UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(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, 1996
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[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
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 August 1,
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. AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited) June 30, 1996 December 31, 1995
------------- -----------------
ASSETS
Current assets:
Cash and cash equivalents............................... $ 242,063 $ 485,819
Inventories............................................. 685,370 332,995
Accounts receivable..................................... 502,757 45,155
Prepaid expenses and other current assets............... 53,125 71,185
------------ -----------
Total current assets................................... 1,483,315 935,154
Restricted cash........................................... 209,500 100,000
Subscription receivable................................... 90,000
Rental equipment (net of accumulated depreciation of
$8,063 in 1996).......................................... 378,937
Equipment and leasehold improvements (net of accumulated
depreciation and amortization of $245,954 in 1996
and $226,576 in 1995).................................... 216,392 136,256
Deposits and other assets................................. 152,197 64,931
Deferred financing costs.................................. 63,575 69,852
Goodwill.................................................. 2,048,364
------------ -----------
TOTAL.................................................. $ 4,552,280 $ 1,396,193
============ ===========
LIABILITIES
Current liabilities:
Accounts payable, prepayments and accrued
expenses............................................... $ 409,143 $ 296,339
Income taxes payable.................................... 162,000
Notes payable-bank (including accrued interest of
$2,100 in 1996)........................................ 252,100
Deferred officers' compensation (including accrued
interest of $684 in 1995).............................. 86,767
Notes payable-officer................................... 30,000
----------- -----------
Total current liabilities.............................. 853,243 383,106
Note payable-other (including accrued interest of $29,283
and $3,210 and net of deferred debt discount of
$109,113 and $15,111 in 1996 and 1995, respectively) 2,170,171 88,102
Note payable-officers (including accrued interest of
$28,554 in 1996 and $15,779 in
1995).................................................. 157,804 290,779
Deferred officers' compensation (including accrued
interest of $4,388 in 1996)............................. 166,470
Grant award and other
liabilities.............................................
89,374 50,000
------------ -----------
Total liabilities...................................... 3,437,062 811,987
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STOCKHOLDERS' EQUITY
Common stock - $.01 par value; 14,000,000 shares
authorized; 6,411,183 and 5,791,083 shares issued
and outstanding, respectively............................ 64,112 57,911
Additional paid-in capital................................ 11,171,698 9,847,887
Deficit................................................... (10,120,592) (9,321,592)
------------ -----------
Total stockholders' equity............................. 1,115,218 584,206
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TOTAL.................................................. $ 4,552,280 $ 1,396,193
============ ===========
The attached notes are made a part hereof.
2
NOVA TECHNOLOGIES, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three months ended Six months ended
June 30, June 30,
-------------------------------------------------
1996 1995 * 1996 1995 *
------------ ------------ ----------- -----------
Net sales.................................................... $ 380,327 $ 27,661 $462,880 $147,543
Cost of sales................................................ 406,883 104,228 709,589 275,457
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Gross (loss)................................................. (26,556) (76,567) (246,709) (127,914)
-------------------------------------------------
Research and development expenses............................ 84,549 59,949 166,168 127,235
General, administrative, marketing
and consulting expenses.................................... 194,659 113,781 346,785 239,970
------------ ------------ ----------- -----------
Total expenses............................................... (279,208) (173,730) (512,953) (367,205)
-------------------------------------------------
(Loss) from operations....................................... (305,764) (250,297) (759,662) (495,119)
Interest and other income.................................... 8,069 982 32,123 2,512
Interest expense............................................. (43,630) (554) (71,461) (1,108)
------------ ------------ ----------- -----------
NET LOSS..................................................... ($341,325) ($249,869) ($799,000) ($493,715)
========================= =========== ===========
Net loss per share........................................... ($0.06) ($0.06) ($0.14) ($0.11)
====== ====== ====== ======
Weighted average number of common
shares used in computing loss
per share.................................................. 5,803,616 4,480,617 5,799,816 4,418,076
========================= =========== ===========
The attached notes are made a part hereof.
* As Adjusted
3
NOVA TECHNOLOGIES, INC. AND SUBSIDIARY
STATEMENTS OF CASH FLOWS
(Unaudited) Six months ended
June 30,
-----------------------------
1996 1995 *
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Cash flows from operating activities:
Net loss................................................................ ($799,000) ($493,715)
Adjustments to reconcile net loss to net cash
(used in) operating activities:
Depreciation and amortization.......................................... 60,156 41,852
Value assigned to warrants given to employees.......................... 17,982
Common stock issued for professional services rendered................. 11,211
Changes in operating assets and liabilities:
(Increase) in inventories............................................. (151,077) (20,657)
(Increase) in accounts receivable, prepaid expenses
and other assets..................................................... (286,161) (1,954)
(Increase) in restricted cash......................................... (109,500)
Decrease in subscription receivable................................... 90,000
Increase (decrease) in accounts payable and accrued
expenses............................................................. 15,649 (6,513)
Increase in deferred officers' compensation........................... 75,999 76,500
Increase in accrued interest payable.................................. 44,649
---------------------------------
Net cash (used in) operating activities............................. (1,048,074) (386,505)
---------------------------------
Cash flows from investing activities:
Purchase of equipment and capitalized tooling costs..................... (11,808) (27,296)
Cash acquired with acquisition of company............................... 30,771
Costs incurred with acquisition of company.............................. (16,895)
---------------------------------
Net cash provided by (used in) investing activities................. 2,068 (27,296)
---------------------------------
Cash flows from financing activities:
Proceeds from notes payable............................................. 900,000
Proceeds from sale of common stock...................................... 20,000 259,851
Issuance costs incurred in sale of common stock......................... (2,000) (24,535)
Proceeds from exercise of warrants...................................... 99,565
Repayment of notes payable-officers..................................... (115,750)
---------------------------------
Net cash provided by financing activities........................... 802,250 334,881
---------------------------------
(DECREASE) IN CASH AND CASH EQUIVALENTS.................................. (243,756) (78,920)
Cash and cash equivalents at beginning of period......................... 485,819 102,245
---------------------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD............................... $242,063 $23,325
=================================
Supplemental disclosure of cash flow information:
Forgiveness of debt owed to officers.................................. $ 762,852
Value of warrants given in connection with financing.................. $100,800
Issuance of stock for acquisition of company.......................... 1,200,000
Issuance of debt for acquisition of company........................... 1,500,000
The attached notes are made a part hereof.
* As Adjusted
4
NOVA TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AS OF JUNE 30, 1996
(UNAUDITED)
(NOTE A):
- ---------
(1) The accompanying unaudited financial statements contained in the
Form 10-QSB represent condensed consolidated 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.
(2) The consolidated statements include the accounts of Nova
Technologies, Inc. and its wholly-owned subsidiary, Vivax Medical Corp. All
significant intercompany transactions and accounts have been eliminated in
consolidation.
(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 the six months ended June 30, 1996 are
not necessarily indicative of the results of operations for the year ending
December 31, 1996.
(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):
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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:
5
NOVA TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AS OF JUNE 30, 1996
(UNAUDITED)
(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 June 30, 1996, the Company has borrowed the full
amount available 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 became exercisable on a pro rata
basis, as the Company achieved its milestones and made additional borrowings
under the facility. As of June 30, 1996, all 300,000 of such warrants are
exercisable and have been valued at $116,800.
(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 June 30, 1996 the Company had borrowed $250,000 under 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 with Peoples. The Company's chairman
of the board 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
6
NOVA TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AS OF JUNE 30, 1996
(UNAUDITED)
per share. Comed (now Vivax), an LOC Corporation, subsequently distributed the
warrant it received to its two former shareholders after Comed was purchased by
the Company.
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 45,000 shares of common stock at an exercise
price of $2.50 per share. At June 30, 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 June 30, 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.
7
NOVA TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AS OF JUNE 30, 1996
(UNAUDITED)
(NOTE F):
- ---------
At June 30, 1996 the following loans are outstanding:
(a) Notes Payable-Peoples $ 250,000
(b) Notes Payable-Officer 159,250
(c) Notes Payable-Other 1,500,000
(d) Notes Payable-CII 750,000
----------
Total Notes Payable 2,659,250
Current Portion 280,000
----------
Long-term Portion $2,379,250
==========
(a) revolving credit loan maturing September 5, 1997: interest at prime
plus 1 1/2%.
(b) interest at 11% per annum; $30,000 payable on demand; $129,250 payable
July 1, 1997 and subordinated to the borrowings under the Peoples and CII loan
facilities. Two officers received permission from Peoples and CII to substitute
deferred compensation aggregating $145,750 due them for an equal amount of
subordinated notes payable. Payments aggregating $115,750 in April 1996 and
$30,000 in July 1996 were made to the officers reducing the amount owed to them
under the notes payable.
(c) comprised of a $750,000 promissory note maturing on July 1, 1997 and a
$750,000 promissory note payable over three years, commencing in 1998, with
principal installments dependant on future operating results of an acquired
business; both notes bear interest at 8% per annum and are secured by certain
inventory, equipment and technology.
(d) matures on September 5, 2001, with interest payable semi-annually at
10% per annum commencing on September 5, 1998.
(NOTE G):
- ---------
Three officers have agreed to defer until July 1, 1997, payment of salaries
due them aggregating $162,082 and payment of interest on deferred compensation
due them aggregating $4,388. Deferred salaries of two officers, aggregating
$145,750 are subordinated to borrowings under Peoples and CII loan facilities.
Three directors have agreed to defer payment of accrued director's fees until
July 1, 1997 aggregating $16,250.
(NOTE H):
- ---------
On June 14, 1996 the Company, through a wholly-owned acquisition
corporation, acquired all of the outstanding capital stock of Comed Systems,
Inc., ("Comed") in exchange for 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 July 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
8
NOVA TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AS OF JUNE 30, 1996
(UNAUDITED)
percent of Comed's operating income (as defined). The transaction was accounted
for as a purchase; therefore the results of operations for Comed were included
in the accompanying financial statements since the date of acquisition. The cost
of the acquisition has been allocated to the fair market value of the assets
acquired and liabilities assumed and resulted in goodwill of approximately
$2,000,000.
(NOTE I):
- ---------
On July 15, 1996 the Company borrowed $250,000 under a Promissory Note due
October 14, 1996 with interest at 10% per annum. The loan is secured by 250,000
shares of the Company's unregistered common stock.
9
Item 6. 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 units and in June
1994, the Company shipped the first order of Novabed units since its inception
and recorded sales of $233,000 in the year ended December 31, 1994 and sales of
$220,000 in the year ended December 31, 1995.
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 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 which exceeded their
aggregate minimum purchase requirements by 5 units. In 1995, the Company sold
and shipped 13 Novabeds and 8 wheelchairs to six of its 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 Novabeds were produced.
Through the first quarter of 1995, the Company produced a number of the
components of the Novabed 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
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 agreement with Connecticut Innovations, Inc. ("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
10
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 the
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. In July, the Company shipped one unit
to a hospital and one wheelchair to a distributor. The distributors have not
ordered a pro rata portion of their 1996 minimums.
On June 14, 1996, the Company, through a wholly owned acquisition
corporation i.e. Vivax Medical Corp. ("Vivax") acquired all of the outstanding
capital stock of Comed Systems, Inc. ("Comed"). The purchase price of $3,000,000
was valued pursuant to the agreement and consisted of 600,000 shares of the
Company's common stock valued at $1,500,000, and two $750,000 promissory notes.
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 positive impact on
revenues, income and the Company's margin.
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 1996 COMPARED TO THREE MONTHS ENDED JUNE 30,
1995.
In the three months ended June 30, 1996 the Company recorded sales of
$380,000 and incurred a net loss of $341,000 ($.06 per share) compared to sales
of $28,000 and a net loss, as adjusted, of $250,000 ($.06 per share) in the
three months ended June 30, 1995. The results of this period include the
operations of Vivax for the period from the date it was acquired by the Company,
i.e. June 14, 1996 through June 30, 1996; as a result of the acquisition, the
comparison between 1996 and 1995 periods may not necessarily be meaningful.
The increase in sales of $352,000 is due to the acquisition of Vivax
($174,000) and increased Nova sales ($178,000).Nova incurred a
11
loss for the quarter of $436,000 which was partly offset by a profit in Vivax
for the month of June in the amount of $95,000.
In the quarter ended June 30, 1996 the Company's cost of sales exceeded its
sales and the Company sustained a gross loss of $27,000 compared to a gross loss
of $77,000 in the quarter ended June 30, 1995. The Vivax division's gross profit
of $141,000 was offset by a $168,000 gross loss in the Nova division. In
September 1995, the Nova division 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 Nova division to meet its manufacturing requirements and
sales objectives despite its new policy of subcontracting the manufacture of
more of the components that go into a Novabed. Manufacturing overhead in the
second quarter increased $138,000 from $82,000 in 1995 to $220,000 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.
Manufacturing in the original facility was shut down at the end of June 1996 and
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 division will be able to achieve such satisfactory production and sales
levels.
Research and development expenses increased $25,000 from $60,000 (as
adjusted for salary accruals) in the second quarter of 1995 to $85,000 in the
comparable 1996 quarter. The increase is attributable to a $5,500 increase in an
officer's salary rate for the quarter and increased wages devoted to research
and development efforts in the second quarter of 1996.
General, administrative, marketing and consulting expenses increased
$81,000 from $114,000 (as adjusted for salary accruals) in the first quarter of
1995 to $195,000 in the comparable 1996 quarter. The increase is attributable to
an $11,000 increase in an officer's salary rate for the quarter and increases of
approximately $23,000 in legal, accounting and miscellaneous expenses. In
addition, Vivax expenses for the period aggregated $38,000 and $9,000 was
attributable to the amortization of goodwill incurred in connection with the
acquisition of Comed.
Interest expense increased $43,000 from $1,000 in 1995 to $44,000 in 1996,
of which $31,000 is attributable to interest on new debt and amortization of
financing costs incurred in the 1995 Financing and $5,000 is attributable to
interest on notes payable issued in conjunction with the acquisition of Comed.
In addition, in the second quarter of 1996 two officers, who earned interest
aggregating $7,000 on debt due them, waived the accrual of interest on debt due
them in the comparable 1995 quarter.
As a result of common stock sales in 1995 the weighted average number of
common shares used in computing loss per share for the
12
second quarter increased from 4,480,617 at June 30, 1995 to 5,803,616 at June
30, 1996 and for the six months from 4,418,076 to 5,799,816 .
SIX MONTHS ENDED JUNE 30, 1996 COMPARED TO SIX MONTHS ENDED JUNE 30, 1995.
In the six months ended June 30, 1996 the Company recorded sales of
$463,000 and incurred a net loss of $799,000 ($.14 per share) compared to sales
of $148,000 and a net loss, as adjusted, of $494,000 ($.11 per share) in the six
months ended June 30, 1995.
The increase in sales of $315,000 is due to the acquisition of Vivax
($174,000) and increased Nova sales ($141,000).
In the six months ended June 30, 1996 the Company's cost of sales exceeded
its sales and the Company sustained a gross loss of $247,000 compared to a gross
loss of $128,000 in the six months ended June 30, 1995. The Vivax division's
gross profit of $141,000 was offset by a gross loss of $388,000 in the Nova
division. In September 1995, the Nova division opened its new 28,000 square foot
manufacturing facility in conjunction with the completion of the 1995 Financing.
The new manufacturing facility was necessary to enable the Nova division to meet
its manufacturing requirements and sales objectives despite its new policy of
subcontracting the manufacture of more of the components that go into a Novabed.
Manufacturing overhead in the first half increased $271,000 from $175,000 in
1995 to $446,000 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. Manufacturing in the original facility was shut down at the
end of June 1996 and 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 $39,000 from $127,000 (as
adjusted for salary accruals) in the first half of 1995 to $166,000 in the
comparable 1996 half. The increase is attributable to an $11,000 increase in an
officer's salary rate for the half and increased wages devoted to research and
development efforts in the six months ended June 30, 1996.
General, administrative, marketing and consulting expenses increased
$107,000 from $240,000 (as adjusted for salary accruals) in the first half of
1995 to $347,000 in the comparable 1996 half. The increase is attributable to an
$21,000 increase in an officer's salary rate for the half, an increase of
approximately $24,000 in legal and accounting expenses and greater travel and
entertainment expenses in connection with marketing and public relations. In
addition, Vivax expenses for the period aggregated $38,000 and $9,000 was
attributable to the amortization of goodwill incurred in connection with the
acquisition of Comed.
13
Interest expense increased $70,000 from $1,000 in 1995 to $71,000 in 1996,
of which $48,000 is attributable to interest on new debt and amortization of
financing costs incurred in the 1995 Financing and $5,000 is attributable to
interest on notes payable issued in conjunction with the acquisition of Comed.
In addition, in the first half of 1996 two officers, who earned interest
aggregating $16,000 on debt due them, waived the accrual of interest on debt due
them in the comparable 1995 half. Interest and other income in the first half of
1996 increased to $32,000 from $3,000 in 1995 due to increased interest income
on larger balances available for investment in money market securities and local
employment incentive payments.
LIQUIDITY AND CAPITAL RESOURCES
During the first half of 1996 the Company used net cash in operating
activities aggregating $1,048,000 compared to $387,000 in the prior year's six
month period. In the month of June 1996, after the acquisition of Comed, Vivax
provided $36,000 to operating activities. 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 $12,000 compared to
$27,000 in the prior year. In the first half of 1996 the Company received
proceeds of $900,000 from borrowing under the 1995 Financing, net proceeds of
$18,000 from the sale of common stock and repaid officers loans aggregating
$115,750 pursuant to an amendment to a subordinated loan agreement in the 1995
Financing permitting the substitution of deferred compensation as security for
notes payable.
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 was 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. 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 Company, since its inception through December 31, 1993 has utilized the
issuance of shares of Common Stock as a source of working
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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. In the six months ended June 30, 1996 the
Company issued 8,100 shares in payment of professional fees aggregating $9,000
and 2,000 shares in payment of finder's fees aggregating $2,200.
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 restricted Common Stock at a price of $1.11 per
share.
2. $1,000,000 loan facility from the People's Bank ("People's") 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 loan in such cash collateral
account. This loan bears interest at People's 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 Connecticut Development Authority
("CDA") and the $200,000 loan from the Department of Economic and
Community Development ("DECD") had been fully funded, People's agreed to
waive such conditions because the Company temporarily deferred the
purchase of capital equipment to be purchased with 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 available borrowing under the
People's 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
15
property, 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 and 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 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 300,000 shares have been
valued at $116,800 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. The 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 repay $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. ("Innovative") and Advanced
Therapeutics, Inc. ("Advanced"), three of the Company's
16
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 the 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
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, its two former shareholders.
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 the 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 June 30, 1996 the Company
(including the Vivax acquisition) had a net worth of $1,115,000, working capital
of $630,000, including unrestricted cash of $242,000, accounts receivable of
$503,000 and inventory aggregating $685,000. At June 30, 1995, the Company had a
capital deficiency of $22,000, working capital of $67,000, including cash of
$23,000, accounts receivable of $1,000 and inventory aggregating $227,000. 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 1995 and at June 30, 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 quantities
17
of Novabed 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 prepaid 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 City 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 End of Each Quarter
During the Period During the Period
Ending September Commencing October 1,
30, 1996 1996 and Thereafter
------------------- ---------------------
Min. Working Capital $500,000 $700,000
Min. Current Ratio 1.50 to 1.00 1.75 to 1.00
Min. Capital Funds $700,000 $1,300,000
Max. Unsubord.Debt Ratio 2.00 to 1.00 2.50 to 1.00
For purposes of the agreement, "Working Capital" is defined as
18
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
(other than goodwill) 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 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 a failure 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 July 1, 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, the former
shareholders of Comed, which are guaranteed by the Company. The first note bears
interest at the rate of 8%, payable at maturity. The maturity date of the note
has been extended from June 14, 1997 to July 1, 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 calendar quarter ending December 31, 1997, in an amount
equal to the lesser of (i) $37,000 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, Comed (now Vivax) posted an
irrevocable letter of credit to People's Bank on behalf of Nova for $200,000
which expires in September 1996. 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
("TimeCapital"). 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
19
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 losses and the need for additional financing for commercial
exploitation of its product. The Company estimates that it will need to obtain
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 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.
20
PART II. OTHER INFORMATION
-----------------
Not Applicable
21
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.
(Registrant)
August 19, 1996 By:/s/ Stephen M. Fisher
------------------------------------
President
August 19, 1996 By:/s/ Harold J. Lash
------------------------------------
Harold J. Lash
Controller and Chief
Accounting Officer
22