<PAGE>
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 September 30, 1996
------------------------
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
For the transition period from __________to ___________
Commission file number 33-42880
--------------------------------
NOVA TECHNOLOGIES, INC.
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(Exact name of small business issuer as specified in its charter)
Delaware 11-2674603
- ------------------------------- ----------------------------------
(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 - 6,919,408 shares outstanding as of October
31, 1996.
Transitional Small Business Disclosure Format: Yes No X
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements. (Unaudited)
- -----------------------------
<TABLE>
<CAPTION>
NOVA TECHNOLOGIES, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS September 30, 1996 December 31, 1995
------------------ -----------------
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents....................................... $203,403 $485,819
Inventories..................................................... 595,246 332,995
Accounts receivable (net of reserve for doubtful
accounts of $34,300 in 1996)................................. 650,148 45,155
Prepaid expenses and other current assets....................... 16,206 71,185
----------- ----------
Total current assets......................................... 1,465,003 935,154
Restricted cash...................................................... 209,500 100,000
Subscription receivable.............................................. 90,000
Rental equipment (net of accumulated depreciation of
$35,077)......................................................... 456,200
Equipment and leasehold improvements (net of accumulated
depreciation and amortization of $271,579 in 1996
and $226,576 in 1995)............................................ 210,678 136,256
Deposits and other assets............................................ 160,135 64,931
Deferred financing costs............................................. 53,989 69,852
Goodwill (net of accumulated amortization of $35,352)................ 2,044,488
----------- ----------
TOTAL........................................................ $4,599,993 $1,396,193
=========== ==========
LIABILITIES
Current liabilities:
Accounts payable and accrued expenses........................... $488,428 $296,339
Income taxes payable............................................ 155,244
Notes payable-bank.............................................. 260,000
Notes payable-other............................................. 250,000
Notes payable-officer........................................... 30,000
Notes payable-acquisition debt (including accrued
interest of $20,000).......................................... 770,000
Deferred officers' compensation (including accrued
interest of $294 in 1996 and $684 in 1995).................... 16,627 86,767
----------- ----------
Total current liabilities.................................... 1,970,299 383,106
Note payable-other (including accrued interest of $43,449
and $3,210 and net of deferred debt discount of
$104,205 and $15,111 in 1996 and 1995, respectively)............ 689,244 88,102
Note payable-officers (including accrued interest of
$32,390 in 1996 and $15,779 in 1995)............................ 131,640 290,779
Note payable-acquisition debt (including accrued interest
of $20,000)..................................................... 770,000
Deferred officers' compensation (including accrued
interest of $6,913)............................................. 182,663
Grant award and other liabilities.................................... 73,124 50,000
----------- ----------
Total liabilities............................................ 3,816,970 811,987
----------- ----------
STOCKHOLDERS' EQUITY
Common stock - $.01 par value; 14,000,000 shares
authorized; 6,419,408 and 5,791,083 shares issued
and outstanding, respectively.................................... 64,194 57,911
Additional paid-in capital........................................... 11,185,657 9,847,887
Deficit.............................................................. (10,466,828) (9,321,592)
</TABLE>
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---------- ----------
Total stockholders' equity ......................... 783,023 584,206
---------- ----------
TOTAL............................................... $4,599,993 $1,396,193
========== ==========
The attached notes are made a part hereof.
2
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NOVA TECHNOLOGIES, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
---------------------------------------------------
1996 1995 * 1996 1995 *
--------- --------- ---------- ----------
<S> <C> <C> <C> <C>
Net sales..................................... $720,689 $22,748 $1,183,569 $170,291
Cost of sales................................. 443,697 124,771 1,153,286 400,228
---------------------------------------------------
Gross profit (loss)........................... 276,992 (102,023) 30,283 (229,937)
---------------------------------------------------
Research and development expenses............. 168,763 90,139 334,931 217,374
General, administrative, marketing
and consulting expenses..................... 362,588 119,173 709,373 359,143
--------- --------- ----------- ----------
Total expenses................................ (531,351) (209,312) (1,044,304) (576,517)
---------------------------------------------------
(Loss) from operations........................ (254,359) (311,335) (1,014,021) (806,454)
Interest and other income..................... 1,782 1,160 33,905 3,672
Interest expense.............................. (93,659) (10,310) (165,120) (11,418)
--------- --------- ----------- ----------
NET LOSS......................................($346,236) ($320,485) ($1,145,236) ($814,200)
======================== =========== ==========
Net loss per share............................ ($0.05) ($0.07) ($0.19) ($0.18)
====== ====== ====== ======
Weighted average number of common
shares used in computing loss
per share...................................6,412,083 4,631,639 6,003,905 4,489,263
======================== =========== ==========
</TABLE>
The attached notes are made a part hereof.
* As Adjusted
3
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NOVA TECHNOLOGIES, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION> Nine months ended
September 30,
-----------------------------------
1996 1995 *
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<S> <C> <C>
Cash flows from operating activities:
Net loss................................................................. ($1,145,236) ($814,200)
Adjustments to reconcile net loss to net cash
(used in) operating activities:
Depreciation and amortization........................................... 144,428 63,895
Value assigned to warrants given to employees........................... 24,681
Common stock issued for professional services rendered.................. 11,988
Changes in operating assets and liabilities:
(Increase) in inventories.............................................. (11,553) (32,936)
(Increase) in accounts receivable, prepaid expenses
and other assets...................................................... (386,757) (79,610)
(Increase) in restricted cash.......................................... (109,500)
Decrease in subscription receivable.................................... 90,000
Increase in accounts payable and accrued expenses...................... 53,019 35,396
Increase in deferred officers' compensation............................ 106,000 97,399
Increase in accrued interest payable................................... 103,370 8,645
----------------------------------
Net cash (used in) operating activities.............................. (1,144,241) (696,730)
----------------------------------
Cash flows from investing activities:
Purchase of equipment and capitalized tooling costs...................... (135,942) (34,032)
Cash acquired with acquisition of company................................ 30,771
Costs incurred with acquisition of company............................... (78,519)
-----------------------------------
Net cash (used in) investing activities.............................. (183,690) (34,032)
-----------------------------------
Cash flows from financing activities:
Proceeds from issuance of notes payable.................................. 1,160,000 100,000
Proceeds from sale of common stock....................................... 20,000 1,591,597
Issuance costs incurred in sale of common stock.......................... (2,000) (168,178)
Proceeds from exercise of warrants....................................... 99,565
Repayment of notes payable-officers...................................... (145,750)
Common stock issued in connection with financing......................... 13,265
-----------------------------------
Net cash provided by financing activities............................ 1,045,515 1,622,984
-----------------------------------
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS.......................... (282,416) 892,222
Cash and cash equivalents at beginning of period.......................... 485,819 102,245
-----------------------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD................................ $203,403 $994,467
===================================
Supplemental disclosure of cash flow information:
Forgiveness of debt owed to officers................................... $762,852
Value of warrants given in connection with financing................... $100,800 28,000
Issuance of stock for acquisition of company........................... 1,200,000
Issuance of debt for acquisition of company............................ 1,500,000
</TABLE>
The attached notes are made a part hereof.
* As Adjusted
4
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NOVA TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AS OF SEPTEMBER 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 nine months ended September 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):
- ---------
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
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NOVA TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AS OF SEPTEMBER 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 September 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 September 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 September 30, 1996 the Company had borrowed $260,000 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. At September 30, 1996 the Company failed to comply
with certain financial covenants pertaining to working capital, equity and
unsubordinated debt. People's Bank has verbally agreed to grant a waiver of
these restrictive convenants until December 31, 1996 and the Company expects to
receive a written waiver within two weeks.
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
6
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NOVA TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AS OF SEPTEMBER 30, 1996
(UNAUDITED)
company to make when due any payment to Peoples. In exchange for issuing these
letters of credit, the Company issued each of the LOC Corporations a warrant to
purchase up to 20,000 shares (60,000 in the aggregate) of the Company's common
stock at an exercise price of $2.50 per share. 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. The
letters of credit expired on September 6, 1996 and the Company expects them to
be renewed.
(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 September 30, 1996 no borrowings were made under
this loan agreement and the commitment date has been extended by CDA to March 7,
1997.
(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 September 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,
7
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NOVA TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AS OF SEPTEMBER 30, 1996
(UNAUDITED)
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.
<TABLE>
<CAPTION>
(NOTE F):
- ---------
<S> <C>
At September 30, 1996 the following loans are outstanding:
(a) Notes Payable-Peoples $ 260,000
(b) Notes Payable-Officer 129,250
(c) Notes Payable-Acquisition Debt 1,500,000
(d) Notes Payable-CII 750,000
(e) Notes Payable-Northern Associates 250,000
---------
Total Notes Payable 2,889,250
Current Portion 1,290,000
---------
Long-term Portion $1,599,250
==========
</TABLE>
(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; $99,250 payable
October 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 payments aggregating $175,750 due them for an
equal amount of subordinated notes payable. Payments aggregating $115,750 in
April 1996, $30,000 in July 1996 and $30,000 in October 1996 were made to the
officers reducing the amount owed to them under the notes payable.
(c) comprised of a $750,000 promissory note payable 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.
(e) promissory note dated July 15, 1996 and repaid in cash on November 1,
1996, (interest at rate of 10% per annum paid in registered Common Stock);
secured by 250,000 shares of unregistered Common Stock and convertible at the
lender's option (which was not exercised) into registered shares of Common Stock
at the rate of $2.00 per share.
(NOTE G):
- ---------
Three officers have agreed to defer payment of salaries due them
aggregating $192,083 and payment of interest on deferred compensation
8
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NOVA TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AS OF SEPTEMBER 30, 1996
(UNAUDITED)
due them aggregating $7,207. Deferred salaries of two officers, aggregating
$145,750 are subordinated to borrowings under Peoples and CII loan facilities.
(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 on July 1, 1997 and the second
note is due on January 1, 2001 subject to quarterly prepayment installments
commencing April 20, 1998. Such installments are equal to the lesser of $37,500
or 25 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 $2,100,000.
(NOTE I):
- ---------
On September 24, 1996 the Company completed a registration of 1,005,525
shares of Common Stock at a proposed maximum offering price of $2.625 per share.
In October 1996 the Company sold 500,000 of the registered shares at $2.00 per
share. Part of the net proceeds were used to repay a $250,000 loan and the
balance will be used for working capital and general corporate purposes.
9
<PAGE>
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 October 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 an equity and debt financing package
(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.
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 September 30, 1996, the Company shipped 32 units, most of
which were purchased by the Company's distributors. 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
10
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$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.
Results of Operations
Three Months Ended September 30, 1996 Compared to Three Months Ended
September 30, 1995.
In the three months ended September 30, 1996 the Company recorded sales of
$721,000 and incurred a net loss of $346,000 ($.05 per share) compared to sales
of $23,000 and a net loss, as adjusted, of $320,000 ($.07 per share) in the
three months ended September 30, 1995. The results of this period include the
operations of Vivax which was acquired by the Company on June 14, 1996; as a
result of the acquisition, the comparison between 1996 and 1995 periods may not
necessarily be meaningful.
The increase in sales of $698,000 is due to the acquisition of Vivax
($526,000) and increased Nova sales ($172,000). Nova incurred a loss for the
quarter of $556,000 which was partly offset by a profit in Vivax for the period
in the amount of $210,000.
In the quarter ended September 30, 1996 the Company realized a gross profit
of $277,000 compared to a gross loss of $102,000 in the quarter ended September
30, 1995. The Vivax division's gross profit of $437,000 was offset by a $160,000
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. Manufacturing overhead in the
third quarter increased $86,000 from $102,000 in the third quarter of 1995 to
$188,000 in the third quarter of 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. As production and sales levels increase
the Company expects the Nova division's gross losses to diminish and thereafter
rising gross profits, although no assurance can be given that the division will
be able to achieve such
11
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satisfactory production and sales levels.
Research and development expenses increased $79,000 from $90,000 (as
adjusted for salary accruals) in the third quarter of 1995 to $169,000 in the
comparable 1996 quarter. The increase is attributable to the transfer of an
officers's primary responsibility in the third quarter of 1996 from
administrative to research and development ($30,000) and the change in the
Hauppauge facility's function from manufacturing to research and development
($49,000), with increased wages devoted to research and development efforts.
General, administrative, marketing and consulting expenses increased
$244,000 from $119,000 (as adjusted for salary accruals) in the third quarter of
1995 to $363,000 in the comparable 1996 quarter. The increase is attributable to
an expansion of the sales force in the Nova division ($34,000) and increases of
approximately $23,000 in legal, accounting and miscellaneous expenses. In
addition, Vivax expenses for the period aggregated $187,000 of which $27,000 was
attributable to the amortization of goodwill incurred in connection with the
acquisition of Comed.
Interest expense increased $84,000 from $10,000 in 1995 to $94,000 in 1996,
of which approximately $49,000 is attributable to interest on new debt and
amortization of financing costs incurred in the 1995 Financing and $35,000 is
attributable to interest on notes payable issued in conjunction with the
acquisition of Comed.
As a result of common stock sold primarily in the third quarter of 1995 and
the second quarter of 1996, the weighted average number of common shares used in
computing loss per share for the third quarter increased from 4,632,000 at
September 30, 1995 to 6,412,000 at September 30, 1996 and for the nine months
from 4,489,000 to 6,004,000.
Nine Months Ended September 30, 1996 Compared to Nine Months Ended
September 30, 1995.
In the nine months ended September 30, 1996 the Company recorded sales of
$1,184,000 and incurred a net loss of $1,145,000 ($.19 per share) compared to
sales of $170,000 and a net loss, as adjusted, of $814,000 ($.18 per share) in
the nine months ended September 30, 1995.
The increase in sales of $1,014,000 is due to the acquisition of Vivax
($700,000) and increased Nova sales ($314,000).
In the nine months ended September 30, 1996 the Company realized a gross
profit of $30,000 compared to a gross loss of $230,000 in the nine months ended
September 30, 1995. The Vivax division's gross profit of $578,000 was offset by
a gross loss of $548,000 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
12
<PAGE>
enable the Nova division to meet its manufacturing requirements and sales
objectives. Manufacturing overhead in the nine months increased $358,000 from
$276,000 in 1995 to $634,000 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. As production and sales levels increase
the Company expects the Nova's division 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 $118,000 from $217,000 (as
adjusted for salary accruals) in the nine months of 1995 to $335,000 in the
comparable nine months of 1996. The increase is attributable to the transfer of
an officer's primary responsibility in the third quarter of 1996 from
administrative to research & development ($30,000), a $15,000 increase in an
officer's salary rate for the nine months, and increased wages and expenses
applicable to research and development efforts both before and after the change
in the Hauppauge facility's function from manufacturing to research and
development.
General, administrative, marketing and consulting expenses increased
$350,000 from $359,000 (as adjusted for salary accruals) in the nine months of
1995 to $709,000 in the comparable nine months of 1996. The increase is
attributable to an expansion of the sales force ($45,000), an increase in
officer's salaries ($22,000) and increases of approximately $50,000 in legal,
accounting and miscellaneous expenses. In addition, Vivax expenses for the
period since its inception on June 14, 1996, aggregated $233,000 of which
$35,000 was attributable to the amortization of goodwill incurred in connection
with the acquisition of Comed.
Interest expense increased $154,000 from $11,000 in 1995 to $165,000 in
1996, of which approximately $98,000 is attributable to interest on new debt and
amortization of financing costs incurred in the 1995 Financing and $40,000 is
attributable to interest on notes payable issued in conjunction with the
acquisition of Comed. In addition, in the first six months 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 six months of 1995. Interest and
other income in the first nine months of 1996 increased to $34,000 from $4,000
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 nine months of 1996 the Company (excluding Vivax) used net cash
in operating activities aggregating $1,393,000 compared to $697,000 in the prior
year's nine month period. In the period from
13
<PAGE>
June 14 to September 30, after the acquisition of Comed, Vivax provided $249,000
to operating activities resulting in net cash used in operations of $1,144,000.
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 $136,000 (of which $121,000 is attributable to Vivax) compared to
$34,000 in the prior year.
During the nine months of 1996 net cash provided by financing activities
aggregated $1,046,000 compared to $1,623,000 in the prior year's nine month
period. In the 1996 period the Company received proceeds of $910,000 from
borrowing under the 1995 Financing, net proceeds of $18,000 from the sale of
common stock and $250,000 from Northern Associates, L.P. ("Northern") under a
Loan and Security Agreement dated July 15, 1996 which was repaid on November 1,
1996. During the period the Company repaid officers' loans aggregating $145,750
pursuant to an amendment to a subordination agreement in the 1995 Financing
permitting the substitution of deferred compensation for notes payable.
In January 1995 the Company received $99,000 from the purchase of 73,752
shares of Common Stock by holders of warrants issued in 1990 and in the nine
months ended September 30, 1995 the Company received proceeds from the sale of
Common Stock net of issuance costs aggregating $1,423,000 and borrowed $100,000
under the 1995 Financing.
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 ("Peoples") 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
14
<PAGE>
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, Peoples 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, Peoples agreed to waive such conditions because
the Company temporarily deferred the purchase of capital equipment to be
purchased with CDA and DECD loans. In 1996, the Company borrowed
$250,000 in May and $10,000 in September. The Company estimates that as
of September 30, 1996 it had utilized all of its available borrowing
under the Peoples facility.
3. $750,000 loan from CII maturing on September 5, 2001. The loan bears
interest at 10% and is collateralized by all of the Company's assets,
including a first lien on its intellectual property, a third lien behind
People's Bank and three of the Company's distributors on accounts
receivable and inventory and a first lien on all other assets.. Interest
only is payable semi-annually commencing on the earlier of (i) September
5, 1998 or (ii) the date the Company declares any dividend or
repurchases any of its outstanding stock. The loan was funded upon
achievement of certain milestones and advances of $100,000, $250,000,
$150,000 and $250,000 were received by the Company on September 5, 1995,
January 26, 1996, March 26, 1996 and June 14, 1996. 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.
15
<PAGE>
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 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. Two of the
letters of credit expired on September 6, 1996 and the Company expects
them to be renewed. The third letter of credit has been extended to
September 6, 1997. 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 Peoples, 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.
16
<PAGE>
As of September 30, 1996, the Company had borrowed $260,000 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. At
September 30, 1996 the Company (including Vivax) had a net worth of $783,000,
net rental equipment of $456,000, working capital deficiency of $505,000,
including unrestricted cash of $203,000, accounts receivable of $650,000 and
inventory aggregating $595,000. In the month of October 1996, the Company
received net proceeds aggregating $900,000 from the sale of 500,000 shares of
its common stock, sold pursuant to a Registration Statement ("the September 1996
Registration"), which was partially used to repay a loan to Northern and will be
used for working capital and other corporate purposes.
At September 30, 1995, the Company had a net worth of $885,000, working
capital of $992,000, including cash of $994,000, accounts receivable of $8,000
and inventory aggregating $239,000.
The Company has expended approximately $40,000 to purchase furniture and
equipment for its new manufacturing facility in Bristol, Connecticut.
Manufacturing operations commenced in November 1995 and at September 30, 1996
the Company employed 13 workers in this facility, including assemblers,
supervisors, purchasing agent, administrative assistant and executive officers.
The Company is reviewing plans to purchase additional manufacturing equipment
and has accelerated manufacturing levels in order to begin shipping quantities
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 (which has been waived for the September 1996 Registration) 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
17
<PAGE>
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:
<TABLE>
<CAPTION>
End of Each Quarter End of Each Quarter
During the Period During the Period
Ending September Commencing October 1,
30, 1996 1996 and Thereafter
------------------- ---------------------
<S> <C> <C>
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
</TABLE>
For purposes of the agreement, "Working Capital" is defined as current
assets minus current liabilities, "Current Ratio" is defined as current assets
divided by current liabilities, "Capital Funds" is defined as the sum of
tangible net worth plus subordinated debt minus the sum of intangible assets
plus loans to officers, directors, employees and affiliates, and "Unsubordinated
Debt Ratio" is defined as total unsubordinated debt divided by total capital
funds. At September 30, 1996, the Company was not in compliance with working
capital, equity and unsubordinated debt covenants. The Company has obtained a
waiver from Peoples and must comply with such covenants by December 31, 1996.
However, such covenants become more stringent for the quarter ending December
31, 1996. The Company hopes to comply with the covenants by raising funds in
public or private offerings similar to the September 1996 Registration. There
can be no assurance that the Company will be able to raise such funds or obtain
such funds under reasonable terms.
The People's Bank loan is secured in part by three letters of credit which
were established for one year and must be replaced or extended for an additional
year. They are still in place as of October 31, 1996. 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 $1.75
million of additional financing to finance its operations over the 8 month
period following November 1996, including
18
<PAGE>
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 expired in September 1996 and has been extended to September 1997. Vivax's
obligation to reimburse the bank which posted the letter of credit is secured by
a first lien on Vivax's accounts receivable and inventory. Nova's obligation to
reimburse Vivax is secured by a second lien on Nova's accounts receivable and
inventory.
On July 15, 1996, the Company obtained a $250,000 loan from Northern
Associates, L.P., ("Northern") an affiliate of TimeCapital Securities
Corporation ("TimeCapital"), bearing interest at the rate of 10% per annum
payable in registered Common Stock. The loan was repaid by the Company on
November 1, 1996.
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.
19
<PAGE>
The Company estimates that it will need to obtain additional equity
contributions of at least $1,750,000 to finance its operations over the 8 month
period following November 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. In the month of October 1996
TimeCapital purchased 500,000 shares of the Company's Common Stock at $2 per
share and remitted net proceeds to the Company of $900,000. 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 two
finders, one of whom is Arlindo Jorge, a director of the Company, pursuant to
which it will pay a commission of 10% of the proceeds of private placement sales
obtained by the finders. There can be no assurance that the Company's estimates
will prove to be accurate, that the Company will be able to raise such
additional capital or that the Company's existing distributors will fulfill
their minimum purchases. If such contingencies are not realized, the Company
would have to drastically reduce its staff and curtail manufacturing operations
which may result in a default under and acceleration of the Company's loan
obligations and, ultimately, bankruptcy and/or the discontinuance of operations.
PART II. OTHER INFORMATION
-----------------
Not Applicable
20
<PAGE>
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)
November 14, 1996 By:/s/ Stephen M. Fisher
------------------------------------
President
November 14, 1996 By:/s/ Harold J. Lash
------------------------------------
Harold J. Lash
Controller and Chief
Accounting Officer
21
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-30-1996
<CASH> 203,403
<SECURITIES> 0
<RECEIVABLES> 684,448
<ALLOWANCES> 34,300
<INVENTORY> 595,246
<CURRENT-ASSETS> 1,465,003
<PP&E> 973,534
<DEPRECIATION> 306,656
<TOTAL-ASSETS> 4,599,993
<CURRENT-LIABILITIES> 1,970,299
<BONDS> 0
0
0
<COMMON> 64,194
<OTHER-SE> 718,829
<TOTAL-LIABILITY-AND-EQUITY> 4,599,993
<SALES> 1,183,569
<TOTAL-REVENUES> 1,183,569
<CGS> 1,153,286
<TOTAL-COSTS> 1,153,286
<OTHER-EXPENSES> 1,044,304
<LOSS-PROVISION> 7,123
<INTEREST-EXPENSE> 165,120
<INCOME-PRETAX> (1,145,236)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,145,236)
<EPS-PRIMARY> (.19)
<EPS-DILUTED> (.19)
</TABLE>
