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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, 1997
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[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
For the transition period from to
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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)
545 Middle Street Bristol, Connecticut 06010
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(Address of principal executive offices)
(860) 589-8200
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(Issuer's telephone number)
89 Cabot Court, Unit L, Hauppauge, NY 11788
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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 - 7,692,657 shares outstanding as of
April 1, 1997.
Transitional Small Business Disclosure Format: Yes No X
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
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NOVA TECHNOLOGIES, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS AND PRO FORMA BALANCE SHEET
<TABLE>
<CAPTION>
Pro Forma
March 31, 1997 March 31, 1997 December 31, 1996
See Note J
------------------------------------------------------------
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents........................... $255,880 $601,027 $373,526
Inventories......................................... 217,044 217,044 584,026
Accounts receivable, net of reserve for doubtful
accounts.......................................... 1,249,123 984,083 581,815
Prepaid expenses and other current assets........... 85,620 85,620 95,278
Subscription receivable............................. 800,000
-------------- ----------- -----------
Total current assets............................. 1,807,667 1,887,774 2,434,645
Restricted cash.......................................... 216,300 216,300 216,300
Rental equipment, net of accumulated depreciation........ 1,740,338 1,036,959 935,821
Equipment and leasehold improvements, net of accumulated
depreciation and amortization........................ 404,286 404,286 319,905
Deposits and other assets................................ 189,962 187,366 93,868
Deferred financing costs................................. 47,129 47,129 54,083
Goodwill, net of accumulated amortization................ 1,918,254 1,279,919 1,296,591
-------------- ----------- -----------
TOTAL............................................ $6,323,936 $5,059,733 $5,351,213
============== =========== ===========
LIABILITIES
Current liabilities:
Accounts payable and accrued expenses............... $867,663 $807,150 $705,105
Income taxes payable................................ 18,406 18,406 30,000
Notes payable-bank.................................. 260,000 260,000 260,000
Notes payable-stockholders including accrued
interest.......................................... 137,301 137,301 134,609
Notes payable-acquisition debt...................... 800,000 300,000 300,000
Current maturities of long-term debt................ 55,646
Deferred officers' compensation (including accrued
interest)......................................... 196,428 196,428 210,924
-------------- ----------- -----------
Total current liabilities........................ 2,335,444 1,719,285 1,640,638
Note payable-CII (including accrued interest
and net of deferred debt discount).................. 737,307 737,307 713,318
Note payable-acquisition debt
(including accrued interest)........................ 800,000 800,000 785,000
Note payable-CDA including accrued interest.............. 102,246 102,246 100,243
Note payable-DECD including accrued interest............. 202,250 202,250
Note payable-other....................................... 32,044
Deferred tax liability................................... 30,000 30,000 30,000
Grant award and other liabilities........................ 73,124 73,124 73,124
-------------- ----------- -----------
Total liabilities................................ 4,312,415 3,664,212 3,342,323
-------------- ----------- -----------
STOCKHOLDERS' EQUITY
Common stock - $.01 par value; 14,000,000 shares
authorized........................................... 80,594 76,927 76,697
Additional paid-in capital............................... 13,961,345 13,349,012 13,307,542
Deficit.................................................. (12,030,418) (12,030,418) (11,375,349)
-------------- ----------- -----------
Total stockholders' equity ...................... 2,011,521 1,395,521 2,008,890
-------------- ----------- -----------
TOTAL............................................ $6,323,936 $5,059,733 $5,351,213
============== =========== ===========
</TABLE>
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
March 31,
-----------------------------
1997 1996
-----------------------------
<S> <C> <C>
Net sales.................................... $421,826 $82,553
Rental income................................ 393,347
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Total revenues................. 815,173 82,553
Cost of revenues............................. 822,964 302,706
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Gross (loss)................................. (7,791) (220,153)
Research and development expense............. 142,536 81,619
General, administrative and
marketing expenses......................... 462,411 152,126
-----------------------------
Total expenses............................... (604,947) (233,745)
-----------------------------
(Loss) from operations....................... (612,738) (453,898)
Interest and other income.................... 27,294 24,054
Interest expense............................. (69,625) (27,831)
-----------------------------
NET LOSS..................................... ($655,069) ($457,675)
=============================
Net loss per share........................... ($0.09) ($0.08)
======= =======
Weighted average number of common
shares used in computing loss
per share.................................. 7,677,990 5,796,016
========= =========
</TABLE>
The attached notes are made a part hereof.
3
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NOVA TECHNOLOGIES, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Three months ended
March 31,
--------------------------------
1997 1996
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<S> <C> <C>
Cash flows from operating activities:
Net loss......................................................... ($655,069) ($457,675)
Adjustments to reconcile net loss to net cash
(used in) operating activities:
Depreciation and amortization................................... 155,485 27,740
Common stock issued for services rendered....................... 8,214
Changes in operating assets and liabilities:
Decrease (increase) in inventories............................. 366,982 (150,370)
(Increase) in accounts receivable, prepaid expenses
and other assets.............................................. (486,110) (103,138)
(Increase) in restricted cash.................................. (90,000)
Increase in accounts payable and accrued expenses.............. 90,454 11,305
(Decrease) increase in deferred officers' compensation......... (17,500) 46,000
Increase in accrued interest payable........................... 43,619 16,455
--------------------------------
Net cash (used in) operating activities...................... (502,139) (691,469)
--------------------------------
Cash flows from investing activities:
Purchase of equipment............................................ (312,060) (10,396)
--------------------------------
Cash flows from financing activities:
Proceeds from issuance of notes payable.......................... 200,000 400,000
Proceeds from sale of common stock............................... 46,000
Issuance costs incurred in sale of common stock.................. (4,300)
Decrease in subscription receivable.............................. 800,000 90,000
--------------------------------
Net cash provided by financing activities.................... 1,041,700 490,000
--------------------------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS.................. 227,501 (211,865)
Cash and cash equivalents at beginning of period.................. 373,526 485,819
--------------------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD........................ $601,027 $273,954
================================
Supplemental disclosure of cash flow information:
Value of warrants given in connection with financing........... $62,800
</TABLE>
The attached notes are made a part hereof.
4
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NOVA TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AS OF MARCH 31, 1997
(UNAUDITED)
(NOTE A):
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(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 for the year
ended December 31, 1996. The condensed financial data included herein should be
read in conjunction with the Form 10-KSB. The December 31, 1996 balance sheet
has been derived from the audited financial statements included in the Company's
1996 Form 10-KSB.
(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 three months ended March 31, 1997
are not necessarily indicative of the results of operations for the year ending
December 31, 1997.
(NOTE C):
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Net loss per share is based on the weighted average number of shares
outstanding during each period. No effect has been given to outstanding options
and warrants as the effect would be antidilutive.
(NOTE D):
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Inventories are stated at the lower of cost (first-in, first-out) or
market.
(NOTE E):
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At March 31, 1997 the following loans are outstanding:
<TABLE>
<S> <C>
(a) Notes Payable-Peoples $ 260,000
(b) Notes Payable-Stockholder 99,250
(c) Notes Payable-Acquisition Debt 1,050,000
(d) Notes Payable-CII 750,000
(e) Notes Payable-CDA 100,000
(f) Notes Payable-DECD 200,000
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Total Notes Payable 2,459,250
Current Portion 659,250
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Long-term Portion $1,800,000
</TABLE>
5
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NOVA TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AS OF MARCH 31, 1997
(UNAUDITED)
(a) revolving credit loan maturing September 5, 1997: interest at prime
plus 1 1/2%.
(b) interest at 11% per annum; payable October 1, 1997 and subordinated
to the borrowings under the Peoples and CII loan facilities. At the
stockholder's discretion the note can be repaid in cash or he may elect to
receive one three-year warrant in exchange for each dollar of debt, to purchase
the Company's common stock at $1.50 per share.
(c) comprised of a $300,000 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. On December 30, 1996 $450,000 of the
original $750,000 promissory note was exchanged for 225,000 shares of the
Company's common stock.
(d) matures on September 5, 2001, with interest payable semi-annually
at 10% per annum commencing on September 5, 1998.
(e) matures on September 1, 2002 and repayable in 48 equal monthly
installments commencing October 1, 1998 bearing interest at the rate of 7.94%
per annum.
(f) repayable in 84 equal monthly installments commencing on January 9,
2000 bearing interest at the rate of 5% per annum.
(NOTE F):
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Two officers have agreed to defer payment of salaries due them
aggregating $183,083 and payment of interest on deferred compensation due them
aggregating $13,345. Deferred salaries of two officers, aggregating $175,750 are
subordinated to borrowings under Peoples and CII loan facilities.
(NOTE G):
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In June 1996 the Company, through a wholly-owned acquisition
corporation, acquired all of the outstanding capital stock of Comed Systems,
Inc., now called Vivax in exchange for 600,000 shares of its common stock and
two $750,000 promissory notes issued by the acquisition corporation. 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 Vivax'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
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NOVA TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AS OF MARCH 31, 1997
(UNAUDITED)
resulted in goodwill of approximately $1,334,000.
(NOTE H):
- ---------
In January 1997 the Company entered into an agreement with Therapy
Concepts, Inc ("Therapy") containing a commitment to purchase certain of
Therapy's products in 1997 and an option (expiring on October 1, 1999) to
acquire a part or all of Therapy's business for an amount payable in a
combination of cash and the Company's common stock.
(NOTE I):
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In May 1997 the Company borrowed $95,000 from People's Bank under its
revolving credit facility.
(NOTE J):
- ---------
In May 1997 the Company entered into an agreement to purchase all of
the outstanding stock of Concept Medical Corporation and Affiliates ("Concept")
in exchange for 366,667 shares of its common stock, a $500,000 promissory note
and $500,000 cash payable at closing. The closing is scheduled for on or about
June 30, 1997. The note will bear interest at 8% per annum and will be subject
to quarterly prepayment installments commencing September 30, 1998. Such
installments will be equal to the lesser of $31,250 or 25 percent of Concept's
operating income (as defined). The transaction will be accounted for as a
purchase. The cost of the acquisition has been allocated to the fair market
value of the assets acquired and liabilities assumed and goodwill of
approximately $638,000 was recorded. Assuming the sale was consummated as of the
beginning of the current and prior fiscal years pro forma operating results of
the Company would be as follows:
<TABLE>
<CAPTION>
Three months ended March 31,
1997 1996
----------------------
<S> <C> <C>
Revenue.............. $1,035,528 $ 419,701
Net loss............. (641,457) (341,736)
Loss per share....... ($.08) ($.06)
Shares used.......... 8,044,657 6,162,683
</TABLE>
7
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Item 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
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 Mobility System and in raising capital to
design and develop a marketable product. In 1994, the Company began taking
orders for Novabed units and in June 1994, the Company shipped its initial
Novabed model.
As of March 31, 1997 the Company has 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.
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") in exchange for 600,000 shares of
the Company's common stock and two $750,000 promissory notes. On December 30,
1996, $450,000 of one of the notes was exchanged for 225,000 shares of the
Company's common stock.
Prior to the acquisition of Comed by Nova, Comed was an independent
distributor of Nova products. The distribution agreement between Nova and Comed
was terminated in connection with the acquisition of Comed by Nova. It is
anticipated that Nova will sell its products to Comed (now Vivax) on
substantially the same terms that Nova sells its products to Nova's independent
distributors. Historically, margins have been greater in the business of
distributing specialty medical beds than in the business of manufacturing
specialty medical devices for sale to distributors. Accordingly, the Company
anticipates that the acquisition of Vivax will have a positive impact on
revenues, income and the Company's margin.
Comed Systems, Inc. was incorporated in December 1989 and began
operations in mid 1991 to distribute specialized beds and support surfaces in
eastern New England. These devices are utilized to manage the treatment and
prevention of pressure wounds, burns, trauma and pain control. The initial
distribution of these products was to the acute and acute rehabilitation
facilities. The initial products being distributed were manufactured by Health
Products of Houston, Texas. The company later distributed products manufactured
by Sunrise Medical, Cardio System, Huntleigh, Creative Medical and Nova
Technologies Inc. The company would purchase the products which ranged in price
from $3,000 to $25,000. The device would then be rented on a daily basis to the
facility. The initial financing was provided by a loan from an officer and a
Small Business Administration ("SBA") backed loan for $500,000 through the
Hampton Co-op Bank. The SBA loan was paid in full in January 1995 and the loan
to the officer was paid
8
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in full in May 1996.
In May 1997 the Company entered into an agreement to purchase all of
the outstanding stock of Concept Medical Corporation and Affiliates ("Concept").
Concept is a distributor of the Company's products and rents specialty beds in
South Florida. The purchase price of $2,100,000 was valued pursuant to the
agreement and consisted of 366,667 shares of the Company's common stock valued
at $1,100,000, a $500,000 promissory note and a cash payment at closing of
$500,000. The closing is scheduled for on or about June 30, 1997.
Results of Operations
In the three months ended March 31, 1997 the Company recorded revenues
of $815,000 and incurred a net loss of $655,000 ($.09 per share) compared to
revenues of $83,000 and a net loss of $458,000 ($.08 per share) in the three
months ended March 31, 1996. The results of 1997 include the operations of Vivax
which was acquired in June 1996; as a result of the acquisition, the comparison
between the quarters ended March 31, 1997 and March 31, 1996 may not necessarily
be meaningful.
The increase in revenues of $732,000 is due to the acquisition of Vivax
($393,000) and increased Nova sales ($339,000). Nova incurred a loss for the
quarter of $687,000 and Vivax earned $32,000 in the quarter.
In the quarter ended March 31, 1997 the Company's cost of sales
exceeded its sales and the Company sustained a gross loss of $8,000 compared to
a gross loss of $220,000 in the quarter ended March 31, 1996. Vivax's gross
profit of $187,000 was offset by a $195,000 gross loss by Nova. In September
1995, Nova 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 Nova
to meet its manufacturing requirements and sales objectives. Initially,
production levels at the new facility have not been high enough to absorb the
higher overhead incurred in the new facility and the cost of servicing units
sold has increased as more units are shipped to customers. In addition, the rate
of production has been curtailed as the Company installs new production
equipment and gears up for a revised model of the Novabed. Manufacturing in the
Hauppauge facility was shut down at the end of June 1996. As production and
sales levels increase the Company expects Nova's gross losses to diminish and
thereafter rising gross profits, although no assurance can be given that Nova
will be able to achieve such satisfactory production and sales levels.
Research and development expenses increased $61,000 from $82,000 in the
first quarter of 1996 to $143,000 in the comparable 1997 quarter. The increase
is attributable to the change in the Hauppauge facility's function from
manufacturing to research and development, consulting fees and increased wages
and expenses applicable to
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research and development efforts. The Company plans to reduce research and
development expenses and closed its 7500 square foot Hauppauge facility in March
1997. On May 1, 1997 the Company moved that operation to a 1500 square foot
building and reduced the number of personnel involved in the research and
development function.
General, administrative and marketing expenses increased $310,000 from
$152,000 in the first quarter of 1996 to $462,000 in the comparable 1997
quarter. The increase is attributable to expansion of the sales force by Nova,
increases in payroll and payroll-related items, consulting fees concerning
possible acquisitions and financing, and sundry expenses in connection with the
growth of the Company. The acquisition of Vivax in June 1996 resulted in
increased expenses aggregating $160,000 in the current quarter, of which $17,000
is attributable to the amortization of goodwill incurred in connection with the
acquisition of Comed.
Interest expense increased $42,000 from $28,000 in 1996 to $70,000 in
1997, of which approximately $21,000 is attributable to interest on debt and
amortization of financing costs incurred in the 1995 Financing and $21,000 is
attributable to interest on notes payable issued in conjunction with the
acquisition of Comed.
As a result of the issuance of common stock in 1996 for capital funds
and for the acquisition of Comed, the weighted average number of common shares
used in computing loss per share increased from 5,796,000 at March 31, 1996 to
7,678,000 at March 31, 1997.
Liquidity and Capital Resources
During the first quarter of 1997 the Company (including Vivax) used net
cash in operating activities aggregating $502,000 compared to $692,000 in the
prior years's first quarter. The decrease in funds used in operating activities
resulted from the effect of higher depreciation charges, inventory reductions
(primarily of Novabeds) and higher accounts payable and accrued expenses. The
Company purchased equipment aggregating $312,000, of which $110,000 was used for
the Bristol facility and $202,000 was used to buy rental equipment for Vivax. In
the prior year's comparable quarter, equipment purchases were $10,000. In the
quarter ended March 31, 1997 the Company paid $62,000 for the development and
right to use plans and technology for three types of mattresses it intends to
manufacture and market.
In the quarter ended March 31, 1997 net cash provided by financing
activities aggregated $1,042,000 compared to $490,000 in the first quarter of
1996. In January 1997, the Company received proceeds of a $200,000 loan from the
Connecticut Department of Economic and Community Development and received
$842,000 in connection with the sale of its common stock. In the first quarter
of 1996 the Company received proceeds of a $400,000 loan from Connecticut
Innovations, Incorporated and received $90,000 from the sale of its common
stock.
10
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As of March 31, 1997, the Company had borrowed $260,000 under the
revolving line of credit and $300,000 under equipment loans (including a
$200,000 equipment loan in January 1997). At March 31, 1997 the Company
(including Vivax) had a net worth of $1,396,000, net rental equipment of
$1,037,000, working capital of $168,000, including unrestricted cash of
$601,000, accounts receivable of $984,000 and inventory aggregating $217,000.
At March 31, 1996, the Company had 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.
The Company has expended approximately $298,000 to purchase equipment
and furniture for its new manufacturing facility in Bristol, CT. and has
purchased approximately $300,000 of rental equipment for Vivax since its
acquisition in June 1996. The Company has at present no material commitments for
capital expenditures.
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>
REQUIRED ACTUAL
<S> <C> <C>
Min. Working Capital $700,000 $168,489
Min. Current Ratio 1.75 to 1.00 1.10 TO 1.00
Min. Capital Funds $1,300,000 $1,366,986
Max. Unsubord. Debt Ratio 2.50 to 1.00 1.72 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 March 31, 1997, the Company was not in compliance with the Minimum
Working Capital and Minimum Current Ratio covenants. The bank has agreed to
waive these covenants at March 31, 1997 and the Company is currently in
discussion with People's Bank with regard to changes in the financial covenants.
The People's Bank loan was secured in part by three letters of credit. The Bank
has agreed to accept substitute collateral from the Company in the form of
additional restricted cash to be held in escrow in the Debt Service Reserve and
has agreed to release these letters of credit. Failure to satisfy any of these
financial covenants constitutes a default under the People's Bank financing
which allows People's Bank to terminate its obligation to provide financing to
the Company and to accelerate all loans outstanding to the Company. A default
under the People's Bank financing also constitutes a default under the Company's
other financing arrangements. The Company estimates that it will require
approximately $2 million of additional financing to finance its
operations over the 12 month period following March 1997, including
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the payment of the $300,000 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
was extended from June 14, 1997 to July 1, 1997. On December 30, 1996 $450,000
of the note was converted to 225,000 shares of the Company's common stock. 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 April 20, 1998, 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.
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 has contracted to
purchase Concept for $2,100,000. In order to meet the terms required at the June
30, 1997 closing date, the Company must raise funds for the required cash
payment of $500,000. The Company believes that it has the resources to either
borrow funds or sell equity to complete this transaction, although no assurance
can be given that the Company will be able to secure such funds or secure at
economical terms.
In January 1997 the Company entered into an agreement with Therapy
Concepts Inc. ("Therapy"), a manufacturer and distributor of air therapy support
surfaces and other related medical products with approximately $10 million in
annual revenues. Under the terms of the agreement the Company has the right to
purchase and Therapy has the option to sell either or both the manufacturing and
the distribution business of Therapy at a purchase price based on a multiple of
earnings (as defined). The term of the option period is from December 1, 1997 to
October 1, 1999. In order to exercise its option, the Company must obtain an
additional $10 million in equity and be listed on the NASDAQ national market
system.
The Company is also 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.
12
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At December 31, 1996, an $800,000 subscription receivable for the sale
of 400,000 shares of the Company's common stock was outstanding. The Company
received proceeds of this subscription in the first quarter of 1997 aggregating
$800,000 less commissions of $80,000.
The Company has received reports on its financial statements from its
independent auditors which include an explanatory paragraph indicating that
substantial doubt exists about the ability of the Company to continue as a going
concern. The factors referenced by the auditors include the Company's recurring
operating losses and the need for additional financing for commercial
exploitation of its product. The Company estimates that it will need to obtain
additional equity or debt contributions of at least $2,000,000 to finance its
operations over the 12 month period following March 1997. 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 has the right to
terminate this agreement at any time upon payment to TimeCapital of $250,000,
comprised of $100,000 cash and 150,000 shares of Nova common stock. 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
13
<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)
June 2, 1997 By: /s/ Stephen M. Fisher
-----------------------------------------
President
June 2, 1997 By: /s/ Harold J. Lash
-----------------------------------------
Harold J. Lash
Controller and Chief
Accounting Officer
14
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<CASH> 601,027
<SECURITIES> 0
<RECEIVABLES> 1,108,325
<ALLOWANCES> 124,242
<INVENTORY> 217,044
<CURRENT-ASSETS> 1,887,774
<PP&E> 2,046,428
<DEPRECIATION> 605,183
<TOTAL-ASSETS> 5,059,733
<CURRENT-LIABILITIES> 1,719,285
<BONDS> 0
0
0
<COMMON> 76,927
<OTHER-SE> 1,318,594
<TOTAL-LIABILITY-AND-EQUITY> 5,059,733
<SALES> 815,173
<TOTAL-REVENUES> 815,173
<CGS> 822,964
<TOTAL-COSTS> 1,427,911
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 69,625
<INCOME-PRETAX> (655,069)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (655,069)
<EPS-PRIMARY> (.09)
<EPS-DILUTED> (.09)
</TABLE>
