Unassociated Document
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D. C. 20549
FORM
10-QSB
(Mark
One)
x
QUARTERLY REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE
ACT OF 1934 for the quarterly period ended March 31, 2006.
o
TRANSITION REPORT UNDER
SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE
ACT OF 1934 for the transition period from __________ to ________.
Commission
file number: 000-33231
INNOVA
HOLDINGS, INC.
(Name
of
Small Business Issuer in its charter)
Delaware
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95-4868120
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(State
or other jurisdiction of incorporation or organization)
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(IRS
Employer Identification No.)
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17105
San Carlos Boulevard, Suite A6151, Fort Myers, Florida 33931
(Address
of principal executive offices)
(239)
466-0488
(Issuer's
telephone number)
Check
whether 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 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 o
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 o No o
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes o No x
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: As of May 1, 2006, the issuer had 604,861,850
shares of common stock, $.001 par value, issued and outstanding.
Transitional
Small Business Issuer Format (Check One): Yes o No x
INNOVA
HOLDINGS, INC.
MARCH
31, 2006 QUARTERLY REPORT ON FORM 10-QSB
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PAGE
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PART
I - FINANCIAL INFORMATION
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Item
1. Financial Statements (Unaudited)
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Consolidated
Balance Sheet
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3
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Statements
of Operations
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4
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Statements
of Cash Flows
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5
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Notes
to Consolidated Financial Statements
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6
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Special
Note Regarding Forward Looking Statements
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13
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Item
2. Management's Discussion and Analysis or Plan of
Operations
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13
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Item
3. Controls and Procedures
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16
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PART
II - OTHER INFORMATION
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16
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Item
1. Legal Proceedings
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16
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Item
2. Unregistered Sales of Equity Securities and Use of
Proceeds
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16
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Item
3. Defaults Upon Senior Securities
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16
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Item
4. Submission of Matters to a Vote of Security
Holders
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17
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Item
5. Other Information
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17
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Item
6. Exhibits
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17
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SIGNATURES
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18
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INNOVA
HOLDINGS, INC.
CONSOLIDATED
BALANCE SHEET
March
31,
2006
(Unaudited)
ASSETS
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Current
assets
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Cash
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$
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30,157
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Accounts
receivable
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38,217
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Inventory
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39,072
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Total
current assets
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107,446
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Property
and equipment, net
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116,604
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Deferred
financing cost
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346,285
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TOTAL
ASSETS
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$
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570,335
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LIABILITIES
AND STOCKHOLDERS' DEFICIT
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Current
liabilities
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Current
maturities of long-term debt
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$
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67,382
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Accounts
payable
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851,092
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Accrued
expenses
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1,446,251
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Notes
payable
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965,801
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Dividend
payable
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35,971
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Derivative
liability
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31,800
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TOTAL
CURRENT LIABILITIES
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3,398,297
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Long-term
debt
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921,718
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Commitments
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STOCKHOLDERS'
DEFICIT:
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Preferred
stock, $.001 par value, 10,000,000 shares authorized,
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492,000
shares issued and outstanding
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492
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Common
stock, $.001 par value, 900,000,000 shares authorized,
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569,302,879
shares issued and outstanding
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569,303
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Additional
paid-in capital
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6,304,996
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Accumulated
deficit
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(10,624,471
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)
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Total
Stockholders' Deficit
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(3,749,680
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)
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TOTAL
LIABILITIES AND STOCKHOLDERS' DEFICIT
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$
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570,335
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The
accompanying notes are an integral part of these consolidated financial
statements.
INNOVA
HOLDINGS, INC.
STATEMENTS
OF OPERATIONS
Three
Months Ended March 31, 2006 and 2005
(Unaudited)
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2006
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2005
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As
restated
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Revenues
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$
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136,490
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$
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-
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Cost
of revenues
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107,690
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-
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Gross
profit
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28,800
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-
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Operating
expenses:
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Selling,
general and administrative
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942,909
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84,343
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Outside
services
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50,259
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139,763
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Legal
fees
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27,034
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13,998
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Professional
fees
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18,705
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295,012
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Depreciation
and amortization
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5,450
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416
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Total
operating expenses
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1,044,357
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533,532
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Loss
from operations
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(1,015,557
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(533,532
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Interest
expense
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(86,782
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(23,537
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Derivative
income (loss)
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(13,992
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-
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Net
loss
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$ |
(1,116,331
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$
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(557,069
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Loss
applicable to common shareholders:
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Net
loss
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$
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(1,116,331
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$
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(557,069
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Beneficial
conversion features and accretions of preferred stock
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(22,610
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(144,000
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Loss
applicable to common shareholders
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$
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(1,138,941
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$
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(701,069
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Loss
per common share:
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Basic
and diluted
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$
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(0.00
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$
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(0.00
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Weighted
average shares outstanding:
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Basic
and diluted
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519,917,518
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371,296,897
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The
accompanying notes are an integral part of these consolidated financial
statements.
INNOVA
HOLDINGS, INC
STATEMENTS
OF CASH FLOWS
Three
Months Ended March 31, 2006 and 2005
(Unaudited)
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2006
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2005
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CASH
FLOWS FROM OPERATING ACTIVITIES
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Net
loss
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$
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(1,116,331
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$
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(557,069
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Adjustments
to reconcile net loss to cash used in
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operating
activities:
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Depreciation
and amortization
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5,450
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416
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Stock
based compensation
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530,021
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-
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Amortization
of deferred financing costs
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2,900
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-
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Amortization of
debt discount
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56,021
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-
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Derivative
loss
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13,992
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-
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Changes
in assets and liabilities:
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Decrease
in inventory
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21,090
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-
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Increase
in accounts receivable
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(38,217
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)
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-
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Increase
in accounts payable
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6,544
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234,563
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Decrease
in accrued expenses
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(73,351
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)
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205,129
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CASH
FLOWS USED IN OPERATING ACTIVITIES
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(591,881
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)
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(116,961
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CASH
FLOWS FROM INVESTING ACTIVITIES
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Additions
to property and equipment
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(5,963
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)
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-
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CASH
FLOWS FROM INVESTING ACTIVITIES
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(5,963
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)
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-
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CASH
FLOWS FROM FINANCING ACTIVITIES
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Proceeds
from sale of common stock
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696,215
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-
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Proceeds
from sale of preferred stock
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-
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148,166
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Payments
of notes payable
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(75,000
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)
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-
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CASH
FLOW FROM FINANCING ACTIVITIES
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621,215
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148,166
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NET
INCREASE (DECREASE) IN CASH
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23,371
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31,205
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Cash,
beginning of period
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6,786
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2,794
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Cash,
end of period
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$
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30,157
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$
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33,999
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SUPPLEMENTAL
CASH FLOW INFORMATION:
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Interest
paid
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$
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4,313
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$
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19,876 |
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Income
taxes paid
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- |
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$
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-
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Supplemental
Disclosure of Non-cash Transactions:
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Amortization
of deferred financing costs
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$
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49,315
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$
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-
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Conversion
of series A preferred stock
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$
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58,840
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$
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-
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The
accompanying notes are an integral part of these consolidated financial
statements.
INNOVA
HOLDINGS, INC.
(Unaudited)
NOTE
1 - BASIS OF PRESENTATION
The
accompanying unaudited interim financial statements of Innova Holdings, Inc.
have been prepared in accordance with accounting principles generally accepted
in the United States of America and the rules of the Securities and Exchange
Commission ("SEC"), and should be read in conjunction with the audited financial
statements and notes thereto contained in the Company's registration statement
filed with the SEC on form 10-KSB. In the opinion of management, all
adjustments, consisting of normal recurring adjustments, necessary for a
fair
presentation of financial position and the results of operations for the
interim
periods presented have been reflected herein. The results of operations for
interim periods are not necessarily indicative of the results to be expected
for
the full year. Notes to the financial statements which would substantially
duplicate the disclosure contained in the audited financial statements for
the
most recent fiscal year ended December 31, 2005 as reported in form 10-KSB
have
been omitted.
In
accordance with SFAS 123(R), the Company has implemented the modified
prospective method which recognizes compensation expense at previously
determined fair values for all unvested awards granted to employees prior
to the
effective date of adoption and fair value for all new share-based payments
made
after adoption. The effect on net loss related to the adoption of FAS 123(R)
was
$358,271.
The
following tabular presentation reflects net loss applicable to common
stockholders for share-based employee compensation as of March 31, 2006 and
2005:
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2006
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2005
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Net
loss applicable to common shareholders:
|
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$
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(1,138,941
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)
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$
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(701,069
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)
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Share-based
employee compensation included in net
loss
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$
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530,021
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-
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Pro
forma net loss applicable to common shareholders for share-based
employee
compensation
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(45,500
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)
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Pro
forma net loss applicable to common shareholders
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$
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(746,569
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)
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Loss
per common share:
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Basic
and diluted - as reported
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$
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(0.00
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)
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Basic
and diluted - pro forma
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$
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(0.00
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)
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For
new
share-based payments made after adoption, the Company has estimated fair
value
at the date of grant using the Flexible Binomial Model, which includes a
volatility assumption of 44.19%, a risk-free rate of 2.45% and the related
term
of the share-based payments ranging from immediate to five years. In determining
fair value of share-based payments as of March 31, 2006, management has
estimated a forfeiture rate of 5%.
During
the first quarter of 2006 there were 20,000,000 options granted to directors
and
13,000,000 options granted to employees. The share purchase options granted
to
directors vested upon the award and for employees the options vest evenly
over a
three year period from date of grant. All options granted in the first quarter
are exercisable at $.01 per share and they expire ten years after the grant
date. The options had a fair value of $210,833 on the grant date.
In
March
2006 the Company modified 18,000,000 options granted in 2005 to the Chief
Financial Officer by changing their vesting from a three year period to 100%
vested as of December 14, 2005 and by changing the exercise price from $.036
to
$.01. And the Company modified 15,000,000 options granted to the Chief Executive
Offficer and 5,658,621 options granted to an employee in 2005 by changing
the
exercise price from $.017 per share to $.01 per share. Additionally, the
Chief
Financial Officer received a bonus of 5,625,000 shares of the Company’s common
stock on March 10, 2006, which was valued at $50,000 based on $.009 per share,
the closing price of the Company stock on the previous day. In connection
with
the modification the Company recorded a charge of $260,000.
NOTE
3 - CAPITAL STOCK
On
June
14, 2005, Innova entered into a Standby Equity Distribution Agreement with
Cornell Capital Partners. Under the Standby Equity Distribution Agreement,
Innova may issue and sell to Cornell Capital Partners common stock for a
total
purchase price of up to $10,000,000. The purchase price for the shares is
equal
to their market price, which is defined in the Standby Equity Distribution
Agreement as the lowest volume weighted average price of the common stock
during
the five trading days following the date notice is given by the Company that
it
desires an advance. The amount of each advance is subject to an aggregate
maximum advance amount of $400,000, with no advance occurring within five
trading days of a prior advance. Cornell Capital Partners received a one-time
commitment fee of 2,608,699 shares of the Company's common stock equal to
approximately $90,000 based on Innova's stock price on May 4, 2005, when
the
term sheet for the Standby Equity Distribution Agreement was signed. Cornell
Capital Partners is paid a fee equal to 5% of each advance, which is retained
by
Cornell Capital Partners from each advance. The Company will pay a structuring
fee of $500 for each advance made under the Standby Equity Distribution
Agreement. The Company also issued to Cornell Capital Partners its promissory
note for $300,000, which is payable by December 31, 2006. The note does not
bear
interest except in the event of a default.
During
the first quarter of 2006, the Company utilized the Standby Equity Distribution
Agreement and sold 74,232,572 shares of common stock to Cornell Capital for
gross proceeds of $635,000. Of the gross proceeds received, Cornell was paid
$31,750 in commitment fees and $4,500 in structuring fees.
On
June
23, 2004, the Company entered into a private placement and sold 125,000 shares
of Series A Preferred Stock for $125,000. Each share of the Series A Preferred
Stock (i) pays a dividend of 5%, payable at the discretion of the Company
in
cash or common stock, (ii) is convertible immediately after issuance into
the
number of shares of common stock equal to $1.00 divided by a conversion price
equal to the lesser of 75% of the average closing bid price of the Company's
common stock over the twenty trading days preceding conversion or $0.005,
(iii)
has a liquidation preference of $1.00 per share, (iv) must be redeemed by
the
Company five years after issuance at $1.00 per share plus accrued and unpaid
dividends, (v) may be redeemed by the Company at any time for $1.30 per share
plus accrued and unpaid dividends,(vi) grants rights to acquire one share
of
Common Stock for each share of Common Stock issued on conversion at a price
per
share equal to the average of the closing price of the common stock on the
five
business days preceding the date of conversion for a period of one year from
the
date of conversion and,(vii) has no voting rights except when mandated by
Delaware law.
Of
the
$125,000 proceeds received from the issuance of the Series A Preferred Stock,
$50,000 was allocated to the beneficial conversion feature embedded in the
Series A Preferred Stock on the date of issuance based on a conversion price
of
$.005 per share. Of this amount, $48,300 was the unamortized embedded beneficial
feature assumed as part of the reverse merger with Robotic Workspace
Technologies, Inc. The beneficial conversion feature is being amortized over
five (5) years and accordingly $3,600 was amortized through Accumulated Deficit
through December 31, 2004. Additionally, the excess of the aggregate fair
value
of the common stock to be issued upon conversion over the $125,000 of proceeds
received when the Series A Preferred Stock was issued amounted to $50,000.
During
the quarter ended September 30, 2005, 43,550 shares of Series A Preferred
Stock
were converted into 8,710,001 shares of Common Stock of the Company.
Accordingly, $13,832 of the unamortized beneficial conversion feature associated
with the converted Series A Preferred Stock was amortized to Accumulated
Deficit
and credited to Additional Paid in Capital during the three months ended
September 30, 2005. Additionally, $8,258 of the remaining beneficial conversion
feature was amortized through Accumulated Deficit for the twelve months ended
December 31, 2005. The total beneficial conversion feature amortized through
Accumulated Deficit associated with the Series A Preferred Stock was $22,090
through the twelve months ended December 31, 2005.
During
the quarter ended March 31, 2006, the remaining $81,450 shares of the Series
A
preferred stock were converted into 16,290,000 shares of the Company’s common
stock, and dividends were converted into 112,168 shares of the Company’s common
stock. Accordingly, all of the remaining unamortized beneficial conversion
feature associated with the converted Series A Preferred Stock totaling $22,610
was amortized to Accumulated Deficit and credited to Additional Paid in Capital
during the three months ended March 31, 2006. As
of
March 31, 2006 there were rights outstanding to acquire 25,000,000 shares
of the
Company’s common stock associated with the conversion of Series A Preferred
Stock into common stock of the Company. These rights have a weighted average
exercise price of $0.018 per share and a weighted average remaining term
of 8
months as of March 31, 2006.
During
the first quarter ended March 31, 2006 the Company obtained an additional
$100,650 of funds through the private placement sale of 11,594,093 shares
of the
Company's common stock at prices ranging from $.0073 to $.0171 per
share.
On
January 24, 2006, the Company entered into a Letter Agreement (the “Agreement”)
with CoroWare, Inc. (“CoroWare”), under which the Company agreed to purchase and
CoroWare agreed to sell all of its assets including, without limitation,
all
hardware, software, employee relations, customer contacts in the military
and
homeland security markets, contacts with Microsoft, Inc. and all other
customers, and all other tangible and intangible assets including all developed
software.
CoroWare
is a systems integration firm with particular expertise in the area of mobile
service robotics. CoroWare is the only mobile service robotics company to
join
the Microsoft ® Windows Embedded Partner Program. CoroWare uses the Windows XP
Embedded operating system to power its mobile service robots, which are based
on
de facto standards, off-the-shelf hardware and proven software.
The
Letter Agreement indicates that the purchase price will consist of: (a) up
to
$450,000 in cash, of which $100,000 is non-contingent and the balance of
$350,000 is contingent based on sales and the gross profit percentage of
the
CoroWare business; (b) up to 30,000,000 restricted shares of the Company’s
common stock, of which 5,000,000 are non-contingent and vest in three equal
annual installments commencing one year from the closing, and the balance
of
25,000,000 is contingent based on sales and the gross profit percentage of
the
Coroware business; and (c) 2,000,000 common stock options exercisable at
$.018
per share, vesting in three equal annual installments commencing one year
from
the closing, with a term of ten years from the date of grant, to be allocated
to
employees of CoroWare. In addition, the Company shall assume specific
liabilities of CoroWare in the amount of $98,168, and no other liabilities.
The
purchased business assets will be placed in a new subsidiary of the Company,
which will change its name to “CoroWare” after the closing.
In
the
event that the Company enters into a binding agreement to sell all of its
stock
or assets, or all of the assets acquired from CoroWare, prior to receipt
by
CoroWare of all of the restricted share portion of the purchase price to
be paid
under the Agreement, then the remaining portion of the restricted share
component of the purchase price shall be delivered to CoroWare immediately
prior
to the closing of such transaction.
The
new
subsidiary shall enter an employment agreement with each key employee of
CoroWare. In addition, in the first twelve month period following closing,
such
key employees shall be eligible for a compensation bonus, based on sales
of not
less than $1,900,000.
The
Company’s obligation to purchase the assets set forth in the Agreement is
subject to a satisfactory due diligence review. If the Company does not notify
CoroWare on or prior to April 30, 2006 that it is not satisfied with the
results
of the due diligence review, this requirement will be deemed met. For purposes
of the Agreement, the Company will be deemed satisfied with the due diligence
review if (a) audited financial statements to be delivered by CoroWare are
not
materially different from the unaudited financial information previously
provided to the Company by Coroware; and (b) all other information relating
to
the business assets of CoroWare does not differ materially from the information
provided to the Company by CoroWare prior to the date of the
Agreement.
The
obligations under the Agreement terminate in the event that (a) a definitive
written agreement is not executed by April 30, 2006; (b) the transaction
contemplated by the Agreement has not closed by May 31, 2006; or (c) there
is a
material adverse change in the business of either the Company or
CoroWare.
The
determination of the consideration to be paid in the transaction was determined
in arms length negotiations between the Boards of Directors of the Company
and
CoroWare. The negotiations took into account the value of the assets sold
to the Company and the consideration paid. At the time of the
transaction, there were no material relationships between CoroWare and the
Company, or any of its affiliates, any director or officer of the Company,
or
any associate of any such officer or director.
Stock
Options:
Compensation
costs of $530,021 were recognized during the first quarter of 2006 for grants
under the stock option plans as a result of the Company implementing SFAS
123(R)
effective January 1, 2006. Under the modified prospective method, the Company
recognizes compensation expense at previously determined fair values for
all
unvested awards granted to employees prior to the effective date of adoption
and
fair value for all new share-based payments made after adoption.
During
the first quarter of 2006 there were 20,000,000 options granted to directors
and
13,000,000 options granted to employees. The share purchase options granted
to
directors vested upon the award and for employees the options vest evenly
over a
three year period from date of grant. All options granted in the first quarter
are exercisable at $.01 per share and they expire ten years after the grant
date.
In
March
2006 the Company modified 18,000,000 options granted to the Chief Financial
Officer in 2005 by changing their vesting from a three year period to 100%
vested as of December 14, 2005 and by changing the exercise price from $.036
to
$.01. Additionally, 12,121,276 options that were granted in December 2004
to
Stratex Solutions, LLC, the business owned by the Chief Financial Officer
before
he became an employee of the Company, with an exercise price of $.005 per
share
and vesting monthly over five years were changed to vest over three years.
And the Company modified 15,000,000 options granted to the Chief Executive
Officer and 5,658,621 options granted to an employee in 2005 by changing
the
exercise price from $.017 per share to $.01 per share.
The
Board
of Directors of the Company approved all of the stock options awarded and
modified.
For
new
share-based payments made after adoption of SFAS 123(R), the Company has
estimated fair value at the date of grant using the Flexible Binomial Model,
which includes a volatility assumption of 44.19%, a risk-free rate of 2.45%
and
the related term of the share-based payments ranging from immediate to five
years. In determining fair value of share-based payments as of March 31,
2006,
management has estimated a forfeiture rate of 5%.
The
following table summarizes stock option activity:
|
|
|
|
Outstanding,
December 31, 2005
|
|
|
103,107,400
|
|
Granted
|
|
|
33,000,000
|
|
Cancelled
|
|
|
-
|
|
Exercised
|
|
|
-
|
|
Outstanding,
March 31, 2006
|
|
|
136,107,400
|
|
Weighted-average
grant-date fair
|
|
|
|
|
value
of options
|
|
$
|
0.01
|
|
Weighted-average
remaining years
|
|
|
|
|
of
contractual life
|
|
|
9.1
|
|
NOTE
4 - NOTES PAYABLE AND
LONG TERM DEBT
On
June
14, 2005 the Company entered into a Standby Equity Distribution Agreement
discussed in Note 3 above. In connection with this agreement, the Company issued
a $300,000 promissory note to Cornell Capital partner, the major terms of which
are as follows:
-the
Company shall repay the Promissory Note in three equal principal payments of
One
Hundred Thousand Dollars ($100,000) each on the 30th, 60th and 90th days
following the date Securities and Exchange Commission declares that a
registration statement filed by the Company in connection with the Standby
Equity Distribution Agreement is effective, which was December 22, 2005.
-this
Promissory Note shall not bear interest unless and until there is an event
of
default.
-at
the
option of Cornell Capital Partners, all sums advanced under the promissory
note
shall become immediately due and payable, without notice or demand, upon the
occurrence of any one or more of the following events of default: (a) the
Company's failure to pay in full any payment of principal within 5 days of
the
date when such payment of principal becomes due; (b) the commencement of any
proceedings under any bankruptcy or insolvency laws, by or against the Company;
or (c) the registration statement is not declared effective within one hundred
eighty (180) days of the date hereof, unless such failure to obtain
effectiveness is solely due to reasons related to the transactions described
in
the Company's April 29, 2003 8-K.
-any
payment of principal which is not paid within 5 days of the date such payment
becomes due, shall bear interest at the rate of twelve (12) percent per annum
commencing on the date immediately following the day upon which the payment
was
due. Upon the occurrence of any event of default as defined above, all sums
outstanding shall thereupon immediately bear interest at the rate of twelve
(12)
percent per annum.
The
promissory note of $300,000 issued to Cornell has been recorded as a note
payable and as deferred financing costs. Also, the Company received a waiver
from Cornell delaying the payment of the amounts due to no later than December
31, 2006. During the three months ended March 31, 2006 $20,000 of the promissory
note was repaid.
On
October 7, 2005, the Company entered into a Securities Purchase Agreement with
Cornell Capital Partners, LP ("Cornell Capital"). Pursuant to this Agreement,
the Company sold a Convertible Debenture in the principal amount of $55,000
to
Cornell Capital. The Convertible Debenture bears interest at the rate of 12%
per
annum and is due on April 7, 2006. The Company will pay directly to Cornell
Capital all revenues it receives until the principal amount and all accrued
interest on the Convertible Debenture has been paid in full. The principal
of
the Convertible Debenture is convertible into common stock of the Company at
a
price of $.03 per share (the "Conversion Shares"). In the event of default
by
the Company, the principal of the Convertible Debenture is convertible into
Conversion Shares at a price of $.005 per share. The Company granted demand
registration rights to Cornell Capital for the Conversion Shares. The
Convertible Debenture is secured by a second lien on all of the assets of the
Company. During the quarter ended March 31, 2006, $30,000 of the convertible
debentures was repaid to Cornell Capital.
As
further discussed under Derivative Liability below, the entire proceeds from
the
Cornell Capital Convertible Debenture were allocated to a derivative liability,
which is being carried at fair value. The resulting discount on the host
instrument is being amortized over the term of the instrument using the
effective interest method. Amortization of debt discount during the three
months
ended March 31, 2006 amounted to $52,471.
During
September through December 2005 the Company entered into short-term debt
obligations other than in the ordinary course of business totaling $257,000.
All
of this short-term debt bears interest at the rate of 10% per annum and is
due
between ninety and one hundred twenty days. All of the lenders are shareholders
of the Company, including the Chief Financial Officer who loaned the Company
$45,000 and a Director who loaned the Company $1,000. All lenders agreed
to
extend the due date to December 31, 2006. During the first quarter ended
March
2006, $25,000 was repaid to a shareholder.
Derivative
Financial Instruments:
The
Company accounts for all derivative financial instruments in accordance with
SFAS No. 133. Derivative financial instruments are recorded as liabilities
in
the consolidated balance sheet, measured at fair value. When available, quoted
market prices are used in determining fair value. However, if quoted market
prices are not available, the Company estimates fair value using either quoted
market prices of financial instruments with similar characteristics or other
valuation techniques.
The
value
of the derivative liabilities relating to the credit facilities in the quarterly
financial statements are subject to the changes in the trading value of the
Company’s common stock and other assumptions. As a result the Company’s
quarterly financial statements may fluctuate from quarter to quarter based
on
factors such as trading value of the Company’s Common Stock. Consequently, our
consolidated financial position and results of operations may vary from quarter
to quarter based on conditions other than the Company’s operating revenue and
expenses. See below regarding valuation methods used for derivative financial
instruments.
The
balance sheet account entitled “Derivative liability” consists of the combined
fair value of the conversion and certain other features that were embedded
in
the Cornell Debenture, referred to above. These features were compounded into
one instrument and bifurcated from the debt instrument upon issuance of the
debenture in accordance with Financial Accounting Standard No. 133, Derivative
Financial Instruments (FAS133). On the date of issuance, the fair value of
the
compound derivative financial instrument amounted to $163,240, which exceeded
the proceeds by ($108,240). In accordance with FAS133, the excess was
immediately charged to expense. During the period from issuance to December
31,
2005, the fair value of the derivative declined in value by $118,932. In
accordance with FAS133, this amount was credited to income during the period.
During the first quarter 2006, the fair value of the derivative declined in
value by $12,508. In accordance with FAS133, this amount was credited to income
during the period. The residual derivative liability associated with the
debenture balance that was repaid, amounting to $26,500, was credited to
Additional Paid in Capital. The derivative financial instrument will continue
to
be adjusted to fair value until the debenture is settled. On March 31, 2006,
the
derivative financial instrument was indexed to 5,300,000 shares of the Company’s
common stock.
The
Company utilizes the Monte Carlo valuation model to value its complex financial
instruments because this methodology provides for all of the necessary
assumptions necessary for fair value determination, including assumptions for
credit risk, interest risk and conversion/redemption behavior. Significant
assumptions underlying this methodology are: Effective Term—remaining term of
the host instrument; Effective Volatility—44.19%; Effective Risk Adjusted
Yield—12.36%.
NOTE
5 - SUBSEQUENT EVENTS
Since
March 31, 2006, the Company utilized the SEDA discussed in Note 3 and sold
50,726,706 shares of common stock to Cornell Capital for gross proceeds of
$850,000. Of the gross proceeds received, Cornell was paid $42,500 in commitment
fees and $2,500 in structuring fees. Additionally, $80,000 of the promissory
note due Cornell and discussed in Note 4 was paid.
Additionally,
the remaining amounts owed Cornell Capital regarding the convertible debentures
borrowed from Cornell Capital, as discussed in Note 4, were repaid after March
31, 2006; these amounts totaled $27,946 and represented principal and accrued
interest.
In
April
2006, 1,333,000 options were granted to an independent contractor at an exercise
price of $.017 per share and a term of three years with complete vesting by
December 31, 2006. Also in April 2006, 11,500,000 options were granted to an
independent contractor at an exercise price of $.013 per share and a term of
three years; vesting is one third at the end of each calendar year ending
December 31, 2008.
NOTE
6 - RESTATEMENT OF PREVIOUSLY REPORTED FINANCIAL STATEMENTS
There
was
a misstatement in the originally prepared March 31, 2005 financial statements
which related to the beneficial conversion features of the $125,000 of
Mandatorily Redeemable Series A Preferred Stock issued in June 2004 and assumed
by the Company as part of the reverse merger in August 2004, and the $525,000
Series B Preferred Stock issued between September 2004 and March 2005.
Management calculated the value of the beneficial conversion features and
determined it was $50,000 for the Series A Preferred Stock at the date of
issuance. Of this amount, $48,300 was the amount of the assumed unamortized
beneficial conversion feature, of which $3,600 was amortized to Accumulated
Deficit during 2004 and $2,500 was amortized to Accumulated Deficit during
the
three months ended March 31, 2005. The beneficial conversion feature was
$146,500 for the Series B Preferred Stock sold in 2004 and $141,500 for the
Series B Preferred Stock sold during the three months ended March 31, 2005.
Accordingly, the Statement of Operations for the three months ended March 31,
2005 was restated to reflect the amount of the beneficial conversion features.
ITEM
2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF
OPERATIONS
This
report contains forward-looking statements within the meaning of Section 27A
of
the Securities Act of 1933 and Section 21E of the Securities Exchange Act of
1934. These statements relate to future events or our future financial
performance. In some cases, you can identify forward-looking statements by
terminology such as "may," "will," "should," "expect," "plan," "anticipate,"
"believe," "estimate," "predict," "potential" or "continue," the negative of
such terms, or other comparable terminology. These statements are only
predictions. Actual events or results may differ materially from those in the
forward-looking statements as a result of various important factors. Although
we
believe that the expectations reflected in the forward-looking statements are
reasonable, such should not be regarded as a representation by Innova Holdings,
Inc., or any other person, that such forward-looking statements will be
achieved. The business and operations of Innova Holdings, Inc. are subject
to
substantial risks, which increase the uncertainty inherent in the
forward-looking statements contained in this report.
BACKGROUND
We
were
formed in 1992 as a supplier to the information technology business. On January
31, 2003, we completed a reverse acquisition into SRM Networks, an Internet
service provider, in which we were deemed the "accounting acquirer". We
discontinued SRM Network's Internet business. In connection with the
transaction, SRM Networks, Inc. changed its name to Hy-Tech Technology Group,
Inc.
On
August
25, 2004, we completed a reverse merger into Robotic Workspace Technologies,
Inc. ("RWT"), a robotics software technology provider, in which RWT was deemed
the "accounting acquirer." Simultaneously, we sold our Hy-Tech Computer Systems,
Inc. subsidiary and discontinued our computer systems sales and services
business. In connection with these transactions, Hy-Tech Technology Group,
Inc.
changed its name to Innova Holdings, Inc.
CRITICAL
ACCOUNTING POLICIES
General
The
consolidated financial statements and notes included in this Form 10-QSB contain
information that is pertinent to this management's discussion and analysis.
The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires the Company to
make
estimates and assumptions that affect the reported amounts of its assets and
liabilities, and affect the disclosure of any contingent assets and liabilities.
The Company believes these accounting policies involve judgment due to the
sensitivity of the methods, assumptions, and estimates necessary in determining
the related asset and liability amounts. The significant accounting policies
are
described in its financial statements and notes included in its Form 10-KSB
filed with the Securities and Exchange Commission.
Revenue
Recognition
The
Company recognizes revenue when persuasive evidence of an arrangement exists,
delivery has occurred, the sales price is fixed or determinable and
collectibility is probable. Product sales are recognized by the Company
generally at the time product is shipped. Shipping and handling costs are
included in cost of goods sold.
The
Company accounts for arrangements that contain multiple elements in accordance
with EITF 00-21, “Revenue Arrangements with Multiple Deliverables”. When
elements such as hardware, software and consulting services are contained in
a
single arrangement, or in related arrangements with the same customer, the
Company allocates revenue to each element based on its relative fair value,
provided that such element meets the criteria for treatment as a separate unit
of accounting. The price charged when the element is sold separately generally
determines fair value. In the absence of fair value for a delivered element,
the
Company allocates revenue first to the fair value of the underlying elements
and
allocates the residual revenue to the delivered elements. In the absence of
fair
value for an undelivered element, the arrangement is accounted for as a single
unit of accounting, resulting in a delay of revenue recognition for the
delivered elements until the undelivered elements are fulfilled. The Company
limits the amount of revenue recognition for delivered elements to the amount
that is not contingent on future delivery of products or services or subject
to
customer-specified return of refund privileges.
Accounting
for Stock-Based Compensation
In
accordance with SFAS 123(R), the Company has implemented the modified
prospective method which recognizes compensation expense at previously
determined fair values for all unvested awards granted to employees prior to
the
effective date of adoption and fair value for all new share-based payments
made
after adoption. The effect on net loss related to the adoption of FAS 123(R)
was
$358,271.
Allowance
for Doubtful Accounts
Earnings
are charged with a provision for doubtful accounts based on past experience,
current factors, and management's judgment about collectibility. Accounts deemed
uncollectible are applied against the allowance for doubtful
accounts.
Derivative
Financial Instruments
The
Company accounts for all derivative financial instruments in accordance with
SFAS No. 133. Derivative financial instruments are recorded as liabilities
in
the consolidated balance sheet, measured at fair value. When available, quoted
market prices are used in determining fair value. However, if quoted market
prices are not available, the Company estimates fair value using either quoted
market prices of financial instruments with similar characteristics or other
valuation techniques.
The
value
of the derivative liabilities relating to the credit facilities in the quarterly
financial statements are subject to the changes in the trading value of the
Company’s common stock and other assumptions. As a result the Company’s
quarterly financial statements may fluctuate from quarter to quarter based
on
factors such as trading value of the Company’s common stock. Consequently, our
consolidated financial position and results of operations may vary from quarter
to quarter based on conditions other than the Company’s operating revenue and
expenses. See Note 4 regarding valuation methods used for derivative
liabilities.
RESULTS
OF OPERATIONS
THREE
MONTHS ENDED MARCH 31, 2006 COMPARED TO THREE MONTHS ENDED MARCH 31,
2005:
During
the three month period ended March 31, 2006 (the "2006 Period") revenues were
$136,490 compared to revenues of $0 during the three month period ended March
31, 2005 (the "2005 Period"). These 2006 revenues resulted from the shipment
of
part of a multiple order for the Universal Robotic Controller produced by
Robotic Workspace Technologies, Inc., a wholly owned subsidiary of Innova
Holdings, Inc. Gross profit on these revenues amounted to $28,800. The remainder
of the order was shipped in April.
Costs
of
goods sold represent primarily materials to assemble the Universal Robot
Controllers, including electronic parts and components, electrical amplifiers,
cabinetry to house all of the materials, warranty costs and teach
pendants. Additionally, labor to assemble the controllers and install
software is included.
Operating
expenses were $1,044,357 during the 2006 period compared to $533,532 during
the
2005 Period. The increase in operating expenses primarily resulted from
increased stock based compensation of $530,021, which resulted from the
implementation of SFAS 123(R) as discussed in Note 2. All other operating
expenses amounted to $514,336 during the 2006 Period compared to $533,532 during
the 2005 Period, and represented mostly compensation costs, trade shows and
other sales expenses, travel expenses, rental expense and related office
expenses. The
Company did not incur any significant R&D expenditures this
quarter.
Net
loss
for the 2006 Period was $1,116,331 compared to a net loss of $557,069 for the
2005 Period, due largely to increased stock based compensation of $530,021,
which resulted from the implementation of SFAF 123(R) as discussed above and
in
Note 2.
LIQUIDITY
AND CAPITAL RESOURCES
At
March
31, 2006, we had current assets of $107,446 and current liabilities of
$3,398,297. At March 31, 2006, we had negative working capital of $3,290,851
and
an accumulated deficit of $10,624,471.
As
described in Note 3, on June 14, 2005, Innova entered into a Standby Equity
Distribution Agreement (SEDA) with Cornell Capital Partners. Under the SEDA,
Innova may issue and sell to Cornell Capital Partners common stock for a total
purchase price of up to $10,000,000 over a twenty four month period, commencing
on the date a registration statement filed with the U.S. Securities and Exchange
Commission. On December 22, 2005 the registration statement became effective.
Starting in January 2006, the Company began to raise capital through the use
of
the SEDA. During the first quarter 2006, $595,000 net proceeds were received
by
the Company and since March 31, 2006 another $803,100 of net proceeds were
received by the Company. Of these amounts, $20,000 and $80,000 respectively,
were used to repay the Cornell promissory note discussed in Note 4. Management
believes the use of the SEDA will provide the Company with sufficient working
capital through the remainder of the SEDA commitment period, which expires
in
December 2007. Additionally, $100,650 was received from investors through a
private placement. The Company will continue to seek funds through private
placements as well as debt financing. The Company will also continue to
investigate alternative sources of financing.
We
cannot
guarantee that additional funding will be available on favorable terms, if
at
all. If we are unable to obtain debt and/or equity financing upon terms that
our
management deems sufficiently favorable, or at all, it would have a materially
adverse impact upon our ability to pursue our business strategy and maintain
our
current operations.
OFF-BALANCE
SHEET ARRANGEMENTS
We
do not
have any off balance sheet arrangements that are reasonably likely to have
a
current or future effect on our financial condition, revenues, results of
operations, liquidity or capital expenditures.
EFFECT
OF RECENT ACCOUNTING PRONOUNCEMENTS
Stock-Based
Compensation. Effective January 1, 2006 we adopted SFAS 123R and our
consolidated financial statements as of and for the three months ended March
31,
2006 reflect the impact of SFAS 123R. For the three months ended March 31,
2006,
we recorded stock-based compensation expense of $530,021. The impact on basic
net loss per share for the three months ended March 31, 2006 was $0.00. For
the
three months ended March 31, 2005, we recognized $0 of stock-based compensation
expense under the intrinsic value method in accordance with APB 25. See Note
2—“Stock-Based Compensation” of the consolidated financial statements for
further information.
a)
Evaluation of Disclosure Controls and Procedures. As of the end of the period
covered by this report, we conducted an evaluation, under the supervision and
with the participation of our Chief Executive Officer and Chief Financial
Officer of our disclosure controls and procedures (as defined in Rule 13a-15(e)
and Rule 15d-15(e) of the Exchange Act). Based upon this evaluation, our Chief
Executive Officer and Chief Financial Officer concluded that our disclosure
controls and procedures are effective to ensure that information required to
be
disclosed by us in the reports that we file or submit under the Exchange Act
is
recorded, processed, summarized and reported, within the time periods specified
in the Commission's rules and forms.
(b)
Changes in internal controls. There was no change in our internal controls
or in
other factors that could affect these controls during our last fiscal quarter
that has materially affected, or is reasonably likely to materially affect,
our
internal control over financial reporting.
None
ITEM
2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
In
January 2006, the Company obtained $70,000 of funds through the private
placement sale of 9,589,042 shares of the Company's common stock at $.0073
per
share, and an additional $25,650 of funds through the private placement sale
of
1,500,000 shares of the Company’s common stock at $.0171 per share In February
2006 an additional $5,000 of funds were obtained through the private placement
sale of 505,051 shares of the Company's common stock at $.0099 per share.
During
the first quarter of 2006 there were 20,000,000 options granted to directors
and
13,000,000 options granted to employees. The share purchase options granted
to
directors vested upon the award and for employees the options vest evenly over
a
three year period from date of grant. All options granted in the first quarter
are exercisable at $.01 per share and they expire ten years after the grant
date. The options had a fair value of $210,833 on the grant date.
On
March
10, 2006 the Chief Financial Officer received a bonus of 5,625,000 shares of
the
Company’s common stock which was valued at $50,000 based on $.009 per share, the
closing price of the Company stock on March 9, 2006.
During
the quarter ended March 31, 2006, the remaining $81,450 shares of the Series
A
preferred stock were converted into 16,290,000 shares of the Company’s common
stock, and dividends were converted into 112,168 shares of the Company’s common
stock.
The
issuance of the aforementioned securities was exempt from registration
requirements of the Securities Act of 1933 pursuant to Section 4(2) of such
Securities Act and Regulation D promulgated thereunder based upon the
representations of each of the purchasers that it was an "accredited investor"
(as defined under Rule 501 of Regulation D) and that it was purchasing such
securities without a present view toward a distribution of the securities.
In
addition, there was no general advertisement conducted in connection with the
sale of the securities.
ITEM
3. DEFAULTS UPON SENIOR SECURITIES
In
February 2003 the Company issued $230,000 of notes payable, which were due
in
June 2003. These notes have not been repaid and have been in default since
2003.
The notes earn interest at 8% unless they are in default, in which case they
earn interest at 15%; since the notes are currently in default they earn
interest at 15%.
ITEM
4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM
5. OTHER INFORMATION
None.
(a)
Exhibits
31.1
Certification by Chief Executive Officer pursuant to Sarbanes Oxley
Section 302.
31.2
Certification by Chief Financial Officer pursuant to Sarbanes Oxley
Section 302.
32.1
Certification by Chief Executive Officer pursuant to 18 U.S.C. Section
1350
32.2
Certification by Chief Financial Officer pursuant to 18 U.S.C. Section
1350
|
SIGNATURES
Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, as amended, the Registrant has duly caused this report to be signed on
its
behalf by the undersigned, thereunto duly authorized, on this 15th
day of
May 2006.
|
|
|
|
INNOVA HOLDINGS,
INC. |
|
|
|
|
|
/s/ Walter
K. Weisel |
|
Walter
K. Weisel
Chief
Executive Officer (Principal Executive
Officer)
|
|
|
|
|
|
|
|
|
|
|
/s/ Eugene
V. Gartlan |
|
Eugene
V. Gartlan
Chief
Financial Officer (Principal Accounting and Financial
Officer)
|
|
|