1
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
FORM 10-QSB
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934.
For the quarterly period ended March 31, 1999
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934.
For the transition period from __________, 19__, to __________, 19__.
Commission File Number 0-29746
CUSIP NUMBER ___________
INNOVA PURE WATER, INC.
(Exact Name of Registrant as Specified in Charter)
Florida 59-2567034
------- ----------
(State or Other Jurisdiction of (I.R.S. Employer Identification Number)
Incorporation or Organization)
13130 56th Court, Suite 604, Clearwater, Florida 33760
------------------------------------------------------
(Address of Principal Executive Offices, Including Zip Code)
(727) 572-1000
--------------
(Registrant's Telephone Number, Including Area Code)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and has been subject to such
filing requirements for the past 90 days.
X YES NO
----- -----
There were 10,076,971 shares of the Registrant's $.0001 par value common stock
as of March 31, 1999.
Transitional Small Business Format (check one) Yes No
----- -----
2
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
3
FINANCIAL STATEMENTS
INNOVA PURE WATER, INC.
Nine Months Ended March 31, 1999 and 1998
(Unaudited)
4
Innova Pure Water, Inc.
Financial Statements
Nine Months Ended March 31, 1999 and 1998
(Unaudited)
CONTENTS
Financial Statements:
Balance Sheet for March 31, 1999 (Unaudited)...................................................1
Statements of Operations for the three and nine months ended
March 31, 1999 and 1998 (Unaudited)........................................................2
Statement of Changes in Stockholders' Equity for the nine months
ended March 31, 1999 (Unaudited)...........................................................3
Statements of Cash Flows for the nine months ended
March 31, 1999 and 1998 (Unaudited)......................................................4-5
Notes to Financial Statements...............................................................6-19
5
Innova Pure Water, Inc.
Balance Sheet
March 31, 1999
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 901,000
Accounts receivable, trade, net of allowance for
doubtful accounts of $8,800 191,000
Other receivables, related parties 75,100
Inventories 136,700
Other current assets 19,700
-----------
Total current assets 1,323,500
Property and equipment, net 198,100
Other assets 225,800
-----------
$ 1,747,400
===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable, trade $ 86,800
Accrued expenses 57,100
Current portion of obligations under capital leases 3,600
Current portion of long-term debt 6,500
-----------
Total current liabilities 154,000
-----------
Long-term liabilities:
Obligations under capital leases, net of current portion 7,400
Long-term debt, net of current portion 15,100
-----------
Total long-term liabilities 22,500
-----------
Stockholders' equity:
Preferred stock; $.001 par value; 2,000,000 shares authorized;
0 shares issued and outstanding 0
Common stock; $.0001 par value; 50,000,000 shares authorized;
10,076,971 shares issued and outstanding 1,000
Capital in excess of par value 8,001,300
Accumulated deficit (6,431,400)
-----------
Total stockholders' equity 1,570,900
-----------
$ 1,747,400
===========
The accompanying notes are an integral part of the financial statements.
1
6
Innova Pure Water, Inc.
Statements of Operations
(Unaudited)
Three Months Ended Nine Months Ended
March 31, March 31,
----------------------- --------------------------
1999 1998 1999 1998
------------------------------------------------------
Net sales, related parties $ 379,600 $ 329,000 $ 701,900
Net sales, other $ 667,800 312,800 2,133,300 997,200
------------------------------------------------------
667,800 692,400 2,462,300 1,699,100
Cost of sales 304,000 336,700 1,299,200 750,600
------------------------------------------------------
Gross profit 363,800 355,700 1,163,100 948,500
------------------------------------------------------
Operating expenses:
Selling expenses 20,800 27,900 95,100 120,700
General and administrative expenses 273,600 306,900 891,200 767,200
Research and product development 45,000 22,700 114,600 64,800
------------------------------------------------------
339,400 357,500 1,100,900 952,700
------------------------------------------------------
Net income (loss) from operations 24,400 (1,800) 62,200 (4,200)
------------------------------------------------------
Other income:
Interest, net 9,800 1,900 31,600 11,000
Income, other 2,400 27,400
Gain on disposal of fixed assets 7,600
------------------------------------------------------
12,200 1,900 66,600 11,000
------------------------------------------------------
Net income $ 36,600 $ 100 $ 128,800 $ 6,800
======================================================
Earnings per common share $ .00 $ .00 $ .01 $ .00
======================================================
Earnings per common share,
assuming dilution $ .00 $ .00 $ .01 $ .00
======================================================
The accompanying notes are an integral part of the financial statements.
2
7
Innova Pure Water, Inc.
Statement of Changes in Stockholders' Equity
Nine Months Ended March 31, 1999
(Unaudited)
Common Stock Capital In
-------------------- Excess of Accumulated Treasury
Shares Amount Par Value Deficit Stock
--------------------------------------------------------------
Balance, June 30, 1998 10,064,871 $1,000 $7,980,000 $(6,560,200) $ 5,700
Stock issued for services and
exercised options 12,600 6,200
Stock repurchase (10,000 shares) 3,400
Treasury stock issued for
services (10,000 shares) (3,400)
Compensation for stock
options issued 20,800
Treasury stock retired (500) (5,700) (5,700)
Net income 128,800
-------------------------------------------------------------
Balance, March 31, 1999 10,076,971 $1,000 $8,001,300 $(6,431,400) $ 0
=============================================================
The accompanying notes are an integral part of the financial statements.
3
8
Innova Pure Water, Inc.
Statements of Cash Flows
(Unaudited)
Nine Months Ended
March 31,
------------------------
1999 1998
------------------------
OPERATING ACTIVITIES
Net income $ 128,800 $ 6,800
------------------------
Adjustments to reconcile net income to net cash and cash
equivalents provided by operating activities:
Depreciation and amortization 86,900 56,700
Provision for losses on accounts receivable 5,000
(Gain) loss on disposal of equipment (7,600) 11,300
Compensation expense for stock and stock options 25,700
(Increase) decrease in:
Accounts receivable 637,800 106,400
Inventories 217,400 10,300
Other current assets (2,300) (19,300)
Increase (decrease) in:
Accounts payable, accrued expenses, and
customer deposits (575,200) (37,100)
Deferred revenue 1,000
------------------------
Total adjustments 382,700 134,300
------------------------
Net cash and cash equivalents provided by operating activities 511,500 141,100
------------------------
INVESTING ACTIVITIES
Acquisition of property and equipment (40,600) (123,300)
Acquisition of patents (65,500) (75,500)
Advances to (from) related parties 17,900 (25,800)
------------------------
Net cash and cash equivalents used by investing activities (88,200) (224,600)
------------------------
FINANCING ACTIVITIES
Repurchase of stock (3,400)
Payments on loans (4,500) (25,600)
Payments on capital lease obligations (3,900) (4,200)
Proceeds from warrant sales and issuance of common stock 1,300
------------------------
Net cash and cash equivalents used by financing activities (10,500) (29,800)
------------------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 412,800 (113,300)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 488,200 752,700
------------------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 901,000 $ 639,400
========================
The accompanying notes are an integral part of the financial statements.
4
9
Innova Pure Water, Inc.
Statements of Cash Flows
(Unaudited)
Nine Months Ended
March 31,
------------------------
1999 1998
------------------------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION AND
NONCASH FINANCING ACTIVITIES:
Cash paid for interest $ 2,600 $ 3,700
========================
During the period ended March 31, 1999, the Company re-issued 10,000 shares
of treasury stock to an employee in satisfaction of a previous obligation.
During the period ended March 31, 1998, the Company issued 1,500,000 shares
of common stock in exchange for 11,000,000 outstanding warrants.
The accompanying notes are an integral part of the financial statements.
5
10
Innova Pure Water, Inc.
Notes to Financial Statements
Nine Months Ended March 31, 1999 and 1998
(Unaudited)
1. NATURE OF OPERATIONS
Innova Pure Water, Inc. was incorporated in Florida in 1985 for the purpose of
developing, manufacturing, and marketing proprietary, state-of-the-art
effective and economical in-the-house and portable water purification products.
The corporate headquarters is located in Clearwater, Florida. Sales are to both
wholesale and retail markets throughout the United States, principally on
credit and primarily through strategic alliances, two of which are billion
dollar companies. Sales are also made to distributors in several foreign
countries. Significant revenues are also generated by direct television
marketing.
For the nine months ended March 31, 1999 and 1998, sales to two customers and
one customer amounted to approximately 90 and 44 percent of net sales,
respectively. Sales to one customer and three customers for the three months
ended March 31, 1999 and 1998 amounted to approximately 93 and 85 percent of
net sales, respectively. Accounts receivable from these customers amounted to
approximately $190,000 at March 31, 1999.
For the nine months ended March 31, 1999 and 1998, sales to foreign customers
(all transacted in U.S. dollars) amounted to approximately 7 and 15 percent of
net sales to unaffiliated customers, respectively. For the three months ended
March 31, 1999 and 1998, sales to foreign customers amounted to approximately 2
and 7 percent of net sales to unaffiliated customers, respectively. These sales
were made to customers in various locations as follows:
Three Months Nine Months
Ended March 31, Ended March 31,
---------------------- -----------------------
1999 1998 1999 1998
---------------------------------------------------
Brazil $ 500
Japan 72,800 $ 77,000
New Zealand $ 5,900 $ 13,400 20,900 30,800
Australia 11,300
England 7,600 7,800 17,000
Other 5,800 40,700 14,000
---------------------------------------------------
$ 11,700 $ 21,000 $142,700 $150,100
===================================================
6
11
Innova Pure Water, Inc.
Notes to Financial Statements
Nine Months Ended March 31, 1999 and 1998
(Unaudited)
1. NATURE OF OPERATIONS (CONTINUED)
On July 21, 1997, the Company entered into a strategic alliance which includes
manufacturing, developing, marketing, and distributing provisions with
Rubbermaid Incorporated(R) ("Rubbermaid"). This agreement grants Rubbermaid
certain rights to the products and technology of the Company as well as to
market and distribute certain products throughout the United States and
specific other countries during the term of the agreement. The Company also
granted Rubbermaid the non-exclusive right to market and distribute certain
products throughout the rest of the world with the exception of specific
products and/or markets reserved under pre-existing agreements under other
strategic alliances. In addition to the product price, the agreement calls for
a limited price adjustment of $.10 per unit for the first ten million units of
product purchased by Rubbermaid. On termination of the agreement, the Company
is entitled to a minimum of $500,000 less any limited price adjustments already
paid. Included in net sales for the three months ended March 31, 1999 and 1998
are approximately $57,100 and $11,000, respectively, of revenues relating to
this limited price adjustment. Included in net sales for the nine months ended
March 31, 1999 and 1998 are approximately $140,600 and $11,000, respectively,
of revenues relating to this limited price adjustment.
The Company currently holds numerous patents in the field of water treatment
and has additional domestic and foreign patents pending. The Company pursues an
aggressive product development program with the goal to provide its strategic
partners with unique competitive advantages.
2. SIGNIFICANT ACCOUNTING POLICIES
The significant accounting policies followed are:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ
from those estimates.
7
12
Innova Pure Water, Inc.
Notes to Financial Statements
Nine Months Ended March 31, 1999 and 1998
(Unaudited)
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
In the opinion of management, all adjustments consisting only of normal
recurring adjustments necessary for a fair statement of (a) the results
of operations for the nine and three month periods ended March 31, 1999
and 1998, (b) the financial position at March 31, 1999, and (c) cash
flows for the nine month periods ended March 31, 1999 and 1998, have
been made.
Cash and cash equivalents consist of checking and operating accounts.
The cash deposits are with a single financial institution and are in
excess of the Federal Deposit Insurance Corporation's insurance
coverage limit of $100,000 at March 31, 1999.
The Company extends credit to its various customers based on the
customer's ability to pay. Based on management's review of accounts
receivable, the allowance for doubtful accounts of $8,800 is considered
to be adequate.
Inventory is stated at the lower of cost, determined by the first-in,
first-out method, or market.
Property and equipment are recorded at cost. Depreciation is calculated
by the straight-line method over the estimated useful lives of the
assets, ranging generally from three to ten years. Additions to and
major improvements of property and equipment are capitalized. Repair
and maintenance expenditures are charged to expense as incurred. As
property or equipment is sold or retired, the applicable cost and
accumulated depreciation are eliminated from the accounts and any gain
or loss is recorded.
When the Company has long-lived assets which have a possible impairment
indicator, the Company estimates the future cash flows from the
operation of these assets. If the estimated cash flows recoup the
recorded value of the assets, they remain on the books at that value.
If the net recorded value cannot be recovered, the assets are written
down to their fair market value if lower than the recorded value.
Deferred tax assets and liabilities are recognized for the estimated
future tax consequences attributable to differences between the
financial statements carrying amounts of existing assets and
liabilities and their respective income tax bases. Deferred tax assets
and liabilities are measured using enacted tax rates expected to apply
to taxable income in the years in which those temporary differences are
expected to be recovered or settled. The effect on deferred tax assets
and liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date.
8
13
Innova Pure Water, Inc.
Notes to Financial Statements
Nine Months Ended March 31, 1999 and 1998
(Unaudited)
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Intangible assets which are included in other assets in the
accompanying financial statements are being amortized over their
estimated useful life of five years.
The Company recognizes revenue at the time products are shipped. Any
deposits received in advance of product shipment are reflected as
liabilities until the products are shipped.
Advertising costs are charged to operations as incurred. Approximately
$2,000 of advertising expense was charged to operations for the nine
months ended March 31, 1999 and 1998. There were no advertising costs
for the three months ended March 31, 1999 and 1998.
The Financial Accounting Standards Board issued Statement 123 (SFAS
123), Accounting for Stock-Based Compensation, which provides that
expense equal to the fair value of all stock-based awards on the date
of the grant be recognized over the service period. Alternatively, this
statement allows entities to continue to apply the provisions of
Accounting Principles Board Opinion No. 25, Accounting for Stock Issued
to Employees, whereby compensation expense is recorded on the date the
options are granted equal to the excess of the market price of the
underlying stock over the exercise price. The Company has elected to
continue to apply the provisions of APB Opinion No. 25 and provide pro
forma disclosure of the provisions of SFAS 123. Under APB Opinion No.
25, the Company recorded $25,700 and $0 of compensation expense for the
nine months ended March 31, 1999 and 1998, respectively. The Company
recorded $10,400 and $0 compensation expense for the three months ended
March 31, 1999 and 1998, respectively.
During the year ended June 30, 1998, the Company adopted Statement of
Financial Accounting Standards No. 128 (SFAS 128), "Earnings per
Share." This statement requires dual presentation of basic and diluted
earnings per share (EPS) for complex capital structures on the face of
the income statement. Basic EPS is computed by dividing income
available to common shareholders by the weighted average number of
common shares outstanding for the period. Diluted EPS reflects the
potential dilution from the exercise or conversion of securities, such
as stock options and warrants, into common stock.
The Company records shares of common stock as outstanding at the time
the Company becomes contractually obligated to issue shares.
9
14
Innova Pure Water, Inc.
Notes to Financial Statements
Nine Months Ended March 31, 1999 and 1998
(Unaudited)
3. INVENTORIES
Inventories at March 31, 1999 consist of:
Raw materials $125,000
Finished goods 5,600
Work in process 6,100
--------
$136,700
========
4. PROPERTY AND EQUIPMENT
Property and equipment at March 31, 1999 consist of:
Tooling $309,600
Machinery and equipment 374,600
Vehicles 32,900
Equipment under capital lease 25,500
--------
742,600
Less:
Accumulated depreciation 533,900
Accumulated depreciation on equipment under capital lease 10,600
--------
$198,100
========
5. RELATED PARTY TRANSACTIONS AND COMMITMENTS
The Company entered into an employment agreement with its President and Chief
Executive Officer effective June 30, 1997, which provides for her employment
for a five-year term ending June 29, 2002. Under the agreement, she is to
receive a base salary of $150,000 per year as well as a bonus of two percent of
net sales of the Company, adjusted by the annual gross margin achieved. For the
nine months ended March 31, 1999 and 1998, respectively, bonuses earned under
the agreement amounted to approximately $46,500 and $33,500. For the three
months ended March 31, 1999 and 1998, respectively, bonuses earned amounted to
approximately $12,300 and $14,000. The agreement contains a restrictive
covenant not to compete for the term of the agreement and for five years
following termination of service without cause. The agreement provides for
severance payments equal to 200 percent of the annual base compensation due
under the agreement in the event there is a "change of control" of the Company,
as defined therein, and she is subsequently terminated without cause.
10
15
Innova Pure Water, Inc.
Notes to Financial Statements
Nine Months Ended March 31, 1999 and 1998
(Unaudited)
5. RELATED PARTY TRANSACTIONS AND COMMITMENTS (CONTINUED)
The Company has been assigned the rights to certain patents owned by the
majority stockholder of the Company who is also the Chairman of the Board of
Directors of the Company. The costs of maintaining these patents are included
in other assets at March 31, 1999 and amount to approximately $225,800. The
costs are being amortized on a straight-line basis over a five-year period.
Effective June 30, 1997, the Company entered into an agreement with the
Chairman of the Board of Directors expiring on December 31, 2002. This
agreement obligates the Company to pay him, in return for the assignment of his
patent rights, a minimum of $100,000 of royalties per year, with a cap of
$300,000 per year, during the term of his employment. The royalty payments will
be calculated based on five percent of sales of products that incorporate these
assigned patents. Upon his termination, a three percent royalty shall be paid
over the residual life of his patents. In connection with the assignment, the
Company paid $116,500, $75,000, $31,200, and $26,200 to the Chairman for the
nine months ended March 31, 1999 and 1998 and the three months ended March 31,
1999 and 1998, respectively.
The above employment agreement and assignment of rights to patents and royalty
payments are not necessarily indicative of the agreements that would have been
entered into by independent parties.
6. LONG-TERM DEBT
Long-term debt at March 31, 1999 consists of:
Note payable; 7.25% interest; monthly payments of
principal and interest of $652 through April 30,
2002; collateralized by a vehicle $21,600
Less amounts currently due 6,500
-------
$15,100
=======
11
16
Innova Pure Water, Inc.
Notes to Financial Statements
Nine Months Ended March 31, 1999 and 1998
(Unaudited)
6. LONG-TERM DEBT (CONTINUED)
The following is a schedule by year of the principal payments required under
this note as of March 31, 1999:
Year Ending
March 31,
-----------
2000 $ 6,500
2001 7,000
2002 7,500
2003 600
-------
$21,600
=======
7. CAPITAL LEASES
The Company has capitalized a rental obligation under a lease of equipment. The
obligation, which matures in 2002, represents the total present value of future
rental payments discounted at the interest rates implicit in the lease. Future
minimum lease payments under the capital lease are:
Year Ending
March 31,
-----------
2000 $ 4,700
2001 4,700
2002 3,500
-------
Total minimum lease payments 12,900
Less:
Amount representing interest 1,900
Amount currently due 3,600
-------
Present value of net minimum lease payments $ 7,400
=======
8. LEASE COMMITMENTS
The Company rents its operating facilities under a noncancelable operating
lease expiring in March 2003.
12
17
Innova Pure Water, Inc.
Notes to Financial Statements
Nine Months Ended March 31, 1999 and 1998
(Unaudited)
8. LEASE COMMITMENTS (CONTINUED)
The following is a schedule by year of future minimum rental payments required
under this lease as of March 31, 1999:
Year Ending
March 31,
-----------
2000 $123,700
2001 128,600
2002 133,500
2003 138,900
--------
$524,700
========
Rent expense amounted to approximately $89,300 and $57,900 for the nine months
ended March 31, 1999 and 1998, respectively. For the three months ended March
31, 1999 and 1998, rent expense amounted to approximately $29,800 and $19,600,
respectively.
9. INCOME TAXES
The Company has incurred significant operating losses since its inception and,
therefore, no tax liabilities have been incurred for the periods presented.
These operating losses give rise to a deferred tax asset at June 30, 1998 and
are as follows:
Deferred tax asset $ 2,500,000
Allowance (2,500,000)
-----------
$ 0
===========
The Company has available at June 30, 1998 approximately $6.1 million of unused
operating loss carryforwards that may be applied against future taxable income
which would reduce taxes payable by approximately $2.5 million in the future.
These operating loss carryforwards expire beginning in 2001. Due to the
Company's history of operating losses, management has established a valuation
allowance in the full amount of the deferred tax assets arising from these
losses because
13
18
Innova Pure Water, Inc.
Notes to Financial Statements
Nine Months Ended March 31, 1999 and 1998
(Unaudited)
9. INCOME TAXES (CONTINUED)
management believes it is more likely than not that the Company will not
generate sufficient taxable income within the appropriate period to offset
these operating loss carryforwards. Income tax benefits resulting from the
utilization of these carryforwards will be recognized in the year in which they
are realized for federal and state tax purposes.
10. EARNINGS PER SHARE
The following data shows the amounts used in computing earnings per share and
the effect on income and the weighted average number of shares of dilutive
potential common stock:
Three Months Nine Months
Ended March 31, Ended March 31,
--------------------------- --------------------------
1999 1998 1999 1998
---------------------------------------------------------
Net income $ 36,600 $ 100 $ 128,800 $ 6,800
=========================================================
Weighted average number
of common shares used
in basic EPS 10,072,638 9,995,871 10,070,437 9,333,462
Effect of dilutive stock
options and warrants 413,747 29,193 457,478
---------------------------------------------------------
Weighted average number
of common shares and
dilutive potential
common stock used
in diluted EPS 10,072,638 10,409,618 10,099,630 9,790,940
=========================================================
14
19
Innova Pure Water, Inc.
Notes to Financial Statements
Nine Months Ended March 31, 1999 and 1998
(Unaudited)
11. EQUITY
Effective October 24, 1996, the Board of Directors authorized 2,000,000 shares
of preferred stock with a par value of $.001 per share. The Board of Directors
is authorized to issue the preferred stock in series and to fix, in the manner
and to the full extent provided and permitted by law, the rights, preferences,
and limitations of each series of preferred stock. At March 31, 1999, no
preferred stock shares were issued or outstanding.
12. STOCK OPTIONS AND WARRANTS
On August 1, 1996, the Company reached an agreement with Innova Holdings, LLC,
a company owned by the Cayre family who also owns the Good Times family of
companies. Good Times has agreed to provide the Company with certain sales and
marketing assistance to sell via direct television, including certain Richard
Simmons promotions. In connection with this agreement, the Company was paid
$500,000 for warrants for the right to purchase 11,000,000 shares of common
stock. The warrants, which were non-dilutive, had the following exercise prices
and expiration dates:
3,300,000 shares at an exercise price of $.40 per share expiring
October 31, 1997;
3,300,000 shares at an exercise price of $.75 per share expiring
October 31, 1998; and
4,400,000 shares at an exercise price of $1.00 per share expiring
October 31, 1999.
On October 30, 1997, the Company entered into a stock purchase agreement with
Innova Holdings, LLC. In connection with this agreement, the Company issued
1,500,000 shares of its common stock to Innova Holdings, LLC in exchange for
the surrender of these warrants to purchase 11,000,000 shares of the Company's
common stock. The 1,500,000 shares issued cannot be sold, transferred,
assigned, or pledged for a two-year period beginning October 30, 1997.
During the year ended June 30, 1997, the Company reserved 750,000 common shares
for issuance under the Company's 1996 incentive stock plan. During the year
ended June 30, 1998, 715,000 stock options, net of forfeitures, were granted
under this plan at an exercise price of $.50 per share. The options vest over a
three-year period beginning July 1, 1998 and expire on June 30, 2001.
Additionally, the Company has an incentive stock option plan for key employees
and advisory members. The plan allows stock options to be granted to officers,
employees, directors, and members of the technical and marketing advisory
boards of the Company.
15
20
Innova Pure Water, Inc.
Notes to Financial Statements
Nine Months Ended March 31, 1999 and 1998
(Unaudited)
12. STOCK OPTIONS AND WARRANTS (CONTINUED)
The following is a summary of stock option activity:
Directors, Technical
Advisory Board, and
Marketing Advisory Board 1996 Incentive
Stock Option Plan Stock Option Plan
------------------------ ----------------------
Weighted Weighted
Average Average
Number Exercise Number Exercise
of Shares Price of Shares Price
--------------------------------------------------
Options granted and outstanding,
June 30, 1998 108,500 $.50 715,000 $.50
Options expired during the period (100,000)
Options exercised during the period
(at a price of $.50 per share) (2,600) .50
-----------------------------------------------
Options granted and outstanding,
March 31, 1998 8,500 $.50 712,400 $.50
===============================================
The following table summarizes the status of options outstanding at March 31,
1999:
Outstanding Options Exercisable Options
-------------------------------- ---------------------------
Weighted Weighted
Average Average
Remaining Remaining
Exercise Contractual Contractual
Price Number Life Number Life
--------------------------------------------------------------
1996 Incentive Stock
Option Plan $.50 712,400 2.25 235,733 2.25
Directors, Technical Advisory
Board, and Marketing
Advisory Board $.50 8,500 .65 8,500 .65
-------- --------
720,900 244,233
======== ========
In addition to the above, the Company has outstanding at March 31, 1999
warrants to purchase 250,000 shares of the Company's common stock at a price of
$.50 per share. The warrants are exercisable at any time through August 15,
2001, at which time the warrants expire. At March 31, 1999, 250,000 shares of
the Company's common stock have been reserved for issuance under these
warrants.
16
21
Innova Pure Water, Inc.
Notes to Financial Statements
Nine Months Ended March 31, 1999 and 1998
(Unaudited)
12. STOCK OPTIONS AND WARRANTS (CONTINUED)
SFAS 123 requires disclosure of pro forma net income as if the fair value based
method had been applied in measuring compensation costs for common stock
options and warrants granted. Pro forma net income (loss) and net earnings
(loss) per common share are as follows for the nine months ended March 31, 1999
and 1998 and the three months ended March 31, 1999 and 1998:
Three Months Nine Months
Ended March 31, Ended March 31,
------------------------- ------------------------
1999 1998 1999 1998
------------------------------------------------------
As reported:
Net income $ 36,600 $ 100 $ 128,800 $ 6,800
======================================================
Basic earnings per
common share $ .00 $ .00 $ .01 $ .00
======================================================
Diluted earnings per
common share $ .00 $ .00 $ .01 $ .00
======================================================
Pro forma:
Net income (loss) $ 15,700 $ (32,700) $ 22,800 $ (41,300)
======================================================
Basic (loss) income per
common share $ .00 $ .00 $ .00 $ .00
======================================================
Diluted (loss) income
per common share $ .00 $ .00 $ .00 $ .00
======================================================
The weighted average fair value of the options and warrants at their grant
during the year ended June 30, 1998 was $.71. The estimated fair value of each
option and warrant granted is calculated using the Black-Scholes option-pricing
model. The following summarizes the weighted average of the assumptions used in
the model:
Risk-free interest rate 5.78%
Expected years until exercise 4.0
Expected dividend yield .00
Estimated fair market value of underlying stock $ .79
17
22
Innova Pure Water, Inc.
Notes to Financial Statements
Nine Months Ended March 31, 1999 and 1998
(Unaudited)
13. CONTINGENCY
The Company is the plaintiff in a patent infringement and unfair competition
lawsuit entitled Innova/Pure Water, Inc. v. Aladdin Sales & Marketing, Inc.,
Filtex USA, Ltd., ACT Marketing, Inc., ACT Marketing, Ltd., Advanced Consumer
Technologies, Inc., and Robert Luzenberg, Case No. 97-924-Civ-T-25D (M.D.
Fla.). The Company claimed patent infringement and false advertising on the
part of the Defendants. Prior to trial, the Company resolved the false
advertising claims on terms deemed favorable to the Company by management,
receiving a cash settlement and an agreement that future statements and claims
would only present factual information. On October 7, 1998, the Court entered a
summary judgment ruling that the defendants did not infringe the Company's
patent. The Company has appealed the lower court's ruling to the United States
Court of Appeals for the Federal Circuit in Washington, D.C. The Company has
received an opinion of patent counsel that there is a "high probability" that
the lower court's ruling will be overturned and that the Filtex products will
be held to be an infringement of the Company's patent. Resolution of the
Company's appeal may take between six months and a year.
The Company was the defendant in a lawsuit filed by a former employee who
alleged breach of his employment contract. The case was Alan R. Kelley v.
Innova Pure Water, Inc., Pinellas County Circuit Court Case No. 98-2771-C1-007.
The plaintiff was seeking severance pay, bonus pay, stock options, and attorney
fees. In April 1999, the Company and the former employee reached a settlement
agreement. In accordance with the settlement agreement, the Company paid Mr.
Kelley $35,000 and issued him options to purchase 100,000 shares of the
Company's common stock at an exercise price of $.50 per share. The options
expire in April 2009.
14. YEAR 2000
The "Year 2000" issue is the result of computer programs being written using
two digits rather than four to define the applicable year. Programs with this
problem may recognize a date using "00" as the year 1900 rather than the year
2000, resulting in system failures or miscalculations. Given this uncertainty,
the Company has recognized the need to remain vigilant in its Year 2000
18
23
Innova Pure Water, Inc.
Notes to Financial Statements
Nine Months Ended March 31, 1999 and 1998
(Unaudited)
14. YEAR 2000 (CONTINUED)
analysis. During the year ended June 30, 1998, the Company replaced all
non-compliant systems with updated hardware and software at a cost of
approximately $20,000. The Company does not anticipate any further costs to
make existing systems compliant. In addition, the Company is in the process of
assessing the Year 2000 readiness of its key suppliers and customers. This
assessment is expected to be completed by June 30, 1999. The Company has not
established a contingency plan with respect to the Year 2000 issue. Although
the Company believes that any changing conditions will not create any
unforeseen Year 2000 problems, they will continue to review the Company's Year
2000 status on a quarterly basis.
19
24
PART I - FINANCIAL INFORMATION
ITEM 2 - MANAGEMENT'S DISCUSSION
AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
25
INNOVA PURE WATER, INC.
ITEM 2 - MANAGEMENT'S DISCUSSION AND
ANALYSIS OR PLAN OF OPERATION
THIS REGISTRATION STATEMENT CONTAINS FORWARD-LOOKING STATEMENTS. THE WORDS
"ANTICIPATED," "BELIEVE," "EXPECT," "PLAN," "INTEND," "SEEK," "ESTIMATE,"
"PROJECT," "WILL," "COULD," "MAY," AND SIMILAR EXPRESSIONS ARE INTENDED TO
IDENTIFY FORWARD-LOOKING STATEMENTS. THESE STATEMENTS INCLUDE, AMONG OTHERS,
INFORMATION REGARDING FUTURE OPERATIONS, FUTURE CAPITAL EXPENDITURES, AND
FUTURE NET CASH FLOW. SUCH STATEMENTS REFLECT THE COMPANY'S CURRENT VIEWS WITH
RESPECT TO FUTURE EVENTS AND FINANCIAL PERFORMANCE AND INVOLVE RISKS AND
UNCERTAINTIES, INCLUDING, WITHOUT LIMITATION, GENERAL ECONOMIC AND BUSINESS
CONDITIONS, CHANGES IN FOREIGN, POLITICAL, SOCIAL, AND ECONOMIC CONDITIONS,
REGULATORY INITIATIVES AND COMPLIANCE WITH GOVERNMENTAL REGULATIONS, THE
ABILITY TO ACHIEVE FURTHER MARKET PENETRATION AND ADDITIONAL CUSTOMERS, AND
VARIOUS OTHER MATTERS, MANY OF WHICH ARE BEYOND THE COMPANY'S CONTROL,
INCLUDING, WITHOUT LIMITATION, THE RISKS DESCRIBED UNDER THE CAPTION
"BUSINESS." SHOULD ONE OR MORE OF THESE RISKS OR UNCERTAINTIES OCCUR, OR SHOULD
UNDERLYING ASSUMPTIONS PROVE TO BE INCORRECT, ACTUAL RESULTS MAY VARY
MATERIALLY AND ADVERSELY FROM THOSE ANTICIPATED, BELIEVED, ESTIMATED, OR
OTHERWISE INDICATED. CONSEQUENTLY, ALL OF THE FORWARD-LOOKING STATEMENTS MADE
IN THIS REGISTRATION STATEMENT ARE QUALIFIED BY THESE CAUTIONARY STATEMENTS AND
THERE CAN BE NO ASSURANCE OF THE ACTUAL RESULTS OR DEVELOPMENTS.
Innova cautions readers that in addition to important factors described
elsewhere, the following important facts, among others, sometimes have
affected, and in the future could affect, the Company's actual results, and
could cause the Company's actual results during 1999 and beyond, to differ
materially from those expressed in any forward-looking statements made by, or
on behalf of, Innova.
INCOME STATEMENT DATA
Three Months Ended Nine Months Ended
March 31, March 31,
----------------------------- ----------------------------
1999 1998 1999 1998
---------------------------------------------------------------
Total revenue $ 667,800 $ 692,400 $ 2,462,300 $ 1,699,100
===============================================================
Net income $ 36,600 $ 100 $ 128,800 $ 6,800
===============================================================
Earnings per common share
- basic $ .00 $ .00 $ .01 $ .00
===============================================================
Shares used in per share
computation 10,072,638 9,995,871 10,070,437 9,333,462
===============================================================
Earnings per common share
- assuming dilution $ .00 $ .00 $ .01 $ .00
===============================================================
Shares used in diluted
computation 10,072,638 10,409,618 10,099,630 9,790,940
===============================================================
26
BALANCE SHEET DATA
March 31,
1999
----------
Total assets $1,747,400
Working capital $1,169,500
Long-term debt $ 22,500
Stockholders' equity $1,570,900
Year 2000
The "Year 2000" issue is the result of computer programs being written using
two digits rather than four to define the applicable year. Programs with this
problem may recognize a date using "00" as the year 1900 rather than the Year
2000, resulting in system failures or miscalculations. Given this uncertainty,
the Company has recognized the need to remain vigilant in its Year 2000
analysis.
The Company has analyzed its information technology systems ("IT") and has
replaced all non-compliance systems with updated hardware and software that is
Year 2000 compliant. The costs to replace the existing hardware and software
amounted to approximately $20,000, with $10,000 each relating to hardware and
software. Funds expended to replace existing hardware and software were
generated from the Company's operations. The Company does not anticipate any
further costs to be spent on hardware and software compliance. The Company does
not employ any equipment that contains microchips or that is computer
controlled and, therefore, believes that the Year 2000 issue will not affect
the Company's non-IT systems.
The Company is currently in the process of assessing the Year 2000 readiness of
its key suppliers and customers. With respect to suppliers, the Company has
only four to six major suppliers, each of whom have been sent a Year 2000
screening memorandum. Concurrently, the Company is soliciting potential
alternate competitive suppliers that are Year 2000 compliant. The Company plans
to complete its assessment of suppliers by June 30, 1999. Should any current
supplier not be able to prove their compliance by that time, the Company will
switch to an alternate compliant supplier. With respect to customers, the
Company has had conversations with its customers and formal information forms
have or will be sent to ascertain each customer's state of compliance and to
assess their condition upon the Company's continuing business.
In addition, the Company is aware of the potential for claims against it and
other companies for damages arising from products and services that were not
Year 2000 ready. Currently, there are no performance contracts in existence. In
addition, the Company has retained the right to provide notification upon order
receipt that the order requirements cannot be met. Such notification may be
provided if within 30 to 60 days of shipment date. Therefore, the Company
believes that there will be no significant claims against it arising from the
Year 2000 issue.
The Company has not established a formal contingency plan with respect to the
Year 2000 issue. This is due to the fact that, at this time, the Company does
not know of any scenarios that, as a result of the Year 2000 issue, would
seriously impact the business except the possibility of failure to receive
timely payments from major customers. The Company has established direct
personal relationships with the key personnel at each of these major customers
with the
27
capability of directly releasing such funds as may be due to the Company. The
Company does not anticipate any lost revenue due to Year 2000 issue. Although
the Company believes that any changing conditions will not create any
unforeseen Year 2000 problems, we will continue to review the Company's Year
2000 status on a quarterly basis.
RESULTS OF OPERATIONS
Net Sales
Net sales for the three-month period ended March 31, 1999 were $667,800, a four
percent decrease from the $692,400 of net sales for the comparable period in
1998. The majority of this decrease is attributable to decreased sales to a
customer who had ran a promotional sales program during the third quarter ended
March 31, 1998.
Net sales for the nine-month period ended March 31, 1999 were $2,462,300, a 45
percent increase over the $1,699,100 of net sales for the comparable period in
1998. Much of this increase is attributable to sales to Rubbermaid under our
strategic alliance.
Cost of Sales
For the three months ended March 31, 1999, our cost of sales were $304,000 as
compared to the $336,700 of costs for the three months ended March 31, 1998.
The decrease in cost of sales, combined with the four percent decrease in net
sales, resulted in an increased gross profit margin to 54 percent from 51
percent. This principally is attributable to a change in product mix with
increased sales of higher margin items.
For the nine months ended March 31, 1999, the cost of sales increased to
$1,299,200 from the $750,600 of costs for the nine months ended March 31, 1998.
This increase is mainly due to the increase in sales volume, as well as
investment in new facilities and increased production capabilities intended to
sustain the anticipated higher sales volume from our major strategic alliances.
The 73 percent increase in cost of sales, offset with the increase in net sales
of 45 percent, resulted in a decline in our gross profit margin for the nine
months ended March 31, 1999 of 47 percent from an overall gross profit margin
of 56 percent for the nine months ended March 31, 1998. This is principally
attributable to the increased costs associated with the enhanced production
capabilities, combined with the constant cost of sales. The rise in sales
volume and efficiencies that have been incorporated were not sufficient to
offset the increase in these costs.
Operating Expenses
For the three-month period ended March 31, 1999, operating expenses amounted to
$339,400, or 51 percent of net sales. For the comparable period in 1998,
operating expenses were $357,500, or 52 percent of net sales. The slight
decrease in operating expenses as a percentage of sales between these periods
of one percent is primarily due to the cutback of lower and middle management
personnel whose function had become under-utilized or less critical to the
operations of the Company.
Operating expenses for the nine months ended March 31, 1999 were $1,100,900, or
45 percent of net sales. For the comparable period in 1998, operating costs
amounted to $952,700, or 56 percent of net sales. The 11 percent decrease as a
percentage of sales between these periods is principally attributable to
the large increase in sales.
28
Other Income
For the three months ended March 31, 1999, net interest income amounted to
$9,800, as compared to net interest income of $1,900 for the three months ended
March 31, 1998. The increase in net interest income is due to investments of
the additional cash generated from operations this quarter.
For the nine months ended March 31, 1999, net interest income amounted to
$31,600 as compared to net interest income of $11,000 for the nine months ended
March 31, 1998. This change is due to the increase in cash invested in interest
bearing securities or accounts with a major national bank.
Income Taxes
Due to the Company's history of operating losses, management has established a
valuation allowance in the full amount of the deferred tax assets arising from
these losses because management believes it is more likely than not that the
Company will not generate sufficient taxable income within the appropriate
period to offset these operating loss carryforwards.
Net Income
Net income for the three months ended March 31, 1999 amounted to $36,600, as
compared to net income of $100 for the comparable period in 1998. The
improvement in 1999 was primarily a result of the higher profit margin and
decrease in operating expenses.
Net income for the nine months ended March 31, 1999 increased by 1,794 percent
to $128,800 from $6,800 for the comparable period in 1998. This increase is
principally attributable to increased sales, as indicated above.
Earnings Per Share
Basic and diluted earnings per share was $(.00) for the three months ended
March 31, 1999. The consistency of earnings per share was due primarily to
similar profit levels for these periods.
For the nine months ended March 31, 1999, basic and diluted earnings per share
amounted to $.01. For the comparable period in 1998, basic and diluted earnings
per share amounted to $0. This turnaround is primarily the result of increased
profits between the comparable periods.
LIQUIDITY AND CAPITAL RESOURCES
Operating Activities
For the nine months ended March 31, 1999, net cash provided by operating
activities amounted to approximately $511,500, an increase over the net cash
provided by operating activities of approximately $141,100 for the comparable
period in 1998. The increase is primarily a result of collections on accounts
receivable and increased profits during the period.
29
Investment Activities
The Company's investment activities include equipment sales and purchases,
patent acquisitions, and net changes in related party advances.
Net cash used by investing activities for the nine months ended March 31, 1999
was approximately $88,200, as compared to net cash used by investing activities
of approximately $224,600 for the comparable period in 1998. The decrease in
cash expended for investing activities is due primarily to decreased costs
incurred in connection with property and equipment acquisitions during the nine
months ended March 31, 1999 as compared to the nine months ended March 31,
1998.
Financing Activities
The Company's financing activities include proceeds from borrowings, payments
on borrowings and capital leases, and proceeds from sales of common stock
warrants.
Net cash of approximately $10,500 was used by financing activities for the nine
months ended March 31, 1999, as compared to net cash used by financing
activities of approximately $29,800 for the nine months ended March 31, 1998.
CAPITAL RESOURCES
At March 31, 1999, the Company does not have any material commitments for
capital expenditures other than for those expenditures incurred in the ordinary
course of business.
The Company believes that its current operations and cash balances will be
sufficient to satisfy its currently anticipated cash requirements for the next
12 months. However, additional capital could be required in excess of the
Company's liquidity, requiring it to raise additional capital through an equity
offering, secured or unsecured debt financing. The availability of additional
capital resources will depend on prevailing market conditions, interest rates,
and the existing financial position and results of operations of the Company.
30
PART II
ITEM 1 - LEGAL PROCEEDINGS
The Company is the plaintiff in a patent infringement and unfair competition
lawsuit entitled Innova/Pure Water, Inc. v. Aladdin Sales & Marketing, Inc.,
Filtex USA, Ltd., ACT Marketing, Inc., ACT Marketing, Ltd., Advanced Consumer
Technologies, Inc., and Robert Luzenberg, Case No. 97-924-Civ-T-25D (M.D.
Fla.). The Company claimed patent infringement and false advertising on the
part of the Defendants. Prior to trial, the Company resolved the false
advertising claims on terms deemed favorable to the Company by management,
receiving a cash settlement and an agreement that future statements and claims
would only present factual information. On October 7, 1998, the Court entered a
summary judgment ruling that the defendants did not infringe the Company's
patent. The Company has appealed the lower court's ruling to the United States
Court of Appeals for the Federal Circuit in Washington, D.C. The Company has
received an opinion of patent counsel that there is a "high probability" that
the lower court's ruling will be overturned and that the Filtex products will
be held to be an infringement of the Company's patent. Resolution of the
Company's appeal may take between six months and a year.
In April, 1999 the Company entered into a settlement agreement in the case of
Alan R. Kelley v. Innova Pure Water, Inc., Pinellas County Circuit Court Case
No. 98-2771-CI-007. Pursuant to the terms of the settlement agreement, the
Company paid Mr. Kelley $35,000 and issued him options to acquire up to 100,000
shares of common stock at an exercise price of $.50. The options issued to Mr.
Kelley have a term of 10 years, are subject to piggyback registration rights
and contain a cashless exercise provision. In exchange, Mr. Kelley dismissed
the lawsuit with prejudice and the parties mutually released each other from
any obligations except those set forth in the settlement agreement. The
Company views the settlement with Mr. Kelley as reasonable because it reduces
attorneys fees in defending the lawsuit and eliminates the risk of a material
adverse outcome due to the uncertainties of litigation.
31
PART II
ITEM 5 - OTHER MATTERS
32
ITEM 5 - OTHER MATTERS
During the period covered by this Form 10-Q the Company purchased 10,000
shares, John E. Nohren, Jr. purchased 43,500 shares and Rose C. Smith purchased
14,500 shares of common stock in the open market.
33
PART II
SIGNATURES
34
ITEM 6 - EXHIBITS AND
REPORTS ON FORM 8-K
(a) Exhibits included herewith are:
(27) Financial Data Schedule
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has caused this report to be signed on its behalf by the
undersigned, thereto duly authorized:
INNOVA PURE WATER, INC.
Dated: May 12, 1999 By: /s/ Rose C. Smith
-------------- --------------------------------------------
Rose C. Smith
President, Chief Executive Officer
Director
Dated: May 12, 1999 By: /s/ John E. Nohren, Jr.
-------------- --------------------------------------------
John E. Nohren, Jr.
Chairman of the Board of Directors
Treasurer
Dated: May 12, 1999 By: /s/ Robert Connell
-------------- --------------------------------------------
Robert Connell
Principal Accounting Officer