UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB/A1
(Mark one)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1996
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 FOR THE TRANSITION PERIOD FROM _____________ TO _____________
COMMISSION FILE NUMBER 33-42880
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NOVA TECHNOLOGIES, INC.
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(Exact name of small business issuer as specified in its charter)
Delaware 11-2674603
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(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
89 Cabot Court, Unit L, Hauppauge, New York 11788
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(Address of principal executive offices)
(516) 434-8811
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(Issuer's telephone number)
Not Applicable
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(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[ ]
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS
Check whether the registrant filed all documents and reports required to be
filed by Section 12, 13 or 15(d) of the Exchange Act after the distribution of
securities under a plan confirmed by a court. Yes [ ] No[ ]
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date:
Common Stock, $.01 par value - 6,411,183 shares outstanding as of July 31, 1996.
Transitional Small Business Disclosure Format: Yes No X
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
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NOVA TECHNOLOGIES, INC.
CONDENSED BALANCE SHEETS
(Unaudited)
March 31, December 31,
1996 1995
-------------- ---------------
ASSETS
Current assets:
Cash and cash equivalents.......... $ 273,954 $ 485,819
Inventories........................ 483,365 332,995
Accounts receivable................ 114,519 45,155
Prepaid expenses and other current
assets............................ 48,296 71,185
----------- -----------
Total current assets............ 920,134 935,154
Restricted cash......................... 190,000 100,000
Subscription receivable................. 90,000
Equipment and leasehold improvements
(net of accumulated depreciation and
amortization of $226,670 in 1996 and
$226,576 in 1995)...................... 129,268 136,256
Deposits and other assets............... 121,594 64,931
Deferred financing costs................ 62,412 69,852
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TOTAL........................... $ 1,423,408 $ 1,396,193
=========== ===========
LIABILITIES
Current liabilities:
Accounts payable and accrued
expenses.......................... $ 273,486 $ 277,430
Customer prepayments.............. 18,909 18,909
Deferred officers' compensation
(including accrued interest of
$684 in 1995).................... 86,767
Notes payable-officers............. 115,750
----------- -----------
Total current liabilities....... 408,145 383,106
Note payable-other (net of deferred
debt discount of $74,776 in 1996 and
$15,111 in 1995)...................... 435,687 88,102
Note payable-officers (including
accrued interest of $23,582 in 1996
and $15,779 in
1995)............................. 182,832 290,779
Deferred officers' compensation
(including accrued interest of $2,086
in 1996)............................... 134,168
Other liabilities....................... 15,250
Grant award............................. 50,000 50,000
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Total liabilities............... 1,226,082 811,987
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STOCKHOLDERS' EQUITY
Common stock - $.01 par value;
14,000,000 shares authorized;
5,798,483 and 5,791,083 shares
issued and outstanding,
respectively........................... 57,985 57,911
Additional paid-in capital.............. 9,918,608 9,847,887
Deficit................................. (9,779,267) (9,321,592)
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Total stockholders' equity...... 197,326 584,206
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TOTAL $ 1,423,408 $ 1,396,193
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The attached notes are made a part hereof.
1
NOVA TECHNOLOGIES, INC.
CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
Three months ended
March 31,
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1996 1995 *
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Net sales............................... $ 82,553 $ 119,882
Cost of sales........................... 302,706 171,229
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Gross (loss)............................ (220,153) (51,347)
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Research and development expense........ 81,619 67,286
General, administrative, marketing
and consulting expenses............... 152,126 126,189
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Total expenses.......................... (233,745) (193,475)
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(Loss) from operations.................. (453,898) (244,822)
Interest and other income............... 24,054 1,530
Interest expense........................ (27,831) (554)
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NET LOSS................................ ($457,675) ($243,846)
========== ==========
Net loss per share...................... ($0.08) ($0.06)
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Weighted average number of common
shares used in computing loss
per share............................. 5,796,016 4,355,533
========== ==========
The attached notes are made a part hereof.
* As Adjusted
2
NOVA TECHNOLOGIES, INC.
STATEMENTS OF CASH FLOWS
(Unaudited) Three months ended
March 31,
--------------------------
1996 1995 *
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Cash flows from operating activities:
Net loss................................................................. ($457,675) ($243,846)
Adjustments to reconcile net loss to net cash ---------- ----------
(used in) operating activities:
Depreciation and amortization........................................... 27,740 20,319
Value assigned to warrants given to employees........................... 9,142
Common stock issued for professional services rendered. 8,214
Changes in operating assets and liabilities:
(Increase) decrease in inventories..................................... (150,370) 34,952
(Increase) in accounts receivable, prepaid expenses
and other assets...................................................... (103,138) (17,524)
(Increase) in restricted cash.......................................... (90,000)
Decrease in subscription receivable.................................... 90,000
Increase (decrease) in accounts payable and accrued
expenses.............................................................. 11,305 (36,917)
Increase in deferred officers' compensation............................ 46,000 48,000
Increase in accrued interest payable................................... 16,455
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Net cash (used in) operating activities................................ (601,469) (185,874)
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Cash flows from investing activities:
Purchase of equipment and capitalized tooling costs...................... (10,396) (4,978)
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Cash flows from financing activities:
Proceeds from notes payable.............................................. 400,000
Proceeds from sale of common stock....................................... 95,100
Issuance costs incurred in sale of common stock.......................... (9,510)
Proceeds from exercise of warrants....................................... 99,565
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Net cash provided by financing activities............................ 400,000 185,155
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INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS.......................... (211,865) (5,697)
Cash and cash equivalents at beginning of period.......................... 485,819 102,245
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CASH AND CASH EQUIVALENTS AT END OF PERIOD................................ $273,954 $96,548
========== ==========
Supplemental disclosure of cash flow information-
Forgiveness of debt owed to officers................................... $762,852
Value of warrants given in connection with financing................... $ 62,800
The attached notes are made a part hereof.
* As Adjusted
3
NOVA TECHNOLOGIES, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
AS OF MARCH 31, 1996
(UNAUDITED)
(NOTE A):
- ---------
The accompanying unaudited financial statements contained in the Form 10-
QSB/A-1 represent condensed financial data and, therefore, do not include all
footnote disclosures required to be included in financial statements prepared in
conformity with generally accepted accounting principles. Such footnote
disclosure was included in the Company's Form 10-KSB/A-1 for the year ended
December 31, 1995. The condensed financial data included herein should be read
in conjunction with the Form 10-KSB/A-1. The December 31, 1995 balance sheet
has been derived from the audited financial statements included in the Company's
1995 Form 10-KSB/A-1.
(NOTE B):
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(1) In management's opinion, all necessary adjustments (consisting only of
normal recurring adjustments) have been made in order to present fairly the
results for the interim periods.
(2) The results of operations for three months ended March 31, 1996 are not
necessarily indicative of the results of operations for the year ending December
31, 1996.
(3) From inception through December 31, 1994, the Company reported results
as a development stage enterprise. Since January 1, 1995, the Company is no
longer classified as a development stage enterprise.
(NOTE C):
- ---------
Net loss per share is based on the weighted average number of shares
outstanding during each period. No effect has been given to outstanding options
and warrants as the effect would be antidilutive.
(NOTE D):
- ---------
Inventories are stated at the lower of cost (first-in, first-out) or
market.
(NOTE E):
- ---------
In September 1995, pursuant to a series of interdependent transactions,
the Company sold 900,901 shares of its common stock for an aggregate of
$1,000,000 in a private placement, received a grant commitment from the city of
Bristol, Connecticut of up to $100,000 and received loan commitments to borrow
in the aggregate of up to $2,050,000 from a bank and various agencies and public
authorities of the state of Connecticut in connection with moving its
manufacturing facilities to Bristol, Connecticut. The loan commitments are as
follows:
(a) The Company entered into a financing agreement with Connecticut
Innovations, Incorporated ("CII") to borrow up to $750,000 in four stages based
on the achievement of certain milestones at an interest rate of 10% per annum.
Interest only is payable semi-annually commencing on the earlier of (i)
September 5, 1998 or (ii) the date the Company declares any dividends or
repurchases any of its outstanding stock. Principal is due on September 5,
2001, collateralized by the assets of the Company, including patents, which
security interest except for patents, is subordinated to the security interest
of the Company's lending bank. As of March 31, 1996, the Company borrowed
$500,000 under this facility. The Company granted CII a warrant to purchase
300,000 shares of common stock at an exercise price of $1.11 per share, expiring
on September 1, 2001. The warrant becomes exercisable on a pro rata basis, as
the Company achieves its milestones and makes additional borrowings under the
facility. As of March 31, 1996, 200,000 of such warrants are exercisable and
have been valued at $78,800.
(b) The Company entered into a loan agreement with People's Bank
("Peoples") providing for a $1,000,000 revolving credit facility expiring on
September 5, 1997 at an interest rate of prime plus 1 1/2%. Borrowings
available under the facility are limited to 80% of eligible accounts receivable
and 50% of eligible inventory and are collateralized by the Company's accounts
receivable and inventory. At March 31, 1996 no borrowings were made under
4
NOVA TECHNOLOGIES, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
AS OF MARCH 31, 1996
(UNAUDITED)
this loan agreement.
The facility contains restrictive covenants that limit capital expenditures
and other financial and ratio requirements with respect to working capital,
equity and unsubordinated debt. The facility restricts the payment of dividends
and also requires funds to be held in escrow as a Debt Service Reserve, as
defined in the agreement.
The Connecticut Development Authority ("CDA") has guaranteed repayment of
40% of the outstanding balance of the loan. The Company's president has
guaranteed repayment of 20% (up to $80,000) of any amounts paid by CDA to
Peoples under their guarantee. In addition, three of the Company's product
distributors (the "LOC Corporations") each agreed to provide an irrevocable
letter of credit in the amount of $200,000 for an aggregate of $600,000, which
letters of credit can be drawn down upon the failure of the Company to make when
due any payment to Peoples. In exchange for issuing these letters of credit, the
Company issued each of the LOC Corporations a warrant to purchase up to 20,000
shares (60,000 in the aggregate) of the Company's common stock at an exercise
price of $2.50 per share.
Pursuant to a put/call agreement with two of the LOC Corporations, the
Company had the right to require the two LOC Corporations to purchase an
aggregate of 126,667 shares of common stock (or the LOC Corporations had the
right to call the Company to issue its common stock) at $1.50 per share for
total proceeds of $190,000. The Company received proceeds of $190,000 during the
period December 1995 through March 1996. Pursuant to the financing agreement
with Peoples, the proceeds received from the LOC Corporations reduce their
outstanding letters of credit in that amount and the funds are to be held in a
restricted cash account by the Company and the number of shares that could be
purchased by LOC Corporations under the warrants was reduced by 19,000.
(c) The Company entered into a loan agreement with CDA providing for a line
of credit of up to $100,000 until September 4, 1996 for 80% of the purchase
price of new or used equipment, bearing interest at the rate of 7.94%. The loan
is repayable in 48 equal monthly installments commencing October 1, 1998 and is
collateralized by all the equipment purchased with the proceeds. The Company
granted CDA warrants to purchase an aggregate 45,000 shares of common stock at
an exercise price of $2.50 per share. At March 31, 1996 no borrowings were made
under this loan agreement.
(d) The Company entered into an Assistance Agreement, which was approved
November 30, 1995 with the Department of Economic and Community Development
("DECD"), providing for a loan to the Company in an amount not to exceed
$200,000 for funding the relocation of the Company's factory (as defined
therein) at an interest rate of 5% per annum. The principal and interest of the
loan is due in 84 equal monthly payments commencing on the third anniversary of
the advancement date, and is collateralized by certain machinery and equipment.
At March 31, 1996 no borrowings were made under the Assistance Agreement.
(e) The Company entered into a Grant Agreement, dated August 8, 1995 with
the city of Bristol, Connecticut ("Bristol"), providing, under certain
conditions, for a grant in an amount up to $100,000 ($50,000 was received in
October 1995 and the balance is to be received on the achievement of certain
employment levels). If the Company relocates 60% of its equipment or employees
of its manufacturing facilities outside Bristol prior to August 8, 2005, the
Company will be obligated to immediately repay the grant.
(NOTE F):
- ---------
At March 31, 1996 the notes payable to officers, as amended, bear interest
at 11% and 12% per annum. The
5
NOVA TECHNOLOGIES, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
AS OF MARCH 31, 1996
(UNAUDITED)
11% and 12% notes (aggregating $170,000 and $105,000), respectively) are payable
on April 1, 1997. The notes are subordinated to the borrowings under the
People's Bank ("Peoples") and Connecticut Innovations, Incorporated ("CII") loan
facilities. The officers received permission from Peoples and CII to substitute
deferred compensation aggregating $115,750 due them at March 31, 1996 for an
equal amount of subordinated notes payable and in April 1996, a payment of
$115,750 was made to the officers reducing the amount owed to them under the
notes payable.
(NOTE G):
- ---------
Two officers have agreed to defer until April 1, 1997 payment of salaries
due them aggregating $16,332. Two officers have agreed to defer until April 1,
1997 payment of interest on deferred compensation due them aggregating $2,086.
Three directors have agreed to defer payment of accrued director's fees until
April 1, 1997 aggregating $15,250.
(NOTE H):
- ---------
In the beginning of May 1996, the Company borrowed $200,000 under its
revolving line of credit.
(NOTE I):
- ---------
On May 31, 1996, the Company, through a wholly-owned acquisition
Corporation, acquired all of the outstanding capital stock of Comed Systems,
Inc. ("Comed") in exchange for the issuance of 600,000 shares of its common
stock, and two $750,000 promissory notes. The notes, which bear interest at 8%
per annum, are guaranteed by the Company. The first note is due in June 1997 and
the second note is due on January 1, 2001 subject to quarterly prepayment
installments commencing December 31, 1997. Such installments are equal to the
lesser of $37,500 or 25 percent of Comed's operating income (as defined).
6
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
GENERAL
The Company, from its inception on January 23, 1984 through the fiscal year
ended December 31, 1994 had been engaged primarily in research and development
of its Novabed(R) patient transfer system and in raising capital to design and
develop a marketable product. The Company had been classified as a development
stage enterprise since substantially all of its efforts were devoted to research
and development and to establishing a new business and there were no significant
revenues. In 1994, the Company began taking orders for Novabed(R) units and in
June 1994, the Company shipped the first order of Novabed(R) units since its
inception and recorded sales of $233,000 in the year ended December 31, 1994.
The Company is now manufacturing its second lot of Novabed(R) units and is
incorporating certain design changes based on suggestions from its distributors.
Since January 1, 1995, the Company is no longer classified as a development
stage enterprise. As of July 1, 1996, it had entered into seven distributorship
agreements providing for the sale and shipment of Novabeds(R) to each
distributor and the granting of an exclusive sales territory to each
distributor.
In 1994, the three distributors then under contract with the Company
ordered and were shipped an aggregate of 20 Novabeds(R) which exceeded their
aggregate minimum purchase requirements by 5 units. In 1995, the Company sold
and shipped 13 Novabeds(R) and 8 wheelchairs to its six distributors, most of
which were shipped in the first quarter. This sales decrease resulted from the
Company's lack of sufficient working capital and the Company's focus on
arranging, negotiating and consummating the 1995 Financing and relocating its
assembly operations from New York to Connecticut. As a result, in 1995 the
Company was unable to produce sufficient product to satisfy its distributors'
minimum purchase requirements. The Company and the two distributors who were
unable to receive their minimum purchase requirements in 1995 agreed to extend
the period for selling and purchasing the minimum requirements for 1995 and
thereafter by one year.
In 1995, the Company decided to alter the way the Novabeds(R) are produced.
Through the first quarter of 1995, the Company produced a number of the
components of the Novabed(R) in-house. The Company is now subcontracting all of
this work, primarily to subcontractors in Connecticut, and is conducting
assembly operations. As a result, the Company will be able to produce
Novabeds(R) with less capital for tooling and equipment. The Connecticut
Presence Requirement contained in several of the Company's financing agreements
requires that the Company conduct a majority of its operations in Connecticut.
Only the Company's agreements with CII also require that the Company conduct a
majority of its subcontracting operations in Connecticut. However, the CII
agreements provide for an exception in the event no Connecticut subcontractor is
able to produce the products or provide the services on commercially reasonable
terms. Accordingly, the Company's subcontracts must be fulfilled in Connecticut
or pursuant to such exception. The Company does not believe that the
Connecticut Presence Requirement will have a material impact on the Company even
in light of its new subcontracting policy.
The Company's distributors have agreed to purchase a minimum number of
units from the Company over specified periods of up to 31 months from June 1,
1996, which includes approximately 184 units during 1996. During the period
January 1, 1996 to July 1, 1996, the Company shipped 19 units, all of which were
purchased by the Company's distributors. As of July 1, 1996, the Company had
unfilled orders for 2 units and 3 wheelchairs. The distributors have not
ordered a pro rata portion of their 1996 minimums.
Prior to the acquisition of Comed by Nova, Comed was an independent
distributor of Nova Products. The distribution agreement between Nova and Comed
was terminated in connection with the acquisition of Comed by Nova. It is
anticipated that Nova will sell its products to Comed (now Vivax) on
substantially the same terms that Nova sells its products to Nova's independent
distributors. Historically, margins have been greater in the business of
distributing specialty medical beds than in the business of manufacturing
specialty medical beds for sale to distributors. Accordingly, the Company
anticipates that the acquisition of Vivax will have a
7
positive impact on revenues, income and the Company's margin.
RESULTS OF OPERATIONS
In the three months ended March 31, 1996 the Company recorded sales of
$83,000 and incurred a net loss of $458,000 ($.08 per share) compared to sales
of $120,000 and a net loss, as adjusted, of $244,000 ($.06 per share) in the
three months ended March 31, 1995.
In the quarter ended March 31, 1996 the Company's cost of sales exceeded
its sales and the Company sustained a gross loss of $220,000 compared to a gross
loss of $51,000 in the quarter ended March 31, 1995. In September 1995, the
Company opened its new 28,000 square foot manufacturing facility in conjunction
with the completion of an equity and debt financing package (the "1995
Financing"). The new manufacturing facility was necessary to enable the Company
to meet its manufacturing requirements and sales objectives despite the
Company's new policy of subcontracting the manufacture of more of the components
that go into a Novabed(R). Manufacturing overhead in the first quarter
increased $135,000 from $91,000 in 1995 to $226,000 in 1996. Initially,
production levels at the new facility have not been high enough to absorb the
additional manufacturing overhead incurred in the new facility. As production
and sales levels increase the Company expects gross losses to diminish and
thereafter rising gross profits, although no assurance can be given that the
Company will be able to achieve such satisfactory production and sales levels.
Research and development expenses increased $15,000 from $67,000 (as
adjusted for salary accruals) in the first quarter of 1995 to $82,000 in the
comparable 1996 quarter. The increase is attributable to a $5,000 increase in
an officer's salary rate for the quarter and increased wages devoted to research
and development efforts in the first quarter of 1996.
General, administrative, marketing and consulting expenses increased
$26,000 from $126,000 (as adjusted for salary accruals) in the first quarter of
1995 to $152,000 in the comparable 1996 quarter. The increase is attributable
to an $11,000 increase in an officer's salary rate for the quarter and an
increase of approximately $16,000 in legal and accounting expenses.
Interest expense increased $27,000 from $1,000 in 1995 to $28,000 in 1996,
of which $18,000 is attributable to interest expense and amortization of
financing costs in connection with the 1995 Financing. In addition, in the
first quarter of 1996 two officers, who earned interest aggregating $9,000 on
debt due them, waived the accrual of interest on debt due them in the comparable
1995 quarter.
The Company's agreements with its distributors generally provide for a
fixed purchase price for Novabeds(R) for an initial period that expires June 30,
1997. The Company's agreement with one of its distributors provides for a fixed
price through December 31, 1998. If inflation, component parts pricing or other
conditions result in an increase in the cost of producing Novabeds(R), the
Company will not be able to pass along such increased costs to its distributors.
The Company does not expect that these fixed price provisions will have a
material impact on the Company.
As a result of common stock sales in 1995 the weighted average number of
common shares used in computing loss per share increased from 4,355,533 at March
31, 1995 to 5,796,016 at March 31, 1996.
LIQUIDITY AND CAPITAL RESOURCES
During the first quarter of 1996 the Company used net cash in operating
activities aggregating $601,000 compared to $186,000 in the prior year's first
quarter. The increase in funds used in operating activities is attributable to
the increase in net loss and to increases in inventory, accounts receivable and
other assets as the Company began utilizing funds received in the 1995
Financing. The Company purchased equipment and capitalized certain tooling
costs aggregating $10,000 compared to $5,000 in the prior year. In the first
quarter of 1996 the Company received proceeds of $400,000 from borrowing under
the 1995 Financing.
8
During 1995 the Company used net cash in operating activities aggregating
$1,210,000 compared to $791,000 in the prior year. The increase in funds used
in operating activities is primarily attributable to increases in inventory,
accounts receivable and other assets as the Company began to utilize the funds
received in the 1995 Financing. The Company purchased equipment and capitalized
certain tooling costs aggregating $73,000 compared to $28,000 in the prior year
and provided cash from financing activities of $1,667,000 compared to $851,000
in 1994. In 1995, proceeds from the sale of Common Stock net of issuance costs
aggregated $1,525,000, proceeds from borrowings net of deferred financing costs
aggregated $42,000 and the Company received $100,000 from the exercise of
warrants.
The Company, since its inception through December 31, 1993 has utilized the
issuance of shares of Common Stock as a source of working capital to pay for
rent, compensation, professional fees and to repay debt. During this period,
the Company issued approximately 457,000 shares of Common Stock to pay such
liabilities, aggregating approximately $837,000. In 1994, the Company issued
15,632 shares in payment of rent and professional fees aggregating $25,093. In
1995, the Company did not issue any common stock in payment of any of its
liabilities.
From January 1, 1995 through August 31, 1995, the Company sold
approximately 394,000 shares of Common Stock in private placement sales, from
which it derived net proceeds of approximately $545,000. In January 1995 the
Company received $99,600 from the purchase of 73,752 shares of Common Stock by
holders of warrants issued in 1990 with an exercise price of $3.00 per share and
an expiration date of December 31, 1994, which expiration was extended to
January 20, 1995 at a revised exercise price of $1.35 per share. The remaining
warrants to purchase 77,391 shares of Common Stock on the same terms were not
exercised and were permitted to lapse. In May 1996, the Company sold 10,000
shares of Common Stock at $2.00 per share.
The ongoing need for working capital has hindered the Company's ability to
operate in an efficient manner and to produce sufficient product. During the
Company's search for additional capital, it has attempted to alleviate this
problem by obtaining waivers of payment or deferring certain salaries, extending
repayment dates on officers' loans, reducing exercise prices and extending
exercise dates of expiring warrants and by selling restricted shares of Common
Stock in private placement sales.
As of September 5, 1995, the Company negotiated an equity and debt
financing package (the "1995 Financing") consisting of the following:
1. $888,280 in net proceeds after finder's fees and expenses, from the
sale of 900,901 shares of Common Stock at a price of $1.11 per share.
2. $1,000,000 loan facility from People's Bank under a two-year revolving
line of credit collateralized by a first lien on accounts receivable and
inventory and a cash collateral account. Nova is required to maintain an
amount equal to the estimated annual debt service on the outstanding People's
Bank loan in such cash collateral account. This loan bears interest at People's
Bank prime rate plus 1.50%. Advances shall not exceed 80% of eligible accounts
receivable plus 50% of eligible inventory. Eligible accounts receivable and
eligible inventory only include accounts receivable and inventory related to
Nova's Connecticut facility and do not include accounts receivable and inventory
of Vivax. Although, People's had no obligation to advance funds until the
$100,000 loan from the CDA and the $200,000 loan from the DECD had been fully
funded, People's Bank agreed to waive such conditions because the Company
temporarily deferred the purchase of capital equipment to be purchased with the
CDA and DECD loans. The Company borrowed $250,000 in May and estimates that as
of June 30, 1996 it had approximately 80,000 of availability under the People's
Bank facility.
3. $750,000 loan from CII maturing on September 5, 2001. The loan bears
interest at 10% and is collateralized by all of the Company's assets, including
a first lien on its intellectual property,
9
a third lien behind People's Bank and three of the Company's distributors on
accounts receivable and inventory and a first lien on all other assets.
Interest only is payable semi-annually commencing on the earlier of (i)
September 5, 1998 or (ii) the date the Company declares any dividend or
repurchases any of its outstanding stock. The loan was funded upon achievement
of certain milestones and advances of $100,000, $250,000, $150,000 and $250,000
were received by the Company on September 5, 1995, January 26, 1996, March 26,
1996 and June 14, 1996. The final milestone was modified on June 7, 1996. In
connection with this loan, CII received warrants to purchase up to 300,000
shares of Common Stock at $1.11 per share. Such warrants vested pro rata as
the CII loan was advanced. The warrants to purchase 200,000 shares which vested
prior to March 31, 1996 have been valued at $78,800 using the Black-Scholes
pricing model and the fair market value of the Common Stock at the time of
vesting of the warrants.
4. $100,000 loan from CDA for the purchase of capital equipment, maturing
on September 1, 2002. This loan bears interest at 7.94% and is collateralized
by a first lien on the equipment to be purchased with the proceeds. The loan
is payable in equal monthly installments of principal and interest commencing
October 1, 1998 in an amount sufficient to fully amortize the loan over its
remaining term. If the Company's full time employment in Connecticut is less
than 67 jobs after February 1, 1998, then the Company must prepay $1,500 of the
loan for each job below such number and the interest rate will be adjusted
upward based on a sliding scale which increases based on the number of jobs
below such employment target. CDA also received warrants to purchase 45,000
shares of Common Stock at $2.50 per share in exchange for a guarantee securing
the People's loan up to a maximum of $400,000.
5. $200,000 loan from DECD for the purchase of capital equipment, maturing
ten years from the date of the first advance. This loan bears interest at 5%
and is collateralized by a first lien on the equipment to be purchased with the
proceeds.
6. $100,000 grant from the town of Bristol, Connecticut to help the
Company relocate its primary manufacturing operations to Bristol, of which
$50,000 was paid in October 1995 and $50,000 will be paid upon achievement by
the Company of certain employment levels at its Bristol facility.
7. Warrants to purchase an aggregate of 60,000 shares, collectively, of
Common Stock at a price of $2.50 per share and a security interest in the
Company's accounts receivable and inventory (which lien is subordinate to the
lien of People's Bank) were given to Comed (now Vivax), Innovative Medical
Systems, Inc. and Advanced Therapeutics, Inc., three of the Company's
distributors, in exchange for each of them agreeing to issue $200,000 letters of
credit securing the People's loan up to a maximum of $600,000. The letters of
credit were established for one year and must be replaced or extended for an
additional year. The Company and Innovative and Advanced also entered into an
agreement allowing such distributors to purchase, and allowing the Company to
require such distributors to purchase, under certain circumstances an aggregate
of up to 126,667 shares of restricted Common Stock at a price of $1.50 per
share. The call was exercised by such distributors in September 1995, and the
Company received proceeds of $100,000 in 1995, $50,000 in January 1996 and
$40,000 in March 1996. Pursuant to the financing agreement with People's, the
proceeds received from the distributors reduced their respective obligations to
maintain letters of credit and are being held in a restricted cash account for
the benefit of People's Bank. Pursuant to the put/call agreement, the number of
warrants issued to the distributors was reduced by 19,000. The remaining
warrants to purchase an aggregate of 41,000 shares of Common Stock remain
outstanding. The warrants issued to Comed have been distributed to Douglas and
Donna Drew.
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The various creditors involved in the 1995 Financing, the Company, Charles
F. Chubb and Paul DiMatteo have entered into agreements (the "Intercreditor
Agreements") which, among other things, clarify the priority of each creditor's
lien on assets of the Company, limit the ability of the creditors to transfer
their financing interests in the Company or amend their financing documents
without obtaining the consent of CII and People's Bank and establish
restrictions and priorities with respect to payments and exercise of remedies.
These liens do not relate to assets of Vivax. A lien on all of the assets of
Vivax was granted as security for the Acquisition Debt.
As of June 30, 1996, the Company had borrowed $250,000 under the revolving
line of credit but had not received any funds under the equipment loans,
although it plans to begin to borrow from these sources in 1996. Legal fees and
commitment fees (excluding the value of warrants) in connection with the 1995
Financing were approximately $90,000. At March 31, 1996 the Company had a net
worth of $197,000, working capital of $512,000, including unrestricted cash of
$274,000, accounts receivable of $115,000 and inventory aggregating $483,000.
At March 31, 1995, the Company had a net worth of $50,000, working capital of
$140,000, including cash of $97,000, accounts receivable of $13,000 and
inventory aggregating $171,000. The Company has expended less than $40,000 to
purchase furniture and equipment for its new manufacturing facility in Bristol,
Connecticut. Manufacturing operations commenced in November and at March 31,
1996 the Company employed 11 workers in this facility, including assemblers,
welders, supervisors, a purchasing agent and an administrative assistant. The
Company is reviewing plans to purchase additional manufacturing equipment and
has accelerated manufacturing levels in order to begin shipping meaningful
quantities of Novabed(R) units. The Company has no material commitments for
capital equipment expenditures. The Company is planning to seek additional
distributors and accelerate product engineering research and development.
The financing arrangements with CDA and DECD, both of which are
instrumentalities of the State of Connecticut, provide that the Company must
prepay such loans together with a prepayment penalty equal to 7.5% of the loans
and the guaranty if the Company physically transfers the operations of its
business located in Connecticut outside of Connecticut within 10 years.
The CII loan agreement requires, with certain exceptions, that the Company
maintain a "Connecticut presence" by basing at least 50% of its officers in
Connecticut, basing a majority of its employees in Connecticut and conducting
the majority of its operations in Connecticut. The Company is currently in
compliance with this requirement. The CII loan agreement contains a mandatory
prepayment provision in the event the Company ceases to maintain a Connecticut
presence, the Company sells Common Stock for its own account in an underwritten
public offering or there is a change in control of the Company or its assets.
This provision includes a prepayment penalty in an amount equal to the greater
of (i) an amount sufficient to provide a rate of return of 25% compounded
annually or (ii) the excess of the market price of the Common Stock underlying
the warrant granted to CII over the exercise price of such warrant. The grant
from the City of Bristol must be repaid if prior to August 8, 2005, the Company
relocates 60% of the equipment or employees of its manufacturing operations
outside of Bristol or the Company defaults in payment of property taxes due to
Bristol. The Company has treated the $50,000 grant paid by the Town of Bristol
as a grant award, to be recorded as income at a later date, if applicable. In
order to comply with these requirements, the Company established its
manufacturing facility in Bristol, Connecticut.
The Company's loan agreement with People's Bank requires that the Company
satisfy at the end of each quarter certain financial covenants as set forth
below:
END OF EACH QUARTER DURING END OF EACH QUARTER DURING THE
THE PERIOD ENDING SEPTEMBER PERIOD COMMENCING OCTOBER 1,
30, 1996 1996 AND THEREAFTER
--------------------------- ------------------------------
Minimum Working Capital $ 500,000 $ 700,000
Minimum Current Ratio 1.50 to 1.00 1.75 to 1.00
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Minimum Capital Funds $ 700,000 $ 1,300,000
Maximum Unsubordinated Debt Ratio 2.00 to 1.00 2.50 to 1.00
For purposes of the agreement, "Working Capital" is defined as current assets
minus current liabilities, "Current Ratio" is defined as current assets divided
by current liabilities, "Capital Funds" is defined as the sum of tangible net
worth plus subordinated debt minus the sum of intangible assets plus loans to
officers, directors, employees and affiliates, and "Unsubordinated Debt Ratio"
is defined as total unsubordinated debt divided by total capital funds. The
Company believes that it is currently in compliance with these covenants.
However, such covenants become more stringent for the quarter ending December
31, 1996. The People's Bank loan is secured in part by three letters of credit
which must be replaced or extended in September 1996 for an additional one year.
Failure to satisfy any of these financial covenants or to replace or renew the
letters of credit constitutes a default under the People's Bank financing which
allows People's Bank to terminate its obligation to provide financing to the
Company and to accelerate all loans outstanding to the Company. A default under
the People's Bank financing also constitutes a default under the Company's other
financing arrangements. The Company estimates that it will require
approximately $2.75 million of additional financing to finance its operations
over the 12 month period following June, 1996, including the payment of the
$750,000 note of Vivax due June 14, 1997, and to comply with the financial
covenants contained in the People's Bank loan agreement.
In connection with the acquisition of Comed, Vivax issued two promissory
notes of $750,000 each to Douglas and Donna Drew which are guaranteed by Nova.
The first note bears interest at the rate of 8%, requires monthly interest
payments and is due on June 14, 1997. The second note bears interest at 8%,
requires quarterly interest payments and matures on January 1, 2001. Principal
payments are due quarterly 60 days following each of the first three calendar
quarters and 110 days following the fourth calendar quarter, commencing with the
calender quarter ending December 31, 1997, in an amount equal to the lesser of
(i) $37,500 or (ii) 25% of the operating income of Vivax during the prior
calendar quarter. Both notes are secured by a second lien on the accounts
receivable and inventory of Vivax and a second lien on Nova's intellectual
property.
In connection with the 1995 Financing, Vivax posted an irrevocable letter
of credit to People's Bank on behalf of Nova for $200,000 which expires on
November 5, 1997. Vivax's obligation to reimburse the bank which posted the
letter of credit is secured by a first lien on Vivax's accounts receivable and
inventory. Nova's obligation to reimburse Vivax is secured by a second lien on
Nova's accounts receivable and inventory.
On July 15, 1996, the Company obtained a $250,000 loan from Northern
Associates, L.P., an affiliate of TimeCapital Securities Corporation. The loan
bears interest at the rate of 10% per annum payable in registered Common Stock,
is due on October 14, 1996, is secured by 250,000 shares of unregistered Common
Stock and is convertible at the lender's option into registered shares of Common
Stock at the rate of $2.00 per share. If the Company does not have registered
shares available, it is obligated to register sufficient shares of Common Stock
to satisfy its obligations. The lender's recourse with respect to the Company's
payment obligations is limited to the Common Stock pledged as collateral. The
Company is obligated to deliver 2,500 shares of Common Stock to the lender as a
fee.
The Company intends to continue to explore strategic alliances or mergers
in addition to the Comed acquisition as a means of improving the Company's cash
flow and capital. In this regard, the Company is engaged in preliminary
discussions with several distributors of medical products regarding a potential
business combination. The Company cannot state that any of these transactions
is probable because no agreement in principle with respect to transaction price
and all other material terms has been reached. In addition, any such
transaction is likely to be subject to the Company obtaining additional
financing and ongoing due diligence. There can be no assurance that any such
transaction will be consummated.
The Company has received reports on its financial statements from its
independent auditors which include an explanatory paragraph indicating that
substantial doubt exists about the ability of the Company to continue as a going
concern. The factors referenced by the auditors include the Company's recurring
operating
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losses and the need for additional financing for commercial exploitation of its
product. The Company estimates that it will need to obtain an additional equity
contributions of at least $2,750,000 to finance its operations over the 12 month
period following June, 1996. These estimates are generated from an internally
prepared business plan. The Company has begun to seek additional capital and
has retained TimeCapital Securities Corporation ("TimeCapital") as its exclusive
agent to assist the Company in raising $1,000,000 through the sale of at least
500,000 shares of Common Stock in a private placement or a registered offering.
The Company has also entered into an agreement with TimeCapital for it to act as
the Company's exclusive agent to assist in arranging for one or more qualified
broker-dealers to serve as the underwriter(s) on behalf of the Company in
connection with a public offering of Common Stock. The Company also has verbal
agreements with three finders, one of whom is Arlindo Jorge a director of the
Company, pursuant to which it will pay a commission of 10% of the proceeds of
private placement sales obtained by the finders. There can be no assurance that
the Company's estimates will prove to be accurate, that the Company will be able
to raise such additional capital or that the Company's existing distributors
will fulfill their minimum purchases. If such contingencies are not realized,
the Company would have to drastically reduce its staff and curtail manufacturing
operations which may result in a default under and acceleration of the Company's
loan obligations and, ultimately, bankruptcy and/or the discontinuance of
operations.
PART II. OTHER INFORMATION
-----------------
Not Applicable
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SIGNATURES
In accordance with the requirements of the Securities Exchange Act of 1934, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
NOVA TECHNOLOGIES, INC.
August 1, 1996 By:/s/ Stephen M. Fisher
------------------------------------
Stephen M. Fisher
President and
Principal Financial
Officer
August 1, 1996 By:/s/ Harold J. Lash
---------------------------------------
Harold J. Lash
Controller and Principal
Accounting Officer
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