UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB/A
Amendment No. 3
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE OF
1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2004
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE TRANSITION PERIOD FROM ________________ TO _________________
COMMISSION FILE NUMBER: 000-33231
INNOVA HOLDINGS, INC.
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(EXACT NAME OF THE COMPANY AS SPECIFIED IN ITS CHARTER)
DELAWARE 95-4868120
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(STATE OR OTHER JURISDICTION OF (IRS EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
17105 SAN CARLOS BOULEVARD
SUITE A6151 FORT MYERS FL 33931
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(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
(239) 466-0488
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(ISSUER TELEPHONE NUMBER)
SECURITIES REGISTERED UNDER SECTION 12(B) OF THE ACT:
TITLE OF EACH CLASS REGISTERED: NAME OF EACH EXCHANGE ON WHICH REGISTERED:
------------------------------- ------------------------------------------
NONE NONE
SECURITIES REGISTERED UNDER SECTION 12(G) OF THE ACT:
COMMON STOCK, PAR VALUE $.001
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(TITLE OF CLASS)
Indicate by check mark whether the Company (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Company was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. [X] Yes [ ] No
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of the Company'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. [X] Yes [ ] No
State issuer's revenues for its most recent fiscal year. $-0-. State the
aggregate market value of the voting and non-voting common equity held by
non-affiliates computed by reference to the price at which the common equity was
sold, or the average bid and asked price of such common equity, as of a
specified date within the past 60 days. (See definition of affiliate in Rule
12b-2 of the Exchange Act.) As of March 15, 2005, approximately $4,500,000
As of March 15, 2005 there were 371,296,897 shares of the issuer's $.001 par
value common stock issued and outstanding.
Documents incorporated by reference. There are no annual reports to security
holders, proxy information statements, or any prospectus filed pursuant to Rule
424 of the Securities Act of 1933 incorporated herein by reference.
Transitional Small Business Disclosure format (check one):
[ ] Yes [X] No
2
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TABLE OF CONTENTS
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ITEM NUMBER AND CAPTION PAGE
Special Note Regarding Forward-Looking Statements..........................4
PART I
1. Description of Business..............................................5
2. Description of Property.............................................16
3. Legal Proceedings...................................................16
4. Submission of Matters to a Vote of Security Holders.................16
PART II
5. Market for Common Equity and Related Stockholder Matters............17
6. Management's Discussion and Analysis or Plan of Operation...........20
7. Financial Statements................................................21
8. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosures..............................................21
8A. Controls and Procedures............................................23
8B. Other Information .................................................26
PART III
9. Directors, Executive Officers, Promoters and Control
Persons; Compliance with Section 16(a) of the Exchange Act.........27
10. Executive Compensation.............................................29
11. Security Ownership of Certain Beneficial Owners and Management.....31
12. Certain Relationships and Related Transactions.....................33
13. Exhibits ..........................................................34
14. Principal Accountant Fees and Services.............................36
NOTE: Registrant has filed this Report on Form 10-KSB/A in order to restate the
financial statements included in its Form 10-KSB filed on April 19, 2005 and to
revise its disclosure under ITEM 8A.- CONTROLS AND PROCEDURES.
3
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This report contains certain financial information and statements regarding our
operations and financial prospects of a forward-looking nature. Although these
statements accurately reflect management's current understanding and beliefs, we
caution you that certain important factors may affect our actual results and
could cause such results to differ materially from any forward-looking
statements which may be deemed to be made in this report. For this purpose, any
statements contained in this Report which are not statements of historical fact
may be deemed to be forward-looking statements. Without limiting the generality
of the foregoing, words such as, "may", "will", "intend", "expect", "believe",
"anticipate", "could", "estimate", "plan" or "continue" or the negative
variations of those words or comparable terminology are intended to identify
forward-looking statements. There can be no assurance of any kind that such
forward-looking information and statements will be reflective in any way of our
actual future operations and/or financial results, and any of such information
and statements should not be relied upon either in whole or in part in
connection with any decision to invest in the shares.
4
PART I
ITEM 1. DESCRIPTION OF BUSINESS.
Innova Holdings, Inc. (Innova or the "Company") is a software technology company
providing software solutions in the industrial industry, service industry and
consumer markets. The Company's plan of operations is to identify, develop and
acquire technology that is or will become a market leader and to create
opportunities to leverage its software into value-added applications when
combined with other software solutions offered by the Innova group of companies.
Innova offers a suite of software solutions to the service, personal, and
industrial robotic markets. Its software and hardware solutions benefit
industrial robot users and developers of new technology and are adaptable to the
commercial end-user market as well. Innova offers its solutions through
licensing of its proprietary software and the sale of its control systems as
well as through complete system development and integration services.
In addition to its current product offering in the industrial market, Innova's
management believes the Company is positioned to become a market leader for the
emerging service and personal robot industry. This belief is based upon the
expertise, experience, and patented technologies developed by Robotic Workspace
Technologies, Inc. (RWT), a wholly-owned subsidiary, which has served the
industrial market for ten years.
Principal Technology Products and Business Solutions
Innova, through RWT, delivers its software through the sale of Control Systems
and the licensing of its Software to end-user companies, system integrators,
manufacturing support providers, software development companies, and other
partners. The proprietary patents, including two pioneer utility patents issued
by the USPTO and one patent pending, are owned by RWT and cover all applications
pertaining to the interface of a general use computer and the mobility of
robots, regardless of specific applications.
Control Systems
The Company has two control systems, the Universal Robot Controller and the
Universal Automation Controller.
Universal Robot Controller
The Universal Robot Controller(TM) (URC(TM)) is the physical control or robot
control which operates the robot. It includes the general purpose PC running
Windows, RobotScript and other programs as well as dedicated separate processors
for real-time motion control of the robot. The URC cabinet houses the PC that
runs the Windows(R) operating system. RobotScript and other software directly
control the connected systems of the robot and related input and output. It also
incorporates the electronic components needed to control the robot motion and
communicate with other PC devices and platforms including internet connectivity
worldwide. In addition, all inputs and outputs required for auxiliary equipment
are controlled by RobotScript and are included in the URC cabinet.
Universal Automation Controller
The Universal Automation Controller(TM) (UAC(TM)), which is in the later stages
of development and is expected to be released soon, is a general-purpose motion
control system for automated machines with fewer than 5-6 axis of movement. The
UAC provides the power of a full-featured open PC motion controller and
Programmable Logic Controller (PLC) in one easy to use PC control system. It
provides direct motion control for complex machines and adds "soft PLC"
(software control of Input/Output). The enhanced motion control capabilities
provide greater functionality and full motion control of less sophisticated
machinery as well. The UAC is powered by RWT's RobotScript(R) software.
The UAC provides standard communications and interface ports, providing maximum
flexibility in choosing off-the-shelf user interface and communications
components. The Company believes that the UAC shortens development time, reduces
manufacturing time, and dramatically decreases the time to market of
motion-based machines, and therefore will greatly improve productivity and
reduce costs in all manufacturing environments.
5
Licensing of Proprietary Software Solutions - Middleware
RobotScript is a universal programming language based on Microsoft's Visual
Basic(R) Scripting Edition (VBScript(R)) software. It provides a robot language
that is simple to use and easy to learn. From a plain text file, robot
programmers can easily control robot motion, coordinate input and output for
auxiliary equipment and communicate with other PC devices for reporting and data
sharing. Because RobotScript operates in the Windows environment, challenges
common to proprietary control schemes, such as networking and file sharing, are
eliminated. RobotScript can access anything on the operating system or network
as well as utilize the Internet for remote monitoring and control of equipment.
The software can also be easily used to create custom applications specific to
customer needs. A software development kit is provided to allow even novice
developers to quickly create a specialized interface for a particular use in
meeting a customer's need.
The proven success of RobotScript has supported the development of a number of
evolutionary, application-specific modules such as arc-welding, vision systems
and automation control. Additional modules are also in development for other
robotic applications such as:
o Guidance Systems
o Sensor Systems
o Voice Control Systems
o Tactile Control Systems
o Laser Welding
o Material Handling
o Medical Applications
o Elder Care Control Systems
o Entertainment Control Systems
o Plasma Cutting
o Autonomous Underwater Vehicles
o Home Land Security Systems
o Security Systems
o Pharmaceutical Production
o TIG/MIG Welding
Gatekeeper is a communication module that serves as the bridge between the
RobotScript programming software and the motion control mechanisms. Gatekeeper
implements a standard protocol that directs the device driver to activate the
appropriate motion control of the robot, input/output of auxiliary equipment and
other devices operating in real time. It is the core software used as a
foundation for all current and future software modules and languages.
The Innova suite of software will be marketed and sold to the service and
personal robot markets through Service Robots, Inc., a wholly-owned subsidiary
of Innova. Generally, the Innova suite of software solutions is referred to as
Middleware, which is connectivity software that consists of a set of enabling
services that allow multiple processes running on one or more machines to
interact across a network. Middleware is essential to migrating mainframe
applications to client/server applications and to providing for communication
across heterogeneous platforms. This technology has evolved during the 1990s to
provide for interoperability in support of the move to client/server
architectures.
6
Markets Served
The markets served are the Industrial Robot market and the Service and Personal
Robot market, which are discussed below.
Industrial Robots - Market Overview
Installations
According to a report released by the UNITED NATIONS ECONOMIC COMMISSION FOR
EUROPE (UNECE) in cooperation with the INTERNATIONAL FEDERATION OF ROBOTICS
(IFR), of which RWT is a supporting member:
o worldwide investment in industrial robots was up 19 percent in 2003 and in
the first half of 2004, orders were up another 18 percent
Worldwide growth between 2004 and 2007 is forecast at an average annual rate of
about 7 percent.
According to the US-based ROBOTIC INDUSTRIES ASSOCIATION (RIA):
o North American robotic companies posted a 13 percent gain in the first
nine months of 2004.
Estimates are that 800,000 to 1 million robots are currently being used
worldwide. Japan leads with some 352,000 units, followed by the European Union
with 266,000 units and about 121,000 units in the United States. (RIA estimates
142,000 robots are being used in the United States).
In Europe, Germany leads with 113,000 units; Italy has 50,000; Spain 20,000, and
the United Kingdom some 14,000 units, according to UNECE.
Installations and Operational Stock of Industrial Robots
2002 and 2003 and Forecasts for 2004-2007
Number of Units
Yearly Installations Operational Stock at Year End
Country 2002 2003 2004 2007 2002 2003 2004 2007
Japan 25,373 31,588 33,200 41,300 350,169 348,734 352,200 349,400
United States 9,955 12,693 12,800 15,900 103,515 112,390 121,300 145,100
European Union 26,296 27,114 28,800 34,400 233,769 249,200 266,100 325,900
Other Europe 582 922 1,000 1,300 11,009 11,409 11,900 14,200
Asia/Australia 5,123 6,695 7,200 8,900 60,427 65,419 69,900 78,500
Other Countries 1,466 2,764 3,200 4,500 11,216 13,620 16,500 27,200
Totals 68,795 81,776 86,200 106,300 770,105 800,772 837,900 940,300
Source: UNECE, IFR and national robot associations.
Users
The primary users of industrial robots in the United States include automotive
manufacturers and automotive suppliers, food and consumer goods companies,
semiconductor and electronics firms, metalworking companies, plastics and rubber
manufacturers, and increasingly sciences, pharmaceutical, and biomedical
businesses, according to RIA.
7
Applications
With regard to applications, material handling - historically the largest
application area for robots - increased 36 percent the first nine months of
2004. Double-digit gains were also posted in assembly, arc welding, and material
handling applications, according to RIA.
Sales
The market for the Company's Universal Robot Controller is the Retrofit market.
Virtually all of the 800,000 + older robots have antiquated control systems
which require replacement in order to improve functionality to current standards
of the robotic industry, and to drastically reduce the costs of spare parts.
Currently, owners of these older robots must buy their spare parts from the
Original Equipment Manufacturers (OEMs) and management belives that since these
spare parts for the controller are proprietary to the OEM, the costs of these
spare parts is very high, thus providing a substantial profit margin to the
OEMs. RWT's Universal Robotic Controller is a state of the art solution which in
management's opinion provides more features and functionality then the
controllers of the robot OEMs.
Service Robots - Market Overview
The service robot industry is rapidly emerging and according to many it is
expected to be large. Although a few products/applications have emerged, they
have not, as of 2004, had widespread impact on ancillary goods and services. So,
whether it is a vacuum cleaning robot or a deep-sea remotely operated vehicle,
system controls are OEM specific. However, increasingly the scope of
applications is beginning to expand and we are experiencing an increasing demand
for software to function as the middleware for connectivity, interoperability,
and ease of integration between high-powered software and devices. We are
beginning to see the smart refrigerator and whole house control systems that may
evolve to have a need to communicate with the vacuum cleaning robot and robotic
lawn mower. In the professional service robot sector, robots used for handling
bombs and hazardous materials may evolve such that there is a need to interface
with, for example, Homeland Security systems using vision, audio and data. As
the market better realizes the potential of such applications, there will be a
substantial push for open software standards. RWT's RobotScript is now poised to
enter this market as the only proven middleware offering with substantial scope
of applications and functionality throughout all sectors of the Service Robots
market - Professional, Entertainment and Personal.
Professional Use
According to UNECE, at the end of 2003, it is estimated that some 21,000 units
were in operation. The value of professional service robots in use is estimated
at $2.4 billion. This market is expected to grow by 54,000 units between 2004
and 2007. Specific areas of use are:
o Underwater systems
o Cleaning robots
o Laboratory robots
o Demolition and construction
o Medical robots
o Mobile robot platforms/general
o Defense, rescue, security
o Field robots (milking, forestry)
The unit prices for professional service robots range from less than $10,000 to
more than $300,000. The most expensive service robots are the underwater systems
($300,000), followed by milking robots ($200,000). The average price of a
medical robot is about $150,000.
UNECE suggests that in the coming years, service robots will not only clean
floors, mow lawns and guard homes, they will assist the elderly and handicapped
with sophisticated interactive equipment, carry out surgery, inspect pipes and
hazardous sites, fight fires, and dispose of bombs. UNECE believes there is a
huge worldwide military investment in service robot R&D that will spur spin-off
products for both the consumer and professional markets.
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Entertainment Use
Robots for entertainment and leisure use, which include toy robots, are forecast
to reach 2.5 million units with a value of $4 billion in the 2004-2007
timeframe, according to UNECE.
Personal Use
At the end of 2003, about 610,000 service robots - autonomous vacuum cleaners
and lawn-mowing robots - were in operation. In 2004-2007 more than 4 million new
units are forecasted with an estimated value of $2.7 billion according to UNECE.
SALES AND MAKETING
The sales and marketing channels employed by Innova include direct sales,
re-sellers, websites, distributors, system integrators and other partners. The
Company is currently in the process of establishing these relationships.
Industrial Controls
The sales for the Universal Robot Controller (URC(TM)) and the Universal
Automation Controller (UAC(TM)) will be directed from the company's offices in
Pontiac, Michigan and Ft. Myers, Florida. Offices are located in the building of
the Classic Companies located in Michigan. Classic has been a long-term systems
integrator for our company. RWT will have a sales representative organization in
place in Chicago, Cincinnati & Atlanta with systems integrators being supported
in each of those areas either from Ft. Myers or directly from Detroit. This is a
model that the company used several years ago, and it functioned successfully
based on territorial splits, commission splits and properly placed applications
engineering support.
As the territories in the southwest and in the lower central U.S. develop, it is
anticipated that sales representative organizations will be used with a direct
support person knowledgeable in applications engineering and our software
capabilities.
Service Robots
The sales, licensing and software applications support for the service robot
activity will initially be headquartered out of Ft. Myers, Florida, until such
time that other areas require support. Another event for the company will be the
service robot conferences and expositions sponsored by Robotics Trends and
supported by other device manufacturers that the Company will be targeting to
license RobotScript(R) as their software development kit.
With respect to the entertainment portion of the future business, a regional
office will be located in Orlando, Florida. This office will be supported
through Ft. Myers and will concentrate primarily on the entertainment and
hospitality industry for service applications and animatronics, while licensing
our software for specific applications.
Innova's Business Development Group is comprised of several high powered
business developers with a focus on the following markets:
o Entertainment
o Theme Parks
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o NASCAR
o Medical
o Healthcare
o Surgery
o Eldercare
o Personal security
o Residential services
o Toys and Hobbies
o Sports
o Education
o Retail
o Hotel and Resorts
o Homeland security
o Aerospace
o NASA
o Military
o Automotive
o Industrial - automation
o Industrial - heavy manufacturing
o Transportation, including airports, railroad and trucking
o Warehousing
Marketing
Our marketing and sales materials will be generated from the home office in Ft.
Myers, Florida using our existing marketing and PR firm, Incomm International.
Additional high level support for closing deals at corporate levels will also be
supported out of Ft. Myers, Florida.
Protection of Trade Secrets and Patents - Significant Litigation
On December 9, 2004, RWT filed a case in the United States District Court for
the Middle District of Florida against ABB, Inc. and ABB Robotics AB. The
action alleges misappropriation of trade secrets, breach of contract and
breach of the covenant of good faith. The action stems from dealings between
the parties in 2002. RWT seeks a trial by jury, an injunction prohibiting
continued use of RWT's trade secrets, and money damages. It is possible that
ABB, Inc. or ABB Robotics AB will counterclaim, although no counterclaims
have yet been filed. The action is entitled Robotic Workspace Technologies,
Inc. v. ABB, Inc. and ABB Robotics AB, Case No. 2:04-cv-611-FtM-29-SPC
RWT Business From1994 Through 2004
RWT started operations in 1994 with the intent to develop a PC based coordinated
motion controller for industrial robots. Up to that point in time, virtually
everyone in the industry doubted if a PC based controller, using an open
architecture system and based on Microsoft's platform, could ever be developed
and accepted as a standard in the industry. RWT dedicated significant resources
and time, over $6 million and six years, to successfully develop such a
controller and was awarded two pioneer utility patents by the USPTO. RWT
successfully established itself as a provider of a Universal Robot Controller to
the industrial market, and in particular to the automobile industry, the key
market for RWT products. In November 2000, after 10 months of due diligence
verifying source code and the operations of the Universal Robot Controller at
Ford and other production facilities, the Ford Motor Company investment group
invested $3.0 million in RWT and Ford planned a substantial order for RWT's
Universal Robot Controllers. Also, Ford received the first rights to RWT's
development and up to 80% of RWT's production capacity. The Ford Vice President
for Body Assembly, Stamping and Structures joined the RWT Board of Directors.
In June 2001, a joint international press conference announcing the Ford
investment in RWT was held at the 32nd International Robotics Conference and
Exposition. Additionally, 10 Universal Robot Controllers were successfully sold
and installed in non-automotive manufacturing environments. However, the
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business of RWT was drastically and adversely affected by the economic recession
and the impact on the automobile industry after the September 11, 2001 attacks
in the US. After the September 11, 2001 attacks, Ford cancelled their orders due
to large losses they were incurring. The resulting continued downturn in the
economy and RWT's inability to raise additional capital resulted in the
termination of all its employees, except the Chief Executive Officer and several
contract employees. RWT substantially shut down its operations during December
2002.
RWT today is building back its business and plans to re-emerge as a provider of
the Universal Robot Controller for the automotive market and other companies in
the industrial market. Additionally, it is in the final stages of developing its
Universal Automation Controller that is targeted to the very broad manufacturing
markets globally. And RWT is offering its RobotScript software and related
application modules including Gatekeeper software under licensing agreements,
which are targeted to the service and personal robot market.
Activities of Hy-Tech Prior to the Merger With RWT
Innova was previously named Hy Tech Technology Group, Inc. (Hy Tech) and had as
its sole operating activities its wholly-owned operating subsidiary Hy Tech
Computer Systems, Inc. (HTCS). On August 25, 2004, Hy Tech completed the reverse
acquisition into RWT in which RWT was deemed to be the "accounting acquirer."
Simultaneously, Hy Tech sold its Hy-Tech Computer Systems, Inc. subsidiary and
discontinued its computer systems sales and services business. Prior to these
transactions, Hy-Tech changed its name to Innova Holdings, Inc.
In January 31, 2003, HTCS completed a reverse acquisition into SRM Networks, an
Internet service provider and web hosting business, in which HTCS was deemed the
"accounting acquirer". SRM Networks, Inc., a Nevada corporation, was
incorporated on June 8, 2001and as part of the reverse merger agreement changed
its state of incorporation to Delaware. In connection with the transaction, SRM
Networks, Inc. changed its name to Hy-Tech Technology Group, Inc. and HTCS
discontinued SRM Network's Internet business.
HTCS was formed in 1992 in Fort Myers, Florida as a supplier to the information
technology business. From 1992 through 2002, HTCS was a leading custom systems
builder and authorized distributor of the world's leading computer system and
components. The products sold by HTCS were "Hy-Tech" branded computer systems -
desktops, notebooks and servers, computer components and peripherals, computer
storage products; computer operating systems and office software; Compaq
computer systems - desktop and servers; computer service; and computer warranty
work. At the end of 2003, as a result of substantial losses, the management of
HTCS concluded that the then existing business was not viable, and initiated the
changes necessary to closing its stores, laying off employees and transferring
all business to e-commerce. Negotiations were initiated to acquire RWT and to
divest the old HTCS business, which was accomplished in August 2004. As a
result, Innova is no longer actively selling any of the HTCS products.
On April 29, 2003, Hy Tech entered into an agreement called an "Option to
Purchase" ("Settlement Agreement") with SunTrust Bank under which Hy Tech agreed
to settle all pending litigation and satisfy all judgments obtained against the
HTCS subsidiary by SunTrust Bank. Hy Tech agreed to pay a total of $1.5 million
by August 28, 2003 in full settlement of all of SunTrust's claims of
approximately $3.7 million. Under the terms of the Settlement Agreement, Hy Tech
delivered $1.0 million dollars to SunTrust on April 29, 2003. This $1.0 million
represents all of the proceeds of the sale of the Convertible Debenture
described below. Hy Tech also agreed to pay SunTrust three installments of
$65,000 each in June 2003, July 2003 and August 2003, and the balance of
$305,000 on or before August 28, 2003. Hy Tech used part of the proceeds from
the Factoring Line of Credit to pay the August 28, 2003 installment of $305,000
due to SunTrust Bank, and all other amounts were paid. As a result of this
settlement, Hy Tech obtained the ownership of the Sun Trust judgment, per the
Settlement Agreement.
On April 22, 2003, Hy Tech entered into an Advisory Agreement (the "Advisory
Agreement") with Altos Bancorp Inc. ("Altos") pursuant to which Altos agreed to
act as the Company's exclusive business advisor for a one year period. Martin
Nielson was President of Altos and subsequently became Chairman and Chief
Executive Officer of Hy Tech. Altos advised Hy Tech regarding equity and debt
financings, strategic planning, mergers and acquisitions, and business
developments.
11
In conjunction with the decision to proceed with the RWT acquisition, the
agreement with Altos was concluded. Altos did not receive any cash compensation
for its services rendered, but will receive 16,133,333 shares of the Company's
common stock.
On April 28, 2003, a merger between Hy Tech and Sanjay Haryama ("SH"), a Wyoming
corporation, was effected. The merger was based upon an Agreement and Plan of
Merger dated April 28, 2003 among the parties. Pursuant to the merger (i) SH was
merged with and into Hy Tech; (ii) the SH shareholder exchanged 1,000 shares of
common stock of SH, constituting all of the issued and outstanding capital stock
of SH, for an aggregate of 1,000 shares of Hy Tech's restricted common stock;
and (iii) SH's separate corporate existence terminated. The SH shareholder was
Coachworks Auto Leasing, which is wholly owned by Jehu Hand. The determination
of the number of shares of Hy Tech's stock to be exchanged for the SH shares was
based upon arms' length negotiations between the parties.
Prior to the merger, SH completed a $1,000,000 financing transaction pursuant to
Rule 504 of Regulation D of the General Rules and Regulations under the
Securities Act of 1933 as amended pursuant to a Convertible Debenture Purchase
Agreement (the "Purchase Agreement") dated April 21, 2003 between SH and an
accredited Colorado investor (the "Investor"). In connection therewith, SH sold
a 1% 1,000,000 Convertible Debenture due April 20, 2008 (the "SH Debenture") to
the Investor. The unpaid principal amount of the SH Debenture was convertible
into unrestricted shares of SH common stock to be held in escrow pending the
repayment or conversion of the SH Debenture. Pursuant to the merger, Hy Tech
assumed all obligations of SH under the SH Debenture and issued the holder
thereof its 1% $1,000,000 Convertible Debenture due April 28, 2008 (the
"Convertible Debenture") in exchange for the SH Convertible Debenture. The
material terms of the Convertible Debenture were identical to the terms of the
SH Convertible Debenture except that the unpaid principal amount of the
Convertible Debenture was convertible into unrestricted shares of Hy Tech's
Common Stock (the "Common Stock"). The per share conversion price for the
Convertible Debenture in effect on any conversion date was the lesser of (a)
$0.35 or one-hundred twenty-five percent (125%) of the average of the closing
bid prices per share of Hy Tech's Common Stock during the five (5) trading days
immediately preceding April 29, 2003 or (b) one hundred percent (100%) of the
average of the three (3) lowest closing bid prices per share of Hy Tech's Common
Stock during the forty (40) trading days immediately preceding the date on which
the holder of the Convertible Debenture provides the escrow agent with a notice
of conversion. The number of shares of Hy Tech's Common Stock issuable upon
conversion was also subject to anti-dilution provisions. The Investor's right to
convert the Convertible Debenture was subject to the limitation that the
Investor may not at any time own more than 4.99% of the outstanding Common Stock
of Hy Tech, unless Hy Tech was in default of any provision of the Convertible
Debenture or the Investor gives seventy five (75) days advance notice of its
intent to exceed the limitation.
Between the date of the merger and the end of November, 2003, the Convertible
Debenture was fully converted to Common Stock of Hy Tech.
On April 28, 2003, Hy Tech announced it had entered into a financing transaction
in which it had received a firm commitment from a private equity fund for the
purchase of a $750,000 convertible debenture from Hy Tech (the "Second
Debenture"). The Second Debenture was not closed and Hy Tech arranged for
alternative financing under a Factoring Line of Credit with Platinum Funding
Corporation.
In May 2003, Martin Nielson assumed full time responsibilities as Chief
Executive Officer, brought new investors to the company, and was chartered to
transform Hy Tech away from being a custom systems builder. During the fiscal
year, Hy Tech took steps necessary to design the new business strategy and
commenced the implementation of this strategy, which also included growth by
acquisition. Among these steps taken were:
o construction of the details of the new plan which led to the decision
to transform and then divest HTCS
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o restructuring of the personnel and reduction of costs and writing off
of unproductive assets
o engagement of key professionals
o negotiating with sources of new investment
o identifying and negotiating with acquisition targets
Concurrent with the steps taken, Hy Tech aggressively pursued new financing from
debt and equity sources to increase working capital, further reduce liabilities,
and to help negotiate acquisitions to provide a platform for growth.
At the same time and due to the substantial requirement for capital to keep
inventory in multiple outlets and to finance receivables, Hy Tech faced
significant challenges to produce an adequate return on investment from HTCS. Hy
Tech restructured operations by shifting its sales operations to an online store
operated by a third party. This change was important. It was much more cost
effective and far less capital intensive. HTCS eliminated the overhead of the
local wholesale outlets, and all local costs became variable. Key employees in
the local operations were offered positions with the contracting company, yet
HTCS retained benefit of the sales as part of the deal.
In February 2004, Hy Tech announced its planned changes which included its
planned acquisition of Robotic Workspace Technologies (RWT) and the intended
divestiture of HTCS. Such changes were in keeping with Hy Tech's new plan to
grow by acquisitions, to differentiate itself by adding unique technologies, by
converting to e-commerce selling and distribution techniques and by adding
complementary, higher margin services.
Effective July 29, 2004, Hy Tech changed its name to Innova Holdings, Inc. from
Hy-Tech Technology Group, Inc. Hy Tech's trading symbol changed to "IVHG.
Simultaneously with the name change, Hy Tech increased its authorized
capitalization from 101,000,000 shares, consisting of 100,000,000 shares of
common stock, $.001 par value and 1,000,000 shares of preferred stock, $.001 par
value to 910,000,000 shares, consisting of 900,000,000 shares of common stock,
$.001 par value and 10,000,000 shares of preferred stock, $.001 par value.
On July 21, 2004, Hy Tech entered into an Agreement and Plan of Merger (the
"Agreement") with Robotic Workspace Technologies, Inc. ("RWT"). This transaction
closed on August 25, 2004. The Agreement provided that RWT Acquisition, Inc., a
wholly owned subsidiary of Hy Tech, will merge into RWT, with RWT continuing as
the surviving corporation. RWT became a wholly owned subsidiary of Hy Tech. The
shareholders of RWT were issued an aggregate of 280,000,000 shares of Hy Tech's
common stock as consideration for the merger. RWT's outstanding options were
converted into options to acquire Hy Tech common stock at the same exchange
ratio at which the RWT shareholders received Hy Tech common stock. For financial
reporting purposes this transaction was treated as an acquisition of Innova and
a recapitalization of RWT using the purchase method of accounting. RWT's
historical financial statements replaced Innova's for SEC reporting purposes. As
part of the agreement, the Company agreed to indemnify the directors of the
Company from certain liabilities that were in existence on the date of closing
of the sale, which management believes may apply to a maximum of approximately
$500,000 of debt. If the Company issues shares of its common stock or pays cash
to settle any of this debt, it shall issue an equal number of common shares to
the former RWT shareholders, in proportion to their RWT share holdings.
The determination of the number of shares of Hy Tech common stock exchanged for
the RWT common stock was determined in arms length negotiations between the
Boards of Directors of Hy Tech and RWT. The negotiations took into account the
value of RWT's financial position, results of operations, products, prospects
and other factors relating to RWT's business. At the time of the execution of
the Agreement, there were no material relationships between RWT and Hy Tech or
any of its affiliates, any director or officer of Hy Tech, or any associate of
any such officer or director.
13
On June 23, 2004, Hy Tech entered into and simultaneously closed an Agreement
with Encompass Group Affiliates, Inc. (Encompass"), pursuant to which Hy Tech
granted to Encompass exclusive, worldwide, royalty free, fully paid up,
perpetual and irrevocable licenses to use Hy Tech's customer list for its
computer and systems related products and its related websites. Hy Tech also
assigned to Encompass Hy Tech's rights to enter into acquisitions with
Cyber-Test, Inc., BCD 2000, Inc. and Pacific Magtron International, Inc. Hy Tech
agreed for a five year period commencing on the closing not to compete with
Encompass (i) in the business of the marketing, sale, integration, distribution
or repair of computer systems, components, equipment or peripherals, and any
related consulting work, and (ii) conducting any business of a nature (A)
engaged in by Encompass or its subsidiaries or (B) engaged in by Hy Tech at the
time of closing, or (C) engaged in by any of BCD 2000, Inc., Cyber Test, Inc. or
Pacific Magtron International Corp. at the time the stock or assets of which are
acquired by Encompass. For (i) a period of three (3) months following the
closing, Hy Tech is permitted to sell, in the ordinary course of its business,
any inventory not sold on or prior to the closing and (ii) so long as RWT is
engaged solely in the business of developing or acquiring proprietary computer
technology within the robotics field, Hy Tech will be permitted to engage in
this business.
Encompass hired Martin Nielson, who had been Hy Tech's Chief Executive Officer,
as an Executive Officer. Mr. Nielson will continue to serve on Hy Tech's board
of directors and resigned as Hy Tech's Chief Executive Officer.
In consideration for the transaction, Encompass assumed all of Hy Tech's
obligations under certain Convertible Debentures (the "Convertible Debentures")
in the aggregate principal amount of $503,300. The holders of the Convertible
Debentures released Hy Tech from all claims arising under the Convertible
Debentures.
The determination of the consideration in the Encompass transaction was
determined in arms length negotiations between the Boards of Directors of Hy
Tech and Encompass. The negotiations took into account the value of the assets
sold to Encompass and the consideration received. At the time of the
transaction, there were no material relationships between Encompass and Hy Tech
or any of its affiliates, any director or officer of Hy Tech, or any associate
of any such officer or director.
On June 23, 2004, immediately after the closing of the transaction with
Encompass, Hy tech entered into a private placement of 125,000 shares of its
Series A Preferred Stock for an aggregate issue price of $125,000 with the
holders of the Convertible Debentures. Each share of the Series A Preferred
Stock (i) pays a dividend of 5%, payable at the discretion of Hy tech in cash or
common stock, (ii) is convertible into the number of shares of common stock
equal to $1.00 divided by a conversion price equal to the lesser of 75% of the
average closing bid price of Hy Tech's common stock over the twenty trading days
preceding conversion or $0.005, (iii) has a liquidation preference of $1.00 per
share, (iv) must be redeemed by Hy Tech five years after issuance at $1.00 per
share plus accrued and unpaid dividends, (v) may be redeemed by Hy Tech at any
time for $1.30 per share plus accrued and unpaid dividends and (vi) has no
voting rights except when mandated by Delaware law.
In the event that Hy Tech has not (a) completed the merger with RWT and (2) RWT
has not raised $500,000 in new capital by August 27, 2004, then each of the
holders of the Series A Preferred Stock may elect to convert their shares into
(a) a demand note payable by Hy Tech in the principal amount equal to the
purchase price of the Series A Preferred Stock plus accrued and unpaid
dividends, with interest at the rate of ten percent (10%) until paid in full and
(b) warrants to purchase 2,500,000 shares of Hy Tech's common stock at an
exercise price of $.005 per share, with a term of two (2) years' from the date
of issuance, and standard anti-dilution provisions regarding stock splits,
recapitalizations and mergers, for each $25,000 of Series A Preferred Stock
purchased. This issuance of the Series A Preferred Stock was exempt from the
registration requirements of the Securities Act of 1933 (the "Act") pursuant to
section 4(2) of the Act.
On August 18, 2004 the Company entered into an agreement with Aegis Funds, Inc
(AFI) to sell all of the issued and outstanding capital stock of HTCS to AFI.
The sale of HTCS to AFI closed on August 25, 2004. At the closing date, for and
in consideration for the transfer to AFI of the HTCS Capital Stock, AFI became
the record and beneficial owner of the HTCS Capital Stock, the Company
transferred as directed by AFI and for the benefit of HTCS the sum of fifteen
thousand dollars ($15,000) in good funds, and the judgment of Sun Trust Bank
against HTCS was transferred to AFI free of all claims and liens. AFI is
controlled by Gary McNear and Craig Conklin, who are directors of the Company.
The transaction was approved by the member of the board of directors who had no
interest in the transaction.
14
Trademarks and Patents
The Company has the following trademarks and patents:
RWT(TM)
Universal Robot Controller(TM)
URC(TM)
RobotScript(R)
TeachPoint File Creator(TM)
Gatekeeper(TM)
ControlScript(TM)
CMMScript(TM)
MediScript(TM)
Robotic Artists(TM)
Service Robots(TM) SM
RWT Patents
1st Patent number 6,442,451 - awarded September 5, 2002 - Versatile robot
control system - Abstract - An improved, versatile robot control system
comprises a general purpose computer with a general purpose operating system in
electronic communication with a real-time computer subsystem. The general
purpose computer includes a program execution module to selectively start and
stop processing of a program of robot instructions and to generate a plurality
of robot move commands. The real-time computer subsystem includes a move command
data buffer for storing the plurality of move commands, a robot move module
linked to the data buffer for sequentially processing the moves and calculating
a required position for a robot mechanical joint. The real-time computer
subsystem also includes a dynamic control algorithm in software communication
with the move module to repeatedly calculate a required actuator activation
signal from a robot joint position feedback signal.
2nd Patent number 6,675,070 - awarded April 5, 2004 - Automation equipment
control system Abstract - A automation equipment control system comprises a
general purpose computer with a general purpose operating system in electronic
communication with a real-time computer subsystem. The general purpose computer
includes a program execution module to selectively start and stop processing of
a program of equipment instructions and to generate a plurality of move
commands. The real-time computer subsystem includes a move command data buffer
for storing the plurality of move commands, a move module linked to the data
buffer for sequentially processing the moves and calculating a required position
for a mechanical joint. The real-time computer subsystem also includes a dynamic
control algorithm in software communication with the move module to repeatedly
calculate a required actuator activation signal from a joint position feedback
signal.
Pending Patents - Number: 20040153213 - Filed December 30, 2003 (continuation of
previous) Automation equipment control system.
Research and Development
There were no substantial funds spent on R & D during the last two years.
Employees
At the end of 2004, the Company had two full time employees and several
independent contractors providing services.
15
Contracts
The Company has entered into contracts with two independent contractors, B.
Smith Holdings, Inc. (B.Smith) and Stratex Solutions, LLC (Stratex). The
contract with B. Smith, which became effective January 14, 2005, is for business
development, sales and marketing services and is for a term of five years and is
automatically renewable annually thereafter unless terminated by either party by
giving written notice of no less than 30 days. Under the terms of the contract,
the Company will pay B. Smith a monthly engagement fee of $10,000 provided
certain sales and other objectives are met, a commission on such sales, stock
options equal to 1% of the common stock outstanding on a fully dilutive basis
vesting over a three year period, reimbursement of approved expenses, and a
one-time payment of 6 million shares of common stock. The monthly fee is payable
in cash or common stock at the option of the Company; if common stock, the price
per share shall be $.005 for the two weeks ended January 31, 2005 and thereafter
at the closing bid price on the fifteenth day of the calendar month, or the
closest trading day, for which such fee is earned. B. Smith has agreed to keep
all inventions, trade secrets and other information about the Company
confidential and to not compete with the Company during the term of the
agreement and for one year thereafter. The contract with Stratex, effective
December 15, 2004, is for certain business planning, financial and accounting
services and is for a term of five years which is automatically renewable
annually thereafter unless terminated by either party by giving written notice
of no less than 30 days. Under the terms of the contract, the Company will pay
Stratex $10,000 monthly for the first 6 months and $15,000 monthly thereafter,
provided certain stipulated objectives are met. The Company shall have the
option to pay Stratex either in cash or common stock; if common stock, the price
per share shall be $.005 through December 15, 2005 and thereafter at the closing
bid price on the first trading day of the calendar month for which such fee is
earned. Additionally, the Company will grant to Stratex stock options equal to
2% of the common stock outstanding on a fully dilutive basis vesting over a
three year period and reimbursement of approved expenses. If the agreement with
Stratex is terminated without just cause or if there is a change of ownership of
the Company or any of its subsidiaries, then all remaining unexercised
outstanding stock options shall immediately vest to the benefit of Stratex.
Stratex is also eligible for incentive fees as determined by the board of
directors. If the agreement with Stratex is terminated without just cause,
Stratex will receive a payment equal to twenty four months of the full monthly
fee payable to Stratex immediately prior to the termination. Stratex has agreed
to keep all inventions, trade secrets and other information about the Company
confidential and to not compete with the Company during the term of the
agreement and for one year thereafter
ITEM 2. DESCRIPTION OF PROPERTY
The Company leases office space at 11595 Kelly Road, Ft. Myers, Florida as its
primary operations. The office space lease, which is for approximately 1,000
square feet, is with Sunset Concepts, LLC, with monthly payments of $1,343. The
lease commenced in May 2004 and expires in August 2005. The office lease is
cancelable with 30 days notice.
The Company is negotiating a lease with The Classic Companies for 15,000 square
feet at $1.00 per square foot annually. The space will be used for the
production of the Company's Universal Robot Controller and the Universal
Automation Controller. Other terms of the lease have not yet been defined.
ITEM 3. LEGAL PROCEEDINGS
Except for one lawsuit, which management of the Company believes has no merit
and is not material; there are no lawsuits against the Company as of March 15,
2005. There are no material proceedings to which any director, officer or
affiliate of the Company, any owner of record or beneficially of more than 5% of
the common stock of the Company is a party adverse to the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
There were no matters submitted during the fourth quarter of 2004 to a vote of
security holders through the solicitation of proxies or otherwise.
16
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Reports to Security Holders
We are a reporting company with the Securities and Exchange Commission, or SEC.
The public may read and copy any materials filed with the SEC at the SEC's
Public Reference Room at 450 Fifth Street N.W., Washington, D.C. 20549. The
public may also obtain information on the operation of the Public Reference Room
by calling the SEC at 1-800-SEC-0330. The SEC maintains an Internet site that
contains reports, proxy and information statements, and other information
regarding issuers that file electronically with the SEC. The address of that
site is http://www.sec.gov.
Prices of Common Stock
Since February 2002, we have been eligible to participate in the OTC Bulletin
Board, an electronic quotation medium for securities traded outside of the
NASDAQ Stock Market, and prices for our common stock were published on the OTC
Bulletin Board under the trading symbol "SRMW" until such time as our
acquisition of Hy-Tech Technology Group, Inc. on January 31, 2003 when our
symbol became HYTT. In August 2004 the name of the Company was changed to Innova
Holdings, Inc. and the trading symbol was changed to IVHG.
The following table sets forth, for the fiscal quarters indicated, the high and
low closing sales price of our Common Stock as reported on the NASD
Over-the-Counter Bulletin Board for each quarterly period during fiscal year
ended December 31, 2004 and December 31, 2003.
Common Stock
Year Ended December 31, 2004 High Low
----------- ----------
First quarter $ 0.056 $ 0.012
Second quarter $ 0.017 $ 0.006
Third Quarter $ 0.014 $ 0.006
Fourth Quarter $ 0.010 $ 0.005
Year Ended December 31, 2003 High Low
First quarter $ 2.480 $ 0.630
Second quarter $ 0.800 $ 0.135
Third quarter $ 0.130 $ 0.024
Fourth quarter $ 0.074 $ 0.041
There are approximately 113 record holders of common equity.
Dividend Policy
The Company has never declared or paid any cash dividends on its common stock.
The Company anticipates that any earnings will be retained for development and
expansion of its business and does not anticipate paying any cash dividends in
the foreseeable future. Additionally, the Company has issued and has outstanding
$125,000 of Series A Preferred Stock and $525,000 of Series B Preferred Stock
all of which earns a 5% dividend, payable in either cash or common stock of the
Company. Such dividends on these Preferred Stock will be paid before any
dividends on common stock. The board of directors has sole discretion to pay
cash dividends based on the Company's financial condition, results of
operations, capital requirements, contractual obligations and other relevant
factors.
17
Securities Authorized for Issuance Under Equity Compensation Plans
The following table set forth the information as of December 31, 2004 with
respect to compensation plans under which equity securities of the Company are
authorized for issuance:
EQUITY COMPENSATION PLAN INFORMATION
December 31, 2004
---------------------------------------------------------------------------
Plan Category Number of shares Weighted average Number of
to be issued exercise price of securities
upon exercise of outstanding remaining
outstanding options available for
options. future issuance
---------------------------------------------------------------------------
Equity
compensation plans
approved by 0 0 0
security holders
---------------------------------------------------------------------------
Equity
compensation plans
not approved by 48,388,141 $.008 18,050,000
security holders
---------------------------------------------------------------------------
Total 48,388,141 $.008 18,050,000
---------------------------------------------------------------------------
On July 15, 2003 the Company adopted a Stock Option Plan authorizing options on
5,000,000 shares. On October 29, 2003 the Company authorized options on
10,900,000 shares to be issued to senior management. On April 15, 2004 the
Company adopted a Stock Option Plan authorizing options on 3,150,000 shares.
Under all of these plans, the Company issued options for 1,000,000 shares. On
December 15, 2004 the Company authorized 32,121,276 options to be awarded to
directors and an independent contractor.
The Company is planning to file an S-8 registration statement in April 2005 for
the Company's stock option plan. Options granted through December 31, 2004 to be
included are 30,900,000 shares to directors and management and 12,121,276 shares
to Stratex Solutions, LLC, a consulting firm providing financial and accounting
support services to the Company. Additionally, options were granted for another
6,060,638 shares in February 2005 to B. Smith Holdings, Inc, for business
development services in support of the Company's growth strategies, and
19,408,621 shares in March 2005 were granted to employees.
Robotic Workspace Technologies, Inc. had a stock option plan in effect at the
time of the merger with the Company, under which plan there were options granted
for the equivalent of 15,266,865 shares of the Company, after adjusting for the
ratio of stock exchange in the merger agreement, which will also be included in
the S-8 filing. There are no remaining shares to be granted under that plan.
Stock Options
There are a total 48,388,141 outstanding options to purchase common equity of
Innova Holdings, Inc. as of March 15, 2005.
Convertible Securities
On June 23, 2004, the Company entered into a private placement of 125,000 shares
of its Series A Preferred Stock for an aggregate issue price of $125,000 with
the holders of the Company's Convertible Debentures. Each share of the Series A
Preferred Stock (i) pays a dividend of 5%, payable at the discretion of the
Company in cash or common stock, (ii) is convertible into the number of shares
of common stock equal to $1.00 divided by a price equal to the lesser of 75% of
the average closing bid price of the Company's common stock over the twenty
trading days preceding conversion or $0.005, (iii) has a liquidation preference
of $1.00 per share, (iv) must be redeemed by the Company five years after
issuance at $1.00 per share plus accrued and unpaid dividends, (v) may be
redeemed by the Company at any time for $1.30 per share plus accrued and unpaid
dividends and (vi) has no voting rights except when mandated by Delaware law.
18
In the event that the Company had not completed the merger with RWT and RWT had
not raised $500,000 in new capital by August 27, 2004, then each of the holders
of the Series A Preferred Stock could elect to convert their shares into (a) a
demand note payable by the Company, in the principal amount equal to the
purchase price of the Series A Preferred Stock plus accrued and unpaid
dividends, with interest at the rate of ten percent (10%) until paid in full and
(b) warrants to purchase 2,500,000 shares of the Company's common stock at an
exercise price of $.005 per share, with a term of two (2) years from the date of
issuance, and standard anti-dilution provisions regarding stock splits,
recapitalizations and mergers, for each $25,000 of Series A Preferred Stock
purchased. Since RWT had not raised $500,000 by August 27, 2004 the holders of
the Series A Preferred Stock could have elected to convert their shares into the
demand note but none of the holders elected to do so. This issuance of the
Series A Preferred Stock was exempt from the registration requirements of the
Securities Act of 1933 (the "Act") pursuant to section 4(2) of the Act.
In September 2004, the Company authorized $525,000 of Series B Preferred Stock,
convertible into the Company's common stock at the lesser of $.005 per share or
75% of the average closing bid prices over the 20 trading days immediately
preceding the date of conversion. At December 31, 2004 $377,000 of the Series B
Preferred Stock had been sold; as of March 15, 2005 all of the Series B
Preferred Stock was sold. None of the Series B Preferred Stock has been
converted into common stock. This issuance of the Series B Preferred Stock was
exempt from the registration requirements of the Securities Act of 1933 (the
"Act") pursuant to section 4(2) of the Act.
Penny Stock Regulation
Shares of our common stock are subject to rules adopted by the Securities and
Exchange Commission that regulate broker-dealer practices in connection with
transactions in "penny stocks". Penny stocks are generally equity securities
with a price of less than $5.00 (other than securities registered on certain
national securities exchanges or quoted on the NASDAQ system, provided that
current price and volume information with respect to transactions in those
securities is provided by the exchange or system). The penny stock rules require
a broker-dealer, prior to a transaction in a penny stock not otherwise exempt
from those rules, deliver a standardized risk disclosure document prepared by
the Securities and Exchange Commission, which contains the following:
o a description of the nature and level of risk in the market for penny
stocks in both public offerings and secondary trading;
o a description of the broker's or dealer's duties to the customer and of
the rights and remedies available to the customer with respect to
violation to such duties or other requirements of securities' laws;
o a brief, clear, narrative description of a dealer market, including "bid"
and "ask" prices for penny stocks and the significance of the spread
between the "bid" and "ask" price;
o a toll-free telephone number for inquiries on disciplinary actions;
o definitions of significant terms in the disclosure document or in the
conduct of trading in penny stocks; and
o such other information and is in such form (including language, type, size
and format), as the Securities and Exchange Commission shall require by
rule or regulation.
19
Prior to effecting any transaction in penny stock, the broker-dealer also must
provide the customer the following:
o the bid and offer quotations for the penny stock;
o the compensation of the broker-dealer and its salesperson in the
transaction;
o the number of shares to which such bid and ask prices apply, or other
comparable information relating to the depth and liquidity of the
market for such stock; and
o monthly account statements showing the market value of each penny stock
held in the customer's account.
In addition, the penny stock rules require that prior to a transaction in a
penny stock not otherwise exempt from those rules, the broker-dealer must make a
special written determination that the penny stock is a suitable investment for
the purchaser and receive the purchaser's written acknowledgment of the receipt
of a risk disclosure statement, a written agreement to transactions involving
penny stocks, and a signed and dated copy of a written suitably statement. These
disclosure requirements may have the effect of reducing the trading activity in
the secondary market for a stock that becomes subject to the penny stock rules.
Holders of shares of our common stock may have difficulty selling those shares
because our common stock will probably be subject to the penny stock rules.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
Plan Of Operation
During the next twelve months, the Company expects to aggressively market and
sell its Universal Robot Controller, complete the development of its Universal
Automation Controller and license its software in the service, personal and
industrial markets. The Company, during the past ten years, successfully
developed its open architecture PC based Universal Robot Controller and
developed its RobotScript, Gatekeeper and related software. Additionally, the
development of the Universal Automation Controller was commenced and is now in
its final stages. As discussed in Item 1 of this document, management believes
there is a large market opportunity for its controllers and software, and
management intends to aggressively pursue those opportunities. Specifically, the
Company has established a Business Development group consisting of ten
individuals who will focus largely on the software licensing opportunities,
retained an industry experienced individual to sell its Universal Robot
Controller as well as license its software, and will establish contractual
relationships with independent sales firms to sell its controllers into the
industrial markets.
Regarding research and development, management expects to continue to constantly
upgrade and improve its software and will work towards developing the next
generation of software. In March 2005, the Company hired Chris Wright as Vice
President of Engineering who is responsible for the continued development and
acquisition of the Company's software, and the identification and development of
new technologies to incorporate into the Company's technology solutions.
The Company does not expect to sell any of its property or equipment in the next
twelve months, nor does it expect to purchase any real property in the next
twelve months. The Company expects to enter into a lease for office space and
laboratory facilities and expects to have as part of that lease the build-out of
the space to meet the needs of the Company's employees. During the next twelve
months the Company expects to purchase certain equipment to support software
development, testing and continued deployment of its technologies. Additionally,
the Company expects to purchase office equipment, computer equipment and
laboratory development and testing equipment to support the planned increase of
the number of employees of the Company.
In order to accomplish all of the goals established by the Company during the
next twelve months, the Company intends to hire approximately 30 employees in
software engineering and applications development, production, sales, and
administration. The funds to finance this expansion are planned to be obtained
from a private equity investment later this year, as well as the issuance of
convertible preferred stock.
20
The Company has been successful in raising working capital through the private
sale of convertible preferred stock and intends to continue to raise funds in
this manner. Additionally, the Company intends to raise the majority of its
funding needs through a private equity sale during 2005. Management believes the
Company will be able to raise sufficient funds through these sources to meet its
cash requirements for the next twelve months and beyond.
The Company does not have any off-balance sheet arrangements.
ITEM 7. FINANCIAL STATEMENTS
The financial statements immediately follow ITEM 14 - Principal Accountant Fees
and Services
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES
Malone & Bailey, PC was the independent certifying accountant for the Company
for the fiscal year ended February 29, 2004. The Company's fiscal year was
changed to December 31 when the Company adopted the fiscal year of RWT after the
reverse merger between the Company and RWT.
On September 22, 2004, Malone & Bailey, PLLC was dismissed as the Company's
certifying accountant. The Company engaged Lopez, Blevins, Bork & Associates,
LLP, Three Riverway, Suite 1400, Houston, Texas 77056 as the Company's
certifying accountant for the fiscal year ending December 31, 2004. The
appointment of Lopez, Blevins, Bork & Associates, LLP was approved by the
Company's board of directors.
The reports of Malone & Bailey, PLLC on the Company's financial statements for
the fiscal years ended February 28, 2003 and February 29, 2004, contained no
adverse opinion or disclaimer of opinion, nor was either qualified or modified
as to uncertainty, audit scope or accounting principle, except that Malone &
Bailey, PLLC expressed in their reports substantial doubt about the ability of
the Company to continue as a going concern.
During the two most recent fiscal years ended February 29, 2004 and February 28,
2003 and in the subsequent interim periods through the date of dismissal, there
were no disagreements between the Company and Malone & Bailey, PLLC on any
matter of accounting principles or practices, financial statement disclosure, or
auditing scope or procedures, which disagreements, if not resolved to its
satisfaction, would have caused Malone & Bailey, PLLC to make reference to the
subject matter of the disagreement in connection with its reports.
During the two most recent fiscal years ended February 29, 2004 and February 28,
2003 and in the subsequent interim periods through the date of dismissal, Malone
& Bailey, PLLC did not advise the Company that:
(A) Internal controls necessary for the Company to develop reliable
financial statements did not exist;
(B) Information had come to its attention that led it to no longer to be
able to rely on the Company's management's representations or made it
unwilling to be associated with the financial statements prepared by
management;
(C) There was a need to expand significantly the scope of its audit, or
that information had come to its attention during such time periods that
if further investigated might: (i) materially impact the fairness or
reliability of either a previously issued audit report or the underlying
financial statements, or the financial statements issued or to be issued
covering the fiscal periods subsequent to the date of the most recent
financial statements covered by an audit report, or (ii) cause it to be
unwilling to rely on management's representations or be associated with
the Company's financial statements.
21
Effective March 5, 2003, the client-auditor relationship between the Company
(previously named Hy Tech Technology Group, Inc. and SRM Networks, Inc.) and
Quintanilla, a Professional Accountancy Corporation ("Quintanilla") ceased. On
that date, the Company engaged Malone & Bailey, PLLC as its principal
independent public accountant. The decision to engage Malone & Bailey, PLLC was
made by the Company's Finance and Audit Committee in accordance with Section 301
of the Sarbanes-Oxley Act of 2002. The change was based on the relocation of the
Company's principal place of business from California to Florida.
Malone & Bailey, PLLC succeeded Quintanilla. Quintanilla's report on the
financial statements of SRM Networks since its inception on June 8, 2001 through
December 31, 2001 and any later interim period up to and including the date the
relationship with Quintanilla ceased, did not contain any adverse opinion or
disclaimer of opinion and was not qualified or modified as to uncertainty, audit
scope or accounting principles.
In connection with the audit of SRM Network's first and most recent fiscal year
ending December 31, 2001 and any later interim period, including the interim
period up to and including the date the relationship with Quintanilla ceased,
there have been no disagreements with Quintanilla on any matters of accounting
principles or practices, financial statement disclosure of auditing scope or
procedure, which disagreements, if not resolved to the satisfaction of
Quintanilla would have caused Quintanilla to make reference to the subject
matter of the disagreements in connection with its report on the Company's
financial statements. Since the Company's inception on June 8, 2001, there have
been no reportable events as defined in Item 301(a)(1)(v) of Regulation S-K.
The Company authorized Quintanilla to respond fully to any inquiries of any new
auditors hired by the Company relating to their engagement as the Company's
independent accountant. The Company requested that Quintanilla review the
disclosure and Quintanilla was given an opportunity to furnish the Company with
a letter addressed to the Commission containing any new information,
clarification of the Company's expression of its views, or the respect in which
it does not agree with the statements made by the Company herein.
The Company did not previously consult with Malone & Bailey, PLLC regarding
either (i) the application of accounting principles to a specified transaction,
either completed or proposed; or (ii) the type of audit opinion that might be
rendered on the Company's financial statements; or (iii) any matter that was
either the subject matter of a disagreement (as defined in Item 304(a)(1)(iv) of
Regulation S-K and the related instructions) between the Company and
Quintanilla, the Company's previous independent accountant, as there were no
such disagreements or another reportable event (as defined in Item 304(a)(1)(v)
of Regulation S-K) from the Company's inception through December 31, 2001 and
any later interim period, including the interim period up to and including the
date the relationship with Quintanilla ceased. The Company has not received any
written or oral advice concluding there was an important factor to be considered
by the Company in reaching a decision as to an accounting, auditing, or
financial reporting issue. Malone & Bailey, PLLC reviewed the disclosure
required by Item 304(a) before it was filed with the Commission and was provided
an opportunity to furnish the Company with a letter addressed to the Commission
containing any new information, clarification of the Company's expression of its
views, or the respects in which it does not agree with the statements made by
the Company in response to Item 304(a). Malone & Bailey, PLLC did not furnish a
letter to the Commission.
22
ITEM 8A. CONTROLS AND PROCEDURES
As of December 31, 2004, our principal executive officer and principal financial
officer evaluated the effectiveness of the Company's disclosure controls and
procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities
Exchange Act of 1934, as amended). This evaluation of the disclosure controls
and procedures included controls and procedures designed to ensure that
information required to be disclosed by the Company in its reports that it files
or submits under the Act is recorded, processed, summarized and reported within
the time periods specified in the Security and Exchange Commission's rules and
forms. Such disclosure controls and procedures include controls and procedures
designed to ensure that information required to be disclosed by the Company in
the reports that it files or submits under the Act is accumulated and
communicated to the Company's management, including its principal executive and
principal financial officers, to allow timely decisions regarding required
disclosure. Based on this evaluation, the Company's principal executive officer
and principal financial officer concluded that the Company's disclosure controls
and procedures were ineffective because the Company had not properly accounted
for certain beneficial conversion features associated with its Series A
Preferred Stock and Series B Preferred Stock issued in 2004 and the accounting
guidance provided by Emerging Issues Task Force Issue Numbers 98-5 and 00-27.
Management concluded that the failure to properly account for and disclose the
beneficial conversion features was a material weakness in its disclosure
controls and procedures.
The Company issued its Series A Preferred Stock in June 2004 and its Series B
Preferred Stock in September 2004. In its financial statements for the year
ended December 31, 2004, the Company did not allocate any portion of the
proceeds of these stock issuances to any beneficial conversion features of the
preferred stock. After filing its annual report on Form 10-KSB, the Company
received a comment letter from the staff of the Securities and Exchange
Commission dated June 22, 2005 that requested, among other things, confirmation
that management of the Company considered the guidance of certain accounting
pronouncements in determining whether a portion of the proceeds of the Company's
Series A Preferred Stock issued in June 2004 and Series B Preferred Stock issued
in September 2004 should be allocated to the beneficial conversion feature.
After receipt of the SEC's comment letter, the Company's Chief Executive Officer
and Chief Financial Officer reevaluated the Company's disclosure controls and
procedures regarding the proper accounting treatment of the preferred stock
issuances in 2004 and presented to the Company's independent certified public
accountants its plan to institute remedial actions to address this material
weakness in its disclosure controls and procedures regarding the issuance of
convertible securities and any associated beneficial conversion features and the
accounting guidance provided by Emerging Issues Task Force Issue Numbers 98-5
and 00-27. These remedial actions are the following:
-the Company hired a new Chief Financial Officer effective June 14,
2005 who has reviewed the Company's disclosure controls and procedures regarding
the issuance of convertible securities and any associated beneficial conversion
features and the accounting guidance provided by Emerging Issues Task Force
Issue Numbers 98-5 and 00-27 and has implemented a special review and analysis
process prior to the execution of legal agreements for all planned issuances of
convertible securities to determine the amount of any beneficial conversion
features, their related accounting treatment and disclosure requirements. This
remedial action was implemented by June 30, 2005.
23
-the Chief Financial Officer is in the process of reviewing all of
the Company's other disclosure controls and procedures, as well as all
accounting policies and procedures and internal controls and appropriate changes
will be made to correct any material weaknesses or significant deficiencies
identified by October 31, 2005;
-the Company's accounting policies and checklists relating to the
selection and application of appropriate accounting policies now includes, as of
June 30, 2005, an item requiring the consideration of whether or not convertible
securities issuances include a beneficial conversion feature and, if so, to
describe the method of accounting for this feature, as well as the method of
calculating the amount of the beneficial conversion feature;
-the Company is in the process of selecting a consulting firm it
will retain to assist in the implementation of Section 404 compliance with the
Sarbanes-Oxley Act, which we expect to implement fully in 2006;
-the Company is in the process of attempting to diversify the
composition of the Board of Directors and is planning to set up an audit
committee and a compensation committee of the Board of Directors by the end of
2005.
The remedial actions to correct the material weakness associated with the
disclosure controls and procedures for beneficial conversion features were
implemented as of June 30, 2005. We anticipate completion of all other actions
by December 31, 2005, except for 404 compliance which we expect to have fully
implemented in 2006. There are no additional material costs expected to be
incurred as a result of the implementation of these remedial actions, since all
of these actions were previously planned by the Company for implementation in
2005 and 2006 or were insignificant in amount.
Management also concluded that it was necessary to restate the Company's
financial statements for the year ended December 31, 2004 included in this
Report on Form10-KSB/A to properly account for the beneficial conversion
features associated with its Series A Preferred Stock and its Series B Preferred
Stock issued in 2004 and the accounting guidance provided by Emerging Issues
Task Force Issue Numbers 98-5 and 00-27. This resulted in a change made to the
Company's financial statements. Specifically, management calculated the values
of the beneficial conversion features and determined that of the $125,000
proceeds received from the issuance of the Series A Preferred Stock, $50,000 was
allocated to the beneficial conversion feature embedded in the Series A
Preferred Stock on the date of issuance based on a conversion price of $.005 per
share. Of this amount, $48,300 was the unamortized embedded beneficial feature
assumed as part of the reverse merger with Robotic Workspace Technologies, Inc.
in August 2004. The beneficial conversion feature is being amortized over five
(5) years and accordingly $3,600 was amortized through Accumulated Deficit
through December 31, 2004. Additionally, the excess of the aggregate fair value
of the common stock to be issued upon conversion over the $125,000 of proceeds
received when the Series A Preferred Stock was issued amounted to $50,000. Of
the $377,000 proceeds received from the issuance of the Series B Preferred
Stock, $146,500 was allocated to the beneficial conversion feature embedded in
the Series B Preferred Stock on the date of issuance, based on a conversion
price of $.005 per share. All of the $146,500 beneficial conversion feature was
amortized through Accumulated Deficit on the date of issuance; therefore, all of
the beneficial conversion feature was amortized as of December 31, 2004.
Additionally, the excess of the aggregate fair value of the common stock to be
issued upon conversion over the $377,000 of proceeds received when the Series B
Preferred Stock was issued amounted to $158,500.
Based upon the foregoing, management restated its financial statements for the
year ended December 31, 2004 as follows:
(1) the Company restated its Balance Sheet and Statements of
Stockholders' Deficit by increasing its Accumulated
Deficit from $(7,290,680) to $(7,440,780) to reflect the
charge of $150,100 arising from the beneficial
conversion features of its preferred stock issuances;
24
(2) the Company restated its Balance Sheet and Statements of
Stockholders' Deficit by increasing its Additional Paid
In Capital from $3,492,621 to $3,687,421 to reflect the
beneficial conversion features of the Series A Preferred
Stock of $48,300 and the Series B Preferred Stock of
$146,500, for a total increase of $194,800;
(3) the Company restated its Balance Sheet and Statements of
Stockholders' Deficit by decreasing the amount of
Stockholders' Deficit from $(3,426,385) to $(3,381,685)
to reflect the net change of $44,700 resulting from the
beneficial conversion features of its Series A Preferred
Stock and Series B Preferred Stock;
(4) the Company restated its Balance Sheet by decreasing the
amount of the Mandatorily Redeemable Series A Preferred
Stock from $125,000 to $80,300, a decrease of $44,700,
to reflect the amount of $48,300 representing the
unamortized beneficial conversion feature assumed at the
time of the reverse merger with Robotic Workspace
Technologies, Inc. in August 2004 associated with its
Series A Preferred Stock less $3,600 representing the
amount amortized to Accumulated Deficit for the period
ended December 31, 2004;
(5) the Company restated its Statements of Operations by
increasing the net loss applicable to common
shareholders from $(1,426,931) to $(1,577,031) to
reflect the $150,100 charge to Accumulated Deficit;
(6) the Company added a new Note 11 to its Financial
Statements explaining the restated financial statements
described above.
In accordance with the Exchange Act, the Company carried out an evaluation,
under the supervision and with the participation of management, including its
principal executive officer and principal financial officer, of the
effectiveness of its internal controls over financial reporting as of December
31, 2004 and the Company's principal executive officer and principal financial
officer concluded that the Company's internal controls over financial reporting
were ineffective because the Company had not properly accounted for certain
beneficial conversion features associated with its Series A Preferred Stock and
Series B Preferred Stock issued in 2004 and the accounting guidance provided by
Emerging Issues Task Force Issue Numbers 98-5 and 00-27, as discussed above.
Management concluded that the failure to properly account for and disclose the
beneficial conversion features was a material weakness in its internal controls
over financial reporting.
As stated above, the Company received a comment letter from the staff of the
Securities and Exchange Commission dated June 22, 2005 that requested, among
other things, confirmation that management of the Company considered the
guidance of certain accounting pronouncements in determining whether a portion
of the proceeds of the Company's Series A Preferred Stock issued in June 2004
and Series B Preferred Stock issued in September 2004 should be allocated to the
beneficial conversion feature. After receipt of the SEC's comment letter, the
Company reevaluated its internal controls over financial reporting and presented
to the Company's independent certified public accountants its plan to institute
remedial actions to address this material weakness in its internal control over
financial reporting for the issuance of convertible securities and any
associated beneficial conversion features and the accounting guidance provided
by Emerging Issues Task Force Issue Numbers 98-5 and 00-27.. These remedial
actions are the following:
25
-the Company hired a new Chief Financial Officer effective June 14,
2005 who has reviewed the Company's internal controls over financial reporting
regarding the issuance of convertible securities and any associated beneficial
conversion features and the accounting guidance provided by Emerging Issues Task
Force Issue Numbers 98-5 and 00-27 and has implemented a special review and
analysis process prior to the execution of legal agreements for all planned
issuances of convertible securities to determine the amount of any beneficial
conversion features, their related accounting treatment and disclosure
requirements. This remedial action was implemented by June 30, 2005.
- the Chief Financial Officer is in the process of reviewing all of
the Company's other internal controls over financial reporting, as well as all
accounting policies and procedures and internal controls, and appropriate
changes will be made to correct any material weaknesses or significant
deficiencies identified by October 31, 2005;
-the Company's accounting policies and checklists relating to the
selection and application of appropriate accounting policies now includes, as of
June 30, 2005, an item requiring the consideration of whether or not convertible
securities issuances include a beneficial conversion feature and, if so, to
describe the method of accounting for this feature, as well as the method of
calculating the amount of the beneficial conversion feature.
-the Company is in the process of selecting a consulting firm it
will retain to assist in the implementation of Section 404 compliance with the
Sarbanes-Oxley Act., which we expect to implement fully in 2006;
-the Company is in the process of attempting to diversify the
composition of the Board of Directors and is planning to set up an audit
committee and a compensation committee of the Board of Directors by the end of
2005.
The remedial actions to correct the material weakness associated with the
internal controls over financial reporting for beneficial conversion features
were implemented as of June 30, 2005. We anticipate completion of all other
actions by December 31, 2005, except for 404 compliance which we expect to have
fully implemented in 2006. There are no additional material costs expected to be
incurred as a result of the implementation of these remedial actions, since all
of these actions were previously planned by the Company for implementation in
2005 and 2006 or were insignificant in amount.
ITEM 8B. OTHER INFORMATION
None
26
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
Our directors, principal executive officers and significant employees are as
specified on the following table:
=======================================================================
Name Age Position
---- --- --------
Walter K. Weisel 65 Chairman, Chief Executive Officer, Chief
Financial Officer and Director
Martin Nielson 53 Previously Chief Executive Officer and
Chairman of the Board of Directors; Director
Gary F. McNear 60 Director; Previously C F O, Vice President,
and Secretary
Craig W. Conklin 55 Director; Previously Chief Operating Officer
and Vice President
Sheri Aws 43 Secretary
=======================================================================
WALTER K. WEISEL became the Company's Chairman and Chief Executive Officer on
August 25, 2004, the date the merger closed between the Company and RWT. With
over thirty years experience, Mr. Weisel is recognized as a pioneer and leader
in the robotics industry. An original founding member of the Robotic Industries
Association (RIA), the U.S. robot manufacturers' trade association, Mr. Weisel
served three terms as President. He served on the RIA Board of Directors and
Executive Committee and, as a spokesperson for the industry, served as an
advisor to members of the U.S. Trade Commission and the U.S. Department of
Commerce. Mr. Weisel was a founding member of Robotics International (RI), a
member society dedicated to the advancement of robotic technology. During his
term as President the membership grew to over 16,000 members. In 1992 Mr. Weisel
was awarded the Joseph F. Engelberger Award, which recognizes the most
significant contribution to the advancement of robotics and automation in the
service of mankind. Each year nominations are received from 26 nations
worldwide. This award has been presented since 1977.
Mr. Weisel has a long record of advancing technology and growing companies that
develop and commercialize technology. Mr. Weisel served 13 years with Prab
Robots, Inc. as Chief Executive Officer, President, and Chief Operating Officer.
During his tenure, Prab Robots, Inc. was transformed into an international
27
organization and leader in the fields of industrial robots and automation. While
under his direction, Prab Robots, Inc. was taken public in an Initial Public
Offering and Unimation, Inc. and several other companies in the U.S. and Europe
were acquired. By 1990, Prab Robots, Inc. was responsible for the largest
installed base of robots in North America and had developed a very successful
robot retrofit business with customers such as General Motors, Ford, and
Chrysler. Mr. Weisel has served as Chairman and Chief Executive Officer of RWT
since its incorporation in 1994, and continues to serve in that capacity.
Mr. Weisel's employment agreement is dated July 19, 2000. Mr. Weisel's salary is
$150,000 per annum plus a bonus at the discretion of the Board of Directors. The
agreement stipulates that Mr. Weisel's salary will be increased to $200,000 and
$250,000 when certain sales and profit objectives are met. The agreement is for
a term of three years and automatically renews for successive one year periods
unless terminated by either party upon not less than sixty days prior to the
renewal date. Mr. Weisel has agreed not to compete with the Company or solicit
its customers or employees for a period of two years following the termination
of his employment. The agreement also requires the Company to pay Mr. Weisel all
accrued compensation, which amounted to $337,500 as of December 31, 2004, upon
receipt of additional capital of no less than $3,000,000.
MARTIN NIELSON was the Company's Chief Executive Officer and Chairman of the
Board of Directors since May 2003. He resigned effective June 1, 2004. Mr.
Nielson is a principal of Altos Bancorp, Inc., serving as its Chairman and Chief
Executive Officer since November 2002. He has also served as Chief Executive
Officer and director of Inclusion Inc. since September, 2000. Mr. Nielson and
Altos were instrumental in assisting the Company in the negotiations that led to
the Company's settlement of its litigation with SunTrust Bank and in securing
the financing that funded that settlement. Mr. Nielson will continue as a
director of the Company. Mr. Nielson is a senior executive with extensive
experience in operations and finance. He has been a business builder for 30
years with such companies as Gap, Businessland, and Corporate Express.
Altos, which is an outgrowth of Nielson's M&A practice during his ten years in
London is engaged in providing investment banking and business development
services to growth oriented, emerging companies throughout the United States and
Europe. Altos was retained by the Company to act as its business advisor, but
that contract was concluded to coincide with the acquisition of RWT. Mr. Nielson
is also a director of Advanced Communications, Inc.
GARY F. MCNEAR was the Chief Financial Officer, Vice President and Secretary
since May 2003 through August 25, 2004, and a Director since May 2003. From
January 2003, through May 2003 he served as Chief Executive Officer and Director
of the Company. Mr. McNear has served as the Chief Executive Officer, Chairman
of the Board, and Treasurer of Hy-Tech Computer Systems(HTCS) since HTCS's
inception in November 1992, and was a founding shareholder. Mr. McNear has also
served as Secretary of HTCS since March 2001. HTCS acquired the Company in a
reverse acquisition in January 2003. Mr. McNear's duties included banking
relationships, cash management, and financial reporting. Mr. McNear's formal
education is in Industrial Administration at Iowa State University. Mr. McNear
is a former officer and pilot in the U.S. Air Force, and a former airline pilot.
CRAIG W. CONKLIN was the Chief Operating Officer and Vice President since May
2003 through August 25, 2004, and a Director since May 2003. From January 2003
through May 2003, he served as President and Director of the Company. Mr.
Conklin has served as President and Director of HTCS since HTCS's inception in
November 1992, and was a founding shareholder. HTCS acquired the Company in a
reverse acquisition in January 2003. Mr. Conklin's duties included marketing and
operations of the Company. Mr. Conklin holds a B.S. in engineering from the
Dartmouth College, and an MBA from the Amos Tuck School of business. Mr. Conklin
was formerly employed by Owens-Corning Fiberglas, Inc. and he operated and sold
Golf & Electric Carriages, Inc., a local distributorship for Club Car Golf
Carts.
SHERI AWS was appointed Secretary of the Company on September 14, 2004. Ms. Aws
has served as Vice President of Administration of RWT, the Company's wholly
owned subsidiary, since February 2004. Prior to that, Ms. Aws served as
Executive Administrator, General Mortgage Corporation of America, from August
28
2003 to February 2004; Director of Just for Kids, an after school and summer
camp program for children, from December 2002 to August 2003; Assistant to the
Chief Executive Officer of RWT from December 2002 through February 2004; and
Administrative Assistant to Vice President of Marketing and Sales and Manager of
Proposals and Contracts Administration for RWT.
Ms. Aws is employed as Vice President of Administration by RWT under an
Employment Agreement dated February 24, 2004. Ms. Aws compensation is $42,000
per annum plus a bonus in the discretion of RWT. Ms. Aws compensation will
increase to $60,000 per annum upon completion of the merger between the Company
and RWT and proper financing. The agreement is for a term of one year, and
automatically renews for successive one year periods unless terminated by either
party upon not less than thirty days notice prior to the renewal date. Ms Aws
has agreed not to compete with RWT or solicit its customers or employees for a
period of one year following the termination of her employment.
There is no family relationship between any of our officers or directors. There
are no orders, judgments, or decrees of any governmental agency or
administrator, or of any court of competent jurisdiction, revoking or suspending
for cause any license, permit or other authority to engage in the securities
business or in the sale of a particular security or temporarily or permanently
restraining any of our officers or directors from engaging in or continuing any
conduct, practice or employment in connection with the purchase or sale of
securities, or convicting such person of any felony or misdemeanor involving a
security, or any aspect of the securities business or of theft or of any felony
or any conviction in a criminal proceeding or being subject to a pending
criminal proceeding.
Our directors will serve until the next annual meeting of stockholders. Our
executive officers are appointed by our Board of Directors and serve at the
discretion of the Board of Directors.
Section 16(a) Beneficial Ownership Reporting Compliance. Except for the late
filing of Form 3s associated with the merger of the Company and RWT by the RWT
shareholders owning 10% or more of the Company after the merger, and the late
filing of Form 3 by certain officers of the Company, we believe that our
officers, directors, and principal shareholders have filed all reports required
to be filed on, respectively, a Form 3 (Initial Statement of Beneficial
Ownership of Securities), a Form 4 (Statement of Changes of Beneficial Ownership
of Securities), or a Form 5 (Annual Statement of Beneficial Ownership of
Securities). The individuals who filed late Form 3s are Walter K. Weisel, Sheri
Aws and Jerry E. Horne. None of these individuals have purchased or sold shares
of the Company's common stock or preferred stock since the merger date and all
Form 3s are currently filed.
CODE OF ETHICS DISCLOSURE COMPLIANCE
The Company has adopted a Code of Ethics that applies to the Company's principal
executive officer, principal financial officer, principal accounting officer and
other employees performing similar functions. The Code of Ethics is being filed
with the Securities and Exchange Commission as part of this report.
ITEM 10. EXECUTIVE COMPENSATION
Any compensation received by our officers, directors, and management personnel
will be determined from time to time by our board of directors. Our officers,
directors, and management personnel will be reimbursed for any out-of-pocket
expenses incurred on our behalf.
29
Summary Compensation Table
The table set forth below summarizes the annual and long-term compensation for
services payable to our executive officers during the years ending December 31,
2004, February 29, 2004 and February 28, 2003.
Innova Holdings, Inc.
Summary Compensation Table
Restricted
Name & Position Year Salary Bonus Other Stock Options LTIP All Other
Walter K. Weisel 2004 $150,000 0.000 0 0 5,000,000 0 0
Chairman and CEO 2003 $150,000 0.000 0 0 0 0 0
(see note 1 and 3 below) 2002 $37,500 0.000 0 0 0 0 0
Martin Nielson 2004 $100,000 0.000 0 0 5,000,000 0 Note 2
Chairman and CEO 2003 $116,667 0.000 0 0 0 0 Note 2
(see notes 1,2 and 3 below) 2002 $0 0.000 0 0 0 0 0
Note 1. Walter K. Weisel has served as Chairman and CEO of the Company since
August 25, 2004, the date the merger between the Company and RWT closed. Martin
Nielson served as Chairman and CEO of the Company from the beginning of the year
to August 25, 2004.
Note 2. On April 22, 2003, the Company entered into an Advisory Agreement with
AltosBancorp Inc. ("Altos") pursuant to which Altos agreed to act as the
Company's exclusive business advisor for a one year period. Martin Nielson was
President of Altos and subsequently became Chairman and Chief Executive Officer
of the Company. Altos advised the Company regarding equity and debt financings,
strategic planning, mergers and acquisitions, and business developments. In
conjunction with the decision to proceed with the RWT acquisition, the agreement
with Altos was concluded. Altos did not receive any cash compensation for its
services rendered, but will receive 16,133,333 shares of the Company's common
stock (valued at approximately $166,000), of which 10,633,333 shares were earned
in 2004 and 5,500,000 shares were earned in 2003. None of these shares have been
issued to Altos as of this filing date.
Note 3. During the past three years, Walter K. Weisel has not received any cash
compensation. The amounts earned by Mr. Weisel remain accrued by the Company as
of December 31, 2004. Martin Nielson received $80,000 in cash compensation;
$50,000 was paid in 2003 and $30,000 was paid in 2004. The balance earned but
unpaid remains accrued by the Company as of December 31, 2004.
2004 Stock Option Plan
The Company adopted the 2004 stock option plan on April 15, 2004. The Plan
provides for the grant of options intended to qualify as "incentive stock
options", options that are not intended to so qualify or "nonstatutory stock
options" and stock appreciation rights. The total number of shares of common
stock reserved for issuance under the plan is 3,150,000 subject to adjustment in
the event of a stock split, stock dividend, recapitalization or similar capital
change. Additionally, the Company authorized 10,900,000 options to be awarded to
management on October 29, 2003 and on December 15, 2005 authorized options for
32,121,276 shares of common stock for directors and an independent contractor.
30
The plan is presently administered by the Company's board of directors, which
selects the eligible persons to whom options shall be granted, determines the
number of common shares subject to each option, the exercise price therefore and
the periods during which options are exercisable, interprets the provisions of
the plan and, subject to certain limitations, may amend the plan. Each option
granted under the plan shall be evidenced by a written agreement between the
Company and the optionee.
Options may be granted to employees (including officers) and directors and
certain consultants and advisors.
The exercise price for incentive stock options granted under the plan may not be
less than the fair market value of the common stock on the date the option is
granted, except for options granted to 10% stockholders which must have an
exercise price of not less than 110% of the fair market value of the common
stock on the date the option is granted. The exercise price for nonstatutory
stock options is determined by the board of directors. Incentive stock options
granted under the plan have a maximum term of ten years, except for 10%
stockholders who are subject to a maximum term of five years. The term of
nonstatutory stock options is determined by the board of directors. Options
granted under the plan are not transferable, except by will and the laws of
descent and distribution.
Also, the plan allows the board of directors to award to an optionee for each
share of common stock covered by an option, a related alternate stock
appreciation right, permitting the optionee to be paid the appreciation on the
option in lieu of exercising the option. The amount of payment to which an
optionee shall be entitled upon the exercise of each stock appreciation right
shall be the amount, if any, by which the fair market value of a share of common
stock on the exercise date exceeds the exercise price per share of the option.
Director's Compensation
The Company has not paid and does not presently propose to pay cash compensation
to any director for acting in such capacity. However, the Company will give the
directors a grant of shares of common stock or options and reimbursement for
reasonable out-of-pocket expenses for attending meetings.
Employment Agreements with Executive Officers
Currently there are employment agreements with two executives, Walter Weisel,
Chairman, CEO and CFO and Sheri Aws, Vice President and Secretary.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
The following table sets forth certain information regarding the beneficial
ownership of our common stock as of March 15, 2005, by each person or entity
known by us to be the beneficial owner of more than 5% of the outstanding shares
of common stock, each of our directors and named executive officers, and all of
our directors and executive officers as a group. Beneficial ownership has been
determined in accordance with Rule 13d-3 of the Securities Exchange Act of 1934,
as amended. Generally, a person is deemed to be the beneficial owner of a
security if he has the right to acquire voting or investment power within 60
days.
Percentage ownership in the following table is based on 371,296,897 shares of
common stock outstanding as of March 15, 2005. A person is deemed to be the
beneficial owner of securities that can be acquired by that person within 60
days from March 15, 2005 upon the exercise of options, warrants or convertible
securities, or other rights. Each beneficial owner's percentage ownership is
determined by dividing the number of shares beneficially owned by that person by
the base number of outstanding shares, increased to reflect the shares
underlying options, warrants, convertible securities, or other rights included
in that person's holdings, but not those underlying shares held by any other
person.
31
-----------------------------------------------------------
Name and Address of Amount and Nature Percent of Class
Beneficial Owner of Beneficial
Owner
-----------------------------------------------------------
Walter K. Weisel 59,001,385 - 15.6%
17105 San Carlos Direct Ownership
Blvd.
Suite A6151
Fort Myers Beach,
FL, 33931
-----------------------------------------------------------
Martin Nielson 30,085,033 - 7.7%
17105 San Carlos Direct (1)
Blvd.
Suite A6151
Fort Myers Beach,
FL, 33931
-----------------------------------------------------------
-----------------------------------------------------------
Gary McNear 10,235,450 - (2). 2.8%
17105 San Carlos Blvd.
Suite A6151
Ft. Myers Beach,
FL, 33931
------------------------------------------------------------
Craig Conklin 10,576,950 - (3). 2.8%
17105 San Carlos Blvd.
Suite A6151
Ft. Myers Beach,
FL, 33931
------------------------------------------------------------
Jerry E. Horne 74,329,227 - 20.0%
17105 San Carlos Blvd. Direct
Suite A6151
Ft. Myers Beach,
FL, 33931
------------------------------------------------------------
John Murphy 26,671,524- 7.2%
17105 San Carlos Blvd. Direct
Suite A6151
Ft. Myers Beach,
FL, 33931
------------------------------------------------------------
Directors and 112,933,301 26.4%
Officers as a Group
------------------------------------------------------------
(1). On April 29, 2003, the Gary F. McNear Revocable Trust ("Gary Trust"), the
Susan M. McNear Revocable Trust ("Susan Trust"), the Craig M. Conklin Revocable
Trust ("Craig Trust") and the Margaret L. Conklin Revocable Trust ("Margaret
Trust") (collectively the "Trusts") entered into a Stock Option and Irrevocable
Proxy Agreement with Altos. Gary McNear was the Chief Financial Officer, Vice
President, Secretary and Director of The Company; he currently is a director of
the Company. Susan McNear is his wife. Craig M. Conklin was the Chief Operating
Officer, Vice President and a Director of the Company; he currently is a
director of the Company. Margaret Conklin is his wife. The Trusts own an
aggregate of 15,838,444 shares of the Company's Common Stock. The Trusts granted
to Altos an option to acquire 10,000,000 of their shares of Common Stock for
$.01 per share for a period of three years. The Trusts also granted to Altos an
irrevocable proxy to vote their shares. The irrevocable proxy is for a term of
three years with respect to the 10,000,000 shares of Common Stock held by the
Trusts that are subject to the option to purchase and for a term of six months
with respect to the 5,838,444 shares of Common Stock held by the Trusts that are
not subject to the option to purchase. The irrevocable proxy relating to the
5,838,444 shares has expired. Additionally, Altos and Mr. Nielson earned a fee
for services rendered, compensation as an executive of the Company and
reimbursement of expenses which are expected to be paid in full upon the
issuance of an additional 20,085,033 shares.
(2). Includes 2,919,224 shares owned by the Susan M. McNear Revocable Trust.
32
(3). Includes 2,919,224 shares owned by the Margaret L. Conklin Revocable Trust.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
On June 23, 2004, the Company entered into and simultaneously closed an
Agreement with Encompass Group Affiliates, Inc. (Encompass"), pursuant to which
the Company granted to Encompass an exclusive, worldwide, royalty free and fully
paid up perpetual and irrevocable licenses to use the customer list associated
with its computer and systems related products business and its related
websites; this business was subsequently closed down. Additionally, the Company
assigned to Encompass the Company's rights to enter into acquisitions with three
companies. In consideration for this transaction, Encompass assumed all of the
Company's obligations under certain Convertible Debentures (the "Convertible
Debentures") in the aggregate principal amount of $503,300. The holders of the
Convertible Debentures released the Company from all claims arising under the
Convertible Debentures.
On April 28, 2003, the Company entered into an employment agreement with Gary F.
McNear, as Chief Financial Officer, Vice President, Secretary and Director. Mr.
McNear is no longer an employee of the Company but is currently a director. Mr.
McNear was paid a base salary of $1,500 per week. The agreement was for a term
of two years. Mr. McNear resigned as an employee of the Company upon the close
of the merger with RWT. The agreement restricts Mr. McNear from competing with
the Company, soliciting the Company's customers or employees, and interfering
with the Company's business during the term of the agreement and for one year
thereafter. Mr. McNear agreed to keep the Company's business trade secrets
confidential and not to make use of them. Under the agreement, Mr. McNear was
also granted an option to acquire 500,000 shares of our common stock, at a price
of $.01 per share, expiring five years from the date of grant.
On April 28, 2003, the Company entered into an employment agreement with Craig
W. Conklin, as the Company's Chief Operating Officer, Vice President, and
Director. Mr. Conklin is no longer an employee of the Company but is currently a
director. Mr. McNear was paid a base salary of $1,500 per week. The agreement
was for a term of two years. The agreement restricts Mr. Conklin from competing
with the Company, soliciting the Company's customers or employees, and
interfering with the Company's business during the term of the agreement and for
one year thereafter. Mr. Conklin agreed to keep the Company's business trade
secrets confidential and not to make use of them. Under the agreement, Mr.
Conklin was also granted an option to acquire 500,000 shares of our common
stock, at a price of $.01 per share, expiring five years from the date of grant.
In January 2003, Craig W. Conklin, our President, and Gary F. McNear, our Chief
Executive Officer, entered into a consulting agreement with the Company's
subsidiary relating to the negotiation of a reduced loan amount due SunTrust
Bank. Pursuant to the consulting agreement, the subsidiary agreed to pay each of
Messrs. Conklin and McNear six percent of the discounted amount of the loan due
SunTrust Bank. In consideration for six percent of the discounted amount,
Messrs. Conklin and McNear agreed to forego any compensation due them for the
past two years and each received. In connection with the SunTrust settlement,
the Company issued common stock valued at $225,772 to each individual, Mr.
Conklin and Mr. McNear.
On August 18, 2004 the Company entered into an agreement with Aegis Funds, Inc
(AFI) to sell all of the issued and outstanding capital stock of its subsidiary
Hy Tech Computer Systems (HTCS) to AFI. The sale of HTCS to AFI closed on August
25, 2004. At the closing date, for and in consideration for the transfer to AFI
of the HTCS Capital Stock, AFI became the record and beneficial owner of the
HTCS Capital Stock, the Company transferred as directed by AFI and for the
benefit of HTCS the sum of fifteen thousand dollars ($15,000) in good funds, and
the judgment of Sun Trust Bank against HTCS was transferred to AFI free of all
claims and liens. AFI is controlled by Gary McNear and Craig Conklin, who are
directors of the Company. The transaction was approved by the member of the
board of directors who had no interest in the transaction.
33
On July 22, 2002, the Company entered into a revolving line of credit of
$225,000 with Fifth Third Bank, Florida, secured by the assets of the Company.
The annual interest rate on unpaid principal is the prime rate plus 2%, due in
monthly installments. Principal and interest were due on July 22, 2003. In
November 2004, a principal shareholder, Jerry E. Horne, loaned the Company
$165,000 to pay down the line of credit with Fifth Third Bank. The loan has the
same terms as the Fifth Third Bank line of credit, except that it remains
unsecured until such time as the Fifth Third Bank line of credit is fully paid,
including principal and accrued interest, and is due upon demand. In January
2005, the Fifth Third Bank line of credit was paid off.
On August 25, 2004 the Company issued 280,000,000 shares of common stock for
100% of the outstanding stock of Robotic Workspace Technology, Inc ("RWT"). For
financial reporting purposes this transaction was treated as an acquisition of
Innova and a recapitalization of RWT using the purchase method of accounting. As
part of this transaction, Walter K. Weisel received 53,172,765 shares of the
Company and Jerry E. Horne received 74,329,227 shares of the Company.
ITEM 13. EXHIBITS
2.1 Exchange Agreement (1)
2.2 Agreement and Plan of Merger dated as of April 29, 2003 between The
Company and Sanjay Haryama (4)
2.3 Certificate of Merger between The Company and Sanjay Haryama as filed with
the Delaware Secretary of State on April 29, 2003. (4)
2.4 Agreement and Plan of Merger among the Company, RWT Acquisition, Inc and
Robotic Workspace Technologies, Inc. dated July 21, 2004. (5)
2.5 Agreement between the Company and Encompass Group Affiliates, Inc. dated
June 23, 2004. (5)
2.6 Agreement between the Company and Aegis Finance, Inc. dated August 18,
2004 *
3.1 Articles of Incorporation (2)
3.2 Bylaws (2)
3.3 Certificate of Amendment to Articles of Incorporation (3)
3.4 Certificate of Amendment to Articles of Incorporation (6)
4.1 Certificate of Designation of Series A Preferred Stock (5)
4.2 Certificate of Designation of Series B Preferred Stock (9)
10.1 Advisory Agreement between The Company and Altos Bancorp Inc. dated April
22, 2003 (4)
10.2 Stock Option and Irrevocable Proxy Agreement among Altos Bancorp, Inc.,
the Gary F. McNear Trust, the Susan M. McNear Trust, the Craig W. Conklin
Trust and the Margaret L. Conklin Trust (4)
10.3 Convertible Debenture Purchase Agreement dated as of April 21, 2003
between Sanjay Haryama and HEM Mutual Assurance LLC. (4)
10.4 Convertible Debenture Purchase Agreement dated as of April 28, 2003
between The Company and HEM Mutual Assurance Fund Limited. (4)
10.5 Option Purchase Agreement between the Company and SunTrust Bank (4)
34
10.6 License Agreement between the Company and Encompass Group Affiliates, Inc.
dated June 23, 2004 for customer list (5)
10.7 License Agreement between the Company and Encompass Group Affiliates, Inc.
dated June 23, 2004 for website (5)
10.8 Assumption Agreement between the Company and Encompass Group Affiliates,
Inc. dated June 23, 2004 (5)
10.9 Noncompetition and Nondisclosure Agreement between the Company and
Encompass Group Affiliates, Inc. dated June 23, 2004 (5)
10.10 Employment Agreement of Sheri Aws dated February 24, 2004 (7)
10.11 Renewal Promissory Note payable to Fifth Third Bank, Florida for $225,000
effective July 22, 2003 (8)
10.12 Security Agreement in favor of Fifth Third Bank, Florida effective July
22, 2003 (8)
10.13 Consulting Agreements with Stratex Solutions, LLC (9)
10.14 Business Development Agreement with B. Smith Holdings, Inc (9)
10.15 Employment Agreement with Walter K. Weisel dated July 19, 2000 (9)
14.1 Code of Ethics (9)
31.1 Rule 13(a) -14(a)/15d-14(a) Certification of Principal Executive Officer*
31.2 Rule 13(a) -14(a)/15d-14(a) Certification of Principal Financial Officer*
32.1 Section 1350 Certification of Chief Executive Officer *
32.2 Section 1350 Certification of Chief Financial Officer *
(1) Incorporated by reference to the Form 8-K filed on February 4, 2003.
(2) Incorporated by reference to the Form SB-2 filed on August 7, 2001.
(3) Incorporated by reference to the Form 10-KSB filed on April 24, 2003.
(4) Incorporated by reference to the Form 8-K filed on May 13, 2003.
(5) Incorporated by reference to the Form 8-K filed on August 8, 2004.
(6) Incorporated by reference to the Form 14C filed on June 30, 2004.
(7) Incorporated by reference to the Form 8-K filed on September 28, 2004.
(8) Incorporated by reference to the Form 8-K filed on January 11, 2005.
(9) Incorporated by reference to the Form 10-KSB filed on April 19, 2005.
*Filed with this report.
35
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
(1) Audit Fees
The aggregate fees billed for professional services rendered by Lopez, Blevins,
Bork & Associates, LLP and Malone & Bailey, PLLC for the audit of the
Registrant's annual financial statements and review of the financial statements
included in the Registrant's Forms 10-QSB or services that are normally provided
by the accountant in connection with statutory and regulatory filings or
engagements for fiscal years 2004 and 2003, including fees paid by Hy-Tech
Technology Group, Inc. for these periods prior to its reverse acquisition by
Robotic Workspaces Technologies, Inc., were $19,500 and $41,300, respectively.
(2) Audit Related Fees
The aggregate fees billed for professional services rendered by Lopez, Blevins,
Bork & Associates, LLP and Malone & Bailey, PLLC for audit related fees for
fiscal years 2004 and 2003 were $0 and $0, respectively.
(3) Tax Fees
The aggregate fees billed for professional services rendered by Lopez, Blevins,
Bork & Associates, LLP and Malone & Bailey, PLLC for the preparation of the
Registrant's tax returns, including tax planning for fiscal years 2004 and 2003
were $0 and $0, respectively.
(4) All Other Fees
No other fees were paid to Lopez, Blevins, Bork & Associates, LLP and Malone &
Bailey, PLLC for fiscal years 2004 and 2003.
(5) Audit Committee Policies and Procedures
The Registrant does not have an audit committee. The Board of Directors of the
Registrant approved all of the services rendered to the Registrant by Lopez,
Blevins, Bork & Associates, LLP and Malone & Bailey, PLLC for fiscal years 2004
and 2003.
(6) Audit Work Attributed to Persons Other than Lopez, Blevins, Bork &
Associates, LLP and Malone & Bailey, PLLC Full-time, Permanent Employees.
Not applicable.
36
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
Innova Holdings, Inc.
Ft Myers Beach, Florida
We have audited the accompanying balance sheet of Innova Holdings, Inc. as of
December 31, 2004 and the related statements of operations, stockholders'
deficit, and cash flows for each of the two years then ended. These financial
statements are the responsibility of Innova's management. Our responsibility is
to express an opinion on these financial statements based on our audits.
We conducted our audits 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 financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Innova Holdings, Inc. as of
December 31, 2004 and the results of its operations and its cash flows for each
of the two years then ended, in conformity with accounting principles generally
accepted in the United States of America.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 2 to the
financial statements, Innova Holdings, Inc. incurred losses of $1,426,931 and
$203,829 for the years ended December 31, 2004 and 2003, respectively. Innova
Holdings, Inc. will require additional working capital to develop its business
until they either (1) achieves a level of revenues adequate to generate
sufficient cash flows from operations; or (2) obtains additional financing
necessary to support its working capital requirements. These conditions raise
substantial doubt about Innova Holdings, Inc.'s ability to continue as a going
concern. Management's plans in regard to this matter are also described in Note
2. The accompanying financial statements do not include any adjustments that
might result from the outcome of these uncertainties.
As discussed in Note 11 to these audited financial statements, the Company
restated its financial statements.
Lopez, Blevins, Bork & Associates, LLP
Houston, Texas
April 15, 2005
37
INNOVA HOLDINGS, INC.
BALANCE SHEET
December 31, 2004
ASSETS
Current assets
Cash $ 2,794
------------
Total current assets 2,794
Property and equipment, net 7,688
------------
TOTAL ASSETS $ 10,482
============
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities
Current maturities of long-term debt $ 37,700
Line of credit -
Accounts payable 573,939
Accrued expenses 1,343,478
Notes payable 395,500
Dividend payable 9,850
------------
Total current liabilities 2,360,467
------------
Long-term debt 951,400
Mandatorily redeemable series A preferred stock 80,300
Commitments
STOCKHOLDERS' DEFICIT:
Preferred stock, $.001 par value, 10,000,000 shares
authorized, 376,834 shares issued and outstanding 377
Common stock, $.001 par value, 900,000,000 shares
authorized, 371,296,897 shares issued and outstanding 371,297
Additional paid-in capital 3,687,421
Accumulated deficit (7,440,780)
------------
Total Stockholders' Deficit (3,381,685)
------------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFCIT $ 10,482
============
See accompanying summary of accounting policies
and notes to financial statements.
38
INNOVA HOLDINGS, INC.
STATEMENTS OF OPERATIONS
Years Ended December 31, 2004 and 2003
2004 2003
------------- -------------
Revenues $ -- $ --
Cost of revenues -- --
------------- -------------
Gross profit -- --
------------- -------------
Operating expenses:
Selling, general and administrative 270,059 172,765
Merger related costs 570,874 --
Outside services 262,050 --
Legal fees 135,869 --
Professional fees 85,763 --
Depreciation and amortization 1,363 626
Gain on sale of assets -- (42,658)
------------- -------------
Total operating expenses 1,325,978 130,733
------------- -------------
Loss from operations 1,325,978 130,733
Interest expense 100,953 73,096
------------- -------------
Net loss $ (1,426,931) $ (203,829)
============= =============
Net loss applicable to common shareholders:
Net loss $ (1,426,931) $ (203,829)
Beneficial conversion of preferred stock (150,100) --
------------- -------------
Net loss applicable to common shareholders $ (1,577,031) $ (203,829)
============= =============
Net loss per share:
Basic and diluted $ (0.00) $ (0.00)
============= =============
Weighted averaged shares outstanding:
Basic and diluted 371,296,897 192,645,050
============= =============
See accompanying summary of accounting policies
and notes to financial statements.
39
INNOVA HOLDINGS, INC.
STATEMENTS OF STOCKHOLDERS' DEFICIT
Years Ended December 31, 2004 and 2003
Common Stock Preferred Stock Additional
------------------------- ------------------------- paid-in Accumulated
Shares Amount Shares Amount capital deficit Total
----------- ----------- ----------- ----------- ----------- ----------- -----------
Balance,
December 31, 2002 192,645,050 $ 192,645 -- $ -- $ 3,276,621 $(5,659,920) $(2,190,654)
Net loss -- -- -- -- -- (203,829) (203,829)
----------- ----------- ----------- ----------- ----------- ----------- -----------
Balance,
December 31, 2003 192,645,050 192,645 -- -- 3,276,621 (5,863,749) (2,394,483)
Issuance of common
stock for notes
payable 61,820,488 61,821 -- -- 441,783 -- 503,604
Common stock issued
for services
rendered 25,534,462 25,534 -- -- 182,472 -- 208,006
Issuance of common
stock in connection
with reverse merger
and recapitalization 91,296,897 91,297 -- -- (774,862) -- (683,565)
Issuance of Series B
Preferred Stock -- -- 376,834 377 376,457 -- 376,834
Dividend declared on
preferred stock -- -- -- -- (9,850) -- (9,850)
Beneficial conversion
feature embedded in
mandatorily redeemable
Series A preferred
stock -- -- -- -- 48,300 (3,600) 44,700
Beneficial conversion
feature embedded in
Series B preferred
stock -- -- -- -- 146,500 (146,500) --
Net loss -- -- -- -- -- (1,426,931) (1,426,931)
----------- ----------- ----------- ----------- ----------- ----------- -----------
Balance,
December 31, 2004 371,296,897 $ 371,297 376,834 $ 377 $ 3,687,421 $(7,440,780) $ (3,381,685)
=========== =========== =========== =========== =========== =========== ===========
See accompanying summary of accounting policies
and notes to financial statements.
40
INNOVA HOLDINGS, INC
STATEMENTS OF CASH FLOWS
Years Ended December 31, 2004 and 2003
2004 2003
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $(1,426,931) $ (203,829)
Adjustments to reconcile net loss to cash used in
operating activities:
Gain on sale of assets -- (42,658)
Depreciation and amortization 1,363 626
Common stock issued for services rendered 208,006 --
Common stock issued for interest expense 58,629 --
Changes in assets and liabilities:
Accounts payable 226,732 (13,134)
Accrued expenses 610,940 212,901
----------- -----------
CASH FLOWS USED IN OPERATING ACTIVITIES (321,261) (46,094)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from the sale of assets -- 42,658
Additions to property and equipment (5,896) --
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES (5,896) 42,658
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from advances - officers -- 7,500
Proceeds from notes payable - net 158,000 --
Proceeds from investors 391,834 --
Payments on long-term debt (224,999) (11,928)
Proceeds from long-term debt -- 11,500
----------- -----------
CASH FLOW FROM FINANCING ACTIVITIES 324,835 7,072
----------- -----------
NET INCREASE (DECREASE) IN CASH (2,322) 3,636
Cash, beginning of period 5,116 1,480
----------- -----------
Cash, end of period $ 2,794 $ 5,116
=========== ===========
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid $ 99,597 $ 10,403
=========== ===========
Income taxes paid $ -- $ --
=========== ===========
See accompanying summary of accounting policies
and notes to financial statements.
41
INNOVA HOLDINGS, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 1 - BASIS OF PRESENTATION
Nature of the Company
Innova Holdings, Inc. is a software technology company providing software
solutions to the industrial robotics industry, service robotics industry and the
personal robotics industry. The Company's plan of operations is to identify,
develop and acquire technology that is or will become a market leader and to
create opportunities to leverage its software into value-added applications when
combined with other software solutions offered by the Innova group of companies.
Innova has two wholly-owned subsidiaries, Robotic Workspace Technologies, Inc.
(RWT) and Service Robots, Inc. RWT delivers its software through the sale of
Control Systems and the licensing of its software to end-user companies, system
integrators, manufacturing support providers, software development companies,
and other partners, primarily in the industrial markets. RWT also offers
complete system development and system integration services. The control systems
include the Universal Robot Controller and the Universal Automation Controller.
The Universal Automation Controller is in the final stages of development The
proprietary patents, including two pioneer utility patents issued by the USPTO
and one patent pending, are owned by RWT and cover all applications pertaining
to the interface of a general use computer and the mobility of robots,
regardless of specific applications.
Innova's software solutions benefit developers of new technology in the service
and personal robotic markets. Software available for licensing includes
RobotScript, a universal programming language based on Microsoft's Visual
Basic(R) software (VBScript(R)). The Innova suite of software will be marketed
and sold to the service and personal robot markets through Service Robots, Inc.
Use of Estimates
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities at the date of the balance sheet. Actual results could differ from
those estimates.
Cash and Cash Equivalents
Cash and cash equivalents include cash and all highly liquid financial
instruments with purchased maturities of three months or less.
42
Fair Value of Financial Instruments
The Company's financial instruments consist of cash and debt. The carrying
amount of these financial instruments approximates fair value due either to
length of maturity or interest rates that approximate prevailing market rates
unless otherwise disclosed in these consolidated financial statements.
Revenue Recognition
The Company recognizes revenue when persuasive evidence of an arrangement
exists, delivery has occurred, the sales price is fixed or determinable and
collectibility is probable.
Product sales are recognized by the Company generally at the time product is
shipped. Shipping and handling costs are included in cost of goods sold.
Allowance for Doubtful Accounts - Earnings are charged with a provision for
doubtful accounts based on past experience, current factors, and management's
judgment about collectibility. Accounts deemed uncollectible are applied against
the allowance for doubtful accounts.
Property and Equipment
Property and equipment are stated at cost less accumulated depreciation. Major
renewals and improvements are capitalized; minor replacements, maintenance and
repairs are charged to current operations. Depreciation is computed by applying
the straight-line method over the estimated useful lives which are generally
three to seven years.
Impairment losses are recorded on long-lived assets used in operations when
indicators of impairment are present and the undiscounted cash flows estimated
to be generated by those assets are less than the assets' carrying amount.
Income Taxes
Income taxes are computed using the asset and liability method. Under the asset
and liability method, deferred income tax assets and liabilities are determined
based on the differences between the financial reporting and tax bases of assets
and liabilities and are measured using the currently enacted tax rates and laws.
A valuation allowance is provided for the amount of deferred tax assets that,
based on available evidence, are not expected to be realized. Additionally,
taxes are calculated and expensed in accordance with applicable tax code.
Basic Loss Per Share
The Company is required to provide basic and dilutive earnings (loss) per common
share information. The basic net loss per common share is computed by dividing
the net loss applicable to common stockholders by the weighted average number of
common shares outstanding.
43
Diluted net loss per common share is computed by dividing the net loss
applicable to common stockholders, adjusted on an "as if converted" basis, by
the weighted average number of common shares outstanding plus potential dilutive
securities. For the periods ended December 2003 and 2004, potential dilutive
securities had an anti-dilutive effect and were not included in the calculation
of diluted net loss per common share.
Recent Accounting Pronouncements
In January 2003, the Financial Accounting Standards Board ("FASB") issued
interpretation No. 46 ("FIN 46") "Consolidation of Variable Interest Entities."
Until this interpretation, a company generally included another entity in its
consolidated financial statements only if it controlled the entity through
voting interests. FIN 46 requires a variable interest entity, as defined, to be
consolidated by a company if that company is subject to a majority of the risk
of loss from the variable interest entity's activities or entitled to receive a
majority of the entity's residual returns. Certain provisions of FIN 46 became
effective during the quarter ended March 31, 2004, the adoption of which did not
have a material impact on the financial position, cash flows or results of
operations of the Company.
In December 2004, the FASB issued SFAS No. 123 (Revised 2004) "Share-Based
Payment" ("SFAS No. 123R"). SFAS No. 123R addresses all forms of share-based
payment ("SBP") awards, including shares issued under certain employee stock
purchase plans, stock options, restricted stock and stock appreciation rights.
SFAS No. 123R will require the Company to expense SBP awards with compensation
cost for SBP transactions measured at fair value. The FASB originally stated a
preference for a lattice model because it believed that a lattice model more
fully captures the unique characteristics of employee stock options in the
estimate of fair value, as compared to the Black-Scholes model which the Company
currently uses for its footnote disclosure. The FASB decided to remove its
explicit preference for a lattice model and not require a particular valuation
methodology. SFAS No. 123R requires us to adopt the new accounting provisions
beginning in our third quarter of 2005. Although the Company is in the process
of evaluating the impact of applying the various provisions of SFAS No. 123R, we
expect that this statement will have a material impact on our consolidated
results of operations.
In April 2004, the Emerging Issues Task Force ("EITF") issued Statement No.
03-06 "Participating Securities and the Two-Class Method Under FASB Statement
No. 128, Earnings Per Share" ("EITF 03-06"). EITF 03-06 addresses a number of
questions regarding the computation of earnings per share by companies that have
issued securities other than common stock that contractually entitle the holder
to participate in dividends and earnings of the company when, and if, it
declares dividends on its common stock. The issue also provides further guidance
in applying the two-class method of calculating earnings per share, clarifying
what constitutes a participating security and how to apply the two-class method
of computing earnings per share once it is determined that a security is
participating, including how to allocate undistributed earnings to such a
security. EITF 03-06 became effective during the quarter ended June 30, 2004,
the adoption of which did not have an impact on the calculation of earnings per
share of the Company.
44
In July 2004, the EITF issued a draft abstract for EITF Issue No. 04-08, "The
Effect of Contingently Convertible Debt on Diluted Earnings per Share" ("EITF
04-08"). EITF 04-08 reflects the Task Force's tentative conclusion that
contingently convertible debt should be included in diluted earnings per share
computations regardless of whether the market price trigger has been met. If
adopted, the consensus reached by the Task Force in this Issue will be effective
for reporting periods ending after December 15, 2004. Prior period earnings per
share amounts presented for comparative purposes would be required to be
restated to conform to this consensus and the Company would be required to
include the shares issuable upon the conversion of the Notes in the diluted
earnings per share computation for all periods during which the Notes are
outstanding.
Stock-Based Compensation
The Company accounts for its stock-based compensation plans under Accounting
Principles Board ("APB") Opinion No. 25, Accounting for Stock Issued to
Employees. The pro forma information below is based on provisions of Statement
of Financial Accounting Standard ("FAS") No. 123, Accounting for Stock-Based
Compensation, as amended by FAS 148, Accounting for Stock-Based
Compensation-Transition and Disclosure, issued in December 2002.
2004 2003
----------- -----------
Net loss applicable to common shareholders $(1,577,031) $ (203,829)
Add: Intrinsic value expense recorded -- --
Deduct: total stock-based employee
compensation determined under fair value
based method -- --
----------- -----------
Pro forma net loss applicable to common
shareholders $(1,577,031) $ (203,829)
=========== ===========
Earnings per share:
Basic and diluted - as reported $ (.00) $ (.00)
Basic and diluted - pro forma $ (.00) $ (.00)
The fair value of each option granted is estimated on the date of grant using
the Black-Scholes option-pricing model with the following weighted average
assumptions used for grants in 2004: no dividend yield and expected volatility
of 80%, risk-free interest rate of 2.75%, and expected lives of 10 years. There
were 1,000,000 options granted in 2003 and 33,962,655 options granted in 2004.
45
NOTE 2 - FINANCIAL CONDITION AND GOING CONCERN
Innova Holdings, Inc. has incurred losses for the years ended December 31,
2004 and 2003 of $1,426,931 and $203,829, respectively. Because of these
losses, the Company will require additional working capital to develop its
business operations.
Innova Holdings, Inc. intends to raise additional working capital through
private placements, public offerings and/or bank financing. During 2004, Innova
Holdings, Inc. raised approximately $377,000 from the sale of preferred stock,
$15,000 from the sale of convertible notes which were subsequently converted
into common stock, and $165,000 from debt which was used to pay down a bank line
of credit.
There are no assurances that Innova Holdings, Inc. will be able to either (1)
achieve a level of revenues adequate to generate sufficient cash flow from
operations; or (2) obtain additional financing through either private
placements, public offerings and/or bank financing necessary to support Innova
Holdings, Inc.'s working capital requirements. To the extent that funds
generated from operations and any private placements, public offerings and/or
bank financing are insufficient, Innova Holdings, Inc. will have to raise
additional working capital. No assurance can be given that additional financing
will be available, or if available, will be on terms acceptable to Innova
Holdings, Inc.
These conditions raise substantial doubt about Innova Holdings, Inc.'s ability
to continue as a going concern. The financial statements do not include any
adjustments relating to the recoverability and classification of asset carrying
amounts or the amount and classification of liabilities that might be necessary
should Innova Holdings, Inc. be unable to continue as a going concern.
NOTE 3 - REVERSE MERGER
On August 25, 2004, Innova Holdings, Inc., (previously Hy-Tech Technology, Inc.)
issued 280,000,000 shares of common stock for 100% of the outstanding stock of
Robotic Workspace Technology, Inc ("RWT"). For financial reporting purposes this
transaction was treated as an acquisition of Innova and a recapitalization of
RWT using the purchase method of accounting. RWT's historical financial
statements replace Innova's in the accompanying financial statements. As part of
this merger, Innova assumed $230,000 of notes payable and $125,000 of redeemable
Series A Preferred Stock which has a mandatory redemption provision. In
addition, the merger agreement requires Innova to issue 37,885,033 shares of
Innova's common stock to its previous management and business advisor for
services rendered up through the merger date; Innova has recorded an accrued
liability for these shares in the amount of $378,850.
The 280,000,000 shares of Innova's common stock issued to RWT shareholders were
comprised of the following:
Shares issued to shareholders as of December 31, 2003 192,645,050
Shares issued to shareholders for conversion of notes payable 61,820,488
Shares issued to shareholders for services rendered 25,534,462
-----------
Total shares issued in reverse merger 280,000,000
===========
Innova sold its wholly owned subsidiary and all of its operations in connection
with the acquisition of RWT. As part of the agreement, the Company agreed to
indemnify the directors of the Company from certain liabilities that were in
existence on the date of closing of the sale, which management believes may
apply to a maximum of approximately $500,000 of debt. If the Company issues
shares of its common stock or pays cash to settle any of this debt, it shall
issue an equal number of common shares to the former RWT shareholders, in
proportion to their RWT share holdings. After the reorganization and stock
purchase there were 371,296,897 shares of common stock outstanding of the
combined entity.
46
NOTE 4 - CAPITAL STOCK
Effective July 29, 2004, the Company changed its name to Innova Holdings, Inc.
from Hy-Tech Technology Group, Inc. The Company's trading symbol changed to
"IVHG." Simultaneously with the name change, the Company increased its
authorized capitalization from 101,000,000 shares, consisting of 100,000,000
shares of common stock, $.001 par value and 1,000,000 shares of preferred stock,
$.001 par value to 910,000,000 shares authorized, consisting of 900,000,000
shares of common stock, $.001 par value and 10,000,000 shares of preferred
stock, $.001 par value.
On June 23, 2004, the Company entered into a private placement and sold 125,000
shares of Series A Preferred Stock for $125,000 with the holders of the
Company's Convertible Debentures. Each share of the Series A Preferred Stock (i)
pays a dividend of 5%, payable at the discretion of the Company in cash or
common stock, (ii) is convertible immediately after issuance into the number of
shares of common stock equal to $1.00 divided by a conversion price equal to the
lesser of 75% of the average closing bid price of the Company's common stock
over the twenty trading days preceding conversion or $0.005, (iii) has a
liquidation preference of $1.00 per share, (iv) must be redeemed by the Company
five years after issuance at $1.00 per share plus accrued and unpaid dividends,
(v) may be redeemed by the Company at any time for $1.30 per share plus accrued
and unpaid dividends and (vi) has no voting rights except when mandated by
Delaware law.
In the event that the Company had not completed the merger with RWT and RWT had
not raised $500,000 in new capital by August 27, 2004, then each of the holders
of the Series A Preferred Stock could elect to convert their shares into (a) a
demand note payable by the Company, in the principal amount equal to the
purchase price of the Series A Preferred Stock plus accrued and unpaid
dividends, with interest at the rate of ten percent (10%) until paid in full and
(b) warrants to purchase 2,500,000 shares of the Company's common stock at an
exercise price of $.005 per share, with a term of two (2) years from the date of
issuance, and standard anti-dilution provisions regarding stock splits,
recapitalizations and mergers, for each $25,000 of Series A Preferred Stock
purchased. Since RWT had not raised $500,000 by August 27, 2004 the holders of
the Series A Preferred Stock could have elected to convert their shares into the
demand note but none of the holders elected to do so.
Of the $125,000 proceeds received from the issuance of the Series A Preferred
Stock, $50,000 was allocated to the beneficial conversion feature embedded in
the Series A Preferred Stock on the date of issuance based on a conversion price
of $.005 per share. Of this amount, $48,300 was the unamortized embedded
beneficial feature assumed as part of the reverse merger with Robotic Workspace
Technologies, Inc. The beneficial conversion feature is being amortized over
five (5) years and accordingly $3,600 was amortized through Accumulated Deficit
through December 31, 2004. Additionally, the excess of the aggregate fair value
of the common stock to be issued upon conversion over the $125,000 of proceeds
received when the Series A Preferred Stock was issued amounted to $50,000.
In September 2004, the Company authorized $525,000 of Series B Preferred Stock.
The terms of the Series B Preferred Stock include the following: i) pays a
dividend of 5%, payable at the discretion of the Company in cash or common
stock, (ii) is convertible immediately after issuance into the Company's common
stock at the lesser of $.005 per share or 75% of the average closing bid prices
over the 20 trading days immediately preceding the date of conversion (iii) has
a liquidation preference of $1.00 per share, (iv) may be redeemed by the Company
at any time up to five years after the issuance date for $1.30 per share plus
accrued and unpaid dividends, (v) ranks junior to the Series A Preferred Stock
upon liquidation of the Company and (vi) has no voting rights except when
mandated by Delaware law.
At December 31, 2004, approximately $377,000 of the Series B Preferred Stock had
been sold; none of the Series B Preferred Stock has been converted into common
stock. Of the $377,000 proceeds received from the issuance of the Series B
Preferred Stock, $146,500 was allocated to the beneficial conversion feature
embedded in the Series B Preferred Stock on the date of issuance, based on a
conversion price of $.005 per share. All of the $146,500 beneficial conversion
feature was amortized through Accumulated Deficit on the date of issuance;
therefore, all of the beneficial conversion feature was amortized as of December
31, 2004. Additionally, the excess of the aggregate fair value of the common
stock to be issued upon conversion over the $377,000 of proceeds received when
the Series B Preferred Sock was issued amounted to $158,500.
47
Stock Options:
No compensation cost has been recognized for grants under the stock option plans
since all grants pursuant to these plans have been made at the current estimated
fair values of the Company's common stock at the grant date. There were
33,962,655 options issued for the year ended December 31, 2004. There were
1,000,000 options issued for the year ended December 31, 2003.
The fair value of each option granted is estimated on the date of grant using
the Black-Scholes option-pricing model with the following weighted average
assumptions used for grants in fiscal 2004: zero dividend yield, expected
volatility of 80%, risk-free interest rate of 2.75% and expected lives of 10
years.
The options granted have a weighted average exercise price of $.008 per share
and vest over three years. The maximum term of the options is ten years.
The following table summarizes stock option activity:
Outstanding, December 31, 2002 13,425,486
Granted 1,000,000
Canceled --
Exercised --
---------------
Outstanding, December 31, 2003 14,425,486
Granted 33,962,655
Canceled --
Exercised --
---------------
Outstanding, December 31, 2004 48,388,141
===============
Weighted-average grant-date fair
value of options, granted during
the year $ .008
===============
Weighted-average remaining, years
of contractual life 8.79
===============
NOTE 5 - LINE OF CREDIT
On July 22, 2002, the Company entered into a revolving line of credit of
$225,000 with Fifth Third Bank, Florida, secured by the assets of the Company.
The annual interest rate on unpaid principal is the prime rate plus 2%, due in
monthly installments. Principal and interest were due on July 22, 2003. The line
of credit was paid in January 2005.
NOTE 6 - ACCRUED EXPENSES
On April 22, 2003, the Company entered into an Advisory Agreement (the "Advisory
Agreement") with AltosBancorp Inc. ("Altos") pursuant to which Altos agreed to
act as the Company's exclusive business advisor. Altos advised the Company
regarding equity and debt financings, strategic planning, mergers and
acquisitions, and business developments, including the merger with RWT. Altos
did not receive any cash compensation for services rendered. In August 2004, as
a final determination of compensation, the Company agreed to pay Altos $161,333
in common stock of the Company, or 16,133,333 shares. Martin Nielson is
president of Altos and after entering into the Advisory Agreement became the
Company's Chairman and Chief Executive Officer, for which he received a salary
and expense reimbursement totaling $104,650 and $114,867 in 2004 and 2003,
respectively. Of these amounts, $80,000 was paid in cash and $139,517 will be
paid in common stock of the Company, or 13,951,700 shares. These amounts owed
Altos and Mr. Nielson are recorded on the balance sheet as accrued expenses.
48
NOTE 7 - NOTES PAYABLE
On April 17, 2002, the Company borrowed $989,100 under a note agreement with the
Small Business Administration. This loan is secured by the equipment and
machinery assets of the Company and by the personal residence and other assets
of the Company's Chairman and CEO, a principal shareholder and founder of RWT.
The balance outstanding as of December 31, 2004 was $989,100 The annual interest
rate on unpaid principle is 4%, due and payable in monthly installments of
$4,813 beginning September 17, 2002, continuing until April 17, 2032.
In November 2004, a principal shareholder loaned the Company $165,000 to pay
down the line of credit with Fifth Third Bank. The loan has the same terms as
the Fifth Third Bank line of credit, except that it remains unsecured until such
time as the Fifth Third Bank line of credit is fully paid, including principal
and accrued interest, and is due upon demand. In January 2005, the Fifth Third
Bank line of credit was paid off.
In February 2003 the Company issued $230,000 of notes payable, the terms of
which were subsequently modified in July 2003. The notes earn interest at 8%
unless they are in default, in which case they earn interest at 15%; the notes
are currently in default. Additionally, the notes had warrants attached to
purchase 115,000 shares of common stock at $1.50 per share and were exercisable
through February 12, 2005. None of these warrants were exercised.
Future maturities of these notes as of December 31, 2004 were as follows:
Years Ending December 31,
2005 $ 433,200
2006 20,067
2007 20,884
2008 21,633
2009 22,510
Thereafter 866,306
-----------
1,384,600
Less: current portion (433,200)
-----------
$ 951,400
===========
In 2002, the company entered into convertible debt notes totaling $429,966.
Terms were 8% per annum, without payment. Accrued interest earned during the
term was to be paid upon maturity on January 31, 2007. The notes were
49
convertible into Class B Convertible Preferred Stock upon certain future events
that did not materialize, including raising $5 million in additional equity. In
March 2004, the notes plus accrued interest were converted into 61,820,488
common shares of Innova Holdings, Inc. The shares were originally converted into
RWT common stock at $.50 a share and then converted into shares of Innova
Holdings, Inc. at 61.37929356 to 1, the effective share exchange ratio for the
merger between RWT and Innova.
NOTE 8 - INCOME TAXES
The Company follows Statement of Financial Accounting Standards Number 109 (SFAS
109), "Accounting for Income Taxes." Deferred income taxes reflect the net
effect of (a) temporary difference between carrying amounts of assets and
liabilities for financial purposes and the amounts used for income tax reporting
purposes, and (b) net operating loss carryforwards. No net provision for
refundable Federal income tax has been made in the accompanying statement of
loss because no recoverable taxes were paid previously. Similarly, no deferred
tax asset attributable to the net operating loss carryforward has been
recognized, as it is not deemed likely to be realized.
The provision for refundable Federal income tax consists of the following:
December 31, 2004
-----------------
Refundable Federal income tax attributable to:
Current Operations $ 480,000
Less, Change in valuation allowance (480,000)
----------
Net refundable amount $ -
==========
The cumulative tax effect at the expected rate of 34% of significant items
comprising our net deferred tax amount is as follows:
December 31, 2004
-----------------
Deferred tax asset attributable to:
Net operating loss carryover $2,000,000
Less, Change in valuation allowance (2,000,000)
----------
Net deferred tax asset $ -
==========
At December 31, 2004, we had an unused net operating loss carryover
approximating $9,500,000 that is available to offset future taxable income; it
expires beginning in 2020.
50
NOTE 9 - COMMITMENTS
Lease Agreements
Rental expense for the operating leases for the years ended December 31, 2004
and 2003 was $17,344 and $21,879, respectively.
The Company leases office space at 11595 Kelly Road, Ft. Myers, Florida as its
primary operations. The office space lease is with Sunset Concepts, LLC, with
monthly payments of $1,343. The lease commenced in May 2004 and expires in
August 2005. The office lease is cancelable with 30 days notice.
There are no future minimum lease payments under non-cancelable operating leases
(with initial or remaining lease terms in excess of one year) as of December 31,
2004.
NOTE 10 - PROTECTION OF TRADE SECRETS AND PATENTS - LITIGATION
On December 9, 2004, Robotic Workspace Technologies, Inc., a wholly owned
subsidiary of Innova Holding, Inc. filed a case in the United States District
Court for the Middle District of Florida against ABB, Inc. and ABB Robotics AB.
The action alleges misappropriation of trade secrets, breach of contract and
breach of the covenant of good faith. The action stems from dealings between the
parties in 2002. RWT seeks a trial by jury and an injunction prohibiting
continued use of RWT's trade secrets and money damages. It is possible that ABB,
Inc. or ABB Robotics AB will counterclaim, although no counterclaims have yet
been filed. The action is entitled Robotic Workspace Technologies, Inc. v. ABB,
Inc. and ABB Robotics AB, Case No. 2:04-cv-611-FtM-29-SPC.
NOTE 11 - RESTATEMENT OF PREVIOUSLY REPORTED FINANCIAL STATEMENTS
There was a misstatement in the originally prepared December 31, 2004 financial
statements discovered in 2005 which related to the beneficial conversion
features of the Mandatorily Redeemable Series A Preferred Stock issued in June
2004 and assumed by the Company as part of the reverse merger in August 2004,
and the Series B Preferred Stock issued in September 2004. Management calculated
the values of the beneficial conversion features and determined that of the
$125,000 proceeds received from the issuance of the Series A Preferred Stock,
$48,300 was the amount of the assumed unamortized beneficial conversion feature,
of which $3,600 was amortized through Accumulated Deficit for the year ended
December 31, 2004. Of the $377,000 proceeds received from the issuance of the
Series B Preferred Stock, $146,500 was allocated to the beneficial conversion
feature, all of which was amortized through Accumulated Deficit for the year
ended December 31, 2004. Accordingly, the Balance Sheet, Statement of Operations
and the Statement of Stockholders' Deficit for the year ended December 31, 2004
were restated to reflect the amounts and related amortization of the beneficial
conversion features.
51
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
INNOVA HOLDINGS, INC.
Date: November 21, 2005 By: /s/ Walter K. Weisel
--------------------------
Walter K. Weisel
Chairman, CEO and Director
In accordance with the requirements of the Exchange Act, this report has been
signed by the following persons on behalf of the registrant and in the
capacities and on the dates indicated.
Date: November 21, 2005 By: /s/ Walter K. Weisel
-----------------------------------
Walter K. Weisel, Chairman, CEO
and Director
Date: November 21, 2005 By: /s/ Eugene Gartlan
-----------------------------------
Eugene Gartlan, Chief
Financial Officer and Principal
Accounting Officer
Date: November 21, 2005 By: /s/ Gary F. McNear
-----------------------------------
Gary. F McNear, Director
Date: November 21, 2005 By: /s/ Craig W. Conklin
-----------------------------------
Craig W. Conklin, Director
Date: November 21, 2005 By: /s/ Martin Nielson
------------------------------------
Martin Nielson, Director
52