<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 March 31, 1996
--------------
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
For the transition period from __________to ___________
Commission file number 33-42880
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NOVA TECHNOLOGIES, INC.
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(Exact name of small business issuer as specified in its charter)
Delaware 11-2674603
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(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
89 Cabot Court, Unit L, Hauppauge, New York 11788
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(Address of principal executive offices)
(516) 434-8811
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(Issuer's telephone number)
Not Applicable
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(Former name, former address and former fiscal year, if changed
since last report)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes [X] No[ ]
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS
Check whether the registrant filed all documents and reports required to be
filed by Section 12, 13 or 15(d) of the Exchange Act after the distribution of
securities under a plan confirmed by a court. Yes [ ] No[ ]
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date:
Common Stock, $.01 par value - 5,801,183 shares outstanding as of May 1,
1996.
Transitional Small Business Disclosure Format: Yes No X
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
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<TABLE>
<CAPTION>
NOVA TECHNOLOGIES, INC.
CONDENSED BALANCE SHEETS
(Unaudited) March 31, 1996 December 31, 1995
--------------- -----------------
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents......................... $273,954 $485,819
Inventories....................................... 483,365 332,995
Accounts receivable............................... 114,519 45,155
Prepaid expenses and other current assets......... 48,296 71,185
----------- -----------
Total current assets........................... 920,134 935,154
Restricted cash........................................ 190,000 100,000
Subscription receivable................................ 90,000
Equipment and leasehold improvements (net of accumu-
lated depreciation and amortization of $226,670 in
1996 and $226,576 in 1995)......................... 129,268 136,256
Deposits and other assets.............................. 121,594 64,931
Deferred financing costs............................... 62,412 69,852
----------- -----------
TOTAL.......................................... $1,423,408 $1,396,193
=========== ===========
LIABILITIES
Current liabilities:
Accounts payable and accrued expenses............. $273,486 $277,430
Customer prepayments.............................. 18,909 18,909
Deferred officers' compensation (including accrued
interest of $684 in 1995)....................... 86,767
Notes payable-officers............................ 115,750
----------- -----------
Total current liabilities...................... 408,145 383,106
Note payable-other (net of deferred debt discount of
$74,776 in 1996 and $15,111 in 1995).............. 435,687 88,102
Note payable-officers (including accrued interest of
$23,582 in 1996 and $15,779 in 1995).............. 182,832 290,779
Deferred officers' compensation (including accrued
interest of $2,086 in 1996)....................... 134,168
Other liabilities...................................... 15,250
Grant award............................................ 50,000 50,000
----------- -----------
Total liabilities.............................. 1,226,082 811,987
----------- -----------
STOCKHOLDERS' EQUITY
Common stock - $.01 par value; 14,000,000 shares
authorized; 5,798,483 and 5,791,083 shares issued
and outstanding, respectively...................... 57,985 57,911
Additional paid-in capital............................. 9,918,608 9,847,887
Deficit................................................ (9,779,267) (9,321,592)
----------- -----------
Total stockholders' equity .................... 197,326 584,206
----------- -----------
TOTAL $1,423,408 $1,396,193
=========== ===========
</TABLE>
The attached notes are made a part hereof.
2
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<TABLE>
<CAPTION>
NOVA TECHNOLOGIES, INC.
CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
Three months ended
March 31,
-----------------------
1996 1995 *
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<S> <C> <C>
Net sales........................................... $82,553 $119,882
Cost of sales....................................... 302,706 171,229
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Gross (loss)........................................ (220,153) (51,347)
----------- -----------
Research and development expense.................... 81,619 67,286
General, administrative, marketing
and consulting expenses........................... 152,126 126,189
----------- -----------
Total expenses...................................... (233,745) (193,475)
----------- -----------
(Loss) from operations.............................. (453,898) (244,822)
Interest and other income........................... 24,054 1,530
Interest expense.................................... (27,831) (554)
----------- -----------
NET LOSS............................................ ($457,675) ($243,846)
=========== ===========
Net loss per share.................................. ($0.08) ($0.06)
====== ======
Weighted average number of common
shares used in computing loss
per share......................................... 5,796,016 4,355,533
========= =========
</TABLE>
The attached notes are made a part hereof.
* As Adjusted
3
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<TABLE>
<CAPTION>
NOVA TECHNOLOGIES, INC.
STATEMENTS OF CASH FLOWS
(Unaudited) Three months ended
March 31,
--------------------------
1996 1995 *
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<S> <C> <C>
Cash flows from operating activities:
Net loss................................................................. ($457,675) ($243,846)
Adjustments to reconcile net loss to net cash ---------- ----------
(used in) operating activities:
Depreciation and amortization........................................... 27,740 20,319
Value assigned to warrants given to employees........................... 9,142
Common stock issued for professional services rendered. 8,214
Changes in operating assets and liabilities:
(Increase) decrease in inventories..................................... (150,370) 34,952
(Increase) in accounts receivable, prepaid expenses
and other assets...................................................... (103,138) (17,524)
(Increase) in restricted cash.......................................... (90,000)
Decrease in subscription receivable.................................... 90,000
Increase (decrease) in accounts payable and accrued
expenses.............................................................. 11,305 (36,917)
Increase in deferred officers' compensation............................ 46,000 48,000
Increase in accrued interest payable................................... 16,455
---------- ----------
Net cash (used in) operating activities................................ (601,469) (185,874)
---------- ----------
Cash flows from investing activities:
Purchase of equipment and capitalized tooling costs...................... (10,396) (4,978)
---------- ----------
Cash flows from financing activities:
Proceeds from notes payable.............................................. 400,000
Proceeds from sale of common stock....................................... 95,100
Issuance costs incurred in sale of common stock.......................... (9,510)
Proceeds from exercise of warrants....................................... 99,565
---------- ----------
Net cash provided by financing activities............................ 400,000 185,155
---------- ----------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS.......................... (211,865) (5,697)
Cash and cash equivalents at beginning of period.......................... 485,819 102,245
---------- ----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD................................ $273,954 $96,548
========== ==========
Supplemental disclosure of cash flow information-
Forgiveness of debt owed to officers................................... $762,852
Value of warrants given in connection with financing................... $ 62,800
</TABLE>
The attached notes are made a part hereof.
* As Adjusted
4
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NOVA TECHNOLOGIES, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
AS OF MARCH 31, 1996
(UNAUDITED)
(NOTE A):
---------
The accompanying unaudited financial statements contained in the Form
10-QSB represent condensed financial data and, therefore, do not include all
footnote disclosures required to be included in financial statements prepared in
conformity with generally accepted accounting principles. Such footnote
disclosure was included in the Company's Form 10-KSB for the year ended December
31, 1995; the condensed financial data included herein should be read in
conjunction with the Form 10-KSB. The December 31, 1995 balance sheet has been
derived from the audited financial statements included in the Company's 1995
Form 10-KSB.
(NOTE B):
---------
(1) In management's opinion, all necessary adjustments (consisting only
of normal recurring adjustments) have been made in order to present fairly the
results for the interim periods.
(2) The results of operations for three months ended March 31, 1996 are
not necessarily indicative of the results of operations for the year ending
December 31, 1996.
(3) From inception through December 31, 1994, the Company reported
results as a development stage enterprise. Since January 1,1995, the Company is
no longer classified as a development stage enterprise.
(NOTE C):
---------
Net loss per share is based on the weighted average number of shares
outstanding during each period. No effect has been given to outstanding options
and warrants as the effect would be antidilutive.
(NOTE D):
---------
Inventories are stated at the lower of cost (first-in, first-out) or
market.
(NOTE E):
---------
In September 1995, pursuant to a series of interdependent transactions,
the Company sold 900,901 shares of its common stock for an aggregate of
$1,000,000 in a private placement, received a grant commitment from the city of
Bristol, Connecticut of up to $100,000 and received loan commitments to borrow
in the aggregate of up to $2,050,000 from a bank and various agencies and public
authorities of the state of Connecticut in connection with moving its
manufacturing facilities to Bristol, Connecticut. The loan commitments are as
follows:
5
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NOVA TECHNOLOGIES, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
AS OF MARCH 31, 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.
Principal is due on September 5, 2001, collateralized by the assets of the
Company, including patents, which security interest except for patents, is
subordinated to the security interest of the Company's lending bank. As of March
31, 1996, the Company borrowed $500,000 under this facility. The Company granted
CII a warrant to purchase 300,000 shares of common stock at an exercise price of
$1.11 per share, expiring on September 1, 2001. The warrant becomes exercisable
on a pro rata basis, as the Company achieves its milestones and makes additional
borrowings under the facility. As of March 31, 1996, 200,000 of such warrants
are exercisable and have been valued at $78,800.
(b) The Company entered into a loan agreement with People's Bank
("Peoples") providing for a $1,000,000 revolving credit facility expiring on
September 5, 1997 at an interest rate of prime plus 1 1/2%. Borrowings available
under the facility are limited to 80% of eligible accounts receivable and 50% of
eligible inventory and are collateralized by the Company's accounts receivable
and inventory. At March 31, 1996 no borrowings were made under this loan
agreement.
The facility contains restrictive covenants that limit capital
expenditures and other financial and ratio requirements with respect to working
capital, equity and unsubordinated debt. The facility restricts the payment of
dividends and also requires funds to be held in escrow as a Debt Service
Reserve, as defined in the agreement.
The Connecticut Development Authority ("CDA") has guaranteed repayment
of 40% of the outstanding balance of the loan. The Company's president has
guaranteed repayment of 20% (up to $80,000) of any amounts paid by CDA to
Peoples under their guarantee. In addition, three of the Company's product
distributors (the "LOC Corporations") each agreed to provide an irrevocable
letter of credit in the amount of $200,000 for an aggregate of $600,000, which
letters of credit can be drawn down upon the failure of the Company to make when
due any payment to Peoples. In exchange for issuing these letters of credit, the
Company issued each of the LOC Corporations a warrant to purchase up to 20,000
shares (60,000 in the aggregate) of the Company's common stock at an exercise
price of $2.50 per share.
Pursuant to a put/call agreement with two of the LOC Corporations, the
Company had the right to require the two LOC
6
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NOVA TECHNOLOGIES, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
AS OF MARCH 31, 1996
(UNAUDITED)
Corporations to purchase an aggregate of 126,667 shares of common stock (or the
LOC Corporations had the right to call the Company to issue its common stock) at
$1.50 per share for total proceeds of $190,000. The Company received proceeds of
$190,000 during the period December 1995 through March 1996. Pursuant to the
financing agreement with Peoples, the proceeds received from the LOC
Corporations reduce their outstanding letters of credit in that amount and the
funds are to be held in a restricted cash account by the Company and the number
of shares that could be purchased by LOC Corporations under the warrants was
reduced by 19,000.
(c) The Company entered into a loan agreement with CDA providing for a
line of credit of up to $100,000 until September 4, 1996 for 80% of the purchase
price of new or used equipment, bearing interest at the rate of 7.94%. The loan
is repayable in 48 equal monthly installments commencing October 1, 1998 and is
collateralized by all the equipment purchased with the proceeds. The Company
granted CDA warrants to purchase an aggregate 45,000 shares of common stock at
an exercise price of $2.50 per share. At March 31, 1996 no borrowings were made
under this loan agreement.
(d) The Company entered into an Assistance Agreement, which was
approved November 30, 1995 with the Department of Economic and Community
Development ("DECD"), providing for a loan to the Company in an amount not to
exceed $200,000 for funding the relocation of the Company's factory (as defined
therein) at an interest rate of 5% per annum. The principal and interest of the
loan is due in 84 equal monthly payments commencing on the third anniversary of
the advancement date, and is collateralized by certain machinery and equipment.
At March 31, 1996 no borrowings were made under the Assistance Agreement.
(e) The Company entered into a Grant Agreement, dated August 8, 1995
with the city of Bristol, Connecticut ("Bristol"), providing, under certain
conditions, for a grant in an amount up to $100,000 ($50,000 was received in
October 1995 and the balance is to be received on the achievement of certain
employment levels). If the Company relocates 60% of its equipment or employees
of its manufacturing facilities outside Bristol prior to August 8, 2005, the
Company will be obligated to immediately repay the grant.
(NOTE F):
---------
At March 31, 1996 the notes payable to officers, as amended, bear interest
at 11% and 12% per annum. The 11% and 12% notes (aggregating $170,000 and
$105,000), respectively) are payable on April 1, 1997.
7
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NOVA TECHNOLOGIES, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
AS OF MARCH 31, 1996
(UNAUDITED)
The notes are subordinated to the borrowings under the People's Bank ("Peoples")
and Connecticut Innovations, Incorporated ("CII") loan facilities. The officers
received permission from Peoples and CII to substitute deferred compensation
aggregating $115,750 due them at March 31, 1996 for an equal amount of
subordinated notes payable and in April 1996, a payment of $115,750 was made to
the officers reducing the amount owed to them under the notes payable.
(NOTE G):
---------
Two officers have agreed to defer until April 1, 1997 payment of salaries
due them aggregating $16,332. Two officers have agreed to defer until April 1,
1997 payment of interest on deferred compensation due them aggregating $2,086.
Three directors have agreed to defer payment of accrued director's fees until
April 1, 1997 aggregating $15,250.
(NOTE H):
---------
In the beginnining of May 1996, the Company borrowed $200,000 under its
revolving line of credit.
8
<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. The Company is now manufacturing its
second lot of Novabed units and is incorporating certain design
changes based on suggestions from its distributors.
Since January 1, 1995, the Company is no longer classified as a
development stage enterprise. As of March 31, 1996 it had entered into
eight distributorship agreements providing for the sale and shipment
of Novabeds to each distributor and the granting of an exclusive sales
territory to each distributor. At March 31, 1996, these agreements
represent in the aggregate, purchase commitments with a value of
approximately $5,700,000, to be ordered and delivered over a period of
up to 36 months.
In 1994, the three distributors then under contract with the
Company ordered and were shipped an aggregate of 19 Novabeds which
exceeded their aggregate minimum purchase requirements by 4 units. In
1995, the Company sold and shipped only 8 Novabeds to its three
distributors, most of which were shipped in the first quarter. This
sales decrease resulted from the Company's lack of sufficient working
capital and the Company's focus on arranging, negotiating and
consummating the 1995 Financing and relocating its assembly operations
from New York to Connecticut. As a result, in 1995 the Company was
unable to produce sufficient product to satisfy its distributors'
minimum purchase requirements. The Company and the two distributors
who were unable to receive their minimum purchase requirements in 1995
agreed to extend the period for selling and purchasing the minimum
requirements for 1995 and thereafter by one year.
In 1995, the Company decided to alter the way Novabeds are
produced. Through the first quarter of 1995, the Company produced a
number of the components of the Novabed in-house. The Company is now
subcontracting much of this work. As a result, the Company will be
able to produce Novabeds with less capital for tooling and equipment.
Results of Operations
In the three months ended March 31, 1996 the Company recorded
sales of $83,000 and incurred a net loss of $458,000 ($.08 per share)
9
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compared to sales of $120,000 and a net loss, as adjusted, of $244,000
($.06 per share) in the three months ended March 31, 1995.
In the quarter ended March 31, 1996 the Company's cost of sales
exceeded its sales and the Company sustained a gross loss of $220,000
compared to a gross loss of $51,000 in the quarter ended March 31,
1995. In September 1995, the Company opened its new 28,000 square foot
manufacturing facility in conjunction with the completion of an equity
and debt financing package (the "1995 Financing"). The new
manufacturing facility was necessary to enable the Company to meet its
manufacturing requirements and sales objectives. Manufacturing
overhead in the first quarter increased $135,000 from $91,000 in 1995
to $226,000 in 1996. Initially, production levels at the new facility
have not been high enough to absorb the additional manufacturing
overhead incurred in the new facility. As production and sales levels
increase the Company expects gross losses to diminish and thereafter
rising gross profits, although no assurance can be given that the
Company will be able to achieve such satisfactory production and sales
levels.
Research and development expenses increased $15,000 from $67,000
(as adjusted for salary accruals) in the first quarter of 1995 to
$82,000 in the comparable 1996 quarter. The increase is attributable
to a $5,000 increase in an officer's salary rate for the quarter and
increased wages devoted to research and development efforts in the
first quarter of 1996.
General, administrative, marketing and consulting expenses
increased $26,000 from $126,000 (as adjusted for salary accruals) in
the first quarter of 1995 to $152,000 in the comparable 1996 quarter.
The increase is attributable to an $11,000 increase in an officer's
salary rate for the quarter and an increase of approximately $16,000
in legal and accounting expenses.
Interest expense increased $27,000 from $1,000 in 1995 to $28,000
in 1996, of which $18,000 is attributable to interest expense and
amortization of financing costs in connection with the 1995 Financing.
In addition, in the first quarter of 1996 two officers, who earned
interest aggregating $9,000 on debt due them, waived the accrual of
interest on debt due them in the comparable 1995 quarter.
The Company's agreements with its distributors generally provide
for a fixed purchase price for Novabeds for an initial period that
expires June 30, 1997. The Company's agreement with one of its
distributors provides for a fixed price through December 31, 1998. If
inflation, component parts pricing or other conditions result in an
increase in the cost of producing Novabeds, the Company will not be
able to pass along such increased costs to its distributors. The
Company does not expect that these fixed price provisions will have a
material impact on the Company.
10
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As a result of common stock sales in 1995 the weighted average
number of common shares used in computing loss per share increased
from 4,355,533 at March 31, 1995 to 5,796,016 at March 31, 1996.
Liquidity and Capital Resources
During the first quarter of 1996 the Company used net cash in
operating activities aggregating $601,000 compared to $186,000 in the
prior year's quarter. The increase in funds used in operating
activities is attributable to the increase in net loss and to
increases in inventory, accounts receivable and other assets as the
Company began utilizing funds received in the 1995 Financing. The
Company purchased equipment and capitalized certain tooling costs
aggregating $10,000 compared to $5,000 in the prior year. In the first
quarter of 1996 the Company received proceeds of $400,000 from
borrowing under the 1995 Financing.
As of September 5, 1995, the Company negotiated the 1995
Financing consisting of the following:
1. $888,280 in net proceeds after finder's fees and expenses, from the
sale of 900,901 shares of restricted Common Stock at a price of $1.11
per share.
2. $1,000,000 loan facility from the People's Bank ("People's") under a
two-year revolving line of credit collateralized by accounts
receivable and inventory and a collateral cash account. The loan
bears interest at prime rate plus 1.5%. Advances shall not exceed 80%
of eligible accounts receivable plus 50% of eligible inventory.
Although, People's has 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") have been fully funded, People's has verbally
agreed to waive such conditions because the Company temporarily
deferred the purchase of capital equipment to be purchased with CDA
and DECD loans. People's obligation to advance funds is also limited
to 50% of the amount advanced by Connecticut Innovations,
Incorporated ("CII") until the CII loan has been fully funded. In
early May 1996, the Company borrowed $200,000 under the People's
facility.
3. $750,000 loan from CII maturing on September 5, 2001. The loan bears
interest at 10% and is collateralized by all of the Company's assets,
including its intellectual property. 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 is to be funded upon achievement of
certain milestones. The first three milestones have been achieved and
advances of $100,000, $250,000 and $150,000 were received by the
Company on September 5, 1995, January 26,1996 and March
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26, 1996. The final $250,000 will be funded when 100% of the
Company's direct labor force is working in Connecticut, 75% of all
manufacturing operations are located in Connecticut, 3 medical
outcome studies have been completed and the Company employs at least
3 sales and service staff, including an insurance reimbursement
specialist. The Company projects that the final advance will be
received in early June 1996. In connection with this loan, CII
received warrants to purchase 300,000 shares of Common Stock at $1.11
per share. Such warrants vest pro rata as the CII loan is advanced.
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 the equipment purchased with the proceeds. The
loan is payable in equal monthly installments of principal and
interest commencing October 1, 1998 in an amount sufficient to fully
amortize the loan over its remaining term. If the Company's full time
employment in Connecticut is less than 67 jobs after February 1,
1998, then the Company must repay $1,500 of the loan for each job
below such number and the interest rate will be adjusted upward based
on a sliding scale which increases based on the number of jobs below
such employment target. CDA also received warrants to purchase 45,000
shares of Common Stock at $2.50 per share in exchange for a guarantee
securing the People's loan up to a maximum of $400,000.
5. $200,000 loan from DECD for the purchase of capital equipment,
maturing ten years from the date of the first advance. The loan bears
interest at 5% and is collateralized by the equipment purchased with
the proceeds.
6. $100,000 grant from the City 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 were given to three of the
Company's distributors in exchange for their issuing letters of
credit securing the People's loan up to a maximum of $600,000. The
Company and two of the distributors also entered into an agreement
allowing such distributors to purchase, and allowing the Company to
require such distributors to purchase, under certain circumstances an
aggregate of up to 126,667 shares of restricted Common Stock at a
price of $1.50 per share. The call was exercised by the distributors
in September 1995 and the Company received proceeds of $100,000 in
1995, $50,000 in January 1996 and $40,000 in March 1996. Pursuant to
the financing agreement with People's, the proceeds received from the
distributors
12
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reduced their outstanding letters of credit and are to be held in a
restricted cash account by the Company. 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.
As of May 8, 1996, the Company had borrowed $200,000 under the
revolving line of credit and had not received any funds under the
equipment loans, although it plans to begin to borrow from these
sources in 1996. Legal fees and commitment fees (excluding the value
of warrants) in connection with the 1995 Financing were approximately
$90,000. At March 31, 1996, the Company has a net worth of $197,000,
working capital of $512,000, including unrestricted cash of $274,000,
accounts receivable of $115,000 and inventory aggregating $483,000. At
March 31, 1995, the Company had a net worth of $50,000, working
capital of $140,000, including cash of $97,000, accounts receivable of
$13,000 and inventory aggregating $171,000. The Company has expended
less than $40,000 to purchase furniture and equipment for its new
manufacturing facility in Bristol, Connecticut. Manufacturing
operations commenced in November and at March 31, 1996 the Company
employed 11 workers in this facility, including assemblers, welders,
supervisors, a purchasing agent and an administrative assistant. The
Company is reviewing plans to purchase additional manufacturing
equipment. 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 Company intends to continue to explore a strategic alliance
or merger as a means of improving the Company's cash flow and capital.
In this regard, the Company is engaged in discussions with several
distributors of medical products regarding a potential business
combination. The Company's discussions with all but one of the
distributors are preliminary. However, 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, the
resolution of certain material business issues and ongoing due
diligence. There can be no assurance that any such transaction will be
consummated.
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%
13
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of its officers in Connecticut, basing a majority of its employees in
Connecticut and conducting the majority of its operations in
Connecticut. The Company is currently in compliance with this
requirement. The CII loan agreement contains a mandatory prepayment
provision in the event the Company ceases to maintain a Connecticut
presence, the Company sells Common Stock for its own account in an
underwritten public offering or there is a change in control of the
Company or its assets. This provision includes a prepayment penalty in
an amount equal to the greater of (i) an amount sufficient to provide
a rate of return of 25% compounded annually or (ii) the excess of the
market price of the Common Stock underlying the warrant granted to CII
over the exercise price of such warrant. The grant from the City of
Bristol must be prepaid if prior to August 8, 2005, the Company
relocates 60% of the equipment or employees of its manufacturing
operations outside of Bristol or the Company defaults in payment of
property taxes due to Bristol. The Company has treated the $50,000
grant paid by the City of Bristol as a grant award, to be recorded as
income at a later date, if applicable. In order to comply with these
requirements, the Company established its manufacturing facility in
Bristol, Connecticut.
From January 1, 1995 through August 31, 1995, the Company sold
approximately 394,000 shares of Common Stock in private placement
sales, from which it derived net proceeds of approximately $545,000.
In January 1995, the Company received $99,600 from the purchase of
73,752 shares of Common Stock by holders of warrants issued in 1990
with an exercise price of $3.00 per share and an expiration date of
December 31, 1994, which expiration was extended to January 20, 1995
at a revised exercise price of $1.35 per share. The remaining warrants
to purchase 77,391 shares of Common Stock on the same terms were not
exercised and were permitted to lapse.
The Company has received reports on its financial statements from
its independent auditors which include an explanatory paragraph
indicating that substantial doubt exists about the ability of the
Company to continue as a going concern. The factors referenced by the
auditors include the Company's recurring operating losses and the need
for additional financing for commercial exploitation of its product.
The Company believes it has sufficient working capital and borrowing
availability to finance operations until June 1996. The Company
estimates that it will need to obtain an additional equity
contribution of at least $1,000,000 on or before June 30, 1996 and
that it will need approximately $1,000,000 in additional financing
prior to December 31, 1996 beyond the $1,000,000 required by June 30,
1996 to finance its operations over the 12 month period following June
1996. These estimates are generated from an internally prepared
business plan. The Company has begun to seek additional capital and
has retained TimeCapital Securities Corporation ("TimeCapital") as its
exclusive agent to assist the Company in raising $500,000 by May 21,
1996 and an additional $500,000 by June 30, 1996 through the sale of
Common Stock at a price of $2.00 per share in private placement. The
Company has also entered into an agreement with TimeCapital for it to
14
<PAGE>
act as the Company's exclusive agent to assist in arranging for one or
more qualified broker-dealers to serve as the underwriter(s) on behalf
of the Company in connection with a public offering of Common Stock.
The Company also has verbal agreements with three finders, one of whom
is Arlindo Jorge, a director of the Company, pursuant to which it will
pay a commission of 10% of the proceeds of private placement sales
obtained by the finders. There can be no assurance that the Company's
estimates will prove to be accurate, that the Company will be able to
raise such additional capital or that the Company's existing
distributors will fulfill their purchase commitments. 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
15
<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)
May 20, 1996 By:/s/ Paul DiMatteo
----------------------------------
Paul DiMatteo
President
May 20, 1996 By:/s/ Stephen M. Fisher
----------------------------------
Stephen M. Fisher
Senior Vice President
and Principal Financial
Officer
May 20, 1996 By:/s/ Harold J. Lash
----------------------------------
Harold J. Lash
Controller and Chief
Accounting Officer
16
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<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> MAR-31-1996
<CASH> 273,954
<SECURITIES> 0
<RECEIVABLES> 114,519
<ALLOWANCES> 0
<INVENTORY> 483,365
<CURRENT-ASSETS> 920,134
<PP&E> 355,938
<DEPRECIATION> 226,670
<TOTAL-ASSETS> 1,423,408
<CURRENT-LIABILITIES> 408,145
<BONDS> 0
0
0
<COMMON> 57,985
<OTHER-SE> 139,341
<TOTAL-LIABILITY-AND-EQUITY> 197,326
<SALES> 82,553
<TOTAL-REVENUES> 82,553
<CGS> 302,706
<TOTAL-COSTS> 536,451
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 27,831
<INCOME-PRETAX> (457,675)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (457,675)
<EPS-PRIMARY> (.08)
<EPS-DILUTED> (.08)
</TABLE>
