U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB/A
AMENDMENT NO. 1
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended: June 30, 2005
------------------------------
[_] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
For the transition period from _______________ to __________________
Commission file number 000-33231
Innova Holdings, Inc.
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(Exact name of small business issuer as specified in its charter)
Delaware 95-4868120
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(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification No.)
17105 San Carlos Blvd., Suite A 6151, Fort Myers, Florida 33931
-------------------------------------------------------------------
(Address of principal executive offices)
(239) 466-0488
-------------------------------
(Issuer's telephone number)
--------------------------------------------------------------------------------
(Former Name, Former Address and Former Fiscal Year,
if Changed Since Last Report)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days. Yes X No __
State the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practical date: 444,345,676 as of July 15, 2005
--------------------------------
Transitional Small Business Disclosure Format (check one). Yes __; No X
Innova Holdings, Inc.
June 30, 2005
Quarterly Report on Form 10-QSB
Table of Contents
Page
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Special Note Regarding Forward Looking Statements..............................3
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements...............................................4
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.........................................15
Item 3. Controls and Procedures...........................................18
PART II - OTHER INFORMATION
Item 2. Unregistered Sales of Equity Securities...........................22
Item 6. Exhibits .........................................................23
Note: Registrant has filed this Report on Form 10-QSB/A in order to restate the
financial statements included in its Form 10-QSB filed on August 22, 2005 and to
revise its disclosure under Item 3 - Controls and Procedures.
2
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
To the extent that the information presented in this Quarterly Report on
Form 10-QSB for the quarter ended June 30, 2005 discusses financial projections,
information or expectations about our products or markets, or otherwise makes
statements about future events, such statements are forward-looking. We are
making these forward-looking statements in reliance on the safe harbor
provisions of the Private Securities Litigation Reform Act of 1995. Although we
believe that the expectations reflected in these forward-looking statements are
based on reasonable assumptions, there are a number of risks and uncertainties
that could cause actual results to differ materially from such forward-looking
statements. These risks and uncertainties are described, among other places in
this Quarterly Report in "Management's Discussion and Analysis of Financial
Condition and Results of Operations".
In addition, we disclaim any obligations to update any forward-looking
statements to reflect events or circumstances after the date of this Quarterly
Report. When considering such forward-looking statements, you should keep in
mind the risks referenced above and the other cautionary statements in this
Quarterly Report.
3
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS Page
----
Unaudited Consolidated Balance Sheet as of June 30, 2005.................5
Unaudited Consolidated Statements of Operations for the three months
and the six months ended June 30, 2005 and June 30, 2004...........6
Unaudited Consolidated Statements of Cash Flows for the six months
ended June 30, 2005 and June 30, 2004..............................7
Notes to Unaudited Consolidated Financial Statements.....................8
4
INNOVA HOLDINGS, INC.
CONSOLIDATED BALANCE SHEET
June 30, 2005
(Unaudited)
ASSETS
Current assets
Cash $ 147,785
-----------
Total current assets 147,785
Property and equipment, net 56,038
-----------
Deferred financing cost 100,000
TOTAL ASSETS $ 303,823
===========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities
Current maturities of long-term debt $ 37,700
Accounts payable 572,652
Accrued expenses 1,366,067
Notes payable 395,500
Dividend payable 21,126
-----------
Total current liabilities $ 2,393,045
-----------
Long-term debt $ 951,400
Mandatorily redeemable series A preferred stock $ 85,300
Commitments
STOCKHOLDERS' DEFICIT:
Preferred stock, $.001 par value, 10,000,000 shares authorized,
525,000 shares issued and outstanding $ 525
Common stock, $.001 par value, 900,000,000 shares authorized,
444,345,676 shares issued and outstanding 444,346
Additional paid-in capital 4,958,519
Accumulated deficit (8,529,312)
-----------
Total Stockholders' Deficit $(3,125,922)
-----------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $ 303,823
===========
The accompanying notes are an integral part of these
consolidated financial statements.
5
INNOVA HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
Three and Six Months Ended June 30, 2005 and 2004
(Unaudited)
Three Months Ended Six Months Ended
June 30 June 30
2005 2004 2005 2004
------------- ------------- ------------- -------------
Revenues $ -- $ -- $ -- $ --
------------- ------------- ------------- -------------
Cost of revenues $ -- $ -- $ -- $ --
------------- ------------- ------------- -------------
Gross profit $ -- $ -- $ -- $ --
------------- ------------- ------------- -------------
Operating expenses:
Selling, general and administrative $ 255,825 $ 52,025 $ 340,168 $ 115,291
Outside services 8,921 23,512 148,684 29,377
Legal fees 42,022 7,333 56,020 16,037
Professional fees 40,056 7,121 335,068 21,194
Depreciation and amortization 1,366 186 1,782 437
------------- ------------- ------------- -------------
Total operating expenses $ 348,190 $ 90,177 $ 881,722 $ 182,336
------------- ------------- ------------- -------------
Loss from operations $ (348,190) $ (90,177) $ (881,722) $ (182,336)
Interest expense (36,773) (27,128) (60,310) (48,345)
------------- ------------- ------------- -------------
Net loss $ (384,963) $ (117,305) $ (942,032) $ (230,681)
============= ============= ============= =============
Net loss applicable to common shareholders:
Net loss $ (384,963) $ (117,305) $ (942,032) $ (230,681)
Beneficial conversion of preferred stock (2,500) -- (146,500) --
============= ============= ============= =============
Net loss applicable to common shareholders $ (387,463) $ (117,305) $ (1,088,532) $ (230,681)
============= ============= ============= =============
Net loss per share:
Basic and diluted $ (0.00) $ (0.00) $ (0.00) $ (0.00)
============= ============= ============= =============
Weighted averaged shares outstanding:
Basic and diluted 444,345,676 271,353,397 444,345,676 271,353,397
============= ============= ============= =============
The accompanying notes are an integral part of these
consolidated financial statements.
6
INNOVA HOLDINGS, INC
CONSOLIDATED STATEMENTS OF CASH FLOWS
Six Months Ended June 30, 2005 and 2004
(Unaudited)
2005 2004
--------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $(942,032) $(230,681)
Adjustments to reconcile net loss to cash used in
operating activities:
Depreciation and amortization 1,782 437
Common stock issued for services 552,533 137,560
Common stock issued for interest payment -- 58,639
Option expense for services 12,871
Changes in assets and liabilities:
Accounts payable (1,286) (107,031)
Accrued expenses 22,589 (9,066)
--------- ---------
CASH FLOWS USED IN OPERATING ACTIVITIES $(353,543) $(150,142)
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Additions to Property and Equipment $ (17,632) $ (5,895)
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES $ (17,632) $ (5,895)
--------- ---------
CASH FLOW FROM FINANCING ACTIVITIES
Proceeds from notes payable $ -- $ 15,000
Proceeds from private placements of common stock 368,000 --
Proceeds from investors in Series B Preferred Stock 148,166 219,334
Payment of principal on note -- (30,237)
--------- ---------
CASH FLOW FROM FINANCING ACTIVITIES $ 516,166 $ 204,097
--------- ---------
NET INCREASE (DECREASE) IN CASH $ 144,991 $ 48,060
Cash, beginning of period 2,794 5,115
--------- ---------
Cash, end of period $ 147,785 $ 53,175
========= =========
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid $ 19,876 $ --
========= =========
Income taxes paid $ -- $ --
========= =========
NON-CASH TRANACTIONS:
Common stock issued for property and equipment $ 32,500 $ --
========= =========
The accompanying notes are an integral part of these
consolidated financial statements.
7
INNOVA HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 - BASIS OF PRESENTATION
The accompanying unaudited interim financial statements of Innova Holdings,
Inc., have been prepared in accordance with accounting principles generally
accepted in the United States of America and the rules of the Securities and
Exchange Commission ("SEC"), and should be read in conjunction with the audited
financial statements and notes thereto contained in the Company's registration
statement filed with the SEC on form 10-KSB. In the opinion of management, all
adjustments, consisting of normal recurring adjustments, necessary for a fair
presentation of financial position and the results of operations for the interim
periods presented have been reflected herein. The results of operations for
interim periods are not necessarily indicative of the results to be expected for
the full year. Notes to the financial statements which would substantially
duplicate the disclosure contained in the audited financial statements for the
most recent fiscal year ended December 31, 2004 as reported in form 10-KSB/A,
have been omitted.
NOTE 2 - STOCK BASED COMPENSATION
The Company accounts for its stock-based compensation plans using the intrinsic
value method 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.
Six Months Ended June 30,
2005 2004
----------- -----------
Net loss applicable to common shareholders $(1,088,532) $ (230,681)
Add: Intrinsic value expense recorded -- --
Deduct: total stock-based employee compensation determined
under fair value based method (26,843) --
----------- -----------
Pro forma net loss applicable to common shareholders $(1,115,375) $ (230,681)
=========== ===========
Earnings per share:
Basic and diluted - as reported $ (.00) $ (.00)
Basic and diluted - pro forma $ (.00) $ (.00)
8
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 and 2005: no dividend yield and expected
volatility of 80% and 150% in 2004 and 2005, respectively, risk-free interest
rate of 2.75%, and expected lives of 10 years.
The options granted have a weighted average exercise price of $0.017 per share
and vest over three and five years. The maximum term of the options is ten
years.
During the six months ended June 30, 2005 there were 70,719,259 options granted,
64,658,621 to employees and 6,060,638 to an independent contractor. The share
purchase options granted to employees vest annually over three years from the
date of grant, 30,658,621 options are exercisable at $0.017 per share,
18,000,000 options are exercisable at $0.036 per share and 16,000,000 options
are exercisable at $0.023 per share, and they expire ten years after the grant
date. The options granted to employees were valued using the intrinsic value
method and had no value because the exercise price was equal to the market price
on the grant date. The share purchase options granted to the independent
contractor vest monthly over five years from the date of grant, are exercisable
at $0.01 per share, and they expire ten years after the grant date. During the
period, $12,871 was recognized as an expense for the fair value of these options
granted to the independent contractor.
NOTE 3 - CAPITAL STOCK
On June 14, 2005, Innova entered into a Standby Equity Distribution Agreement
with Cornell Capital Partners. Under the Standby Equity Distribution Agreement,
Innova may issue and sell to Cornell Capital Partners common stock for a total
purchase price of up to $10,000,000. The purchase price for the shares is equal
to their market price, which is defined in the Standby Equity Distribution
Agreement as the lowest volume weighted average price of the common stock during
the five trading days following the date notice is given by the Company that it
desires an advance. The amount of each advance is subject to an aggregate
maximum advance amount of $400,000, with no advance occurring within five
trading days of a prior advance. Cornell Capital Partners received a one-time
commitment fee of 2,608,699 shares of the Company's common stock equal to
approximately $90,000 based on Innova's stock price on May 4, 2005, when the
term sheet for the Standby Equity Distribution Agreement was signed. Cornell
Capital Partners is paid a fee equal to 5% of each advance, which is retained by
Cornell Capital Partners from each advance. The Company will pay a structuring
fee of $500 for each advance made under the Standby Equity Distribution
Agreement. The Company also issued to Cornell Capital Partners its promissory
note for $300,000. The principal of the note is payable in three $100,000
installments due on the 30th, 60th and 90th days following the date the
registration statement for the shares to be issued under the Standby Equity
Distribution Agreement is declared effective by the SEC. The note does not bear
interest except in the event of a default. On June 14, 2005, Innova entered into
a Placement Agent Agreement with Monitor Capital, Inc. a registered
broker-dealer. Pursuant to the Placement Agent Agreement, Innova paid a one-time
placement agent fee of 289,855 restricted shares of common stock equal to
approximately $10,000 based on Innova's stock price on May 4, 2005, when the
term sheet for the Standby Equity Distribution Agreement was signed, for
advising us in connection with the Standby Equity Distribution Agreement. In
connection with this Standby Equity Distribution Agreement, the Company entered
into a Registration Rights agreement with Cornell Capital Partners wherein the
Company agreed to file with the Securities and Exchange Commission a
registration statement for the sale by Cornell of the common stock of the
Company to be purchased by Cornell under the terms of the Standby Equity
Distribution Agreement, along with the one-time commitment fee and the placement
agent fee. Accordingly, the Company filed an SB-2 registration statement with
the Securities and Exchange Commission in August 2005 for a total of 284,
364,726 shares to be sold including 250,000,000 shares estimated to be sold to
Cornell Capital Partners under the Standby Equity Distribution Agreement.
Additionally, 34,364,726 currently issued and outstanding shares were included
in the registration statement for sale by existing shareholders.
9
The commitment fee of 2,608,699 shares paid to Cornell and the placement agency
fee paid to Monitor have been accounted for as a deferred financing fee and will
be amortized over the period of the financing, which can be up to twenty-four
months from the date the registration statement is declared effective by the
Securities and Exchange Commission. The promissory note of $300,000 issued to
Cornell has not been recorded since it is a contingent fee payable upon the
completion of certain events described further in Note 5 to the financial
statements included in this report.
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 and $5,000 were amortized through
Accumulated Deficit through December 31, 2004 and June 30, 2005, respectively.
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.
10
In September 2004, the Company authorized $525,000 of Series B Preferred Stock.
Each share of Series B 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 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. During the first quarter of 2005, the Company sold $148,000 of the
Series B Preferred Stock, bringing the total sold to $525,000 as of March 31,
2005 and June 30, 2005; none of the Series B Preferred Stock has been converted
into common stock. Of the $148,000 proceeds received from the issuance of the
Series B Preferred Stock, $141,500 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 $141,500 beneficial
conversion feature was amortized through Accumulated Deficit on the date of
issuance; therefore, all of the beneficial conversion feature was amortized as
of June 30, 2005. Additionally, the excess of the aggregate fair value of the
common stock to be issued upon conversion over the $148,000 of proceeds received
when the Series B Preferred Stock was issued amounted to $39,400.
In April 2005, the Company obtained an additional $150,000 of funds through the
private placement sale of 12,000,000 shares of the Company's common stock at
$.0125 per share and in May an additional $210,000 of funds were obtained
through the private placement sale of 7,266,667 shares of the Company's common
stock at $.03 per share. Investors in these shares of the Company's common stock
will be given notice in the event that the Company files any registration
statement with the Securities and Exchange Commission for its Common Stock
(excluding any registration statement on Form S-8 or S-4) and shall be entitled
to include any or all of the shares of Common Stock purchased in these
investments in such Registration Statement. In August 2005, such Registration
Statement was filed with the SEC and all of these investors are listed as
selling shareholders.
In 2002, the company entered into convertible debt notes which totaled $429,966
at December 31, 2003. An additional $15,000 of the notes were issued during the
first quarter of 2004. Terms were 8% per annum. Accrued interest earned during
the term was to be paid upon maturity on January 31, 2007. The notes were
convertible into Class B Convertible Preferred Stock upon certain future events
that did not materialize, including raising $5 million in additional equity.
During the first six months of 2004, notes totaling $444,966 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.
Additionally, during the first six months of 2004 16,887,859 shares were issued
for services performed for the Company valued at $137,570 or the equivalent of
$0.008 per share.
During the six months ended June 30, 2005 there were 70,719,259 options granted,
64,658,621 to employees and 6,060,638 to an independent contractor. The share
purchase options granted to employees vest annually over three years from the
date of grant, 30,658,621 options are exercisable at $0.017 per share,
18,000,000 options are exercisable at $0.036 per share and 16,000,000 options
11
are exercisable at $0.023 per share, and they expire ten years after the grant
date. The options granted to employees were valued using the intrinsic value
method and had no value because the exercise price was equal to the market price
on the grant date. The share purchase options granted to the independent
contractor vest monthly over five years from the date of grant, are exercisable
at $0.01 per share, and they expire ten years after the grant date. During the
period, $12,871 was recognized as an expense for the fair value of these options
granted to the independent contractor.
Additionally, the Company awarded 54,684,016 shares of the Company's common
stock to twenty-four (24) employees, independent contractors and individuals for
services provided to the Company in 2004 and 2005 valued at $581,000 or the
equivalent of $0.01 per share. These amounts were fully accrued during 2004 and
2005.
The Board of Directors of the Company approved all of the stock options and
shares of the Company's common stock awarded.
Stock Options:
No compensation cost has been recognized for grants under the Company's stock
option plans since all grants pursuant to these plans have been made at the then
current estimated fair values of the Company's common stock at the grant date.
There were 70,719,259 options issued for the six months ended June 30, 2005.
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 and 2005: zero dividend yield,
expected volatility of 80% and 150% in 2004 and 2005, respectively,, risk-free
interest rate of 2.75% and expected lives of 10 years.
The following table summarizes stock option activity:
Outstanding, December 31, 2003 14,425,486
Granted 33,962,655
Canceled --
Exercised --
-----------
Outstanding, December 31, 2004 48,388,141
Granted 70,719,259
Canceled --
Exercised --
-----------
Outstanding, June 30, 2005 119,107,400
===========
Weighted-average grant-date fair
value of options $ 0.015
===========
Weighted-average remaining years
of contractual life 9.2
===========
NOTE 4 - 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 was the prime rate plus 2%, due in
monthly installments. Principal and interest were due on July 22, 2003. In
12
November 2004, a principal shareholder loaned the Company $165,000 to pay down
the line of credit with Fifth Third Bank. The loan with the principal
shareholder 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.
NOTE 5 - NOTES PAYABLE
On June 14, 2005 the Company entered into a Standby Equity Distribution
Agreement discussed in Note 3 above. In connection with this agreement, the
Company issued a promissory note to Cornell Capital partner, the major terms of
which are as follows:
-the Company shall repay the Promissory Note in three equal principal
payments of One Hundred Thousand Dollars ($100,000) each on the 30th, 60th and
90th days following the date Securities and Exchange Commission declares that a
registration statement filed by the Company in connection with the Standby
Equity Distribution Agreement is effective.
-this Promissory Note shall not bear interest unless and until there is an
event of default.
-at the option of Cornell Capital Partners, all sums advanced under the
promissory note shall become immediately due and payable, without notice or
demand, upon the occurrence of any one or more of the following events of
default: (a) the Company's failure to pay in full any payment of principal
within 5 days of the date when such payment of principal becomes due; (b) the
commencement of any proceedings under any bankruptcy or insolvency laws, by or
against the Company; or (c) the registration statement is not declared effective
within one hundred eighty (180) days of the date hereof, unless such failure to
obtain effectiveness is solely due to reasons related to the transactions
described in the Company's April 29, 2003 8-K.
-any payment of principal which is not paid within 5 days of the date such
payment becomes due, shall bear interest at the rate of twelve (12) percent per
annum commencing on the date immediately following the day upon which the
payment was due. Upon the occurrence of any event of default as defined above,
all sums outstanding shall thereupon immediately bear interest at the rate of
twelve (12) percent per annum.
The promissory note of $300,000 issued to Cornell has not been recorded since it
is a contingent fee payable upon the completion of events described above.
NOTE 6 - COMMITMENTS
On May 15, 2005 the Company leased 4,000 square feet of space at 15870 Pine
Ridge Road, Ft Myers, Florida which will be used as its primary operations. The
lease is with Gulf To Bay Construction, Inc., with monthly payments of $3,533
through June 1, 2010. The lease has five (5) successive renewal options each for
a period of two (2) years. The rent will increase annually by 3%. The space is
the location of the Company's Research, Design and Engineering center as well as
office space for fifteen (15) employees.
On June 15, 2005 the Company entered into a lease with Bola Industries, LLC for
approximately 4,000 square feet of production space located at 30946 Industrial
Road, Livonia Michigan. The lease is on a monthly basis and expires on December
31, 2005. The rent is $3,775 monthly and includes all utilities, use of all
equipment on site including certain heavy equipment, and use of internet
service.
13
NOTE 7 - SUBSEQUENT EVENTS
In July and August 2005 the Company obtained an additional $100,000 of funds
through the private placement sale of 6,666,667 shares of the Company's common
stock at $0.015 per share. This offering ended on August 8, 2005. Additionally,
on July 22, 2005 the Company borrowed $30,000 and entered into a short term note
for that amount, the terms of which are: interest at the annual rate of 5%, due
date in six months, and principal and accrued interest are convertible into
common stock of the Company at $.015 per share.
With respect to the sale of these securities, all transactions were exempt from
registration pursuant to Section 4(2) of the Securities Act of 1933 (the "1933
Act"), and Regulation D promulgated under the 1933 Act. In each instance, the
purchaser had access to sufficient information regarding Innova so as to make an
informed investment decision. More specifically, Innova had a reasonable basis
to believe that each purchaser was an "accredited investor" as defined in
Regulation D of the 1933 Act and otherwise had the requisite sophistication to
make an investment in the Company's securities.
14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
BACKGROUND
We were formed in 1992 as a supplier to the information technology
business. On January 31, 2003, we completed a reverse acquisition into SRM
Networks, an Internet service provider, in which we were deemed the "accounting
acquirer". We have discontinued SRM Network's Internet business. In connection
with the transaction, SRM Networks, Inc. changed its name to Hy-Tech Technology
Group, Inc.
On August 25, 2004, we completed a reverse merger into Robotic Workspace
Technologies, Inc. ("RWT"), a robotics software technology provider, in which
RWT was deemed the "accounting acquirer." Simultaneously, we sold our Hy-Tech
Computer Systems, Inc. subsidiary and discontinued our computer systems sales
and services business. In connection with these transactions, Hy-Tech Technology
Group, Inc. changed its name to Innova Holdings, Inc.
RESULTS OF OPERATIONS
Three months ended June 30, 2005 compared to three months ended June 30,
2004
During the three month period ended June 30, 2005 (the "2005 Period")
revenues were $0 compared to revenues of $0 during the three month period ended
June 30, 2004 (the "2004 Period").
Operating expenses were $348,190 during the 2005 period compared to
$90,177 during the 2004 Period. The increase in operating expenses primarily
resulted from the Company's reestablishing its core business after a shutdown
period of several years. During the 2005 Period, expenses were incurred for
compensation, marketing, and production not incurred during the 2004 Period.
Also, the Company has entered into operating leases for operating and
administrative space which is described in Note 6 to the financial statements
included in this report, and incurred increased professional fees for auditing,
accounting, financial and business planning services.
Net loss for the 2005 Period was $384,963 compared to a net loss of
$117,305 for the 2004 Period, due to the factors described above.
Six months ended June 30, 2005 compared to six months ended June 30, 2004
During the six month period ended June 30, 2005 (the "2005 Period")
revenues were $0 compared to revenues of $0 during the six month period ended
June 30, 2004 (the "2004 Period").
Operating expenses were $881,722 during the 2005 period compared to
$182,336 during the 2004 Period. As mentioned above, the increase in operating
expenses primarily resulted from the Company's reestablishing its core business
after a shutdown period of several years. During the 2005 Period, expenses were
incurred for compensation, marketing, and production not incurred during the
2004 Period. Additionally, expenses were incurred for financial and business
15
development activities. Also, the Company has entered into operating leases for
operating and administrative space which is described in Note 6 to the financial
statements included in this report, and incurred increased professional fees for
auditing, accounting, financial and business planning services.
Net loss for the 2005 Period was $942,032 compared to a net loss of
$230,681 for the 2004 Period, due to the factors described above.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 2005, we had current assets of $147,785 and current
liabilities of $2,393,045. At June 30, 2005, we had negative working capital of
$2,245,260 and an accumulated deficit of $8,529,312.
The reverse merger of RWT discussed above, which closed on August 25,
2004, is indicative of the Company's plan to grow by acquisition and development
of leading software and technology solutions. The Company remains in discussion
with various financing sources to allow it access to the financing needed to
complement the use of its stock in achieving these plans. The Company intends to
raise additional working capital through private placements, public offerings
and/or bank financing.
In April 2005, the Company obtained an additional $150,000 of funds
through the private placement sale of 12,000,000 shares of the Company's common
stock at $.0125 per share and in May an additional $210,000 of funds were
obtained through the private placement sale of 7,266,667 shares of the Company's
common stock at $.03 per share. Investors in these shares of the Company's
common stock will be given notice in the event that the Company files any
registration statement with the Securities and Exchange Commission for its
Common Stock (excluding any registration statement on Form S-8 or S-4) and shall
be entitled to include any or all of the shares of Common Stock purchased in
these investments in such Registration Statement. The Company filed an SB-2
registration statement in August 2005 for the sale of these securities and
additional securities for the Standby Equity Distribution Agreement discussed in
Note 3 to the financial statements included in this report totaling 250,000,000
shares, as well as other shares for existing shareholders; in total, 284,364,726
shares have been included in the registration statement for sale over up to a
two year period from the date such registration statement is declared effective
by the Securities and Exchange Commission.
Additionally, in July and August 2005 the Company obtained an additional
$100,000 of funds through the private placement sale of 6,666,667 shares of the
Company's common stock at $0.015 per share. This offering ended on August 8,
2005. Additionally, on July 22, 2005 the Company borrowed $30,000 and entered
into a short term note for that amount, the terms of which are: interest at the
annual rate of 5%, due date in six months, and principal and accrued interest
are convertible into common stock of the Company at $0.015 per share.
There are no assurances that the Company will be able to obtain additional
financing through private placement, public offerings and/or bank financing
necessary to support the Company's plan. No assurance can be given that
financing will be available, or if available, will be on terms acceptable to the
Company. If adequate financing is not available, the Company may be required to
curtail its operations. These conditions raise substantial doubt about the
Company's ability to continue as a going concern. The consolidated financial
16
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 the Company be unable to continue as
a going concern.
We cannot guarantee that additional funding will be available on favorable
terms, if at all. If we are unable to obtain debt and/or equity financing upon
terms that our management deems sufficiently favorable, or at all, it would have
a materially adverse impact upon our ability to pursue our business strategy and
maintain our current operations.
17
ITEM 3. CONTROLS AND PROCEDURES
As of June 30, 2005, 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) as of the end of the period covered
by this report. 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 have 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 2005 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 it Series A Preferred Stock in June 2004 and its Series
B Preferred Stock in September 2004 through March 2005. In its financial
statements for the year ended December 31, 2004 and the quarter ended March 31,
2005, 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 quarterly report for the quarter ended March 31, 2005 on Form 10-QSB,
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 through March 2005 should be allocated
to the beneficial conversion features. After receipt of the SEC's comment
letter, the Company reevaluated its disclosure controls and procedures and 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 disclosure controls and procedures 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. The remedial actions implemented during the three
months ended June 30, 2005 were the following:
18
-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. These
remedial actions were implemented by June 30, 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.
Other actions underway to identify any other material weakness or
significant deficiency, if any, include the following:
-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 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 in 2006;
Additionally, 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. There were no changes in addition to these
remedial measures discussed above that materially affected or are reasonably
likely to materially affect the Company's internal control over financial
reporting. 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.
19
During the three months ended June 30, 2005, management also concluded
that it was necessary to restate the Company's financial statements for the year
ended December 31, 2004 and the quarter ended March 31, 2005 included in its
Report on Form10-QSB/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 2005 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
value of the beneficial conversion features and determined it was $50,000 for
the Series A Preferred Stock at the date of issuance. Of this amount, $48,300
was the amount of 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 and $2,500 was amortized to Accumulated Deficit during the three months
ended March 31, 2005 and $2,500 was amortized to Accumulated Deficit for the
three months ended June 30, 2005. Management also determined that of the
$148,000 proceeds received from the issuance of the Series B Preferred Stock
during the quarter ended March 31, 2005, $141,500 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
$141,500 beneficial conversion feature was amortized through Accumulated Deficit
on the date of issuance; therefore, all of the beneficial conversion feature was
amortized as of March 31, 2005. Additionally, the excess of the aggregate fair
value of the common stock to be issued upon conversion over the $148,000 of
proceeds received when the Series B Preferred Stock was issued amounted to
$39,400.
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 June 30,
2005 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 2005 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 through March 2005 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.. The remedial actions and changes in internal controls over financial
reporting that have materially affected the Company's internal controls over
financial reporting and that were implemented during the three months ended June
30, 2005 were the following:
20
-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 their related accounting
treatment and disclosure requirements. These remedial actions were implemented
by June 30, 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;
Other actions underway to identify any other material weakness or
significant deficiency, if any, include the following:
-the Chief Financial Officer is in the process of reviewing all of the
Company's other internal controls over financial reporting , as well as al
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 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;
Additionally, 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. There were no changes in addition to these
remedial measures discussed above that materially affected or are reasonably
likely to materially affect the Company's internal control over financial
reporting. 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.
21
PART II - OTHER INFORMATION
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES
In April 2005, the Company obtained an additional $150,000 of funds
through the private placement sale of 12,000,000 shares of the Company's common
stock at $.0125 per share and in May and June an additional $218,000 of funds
were obtained through the private placement sale of 7,266,667 shares of the
Company's common stock at $.03 per share. These private placements were exempt
from registration under the Securities Act of 1933, as amended, pursuant to
section 4(2) and rule 506 thereunder. Investors in these shares of the Company's
common stock will be given notice in the event that the Company files any
registration statement with the Securities and Exchange Commission for its
Common Stock (excluding any registration statement on Form S-8 or S-4) and shall
be entitled to include any or all of the shares of Common Stock purchased in
these private placements in such Registration Statement.
In July and August 2005 the Company obtained an additional $100,000 of
funds through the private placement sale of 6,666,667 shares of the Company's
common stock at $0.015 per share. This offering ended on August 8, 2005.
Additionally, on July 22, 2005 the Company borrowed $30,000 and entered into a
short term note for that amount, the terms of which are: interest at the annual
rate of 5%, due date in six months, and principal and accrued interest are
convertible into common stock of the Company at $0.015 per share.
With respect to the sale of these securities, all transactions were exempt
from registration pursuant to Section 4(2) of the Securities Act of 1933 (the
"1933 Act"), and Regulation D promulgated under the 1933 Act. In each instance,
the purchaser had access to sufficient information regarding Innova so as to
make an informed investment decision. More specifically, Innova had a reasonable
basis to believe that each purchaser was an "accredited investor" as defined in
Regulation D of the 1933 Act and otherwise had the requisite sophistication to
make an investment in the Company's securities.
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ITEM 6. EXHIBITS
(a) Exhibits
31.1 Rule 13(a)-14(a)/15(d)-14(a) Certification of Principal
Executive Officer
31.2 Rule 13(a)-14(a)/15(d)-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
23
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, hereunto duly
authorized.
Innova Holdings, Inc.
Dated: November 21, 2005 By: /s/ Walter Weisel
-----------------------------
Walter Weisel
Chief Executive Officer
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