UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
FORM 10-QSB
| x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. |
For the quarterly period ended March 31, 2005
| ¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. |
For the transition period from , 20 , to , 20 .
Commission File Number 0-29746
INNOVA PURE WATER, INC.
(Exact Name of Registrant as Specified in Charter)
| Florida | 59-2567034 | |
(State or Other Jurisdiction of Incorporation or Organization) | (I.R.S. Employer Identification Number) |
13130 56th Court, Suite 609, Clearwater, Florida 33760
(Address of Principal Executive Offices)
(727) 572-1000
(Registrant’s Telephone Number, Including Area Code)
Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities 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. x YES ¨ NO
There were 12,423,601 shares of the Registrant’s $.0001 par value common stock outstanding as of March 31, 2005.
Transitional Small Business Format (check one) Yes ¨ NO x
Table of Contents
Contents
| Part I – Financial Information | ||||
| Item 1. | Condensed Financial Statements | 1 | ||
| Item 2. | Management’s Discussion & Analysis of Financial Condition and Results of Operations | 9 | ||
| Item 3. | Controls and Procedures | 15 | ||
| Item 1. | Legal Proceedings | 15 | ||
| Item 2. | Changes in Securities | 15 | ||
| Item 3. | Defaults Upon Senior Securities | 15 | ||
| Item 4. | Submission of Matters to a Vote of Security Holders | 15 | ||
| Item 5. | Other Matters | 15 | ||
| Item 6. | Exhibits and Reports on Form 8-K | 16 | ||
| Signatures | 17 | |||
Item 1. Condensed Financial Statements
Innova Pure Water, Inc.
Condensed Financial Statements
Three and Nine Months Ended
March 31, 2005 and 2004 (Unaudited)
Contents
Condensed Financial Statements:
| 2 | ||
| 3 | ||
| 4 | ||
Condensed Statements of Cash Flows for the Nine Months Ended March 31, 2005 and 2004 (Unaudited) | 5 | |
| 6 | ||
Condensed Balance Sheet
March 31, 2005
(Unaudited)
Assets | ||||
Current assets: | ||||
Cash | $ | 12,100 | ||
Accounts receivable, trade | 52,800 | |||
Other receivables and prepaid expenses, net of allowance for doubtful accounts of $2,000 | 2,300 | |||
Inventories | 37,400 | |||
Total current assets | 104,600 | |||
Property and equipment, net | 4,500 | |||
Other assets: | ||||
Patents, net of accumulated amortization of $578,600 | 175,900 | |||
Other receivables, related party, net of allowance for doubtful accounts of $18,000 | 100 | |||
Other | 5,700 | |||
Total other assets | 181,700 | |||
| $ | 290,800 | |||
Liabilities and Stockholders’ Equity (Deficit) | ||||
Current liabilities: | ||||
Accounts payable, trade | $ | 140,400 | ||
Accrued expenses | 44,900 | |||
Deferred compensation | 400,100 | |||
Advances, related party | 190,000 | |||
Deferred revenue | 125,300 | |||
Total current liabilities | 900,700 | |||
Note Payable net of unamortized discount of $26,400 | 173,600 | |||
Stockholders’ equity (deficit): | ||||
Preferred stock; $.001 par value; 2,000,000 shares authorized; 0 shares issued and outstanding | ||||
Common stock; $.0001 par value; 50,000,000 shares authorized; 12,449,684 shares issued and 12,423,601 shares outstanding | 1,200 | |||
Capital in excess of par value | 8,560,100 | |||
Accumulated deficit | (9,331,900 | ) | ||
| (770,600 | ) | |||
Treasury stock, at cost; 26,083 shares | (12,900 | ) | ||
Total stockholders’ deficit | (783,500 | ) | ||
| $ | 290,800 | |||
The accompanying notes are an integral part of the financial statements.
2
Condensed Statements of Operations
(Unaudited)
| Three Months Ended March 31, | Nine Months Ended March 31, | |||||||||||||
| 2005 | 2004 | 2005 | 2004 | |||||||||||
Net sales | $ | 189,600 | 190,400 | $ | 273,300 | 494,700 | ||||||||
Cost of sales | 81,200 | 91,700 | 136,400 | 277,900 | ||||||||||
Gross profit | 108,400 | 98,700 | 136,900 | 216,800 | ||||||||||
Operating expenses: | ||||||||||||||
Selling expenses | 200 | |||||||||||||
General and administrative expenses | 185,800 | 201,400 | 440,000 | 562,100 | ||||||||||
Research and product development | 800 | 9,900 | ||||||||||||
| 185,800 | 202,200 | 440,000 | 572,200 | |||||||||||
Loss from operations | (77,400 | ) | (103,500 | ) | (303,100 | ) | (355,400 | ) | ||||||
Other (income) expenses: | ||||||||||||||
Interest, net | 3,000 | (24,900 | ) | 12,500 | (19,100 | ) | ||||||||
Royalties and other income | (73,100 | ) | (5,700 | ) | (111,000 | ) | (45,000 | ) | ||||||
| (70,100 | ) | (30,600 | ) | (98,500 | ) | (64,100 | ) | |||||||
Net loss | $ | (7,300 | ) | (72,900 | ) | $ | (204,600 | ) | (291,300 | ) | ||||
Loss per common share | $ | .00 | (.01 | ) | $ | (.02 | ) | (.02 | ) | |||||
Weighted average number of Common shares outstanding | 12,423,601 | 12,173,765 | 12,423,601 | 12,173,765 | ||||||||||
The accompanying notes are an integral part of the condensed financial statements
3
Condensed Statement of Changes in Stockholders’ Equity (Deficit)
Nine Months Ended March 31, 2005
(Unaudited)
| Common Stock | Capital In Excess Of | Accumulated Deficit | Treasury Stock | |||||||||||||
| Shares | Amount | |||||||||||||||
| Balance, June 30, 2004 | 12,449,684 | $ | 1,200 | $ | 8,530,100 | $ | (9,127,300 | ) | $ | (12,900 | ) | |||||
| Contribution of services | 30,000 | |||||||||||||||
| Net loss | (204,600 | ) | ||||||||||||||
| Balance, March 31, 2005 | 12,449,684 | $ | 1,200 | $ | 8,560,100 | $ | (9,331,900 | ) | $ | (12,900 | ) | |||||
The accompanying notes are an integral part of the condensed financial statements.
4
Condensed Statements of Cash Flows
(Unaudited)
| Nine Months Ended March 31, | ||||||||
| 2005 | 2004 | |||||||
Operating activities | ||||||||
Net loss | $ | (204,600 | ) | $ | (291,300 | ) | ||
Adjustments to reconcile net loss to net cash (used) provided by operating activities: | ||||||||
Depreciation and amortization | 18,500 | 98,200 | ||||||
Amortization of note payable discount | 9,200 | 15,100 | ||||||
Gain on settlement of payables | (56,400 | ) | ||||||
Increase of deferred compensation of related parties | 82,500 | 157,700 | ||||||
Capital contribution of services | 30,000 | |||||||
(Increase) decrease in: | ||||||||
Accounts and other receivables | (8,700 | ) | (17,200 | ) | ||||
Inventories | (17,900 | ) | 58,100 | |||||
Other assets and prepaid expenses | 1,800 | (29,200 | ) | |||||
(Decrease) increase in: | ||||||||
Accounts payable and accrued expenses | 2,300 | 1,900 | ||||||
Customer deposits on purchase orders | 67,000 | |||||||
Deferred revenue | (88,000 | ) | (31,500 | ) | ||||
Total adjustments | (26,700 | ) | 320,100 | |||||
Net cash (used) provided by operating activities | (231,300 | ) | 28,800 | |||||
Investing activities | ||||||||
Decrease in restricted cash | 67,000 | |||||||
Acquisition of patents | (1,600 | ) | ||||||
Acquisition of equipment | (400 | ) | ||||||
Net cash provided (used) by investing activities | 67,000 | (2,000 | ) | |||||
Financing activities | ||||||||
Increase in advances, related party, net | 190,000 | 4,000 | ||||||
Decrease in bank overdraft | (13,600 | ) | ||||||
Net cash provided by financing activities | 176,400 | 4,000 | ||||||
Net increase in cash | 12,100 | 30,800 | ||||||
Cash, beginning of year | 48,800 | |||||||
Cash, end of period | $ | 12,100 | $ | 79,600 | ||||
Supplemental disclosures of cash flow information and noncash financing activities: | ||||||||
Cash paid during the year for interest | $ | 12,500 | $ | 20,200 | ||||
During the nine months ended March 31, 2005, the Company incurred $21,500 of payables for the acquisition and defense of patents.
During the nine months ended March 30, 2004, the Company entered into an agreement to issue a non-exclusive right to a patent in satisfaction of $200,000 of the note payable and cancellation of 800,000 common stock options. As a result of the cancellation of options, the unused value of these options were credited to additional paid in capital.
The accompanying notes are an integral part of the condensed financial statements.
5
Notes to Condensed Financial Statements
Three and Nine Months Ended March 31, 2005 and 2004 (Unaudited)
1. Condensed Financial Statements
In the opinion of management, all adjustments consisting only of normal recurring adjustments necessary for a fair statement of (a) the results of operations for the three and nine month periods ended March 31, 2005 and 2004, (b) the financial position at March 31, 2005, and (c) cash flows for the nine-month periods ended March 31, 2005 and 2004, have been made.
The unaudited condensed financial statements and notes are presented as permitted by Form 10-QSB. Accordingly, certain information and note disclosures normally included in condensed financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been omitted. The accompanying condensed financial statements and notes should be read in conjunction with the audited financial statements and notes of the Company for the fiscal year ended June 30, 2004. The results of operations for the three and nine month periods ended March 31, 2005 are not necessarily indicative of those to be expected for the entire year.
2. Going Concern
The accompanying financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America, which contemplates continuation of the Company as a going concern. However, the Company has sustained substantial operating losses in recent years. The Company has incurred an additional loss of $204,600 for the nine month period ended March 31, 2005, which increased the Company’s accumulated deficit to approximately $9,331,900. The Company also has negative working capital of approximately $796,100 and negative shareholders’ equity of approximately $783,500 as of March 31, 2005. These factors raise substantial doubt about the ability of the Company to continue as a going concern. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Although the Company continues to maintain costs and institute efforts to conserve cash, such efforts will not make them a viable business entity, and without significant additional revenues they may not be able to stay in business. In order to reduce costs, the Company continues to explore the possibility of outsourcing production and support tasks that are currently being done in-house. The Company is also seeking smaller office space in keeping with its reduced staff level, whether products can be economically outsourced or more cost effective offices located remains in question.
While the Company has not been successful in attracting outside capital to date, interested parties have come forward. However, no assurance can be given that the Company will be able to raise outside capital or that such funds will be available to them on favorable terms. If the Company raises additional funds through the issuance of equity or debt securities, such securities may have rights, preferences or privileges senior to those of the rights of common stock and stockholders may experience substantial additional dilution.
Although the Company has not experienced any difficulty in securing the necessary raw materials from vendors, the Company is on payment schedules with some vendors, and if they fail to maintain these payments or if these vendors require satisfaction of outstanding obligations to fulfill new orders, the Company’s operations could be adversely affected.
6
Innova Pure Water, Inc.
Notes to Condensed Financial Statements
Three and Nine Months Ended March 31, 2005 and 2004 (Unaudited)
2. Going Concern (continued)
The Company continuously discusses opportunities with new potential strategic alliance partners. Unfortunately, they did not procure any new significant strategic alliances in fiscal year 2004 and there is no assurance that they will enter into any new alliances in fiscal 2005. To date, arrangements with CamelBak, Sawyer Products and Nikken have not generated significant revenues and it does not appear these alliances will result in significant revenues for fiscal 2005. The Company continues to have discussions with other businesses regarding merging a private company into Innova that has a complimentary business or product lines, although they have not been able to finalize the terms of any proposed acquisitions. They will continue to explore this possibility in fiscal 2005.
3. Contingencies
The Company is in the early stages of an action filed by former employees. They claim the Company owes them for accrued vacation time and the total requested amount is less than $10,000. The Company counterclaimed against the former employees and their new employer, Sawyer Products, Inc., for violation of and interference with the former employee’s covenants not to compete with the Company. In the litigation, Sawyer Products filed a claim against the Company and certain of its officers and directors which alleges misrepresentation in connection with certain loans to the Company and warrants received from the Company. The Company believes it has meritorious defenses and intends to vigorously defend the claims.
The Company is currently the plaintiff in a patent infringement lawsuit entitled Innova Pure Water, Inc., Plaintiff v. Safari Water Filtration Systems, Inc. d/b/a Safari Outdoor Products, Defendant; Case No. 99-1781-Civ-T-23F filed by the Company on August 4, 1999. The case was filed with the U.S. District Court, Middle District of Florida, Tampa Division. The Company has claimed patent infringement of U.S. Patent 5,609,759 on the part of the defendants. On December 16, 2003, the court ruled in favor of Safari. Innova filed an appeal with the United States Court of Appeals, case No. 04-1097, who, on August 11, 2004, reversed the lower courts decision. The case has been remanded back to the Circuit Court on September 1, 2004 to find on any remaining issues. Innova has filed for a summary judgment or the prompt setting of a trial date. It is not yet possible to evaluate the likelihood of a favorable or unfavorable outcome.
4. Stock and Stock Options
Stock-based compensation to non-employees is valued using the Black-Scholes option pricing model. During the periods ended March 31, 2005 and 2004, the Company did not grant any stock options.
During the nine months ended March 31, 2004, the Company entered into an agreement to issue a non-exclusive right to a patent in satisfaction of $200,000 of the note payable and cancellation of 800,000 common stock options. As a result of the cancellation of options, the unused value of these options were credited to additional paid in capital.
7
Innova Pure Water, Inc.
Notes to Condensed Financial Statements
Three and Nine Months Ended March 31, 2005 and 2004 (Unaudited)
5. Advances, related party
As of March 31, 2005, an officer and shareholder has made advances to the company in the amount of $190,000. These advances are unsecured and payable on demand. They carry a stated interest rate of 5%.
8
PART I – FINANCIAL INFORMATION
Item 2. Management’s Discussion & Analysis of Financial Condition and Results of Operation
THIS FILING CONTAINS FORWARD-LOOKING STATEMENTS. THE WORDS “ANTICIPATED,” “BELIEVE,” “EXPECT,” “PLAN,” “INTEND,” “SEEK,” “ESTIMATE,” “PROJECT,” “WILL,” “COULD,” “MAY,” AND SIMILAR EXPRESSIONS ARE INTENDED TO IDENTIFY FORWARD-LOOKING STATEMENTS. THESE STATEMENTS INCLUDE, AMONG OTHERS, INFORMATION REGARDING FUTURE OPERATIONS, FUTURE CAPITAL EXPENDITURES, AND FUTURE NET CASH FLOW. SUCH STATEMENTS REFLECT THE COMPANY’S CURRENT VIEWS WITH RESPECT TO FUTURE EVENTS AND FINANCIAL PERFORMANCE AND INVOLVE RISKS AND UNCERTAINTIES, INCLUDING, WITHOUT LIMITATION, GENERAL ECONOMIC AND BUSINESS CONDITIONS, CHANGES IN FOREIGN, POLITICAL, SOCIAL, AND ECONOMIC CONDITIONS, REGULATORY INITIATIVES AND COMPLIANCE WITH GOVERNMENTAL REGULATIONS, THE ABILITY TO ACHIEVE FURTHER MARKET PENETRATION AND ADDITIONAL CUSTOMERS, AND VARIOUS OTHER MATTERS, MANY OF WHICH ARE BEYOND THE COMPANY’S CONTROL. SHOULD ONE OR MORE OF THESE RISKS OR UNCERTAINTIES OCCUR, OR SHOULD UNDERLYING ASSUMPTIONS PROVE TO BE INCORRECT, ACTUAL RESULTS MAY VARY MATERIALLY AND ADVERSELY FROM THOSE ANTICIPATED, BELIEVED, ESTIMATED, OR OTHERWISE INDICATED. CONSEQUENTLY, ALL OF THE FORWARD-LOOKING STATEMENTS MADE IN THIS FILING ARE QUALIFIED BY THESE CAUTIONARY STATEMENTS AND THERE CAN BE NO ASSURANCE OF THE ACTUAL RESULTS OR DEVELOPMENTS.
Innova cautions readers that in addition to important factors described elsewhere, the following important facts, among others, sometimes have affected, and in the future could affect, the Company’s actual results, and could cause the Company’s actual results during 2005 and beyond, to differ materially from those expressed in any forward-looking statements made by, or on behalf of, Innova.
INCOME STATEMENT DATA
Nine Months Ended March 31, | ||||||||
| 2005 | 2004 | |||||||
Total revenue | $ | 273,300 | $ | 494,700, | ||||
Net loss | $ | (204,600 | ) | $ | (291,300 | ) | ||
Loss per common share—basic | $ | (.02 | ) | $ | (.02 | ) | ||
Shares used in per share computation | 12,423,601 | 12,173,765 | ||||||
9
BALANCE SHEET DATA
March 31, 2005 | ||||
Total assets | $ | 290,800 | ||
Working capital | $ | (796,100 | ) | |
Long-term debt | $ | 173,600 | ||
Stockholders’ deficit | $ | (783,500 | ) | |
RESULTS OF OPERATIONS
Net Sales
Net sales for the three-month period ended March 31, 2005 were $189,600, an $800 decrease from the $190,400 of net sales for the comparable period in 2004.
Net sales for the nine month period ended March 31, 2005 were $273,300, a decrease of 45 percent from the $494,700 of net sales for the comparable period in 2004. This decrease is attributable to the decrease in sales to Sawyer Products during the nine month period ended March 31, 2005 as compared to the same period in 2004.
During the three month period ended March 31, 2005 CamelBak and Nikken Global, accounted for 50% and 20% of total sales made, respectively. The loss of either one of these customers at this time would have a material impact on the Company’s ability to continue in business.
While the Company has entered into several strategic alliances in previous years with companies such as Rubbermaid and U.S. Filter (Culligan), none of these alliances have resulted in the long-term trading partner relationships that would assist the Company in achieving its goal of becoming profitable. There are no assurances that any current strategic alliances will result in the Company becoming profitable.
The Company is currently in discussions with several companies regarding utilization of the proprietary Innova filtration systems. Although there are no assurances, the Company believes it will be able to increase its cash flow from operations in its current fiscal year.
Cost of Sales
For the three months ended March 31, 2005, the cost of sales decreased to $81,200 from the $91,700 of costs for the three months ended March 31, 2004, which equates to a decrease of 11 percent. This decrease is mainly due to the decrease in sales.
For the nine months ended March 31, 2005, the cost of sales decreased to $136,400 from the $277,900 of costs for the nine months ended March 31, 2004 or a decrease of 51%. This decrease is mainly due to the decrease in sales.
Gross profit margin was 57 percentage points for the three months ended March 31, 2005, compared to a gross profit margin percentage of 52 percent for the three months ended March 31, 2004. This increase is principally attributable to the decrease in the manufacturing labor costs due to employee turnover.
Gross profit margin increased 6 percentage points for the nine months ended March 31, 2005, to a gross profit margin of 50 percent from an overall gross profit margin of 44 percent for the nine months ended March 31, 2004. This increase is principally attributable to the decrease in the manufacturing labor costs due to employee turnover.
10
Operating Expense
Operating expenses for the three months ended March 31, 2005 were $185,800 as compared to $202,200 for the similar period last year. The 8 percent decrease in operating expenses is principally attributable to the decreases in general and administrative and research and development expenditures.
Operating expenses for the nine months ended March 31, 2005 were $440,000 as compared to $572,200 for the similar period last year. The 23 percent decrease in operating expenses is principally attributable to the decreases in general and administrative and research and development expenditures.
Other Income
For the three months ended March 31, 2005, net interest expense amounted to $3,000 as compared to net interest income of $24,900 for the three months ended March 31, 2004. This decrease is due to the amortization of the discount on the note payable to Sawyer Products.
For the nine months ended March 31, 2005, net interest expense amounted to $12,500 as compared to net interest income of $19,100 for the nine months ended March 31, 2004. This decrease is principally due to interest charged on the loan from Sawyer and the accrued interest on various payables that were not present during the same period in 2004.
Royalty and other income for the three months ended March 31, 2005 of $73,100 as compared to $5,700 for the three months ended March 31, 2004, was due to the realization of revenue from exclusivity fees paid to the Company based on the agreement with Sawyer Products signed in August 2003, whereby the Company received a total fee of $200,000, which was paid by Sawyer Products as a reduction in the balance of the note payable, for a licensing agreement for certain technology. Approximately $16,700 of this fee will be recognized as revenue during each quarter over the next year, with the remaining balance being classified as deferred revenue. The increase was also due to the settlement of two payables as fifty percent of the outstanding balance.
Royalty and other income for the nine months ended March 31, 2005 of $111,000 as compared to $45,000 for the nine months ended March 31, 2004, was due to the realization of revenue from exclusivity fees paid to the Company based on the agreement with Sawyer Products signed in August 2003, whereby the Company received a total fee of $200,000, to be recognized over a three year period, which was paid by Sawyer Products as a reduction in the balance of the note payable, for a licensing agreement for certain technology. Approximately $16,700 of this fee will be recognized as revenue during each quarter over the next year, with the remaining balance being classified as deferred revenue. The increase was also due to the settlement of two payables as fifty percent of the outstanding balance.
Income Taxes
Due to the Company’s history of operating losses, management has established a valuation allowance in the full amount of the deferred tax assets arising from these losses because management believes it is more likely than not that the Company will not generate sufficient taxable income within the appropriate period to offset these operating loss carryforwards.
Net Loss
Net loss for the three months ended March 31, 2005 amounted to $7,300 as compared to net loss of $72,900 for the three months ended March 31, 2004. This decrease in the net loss is principally attributable to the gain on the settlement of two payables at fifty percent of the outstanding balance and the decrease in general and administrative and research and development expenditures.
Net loss for the nine months ended March 31, 2005 amounted to $204,600 as compared to net loss of $291,300 for the nine months ended March 31, 2004. This decrease in the net loss is principally attributable to the decrease in sales and a slightly larger decrease in general and administrative and research and development expenditures, coupled with the gain on the settlement of two payables at fifty percent of the outstanding balance.
11
Loss Per Share
For the three months ended March 31, 2005, basic loss per share amounted to $.00. For the comparable period in 2004, basic loss per share amounted to $(.01).
For the nine months ended March 31, 2005, basic loss per share amounted to $(.02). For the comparable period in 2004, basic loss per share amounted to $(.02).
Liquidity and Capital Resources
Operating Activities
For the nine months ended March 31, 2005, net cash used by operating activities amounted to approximately $231,300, compared to the net cash provided by operating activities of approximately $28,800 for the comparable period in 2004. This increase in cash used is primarily a result of the timing differences in the payment and receipt of certain assets and liabilities.
Investment Activities
The Company’s investment activities include equipment purchases and patent acquisitions.
The Company provided $67,000 from investing activities for the nine months ended March 31, 2005, as compared to net cash used by investing activities of approximately $2,000 for the comparable period in 2004. This increase in cash provided for investing activities is due primarily to the use of restricted cash during the nine months ended March 31, 2005.
Financing Activities
The Company provided $176,400 of financing activities for the nine month period ended March 31, 2005, as compared to $4,000 of financing activities for the same period ended March 31, 2004. This change resulted primarily from the proceeds from advances from a related party.
CAPITAL RESOURCES
As shown in the accompanying financial statements, we incurred a net loss of $204,600 during the nine months ended March 31, 2005 and as of that date, our current liabilities exceeded our current assets by $796,100. Therefore, our ability to continue as a going concern is uncertain. We expect to incur significant losses in the future. As a result, we will need to generate significant revenues to achieve profitability and may never achieve profitability.
Although we continue to maintain our efforts to conserve cash, such efforts will not make us a viable business entity, and without significant additional revenues we may not be able to stay in business. Our two executive officers have agreed to defer or contribute to capital a substantial portion of their compensation and payments.
We continue to explore the possibility of outsourcing some of our production and support tasks that are currently being done in-house in order to reduce such costs. However, until we have sufficient volume to support significant outsourcing, we are not in a position to outsource production to save costs.
We have not been successful in attracting outside capital. Although we continue to pursue various opportunities, we cannot assure you that we would be able to raise any outside capital or that such funds will be available to us on favorable terms. If we raise additional funds through the issuance of our equity or debt securities, such securities may have rights, preferences or privileges senior to those of the rights of our common stock and our stockholders may experience substantial dilution.
We are in continuous discussions with new prospective strategic alliance partners. To date, our arrangements with CamelBak, Sawyer Products and Nikken have not generated significant revenues and it does not appear these alliances will result in significant revenues for fiscal 2005. We continue to have discussions with other businesses regarding merging a private company into Innova that has a complimentary business or product lines. We have not been able to finalize the terms of any proposed acquisitions; however we will continue to explore this possibility in fiscal 2005.
12
Our principal capital and liquidity needs historical have related to the acquisition, procurement and manufacturing of component parts relating to our water filtration products, sales and marketing activities, the development of manufacturing infrastructure, litigation costs associated with patent protection, and compensation to our executive officers. Because we have not had sufficient capital resources, we may have to substantially scale back research and development efforts, marketing and improvement of our manufacturing infrastructure. Unfortunately, we do not believe that we are in position to substantially decrease our capital and liquidity requirements through additional cost cutting efforts. Thus, there is no assurance that we will be able to stay in business. If we are not able to attract additional capital or generate significant revenues through our existing or new strategic alliances, it does not make sense for us to continue our status as a reporting issuer under Section 12(g) of the Securities Exchange Act of 1934, as amended. As such, management may be required to deregister in fiscal year ending June 30, 2005 as it will be unable to absorb and pay for the costs of maintaining its status as a reporting issuer under the 1934 Act.
CRITICAL ACCOUNTING POLICIES
The Company has prepared the accompanying unaudited condensed financial statements in conformity with accounting principles generally accepted in the United States for interim financial information. The preparation of the financial statements requires the use of judgment and estimates that affect the reported amounts of revenues, expenses, assets and liabilities. The Company has adopted accounting policies and practices that are generally accepted in the industry in which it operates. The Company believes the following are its most critical accounting policies that affect significant areas and involve management’s judgment and estimates. If these estimates differ significantly from actual results the impact to the consolidated financial statements may be material.
Revenue and Accounts Receivable
The Company recognizes revenue at the time products are shipped. Any deposits received in advance of product shipment are reflected as liabilities until the products are shipped. The Company records amounts billed to customers for shipping and handling costs as sales revenue. Costs incurred by the Company for shipping and handling are included in cost of sales.
The Company extends credit to its various customers based on the customer’s ability to pay. The Company establishes an allowance for doubtful accounts by analyzing specific customer accounts and assessing its risk of loss based on insolvency, disputes or other collection issues. If the financial condition of a significant customer deteriorates resulting in their inability to pay their accounts when due, an increase in our allowance for doubtful accounts would be required, which could negatively affect operating results.
Property and Equipment
Property and equipment are recorded at cost. Depreciation is calculated by the straight-line method over the estimated useful lives of the assets, ranging generally from 2 to 10 years. Additions to and major improvements of property and equipment are capitalized. Repair and maintenance expenditures are charged to expense as incurred. As property or equipment is sold or retired, the applicable cost and accumulated depreciation are eliminated from the accounts and any gain or loss is recorded.
Inventory
Inventories are valued at the lower of cost (first-in, first-out basis) or market. Inventory write-downs are recorded for the valuation of inventory at the lower of cost or market by analyzing market conditions and estimates of future sales prices as compared to inventory costs and inventory balances.
The Company evaluates inventory balances for excess quantities and obsolescence on a regular basis by analyzing backlog, estimated demand, inventory on hand, sales levels and other information. Unanticipated changes in technology or customer demand could result in a decrease in demand for one or more of our products, which may require an increase in inventory write-downs, which could negatively affect operating results.
13
Deferred Tax Assets and Liabilities
Deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial statements carrying amounts of existing assets and liabilities and their respective income tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.
Other
Intangible assets that are included in other assets in the accompanying financial statements are being amortized over their estimated useful life of five years.
The Company records shares of common stock as outstanding at the time the Company becomes contractually obligated to issue shares.
Costs of discounts and point-of-sale rebates are recognized at the date at which the related sales revenue is recognized and are recorded as a reduction of sales revenue. The Company does not currently offer any discounts or point-of-sale rebates to its customers.
Item 3. Controls and Procedures
Evaluation of disclosure controls and procedures.
(a)Evaluation of disclosure controls and procedures. Under the supervision and with the participation of the Company’s management, including the Company’s principal executive officer and principal financial officer, the Company conducted an evaluation of the effectiveness of the design and operations of its disclosure controls and procedures, as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), as of the end of the period covered by this report. Based on their evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures were effective such that the material information required to be included in our Securities and Exchange Commission (“SEC”) reports is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms relating to Innova Pure Water, Inc., including our consolidated subsidiaries, and was made known to them by others within those entities, particularly during the period when this report was being prepared.
(b)Changes in internal controls. There were no significant changes in our internal controls or to our knowledge, in other factors that could significantly affect our disclosure controls and procedures subsequent to the evaluation date.
The Company is currently the plaintiff in a patent infringement lawsuit entitled Innova Pure Water, Inc., Plaintiff v. Safari Water Filtration Systems, Inc. d/b/a Safari Outdoor Products, Defendant; Case No. 99-1781-Civ-T-23F filed by the Company on August 4, 1999. The case was filed with the U.S. District Court, Middle District of Florida, Tampa Division. The Company has claimed patent infringement of U.S. Patent 5,609,759 on the part of the defendants. On December 16, 2003, the court ruled in favor of Safari. Innova filed an appeal with the United States Court of Appeals, case No. 04-1097, who, on August 11, 2004, reversed the lower courts decision. The case has been remanded back to the Circuit Court on September 1, 2004 to find on any remaining issues. Innova has filed for a summary judgment or the prompt setting of a trial date. It is not yet possible to evaluate the likelihood of a favorable or unfavorable outcome.
The Company is in the early stages of an action filed by former employees. They claim the Company owes them for accrued vacation time and the total requested amount is less than $10,000. The Company counterclaimed against the former employees and their new employer, Sawyer Products, Inc., for violation of and interference with the former employee’s covenants not to compete with the Company. In the
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litigation, Sawyer Products filed a claim against the Company and certain of its officers and directors which alleges misrepresentation in connection with certain loans to the Company and warrants received from the Company. The Company believes it has meritorious defenses and intends to vigorously defend the claims.
During the nine month period ended March 31, 2005, there was no modification of any instruments defining the rights of holders of the Company’s common stock and no limitation or qualification of the rights evidenced by the Company’s common stock as a result of the issuance of any other class of securities or the modification thereof.
Item 3. Defaults Upon Senior Securities
During the nine month period ended March 31, 2005, the Company was not in default on any of its indebtedness.
Item 4. Submission of Matters to a Vote of Security Holders
During the nine month period ended March 31, 2005, the Company did not submit any matters to a vote of its security holders.
The Company does not have any other material information to report with respect to the nine month period ended March 31, 2005.
Item 6. Exhibits and Reports on Form 8-K
| (a) | Exhibits included herewith are: |
| 31.1 | Certification of the Chief Executive Officer, dated June 2, 2005 (This certification required as Exhibit 31 under Item 601(a) of Regulation S-K is filed as Exhibit 99.1 pursuant to SEC interim filing guidance.) (2) | |
| 31.2 | Certification of the Chief Financial Officer, dated June 2, 2005 (This certification required as Exhibit 31 under Item 601(a) of Regulation S-K is filed as Exhibit 99.2 pursuant to SEC interim filing guidance.) (2) | |
| 32 | Written Statements of the Chief Executive Officer and Chief Financial Officer, dated June 2, 2005 (This certification required as Exhibit 32 under Item 601(a) of Regulation S-K is furnished in accordance with Item 601(b)(32)(iii) of Regulation S-K as Exhibit 99.3 pursuant to SEC interim filing guidance.) (2) | |
| (b) | Reports on Form 8-K – The Company filed a report on Form 8-K on November 22, 2004, which related to the resignation of E.J. Mersis effective November 19, 2004 as a Director and Chief Financial Officer. John E. Nohren, Jr. will replace Mr. Mersis as Chief Financial Officer. |
Pursuant to the requirements of the Securities and Exchange Act of 1934, the registrant has caused this report to be signed on its behalf by the undersigned, thereto duly authorized:
| Dated: June 2, 2005 | By: | /s/ Rose C. Smith | ||
| Rose C. Smith | ||||
| President, Chief Executive Officer, | ||||
| Director | ||||
| Dated: June 2, 2005 | By: | /s/ John E. Nohren, Jr. | ||
| John E. Nohren, Jr. | ||||
Chairman of the Board of Directors, Chief Financial Officer and Principal | ||||
| Accounting Officer | ||||
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Exhibit Index
Exhibit Description
| 31.1 | Certification of the Chief Executive Officer, dated June 2, 2005 (This certification required as Exhibit 31 under Item 601(a) of Regulation S-K is filed as Exhibit 99.1 pursuant to SEC interim filing guidance.) (2) | |
| 31.2 | Certification of the Chief Financial Officer, dated June 2, 2005 (This certification required as Exhibit 31 under Item 601(a) of Regulation S-K is filed as Exhibit 99.2 pursuant to SEC interim filing guidance.) (2) | |
| 32 | Written Statements of the Chief Executive Officer and Chief Financial Officer, dated June 2, 2005 (This certification required as Exhibit 32 under Item 601(a) of Regulation S-K is furnished in accordance with Item 601(b)(32)(iii) of Regulation S-K as Exhibit 99.3 pursuant to SEC interim filing guidance.) (2) | |
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