Directors serve one (1) year terms until their
successors are elected. The executive officers serve terms of one (1) year or
until their death, resignation or removal by the Board.
NAME AGE POSITION(S)
------------------- ------ ------------------------------------------
Timothy J. Connolly 53 Director/Vice Chairman of the Board,
President and Chief Executive Officer
Fred S. Zeidman 59 Director/Chairman of the Board
A.P. Shukis 61 Chief Financial Officer
There are no family relationships among any of the directors or executive
officers of the Company. Except as provided herein, none of the Company's
directors or executive officers is a director of any company that files reports
with the SEC, except as discussed below. None of the Company's directors have
been involved in any bankruptcy or criminal proceeding (excluding traffic and
other minor offenses), and none have been enjoined from engaging in any business
during the past five (5) years.
Set forth below is a brief description of the background and business experience
of each of the Company's existing Directors and executive officers for the past
five (5) years:
TIMOTHY J. CONNOLLY has served as Chief Executive Officer of the Company since
August 31, 2005 and has served as a director of the Company effective October
27, 2005. Mr. Connolly has been actively engaged in the development of companies
for over twenty (20) years, and has been the Chairman, President or CEO of
numerous private and public companies. He is currently director and Chief
Executive Officer of CSI Business Finance, Inc. (OTCBB:CSIB). He is also an
elected official, serving as the President and Chairman of the Board of Weston
Municipal Utility District for the last twenty (20) years. Mr. Connolly has been
a principal or consultant in transactions over the last twenty (20) years that
total in excess of $500 million. He is particularly skilled in the areas of
short and long term strategic planning, capital formation, mergers and
acquisitions, marketing, sales strategy and crisis resolution. Mr. Connolly is
also a nationally syndicated business journalist on both Business Talk Radio
Network and Cable Radio Network.
FRED S. ZEIDMAN has served as a director of the Company effective October 27,
2005. He was appointed Chairman of the United States Holocaust Memorial Council
by President George W. Bush in March 2002. The Council, which includes
fifty-five Presidentially-appointed members and ten (10) members from the U.S.
Congress, is the governing board of the United States Holocaust Memorial Museum.
A prominent Houston-based business and civic leader, Mr. Zeidman is Chairman of
the Board of Seitel, Inc. and Chairman of the Board of Corporate Strategies,
Inc. In 2004 he joined Greenberg Traurig as Senior Managing Director of
Governmental Affairs. Mr. Zeidman also currently serves as a director of
Prosperity Bank in Houston. Mr. Zeidman holds a Bachelor's degree from
Washington University in St. Louis, and a Master's in Business Administration
from New York University.
11
A.P. SHUKIS has served as Chief Financial Officer of the Company since August
31, 2005. He spent four and one half (4 1/2) years as a senior auditor for
Arthur Young & Co. before leaving to pursue a career in the oil and gas
industry. During his career, which included a fifteen (15) year stint as
controller of a public U.S. company traded on the London Stock Exchange, he
gained extensive experience in the areas of financial reporting, due diligence,
treasury, internal control, budgeting and forecasting and banking relations. Mr.
Shukis has served as a Director of Dril-Quip Inc. (NYSE:DRQ) since 2003. Mr.
Shukis received his undergraduate degree from the University of Houston in 1971.
ITEM 10. EXECUTIVE COMPENSATION
COMPENSATION OF EXECUTIVE OFFICERS
The following table sets forth the annual and long-term compensation for
services in all capacities for the fiscal years ended December 31, 2005, 2004
and 2003. No other executive officer received compensation exceeding $100,000
during the years ended December 31, 2005, 2004 and 2003.
SUMMARY COMPENSATION TABLE
Long Term
Annual Compensation Compensation Awards
Securities
Underlying
Other Annual Options All Other
(Number of
Name and Principal Position Year Salary Bonus Compensation Shares) Compensation
--------------------------- ----- --------- ------------- ------------- ------------- -------------
Timothy J. Connolly, Vice 2005 $ 265,000 $ 20,000 $ 12,000 $ -- $ --
Chairman of the Board and
Chief Executive Officer 2004 $ 254,583 -- $ 12,000 $ -- $ --
2003 $ 195,000 -- $ 12,000 $ -- $ --
STOCK OPTIONS
On December 13, 2005, the Emerge Capital Corp. 2005 Stock Incentive Plan (the
"Plan") was adopted and approved by shareholders. On a calendar year basis, an
amount of shares of Common Stock equivalent to fifteen percent (15%) of the
fully diluted shares outstanding on January 2 of any such calendar year may be
allocated, at the discretion of the Administrator, to be granted as awards under
the Plan, less awards outstanding at the end of the prior calendar year. There
are no outstanding options at December 31, 2005.
For the years ended December 31, 2003, 2004 and 2005, there were no options
granted.
EMPLOYMENT AGREEMENTS
On September 1, 2004, Corporate Strategies entered into a five year employment
agreement, effective June 1, 2004, with Timothy J. Connolly to serve as Chief
Executive Officer and director of Corporate Strategies. The agreement has a
renewal provision and provides for an annual salary and bonus upon attaining
certain performance criteria set by the board of directors. The agreement also
provides certain anti-dilution provisions in return for an extension of lock-up
of the Chief Executive Officer's shares until December 31, 2007 and for certain
other fringe benefits.
On September 1, 2004, Corporate Strategies entered into a three year employment
agreement with Fred Zeidman to serve as President and a director of Corporate
Strategies. The agreement has a renewal provision and provides for an annual
salary and bonus upon attaining certain performance criteria set by the board of
directors and certain fringe benefits; in addition, Mr. Zeidman receives 50% of
all consulting fees from companies directly provided by or supervised by him.
12
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED SHAREHOLDER MATTERS
The table below sets forth information with respect to the beneficial ownership
of our common stock and Series B Preferred Stock as of March 6, 2006 for (a) any
person who we know is the beneficial owner of more than five percent (5%) of our
outstanding common stock and Series B Preferred, (b) each of our directors and
executive officers and (c) all of our directors and officers as a group. Other
than the persons identified below, no person owned beneficially more than five
percent (5%) of each of the Company's common stock and Series B Preferred. With
the exception of the Company's 263.921 non-voting shares of Series C Preferred
Stock, there are no other classes or series of capital stock outstanding. As of
March 6, 2006, the Company had 23,835,816 shares of common stock and 100,000
shares of Series B Preferred issued and outstanding.
(A) SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AMOUNT & TOTAL OF
AMOUNT OF NATURE OF DIRECT AND
TITLE OF NAME AND ADDRESS DIRECT BENEFICIAL BENEFICIAL PERCENTAGE
CLASS OF BENEFICIAL OWNER OWNERSHIP OWNERSHIP OWNERSHIP OF CLASS (5)
----- ------------------- ------------- ----------- -------------- -------------
Common Michael O. Sutton
10806 Briar Branch Lane 11,500,000 28,764,157 (1) 40,264,157 76.55%
Houston, TX 77024
Common Timothy J. Connolly
109 North Post Oak Lane 47,500 402,741,347 (2) 402,788,847 94.42%
Suite 422
Houston, TX 77024
Common Jan Carson Connolly
8602 Pasture View Lane -- 402,788,847 (3) 402,788,847 94.42%
Houston, TX 77024
Common iVoice, Inc.
750 highway 34 -- 3,750,000 (4) 3,750,000 15.73%
Matawan, NJ 0747
Common Gerald Holland
22 Coult Lane -- 2,250,000 (4) 2,250,000 9.44%
Old Lyme, CT 07601
Common Cornell Capital Partners, LP
101 Hudson Street, Suite 3701 -- 1,860,000 (4) 1,860,000 7.80%
Jersey City, New Jersey 07302
Common Joanna Saporito
668 W. Saddle River Road -- 1,250,000 (4) 1,250,000 5.24%
Ho-Ho-Kus, NJ 07423
Common Mary-Ellen Viola
294 Long Hill Drive -- 1,250,000 (4) 1,250,000 5.24%
Short Hills, NJ 07078
13
(1) Includes 28,674,157 shares which may be issued upon conversion of
the 6,666 shares of Series B Preferred beneficially owned by Mr.
Sutton.
(2) Includes 342,317,631 shares of common stock which may be issued upon
conversion of 79,331 shares of Series B Preferred beneficially owned
by Mr. Connolly and 60,423,716 shares of common stock which may be
issued upon conversion of 14,603 shares of Series B Preferred
beneficially owned by his spouse.
(3) Includes 47,500 shares of common stock owned by Ms. Connolly's
spouse, 60,423,716 shares of common stock which may be issued upon
conversion of 14,003 shares of Series B Preferred beneficially owned
by Ms. Connolly and 342,317,631 shares of common stock which may be
issued upon conversion of 79,331 shares of Series B Preferred
beneficially owned by spouse.
(4) These shares represent the approximate number of shares underlying
convertivle debentures at an assumed price of $0.08 per share (i.e.
eighty percent (80%) of a recent five (5) day average price of $0.10
per share), subject to an ownership limitation of nine and nine-
tenths percent (9.9%) contained in the convertible debentures.
Because the conversion price will fluctuate based on the market
price of the Company's stock, the actual number of shares to be
issued upon conversion of the debentures may be higher or lower.
(5) Applicable percentages of ownership are based on 23,835,816 shares
of common stock and 100,000 shares of Series B Preferred outstanding
on March 6, 2006 for each shareholder. The Series B Preferrd shall,
on an as converted basis, convert to ninety five percent (95%) of
the issued and outstanding common stock as of the date of August
2005 merger. Beneficial ownership is determined in accordance within
the rules of the SEC and generally includes voting of investment
power with respect to the securities. Shares subject to securities
exercisable or convertible into shares of common stock that are
currently exercisable or exercisable within sixty (60) days of March
6, 2006 are deemed to be beneficially owned by the person holding
such options for the purpose of computing the percentage of
ownership of such persons, but are not treated as outstanding for
the purpose of computing the percentage ownership of any other
person.
(B) SECURITY OWNERSHIP OF MANAGEMENT
AMOUNT & TOTAL OF
AMOUNT OF NATURE OF DIRECT AND
TITLE OF NAME AND ADDRESS DIRECT BENEFICIAL BENEFICIAL PERCENTAGE
CLASS OF BENEFICIAL OWNER OWNERSHIP OWNERSHIP OWNERSHIP OF CLASS (1)
----- ------------------------------- --------- ----------- --------- -------------
Common Timothy J. Connolly
109 North Post Oak Lane 47,500 402,741,347 (2) 402,788,847 94.42%
Suite 422
Houston, TX 77024
Common Fred S. Zeidman -- -- -- 0%
109 North Post Oak Lane
Suite 422
Houston, TX 77024
Common A.P. Shukis -- -- -- 0%
109 North Post Oak Lane
Suite 422
Houston, TX 77024
ALL DIRECTORS AND EXECUTIVE
OFFICERS AS A GROUP (3 PERSONS) 47,500 402,741,347 402,788,847 94.42%
14
AMOUNT & TOTAL OF
AMOUNT OF NATURE OF DIRECT AND
TITLE OF NAME AND ADDRESS DIRECT BENEFICIAL BENEFICIAL PERCENTAGE
CLASS OF BENEFICIAL OWNER OWNERSHIP OWNERSHIP OWNERSHIP OF CLASS (1)
----- ------------------------------- --------- ----------- --------- -------------
(1) Applicable percentages of ownership are based on 23,835,816 shares
of common stock and 100,000 shares of Series B Preferred outstanding
on March 6, 2006 for each shareholder. The Series B Preferrd shall,
on an as converted basis, convert to ninety-five percent (95%) of
the issued and outstanding common stock as of the date of merger.
Beneficial ownership is determined in accordance within the rules of
the SEC and Generally includes voting of investment power with
respect to the securities. Shares subject to securities exercisable
or convertible into shares of common stock that are currently
exercisable or exercisable within sixty (60) days of March 6, 2006
are deemed to be Beneficially owned by the person holding such
options for the purpose of computing the percentage of ownership of
such persons, but are not treated as outstanding for the purpose of
computing the percentage ownership of any other person.
(2) Includes 342,317,631 shares of common stock which may be issued upon
conversion of 79,331 shares of Series B Preferred beneficially owned
by Mr. Connolly and 60,423,716 shares of common stock which may be
issued upon conversion of 14,603 shares of Series B Preferred
beneficially owned by his spouse.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
CONCENTRATION OF TRANSACTIONS WITH CORNELL CAPITAL PARTNERS, LP
At December 31, 2005, $2,100,000 of the convertible debentures and $ 4,881,274,
of secured notes payable are owed to a single creditor, Cornell Capital.
Cornell Capital was the principal lender to Nuwave both before and after the
merger.
Cornell Capital acquired Lehigh Acquisition Corp., formerly a wholly-owned
subsidiary of NuWave, in February 2006. Lehigh owns the land held for
development and sale reflected in the financial statements. Proceeds from the
sale of $5,556,356 reduced indebtedness to Cornell Capital by $5,281,274.
Cornell Capital has significant relationships with affiliated companies, both as
a purchaser and lender.
ITEM 13. EXHIBITS
(a) Documents Filed As Part Of This Report:
See Index to Consolidated Financial Statements attached which are filed as part
of this Annual Report.
(b) Exhibits:
EXHIBIT NO. DESCRIPTION LOCATION
-------------- ---------------------------------------------------- ----------------------------------------------------
4.1 2005 Stock Incentive Plan Incorporated by reference to Appendix A to the
Company's Definitive Information Statement as filed
with the U.S. Securities and Exchange Commission on
December 13, 2005
10.1 Assignment and Amendment Agreement, dated January Incorporated by reference to Exhibit 99.7 to the
26, 2004, related to the Secured Note Payable Company's Current Report on Form 8-K as filed with
Agreement dated December 22, 2003, by and between the U.S. Securities and Exchange Commission on
Stone Street Asset Management, LLC and NuWave January 27, 2005
10.2 Convertible Debenture, issued on May 6, 2004, by Provided herewith
Corporate Strategies, Inc. to Cornell Capital
Partners, LP
10.3 Convertible Debenture, issued on June 24, 2004, by Provided herewith
Corporate Strategies, Inc. to iVoice, Inc.
10.4 Employment Agreement, dated September 1, 2004, by Provided herewith
and between Corporate Strategies, Inc. and Timothy
J. Connolly
10.5 Employment Agreement, dated September 1, 2004, by Provided herewith
and between Corporate Strategies, Inc. and Fred
Zeidman
10.6 Convertible Debenture, issued on September 28, Provided herewith
2004, by Corporate Strategies, Inc. to Cornell
Capital Partners, LP
10.7 Termination Agreement, dated January 26, 2005, Incorporated by reference as Exhibit 99.1 to the
related to the Standby Equity Distribution dated as Company's Current Report on Form 8-K as filed with
of May 2004 by and between the Company and Cornell the U.S. Securities and Exchange Commission on
Capital Partners, LP January 27, 2005
10.8 Standby Equity Distribution Agreement, dated as of Incorporated by reference as Exhibit 99.2 to the
January 26, 2005, between the Company and Cornell Company's Current Report on Form 8-K as filed with
Capital Partners, LP the U.S. Securities and Exchange Commission on
January 27, 2005
10.9 Registration Rights Agreement, dated as of January Incorporated by reference as Exhibit 99.3 to the
26, 2005, by and between the Company and Cornell Company's Current Report on Form 8-K as filed with
Capital Partners, LP the U.S. Securities and Exchange Commission on
January 27, 2005
15
EXHIBIT NO. DESCRIPTION LOCATION
-------------- ---------------------------------------------------- ----------------------------------------------------
10.10 Placement Agent Agreement, dated as of January 26, Incorporated by reference to Exhibit 99.4 to the
2005, by and among the Company, Cornell Capital Company's Current Report on Form 8-K as filed with
Partners, LP and Newbridge Securities Corporation the U.S. Securities and Exchange Commission on
January 27, 2005
10.11 Termination Agreement, dated January 26, 2005, Incorporated by reference to Exhibit 99.5 to the
related to the Convertible Debenture issued by the Company's Current Report on Form 8-K as filed with
Company and Cornell Capital Partners, LP on the U.S. Securities and Exchange Commission on
December 22, 2003 January 27, 2005
10.12 Promissory Note, dated as of January 2, 2005, Incorporated by reference to Exhibit 99.6 to the
issued by the Company to Cornell Capital Partners, Company's Current Report on Form 8-K as filed with
LP the U.S. Securities and Exchange Commission on
January 27, 2005
10.13 Convertible Debenture, issued on April 6, 2005, by Provided herewith
Corporate Strategies, Inc. to Cornell Capital
Partners, LP
10.14 $250,000 Convertible Debenture, dated as of May 5, Incorporated by reference as Exhibit 99.1 to the
2005, issued to Cornell Capital Partners, LP 2005, issued to Cornell Capital Partners, LP
Company's Current Report on Form 8-K as filed with
the U.S. Securities and Exchange Commission on May
10, 2005
10.15 Letter of Intent, dated June 3, 2005, by and Incorporated by reference as Exhibit 99.1 to the
between the Company and Corporate Strategies, Inc. Company's Current Report on Form 8-K as filed with
the U.S. Securities and Exchange Commission on June
16, 2005
10.16 $150,000 Convertible Debenture, dated as of July Incorporated by reference as Exhibit 99.1 to the
20, 2005, issued to Cornell Capital Partners, LP Company's Current Report on Form 8-K as filed with
the U.S. Securities and Exchange Commission on July
28, 2005
10.17 Merger Agreement, dated as of August 31, 2005, by Incorporated by reference as Exhibit 99.1 to the
and among NuWave Technologies, Inc., Strategies Company's Current Report on Form 8-K/A as filed
Acquisition Corp., Corporate Strategies Inc. and with the U.S. Securities and Exchange Commission on
the Shareholders listed therein September 8, 2005
10.18 Services Agreement, dated October 1, 2005, by and Provided herewith
between Timothy J. Connolly and Sagamore Holdings,
Inc.
16
EXHIBIT NO. DESCRIPTION LOCATION
-------------- ---------------------------------------------------- ----------------------------------------------------
10.20 Stock Purchase Agreement, dated as of November 11, Incorporated by reference as Exhibit 10.1 to the
2005, by and among Corporate Strategies, Inc., Mr. Company's Current Report on Form 8-K as filed with
Robert P. Farrell and Mr. Joseph W. Donohue, Jr. the U.S. Securities and Exchange Commission on
January 30, 2006
10.21 Letter, dated November 18, 2005, from Cornell Provided herewith
Capital Partners, LP to modify certain Debentures
10.22 Consulting Agreement, dated December 14, 2005, by Provided herewith
and between Timothy J. Connolly on behalf of
Corporate Strategies, Inc. and Elite Flight
Solutions, Inc.
10.23 Convertible Debenture, issued December 31, 2005, by Provided herewith
Elite Flight Solutions, Inc. to Corporate
Strategies, Inc.
10.24 Consulting Agreement, dated January 1, 2006, by and Provided herewith
between Timothy J. Connolly and Power Technology,
Inc.
10.25 Consulting Agreement, dated January 1, 2006, by and Provided herewith
between Timothy J. Connolly on behalf of Corporate
Strategies, Inc. and TRAC Financial Group, Inc.
10.26 Assumption Agreement, dated February 7, 2006, by Incorporated by reference as Exhibit 10.2 to the
and between Lehigh and Cornell Capital Partners, LP Company's Current Report on Form 8-K as filed with
the U.S. Securities and Exchange Commission on
February 15, 2006
10.27 Stock Purchase Agreement, dated as of February 3, Incorporated by reference as Exhibit 10.1 to the
2006, by and between the Company and Cornell Company's Current Report on Form 8-K as filed with
Capital Partners, LP the U.S. Securities and Exchange Commission on
February 15, 2006
10.28 Joinder Agreement, dated as of February 11, 2006, Incorporated by reference as Exhibit 10.5 to the
effective as of December 31, 2005 by Elite Flight Company's Current Report on Form 8-K as filed with
Solutions, Inc. the U.S. Securities and Exchange Commission on
February 28, 2006
17
EXHIBIT NO. DESCRIPTION LOCATION
-------------- ---------------------------------------------------- ----------------------------------------------------
10.29 Security Agreement, dated as of February 11, 2006, Incorporated by reference as Exhibit 10.4 to the
effective as of December 31, 2005, by and between Company's Current Report on Form 8-K as filed with
Elite Flight Solutions, Inc. and Corporate the U.S. Securities and Exchange Commission on
Strategies, Inc. February 28, 2006
10.30 Secured Convertible Debenture, dated as of February Incorporated by reference as Exhibit 10.3 to the
11, 2006, effective as of December 31, 2005 issued Company's Current Report on Form 8-K as filed with
to Corporate Strategies, Inc. the U.S. Securities and Exchange Commission on
February 28, 2006
10.31 Registration Rights Agreement, dated as of February Incorporated by reference as Exhibit 10.2 to the
11, 2006, effective as of December 31, 2005 by and Company's Current Report on Form 8-K as filed with
between Elite Flight Solutions, Inc. and Corporate the U.S. Securities and Exchange Commission on
Strategies, Inc. February 28, 2006
10.32 Securities Purchase Agreement, dated as of February Incorporated by reference as Exhibit 10.1 to the
11, 2006, effective as of December 31, 2005, by and Company's Current Report on Form 8-K as filed with
between Elite Flight Solutions, Inc. and Corporate the U.S. Securities and Exchange Commission on
Strategies, Inc. February 28, 2006
16.1 Letter, dated November 9, 2005, from Weiser LLP Incorporated by reference as Exhibit 99.1 to the
Company's Current Report on Form 8-K as filed with
the U.S. Securities and Exchange Commission on
November 14, 2005
31.1 Certification by Chief Executive Officer pursuant Provided herewith
to 15.U.S.C. Section 7241, as adopted pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
31.2 Certification by Chief Financial Officer pursuant Provided herewith
pursuant to 15.U.S.C. Section 7241, as adopted
adopted pursuant to Section 302 of the Sarbanes-
Oxley Act of 2002
32.1 Certification by Chief Executive Officer pursuant Provided herewith
to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
32.2 Certification by Chief Financial Officer pursuant Provided herewith
to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
(1) Audit Fees. Corporate Strategies, Inc. paid to Thomas Leger & Co.,
L.L.P. ("Leger") audit fees of $61,943 for the audit of fiscal year 2004 and
$10,254 for 2004 quarterly reviews. The Company paid Leger audit fees of $47,142
for the audit of fiscal year 2005 and $20,510 for 2005 quarterly reviews. The
2005 audit fees above represent fees billed through March 18, 2006 and do not
include the final billing for the 2005 audit.
(2) Audit-related fees. Corporate Strategies, Inc. paid Leger
audit-related fees of $42,764 in 2004 which are costs associated with the filing
of a Form SB-2 which was subsequently withdrawn. The Company paid Leger audit
related fees of $46,728 in 2005 which are costs associated with the merger of
Corporate Strategies, Inc. with NuWave Technologies, Inc., including the filings
of Form 8-K.
(3) Tax Fees. The Company has not paid for tax services to Leger.
(4) All Other Fees. The Company has not paid for any other services to
Leger.
(5) Audit Committee pre-approval policies and procedures. The Company does
not currently have an audit committee. Fred S. Zeidman, Chairman of The Board
of Emerge Capital Corp., approved the engagement of Leger.
18
SIGNATURES
Pursuant to the requirement of Section 13 or 15(d) of the Exchange Act,
Emerge Capital has duly caused this Annual Report to be signed on its behalf by
the undersigned, thereunto duly authorized April 17, 2006.
April 17, 2006 EMERGE CAPITAL CORP.
By: /s/Timothy J. Connolly
------------------------------
Timothy J. Connolly
President, Chief Executive Officer and
Vice Chairman of the Board of Directors
19
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
TABLE OF CONTENTS
PAGE
Report of Independent Registered Public Accounting Firm F-1
Consolidated Balance Sheet as of December 31, 2005 F-2
Consolidated Statements of Operations for the Years Ended
December 31, 2005 and 2004 F-3
Consolidated Statements of Changes in Shareholders' Deficit
for the Years Ended December 31, 2005 and 2004 F-4
Consolidated Statements of Cash Flows for the Years Ended
December 31, 2005 and 2004 F-5
Notes to the Consolidated Financial Statements F-6 to F-24
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FRIM
To the Shareholders
Emerge Capital Corp. (formerly Nuwave Technologies, Inc.) and Subsidiaries
Houston, Texas
We have audited the accompanying consolidated balance sheet of Emerge Capital
Corp. (formerly Nuwave Technologies, Inc.) and Subsidiaries as of December 31,
2005 and the related consolidated statements of operations, changes in
shareholders' deficit, and cash flows for the years ended December 31, 2005 and
2004. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audit.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the consolidated financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the over-all consolidated financial statement
presentation. We believe that our audit provides a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects the financial position of Emerge Capital Corp.
(formerly Nuwave Technologies, Inc.) and Subsidiaries as of December 31, 2005,
and the consolidated results of their operations and their cash flows for the
years ended December 31, 2005 and 2004 in conformity with accounting principles
generally accepted in the United States of America.
/s/ Thomas Leger & Co., L.L.P.
Thomas Leger & Co., L.L.P.
April 8, 2006
Houston, Texas
F-1
EMERGE CAPITAL CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 2005
ASSETS
------
CURRENT ASSETS
Cash and cash equivalents $ 378,399
Restricted cash 98,452
Purchased accounts receivable 90,005
Other accounts receivable (net of allowance for bad debts of $138,737) 85,628
Notes receivable 246,500
Note receivable due from affiliate 344,282
Investment in marketable securities 605,692
Deferred financing costs 100,689
Prepaid expense 26,287
-----------
Total current assets 1,975,934
-----------
NONCURRENT ASSETS
Land held for development and sale 2,883,095
Investments 14,819
Fixed assets, net 71,877
-----------
Total noncurrent assets 2,969,791
-----------
TOTAL ASSETS $ 4,945,725
===========
LIABILITIES AND SHAREHOLDERS' DEFICIT
-------------------------------------
CURRENT LIABILITIES
Accounts payable $ 308,278
Accrued liabilities 190,930
Convertible debentures--net of $9,781 discount 90,219
Notes payable 354,953
Accrued interest payable 184,798
Unearned income 46,000
Derivative liability 836,628
Due to clients 83,260
-----------
Total current liabilities 2,095,066
-----------
NONCURRENT LIABILITIES
Convertible debentures--net of $701,868 discount 1,883,132
Secured notes payable 4,615,858
Accrued interest payable 309,918
-----------
Total noncurrent liabilities 6,808,908
-----------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' DEFICIT
Preferred Stock, par value $.01, 2,000,000 shares authorized:
Series A Convertible Preferred Stock, noncumulative, $.01 par value;
400,000 shares authorized; none issued --
Series B Convertible Preferred Stock, 100,000 shares authorized;
100,000 shares issued and outstanding; no liquidation or redemption
value 1,000
Series C Preferred stock; liquidation preference of $804,000
redeemable at $1,500 per share at Company option, cumulative dividends
of $120 per share per year, non-voting, par value $.01, 1,000 shares
authorized, 536 shares issued and outstanding 5
Common stock, $.001 par value; 900,000,000 shares authorized;
22,710,816 shares issued and outstanding 22,711
Additional paid-in capital 719,638
Retained deficit (4,701,603)
-----------
Total shareholders' deficit (3,958,249)
-----------
TOTAL LIABILITIES AND SHAREHOLDERS' DEFICIT $ 4,945,725
===========
The accompanying notes are an integral
part of these consolidated financial statements.
F-2
EMERGE CAPITAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended December 31
----------------------------
2005 2004
REVENUE
Discount income $ 153,108 $ 185,226
Consulting revenue 183,000 153,270
Marketable securities gain 80,600 323,613
Fee income 174,900 --
------------ ------------
Total revenue 591,608 662,109
------------ ------------
GENERAL AND ADMINISTRATIVE EXPENSES
Salaries and benefits 516,496 182,646
Advertising 58,622 42,949
Business development, travel and entertainment 134,465 65,986
Rent 71,819 25,252
Depreciation and amortization 20,232 13,976
Professional fees 366,754 249,845
Bad debt 78,787 388,000
Other 99,548 128,892
------------ ------------
Total general and administrative expenses--2005
is net of $38,000 allocation to an affiliated
entity 1,346,723 1,097,546
------------ ------------
OPERATING LOSS (755,155) (435,437)
------------ ------------
OTHER (INCOME) EXPENSE
Minority interest -- (16,230)
Interest expense 192,543 45,281
Interest expense-derivatives 232,423 36,514
Net change in fair value of derivative liabilities 108,357 (131,860)
Debt modification gain (392,017) --
Other expense 43,014 --
Other income (24,657) (19,185)
Interest income (36,909) (27,166)
Recovery of bad debts (169,456) (115,000)
Gain on sale of property (28,625) --
Merger expense 3,434,943 --
------------ ------------
Total other (income) expense 3,359,616 (227,646)
------------ ------------
Loss before income tax (4,114,731) (207,791)
------------ ------------
INCOME TAX PROVISION
Current income tax expense (benefit) (50,570) 10,000
Deferred income tax expense -- 33,157
------------ ------------
Total income tax provision (benefit) (50,570) 43,157
------------ ------------
NET LOSS FROM CONTINUING OPERATIONS (4,064,161) (250,948)
------------ ------------
DISCONTINUED OPERATIONS
Loss from discontinued operations net of $61,020
gain from disposition (157,082) (230,853)
------------ ------------
NET LOSS (4,221,243) (481,801)
Preferred dividends paid 60,196 72,086
------------ ------------
LOSS APPLICABLE TO COMMON SHARES $ (4,281,439) $ (553,887)
============ ============
Basic and diluted loss per share:
Loss from continuing operations $ (0.20) $ (0.02)
Loss from discontinued operations (0.01) (0.01)
------------ ------------
$ (0.21) $ (0.03)
============ ============
Basic and diluted average shares outstanding 20,863,605 19,940,000
============ ============
The accompanying notes are an integral
part of these consolidated financial statements.
F-3
EMERGE CAPITAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' DEFICIT
For the Years Ended December 31, 2005 and 2004
Series A
Preferred Stock Class A Common Stock Class B Common Stock
Shares Amount Shares Amount Shares Amount
-------- -------- ------------ ------------ ------------ --------
Balance, December 31, 2003 766 $ 1 -- $ -- 45,000,000 $ 45,000
Redemption of preferred stock (167) -- -- -- -- --
Issuance of stock -- -- 14,880,000 14,880 6,750,000 6,750
Net loss -- -- -- -- -- --
Preferred dividends paid -- -- -- -- -- --
-------- -------- ------------ ------------ ------------ --------
Balance, December 31, 2004 599 1 14,880,000 14,880 51,750,000 51,750
Exchange of Class B common stock
for Class A common stock -- -- 25,000,000 25,000 (8,333,333) (8,333)
Recapitalization through reverse
merger and acquisition of Nuwave Technologies, Inc. (570) (1) (39,880,000) (39,880) (43,416,667) (43,417)
Distribution of CSI Business Finance, Inc.
preferred stock to shareholders -- -- -- -- -- --
Redemption of preferred stock (29) -- -- -- -- --
Net Loss -- -- -- -- -- --
Preferred dividends paid -- -- -- -- -- --
-------- -------- ------------ ------------ ------------ --------
Balance, December 31, 2005 -- $ -- -- $ -- -- $ --
======== ======== ============ ============ ============ ========
Additional
Series B Preferred Series C Preferred Common Stock Paid-in
Shares Amount Shares Amount Shares Amount Capital
-------- ------ ----- --- ----------- -------- ---------
Balance, December 31, 2003 -- $ -- -- $-- -- $ -- $628,788
Redemption of preferred stock -- -- -- -- -- -- (145,471)
Issuance of stock -- -- -- -- -- -- 257,985
Net loss -- -- -- -- -- -- --
Preferred dividends paid -- -- -- -- -- -- --
-------- ------ ----- --- ----------- -------- ---------
Balance, December 31, 2004 -- -- -- -- -- -- 741,302
Exchange of Class B common stock
for Class A common stock -- -- -- -- -- -- (16,667)
Recapitalization through reverse
merger and acquisition of Nuwave Technologies, Inc. 100,000 1,000 570 6 22,710,816 22,711 51,046
Distribution of CSI Business Finance, Inc.
preferred stock to shareholders -- -- -- -- -- -- (1,000)
Redemption of preferred stock -- -- (34) (1) -- -- (55,043)
Net Loss -- -- -- -- -- -- --
Preferred dividends paid -- -- -- -- -- -- --
-------- ------ ----- --- ----------- -------- ---------
Balance, December 31, 2005 100,000 $1,000 536 $ 5 22,710,816 $ 22,711 $ 719,638
======== ====== ===== === =========== ======== =========
Retained
Deficit Total
----------- -----------
Balance, December 31, 2003 $ 96,000 $ 769,789
Redemption of preferred stock -- (145,471)
Issuance of stock -- 279,615
Net loss (481,801) (481,801)
Preferred dividends paid (72,086) (72,086)
----------- -----------
Balance, December 31, 2004 (457,887) 350,046
Exchange of Class B common stock
for Class A common stock -- --
Recapitalization through reverse
merger and acquisition of Nuwave Technologies, Inc. -- (8,535)
Distribution of CSI Business Finance, Inc.
preferred stock to shareholders 37,723 36,723
Redemption of preferred stock -- (55,044)
Net Loss (4,221,243) (4,221,243)
Preferred dividends paid (60,196) (60,196)
----------- -----------
Balance, December 31, 2005 $(4,701,603) $(3,958,249)
=========== ===========
The accompanying notes are an integral
part of these consolidated financial statements.
F-4
EMERGE CAPITAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31
--------------------------
2005 2004
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $(4,221,243) $ (481,801)
Adjustment to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 20,232 32,329
Amortization of deferred expenses 132,801 53,996
Minority interest -- (16,230)
Loss from discontinued operations 218,102
Non-cash merger expenses 3,420,633 --
Non-cash expense for redemption of preferred stock 39,457 75,529
Non-cash interest expense-derivatives 232,423 36,514
Net change in fair value of derivative liability 108,357 (131,860)
Non-cash debt modification gain (392,017) --
Non-cash gain on sale of land (25,776) --
Non-cash gain on sale of subsidiary (61,020) --
Non-cash income -- (6,653)
Non-cash deferred taxes 33,157
(Increase) decrease in assets: --
Purchased accounts receivable 491,269 (262,001)
Other accounts receivable 42,382 (87,903)
Notes receivable (2,298) (80,913)
Deferred tax asset (28,110) --
Prepaid and other (13,176) (17,683)
Investment in marketable securities 295,623 (296,693)
Deferred expenses -- (28,917)
Increase (decrease) in liabilities: --
Accounts payable (7,012) (51,363)
Accrued liabilities (135,852) 31,064
Margin loans (466,986) 392,891
Unearned income 46,000 --
Current tax liability -- (30,945)
Due to clients 61,799 (62,996)
Accrued interest 226,721 --
----------- -----------
Net cash used in operating activities (17,691) (899,178)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of fixed assets (78,097) (78,392)
Cash received in merger 35,853 --
Cash distributed at sale of subsidiary (130,161) --
Purchase of minimum lease payments receivable -- (253,422)
Purchase of debentures -- (86,285)
Redemption of investments -- 1,181
----------- -----------
Net cash used in investing activities (172,405) (416,918)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Principal payments on note payable -- (215,006)
Proceeds from note payable -- 279,352
Net proceeds from sale of convertible debentures 335,000 1,135,000
Net proceeds from issuance of common stock -- 270,000
Purchase of stock from minority interest 1,000 (7,500)
Proceeds from issuance of stock to minority interest -- 10,917
Preferred dividends paid (60,196) (72,086)
----------- -----------
Net cash provided by financing activities 275,804 1,400,677
----------- -----------
NET INCREASE IN CASH AND CASH EQUIVALENTS 85,708 84,581
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 391,143 306,562
----------- -----------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 476,851 $ 391,143
=========== ===========
SUPPLEMENTAL INFORMATION
Interest paid $ 10,977 $ 44,916
Taxes paid -- 40,945
Redemption of preferred stock:
Decrease in accounts receivable 94,500 221,000
Decrease in paid-in capital 55,043 145,471
Acquired in merger:
Assets 3,128,348 --
Liabilities 6,456,805 --
Merger expenses 3,328,457 --
Assets of discounted operations 490,720 --
Liabilities of discounted operations 136,133 --
Non-cash liabilities acquired in merger 6,456,805 --
Capitalized interest 123,636 --
Increase in deferred expenses -- 165,000
Additional minority investment -- 17,584
Decrease in paid-in capital:
For change in par value -- 10,300
For cost of registration statement and issuance of common stock -- 85,714
Marketable securities exchanged for debentures -- 248,715
Common stock issued for services 19,800 --
Reserve for bad debts 78,787 388,000
The accompanying notes are an integral
part of these consolidated financial statements.
F-5
EMERGE CAPITAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2005 And 2004
NOTE 1 - DESCRIPTION OF MERGER, NATURE OF OPERATIONS AND CONSOLIDATION
On August 31, 2005, NuWave Technologies, Inc. ( "NuWave" or "the Company")
entered into a merger agreement (the "Agreement") with Corporate Strategies,
Inc. ("Corporate Strategies") and the shareholders of Corporate Strategies
("Shareholders"). The Company was subsequently renamed Emerge Capital Corp. The
transaction is being accounted for as a reverse acquisition since control of the
merged group has passed to the shareholders of the acquired company (Corporate
Strategies).
Pursuant to the terms of the Agreement, the Company issued one (1) share of its
common stock ("Common Stock"), par value $0.001 per share, to each holder of
Corporate Strategies Class A common stock in exchange for two (2) shares of
Corporate Strategies Class A common stock, par value $0.001 per share. Second,
the Company issued one (1) share of the Company's Series C preferred stock
("Series C Preferred"), par value $0.01 per share, to each holder of Corporate
Strategies Series A preferred stock for one (1) share of Corporate Strategies
Series A preferred stock, par value $0.001 per share.
The Company issued and delivered shares of its Series B convertible Preferred
stock ("Series B Preferred") to each holder of Corporate Strategies Class B
common stock so that effectively upon conversion of the Series B Preferred into
common shares, the common shares issued upon conversion shall be equal to
ninety-five percent (95%) of the issued and outstanding stock of the Company
(calculated on a fully diluted basis as of the date of the Merger, following the
issuance of all the Merger Consideration (as such term is defined in the
Agreement) and after giving effect to such conversion, but not including any
shares of Common Stock issuable upon conversion of any then outstanding Company
convertible debentures ). Therefore, the Merger Consideration for the Common
Stock, Series C Preferred and Series B Preferred was the Corporate Strategies
Class A common, Series A preferred and Class B common, respectively. The number
of shares issued to the Shareholders in connection with the Merger was based
upon a determination by the Company's Board of Directors (the "Board").
The Series B Convertible Preferred Stockholders and the holders of the common
stock vote together and the Preferred Stock shall be counted on an "as
converted" basis, thereby giving the Preferred Shareholders control of the
Company.
NATURE OF OPERATIONS AND ORGANIZATION
The Company primarily provides business restructuring, turnaround execution and
business development advisory services for emerging and re-emerging public and
private companies.
F-6
The Company owned Aim American Mortgage, Inc. ("Aim"), from February 18, 2003 to
December 31, 2005. Aim engaged in residential mortgage brokerage activities. The
consolidated financial statements of the Company include the results of the
operations of Aim through December 31, 2005. Aim was sold on December 31, 2005
and has been reflected in discontinued operations in the financial statements.
On October 22, 2004, the Company formed CSI Business Finance, Inc. ("CSIBF"),
incorporated in Texas, for the purpose of engaging in equipment leasing and
other business finance activities. The consolidated financial statements of the
Company include the results of operations of CSIBF for the period from October
22, 2004 (inception) to August 31, 2005, the date CSIBF was distributed to
shareholders. The results are presented in discontinued operations.
CONSOLIDATION AND PRESENTATION
The accompanying consolidated financial statements include the accounts of the
Company and its subsidiaries. All significant inter-company balances and
transactions have been eliminated.
Since Corporate Strategies is the surviving entity of the reverse merger, the
financial statements include the results of operations since the merger (August
31, 2005) for NuWave and its consolidated subsidiaries, and the operations of
Corporate Strategies since its inception. The statement of operations for the
year ended December 31, 2004 is that of Corporate Strategies.
NOTE 2 -SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
REVENUE RECOGNITION
The Company's revenue recognition policies are in compliance with Staff
Accounting Bulletin 104. Revenue is recognized at the date a formal arrangement
exists, the price is fixed or determinable, the delivery is complete, no other
significant obligation of the Company exists and collectibility is reasonably
assured.
Revenues from sales of real estate are recorded when title is conveyed to the
buyer, adequate cash payment has been received and there is no continued
involvement .The subsidiary holding real estate was sold in February 2006.
Commission income from the brokering of loans is recognized when all of the
services required to be performed for such revenues have been completed.
Incremental direct costs include credit reports appraisal fees, document
preparation fees, wire fees, filing fees, and commissions, and are included in
operating expenses, net of reimbursements. The mortgage brokerage subsidiary was
sold in December 2005, and the results are included in discontinued operations.
Discount income from purchased receivables represents a percentage of the
purchase invoice. The discount percentage earned is determined by the number of
days the invoice is outstanding.
Consulting revenue is recognized as services are performed.
Marketable securities gains (losses) is both trading gains or losses and the
change in market value of the trading securities owned by the Company, including
related puts and calls, in accordance with Financial Accounting Standard 115
"Accounting for Certain Investments in Debt and Equity Securities."
Lease agreements, under which the Company recovers substantially all its
investment from the minimum lease payments are accounted for as finance leases.
At lease commencement, the Company records a minimum lease payment receivable
and unearned lease income. The remaining unearned income is recognized as
revenue over the term of receivables using the interest method. The leasing
subsidiary was distributed to shareholders in August 2005, and the results are
included in discontinued operations
F-7
USE OF ESTIMATES
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect certain reported amounts and disclosures.
Accordingly, actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS
For purposes of the consolidated statement of cash flows, the Company considers
all short-term securities purchased with a maturity date of three months or less
to be cash equivalents.
COLLECTIBILITY OF ACCOUNTS AND NOTES RECEIVABLE
The accounts and notes receivable are reviewed monthly for aging and quarterly
credit evaluation of the customer's financial condition to determine
collectibility. Write-offs or an increase in the allowance for doubtful accounts
are made based on this evaluation. The allowance for doubtful accounts was
approximately $138,000 at December 31, 2005 .
The purchased accounts receivable have a related liability on the Company's
financial statements called "Due to Clients." This liability includes an amount
which represents the difference between the face amount of the invoices
purchased and the amount paid by the Company for the invoice. This amount
effectively serves as an additional allowance for doubtful accounts since it can
be used to offset the customer's uncollected purchased account receivable
balances.
FIXED ASSETS
Fixed assets are stated at cost. Depreciation is computed using the
straight-line method over estimated useful lives of three to five years.
Leasehold improvements are amortized on a straight-line basis over the shorter
of the useful life of the improvement or the term of the lease.
When assets are retired or otherwise disposed of, the cost and related
accumulated depreciation are removed from the accounts, and any resulting gain
or loss is recognized in operations for the period. The cost of maintenance and
repairs is charged to expense as incurred; significant renewals and betterments
are capitalized.
LAND HELD FOR DEVELOPMENT AND SALE
Land held for development and sale is stated at the seller's historical cost
basis, plus the costs of improvements. The subsidiary holding the land was sold
in February 2006.
INTEREST CAPITALIZATION
The Company follows SFAS No. 34, "Capitalization of Interest Costs", which
provides for the capitalization of interest as part of the historical cost of
acquiring certain assets. Interest is capitalized on assets that require a
period of time to get them ready for their intended use, such as real estate
development projects. Interest is capitalized from the period activities begin,
such as planning and permitting, until such time as the project is complete.
Interest costs include interest recognized on obligations having explicit rates,
as well as the amortization of discounts that result from imputing interest on
convertible debentures over the life of the obligation. Interest is capitalized
on only the net book value of the land and improvements, net of the discount
recorded on the acquisition of the land. Interest on specific borrowings
associated with the land, that are in excess of its net book value are expensed
as incurred. Capitalized interest on land held for development and sale for the
four months since the merger was $39,158.
F-8
IMPAIRMENT OF LONG-LIVED ASSETS
The Company periodically assesses the recoverability of long-lived assets,
including property and equipment and land held for development and sale, when
there are indications of potential impairment, based on estimates of
undiscounted future cash flows. The amount of impairment is calculated by
comparing anticipated discounted future cash flows with the carrying value of
the related asset. In performing this analysis, management considers such
factors as current results, trends, and future prospects, in addition to other
economic factors.
DERIVATIVE FINANCIAL INSTRUMENTS
Derivatives are accounted for in accordance with SFAS 133 and EITF No. 00-19,
"Accounting for Derivative Financial Instruments Indexed to, and Potentially
Settled in, a Company's Own Stock
FAIR VALUE DISCLOSURE AT DECEMBER 31, 2005
The carrying value of cash, notes and accounts receivable, accounts payable,
accrued liabilities and notes payable are reasonable estimates of their fair
value because of short-term maturity.
INCOME TAXES
The Company accounts for income taxes under SFAS No. 109, "Accounting for Income
Taxes," which requires an asset and liability approach to financial accounting
and reporting for income taxes. The difference between the financial statement
and tax basis of assets and liabilities is determined annually. Deferred tax
assets and liabilities are computed for those differences that have future tax
consequences using the currently enacted tax laws and rates that apply to the
periods in which they are expected to affect taxable income. Valuation
allowances are established, if necessary, to reduce the deferred tax asset to
the amount that will assure full realization. Income tax expense is the current
tax payable or refundable for the period plus or minus the net change in the
deferred tax assets and liabilities.
ADVERTISING
Advertising costs are expensed as incurred. Advertising expense on continuing
operations was $58,622 and $42,949 for the years ended December 31, 2005 and
2004, respectively.
NET LOSS PER SHARE
Basic income (loss) per share is computed by dividing the net income (loss)
available to common shareholders by the weighted average of common shares
outstanding during the year. Diluted per share amounts assume the conversion,
exercise, or issuance of all potential common stock instruments unless the
effect is anti-dilutive, thereby reducing the loss or increasing the income per
share.
RECLASSIFICATIONS
The accompanying consolidated financial statements for prior years contain
certain reclassifications to conform with current year presentation.
F-9
RECENT ACCOUNTING PRONOUNCEMENTS
In April 2005, the Securities and Exchange Commission amended the effective date
of Statement of Financial Accounting Standards No. 123R, "Share Based Payment"
(`SFAS 123R"), from the first interim or annual period after June 15, 2005 to
the beginning of the next fiscal year that begins after June 15, 2005. SFAS 123R
requires that the cost of all share-based payments to employees, including
grants of employee stock options, be recognized in the financial statements
based on their fair values. That cost will be recognized as an expense over the
vesting period of the award. Pro forma disclosures previously permitted under
SFAS 123 no longer will be an alternative to financial statement recognition. In
addition, the Company will be required to determine fair value in accordance
with SFAS 123R. The Company does not expect that SFAS 123R will have a material
impact on its consolidated financial statements.
In May 2005, the Financial Accounting Standards Board (`FASB") issued Statement
of Financial Accounting Standards No. 154, "Accounting Changes and Error
Corrections-a replacement of APB Opinion No. 20 and FASB Statement No. 3"(`SFAS
154"), which is effective for accounting changes and corrections of errors made
in fiscal years beginning after December 15, 2005. SFAS 154 applies to all
voluntary changes in accounting principles, and changes the accounting and
reporting requirements for a change in accounting principle. SFAS 154 requires
retrospective application to prior periods' financial statements of a voluntary
change in accounting principle unless it is impracticable. APB 20 previously
required that most voluntary changes in accounting principle be recognized by
including in net income of the period of the change the cumulative effect of
changing to the new accounting principle. SFAS 154 also requires that a change
in depreciation, amortization, or depletion method for long-lived, nonfinancial
assets to be accounted for as a change in accounting estimate effected by a
change in accounting principle. SFAS 154 carries forward without change the
guidance in APB 20 for reporting the correction of an error in previously issued
financial statements, a change in accounting estimate and a change in reporting
entity, as well as the provisions of SFAS 3 that govern reporting accounting
changes in interim financial statements. The Company does not expect that SFAS
154 will have a material impact on its consolidated financial statements.
In December 2004, the FASB issued Statement of Financial Accounting Standards
No. 153, "Exchanges of Nonmonetary Assets - an amendment of APB Opinion No. 29"
("SFAS No. 153"). Previous guidance regarding the accounting for nonmonetary
assets was based on the principle that exchanges of nonmonetary assets should be
measured based on the fair value of the assets exchanged. This previous
guidance, however, included certain exceptions to that principle, SFAS No. 153
amends APB Opinion No. 29 to eliminate the exception for nonmonetary exchanges
of similar productive assets and replaces it with a general exception for
exchanges of nonmonetary assets that do not have commercial substance. A
nonmonetary exchange has commercial substance if the future cash flows of the
entity are expected to change significantly as a result of the exchange. The
provisions of SFAS No. 153 are generally effective for nonmonetary asset
exchanges occurring in fiscal periods beginning after June 15, 2005. The Company
does not expect the adoption of SFAS No. 153 will have a material impact on its
consolidated financial statements.
In March 2005, the FASB issued Interpretation No. 47, Accounting for Conditional
Asset Retirement Obligations (FIN 47). FIN 47 is an interpretation of FAS No.
143, Asset Retirement Obligations, and relates to the timing of liability
recognition for legal obligations associated with the retirement of a tangible
long-lived asset in which the timing and (or) method of settlement are
conditional on a future event that may or may not be within the control of the
entity. The adoption of FIN 47, effective December 31, 2005, did not have an
effect on the Company's consolidated results of operations or financial
position.
NOTE 3 - RESTATEMENT OF PREVIOUSLY ISSUED CONSOLIDATED FINANCIAL STATEMENTS
The Company has restated its consolidated balance sheet, consolidated statements
of operations and cash flows for the year ended December 31, 2004 and interim
periods during 2004 and 2005 from the amounts previously reported. The
restatements include adjustments to (a) correct the accounting for convertible
debentures to recognize the effects of derivatives, (b) remove the beneficial
conversion feature previously recorded for the convertible debentures, and (c)
recognize the effects those changes had on recording the merger at August 31,
2005.
Following is a summary of the restatement adjustments:
CONSOLIDATED STATEMENT OF OPERATIONS
For the Year Ended December 31, 2004
Previously Increases As
Reported (Decreases) Restated
------------- ------------- -------------
Merger Expenses $ 370,894 $ (325,000) $ 45,894
Interest expense -derivatives -- 36,514 36,514
Net change in fair value of
derivative liability -- (131,860) (131,860)
------------- ------------- -------------
Total restatements $ 370,894 $ (420,346) $ (49,452)
============= ============= =============
Net loss $ (974,233) $ (420,346) $ (553,887)
============= ============= =============
Basic and diluted loss
per share $ (0.02) $ (0.01)
============= =============
Weighted average common shares used
in computing basic and diluted
loss per share 57,736,557 57,736,657
============= =============
NOTE 4 - CONCENTRATIONS OF CREDIT RISK AND MAJOR CUSTOMERS
Financial instruments, which potentially subject the Company to concentrations
of credit risk consist principally of cash, accounts and notes receivable and
marketable securities. The Company maintains its cash accounts in a high quality
FDIC insured bank in Texas and in money market brokerage accounts. The Company's
accounts receivables consist of purchased receivables for consulting from
companies located in the United States. The Company performs ongoing credit
evaluations of its customers' financial conditions to ensure collections and
minimize losses. The Company reduces its credit risk relating to marketable
securities through diversification of marketable securities held.
For the years ended December 31, 2005 and 2004, the Company had sales as a
percent of annual revenues from continuing operations to the following
customers:
2005 2004
---- ----
Customer A 26% 13%
Customer B 10% --
No other customers accounted for more than 10% of revenue during the year.
F-10
NOTE 5 - CONCENTRATION OF TRANSACTIONS WITH CORNELL CAPITAL PARTNERS, L. P.
At December 31, 2005 , $2,100,000 of the convertible debentures and $ 4,881,274,
of secured notes payable are owed to a single creditor, Cornell Capital
Partners, L.P ("Cornell").
Cornell was the principal lender to Nuwave both before and after the merger.
A wholly owned subsidiary, Lehigh Acquisitions was sold to Cornell in February
2006. Lehigh owns the land held for development and sale reflected in the
financial statements. Proceeds from the sale of $5,556,356 reduced indebtedness
to Cornell by $5,281,274.
Cornell has significant relationships with affiliated companies, both as a
purchaser and lender.
NOTE 6 - PURCHASED ACCOUNTS RECEIVABLE
The Company purchases accounts receivable balances from clients and typically
pays less than the face value of the balance at the time a receivable is
purchased. Any amounts collected by the Company in excess of the amounts paid
for the purchased accounts receivable less fees earned and required reserves are
remitted to client. Such excess amounts may be applied to offset uncollected
account balances. Any remaining excess amounts are recorded in the balance sheet
as due to clients.
NOTE 7 - FIXED ASSETS
Fixed assets consisted of the following at December 31, 2005:
Computer equipment $ 37,799
Furniture and fixtures 61,094
Leasehold improvements 38,752
Intangible 5,000
--------
142,645
Less accumulated depreciation (70,768)
--------
Fixed assets, net $ 71,877
========
Depreciation expense for the years ended December 31, 2005 and 2004 was $20,232
and $13,976, respectively.
NOTE 8 - INVESTMENT IN MARKETABLE SECURITIES
Investments in marketable securities primarily include shares of common stock in
various companies. The investments are considered trading securities, and
accordingly any changes in market value are reflected in the consolidated
statement of operations. At December 31, 2005 and 2004, the Company had
unrealized gains (losses) of $27,930 and ($25,319), respectively, related to
marketable securities held on those dates. These unrealized losses are included
in the consolidated statements of operations for the respective years.
Investments include shares of common stock in companies which do not have a
readily determinable fair market value and are accounted for using the cost
method. Once a quarter, the financial statements, operations and any other
information needed to evaluate these investments are reviewed to determine if an
impairment needs to be recorded.
F-11
NOTE 9 - NOTE RECEIVABLE DUE FROM AFFILIATE
A note receivable from CSI Business Finance, Inc was entered into on July 1,
2005. The original note of $320,034 is adjusted monthly for net
receivable/payable transactions, bears interest at 12%, and is payable on June
30, 2006 or upon demand by Emerge.
NOTE 10 - NOTES PAYABLE
On November 20, 2002, the Company obtained an unsecured revolving line of credit
of $100,000 at prime plus 2% with an open maturity date. At December 31, 2005,
the prime rate was 7.25% and amount borrowed was $89,537. At December 31, 2005,
all payments under the terms of the note were current.
As a result of the merger with NuWave at August 31, 2005, the Company acquired
the following notes payable:
$1,400,000 note payable, secured by land, due in January 2010 (paid in
February 2006 - see Note 23 - Subsequent events.)
$3,481,274 secured by land, due in December 2008 (paid in February 2006 -
see Note 23 - Subsequent events.)
NOTE 11 -CONVERTIBLE DEBENTURES - DERIVATIVE FINANCIAL INSTRUMENTS
The Convertible Debentures issued from 2003 through 2005 have been accounted for
in accordance with SFAS 133 and EITF No. 00-19, "Accounting for Derivative
Financial Instruments Indexed to, and Potentially Settled in, a Company's Own
Stock."
The Company has identified the following instruments have derivatives requiring
evaluation and accounting under the relevant guidance applicable to financial
derivatives:
Cornell Debenture issued 5/6/04 in the face amount of $400,000
Cornell Debenture issued 6/24/04 in the face amount of $500,000
Cornell Debenture issued 9/28/04 in the face amount of $400,000
Cornell Debenture issued 4/6/05 in the faceamount of $400,000
Holland et. al. Debentures issued 12/8/03 in the face amountof $135,000
Holland et. al. Debentures issued 12/22/03 in the face amount of$250,000
Saporito Debenture issued 1/29/04 in the face amount of $100,000
ViolaDebenture issued 10/12/04 in the face amount of $100,000
Cornell Debenturesissued 5/5/05 in the face amount of $250,000
Cornell Debenture issued 7/20/05 inthe face amount of $150,000
The Company has identified the above debentures have embedded derivatives. These
embedded derivatives have been bifurcated from their respective host debt
contracts and accounted for as derivative liabilities in accordance with EITF
00-19. When multiple derivatives exist within the Convertible Notes, they have
been bundled together as a single hybrid compound instrument in accordance with
SFAS No. 133 Derivatives Implementation Group Implementation Issue No. B-15,
"Embedded Derivatives: Separate Accounting for Multiple Derivative Features
Embedded in a Single Hybrid Instrument."
The embedded derivatives within the Convertible Notes have been recorded at fair
value at the date of issuance; and are marked-to-market each reporting period
with changes in fair value recorded to the Company's income statement as "Net
change in fair value of derivative liabilities." The Company has utilized a
third party valuation firm to fair value the embedded derivatives using a
layered discounted probability-weighted cash flow approach.
F-12
The fair value of the derivative liabilities are subject to the changes in the
trading value of the Company's common stock, as well as other factors. As a
result, the Company's financial statements may fluctuate from quarter-to-quarter
based on factors, such as the price of the Company's stock at the balance sheet
date and the amount of shares converted by note holders. Consequently, our
financial position and results of operations may vary from quarter-to-quarter
based on conditions other than our operating revenues and expenses.
CORNELL 5/06/04 CONVERTIBLE DEBENTURE
On May 6, 2004, Corporate Strategies entered into a Secured Debenture agreement
with Cornell Capital Partners LP, pursuant to which the Company sold $400,000 of
convertible notes due May 5, 2007.
The notes bear interest at 5%, which is accrued until maturity on May 5, 2007.
The notes are convertible, at the option of the holders, into common stock of
the Company at a price of $0.18 per share, subject to standard anti-dilution
provisions relating to splits, reverse splits and other transactions plus a
reset provision whereby the conversion price may be adjusted downward to a lower
price per share based on 80% of the lowest closing bid price for the five
trading days prior to conversion. The Holder has the right to cause the notes to
be converted into common stock, subject to an ownership limitation of 4.99% of
the outstanding stock. The Company has the right to repurchase the Notes at 120%
of the face amount. The conversion feature, reset provision and the Company's
optional early redemption right have been bundled together as a single compound
embedded derivative liability, and fair valued using a layered discounted
probability-weighted cash flow approach.
CORNELL 6/24/04 CONVERTIBLE DEBENTURE
On June 24, 2004, Corporate Strategies entered into a Secured Debenture
agreement with I-Voice, pursuant to which the Company sold $500,000 of
convertible notes due May 1, 2007. The notes were subsequently assigned to
Cornell Capital Partners, L.P.
The notes bear interest at 5%, which is accrued until maturity on May 1, 2007.
The notes are convertible, at the option of the holders, into common stock of
the Company at a price of $0.114 per share, subject to standard anti-dilution
provisions relating to splits, reverse splits and other transactions plus a
reset provision whereby the conversion price may be adjusted downward to a lower
price per share based on 80% of the lowest closing bid price for the five
trading days prior to conversion. The Holder has the right to cause the notes to
be converted into common stock, subject to an ownership limitation of 4.99% of
the outstanding stock. The Company has the right to repurchase the Notes at 120%
of the face amount. The conversion feature, reset provision and the Company's
optional early redemption right have been bundled together as a single compound
embedded derivative liability, and fair value using a layered discounted
probability-weighted cash flow approach
CORNELL 9/28/04 CONVERTIBLE DEBENTURE
On September 28, 2004, Corporate Strategies entered into a Secured Debenture
agreement with Cornell Capital Partners, L.P., pursuant to which the Company
sold $400,000 of convertible notes due September 28, 2007.
The notes bear interest at 5%, which is accrued until maturity on September 28,
2007. The notes are convertible, at the option of the holders, into common stock
of the Company at a price of $0.084 per share, subject to standard anti-dilution
provisions relating to splits, reverse splits and other transactions plus a
reset provision whereby the conversion price may be adjusted downward to a lower
price per share based on 80% of the lowest closing bid price for the five
trading days prior to conversion. The Holder has the right to cause the notes to
be converted into common stock, subject to an ownership limitation of 4.99% of
the outstanding stock. The Company has the right to repurchase the Notes at 120%
of the face amount. The conversion feature, reset provision and the Company's
optional early redemption right have been bundled together as a single compound
embedded derivative liability, and fair valued using a layered discounted
probability-weighted cash flow approach.
F-13
CORNELL 4/06/05 CONVERTIBLE DEBENTURE
On April 6, 2005, Corporate Strategies entered into a Secured Debenture
agreement with Cornell Capital Partners, L.P., pursuant to which the Company
sold $400,000 of convertible notes due April 6, 2008.
The notes bear interest at 5%, which is accrued until maturity on April 6, 2008.
The notes are convertible, at the option of the holders, into common stock of
the Company at a price of $0.108 per share, subject to standard anti-dilution
provisions relating to splits, reverse splits and other transactions plus a
reset provision whereby the conversion price may be adjusted downward to a lower
price per share based on 80% of the lowest closing bid price for the five
trading days prior to conversion. The Holder has the right to cause the notes to
be converted into common stock, subject to an ownership limitation of 4.99% of
the outstanding stock. The Company has the right to repurchase the Notes at 120%
of the face amount. The conversion feature, reset provision and the Company's
optional early redemption right have been bundled together as a single compound
embedded derivative liability, and fair valued using a layered discounted
probability-weighted cash flow approach.
HOLLAND ET. AL. 12/08/03 SECURED CONVERTIBLE NOTES
On December 8, 2003, NuWave entered into a Secured Debenture agreement with five
investors (Holland et. al) pursuant to which NuWave sold $135,000 of 5%
convertible notes due December 8, 2005.
The notes bear interest at 5%, which is accrued until maturity on December 8,
2005. The notes are convertible, at the option of the holders, into common stock
of the Company at a price of $0.216 per share, subject to standard anti-dilution
provisions relating to splits, reverse splits and other transactions plus a
reset provision whereby the conversion price may be adjusted downward to a lower
price per share based on 80% of the lowest daily volume weighted average price
("VWAP") for the five trading days prior to conversion. The Holder has the right
to cause the notes to be converted into common stock. The Company has the right
to repurchase the Notes at 110% of the face amount. The notes are unsecured
general obligations of the Company and are subordinated to all other
indebtedness of the Company unless the other indebtedness is expressly made
subordinate to the notes. The notes were acquired by the Company effective
August 31, 2005 as part of the reverse merger between NuWave and the Corporate
Strategies. The notes were amended on November 30, 2005 to defer the maturity
date to January 31, 2007. The conversion feature, reset provision and the
Company's optional early redemption right have been bundled together as a single
compound embedded derivative liability, and fair valued using a layered
discounted probability-weighted cash flow approach. The modification was
determined to be substantial and the Company accounted for the modification as
an extinguishment of debt, under EITF 96-19 and recorded the replacement note.
The single compound embedded derivative liability was valued using the same
methodology for the replacement note.
HOLLAND ET. AL. 12/22/03 SECURED CONVERTIBLE NOTES
On December 22, 2003, NuWave entered into a Secured Debenture agreement with two
investors (Holland et. al) pursuant to which Nuwave sold $250,000 of convertible
notes due December 22, 2005.
The notes bear interest at 5%, which is accrued until maturity on December 22,
2005. The notes are convertible, at the option of the holders, into common stock
of the Company at a price of $0.168 per share, subject to standard anti-dilution
provisions relating to splits, reverse splits and other transactions plus a
reset provision whereby the conversion price may be adjusted downward to a lower
price per share based on 80% of the lowest daily volume weighted average price
("VWAP") for the five trading days prior to conversion. The Holder has the right
to cause the notes to be converted into common stock. The Company has the right
to repurchase the Notes at 110% of the face amount. The notes are unsecured
general obligations of the Company and are subordinated to all other
indebtedness of the Company unless the other indebtedness is expressly made
subordinate to the notes. The notes were acquired by the Company effective
August 31, 2005 as part of the reverse merger between NuWave and Corporate
Strategies The notes were amended on November 30, 2005 to defer the maturity
date to January 31, 2007. The conversion feature, reset provision and the
Company's optional early redemption right have been bundled together as a single
compound embedded derivative liability, and valued using a layered discounted
probability-weighted cash flow approach. The modification was determined to be
substantial and the Company accounted for the modification as an extinguishment
of debt under EITF 96-19, and recorded the replacement note. The single compound
embedded derivative liability was valued using the same methodology for the
replacement note.
F-14
SAPORITO CONVERTIBLE DEBENTURE
On January 29, 2004, NuWave entered into a Secured Debenture agreement with
Joanna Saporito pursuant to which NuWave sold $100,000 of convertible notes due
January 29, 2006.
The notes bear interest at 5%, which is accrued until maturity on January 29,
2006. The notes are convertible, at the option of the holders, into common stock
of the Company at a price of $0.156 per share, subject to standard anti-dilution
provisions relating to splits, reverse splits and other transactions plus a
reset provision whereby the conversion price may be adjusted downward to a lower
price per share based on 80% of the lowest daily volume weighted average price
("VWAP") for the five trading days prior to conversion. The Holder has the right
to cause the notes to be converted into common stock. The Company has the right
to repurchase the Notes at 110% of the face amount. The notes are unsecured
general obligations of the Company and are subordinated to all other
indebtedness of the Company unless the other indebtedness is expressly made
subordinate to the notes. The notes were acquired by the Company effective
August 31, 2005 as part of the reverse merger between NuWave Technologies and
Corporate Strategies. The notes were amended on November 30, 2005 to defer the
maturity date to January 31, 2007. The conversion feature, reset provision and
the Company's optional early redemption right have been bundled together as a
single compound embedded derivative liability, and fair valued using a layered
discounted probability-weighted cash flow approach. The modification was
determined to be substantial and the Company accounted for the modification as
an extinguishment of debt under EITF 96-19, and recorded the replacement note.
The single compound embedded derivative liability was valued using the same
methodology .
VIOLA CONVERTIBLE DEBENTURE
On October 12, 2004, NuWave Technologies entered into a Secured Debenture
agreement with Mary-Ellen Viola pursuant to which NuWave sold $100,000 of
convertible notes due October 12, 2006.
The notes bear interest at 5%, which is accrued until maturity on October 12,
2006. The notes are convertible, at the option of the holders, into common stock
of the Company at a price of $0.078 per share, subject to standard anti-dilution
provisions relating to splits, reverse splits and other transactions plus a
reset provision whereby the conversion price may be adjusted downward to a lower
price per share based on 80% of the lowest closing bid price for the five
trading days prior to conversion. The Holder has the right to cause the notes to
be converted into common stock, subject to an ownership limitation of 9.99% of
the outstanding stock. The Company has the right to repurchase the Notes at 110%
of the face amount. The notes were acquired by the Company effective August 31,
2005 as part of the reverse merger between NuWave and Corporate Strategies. The
conversion feature, reset provision and the Company's optional early redemption
right have been bundled together as a single compound embedded derivative
liability, and fair valued using a layered discounted probability-weighted cash
flow approach.
CORNELL 5/5/05 CONVERTIBLE DEBENTURE
On May 5, 2005, NuWave entered into a Secured Debenture agreement with Cornell
Capital Partners LP, pursuant to which NuWave sold $250,000 of convertible notes
due December 1, 2005.
The notes bear interest at 12%, which is accrued until maturity on December 1,
2005. The notes are convertible, at the option of the holders, into common stock
of the Company at a price of $0.084 per share, subject to standard anti-dilution
provisions relating to splits, reverse splits and other transactions. The Holder
has the right to cause the notes to be converted into common stock, subject to
an ownership limitation of 4.99% of the outstanding stock. The Company has the
right to repurchase the Notes at 120% of the face amount. The notes were
acquired by the Company effective August 31, 2005 as part of the reverse merger
between NuWave Technologies and Corporate Strategies. The notes were amended on
November 30, 2005 to defer the maturity date to January 31, 2007. The conversion
feature and the Company's optional early redemption right have been bundled
together as a single compound embedded derivative liability, and fair valued
using a layered discounted probability-weighted cash flow approach. The
modification was determined to be substantial and the Company accounted for the
modification as an extinguishment of debt under EITF 96-19, and recorded the
replacement note. The single compound embedded derivative liability was valued
using the same methodology.
F-15
CORNELL 7/20/05 CONVERTIBLE DEBENTURE
On July 20, 2005, NuWave entered into a Secured Debenture agreement with Cornell
Capital Partners LP, pursuant to which NuWave sold $150,000 of convertible notes
due February 15, 2006.
The notes bear interest at 12%, which is accrued until maturity on February 15,
2006. The notes are convertible, at the option of the holders, into common stock
of the Company at a price of $0.066 per share, subject to standard anti-dilution
provisions relating to splits, reverse splits and other transactions. The Holder
has the right to cause the notes to be converted into common stock, subject to
an ownership limitation of 4.99% of the outstanding stock. The Company has the
right to repurchase the Notes at 120% of the face amount. The notes were
acquired by the Company effective August 31, 2005 as part of the reverse merger
between NuWave Technologies and Corporate Strategies. The notes were amended on
November 30, 2005 to defer the maturity date to January 31, 2007. The conversion
feature and the Company's optional early redemption right have been bundled
together as a single compound embedded derivative liability, and fair valued
using a layered discounted probability-weighted cash flow approach. The
modification was determined to be substantial and the Company accounted for the
modification as an extinguishment of debt under ITF 96-19, and recorded the
replacement note. The single compound embedded derivative liability was valued
using the same methodology.
DERIVATIVE VALUATIONS
The fair value model utilized to value the various embedded derivatives in the
convertible notes, comprises multiple probability-weighted scenarios under
various assumptions reflecting the economics of the Convertible Notes, such as
the risk-free interest rate, expected Company stock price and volatility,
likelihood of conversion and or redemption, and likelihood default status and
timely registration. At inception, the fair value of this single compound
embedded derivative was bifurcated from the host debt contract and recorded as a
derivative liability which resulted in a reduction of the initial notional
carrying amount of the Convertible Notes (as unamortized discount which will be
amortized over the term of the note under the effective interest method).
The following is a summary of the Convertible Notes and the adjustments made
based on the embedded derivatives:
Summary of Derivative Values
--------------------------------------------------------- -----------------------------------------------------------------
Derivative Liabilities-Value as of:
--------------------------------------------------------- -----------------------------------------------------------------
Convertible Note At 12/31/2004 8/31/2005 11/30/2005 12/31/2005
Inception merger modification
--------- ---------- --------- ------------- ----------
Holland et. al. Debentures issued 12/8/03 (A) $ N/A $ N/A $ 110,919 $ 112,350 $ 111,267
Holland et. al. Debentures issued 12/22/03 (A) N/A N/A 210,460 210,751 206,050
Saporito Debenture issued 1/29/04 (A) N/A N/A 82,330 83,222 83,322
Cornell Debentures issued 5/6/04 (B) 120,329 28,946 N/A N/A 70,327
F-16
Cornell Debentures issued 6/24/04 (B) 56,117 34,619 N/A N/A 76,821
Cornell Debentures issued 9/28/04 (B) 55,921 36,942 N/A N/A 75,570
Viola Debenture issued 10/12/04 (A) N/A N/A 14,881 N/A 73,920
Cornell Debentures issued 4/6/05 (B) 134,717 N/A N/A N/A 116,753
Cornell Debentures issued 5/5/05 (A) N/A N/A 4,810 44,698 11,221
Cornell Debenture issued 7/20/05 A) N/A N/A 2,122 41,384 11,370
--------- ---------- --------- ------------- ----------
Total $ 836,628
==========
(A) NuWave
(B) Corporate Strategies
DEBT DISCOUNTS
For the period from inception of the Convertible Notes through each balance
sheet date, the amortization of unamortized discount on the Convertible Notes
has been classified as interest expense in the accompanying statement of
operation. The following table summarizes the debt discount as of December 31,
2004 and 2005 from the amortization of the embedded derivatives for each
convertible note:
Summary of Debt Discount
Debt Discount
--------------------------------------------------------------------------------
Convertible Note 12/31/2004 12/31/2005
----------------------------------------------------- ---------- -----------
Holland et. al. Debentures issued 12/8/03(A) $ N/A $ 108,776
Holland et. al. Debentures issued 12/22/03(A) N/A 204,279
Saporito Debenture issued 1/29/04(A) N/A 80,575
Cornell Debentures issued 5/6/04 (B) 97,558 59,205
Cornell Debentures issued 6/24/04(B) 46,851 28,507
Cornell Debentures issued 9/28/04(B) 51,444 33,501
Viola Debenture issued 10/12/04 (A) N/A 9,781
Cornell Debentures issued 4/6/05(B) N/A 106,577
Cornell Debentures issued 5/5/05(A) N/A 41,699
Cornell Debenture issued 7/20/05(A) N/A 38,749
----------------------------------------------------- ---------- -----------
Total: $ 711,649
===========
(A) NuWave
(B) Corporate Strategies
F-17
Annual maturities of notes payable and convertible debentures at December 31,
2005 are as follows:
Year Ending December 31, Amount
------------------------ ------------
2006 $ 454,953
2007 2,463,995
2008 4,174,543
2009 308,274
2010 254,046
------------
7,655,811
Less: unamortized debt discount (711,649)
------------
Total notes payable and
convertible debentures $ 6,944,162
============
NOTE 12 - DEBT EXTINGUISHMENT
The Company accounts for modifications to debt instruments based on the
accounting guidance found in EITF 96-19, Debtor's Accounting for a Modification
or Exchange of Debt Instruments. Several of the convertible notes were modified
in November, 2005 to extend the maturity to January 31, 2007. Upon modification,
each of the convertible notes were tested for extinguishment under the guidance
of EITF 96-19. The modification was determined to be substantial for the
following notes and the Company accounted for the modification as an
extinguishment of debt and recorded the following gains/(losses):
F-18
Summary of Debt Extinguishment
---------------------------------------------- ---------------------------------
Convertible Note Gain on Extinguishment
---------------------------------------------- ---------------------------------
Holland et. al. Debentures issued 12/8/03 $ 113,268
Holland et. al. Debentures issued 12/22/03 194,414
Saporito Debenture issued 1/29/04 68,571
Cornell Debentures issued 5/5/05 7,071
Cornell Debenture issued 7/20/05 8,692
------------
Total $ 392,017
============
NOTE 13 - DESCRIPTION OF CAPITAL STOCK
The current authorized capital stock of the Company consists of Nine hundred
Million (900,000,000) shares of Common Stock, par value $0.001 per share, One
Hundred Thousand (100,000) shares of convertible Series B Preferred, par value
$0.01 per share and One Thousand (1,000) non-voting shares of Series C
Preferred, par value $0.01 per share. As of December 31, 2005, 22,710,816 shares
of Common Stock, One Hundred Thousand (100,000) shares of Series B Preferred and
536.199 shares of Series C preferred stock were issued and outstanding. The
following description is a summary of the capital stock and contains the
material terms of voting capital stock.
Each share of Common Stock entitles the holder to one (1) vote on each matter
submitted to a vote of our shareholders, including the election of Directors.
There is no cumulative voting. Subject to preferences that may be applicable to
any outstanding preferred stock, Shareholders are entitled to receive ratably
such dividends, if any, as may be declared from time to time by the Board of
Directors. Shareholders have no preemptive, conversion or other subscription
rights.
F-19
The Company is authorized to issue two million (2,000,000) shares of preferred
stock. As a class, the holders of the Company's Series B Preferred shall,
collectively, be entitled to cast a number of votes equal to ninety-five percent
(95%) of the total issued and outstanding voting stock of the company on all
matters submitted to the shareholders for approval, which votes shall be
distributed among the holders of Series B Preferred on a pro rata basis based
upon the number of shares of Series B Preferred held by such respective holders.
The holders of shares of the Series B Preferred shall be entitled to vote on all
matters on which the common stock shall be entitled to vote. The series c
preferred shares have no voting rights, except as required under delaware
general corporation law.
NOTE 14 - WARRANTS
At December 31, 2005 warrants were outstanding to purchase 200,000 shares of the
Company's common stock for $1.00 per common share. The warrants expire in
September 2008.
NOTE 15 - STOCK OPTIONS
On December 13, 2005, the Emerge Capital Corp. 2005 Stock Incentive Plan (the
Plan) was adopted and approved by shareholders. On a calendar year basis, an
amount of shares of Common Stock equivalent to the greater of 10 million common
shares or fifteen percent (15%) of the fully diluted shares outstanding on
January 2 of any such calendar year may be allocated, at the discretion of the
Administrator, to be granted as awards under the Plan, less awards outstanding
at the end of the prior calendar year. There are no outstanding options at
December 31, 2005.
NOTE 16 - COMMITMENTS AND CONTINGENCIES
EMPLOYMENT CONTRACTS
On September 1, 2004, the Company entered into a five year employment agreement,
effective June 1, 2004, with Tim Connolly, Chief Executive Officer and Vice
Chairman of the Board. The agreement has a renewal provision and provides for an
annual salary and bonus upon attaining certain performance criteria set by the
board of directors. The agreement also provides certain anti-dilution provisions
in return for an extension of lock-up of the Chief Executive Officer's shares
until December 31, 2007 and for certain other fringe benefits.
On September 1, 2004, Corporate Strategies entered into a three year employment
agreement with Fred Zeidman, Chairman of the Board. The agreement has a renewal
provision and provides for an annual salary and bonus upon attaining certain
performance criteria set by the board of directors and certain fringe benefits;
in addition, Mr. Zeidman receives 50% of all consulting fees from companies
directly provided by or supervised by him.
LEASES
The Company leases its office space under operating leases. Rental expense under
operating leases for continuing operations aggregated $71,819 and $25,252 for
the years ended December 31, 2005 and 2004, respectively. Effective February 10,
2005, the Company entered into a new five year lease in and moved the Company's
headquarters there, with AIM remaining in the other leased area. AIM was sold in
December 2005 and assumed the lease on the area they occupy.
F-20
Future minimum payments under non-cancellable operating leases for continuing
operations with initial or remaining terms of one year or more consist of the
following at December 31, 2005:
Operating
Leases
---------
2006 $ 84,652
2007 73,591
2008 74,032
2009 74,032
2010 8,058
---------
Total minimum lease payments $ 314,365
=========
NOTE 17 - STANDBY EQUITY DISTRIBUTION AGREEMENT
Emerge entered into a Standby Equity Distribution Agreement "SEDA " with Cornell
under which the Company may, at its discretion, periodically sell to Cornell
registered shares of the Company's common stock for a total purchase price of up
to $30 million. For each share of common stock purchased under the SEDA, Cornell
will pay Emerge 99% of the volume weighted average price on the Over-the-Counter
Bulletin Board or other principal market on which its common stock is traded for
the 5 days immediately following the notice date. Further, Cornell will retain a
fee of 10% of each advance under the SEDA. Pursuant to the terms of the SEDA,
the Company is restricted from raising capital from the sale of securities at a
price less than the market price of the Company's common stock on the date of
issuance or granting additional security interests in the Company's assets.
The amount of each advance is limited to a maximum draw down of $1,000,000 every
7 trading days up to a maximum of $4,000,000 in any 30-day period. The amount
available under the SEDA is not dependent on the price or volume of the
Company's common stock. The Company's ability to request advances is conditioned
upon the Company having enough shares of common stock registered pursuant to the
SEC rules and regulations. In addition, the Company may not request advances if
the shares to be issued in connection with such advances would result in Cornell
owning more than 9.9% of the Company's outstanding common stock.
NOTE 18 - RELATED PARTY TRANSACTIONS
Emerge and Business Finance are two separate public entities that are under
common control. This common control has the potential for altering operating
results or financial position in a manner significantly different from those
that would have been obtained if the entities were autonomous. Common management
has developed certain controls to minimize potential conflicts by segregating
types of transactions between the two entities, and limiting transactions
between the two entities to those contractually permitted.
BROKERAGE FEES
The Company has an arrangement whereby it introduces prospective financing
clients to CSI Business Finance (Finance), a related party; if a transaction is
consummated, the Company earns a fee which is paid by the customer. For the four
months since the spin-off of Finance, such fees have totaled $175,000.
F-21
ALLOCATION OF OPERATING EXPENSES
The Company performs certain administrative and management functions for
Finance. Based on an estimation of efforts expended, Finance was allocated
approximately $38,000 since the spin-off in August 2005.
NOTE 19 - INCOME TAXES
The following table sets forth a reconciliation of the statutory federal income
tax for the year ended December 31, 2005 and 2004:
Loss before taxes $ (4,271,813) $ (438,644)
============ ============
Income tax benefit computed at statutory rates $ (1,452,416) $ (149,139)
Permanent differences, nondeductible expenses 47,608 29,407
Increase in valuation allowance 173,247 113,900
Net increase in fair value of devivative
liability net of amortization of discount
and debt modification gain (17,420) (32,417)
Gain on sale of subsidiary 118,048 --
Merger expense 1,062,767 --
Net operating loss allocable to a
a subsidiary that was sold 96,668 --
Increase in deferred liability -- 13,807
Other 22,068 (18,715)
------------ ------------
Tax (Liability) Benefit $ 50,570 $ (43,157)
============ ============
The Company will file a consolidated tax return with its subsidiaries.
DEFERRED INCOME TAXES
The tax effects of the temporary differences between financial statement income
and taxable income are recognized as a deferred tax asset and liability.
Significant components of the deferred tax asset and liability as of December
31, 2005 is set out below:
DEFERRED TAX ASSET
Conversion to cash basis for tax reporting purposes $ 16,121
Net operating loss 100,108
Valuation allowance (287,147)
Unrealized loss on security transactions 153,222
Accrued interest 10,656
Reserve for bad debts 26,787
------------
Deferred tax asset 19,747
DEFERRED TAX LIABILITY
Fixed asset tax basis difference 19,747
------------
Net deferred tax asset (liability) $ --
============
The Company has a net operating loss carry forward estimated at $294,000 which
expires in 2026. The loss may be limited under Internal Revenue Code section
382.
F-22
NOTE 20 - SEGMENT REPORTING
The Company had four segments: business services (which consists of turnaround
execution services, management restructuring services, and business development
services) and real estate development which were continuing at December 31,
2005, and mortgage brokerage, previously through its 85% owned subsidiary, Aim
American Mortgage, Inc., (Aim was sold on December 31, 2005.), and equipment
leasing and business finance, through its wholly owned subsidiary, CSI Business
Finance, Inc. (which was distributed to the shareholders of CSI effective August
31, 2005.) The mortgage brokerage and equipment leasing and business finance
segments are treated as discontinued operations in the financial statements.
The Company primarily provides business restructuring, turnaround execution and
business development advisory services for emerging and re-emerging public
companies.
The Company evaluates segment performance and allocates resources based on
several factors, of which revenue and income before federal income tax are the
primary financial measures. The accounting policies of the reportable segments
are the same as those described in the footnote entitled "Summary of Significant
Accounting Policies" of the Notes to the Consolidated Financial Statements.
The Company's operations are conducted in the United States.
Discontinued Operations
-------------------------
Business Real Mortgage Equipment
Services Estate Brokerage Leasing(1)
----------- ----------- ----------- ----------
Year ended December 31, 2004
Revenue $ 662,109 $ -- $ 1,145,025 $ 6,653
Interest expense/(income) 54,629 -- (8,654) --
Income (Loss) before income tax (207,791) -- (233,078) 2,875
Segment assets 1,921,509 -- 412,855 338,223
Additions to long-term assets 9,681 -- 34,391 34,320
Depreciation and amortization 13,976 -- 17,400 953
Year ended December 31, 2005
Revenue $ 591,608 $ -- $ 932,330 $ --
Interest expense/(income) 347,581 43,428 (3,358) 6,371
Loss before income tax, merger
expense and discontinued operations (665,542) (14,426) -- --
Loss from discontinued operations (268,053) (38,791)
Segment assets 1,913,194 3,032,531 -- --
Additions to long-term assets 78,097 -- -- --
Depreciation and amortization 20,232 -- -- --
(1) Amounts presented for December 31, 2004 are for the period from October 22,
2004 (inception) to December 31, 2004
F-23
NOTE 21 - CONSULTING SERVICES CONTRACTS
The Company enters into contracts to provide strategic consulting services,
including general business development, mergers, acquisitions, management
advisory, and restructuring services. There were four such contracts at December
31, 2005. The contracts generally provide for a base payment of $6,000 - 12,000
per month, which may be payable in stock, with additional fees for consulting
services beyond a preset amount. Some contracts include warrants or success
fees.
NOTE 22 - SAGAMORE TRANSACTIONS
As part of a restructuring consulting arrangement the Company received 70% of
the then outstanding stock of Sagamore, Holdings, Inc. ("Sagamore") for a
nominal price ($100), in order to exercise temporary control. Major creditors
have indicated their intent to convert indebtedness into stock, and the plan is
for Sagamore to issue additional shares to satisfy other indebtedness. Sagamore
has a history of operating losses, and future profitability depends on the
success of restructuring. Based on temporary control, the minimal investment
with no commitments for additional capital from the Company, and the history of
significant losses, the Company has determined it is appropriate to treat
Sagamore as an investment, recorded under the equity method. Accordingly,
Sagamore is not consolidated in the accompanying financial statements.
NOTE 23 - SUBSEQUENT EVENTS - UNAUDITED
In February 2006, the Company sold its 100% owned subsidiary Lehigh to Cornell
for total proceeds of approximately $5,556,000 including cash of $93,000,
repayment of $ 4,881,000 promissory notes and $400,000 convertible debenture to
Cornell, and payment of $182,000 of payables. The transaction resulted in a gain
of approximately $1,155,000 in February 2006.
On February 21, 2006, the Company agreed to repurchase 272.278 shares of the
Company's Series C Preferred stock for a promissory note of $240,000. The note
bears interest at 8% and is payable in monthly installments of approximately
$4,800 until paid in full.
NOTE 24 - PRO FORMA STATEMENT OF OPERATIONS
The unaudited condensed consolidated statement of operations for the year ended
December 31, 2005 and 2004 is presented as if the merger exchange had taken
place at December 31, 2004 and 2003. The unaudited condensed consolidated
statement of operations is provided for informational purposes only and does not
purport to represent what the consolidated results of operations would have been
had the merger, in fact, occurred on those dates and is presented for
illustrative purposes only. The pro forma adjustments are based upon available
information and assumptions that management believes are reasonable.
Emerge
DECEMBER 31, 2005 Capital
Corp. January-
For the year August 2005
Ended December 31, NuWave
2005(c) Transactions Adjustment Proforma
------------ ------------ ------------ ------------
Revenue $ 591,608 $ -- $ -- $ 591,608
General and administrative
expense 1,346,723 673,045 (497,568)(a) 1,522,200
Other (income) expense 3,359,616 22,512 (21,619)(a) 3,354,475
(6,034)(b)
Tax benefit (50,570) -- -- (50,570)
------------ ------------ ------------ ------------
Net loss from continuing
operations $ (4,064,161) $ (695,557) $ (525,221) $ 4,234,497
============ ============ ============ ============
(a) To eliminate expenses that do not relate to on-going operations.
(b) To record the amortization of debt discount and net change in fair value
of derivative liabilities.
(c) Includes the operations of NuWave for the four(4) months since the merger.
DECEMBER 31, 2004
Emerge
Capital Nuwave
Corp. Technologies, Inc.
For the year For the year ended
Ended December 31, December 31,
2004 2004 Adjustment Proforma
------------ ------------ ------------ ------------
Revenue $ 1,947,972 $ -- $ -- $ 1,947,972
General and administrative
expense 2,488,081 740,669 (475,789)(a) 5,653,961
2,901,000 (b)
Other (income) expense 318,231 (355,280) 632,811 (a) 595,762
Tax Provision (benefit) 43,807 (49,590) 49,590 (a) 43,807
------------ ------------ ------------ ------------
Net loss from continuing
operations $ (902,147) $ (335,799) $ (3,107,612) $ (4,345,558)
============ ============ ============ ============
(a) To eliminate expenses that do not relate to on-going operations.
(b) Recording merger expense.
F-24