U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 for the quarterly period ended June 30, 2000
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 for the transition period from _______ to _______
Commission file number 0-23505
INNOVACOM, INC.
(Exact name of small business issuer as specified in its charter)
Nevada 88-0308568
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
3400 Garrett Drive
Santa Clara, CA 94054
(Address of principal executive offices) (Zip Code)
(408) 727-2447
(Issuer's telephone number)
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 [ ]
Number of shares of common stock outstanding as of June 30, 2000 was 36,534,593
Transitional Small Business disclosure format Yes [ ] No [X]
<PAGE>2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
INNOVACOM, INC. AND SUBSIDIARIES
(A Development Stage Enterprise)
CONDENSED CONSOLIDATED BALANCE SHEET
(In Thousands, except per share amounts)
(Unaudited)
JUNE 30,
2000
--------
ASSETS
CURRENT ASSETS:
Cash $ 108
Accounts receivable,
less: allowance for doubtful accounts of $10,000 94
Other receivables 5
Inventory, net 376
Prepaid expenses 158
Deferred offering costs 83
--------
Total current assets 824
PROPERTY AND EQUIPMENT, net 104
Deposits 37
--------
Total Assets $ 965
========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Notes payable - related parties $ 100
Secured promissory notes 6,475
Convertible debentures 4,750
Accounts payable 1,068
Accrued liabilities 3,257
Liabilities in excess of assets of
discontinued operations 63
--------
Total current liabilities 15,713
STOCKHOLDERS' EQUITY (DEFICIT):
Common stock, $.001 par value, 150,000,000 shares
Authorized, 36,534,593 shares issued and
outstanding 36
Warrants 3,156
Additional paid-in capital 29,265
Deficit accumulated during development stage (47,205)
--------
Total stockholders' deficit (14,748)
Total liabilities and stockholders' equity (deficit) $ 965
========
See accompanying notes to these condensed consolidated financial statements.
<PAGE>3
INNOVACOM, INC. AND SUBSIDIARIES
(A Development Stage Enterprise)
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
MARCH 3, 1993
FOR THE THREE MONTHS ENDED FOR THE SIX MONTHS ENDED (INCEPTION)
JUNE 30, JUNE 30, TO JUNE 30,
-------------------------- ------------------------- ----------
1999 2000 1999 2000 2000
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Revenues $ 61 $ 89 $ 97 $ 386 $ 1,150
---------- ---------- ---------- ---------- ----------
COSTS AND EXPENSES:
Costs of goods sold 50 59 79 296 1,179
Research and development 367 507 736 978 13,300
Selling, general and
administrative 884 726 1,629 1,751 20,692
Impairment loss on property
and equipment - - - - 937
---------- ---------- ---------- ---------- ----------
Total costs and expenses 1,301 1,292 2,444 3,025 36,108
---------- ---------- ---------- ---------- ----------
Operating Loss (1,240) (1,203) (2,347) (2,639) (34,958)
---------- ---------- ---------- ---------- ----------
OTHER INCOME (EXPENSE):
Interest expense, net of
interest income (1,217) (795) (1,876) (1,732) (10,531)
Debt conversion expense - - - - (261)
Other income - - - - 2
---------- ---------- ---------- ---------- ----------
Total other income (expense) (1,217) (795) (1,876) (1,732) (10,790)
---------- ---------- ---------- ---------- ----------
Loss From Continuing Operations
Before Income Tax Expense,
Discontinued Operations and
Extraordinary item (2,457) (1,998) (4,223) (4,371) (45,748)
Income Tax Expense - - 2 2 10
---------- ---------- ---------- ---------- ----------
Loss From Continuing Operations (2,457) (1,998) (4,225) (4,373) (45,758)
---------- ---------- ---------- ---------- ----------
Gain/(loss) on disposal of
discontinued operations - - - - (1,159)
Loss from operations of
discontinued operation, net of
income tax expense - - - - (1,131)
---------- ---------- ---------- ---------- ----------
GAIN/(LOSS) FROM DISCONTINUED
OPERATIONS - - - - (2,290)
---------- ---------- ---------- ---------- ----------
EXTRAORDINARY ITEM:
GAIN ON EXTINGUISHMENT OF
LIABILITIES 57 17 180 35 843
---------- ---------- ---------- ---------- ----------
Net Loss $ (2,400) $ (1,981) $ (4,045) $ (4,338) $ (47,205)
========== ========== ========== ========== ==========
Basic and Diluted Net Loss Per Share:
Continuing operations $ (.10) $ (.05) $ (.17) $ (.13)
Discontinued operations - - - -
Extraordinary item - - .01 -
---------- ---------- ---------- ----------
Basic and diluted net loss per share $ (.10) $ (.05) $ (.16) $ (.13)
========== ========== ========== ==========
WEIGHTED AVERAGE NUMBER OF SHARES
OUTSTANDING 24,970 36,440 25,003 33,669
========== ========== ========== ==========
</TABLE>
See accompanying notes to these condensed consolidated financial statements.
<PAGE>4
INNOVACOM, INC. AND SUBSIDIARIES
(A Development Stage Enterprise)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
FOR THE SIX MONTHS ENDED MARCH 3, 1993
JUNE 30, (INCEPTION) TO
------------------------- JUNE 30,
1999 2000 2000
---------- ---------- ----------
<S> <C> <C> <C>
Cash Flows From Operating Activities:
Net loss from continuing operations $ (4,225) $ (4,373) $ (45,758)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 76 59 932
Provision for inventory obsolescence - 44 85
Provision for doubtful accounts - - 20
Amortization of discount on long-term debt - - 2,346
Loss on sale of fixed assets - - 25
Impairment loss on property and equipment - - 940
Interest related to beneficial conversion feature
and warrants issued in connection with notes
payable and convertible debentures 1,058 743 4,140
Compensation recognized upon issuance of
stock and stock options 18 232 6,069
Shares canceled from default judgement - - (250)
Contribution of product license - - 1,275
Write down of purchased incomplete
research and development - - 500
Write-off acquisition costs - - 68
Gain on extinguishment of liabilities 180 35 843
Debt conversion expense - - 261
Write-off of related party receivable - - 140
CHANGES IN OPERATING ASSETS AND LIABILITIES:
Accounts receivable (22) 55 (104)
Other receivables (15) 1 (15)
Inventory (229) (210) (461)
Prepaid expenses (34) (110) (159)
Deferred offering costs - (22) (22)
Deposits - - (37)
Accounts payable (407) (154) 1,474
Accrued liabilities 798 978 4,581
---------- ---------- ----------
Net cash used in operating activities
from continuing operations (2,802) (2,722) (23,107)
---------- ---------- ----------
Net loss from discontinued operations - - (2,290)
Loss on disposal of assets - - 49
Write-down of film rights and film costs inventory - - 250
Write-down of goodwill - - 848
Change in liabilities in excess of assets of
discontinued operations - - 63
---------- ---------- ----------
Net cash used in operating activities
from discontinued operations - - (1,080)
---------- ---------- ----------
</TABLE>
(continued)
<PAGE>5
INNOVACOM, INC. AND SUBSIDIARIES
(A Development Stage Enterprise)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
(continued)
<TABLE>
<CAPTION>
FOR THE SIX MONTHS ENDED MARCH 3, 1993
JUNE 30, (INCEPTION) TO
-------------------------- JUNE 30,
1999 2000 2000
---------- ---------- ----------
<S> <C> <C> <C>
Cash Flows From Investing Activities:
Cash received in acquisition of Sierra Vista
Entertainment $ - $ - $ 2,917
Cost incurred for organization of joint venture - - (68)
Advance to related party - - (140)
PURCHASES OF PROPERTY AND EQUIPMENT (5) (19) (2,219)
Proceeds from sale of assets - - 4
---------- ---------- ----------
Net cash provided by (used in) investing
activities (5) (19) 494
---------- ---------- ----------
Cash Flows From Financing Activities:
Proceeds from notes payable 2,065 - 4,865
Proceeds from secured promissory notes - 2,275 6,475
Net proceeds from sale of convertible debentures with
detachable warrants 750 - 9,358
Principal payments on notes payable-related party (66) - (309)
Proceeds from sale of common stock - - 2,898
Proceeds from exercise of stock options - 271 273
Proceeds from settlements 78 - 241
---------- ---------- ----------
Net cash provided by financing activities 2,827 2,546 23,801
---------- ---------- ----------
Net Increase (Decrease) in Cash and Cash
EQUIVALENTS 20 (195) 108
CASH AND CASH EQUIVALENTS, beginning of
period 34 303 -
---------- ---------- ----------
Cash and Cash Equivalents, END OF PERIOD $ 54 $ 108 $ 108
========== ========== ==========
</TABLE>
See accompanying notes to these condensed consolidated financial statements.
<PAGE>6
INNOVACOM, INC. AND SUBSIDIARIES
(A Development Stage Enterprise)
Notes to Condensed Consolidated Financial Statements
June 30, 2000
(Unaudited)
1. BASIS OF PRESENTATION:
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with generally accepted accounting principles
for interim financial information and pursuant to the rules and regulations
of the Securities and Exchange Commission. Accordingly, they do not include
all of the information and footnotes required by generally accepted
accounting principles for complete financial statements. For further
information, refer to the financial statements and footnotes thereto
included in the Company's annual report on Form 10-KSB for the fiscal year
ended December 31, 1999.
In the opinion of management, the unaudited condensed consolidated financial
statements contain all adjustments considered necessary to present fairly
the Company's financial position at June 30, 2000, results of operations for
the three and six months ended June 30, 1999 and 2000, and the period from
March 3, 1993 (inception) to June 30, 2000, and the cash flows for the six
months ended June 30, 1999 and 2000, and the period from March 3, 1993
(inception) to June 30, 2000. The results for the period ended June 30,
2000, are not necessarily indicative of the results to be expected for the
entire fiscal year ending December 31, 2000.
2. SECURED PROMISSORY NOTES:
During the three months ended March 31, 2000, the Company entered into
promissory note agreements totaling $975,000 that are due on demand and
accrue interest at 13% per annum. The notes are secured by substantially all
of the Company's assets. As part of the issuance of the notes, the Company
issued to the note holder five-year warrants to purchase 487,500 shares of
common stock at prices ranging from $0.30 to $1.00.
During the three months ended June 30, 2000, the Company entered into
promissory note agreements totaling $1,300,000 that are due on demand and
accrue interest at 13% per annum. The notes are secured by substantially all
of the Company's assets. As part of the issuance of the notes, the Company
issued to the note holder five-year warrants to purchase 650,000 shares of
common stock at prices ranging from $0.37 to $0.50.
3. CONVERTIBLE DEBENTURES:
During the three months ended March 31, 2000, the holders of the December
31, 1997 debentures converted $4,690,000 in principal and $723,063 in
accrued interest into 8,349,249 shares of common stock.
<PAGE>7
INNOVACOM, INC. AND SUBSIDIARIES
(A Development Stage Enterprise)
Notes to Condensed Consolidated Financial Statements
June 30, 2000
(Unaudited)
4. EQUITY FINANCING FACILITY:
On June 19, 2000, as amended on July 26, 2000, the Company entered into a
common stock purchase agreement and related agreements with Jashell
Investments Limited (Jashell), a private equity fund. Subject to the
fulfillment of certain conditions, the agreements provide the Company with
an equity financing facility through which the Company may sell up to a
total of $10,000,000 worth of shares of common stock, at their option, to
Jashell periodically over a 24 month period. The Company's ability to
request a draw down under the facility is subject to the continued
effectiveness of a resale registration statement filed with the Securities
and Exchange Commission to cover the shares to be issued. The amount of
common stock to be sold at each draw down will not be less than $250,000 nor
more than $1,000,000. The Company has agreed to sell the shares to Jashell
at a price equal to the then current market price of the common stock during
the draw down period, less a discount of 21% or 24%, specifically determined
based upon a formula. The number of shares the Company may sell to Jashell
varies depending on certain factors, including the market price of the
common stock and the then current ownership interest of Jashell. In
connection with each draw down, the Company granted Jashell a warrant to
purchase up to 50% of the number of shares acquired in a draw down at an
exercise price equal to the purchase price of the common stock acquired
pursuant to the draw down. The warrant will expire 22 business days after
its issuance.
As part of the issuance of the Common Stock purchase agreement, the Company
issued to the investor warrants to purchase 100,000 shares of common stock
at an exercise price of $0.70 per share. In addition, 10,000 shares of
common stock were issued on June 19, 2000 as a finders fee.
5. STOCKHOLDERS' EQUITY:
During the three months ended March 31, 2000, outstanding options to
purchase 437,627 shares of common stock were exercised in non-cash
transactions. In addition, outstanding warrants to purchase 785,028 shares
of common stock were also exercised in non-cash transactions.
Also, during the three months ended March 31, 2000, options to purchase
1,038,017 shares of common stock were exercised with prices ranging from
$0.23 to $0.26 per share with proceeds received equal to $270,000.
During the three months ended June 30, 2000, the Company issued 122,573
shares of common stock at the par value of $0.001 in a cashless exercise of
warrants originally issued in connection with the secured promissory notes.
<PAGE>8
INNOVACOM, INC. AND SUBSIDIARIES
(A Development Stage Enterprise)
Notes to Condensed Consolidated Financial Statements
June 30, 2000
(Unaudited)
6. SUBSEQUENT EVENTS:
On July 11, 2000, the Company borrowed $425,000 from an investor in the form
of a note. The note bears interest at 13% and is due on demand. In
conjunction with this note, the Company issued five year warrants to
purchase up to 212,500 shares of Common Stock at $.30 per share
<PAGE>9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
With the exception of historical facts stated herein, the matters discussed in
this report are "forward looking" statements that involve risks and
uncertainties that could cause actual results to differ materially from
projected results. Such "forward looking" statements include, but are not
necessarily limited to, statements regarding anticipated levels of future
revenues and earnings from operations of the Company. Factors that could cause
actual results to differ materially include, in addition to other factors
identified in this report, lack of revenues, substantial losses, need for
additional capital and limited operating history, and other risk factors
detailed in the Company's Securities and Exchange Commission ("SEC") filings
including the risk factors set forth in the Company's Registration Statement on
Form SB-2, SEC File No. 333-42766 filed August 1, 2000 and "Certain
Considerations" section in the Company's Form 10-KSB for the year ended December
31, 1999. Readers of this report are cautioned not to put undue reliance on
"forward looking" statements which are, by their nature, uncertain as reliable
indicators of future performance. The Company disclaims any intent or obligation
to publicly update these "forward looking" statements, whether as a result of
new information, future events, or otherwise.
Revenues
Revenues were approximately $89,000 and $386,000 for the three and six month
periods ended June 30, 2000, as compared to approximately $61,000 and $97,000
for the same periods in 1999. Revenues in 2000 and 1999 were from the sale of
the Company's standard transmission products.
Cost of goods sold
Cost of goods sold was approximately $59,000 and $296,000 for the three and six
month periods ended June 30, 2000 as compared to approximately $50,000 and
$79,000 for the same periods in 1999. The product margins for all periods
presented in these statements are not necessarily indicative of those that the
Company might experience at such time, if any, that standard products begin to
be shipped in full-production quantities for installation by end-users.
Research and development
Research and development expense increased to approximately $507,000 and
$978,000 in the three and six month periods ended June 30, 2000 from
approximately $367,000 and $736,000 in the same periods in 1999. The increase in
R&D expenditure represents the Company's ongoing program to develop its products
to meet market opportunities.
Selling, general and administrative
Selling, general and administrative expense declined to approximately $726,000
in the three months ended June 30, 2000, from approximately $884,000 in the same
period in 1999, a reduction of about 18%. The decrease in the current quarter
came almost entirely from a reduction in general and administrative expense due
to a reclass of production period costs in 1999 from cost of sales to G&A that
was not required in 2000. For the six months ended June 30, 2000 , selling,
general and administrative expense increased about 7%, to approximately
$1,751,000 from approximately $1,629,000 in the same period in 1999. The
increase is due to the hiring of additional sales staff and compensation expense
recognized upon the issuance of stock options and warrants in the first quarter
of 2000 offset by the reclass of production period costs discussed above.
<PAGE>10
Interest expense, net of interest income
Interest expense decreased to approximately $795,000 in the three months ended
June 30, 2000, from approximately $1,217,000 in the same period in 1999, a
reduction of about 35%. This reduction was the net result of a lower balance in
outstanding convertible debentures and the expiration of the agreement to pay a
finder's fee for any funding from the holders of the convertible debentures and
the secured promissory notes. For the six months ended June 30, 2000, interest
expense decreased about 8%, to approximately $1,732,000 from approximately
$1,876,000 in the same period in 1999. This reduction was the net result of a
lower balance in outstanding convertible debentures and the expiration of the
agreement to pay a finder's fee for any funding from the holders of the
convertible debentures and the secured promissory notes.
Loss from continuing operations
As a result of the financial results explained above, loss from continuing
operations decreased to approximately $1,998,000 in the three months ended June
30, 2000, from approximately $2,457,000 in the same period in 1999, a reduction
of about 19%. For the six months ended June 30, 2000, the loss from continuing
operations increased $148,000 or about 4%, to approximately $4,373,000 from
approximately $4,225,000 in the same period in 1999. This is a direct reflection
of the increased expenditures in manufacturing and R&D to roll out product
offset by the decrease in finance costs associated with the borrowings.
Liquidity and Capital Resources
Since inception, the Company has funded its operations primarily through the
sale of stock and placement of debt. On June 30, 2000, the Company had a cash
balance of approximately $108,000 and a working capital deficit of approximately
$14,889,000. This compares with cash of approximately $303,000 and a working
capital deficit of approximately $17,309,000 at December 31, 1999. The decrease
in working capital deficit is largely a result of the conversion of $4,690,000
of convertible debentures to equity less an increase in secured promissory notes
and other liabilities of approximately $2,300,000.
During the quarter ended June 30, 2000, the Company borrowed an additional total
of $1,300,000 from the investor who has previously funded the Company. This
borrowing is evidenced in the form of three notes. The notes bear interest at
13% and are due on demand. In conjunction with this funding, the Company issued
the holder of the notes five year warrants to purchase up to 650,000 shares of
Common Stock at prices ranging from $0.37 to $0.50 per share.
On July 11, 2000, the Company borrowed $425,000 from an investor in the form of
a note. The note bears interest at 13% and is due on demand. In conjunction with
this note, the Company issued five year warrants to purchase up to 212,500
shares of Common Stock at $.30 per share
Equity Financing Facility- On June 19, 2000, as amended on July 26, 2000, the
company entered into a common stock purchase agreement and related agreements
with a private equity fund organized under the laws of the British Virgin
Islands. Subject to the fulfillment of certain conditions, the agreements
provide the Company us with an equity financing facility through which it may
sell up to a total of $10,000,000 worth of shares of its common stock, at its
option, to the private equity fund periodically over a 24-month period. The
Company's ability to request a draw down under the facility is subject to the
<PAGE>11
continued effectiveness of a resale registration statement filed with the
Securities and Exchange Commission to cover the shares to be issued. The amount
of common stock to be sold at each draw down will not be less than $250,000 nor
more than $1 million. The Company has agreed to sell its shares to the private
equity fund at a price equal to the then current market price of our common
stock during the draw down period, less a discount of 21% or 24% specifically
determined based upon a formula. The number of shares that the Company may sell
to the private equity fund varies depending on certain factors, including the
market price of the common stock and the then current ownership interest of
private equity fund. In connection with each draw down, the Company will grant
the private equity fund a warrant to purchase up to 50% of the number of shares
acquired in a draw down at an exercise price equal to the purchase price of the
common stock acquired pursuant to the draw down. The warrant will expire 22
business days after its issuance. The Company also issued a three year warrant
to the private equity fund to purchase up to 100,000 shares of our common stock
at an exercise price of $0.7027 per share. The resale of the shares acquired
pursuant to the equity financing facility are included in the Form SB-2
Registration Statement filed with the U.S. Securities and Exchange commission on
August 1, 2000.
Management projects that the Company will not be able to internally generate the
cash that will be required to fund its operations and to pay off the liabilities
incurred in prior periods for at least the balance of 2000. Accordingly, the
Company will require additional funding to finance its operations. Since
December 1997, the Company has financed its operations through the issuance of
convertible debentures and demand notes to two investment funds that are
affiliated with each other, but no assurance can be given that these investors
will continue to provide funds to the Company. In this event, the Company will
need to secure additional financing from alternative sources. The Company is
already actively pursuing alternative funding sources. There can be no assurance
that additional funding will be available on terms favorable to the Company.
Impact of the Year 2000 Issue
The Company has experienced no disruptions in its operations that management can
attribute to Year 2000 software issues. In addition, the Company has seen no
Year 2000 related problems itself or received any reports of such problems from
its customers related to the Company's products.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings. - Not Applicable
Item 2. Changes in Securities and Use of Proceeds. - Not Applicable
Item 3. Defaults Upon Senior Securities. - Not Applicable
Item 4. Submission of Matters to a Vote of Security Holders. - Not Applicable
Item 5. Other Information. - Not Applicable
Item 6. Exhibits and Reports on Form 8-K - Not Applicable
<PAGE>12
SIGNATURES
In accordance with the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
INNOVACOM, INC.
(Registrant)
FRANK J. ALIOTO
Date: August 10, 2000 ______________________________________
Frank J. Alioto, President and
Chief Executive Officer
JAMES D. CASEY
Date: August 10, 2000 ______________________________________
James D. Casey, Chief Financial Officer
