As filed with the Securities and Exchange Commission on November 28, 2005
Registration No. 333-127368
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
PRE-EFFECTIVE
AMENDMENT NO.2
TO
FORM SB-2
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
DELAWARE INNOVA HOLDINGS, INC. 95-4868120
(State or Other (Name of Registrant (I.R.S. Employer
Jurisdiction of in Our Charter) Identification No.)
Incorporation
or Organization)
WALTER WEISEL
17105 SAN CARLOS BOULEVARD 17105 SAN CARLOS BOULEVARD
SUITE A1651 SUITE A6151
FORT MYERS, FLORIDA 33931 7371 FORT MYERS, FLORIDA 33931
(239) 466-0488 (239) 466-0488
(Address and telephone number (Primary Standard (Name, address and
of Principal Executive Offices Industrial Classification telephone number
and Principal Place of Business) Code Number) of agent for
service)
Copies to:
Gregory Sichenzia, Esq.
Eric A. Pinero, Esq.
Sichenzia Ross Friedman Ference LLP
1065 Avenue of the Americas, 21st Flr.
New York, New York 10018
(212) 930-9700
(212) 930-9725 (fax)
Approximate date of commencement of proposed sale to the public: AS SOON AS
PRACTICABLE AFTER THIS REGISTRATION STATEMENT BECOMES EFFECTIVE.
If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933 check the following box. [X]
If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, please check the following box and list
the Securities Act registration statement number of the earlier effective
registration statement for the same offering. |_|
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering.|_|
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. |_|
CALCULATION OF REGISTRATION FEE
=================================================================================================================
PROPOSED
MAXIMUM
PROPOSED MAXIMUM AGGREGATE AMOUNT OF
TITLE OF EACH CLASS OF AMOUNT TO BE OFFERING PRICE OFFERING REGISTRATION
SECURITIES TO BE REGISTERED REGISTERED PER SHARE (1) PRICE (1) FEE
-----------------------------------------------------------------------------------------------------------------
Common Stock, par value
$0.001 per share 284,364,726 shares (2) $.04 $11,374,589 $1,441.16
-----------------------------------------------------------------------------------------------------------------
TOTAL 284,364,726 shares (2) $.04 $11,374,589 $1,441.16 (3)
=================================================================================================================
(1) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(c) under the Securities Act of 1933. For the purposes of
this table, we have used the average of the closing bid and asked prices as of a
recent date.
(2) Of these shares, 250,000,000 will be issued under the Standby Equity
Distribution Agreement, 2,608,699 were issued as a one-time commitment fee under
the Standby Equity Distribution Agreement with Cornell Capital Partners, L.P.,
289,855 were issued as a one-time placement agent fee under the Placement Agent
Agreement to Monitor Capital, Inc., which advised us in connection with the
Standby Equity Distribution Agreement, and 31,466,172 are held by selling
shareholders who acquired their shares in private placements.
(3) Paid upon filing of Form SB-2 on August 9, 2005.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE
A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE
SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
PRELIMINARY
PROSPECTUS
Subject to completion, dated November 28, 2005
INNOVA HOLDINGS, INC.
284,364,726 SHARES OF COMMON STOCK
This prospectus relates to the sale of up to 284,364,726 shares of common stock
of Innova Holdings, Inc. ("Innova" or the "Company") by certain persons who are
stockholders of Innova, including Cornell Capital Partners, L.P. ("Cornell
Capital Partners"). Please refer to "Selling Stockholders" beginning on page 13.
Innova is not selling any shares of common stock in this offering and therefore
will not receive any proceeds from this offering. Innova will, however, receive
proceeds from the sale of common stock under the Standby Equity Distribution
Agreement ("Equity Distribution Agreement"), which was entered into on June 14,
2005 between Innova and Cornell Capital Partners. All costs associated with this
registration will be borne by Innova.
The shares of common stock are being offered for sale by the selling
stockholders at prices established on the Over-the-Counter Bulletin Board during
the term of this offering. On September 13, 2005, the last reported sale price
of our common stock was $0.024. Our common stock is quoted on the
Over-the-Counter Bulletin Board under the symbol "IVHG." These prices will
fluctuate based on the demand for the shares of common stock.
The selling stockholders consist of Cornell Capital Partners, which intends to
sell up to 252,608,699 shares of common stock, 250,000,000 of which will be
acquired by it pursuant to the Equity Distribution Agreement and 2,608,699 of
which were received from Innova as a one-time commitment fee under the Equity
Distribution Agreement. In addition to Cornell Capital Partners, the other
stockholders selling shares under this offering are Monitor Capital, Inc.
("Monitor"), which intends to sell up to 289,855 shares acquired as a one-time
placement agent fee for advising us in connection with the Equity Distribution
Agreement, and other selling shareholders who acquired their shares in private
placements and intend to sell up to 31,466,172 shares.
One of the selling stockholders, Cornell Capital Partners, is an "underwriter"
within the meaning of the Securities Act of 1933. With the exception of Cornell
Capital Partners, no other underwriter or person has been engaged to facilitate
the sale of shares of common stock in this offering. This offering will
terminate twenty-four months after the accompanying registration statement is
declared effective by the Securities and Exchange Commission ("SEC"). None of
the proceeds from the sale of stock by the selling stockholders will be placed
in escrow, trust or any similar account.
Brokers or dealers effecting transactions in these shares should confirm that
the shares are registered under applicable state law or that an exemption from
registration is available.
THESE SECURITIES ARE SPECULATIVE AND INVOLVE A HIGH DEGREE OF RISK.
PLEASE READ THE "RISK FACTORS" BEGINNING ON PAGE 5.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
REGULATOR HAS APPROVED OR DISAPPROVED OF THESE SECURITIES, OR PASSED UPON THE
ADEQUACY OR ACCURACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. THE
SELLING STOCKHOLDERS MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION
STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS
PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES AND NEITHER THE COMPANY NOR
THE SELLING STOCKHOLDERS ARE SOLICITING AN OFFER TO BUY THESE SECURITIES IN ANY
STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
The date of this prospectus is November __, 2005.
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TABLE OF CONTENTS
PROSPECTUS SUMMARY.........................................................1
THE OFFERING...............................................................2
SUMMARY CONSOLIDATED FINANCIAL STATEMENTS..................................4
RISK FACTORS...............................................................5
FORWARD-LOOKING STATEMENTS.................................................12
SELLING STOCKHOLDERS.......................................................13
USE OF PROCEEDS............................................................16
DILUTION...................................................................17
STANDBY EQUITY DISTRIBUTION AGREEMENT......................................18
PLAN OF DISTRIBUTION.......................................................21
PLAN OF OPERATIONS.........................................................23
BUSINESS DESCRIPTION.......................................................30
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE...................................43
MANAGEMENT.................................................................45
EXECUTIVE COMPENSATION ....................................................47
DESCRIPTION OF PROPERTY....................................................51
LEGAL PROCEEDINGS..........................................................52
PRINCIPAL STOCKHOLDERS.....................................................52
SECURITIES AUTHORIZED FOR ISSUANCE
UNDER EQUITY COMPENSATION PLANS..........................................54
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.............................57
MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S
COMMON EQUITY AND OTHER STOCKHOLDER MATTERS..............................58
DESCRIPTION OF SECURITIES..................................................60
EXPERTS....................................................................61
TRANSFER AGENT.............................................................62
LEGAL MATTERS..............................................................62
HOW TO GET MORE INFORMATION................................................62
FINANCIAL STATEMENTS.......................................................F-1
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PROSPECTUS SUMMARY
INTRODUCTION
The following is only a summary of the information, financial statements and
notes included in this prospectus. You should read the entire prospectus
carefully, including "Risk Factors" and our Financial Statements and the notes
to the Financial Statements before making any investment decision regarding the
Company. In this prospectus, "we," "us," "our," and the "Company" refer to
Innova Holdings, Inc.
The "Company" is an automation technology company providing hardware and
software systems-based solutions for the manufacturing, aerospace, consumer,
medical, entertainment, and service industries. The Company's plan of operations
is to continue to market and sell its existing business solutions in automation
and motion control and to identify, develop, and acquire complementary
technologies that are or will become market leaders. Innova also looks to create
opportunities to leverage all of its technologies into value-added applications
when combined with other solutions offered by the Innova group of companies.
Through its wholly-owned subsidiary Robotic Workspace Technologies, Inc., Innova
currently offers a suite of hardware and software systems-based solutions to the
industrial, service, and personal robotic markets. Its software and hardware
solutions benefit industrial robot users and developers of new technology and
are adaptable to the commercial end-user market as well. Innova offers its
solutions through licensing of its proprietary software and the sale of its
control systems as well as through complete system development and integration
services.
The primary market for the Company's Universal Robot Controller is the Retrofit
market. Virtually all of the 800,000 + older robots in use throughout all of
manufacturing have antiquated control systems which require replacement in order
to improve functionality to current standards of the robotic industry, and to
drastically reduce the costs of spare parts. Currently, owners of these older
robots must buy their spare parts from the Original Equipment Manufacturers
(OEMs). Since these spare parts for the controller are proprietary to the OEM,
the costs of these spare parts is very high, thus providing a substantial profit
margin to the OEMs. The Company's Universal Robotic Controller is a state of the
art high performance solution which in management's opinion provides more
features and functionality than the controllers of the robot OEMs. The Company
believes that the retrofitting of industrial robot installations throughout
manufacturing will experience steady growth and that the Company is positioned
to participate in this growth.
The Company's business operations commenced in 1994 and have been underway since
that date. The Company developed software technology and received three patents
for its Universal Robot Controller. There were 10 controllers sold and other
sales which in total was greater than $2.0 million since the commencement of
sales in 1994. Unfortunately, as a result of the September 11, 2001 attacks in
the US and the recession, the Company had to reduce substantially its business
operations. However, with the recovery in the economy and in particular in the
manufacturing sector, the Company is restoring its infrastructure. Sales are in
process along with the reestablishment of operating and production facilities.
Additionally, the Company has plans to continue its development of an additional
product which had not been its primary product offering nor its primary business
activity, the Universal Automation Controller.
Most of the current business activities have been focused on the immediate sales
and production of the Company's Universal Robot Controller. Such business
activities have included the rebuilding of the sales organization and rebuilding
the engineering staff, as well as marketing and production. Today we have seven
individuals supporting the Company in sales activities, six individuals
supporting production activities and 8,000 square feet of production facilities.
Seven of these individuals are direct employees and the others are independent
contractors who do not contribute all of their time to the Company's activities.
Individuals previously employed are returning which cuts the training and start
up period. Sales activities are underway and the company received its first
order for multiple Universal Robot Controllers earlier this year, and recently
received an important order from NASA Goddard Space Flight Center for the
Company's high performance controller. The lead time for the fulfillment of
orders is long, usually between six to seven months for new applications and
four to six months for repeat applications. Accordingly, management does not
expect to record any of the current orders as sales until the fourth quarter of
2005 and the first quarter of 2006.
1
GOING CONCERN
The report of our independent auditors includes a going concern uncertainty
explanatory paragraph in their auditors' report. Management recognizes that the
Company must generate capital and revenue resources to enable it to continue to
operate. Ultimately, Innova must achieve profitable operations. The Company is
planning to obtain additional capital from revenue generated from operations and
through the sale of equity securities. The realization of assets and
satisfaction of liabilities in the normal course of business is dependent upon
Innova obtaining additional revenues and equity capital and ultimately achieving
profitable operations. However, no assurances can be given that the Company will
be successful in these activities. Should any of these events not occur, the
Company could be required to curtail some operations or cease operations
entirely.
ABOUT US
Our principal executive offices are located at 17105 San Carlos Boulevard, Suite
A6151, Fort Myers, Florida 33931. Our telephone number is (239) 466-0488. Our
website is www.innovaholdings.com.
THE OFFERING
This offering relates to the sale of common stock by certain persons who are
stockholders of Innova. Cornell Capital Partners is a stockholder of Innova who
intends to sell up to 252,608,699 shares of common stock, 250,000,000 of which
will be purchased under the Equity Distribution Agreement and 2,608,699 of which
were received from Innova as a one-time commitment fee under the Equity
Distribution Agreement. The other selling stockholders are Monitor Capital,
Inc., the Company's Placement Agent which advised us in connection with the
Equity Distribution Agreement, and intends to sell up to 289,855 shares of
common stock, and the other selling shareholders (including Walter Weisel, the
Company's Chairman and CEO) listed on page 13 who intend to sell up to
31,466,172 shares. The commitment amount of funds Cornell Capital will use to
purchase shares from the Company under the Equity Distribution Agreement is
$10,000,000. At an assumed price of $.04 per share, Innova will be able to
receive the entire $10,000,000 in gross proceeds assuming the sale of the entire
250,000,000 shares being registered under this registration statement.
On June 14, 2005, Innova entered into an Equity Distribution Agreement with
Cornell Capital Partners. Under the 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 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 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 Equity Distribution Agreement. The Company also issued to Cornell
Capital Partners its promissory note for $300,000. The principal of the note is
payable in three $100,000 installments due on the 30th, 60th and 90th days
following the date the registration statement for the shares to be issued under
the Equity Distribution Agreement is declared effective by the SEC. The note
2
does not bear interest except in the event of a default. On June 14, 2005,
Innova entered into a Placement Agent Agreement with Monitor Capital, Inc. a
registered broker-dealer. Pursuant to the Placement Agent Agreement, Innova paid
a one-time placement agent fee of 289,855 restricted shares of common stock
equal to approximately $10,000 based on Innova's stock price on May 4, 2005,
when the term sheet for the Equity Distribution Agreement was signed.
The other selling shareholders acquired their shares in private transactions
with the Company.
COMMON STOCK OFFERED 284,364,726 shares by selling stockholders
OFFERING PRICE Market price
COMMON STOCK OUTSTANDING
BEFORE THE OFFERING 460,474,045 shares as of September 30, 2005(1)
USE OF PROCEEDS We will not receive any proceeds of the shares
offered by the selling stockholders. Any proceeds
we receive from the sale of common stock under the
Equity Distribution Agreement will be used for
general working capital purposes, repayment of debt
and implementing the Company's growth strategies.
See "Use of Proceeds."
RISK FACTORS
The securities offered hereby involve a high degree of risk and immediate
substantial dilution. See "Risk Factors" and "Dilution."
OVER-THE-COUNTER
BULLETIN BOARD SYMBOL IVHG
(1) Excludes up to an estimated 250,000,000 shares of common stock to be issued
under the Equity Distribution Agreement. Includes the commitment fee of
2,608,699 shares of common stock received by Cornell Capital Partners and the
one-time placement agent fee of 289,855 shares of common stock received by
Monitor Capital, Inc.
3
SUMMARY CONSOLIDATED FINANCIAL INFORMATION
STATEMENT FOR YEAR ENDED FOR YEAR ENDED FOR THE FOR THE
OF OPERATIONS DECEMBER 31 DECEMBER 31 NINE NINE
------------- 2004 2003 MONTHS MONTHS
-------------- -------------- ENDED ENDED
September 30,September 30,
2005 2004
(unaudited) (unaudited)
--------------------------
REVENUES $ 0 $ 0 $ 0 $ 3,300
OPERATING EXPENSES 1,325,978 130,733 1,384,668 495,508
INTEREST EXPENSE 100,953 73,096 93,411 70,008
NET LOSS (1,426,931) (203,829) (1,478,079) (562,216)
LOSS PER SHARE $ (0.00) $ (0.00) $ (0.00) $ (0.00)
BALANCE SHEET DATA DECEMBER 31, SEPTEMBER 30,
------------------ 2004 2005
(unaudited)
-------------- -------------
Current assets:
Cash $ 2,794 $ -
Inventory 14,889
Property and Equipment (net) 7,688 59,431
Deferred financing cost 100,000
TOTAL ASSETS $ 10,482 $ 174,320
Current liabilities 2,360,467 2,633,019
Long term debt 951,400 951,400
Mandatorily redeemable Series
A Preferred Stock 80,300 57,211
TOTAL LIABILITIES $ 3,392,167 $ 3,641,630
Stockholders' Deficit
Preferred stock, $.001 par value;
10,000,000 shares authorized
376,834 shares and 525,000 shares
issued and outstanding at December
31, 2004 and September 30, 2005, respectively 377 525
Common stock, $.001 par value;
900,000,000 shares authorized
371,296,897 shares and 460,474,045 shares
issued and outstanding at December 31, 2004
and September 30, 2005, respectively 371,297 460,475
Additional paid-in capital 3,687,421 5,139,639
Accumulated deficit (7,440,780) (9,067,949)
TOTAL STOCKHOLDERS' DEFICIT (3,381,685) (3,467,310)
TOTAL LIABILITIES
AND STOCKHOLDERS' DEFICIT $ 10,482 $ 174,320
4
RISK FACTORS
WE ARE SUBJECT TO VARIOUS RISKS THAT MAY MATERIALLY HARM OUR BUSINESS, FINANCIAL
CONDITION AND RESULTS OF OPERATIONS. YOU SHOULD CAREFULLY CONSIDER THE RISKS AND
UNCERTAINTIES DESCRIBED BELOW AND THE OTHER INFORMATION IN THIS PROSPECTUS
BEFORE DECIDING TO PURCHASE OUR COMMON STOCK. IF ANY OF THESE RISKS OR
UNCERTAINTIES ACTUALLY OCCURS, OUR BUSINESS, FINANCIAL CONDITION OR OPERATING
RESULTS COULD BE MATERIALLY HARMED. IN THAT CASE, THE TRADING PRICE OF OUR
COMMON STOCK COULD DECLINE AND YOU COULD LOSE ALL OR PART OF YOUR INVESTMENT.
RISKS RELATED TO OUR BUSINESS
INNOVA HAS HISTORICALLY LOST MONEY AND LOSSES MAY CONTINUE IN THE FUTURE, WHICH
MAY CAUSE US TO CURTAIL OPERATIONS.
For the year ended December 31, 2004, we lost $1,426,931 and for the nine months
ended September 30, 2005, we lost $1,478,079. Our accumulated deficit was
$7,440,780 as at December 31, 2004 and $9,067,949 as at September 30, 2005.
While we are building our sales and operating infrastructure, future losses are
likely to occur, as we are dependent on spending money in excess of funds
received from sales to pay for our operations. No assurances can be given that
we will be successful in reaching or maintaining profitable operations.
Accordingly, we may experience liquidity and cash flow problems. If our losses
continue, our ability to operate may be severely impacted which may cause us to
cease operations altogether.
INNOVA MAY NEED TO RAISE ADDITIONAL CAPITAL OR DEBT FUNDING TO SUSTAIN
OPERATIONS.
Unless Innova can become profitable with the existing sources of funds we have
available, including funds to be received under the terms of the Equity
Distribution Agreement, and our operations generate sufficient cash flows to
enable the Company to generate a profit on a sustained basis, we will require
additional capital to sustain operations and we may need access to additional
capital or additional debt financing to grow our operations. In addition, to the
extent that we have a working capital deficit and cannot offset the deficit from
profitable sales, we may have to raise capital to repay the deficit and provide
more working capital to permit growth in revenues. We cannot assure that
financing whether from external sources or related parties will be available if
needed or on favorable terms. Our potential inability to obtain adequate
financing if necessary will result in the need to reduce the pace of business
operations. Any of these events could be materially harmful to our business and
may result in a lower stock price and could cause us to cease operations
altogether.
THE REPORT OF OUR INDEPENDENT AUDITORS INCLUDES A GOING CONCERN UNCERTAINTY
EXPLANATORY PARAGRAPH FOR THE YEARS ENDED DECEMBER 31, 2004, AND DECEMBER 31,
2003, WHICH MEANS THAT WE MAY NOT BE ABLE TO CONTINUE OPERATIONS UNLESS WE CAN
BECOME PROFITABLE OR OBTAIN ADDITIONAL FUNDING.
We have a history of operating losses that are likely to continue in the future.
Our auditors have included an uncertainty explanatory paragraph in their
Independent Auditor's Report included in our audited financial statements for
the years ended December 31, 2004 and 2003 to the effect that our significant
losses from operations and our dependence on equity and debt financing raise
substantial doubt about our ability to continue as a going concern. Our
financial statements do not include any adjustments that might be necessary
should the Company be unable to continue as a going concern. We expect to be
able to continue operations for twenty four months with the cash currently on
hand, anticipated from our operations and from the Standby Equity Distribution
Agreement entered into by the Company and Cornell Capital Partners, which was
signed on June 14, 2004.
5
WE HAVE A WORKING CAPITAL DEFICIT, WHICH MEANS THAT OUR CURRENT ASSETS ON
DECEMBER 31, 2004 WERE NOT SUFFICIENT TO SATISFY OUR CURRENT LIABILITIES AND,
THEREFORE, OUR ABILITY TO CONTINUE OPERATIONS IS AT RISK.
As of December 31, 2004, the date of our most recent audited financial
statements, we had a working capital deficit of $2,357,673 which means that our
current liabilities as of that date exceeded our current assets by $2,357,673.
As of September 30, 2005, our working capital deficit was $2,618,130. Current
assets are assets that are expected to be converted to cash within one year and,
therefore, may be used to pay current liabilities as they become due. Our
working capital deficit means that our current assets were not sufficient to
satisfy all of our current liabilities on December 31, 2004 and September 30,
2005. If our ongoing operations do not begin to provide sufficient profitability
to offset the working capital deficit, we may have to raise additional capital
or debt in the future to fund the deficit or curtail future plans.
OUR PRODUCTS MUST BE ACCEPTED IN THE MARKET.
If our Universal Robot Controller and our Universal Automation Controller do not
achieve market acceptance by an increasing customer base, we will not be able to
generate revenues necessary to support our business operations, which could
result in the termination of our operations.
OUR COMMON STOCK MAY BE AFFECTED BY LIMITED TRADING VOLUME AND MAY FLUCTUATE
SIGNIFICANTLY, WHICH MAY AFFECT OUR SHAREHOLDERS' ABILITY TO SELL SHARES OF OUR
COMMON STOCK.
Prior to the date of this prospectus, there has been a limited public market for
our common stock and there can be no assurance that a more active trading market
for our common stock will develop. An absence of an active trading market could
adversely affect our shareholders' ability to sell our common stock in short
time periods, or possibly at all. Our common stock has experienced, and is
likely to experience in the future, significant price and volume fluctuations,
which could adversely affect the market price of our common stock without regard
to our operating performance. In addition, we believe that factors such as
quarterly fluctuations in our financial results and changes in the overall
economy or the condition of the financial markets could cause the price of our
common stock to fluctuate substantially. These fluctuations may also cause short
sellers to enter the market from time to time in the belief that Innova will
have poor results in the future. We cannot predict the actions of market
participants and, therefore, can offer no assurances that the market for our
stock will be stable or appreciate over time. The market factors may negatively
impact our shareholders' ability to sell shares of the Company's common stock.
OUR COMMON STOCK IS DEEMED TO BE "PENNY STOCK," WHICH MAY MAKE IT MORE DIFFICULT
FOR INVESTORS TO SELL THEIR SHARES DUE TO SUITABILITY REQUIREMENTS.
Our common stock is deemed to be "penny stock" as that term is defined in Rule
3a51-1 promulgated under the Securities Exchange Act of 1934. This
classification may reduce the potential market for our common stock by reducing
the number of potential investors. This may make it more difficult for investors
in our common stock to sell shares to third parties or to otherwise dispose of
them. This could cause our stock price to decline. Penny stocks are stocks:
o With a price of less than $5.00 per share;
o That are not traded on a "recognized" national exchange;
6
o Whose prices are not quoted on the NASDAQ automated quotation system (NASDAQ
listed stock must still have a price of not less than $5.00 per share); or
o In issuers with net tangible assets less than $2.0 million (if the issuer has
been in continuous operation for at least three years) or $10.0 million (if in
continuous operation for less than three years), or with average revenues of
less than $6.0 million for the last three years.
Broker/dealers dealing in penny stocks are required to provide potential
investors with a document disclosing the risks of penny stocks. Moreover,
broker/dealers are required to determine whether an investment in a penny stock
is a suitable investment for a prospective investor.
WE RELY IN PART ON SYSTEMS INTEGRATORS TO SELL OUR PRODUCTS.
We believe that our ability to sell products to system integrators will be
important to our success. Our relationships with system integrators are
generally not exclusive, and some of our system integrators may expend a
significant amount of effort or give higher priority to selling products of
other companies. In the future, any of our system integrators may discontinue
their relationships with us. The loss of or a significant reduction in revenues
from system integrators to which we may sell a significant amount of our
products could negatively impact our business, financial condition or results of
operations.
THE SUCCESS OF OUR BUSINESS DEPENDS ON OUR KEY EMPLOYEES.
We are highly dependent upon the continuing contributions of our key management,
sales, and software engineering and product development personnel. In
particular, we would be adversely affected if we were to lose the services of
Walter K. Weisel, Chief Executive Officer and Chairman of the Board, who has
provided significant leadership to us since our inception. In addition, the loss
of the services of any of our senior managerial, technical or sales personnel
could impair our business, financial condition, and results of operations.
OUR EXISTING AND NEW PRODUCTS, SERVICES AND TECHNOLOGIES MAY NEVER BE
PROFITABLE.
Currently the Company has its Universal Robot Controller (URC) and related
software to sell to owners of industrial robots as well as to non-industrial
customers needing the functions and features of industrial robots; this later
category is generally considered the Service Robot market and is a market in the
process of emerging. Today the Company is actively selling its Universal Robot
Controller into each of the industrial and service robot markets. The Company is
always in the process of evaluating the URC and determining the appropriate time
to upgrade to the next generation of URC. Management of the Company has made the
decision to invest some of the proceeds form the Equity Distribution Agreement
in that upgrade. Additionally, the Company previously invested resources in the
development of a Universal Automation Controller (UAC) which should have a broad
market application in all uses of automation devices in the manufacturing
industries. Additional funds are required to complete the development of the
UAC. We have made significant investments in research and development for the
UAC. Substantial revenues from these products, services and technologies may not
be achieved for a number of years, if at all. Moreover, these products and
services may never be profitable.
7
IF WE FAIL TO ADEQUATELY PROTECT OUR INTELLECTUAL PROPERTY RIGHTS, COMPETITORS
MAY USE OUR TECHNOLOGY AND TRADEMARKS, WHICH WOULD WEAKEN OUR COMPETITIVE
POSITION AND MAY RESULT IN THE FAILURE OF OUR BUSINESS.
Our success depends, in part, upon our patented proprietary technology. We rely
on a combination of three issued patents, copyrights, trademarks and trade
secret rights, confidentiality procedures and licensing arrangements to
establish and protect our proprietary rights. It is possible that other
companies could successfully challenge the validity or scope of our patents and
that our patents may not be supported, eliminating a competitive advantage the
Company currently enjoys. As part of our confidentiality procedures, we
generally enter into non-disclosure agreements with our employees, distributors
and corporate partners and into license agreements with respect to our software,
documentation and other proprietary information. Despite these precautions,
third parties could copy or develop similar technology independently. The
protection of our proprietary rights may not be adequate and our competitors
could independently develop similar technology, duplicate our products, or
design around patents and other intellectual property rights that we hold. In
connection with our efforts to protect our intellectual property, the Company
believed it necessary to commence an action in the Florida Federal District
Court against ABB, Inc. and ABB Robotics AB, for alleged misappropriation of
trade secrets, breach of contract and breach of the covenant of good faith. The
Company may need to commence other litigation to protect its intellectual
property and such litigation may be costly or unsuccessful.
WE NEED TO ESTABLISH AND MAINTAIN STRATEGIC AND LICENSING RELATIONSHIPS.
Innova's success will depend in part upon its ability to establish and maintain
strategic and licensing relationships with companies in our markets as well as
in related business fields, including but not limited to businesses in the
industrial manufacturing markets and businesses in the service robotic markets.
Innova believes that these relationships are needed to allow Innova access to
manufacturing, sales and distribution resources. However, the amount and timing
of resources to be devoted to these activities by such other companies are not
within Innova's control. There can be no assurance that Innova will be able to
maintain its existing relationships or enter into beneficial relationships in
the future, that other parties will perform their obligations as expected or
that Innova's reliance on others will not result in unforeseen problems. There
can be no assurance that Innova's current and potential future strategic
partners and licensees will not develop or pursue alternative technologies
either on their own or in collaboration with others, including with Innova's
competitors. The failure of any of Innova's current or future collaboration
efforts could have a material adverse effect on Innova's ability to sell
existing products or to introduce new products or applications and therefore
could have a material adverse effect on Innova's business, financial condition
and results of operations.
A BREACH OF CUSTOMER CONFIDENTIAL INFORMATION COULD DAMAGE OUR BUSINESS.
Any breach of security relating to confidential information of customers could
result in legal liability for Innova and a reduction in customer's use or total
cancellation of their participation, which could materially harm our business.
It is anticipated that we will receive highly confidential information from
customers. Innova anticipates that it will possess sensitive customer
information as part of our services, which could be valuable to competitors or
other similar companies if misappropriated or accessed. Innova's security
procedures and protocols to protect the customer against the risk of inadvertent
disclosure or intentional breach of security might fail, thereby exposing
customers to the risk of disclosure of their confidential information.
WE HAVE RECEIVED A SUBPOENA FROM THE SEC REGARDING A TRANSACTION FROM APRIL
2003.
The Company received a subpoena from the SEC dated May 10, 2005 relating to an
investigation of trading in certain OTC stocks, including the Company's common
stock. The subpoena seeks documents relating to the merger and financing
transactions entered into by the Company in April 2003. The investigation is
still in its early stages and the Company is not able to predict what actions,
if any, the SEC may take against the Company as a result of the investigation.
8
In August 2004, the Company completed a reverse merger with Robotic Workspace
Technology, Inc. (RWT). The subpoena concerns transactions that occurred 16
months before the RWT merger. The management of the Company, including Walter
Weisel, who took office as Chief Executive Officer of the Company in August 2004
following the merger with RWT, intends to cooperate to the fullest extent
possible in the investigation.
THE COMPANY'S DISCLOSURE CONTROLS AND PROCEDURES AND ITS INTERNAL CONTROLS OVER
FINANCIAL REPORTING WERE INEFFECTIVE BECAUSE OF NOT PROPERLY ACCOUNTING FOR
BENEFICIAL CONVERSION FEATURES ASSOCIATED WITH CONVERTIBLE PREFERRED STOCK SOLD
IN 2004 AND 2005.
As of December 31, 2004, March 31, 2005, June 30, 2005 and September 30 2005,
our principal executive officer and principal financial officer evaluated the
effectiveness of our disclosure controls and procedures and the effectiveness of
our internal controls over financial reporting and concluded that our disclosure
controls and procedures and our internal controls over financial reporting were
ineffective, as of the end of the periods covered by such reports, so as to
insure that all of the information required to be reported in our periodic
reports was recorded, processed, summarized, and reported, within the time
periods specified in the Commission's rules and forms, because we had not
properly accounted for certain beneficial conversion features associated with
our Series A Preferred Stock and Series B Preferred Stock issued in 2004 and
2005 and the accounting guidance provided by Emerging Issues Task Force Issue
Numbers 98-5 and 00-27. Management concluded that the failure to properly
account for and disclose the beneficial conversion features was a material
weakness in our disclosure controls and procedures and our internal controls
over financial reporting.
We issued our Series A Preferred Stock in June 2004 and our Series B Preferred
Stock in September 2004 through March 2005. In our financial statements for the
year ended December 31, 2004, and the quarter ended March 31, 2005, we did not
allocate any portion of the proceeds of these stock issuances to any beneficial
conversion features of the preferred stock. After filing our annual report on
Form 10-KSB and our quarterly report for the three months ended March 31, 2005
on Form 10-QSB, we received a comment letter from the staff of the Securities
and Exchange Commission dated June 22, 2005 that requested, among other things,
confirmation that our management considered the guidance of certain accounting
pronouncements in determining whether a portion of the proceeds of our Series A
Preferred Stock issued in June 2004 and Series B Preferred Stock issued in
September 2004 through March 2005 should be allocated to the beneficial
conversion feature.
The following are certain remedial actions and changes in our disclosure
controls and procedures and internal controls over financial reporting which we
have undertaken, and plan to undertake, to insure that all of the information
required to be reported in our periodic reports was recorded, processed,
summarized, and reported, within the time periods specified in the Commission's
rules and forms:
-we hired a new Chief Financial Officer effective June 14, 2005 who
has reviewed our disclosure controls and procedures regarding the issuance of
convertible securities and any associated beneficial conversion features and the
accounting guidance provided by Emerging Issues Task Force Issue Numbers 98-5
and 00-27 and have implemented a special review and analysis process prior to
the execution of legal agreements for all planned issuances of convertible
securities to determine the amount of any beneficial conversion features, their
related accounting treatment and disclosure requirements. This remedial action
was implemented by June 30, 2005.
- our Chief Financial Officer reviewed all of our other disclosure
controls and procedures, as well as all accounting policies and procedures and
internal controls and no other changes were necessary to correct any material
weaknesses or significant deficiencies since none were identified;
-our accounting policies and checklists relating to the selection
and application of appropriate accounting policies now includes, as of June 30,
2005, an item requiring the consideration of whether or not convertible
securities issuances include a beneficial conversion feature and, if so, to
describe the method of accounting for this feature, as well as the method of
calculating the amount of the beneficial conversion feature.
As of October 31, 2005 all of the Company's disclosure controls and procedures
and its internal controls over financial reporting are effective. Other steps
underway include the following:
-we are in the process of selecting a consulting firm we will retain
to assist in the implementation of Section 404 compliance with the
Sarbanes-Oxley Act, which we expect to implement fully in 2006;
-we are in the process of attempting to diversify the composition of
the Board of Directors and are planning to set up an audit committee and a
compensation committee of the Board of Directors by the end of 2005.
The remedial actions to correct the material weakness associated with
the disclosure controls and procedures and internal controls over financial
reporting for beneficial conversion features were implemented as of June 30,
2005. We anticipate completion of all other actions by December 31, 2005, except
for Section 404 compliance with the Sarbanes-Oxley Act which we expect to have
fully implemented in 2006.
There were no additional material costs incurred and no additional material
costs are expected to be incurred as a result of the implementation of these
remedial actions, since all of these actions were previously planned by us for
implementation in 2005 and 2006 or were insignificant in amount.
9
RISKS RELATED TO THIS OFFERING
FUTURE SALES BY OUR STOCKHOLDERS MAY NEGATIVELY AFFECT OUR STOCK PRICE AND OUR
ABILITY TO RAISE FUNDS IN NEW STOCK OFFERINGS.
Sales of our common stock in the public market following this offering could
lower the market price of our common stock. Sales may also make it more
difficult for us to sell equity securities or equity-related securities in the
future at a time and price that our management deems acceptable or at all. Of
the 460,474,045 shares of common stock outstanding as of September 30, 2005,
75,362,931 shares are, or will be, freely tradable without restriction, unless
held by our "affiliates." The remaining 385,111,114 shares of common stock are
held by existing stockholders, including the officers and directors, are
"restricted securities" and may be resold in the public market only if
registered or pursuant to an exemption from registration. Some of these shares
may be resold under Rule 144.
NEW SHAREHOLDERS WILL EXPERIENCE SIGNIFICANT DILUTION IN NET TANGIBLE BOOK VALUE
PER SHARE.
The sale of shares in this offering will have a dilutive impact on our new
stockholders. For example, if the offering occurred on September 30, 2005 at an
assumed offering price of $.04 per share, the new stockholders would experience
an immediate dilution in net tangible book value of $0.0322 per share. If our
stock price is higher, then our new stockholders would experience greater
dilution.
CORNELL CAPITAL PARTNERS WILL PAY LESS THAN THE THEN-PREVAILING MARKET PRICE OF
OUR COMMON STOCK UNDER THE EQUITY DISTRIBUTION AGREEMENT.
The common stock to be issued under the Equity Distribution Agreement will be
issued at 96% of the lowest volume weighted average price during the five
trading days following the date notice is given by the Company that it desires
an advance. In addition, Cornell Capital Partners will retain 5% from each
advance. These discounted sales could cause the price of our common stock to
decline.
THE SELLING STOCKHOLDERS INTEND TO SELL THEIR SHARES OF COMMON STOCK IN THE
MARKET, WHICH SALES MAY CAUSE OUR STOCK PRICE TO DECLINE.
The selling stockholders intend to sell in the public market up to 284,364,726
shares of the common stock being registered in this offering. That means that up
to 284,364,726 shares may be sold pursuant to this registration statement. As a
result our net income per share could decrease in future periods, and the market
price of our common stock could decline. In addition, the lower our stock price,
the more shares of common stock we will have to issue under the Equity
Distribution Agreement to draw down the full amount.
THE SALE OF OUR STOCK UNDER OUR EQUITY DISTRIBUTION AGREEMENT COULD ENCOURAGE
SHORT SALES BY THIRD PARTIES, WHICH COULD CONTRIBUTE TO THE FUTURE DECLINE OF
OUR STOCK PRICE.
10
In many circumstances, the provision of an equity distribution agreement for
companies that are traded on the Over-the-Counter Bulletin Board ("OTCBB") has
the potential to cause a significant downward pressure on the price of common
stock. This is especially the case if the shares being placed into the market
exceed the market's ability to take up the increased stock or if Innova has not
performed in such a manner to show that the equity funds raised will be used to
grow Innova. Such an event could place further downward pressure on the price of
common stock. Under the terms of our Equity Distribution Agreement, Innova may
request numerous advances pursuant to the terms of the agreement. Even if Innova
uses the equity distribution agreement to grow its revenues and profits or
invest in assets which are materially beneficial to Innova, the opportunity
exists for short sellers and others to contribute to the future decline of
Innova's stock price. If there are significant short sales of stock, the price
decline that would result from this activity will cause the share price to
decline, which in turn may cause long holders of the stock to sell their shares
thereby contributing to sales of stock in the market. If there is an imbalance
on the sell side of the market the stock the price will decline. It is not
possible to predict the circumstances in which short sales could materialize or
to what amount the share price could drop. In some companies that have been
subjected to short sales the stock price has dropped to near zero. This could
happen to Innova.
THE PRICE YOU PAY IN THIS OFFERING WILL FLUCTUATE AND MAY BE HIGHER OR LOWER
THAN THE PRICES PAID BY OTHER PEOPLE PARTICIPATING IN THIS OFFERING.
The price in this offering will fluctuate based on the prevailing market price
of the common stock on the OTCBB. Accordingly, the price you pay in this
offering may be higher or lower than the prices paid by other people
participating in this offering.
WE MAY NOT BE ABLE TO ACCESS SUFFICIENT FUNDS UNDER THE EQUITY DISTRIBUTION
AGREEMENT WHEN NEEDED.
We are dependent on external financing to fund our operations. Our financing
needs are expected to be substantially provided from the Equity Distribution
Agreement we have signed with Cornell Capital Partners. No assurances can be
given that such financing will be available in sufficient amounts or at all when
needed, in part, because we are limited to a maximum cash advance of $400,000
during any five trading day period. Based on an assumed offering price of $0.04
per share, we will be able to receive a total amount of $10,000,000 in gross
proceeds under the Equity Distribution Agreement. This amount will utilize all
of the 250,000,000 shares of our common stock registered for the Equity
Distribution Agreement under this registration statement. If the actual average
price at which we sell shares of common stock under the Equity Distribution
Agreement is less than $0.04 per share, we would need to register additional
shares to fully utilize the funds available under the Equity Distribution
Agreement.
In addition, in the event Cornell Capital Partners holds 9.9% of our then
outstanding common stock, we will be unable to obtain a cash advance under the
Equity Distribution Agreement. A possibility exists that Cornell Capital
Partners may own 9.9% of our outstanding common stock at a time when we would
otherwise plan to make an advance under the Standby Equity Distribution
Agreement. In that event, if we are unable to obtain additional external funding
or generate revenue from the sale of our products, we could be forced to curtail
or cease our operations.
CORNELL CAPITAL PARTNERS MAY SELL OUR SHARES OF COMMON STOCK PRIOR TO THE DATE
THE STOCK IS DELIVERED TO IT.
Cornell Capital Partners is deemed to beneficially own the shares of common
stock corresponding to a particular advance on the date that we deliver an
advance notice to Cornell, which is prior to the date the stock is delivered to
Cornell. Cornell may sell such shares any time after we deliver an advance
notice. Accordingly, Cornell may sell such shares during the pricing period.
Such sales may cause our stock price to decline.
11
FORWARD-LOOKING STATEMENTS
Information included or incorporated by reference in this prospectus may contain
forward-looking statements. This information may involve known and unknown
risks, uncertainties and other factors which may cause our actual results,
performance or achievements to be materially different from the future results,
performance or achievements expressed or implied by any forward-looking
statements. Forward-looking statements, which involve assumptions and describe
our future plans, strategies and expectations, are generally identifiable by use
of the words "may," "will," "should," "expect," "anticipate," "estimate,"
"believe," "intend" or "project" or the negative of these words or other
variations on these words or comparable terminology.
This prospectus contains forward-looking statements, including statements
regarding, among other things, (a) our projected sales and profitability, (b)
our growth strategies, (c) anticipated trends in our industry, (d) our future
financing plans and (e) our anticipated needs for working capital. These
statements may be found under "Management's Discussion and Analysis" and
"Description of Business," as well as in this prospectus generally. Actual
events or results may differ materially from those discussed in forward-looking
statements as a result of various factors, including, without limitation, the
risks outlined under "Risk Factors" and matters described in this prospectus
generally. In light of these risks and uncertainties, there can be no assurance
that the forward-looking statements contained in this prospectus will in fact
occur.
12
SELLING STOCKHOLDERS
The following table presents information regarding the selling stockholders. The
selling stockholders are the entities who have assisted in or provided financing
to Innova. A description of each selling stockholder's relationship to Innova
and how each selling stockholder acquired the shares to be sold in this offering
is detailed in the information immediately following this table.
------------------ ----------------- -------------- ------------------ -------------------- ---------------- ----------------------
Selling Shares Percentage Shares to be Percentage of Shares to be Percentage of Shares
Stockholder Beneficially of Acquired under Outstanding Shares Sold in the Beneficially Owned
Owned Before Outstanding the Equity to be Acquired Offering After Offering (1)
Offering Shares Distribution under the Equity
Beneficially Agreement Distribution
Owned Before Agreement
Offering (1)
------------------ ----------------- -------------- ------------------ -------------------- ---------------- ----------------------
Shares Acquired
in Financing
Transactions
with Innova
------------------ ----------------- -------------- ------------------ -------------------- ---------------- ----------------------
Cornell Capital 4,442,033(2) 0.96% 250,000,000 (3) 35% 252,608,699 .26%
Partners, L.P.
------------------ ----------------- -------------- ------------------ -------------------- ---------------- ----------------------
Monitor Capital, 289,855 (4) 0.06% ------------ ----------- 289,855 0%
Inc.
------------------ ----------------- -------------- ------------------ -------------------- ---------------- ----------------------
Others
------------------ ----------------- -------------- ------------------ -------------------- ---------------- ----------------------
Walter K. Weisel 52,961,380(5) 11.48% ----------- ------------ 10,000,000 6.04%
------------------ ----------------- -------------- ------------------ -------------------- ---------------- ----------------------
Michael Cozza 1,116,172 0.24% ----------- ----------- 1,116,172 0%
------------------ ----------------- -------------- ------------------ -------------------- ---------------- ----------------------
Harold C. 3,834,924 0.83% ----------- ------------ 3,083,333 0.11%
Claypool
------------------ ----------------- -------------- ------------------ -------------------- ---------------- ----------------------
Richard K. & 48,496,996 10.00% ----------- ------------ 12,266,667 4.93%
Johanna Wynns
------------------ ----------------- -------------- ------------------ -------------------- ---------------- ----------------------
Michael Etchison 4,000,000 0.87% ----------- ------------ 4,000,000 0%
------------------ ----------------- -------------- ------------------ -------------------- ---------------- ----------------------
Kenneth Martin 1,000,000 0.22% ------------ ------------- 1,000,000 0%
------------------ ----------------- -------------- ------------------ -------------------- ---------------- ----------------------
Total 116,141,360 284,364,726
------------------ ----------------- -------------- ------------------ -------------------- ---------------- ----------------------
(1) Applicable percentage of ownership is based on 460,474,045 shares of common
stock outstanding as of September 30, 2005, together with securities exercisable
or convertible into shares of common stock within 60 days of September 30, 2005,
for each stockholder. Beneficial ownership is determined in accordance with the
rules of the Securities and Exchange Commission and generally includes voting or
investment power with respect to securities. Shares of common stock subject to
securities exercisable or convertible into shares of common stock that are
currently exercisable or exercisable within 60 days are deemed to be
beneficially owned by the person holding such securities for the purpose of
computing the percentage of ownership of such person, but are not treated as
outstanding for the purpose of computing the percentage ownership of any other
person. Note that affiliates are subject to Rule 144 and insider trading
regulations - percentage computation is for illustration purposes only.
13
(2) Includes 2,608,699 shares received by Cornell Capital Partners as a one-time
commitment fee under the Equity Distribution Agreement and 1,833,334 shares
beneficially owned under conversion rights associated with $55,000 of
convertible debentures sold to Cornell in October 2005.
(3) Includes 250,000,000 shares to be acquired by Cornell Capital Partners under
the Equity Distribution Agreement assuming a price of $.04 per share.
(4) Includes 289,855 shares received by Monitor Capital, Inc., as a one-time fee
under the Placement Agent Agreement. On June 14, 2005, Innova entered into a
Placement Agent Agreement with Monitor Capital, Inc., a registered
broker-dealer. Under the Placement Agent Agreement, the Placement Agent agreed
to provide us with services consisting of reviewing the terms of the Equity
Distribution Agreement and advising the Company with respect to those terms.
Pursuant to the Placement Agent Agreement, Innova paid a one-time placement
agent fee of 289,855 restricted shares of common stock equal to approximately
$10,000 based on Innova's stock price on May 4, 2005, when the term sheet for
the Equity Distribution Agreement was signed. This registration statement
includes the 289,855 shares received by Monitor Capital, Inc., as its one-time
fee under the Placement Agent Agreement. There is no affiliation between Monitor
Capital, Inc. and Cornell Capital Partners.
(5) Mr. Weisel is the Chairman and CEO of Innova.
The following information contains a description of each selling shareholder's
relationship to Innova and how each selling shareholder acquired the shares to
be sold in this offering. None of the selling stockholders have held a position
or office, or had any other material relationship, with Innova, except as
follows:
SHARES ACQUIRED IN FINANCING TRANSACTIONS WITH INNOVA
CORNELL CAPITAL PARTNERS, L.P.: Cornell Capital Partners is the investor under
the Equity Distribution Agreement. All investment decisions of, and control of,
Cornell Capital Partners are held by its general partner, Yorkville Advisors,
LLC. Mark Angelo, the managing member of Yorkville Advisors, makes the
investment decisions on behalf of and controls Yorkville Advisors. Cornell
Capital Partners has or will acquire all shares being registered in this
offering in financing transactions with Innova. Those transactions are explained
below:
o 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 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.
OBLIGATION OF THE COMPANY TO REPAY TO CORNELL CAPITAL PRINCIPAL AND INTEREST DUE
UNDER THE CONVERTIBLE DEBENTURE WITH ALL OF ITS REVENUES, IF ANY, WHEN SUCH
REVENUES ARE RECEIVED
The Company is obligated to 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.
o EQUITY DISTRIBUTION AGREEMENT. On June 14, 2005, Innova entered into an Equity
Distribution Agreement with Cornell Capital Partners. Under the 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 96% of the market price, which is defined 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 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 on May 4, 2005.
Cornell Capital Partners is entitled to retain a fee of 5% of each advance. The
Company also issued to Cornell Capital Partners its promissory note for
$300,000. The principal of the note is payable in three $100,000 installments
due on the 30th, 60th and 90th days following the date the registration
statement for the shares to be issued under the Equity Distribution Agreement is
declared effective by the SEC. The note does not bear interest except in the
event of a default. Innova entered into a placement agent agreement with Monitor
Capital, Inc., a registered broker-dealer pursuant to which it advised the
Company in connection with the Equity Distribution Agreement. Pursuant to the
placement agent agreement, Innova paid a one-time placement agent fee of 289,855
restricted shares of common stock equal to approximately $10,000 based on
Innova's stock price on May 4, 2005.
14
There are certain risks related to sales by Cornell Capital Partners, including:
o The outstanding shares would be issued based on discount to the market rate.
As a result, the lower the stock price around the time Cornell Capital Partners
is issued shares, the greater likelihood that Cornell Capital Partners gets more
shares. This could result in substantial dilution to the interests of other
holders of common stock.
o To the extent Cornell Capital Partners sells its common stock, the common
stock price may decrease due to the additional shares in the market. This could
result in Cornell Capital Partners selling greater amounts of common stock, the
sales of which could further depress the stock price.
o The potentially significant downward pressure on the price of the common stock
as Cornell Capital Partners sells material amounts of common stock could
encourage short sales by others. This could place further downward pressure on
the price of the common stock.
Other Selling Shareholders:
Monitor Capital, Inc. received its shares in a private placement as a one-time
fee associated with its entering into a Placement Agent Agreement with the
Company on June 14, 2005 to act as an advisor to the Company in connection with
the Equity Distribution Agreement entered into with Cornell Capital Partners.
Walter Weisel is the founder of the Company and purchased his shares from the
Company in a private placement prior to the merger of Robotic Workspace
Technologies, Inc. with Innova Holdings, Inc. Mr. Weisel is Chairman and CEO of
the Company.
Michael Cozza was issued his shares in consideration for goods sold to the
Company.
Harold Claypool was issued 1,083,333 shares in consideration for goods and
services sold to the Company. In addition, Mr. Claypool received 2,751,591
shares from investments in a private placements.
Others: In April 2005, the Company obtained an additional $150,000 of funds
through the private placement sale of 12,000,000 shares of the Company's common
stock at $.0125 per share and in May and June 2005 an additional $218,000 of
funds were obtained through the private placement sale of 7,266,667 shares of
the Company's common stock at $.03 per share. The other selling shareholders
purchased their shares in this private placement. Under the terms of their
subscription agreements, investors in these shares of the Company's common stock
have been given notice that the Company will file this registration statement
with the Securities and Exchange Commission for its Common Stock and shall be
entitled to include any or all of the shares of Common Stock purchased in these
private placements in such registration statement. These selling shareholders
have requested inclusion of their shares in this registration statement.
Additionally, on July 22, 2005 the Company borrowed $30,000 from Richard K.
Wynns and entered into a short term note for that amount, the terms of which
are: interest at the annual rate of 5%, due date in six months, and principal
and accrued interest are convertible into common stock of the Company at $.015
per share. On October 5, 2005 and October 17, 2005 the Company entered into
short-term debt obligations with Rickard K. Wynns other than in the ordinary
course of business, in the amounts of $30,000 and $30,000, respectively. The
short-term debt bears interest at the rate of 10% per annum and are due in six
months.
With respect to the sale of these securities in these private placements, all
transactions were exempt from registration pursuant to Section 4(2) of the
Securities Act of 1933 (the "1933 Act"), and Regulation D promulgated under the
1933 Act. In each instance, the purchaser had access to sufficient information
regarding Innova so as to make an informed investment decision. More
specifically, Innova had a reasonable basis to believe that each purchaser was
an "accredited investor" as defined in Regulation D of the 1933 Act and
otherwise had the requisite sophistication to make an investment in the
Company's securities.
15
USE OF PROCEEDS
This prospectus relates to shares of our common stock that may be offered and
sold from time to time by certain selling stockholders. There will be no
proceeds to us from the sale of shares of common stock in this offering.
However, we will receive the proceeds from the sale of shares of common stock to
Cornell Capital Partners under the Equity Distribution Agreement. The purchase
price of the shares purchased under the Equity Distribution Agreement will be
equal to 96% of the lowest volume weighted average price of our common stock on
the Over-the-Counter Bulletin Board for the five days immediately following the
date notice is given by the Company that it desires an advance. Innova will pay
Cornell Capital 5% of each advance as an additional fee. Pursuant to the Equity
Distribution Agreement, Innova cannot draw more than $400,000 every five trading
days or more than $10,000,000 over 24 months.
For illustrative purposes only, we have set forth below our intended use of
proceeds for the range of net proceeds indicated below to be received under the
Equity Distribution Agreement. The table assumes estimated offering expenses of
$85,000, a purchase price of 96% of $.04 per share, plus 5% retainage payable to
Cornell Capital Partners under the Equity Distribution Agreement. The figures
below are estimates only, and may be changed due to various factors, including
the timing of the receipt of the proceeds.
GROSS PROCEEDS $ 2,500,000 $ 5,000,000 $ 10,000,000
NET PROCEEDS $ 2,190,000 $ 4,465,000 $ 9,015,000
NO. OF SHARES ISSUED UNDER THE
EQUITY DISTRIBUTION AGREEMENT
AT AN ASSUMED PRICE OF $.04 62,500,000 125,000,000 250,000,000
USE OF PROCEEDS: AMOUNT AMOUNT AMOUNT
----------------------------------- ------------ ------------ ------------
Business Development $ 200,000 $ 700,000 $ 1,500,000
Infrastructure and Improvements $ 100,000 $ 250,000 $ 500,000
Operating Capital $ 790,000 $ 2,015,000 $ 4,815,000
Repayment of debt, $ 885,000 $ 885,000 $ 885,000
including promissory note for
$300,000 issued to Cornell Capital
Partners
Acquisitions $ 215,000 $ 615,000 $ 1,315,000
TOTAL $ 2,190,000 $ 4,465,000 $ 9,015,000
================================================================================
16
DILUTION
The net tangible book value of Innova as of September 30, 2005 was a deficit of
$3,467,310 or $0.0075 per share of common stock. Net tangible book value per
share is determined by dividing the tangible book value of Innova (total
tangible assets less total liabilities) by the number of outstanding shares of
our common stock. Since this offering is being made solely by the selling
stockholders and none of the proceeds will be paid to Innova, our net tangible
book value will be unaffected by this offering. Our net tangible book value and
our net tangible book value per share, however, will be impacted by the common
stock to be issued under the Equity Distribution Agreement. The amount of
dilution will depend on the offering price and number of shares to be issued
under the Equity Distribution Agreement. The following example shows the
dilution to new investors at an offering price of $.04 per share, which is in
the range of the recent share price.
If we assume that Innova had issued 250,000,000 shares of common stock under the
Equity Distribution Agreement at an assumed offering price of $.04 per share
(i.e., the number of shares registered in this offering under the Equity
Distribution Agreement), less retention fees of $500,000, a discount of
$400,000, and offering expenses of $85,000, our net tangible book value as of
September 30, 2005 would have been $5,547,690 or $0.0078 per share. Note that at
an offering price of $.04 per share, Innova would receive gross proceeds of
$10,000,000, or the entire amount available under the Equity Distribution
Agreement. At an assumed offering price of $.04, Cornell Capital Partners would
receive a discount of $400,000 on the purchase of 250,000,000 shares of common
stock. Such an offering would represent an immediate increase in net tangible
book value to existing stockholders of $0.0153 per share and an immediate
dilution to new stockholders of $.0322 per share. The following table
illustrates the per share dilution:
Assumed public offering price per share $ 0.04
Net tangible book value per share before this offering $(0.0075)
Increase attributable to new investors $ 0.0153
Net tangible book value per share after this offering $ 0.0078
Dilution per share to new stockholders $ 0.0322
The dilution tables set forth on this page are used to show the dilution that
will result to our shareholders caused by our use of the equity line of credit
provided under the Equity Distribution Agreement. In order to give prospective
investors an idea of the dilution per share they may experience, we have
prepared the following table showing the dilution per share at various assumed
market prices:
DILUTION
ASSUMED NO. OF SHARES PER SHARE PRICE
OFFERING PRICE TO BE ISSUED TO NEW INVESTORS
-------------- ------------- ----------------
$0.04 250,000,000 $0.0322
$0.03 250,000,000 $0.0254
$0.02 250,000,000 $0.0186
$0.01 250,000,000 $0.0118
17
STANDBY EQUITY DISTRIBUTION AGREEMENT
SUMMARY
On June 14, 2005, we entered into a Standby Equity Distribution Agreement
(Equity Distribution Agreement) with Cornell Capital Partners. Pursuant to the
Equity Distribution Agreement, we may, at our discretion, periodically sell to
Cornell Capital Partners shares of common stock for a total purchase price of up
to $10,000,000 over a period of twenty four months. For each share of common
stock purchased under the Equity Distribution Agreement, Cornell Capital
Partners will pay 96% of the lowest volume weighted average price of our common
stock on the Over-the-Counter Bulletin Board or other principal market on which
our common stock is traded for the five days immediately following the date
notice is given by the Company that it desires an advance. The number of shares
purchased by Cornell Capital Partners for each advance is determined by dividing
the amount of each advance by the purchase price for the shares of common stock.
Further, Cornell Capital Partners will retain 5% of each advance under the
Equity Distribution Agreement. The Company will pay a structuring fee of $500
for each advance made under the Equity Distribution Agreement. The effectiveness
of the sale of the shares under the Equity Distribution Agreement is conditioned
upon us registering the shares of common stock with the SEC and obtaining all
necessary permits or qualifying for exemptions under applicable state law. The
costs associated with this registration will be borne by us. There are no other
significant closing conditions to advances under the Equity Distribution
Agreement. Cornell Capital Partners is a private limited partnership whose
business operations are conducted through its general partner, Yorkville
Advisors, LLC.
In connection with the transaction, Cornell Capital Partners received a one-time
commitment fee of 2,608,699 restricted shares of the Company's common stock,
equal to approximately $90,000 based on the Company's stock price on May 4,
2005, the date on which the term sheet for the Equity Distribution Agreement was
signed. These shares will be registered for resale in this registration
statement for the common stock to be issued under the Equity Distribution
Agreement. The Company also issued to Cornell Capital Partners its promissory
note for $300,000. The principal of the note is payable in three $100,000
installments due on the 30th, 60th and 90th days following the date the
registration statement for the shares to be issued under the Equity Distribution
Agreement is declared effective by the SEC. The note does not bear interest
except in the event of a default. The note is in default if the registration
statement is not declared effective within 180 days of the date of the Equity
Distribution Agreement, unless such failure to obtain effectiveness is solely
due to reasons related to the transactions described in the Company's April 29,
2003 Form 8-K filing.
In addition, we engaged Monitor Capital, Inc., a registered broker-dealer, as
our exclusive Placement Agent in connection with the Equity Distribution
Agreement. The Placement Agent will advise the Company regarding the terms of
the Equity Distribution Agreement. For its services, Monitor Capital, Inc. had
previously received 289,855 shares of our common stock, equal to approximately
$10,000 based on Innova's stock price on May 4, 2005, the date on which the term
sheet for the Equity Distribution Agreement was executed. These shares will be
registered for resale in this registration statement for the common stock to be
issued under the Equity Distribution Agreement.
EQUITY LINE OF CREDIT EXPLAINED
Pursuant to the Equity Distribution Agreement, we may periodically sell shares
of common stock to Cornell Capital Partners to raise capital to fund our working
capital needs. The periodic sale of shares is known as an advance. We may
request an advance every five trading days. A closing will be held the first
trading day after the pricing period at which time we will deliver shares of
common stock and Cornell Capital Partners will pay the advance amount. There are
no closing conditions imposed on the Company for any of the advances other than
that the Company has filed its periodic and other reports with the SEC, has
delivered the stock for an advance, and the trading of the Company's common
stock has not been suspended. We may request advances under the Equity
Distribution Agreement once the underlying shares are registered with the SEC.
Thereafter, we may continue to request advances until Cornell Capital Partners
has advanced $10,000,000 or 24 months after the effective date of this
registration statement, whichever occurs first.
18
The amount of each advance is subject to a maximum amount of $400,000, and we
may not submit an advance within five trading days of a prior advance. The
amount available under the Equity Distribution Agreement is not dependent on the
price or volume of our common stock. Our ability to request advances is
conditioned upon us registering the shares of common stock with the SEC. In
addition, we may not request advances if the shares to be issued in connection
with such advances would result in Cornell Capital Partners owning more than
9.9% of our outstanding common stock. We would be permitted to make advances on
the Equity Distribution Agreement only so long as Cornell Capital Partners'
beneficial ownership of our common stock remains lower than 9.9% and, therefore,
a possibility exists that Cornell Capital Partners may own more than 9.9% of
Innova's outstanding common stock at a time when we would otherwise plan to make
an advance under the Equity Distribution Agreement.
We do not have any agreements with Cornell Capital Partners regarding the
distribution of such stock, although Cornell Capital Partners has indicated that
it intends to promptly sell any stock received under the Equity Distribution
Agreement.
We cannot predict the actual number of shares of common stock that will be
issued pursuant to the Equity Distribution Agreement, in part, because the
purchase price of the shares will fluctuate based on prevailing market
conditions and we have not determined the total amount of advances we intend to
draw. Nonetheless, we can estimate the number of shares of our common stock that
will be issued using certain assumptions. Assuming we issued the number of
shares of common stock being registered in this offering at a recent price of
$.04 per share, we would issue 250,000,000 shares of common stock to Cornell
Capital Partners for gross proceeds of $10,000,000. These shares would represent
36% of our outstanding common stock upon issuance. We are registering
250,000,000 shares of common stock for resale by Cornell Capital Partners.
Assuming an offering price of $.04 per share, we will be able to fully utilize
the $10,000,000 available under the Equity Distribution Agreement by Cornell
Capital Partners. If the average price for which we sold shares under the Equity
Distribution Agreement is lower than the $.04 per share, we will need to
register additional shares of common stock to fully utilize the shares under the
Equity Distribution Agreement.
There is an inverse relationship between our stock price and the number of
shares to be issued under the Equity Distribution Agreement. That is, as our
stock price declines, we would be required to issue a greater number of shares
under the Equity Distribution Agreement, otherwise we will experience a decrease
in the amount of proceeds we may be able to receive under the Equity
Distribution Agreement. The following table shows the number of shares to be
issued under the Equity Distribution Agreement at an assumed offering price of
$0.04 per share, $0.03 per share , $0.02 per share and $0.01 per share.
Assumed Offering $ 0.04 $ 0.03 $ 0.02 $ 0.01
No. of Shares(1) 250,000,000 250,000,000 250,000,000 250,000,000
Total Outstanding(2) 710,474,045 710,474,045 710,474,045 710,474,045
Percent Outstanding(3) 35% 35% 35% 35%
Net Cash to Innova $ 9,015,000 $ 6,740,000 $ 4,465,000 $ 2,190,000
(1) Represents the number of shares of common stock to be issued to Cornell
Capital Partners, L.P. under the Equity Distribution Agreement at the prices set
forth in the table.
(2) Represents the total number of shares of common stock outstanding after the
issuance of the shares to Cornell Capital Partners, L.P. under the Equity
Distribution Agreement.
(3) Represents the shares of common stock to be issued as a percentage of the
total number of shares outstanding after their issuance.
19
Proceeds received under the Equity Distribution Agreement will be used in the
manner set forth in the "Use of Proceeds" section of this prospectus. We cannot
predict the total amount of proceeds to be raised in this transaction because we
have not determined the total amount of the advances we intend to receive.
Cornell Capital Partners has the ability to permanently terminate its obligation
to purchase shares of common stock from Innova under the Equity Distribution
Agreement if there shall occur any stop order or suspension of the effectiveness
of this registration statement for an aggregate of fifty (50) trading days,
other than due to acts by Cornell Capital Partners or if Innova fails materially
to comply with certain terms of the Equity Distribution Agreement, and such
failure is not cured within thirty (30) days after receipt of written notice
from Cornell Capital Partners.
All fees and expenses under the Equity Distribution Agreement will be borne by
Innova. We expect to incur expenses of approximately $85,000 in connection with
this offering, consisting primarily of professional fees. In connection with the
Equity Distribution Agreement, Cornell Capital Partners received a one-time
commitment fee in the form of 2,608,699 shares of common stock. In addition, we
issued 289,855 shares of common stock to Monitor Capital, Inc., an unaffiliated
registered broker-dealer, as compensation for its services as a placement agent.
In the event Cornell Capital Partners holds more than 9.9% of our then
outstanding common stock, we will be unable to obtain a cash advance under the
Equity Distribution Agreement. Although Cornell has expressed its intent to sell
the shares it purchases through the Equity Distribution Agreement, a possibility
exists that Cornell Capital Partners may own more than 9.9% of our outstanding
common stock at a time when we would otherwise plan to receive an advance under
the Equity Distribution Agreement. In that event, if we are unable to obtain
additional external funding or generate revenue from the sale of our products,
we could be forced to curtail or cease our operations.
20
PLAN OF DISTRIBUTION
The selling stockholders have advised us that the sale or distribution of our
common stock owned by the selling stockholders may be effected directly to
purchasers by the selling stockholders as principals or through one or more
underwriters, brokers, dealers or agents from time to time in one or more
transactions (which may involve crosses or block transactions) (i) on the
over-the-counter market or on any other market in which the price of our shares
of common stock are quoted or (ii) in transactions otherwise than on the
over-the-counter market or in any other market on which the price of our shares
of common stock are quoted. Any of such transactions may be effected at market
prices prevailing at the time of sale, at prices related to such prevailing
market prices, at varying prices determined at the time of sale or at negotiated
or fixed prices, in each case as determined by the selling stockholders or by
agreement between the selling stockholders and underwriters, brokers, dealers or
agents, or purchasers. If the selling stockholders effect such transactions by
selling their shares of common stock to or through underwriters, brokers,
dealers or agents, such underwriters, brokers, dealers or agents may receive
compensation in the form of discounts, concessions or commissions from the
selling stockholders or commissions from purchasers of common stock for whom
they may act as agent (which discounts, concessions or commissions as to
particular underwriters, brokers, dealers or agents may be in excess of those
customary in the types of transactions involved).
Cornell Capital Partners is an "underwriter" within the meaning of the
Securities Act of 1933 in connection with the sale of common stock under the
Equity Distribution Agreement and the one-time commitment fee under the Equity
Distribution Agreement. Under the Equity Distribution Agreement, Cornell Capital
Partners will pay us 96% of the lowest volume weighted average price of our
common stock on the Over-the-Counter Bulletin Board or other principal trading
market on which our common stock is traded for the five days immediately
following the date notice is given by the Company that it desires an advance. In
addition, Cornell Capital Partners will retain 5% of the proceeds received by us
under the Equity Distribution Agreement, and received a one-time commitment fee
in the form of 2,608,699 shares of common stock on June 14, 2005. The Company
also issued to Cornell Capital Partners its promissory note for $300,000. The 5%
retainage, the 4% discount from the lowest volume weighted average price of our
shares, the 2,608,699 shares of common stock and the promissory note are
underwriting discounts. In addition, we engaged Monitor Capital, Inc., an
unaffiliated registered broker-dealer, to act as our Placement Agent in
connection with the Equity Distribution Agreement and issued to Monitor Capital,
Inc. a one-time placement agent fee of 289,855 shares of common stock.
Cornell Capital Partners was formed in February 2000 as a Delaware limited
partnership. Cornell Capital Partners is a domestic hedge fund in the business
of investing in and financing public companies. Cornell Capital Partners does
not intend to make a market in our stock or to otherwise engage in stabilizing
or other transactions intended to help support the stock price. Prospective
investors should take these factors into consideration before purchasing our
common stock.
In offering the shares covered by this prospectus, any broker-dealers who
execute sales for the selling stockholders are "underwriters" within the meaning
of the Securities Act in connection with such sales. Any profits realized by the
selling stockholders and the compensation of any broker-dealer are underwriting
discounts and commissions.
Under the securities laws of certain states, the shares of common stock may be
sold in such states only through registered or licensed brokers or dealers. The
selling stockholders are advised to ensure that any underwriters, brokers,
dealers or agents effecting transactions on behalf of the selling stockholders
are registered to sell securities in all fifty states. In addition, in certain
states the shares of common stock may not be sold unless the shares have been
registered or qualified for sale in such state or an exemption from registration
or qualification is available and is complied with.
21
We will pay all the expenses incident to the registration, offering and sale of
the shares of common stock to the public hereunder other than commissions, fees
and discounts of underwriters, brokers, dealers and agents. If any of these
other expenses exists, Innova expects the selling stockholders to pay these
expenses. We have agreed to indemnify Cornell Capital Partners and its
controlling persons against certain liabilities, including liabilities under the
Securities Act. We estimate that the expenses of the offering to be borne by us
will be approximately $85,000. The offering expenses consist of: a SEC
registration fee of $1,441.16, printing expenses of $2,500 accounting fees of
$15,000, legal fees of $50,000 and miscellaneous expenses of $16,058.84. We will
not receive any proceeds from the sale of any of the shares of common stock by
the selling stockholders. We will, however, receive proceeds from the sale of
common stock under the Equity Distribution Agreement.
The selling stockholders should be aware that the anti-manipulation provisions
of Regulation M under the Exchange Act will apply to purchases and sales of
shares of common stock by the selling stockholders, and that there are
restrictions on market-making activities by persons engaged in the distribution
of the shares. Under Registration M, the selling stockholders or their agents
may not bid for, purchase, or attempt to induce any person to bid for or
purchase, shares of our common stock while such selling stockholders are
distributing shares covered by this prospectus. Accordingly, the selling
stockholders are not permitted to cover short sales by purchasing shares while
the distribution is taking place. The selling stockholders are advised that if a
particular offer of common stock is to be made on terms constituting a material
change from the information set forth above with respect to the Plan of
Distribution, then, to the extent required, a post-effective amendment to the
accompanying registration statement must be filed with the Securities and
Exchange Commission.
The number of shares of our common stock issuable to Cornell Capital Partners
under the Equity Distribution Agreement is subject to a 9.9% cap on the
beneficial ownership that Cornell Capital Partners and its affiliates may have
at the time we request an advance of funds. The amount of funds we can actually
draw down under the Equity Distribution Agreement is limited based upon how many
shares of our common stock are beneficially owned by Cornell Capital Partner and
its affiliates at the time of the advance request. In the event Cornell Capital
Partners and its affiliates hold more than 9.9% of our then outstanding common
stock, we will be unable to obtain a cash advance under the Equity Distribution
Agreement. A possibility exists that Cornell Capital Partners and its affiliates
may own more than 9.9% of our outstanding common stock at a time when we would
otherwise plan to request an advance under the Equity Distribution Agreement. In
that event, if we are unable to obtain additional external funding or generate
revenue from the sale of our products and services, we could be forced to
curtail or cease our operations.
22
PLAN OF OPERATIONS
INTRODUCTION-FORWARD LOOKING STATEMENTS
In connection with the safe harbor provisions of the Private Securities
Litigation Reform Act of 1995 (the "Reform Act"), Innova is hereby providing
cautionary statements identifying important factors that could cause the
Company's actual results to differ materially from those projected in
forward-looking statements made herein. Any statements that express, or involve
discussions as to, expectations, beliefs, plans, objectives, assumptions of
future events or performance are not statements of historical facts and may be
forward-looking. These forward-looking statements are based largely on Innova's
expectations and are subject to a number of risks and uncertainties, including
but not limited to, economic, competitive, regulatory, growth strategies,
available financing and other factors discussed elsewhere in this report and in
documents filed by Innova with the SEC. Many of these factors are beyond
Innova's control. Actual results could differ materially from the
forward-looking statements made. In light of these risks and uncertainties,
there can be no assurance that the results anticipated in the forward-looking
information contained in this prospectus will, in fact, occur.
Any forward-looking statement speaks only as of the date on which such statement
is made, and Innova undertakes no obligation to update any forward-looking
statement or statements to reflect events or circumstances after the date on
which such statement is made or to reflect the occurrence of unanticipated
events. New factors emerge from time to time and it is not possible for
management to predict all of such factors, nor can it assess the impact of each
such factor on the business or the extent to which any factor, or combination of
factors, may cause actual results to differ materially from those contained in
any forward-looking statements.
GOING CONCERN QUALIFICATION
Innova's auditors have included an explanatory paragraph in their auditors'
report for the years ended December 31, 2004 and 2003, to the effect that our
significant losses from operations and our dependence on equity and debt
financing raise substantial doubt about our ability to continue as a going
concern. Management recognizes that the Company must generate capital and
revenue resources to enable it to continue to operate. Ultimately, Innova must
achieve profitable operations. The Company is planning to obtain additional
capital from revenue generated from operations, through the sale of equity
securities and through debt when it is available to the Company. The realization
of assets and satisfaction of liabilities in the normal course of business is
dependent upon Innova's obtaining additional revenues and equity capital and
ultimately achieving profitable operations. However, no assurances can be given
that the Company will be successful in these activities. Should any of these
events not occur, the Company could be required to curtail some operations or
cease operations entirely.
PLAN OF OPERATION
During the next twelve months, the Company expects to aggressively market and
sell its Universal Robot Controller, complete the development of its Universal
Automation Controller, and license its software in the service, personal and
industrial markets. The Company, during the past ten years, successfully
developed its open architecture PC based Universal Robot Controller and
developed its RobotScript, Gatekeeper and related software. Additionally, the
development of the Universal Automation Controller was commenced and is now in
its final stages of development. Management believes there is a large market
opportunity for its controllers, software and related systems and services, and
management intends to aggressively pursue those opportunities. Specifically, the
Company has a Business Development group consisting of five individuals who
focus largely on the sale of the Universal Robot Controller as well as software
licensing opportunities, two industry experienced individual to sell its
Universal Robot Controller as well as license its software, and establish
contractual relationships with independent sales firms such as system
integrators to sell its controllers and systems related services into the
industrial markets and the service market.
23
The Company's business operations commenced in 1994 and have been underway since
that date. The Company, through its wholly-owned subsidiary Robotic Workplace
Technologies, Inc. (RWT), developed software and hardware technology, all
imbedded in its high performance automation controllers, and received three
patents for its Universal Robot Controller. There were 10 controllers sold and
other sales which in total was greater than $2.0 million since the commencement
of sales in 1994. In 2000, the Ford Motor Company investment group invested $3.0
million in RWT and Ford planned a substantial order for RWT's Universal Robot
Controllers. Also, Ford received the first rights to RWT's development and up to
80% of RWT's production capacity. After the September 11, 2001 attacks, Ford
cancelled their planned orders due to large losses they were incurring and a
severe downturn in sales. The resulting continued downturn in the economy and
RWT's inability to raise additional capital resulted in the termination of all
its employees, except the Chief Executive Officer and several contract
employees. RWT substantially shut down its operations during December 2002.
However, with the recovery in the economy and in particular in the manufacturing
sector, the Company is restoring its infrastructure. Sales are in process along
with the reestablishment of operating and production facilities. Additionally,
the Company has plans to continue its development of an additional product which
had not been its primary product offering nor its primary business activity, the
Universal Automation Controller.
Most of the current business activities have been focused on the immediate sales
and production of the Company's Universal Robot Controller. Such business
activities have included the rebuilding of the sales organization and rebuilding
the engineering staff, as well as marketing and production. Today we have seven
individuals supporting the Company in sales activities, six individuals
supporting production activities and over 8,000 square feet of production
facilities. Seven of these individuals are direct employees and the others are
independent contractors who do not contribute all of their time to the Company's
activities. Individuals previously employed are returning which cuts the
training and start-up period. Sales activities are underway and the company
received its first order for multiple Universal Robot Controllers earlier this
year. However, the lead time for the fulfillment of orders is long, usually
between six to seven months for new applications and four to six months for
repeat applications. Accordingly, management does not expect to record any of
the current orders as sales until the fourth quarter of 2005 and the first
quarter of 2006.
Regarding research and development, management expects to continue to constantly
upgrade and improve its software and will work towards developing the next
generation of software and the identification and development of new
technologies to incorporate into the Company's technology solutions.
The Company does not expect to sell any of its property or equipment in the next
twelve months, and it plans to purchase select automation control lab equipment
as well as certain robots and related equipment for continued research and
development; it does not expect to purchase any real property in the next twelve
months. Additionally, during the next twelve months the Company expects to
purchase certain equipment to support software development, testing and
continued deployment of its technologies and related systems. The Company also
expects to purchase additional office equipment, computer equipment and
laboratory development and testing equipment to support the planned increase of
the number of employees of the Company. The Company has entered into two leases
for office space, research, engineering and design, as well as production
facilities.
In order to accomplish all of the goals established by the Company during the
next twelve months, the Company intends to hire approximately 20 employees in
software engineering and applications development, production, sales, and
administration. The funds to finance this expansion will come from the shares
sold to Cornell under the Equity Distribution Agreement and it is the intention
of management that eventually, funds will also come from debt financing.
24
The Company does not have any off-balance sheet arrangements.
The following table sets forth certain information concerning our contractual
obligations and other commercial commitments as of December 31, 2004:
Payments due by Period
-------------------------------------------------------------------
Contractual Obligations: Total Less than 1 1-3 4-5 After 5
year years years years
------------------------------------------ -------------- -------------- ------------- ----------- -----------
Short-Term Loans 300,000 300,000 - - -
------------------------------------------ -------------- -------------- ------------- ----------- -----------
Loans from officers/ shareholders 165,000 165,000 - - -
------------------------------------------ -------------- -------------- ------------- ----------- -----------
Long-Term Debt 1,219,600 267,700 63,100 45,000 843,800
------------------------------------------ -------------- -------------- ------------- ----------- -----------
Capital Lease Obligations - - - - -
------------------------------------------ -------------- -------------- ------------- ----------- -----------
Operating Leases 237,000 61,500 135,700 39,800 -
------------------------------------------ -------------- -------------- ------------- ----------- -----------
Unconditional Purchase Obligations - - - - -
------------------------------------------ -------------- -------------- ------------- ----------- -----------
Other Long-Term Obligations 160,000 - - 160,000 -
------------------------------------------ -------------- -------------- ------------- ----------- -----------
Total Contractual Cash Obligations 2,081,600 794,200 198,800 244,800 843,800
------------------------------------------ -------------- -------------- ------------- ----------- -----------
Amount of Commitment Expiration Per Period
-------------------------------------------------------------------
Other Commercial Commitments Total Less than 1 1-3 4-5 Over 5
Amounts year years years years
Committed
------------------------------------------ -------------- -------------- ------------- ----------- -----------
Lines of Credit - - - - -
------------------------------------------ -------------- -------------- ------------- ----------- -----------
Standby Letters of Credit - - - - -
------------------------------------------ -------------- -------------- ------------- ----------- -----------
Guarantees - - - - -
------------------------------------------ -------------- -------------- ------------- ----------- -----------
Standby Repurchase Obligations - - - - -
------------------------------------------ -------------- -------------- ------------- ----------- -----------
Other Commercial Commitments 450,000 450,000 - - -
------------------------------------------ -------------- -------------- ------------- ----------- -----------
Total Commercial Commitments 2,531,600 1,244,200 198,800 244,800 843,800
------------------------------------------ -------------- -------------- ------------- ----------- -----------
In September and October 2005, we entered into short-term debt obligations other
than in the ordinary course of business. All of the short-term debt bears
interest at the rate of 10% per annum. The following table sets for the names of
the lenders, the amount of the loans, the dates of the loans and the due date of
the loans:
------------------------- ----------------------- ----------------------- --------------------------
Lender Amount of Loan Date of Loan Due Date
------------------------- ----------------------- ----------------------- --------------------------
Eugene Gartlan $40,000 September 19, 2005 December 19, 2005
------------------------- ----------------------- ----------------------- --------------------------
Jerry Horne $50,000 September 22, 2005 October 22, 2005
------------------------- ----------------------- ----------------------- --------------------------
James Marks $30,000 September 22, 2005 October 22, 2005
------------------------- ----------------------- ----------------------- --------------------------
Eugene Gartlan $ 5,000 October 5, 2005 January 5, 2006
------------------------- ----------------------- ----------------------- --------------------------
Rick Wynns $30,000 October 5, 2005 April 5, 2006
------------------------- ----------------------- ----------------------- --------------------------
Rick Wynns $30,000 October 17, 2005 April 17, 2006
------------------------- ----------------------- ----------------------- --------------------------
25
All of the lenders are shareholders of the Company. Mr. Gartlan is also the
Chief Financial Officer of the Company.
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 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.
OBLIGATION OF THE COMPANY TO REPAY TO CORNELL CAPITAL PRINCIPAL AND INTEREST DUE
UNDER THE CONVERTIBLE DEBENTURE WITH ALL OF ITS REVENUES, IF ANY, WHEN SUCH
REVENUES ARE RECEIVED
The Company is obligated to 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.
As of December 31, 2004, March 31, 2005, June 30, 2005 and September 30, 2005,
our principal executive officer and principal financial officer evaluated the
effectiveness of our disclosure controls and procedures and the effectiveness of
our internal controls over financial reporting and concluded that our disclosure
controls and procedures and our internal controls over financial reporting were
ineffective, as of the end of the periods covered by such reports, so as to
insure that all of the information required to be reported in our periodic
reports was recorded, processed, summarized, and reported, within the time
periods specified in the Commission's rules and forms, because we had not
properly accounted for certain beneficial conversion features associated with
our Series A Preferred Stock and Series B Preferred Stock issued in 2004 and
2005 and the accounting guidance provided by Emerging Issues Task Force Issue
Numbers 98-5 and 00-27. Management concluded that the failure to properly
account for and disclose the beneficial conversion features was a material
weakness in our disclosure controls and procedures and our internal controls
over financial reporting.
We issued our Series A Preferred Stock in June 2004 and our Series B Preferred
Stock in September 2004 through March 2005. In our financial statements for the
year ended December 31, 2004, and the quarter ended March 31, 2005, we did not
allocate any portion of the proceeds of these stock issuances to any beneficial
conversion features of the preferred stock. After filing our annual report on
Form 10-KSB and our quarterly report for the three months ended March 31, 2005
on Form 10-QSB, we received a comment letter from the staff of the Securities
and Exchange Commission dated June 22, 2005 that requested, among other things,
confirmation that our management considered the guidance of certain accounting
pronouncements in determining whether a portion of the proceeds of our Series A
Preferred Stock issued in June 2004 and Series B Preferred Stock issued in
September 2004 through March 2005 should be allocated to the beneficial
conversion feature.
The following are certain remedial actions and changes in our disclosure
controls and procedures and internal controls over financial reporting which we
have undertaken, and plan to undertake, to insure that all of the information
required to be reported in our periodic reports was recorded, processed,
summarized, and reported, within the time periods specified in the Commission's
rules and forms:
-we hired a new Chief Financial Officer effective June 14, 2005 who
has reviewed our disclosure controls and procedures regarding the issuance of
convertible securities and any associated beneficial conversion features and the
accounting guidance provided by Emerging Issues Task Force Issue Numbers 98-5
and 00-27 and have implemented a special review and analysis process prior to
the execution of legal agreements for all planned issuances of convertible
securities to determine the amount of any beneficial conversion features, their
related accounting treatment and disclosure requirements. This remedial action
was implemented by June 30, 2005.
- our Chief Financial Officer reviewed all of our other disclosure
controls and procedures, as well as all accounting policies and procedures and
internal controls and no other changes were necessary to correct any material
weaknesses or significant deficiencies since none were identified;
26
-our accounting policies and checklists relating to the selection
and application of appropriate accounting policies now includes, as of June 30,
2005, an item requiring the consideration of whether or not convertible
securities issuances include a beneficial conversion feature and, if so, to
describe the method of accounting for this feature, as well as the method of
calculating the amount of the beneficial conversion feature.
As of October 31, 2005 all of the Company's disclosure controls and procedures
and its internal controls over financial reporting are effective. Other steps
underway include the following:
-we are in the process of selecting a consulting firm we will retain
to assist in the implementation of Section 404 compliance with the
Sarbanes-Oxley Act, which we expect to implement fully in 2006;
-we are in the process of attempting to diversify the composition of
the Board of Directors and are planning to set up an audit committee and a
compensation committee of the Board of Directors by the end of 2005.
The remedial actions to correct the material weakness associated with
the disclosure controls and procedures and internal controls over financial
reporting for beneficial conversion features were implemented as of June 30,
2005. We anticipate completion of all other actions by December 31, 2005, except
for Section 404 compliance with the Sarbanes-Oxley Act compliance which we
expect to have fully implemented in 2006.
There were no additional material costs incurred and no additional
material costs are expected to be incurred as a result of the implementation of
these remedial actions, since all of these actions were previously planned by us
for implementation in 2005 and 2006 or were insignificant in amount.
CRITICAL ACCOUNTING POLICIES
Use of Estimates
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities at the date of the balance sheet. Actual results could differ from
those estimates.
Cash and Cash Equivalents
Cash and cash equivalents include cash and all highly liquid financial
instruments with purchased maturities of three months or less.
27
Fair Value of Financial Instruments
The Company's financial instruments consist of cash and debt. The carrying
amount of these financial instruments approximates fair value due either to
length of maturity or interest rates that approximate prevailing market rates
unless otherwise disclosed in the consolidated financial statements.
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 or services are rendered. Shipping and handling costs are included in
cost of goods sold.
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.
Property and Equipment
Property and equipment are stated at cost less accumulated depreciation. Major
renewals and improvements are capitalized; minor replacements, maintenance and
repairs are charged to current operations. Depreciation is computed by applying
the straight-line method over the estimated useful lives which are generally
three to seven years.
Impairment Losses
Impairment losses are recorded on long-lived assets used in operations when
indicators of impairment are present and the undiscounted cash flows estimated
to be generated by those assets are less than the assets' carrying amount.
Income Taxes
Income taxes are computed using the asset and liability method. Under the asset
and liability method, deferred income tax assets and liabilities are determined
based on the differences between the financial reporting and tax bases of assets
and liabilities and are measured using the currently enacted tax rates and laws.
A valuation allowance is provided for the amount of deferred tax assets that,
based on available evidence, are not expected to be realized. Additionally,
taxes are calculated and expensed in accordance with applicable tax code.
Basic Loss Per Share
The Company is required to provide basic and dilutive earnings (loss) per common
share information. The basic net loss per common share is computed by dividing
the net loss applicable to common stockholders by the weighted average number of
common shares outstanding.
Diluted net loss per common share is computed by dividing the net loss
applicable to common stockholders, adjusted on an "as if converted" basis, by
the weighted average number of common shares outstanding plus potential dilutive
securities. For the periods ended December 2003 and 2004, potential dilutive
securities had an anti-dilutive effect and were not included in the calculation
of diluted net loss per common share.
28
Stock-Based Compensation
The Company currently accounts for its stock-based compensation plans under
Accounting Principles Board ("APB") Opinion No. 25, Accounting for Stock Issued
to Employees, and provides pro forma information in its footnotes of the fair
market value costs of these options based on provisions of Statement of
Financial Accounting Standard ("FAS") No. 123, Accounting for Stock-Based
Compensation, as amended by FAS 148, Accounting for Stock-Based
Compensation-Transition and Disclosure, issued in December 2002.
Recent Accounting Pronouncements
In January 2003, the Financial Accounting Standards Board ("FASB") issued
interpretation No. 46 ("FIN 46") "Consolidation of Variable Interest Entities."
Until this interpretation, a company generally included another entity in its
consolidated financial statements only if it controlled the entity through
voting interests. FIN 46 requires a variable interest entity, as defined, to be
consolidated by a company if that company is subject to a majority of the risk
of loss from the variable interest entity's activities or entitled to receive a
majority of the entity's residual returns. Certain provisions of FIN 46 became
effective during the quarter ended March 31, 2004, the adoption of which did not
have a material impact on the financial position, cash flows or results of
operations of the Company.
In December 2004, the FASB issued SFAS No. 123 (Revised 2004) "Share-Based
Payment" ("SFAS No. 123R"). SFAS No. 123R addresses all forms of share-based
payment ("SBP") awards, including shares issued under certain employee stock
purchase plans, stock options, restricted stock and stock appreciation rights.
SFAS No. 123R will require the Company to expense SBP awards with compensation
cost for SBP transactions measured at fair value. The FASB originally stated a
preference for a lattice model because it believed that a lattice model more
fully captures the unique characteristics of employee stock options in the
estimate of fair value, as compared to the Black-Scholes model which the Company
currently uses for its footnote disclosure. The FASB decided to remove its
explicit preference for a lattice model and not require a particular valuation
methodology. SFAS No. 123R requires us to adopt the new accounting provisions
beginning in our third quarter of 2005. Although the Company is in the process
of evaluating the impact of applying the various provisions of SFAS No. 123R, we
expect that this statement will have a material impact on our consolidated
results of operations.
In April 2004, the Emerging Issues Task Force ("EITF") issued Statement No.
03-06 "Participating Securities and the Two-Class Method Under FASB Statement
No. 128, Earnings Per Share" ("EITF 03-06"). EITF 03-06 addresses a number of
questions regarding the computation of earnings per share by companies that have
issued securities other than common stock that contractually entitle the holder
to participate in dividends and earnings of the company when, and if, it
declares dividends on its common stock. The issue also provides further guidance
in applying the two-class method of calculating earnings per share, clarifying
what constitutes a participating security and how to apply the two-class method
of computing earnings per share once it is determined that a security is
participating, including how to allocate undistributed earnings to such a
security. EITF 03-06 became effective during the quarter ended June 30, 2004,
the adoption of which did not have an impact on the calculation of earnings per
share of the Company.
In July 2004, the EITF issued a draft abstract for EITF Issue No. 04-08, "The
Effect of Contingently Convertible Debt on Diluted Earnings per Share" ("EITF
04-08"). EITF 04-08 reflects the Task Force's tentative conclusion that
contingently convertible debt should be included in diluted earnings per share
computations regardless of whether the market price trigger has been met. If
adopted, the consensus reached by the Task Force in this Issue will be effective
for reporting periods ending after December 15, 2004. Prior period earnings per
share amounts presented for comparative purposes would be required to be
restated to conform to this consensus and the Company would be required to
include the shares issuable upon the conversion of the Notes in the diluted
earnings per share computation for all periods during which the Notes are
outstanding.
29
BUSINESS DESCRIPTION
Innova Holdings, Inc. (Innova or the "Company") is an automation technology
company providing hardware and software systems-based solutions for the
manufacturing, aerospace, consumer, medical, entertainment, and service
industries. The Company's plan of operations is to continue to market and sell
its existing business solutions and to identify, develop, and acquire
complimentary technologies that are or will become market leaders. Innova also
looks to create opportunities to leverage all of its technologies into
value-added applications when combined with other solutions offered by the
Innova group of companies.
Innova's current business is focused on the Motion Control market which is a
very large and fractured market representing over $1.4 billion in sales,
according to Frost & Sullivan. The Motion Control market includes software,
hardware and system integration services for industrial robots, machine tools
and other automated production devices. Innova's current business solutions are
focused on the high performance robotic control segment of the Motion Control
market, and with the planned introduction of the Company's high performance
automation controller, the Company will expand its market positioning beyond the
robotic segment and into the general automation control segment and the machine
tool control segment. Additionally, Innova plans to expand its market position
further by acquiring key companies providing complementary and unique
technologies to the high-end specialty niche motion control applications market.
Such opportunities may be focused on robotic and non-robotic segments and may
include technologies and applications that are inherent to both robotic and
machine tool motion control. Innova also will seek out and acquire other
companies serving other technology markets besides Motion Control where it can
leverage its marketing strength and technology capabilities.
Innova currently offers a suite of hardware and software systems-based solutions
to the industrial, service, and personal robotic markets. Its software and
hardware solutions benefit industrial robot users and developers of new
technology and are adaptable to the commercial end-user market as well. Innova
offers its solutions through licensing of its proprietary software and the sale
of its control systems as well as through complete system development and
integration services.
In addition to its current product offering in the industrial market, Innova's
management believes the Company is positioned to become a market leader for the
emerging service and personal robot industry. This belief is based upon the
expertise, experience, and patented technologies developed by Robotic Workspace
Technologies, Inc. (RWT), a wholly-owned subsidiary, which has served the
industrial market for ten years.
Principal Technology Products and Business Solutions
Innova, through RWT, delivers its hardware and software through the sale of
Control Systems and the licensing of its Software to end-user companies, system
integrators, manufacturing support providers, software development companies,
and other third parties. The proprietary patents, including three pioneer
utility patents issued by the USPTO, are owned by RWT and cover all applications
pertaining to the interface of a general use computer and the mobility of
robots, regardless of specific applications.
According to ARC Advisory Group, the process industries including industrial
motion control and system integration, are entering a collaborative
manufacturing era with roughly $65 billion worth of installed process control
systems that are rapidly approaching the end of their useful life. These systems
simply cannot deliver the level of functional autonomy and coordination required
to be competitive. In their quest for operational excellence, process
manufacturers face further challenges and the need to maximize return on assets
(ROA). Manufacturing assets represent 75 % of capital assets for most process
manufacturers and most of these assets are controlled by process/motion control
automation. Process automation presents an outstanding opportunity to make a big
change in ROA by catalyzing a small change in asset utilization. The experience
gained by Innova/RWT in the robotics market has paved the way for entry into
this sector of motion control. According to ARC, in today's collaborative
manufacturing era, things are considerably different than they were in the past.
Process control is no longer independent or the focal point. The focus now is on
enterprise performance with the business systems responsible for optimizing
planning and scheduling. Manufacturing systems are poised to respond. This level
of collaboration highlights the need for business performance requirements and
emerging technologies to converge into a collaborative process that delivers a
strategic competitive advantage for both process manufacturers and their
suppliers. Innova/RWT intends to be a supplier of these enabling technologies
for this growing need.
30
Manufacturing assets make up the majority of total assets in the motion control
and process industries and raw material and conversion costs account for the
majority of operating costs. For the most part, process automation systems,
including robotic controllers and automation device controllers, are controlling
these assets and, if they are not performing effectively as an integral part of
a company's business strategy, then profits and competitiveness suffer. A
collaborative approach to process automation can deliver an extraordinary
competitive advantage to process manufacturers. Innova/RWT has high performance
controllers and supporting software, system integration services and other key
solutions to meet this increasing demand in the market.
Control Systems - The Company has two control systems, the Universal Robot
Controller and the Universal Automation Controller, which is in development.
Universal Robot Controller - The Universal Robot Controller(TM) (URC(TM)) is the
physical control system including hardware and software that operates the robot.
It includes the general purpose PC running Windows(R), the RobotScript(R)
programming environment, and other programs as well as dedicated separate
processors for real-time motion control of the robot. The URC cabinet houses the
PC that runs the Windows operating system. RobotScript and other software
directly control the connected systems of the robot and related input and
output. It also incorporates the electronic components needed to control the
robot motion and communicate with other PC devices and platforms including
Internet connectivity. In addition, all inputs and outputs required for
auxiliary equipment are controlled by RobotScript and are included in the URC
cabinet.
Universal Automation Controller - The Universal Automation Controller(TM)
(UAC(TM)), which is in the later stages of development and is expected to be
released soon, is a general-purpose motion control system for automated machines
with fewer than 5-6 axis of movement. The UAC provides the power of a
full-featured open PC motion controller and Programmable Logic Controller (PLC)
in one easy to use PC control system. It provides direct motion control for
complex machines and adds "soft PLC" control of Input/Output. The enhanced
motion control capabilities provide greater functionality and full motion
control of less sophisticated machinery as well. The UAC is powered by RWT's
RobotScript(R) software.
The UAC provides standard communications and interface ports, providing maximum
flexibility in choosing off-the-shelf user interface and communications
components. The Company believes that the UAC shortens development time, reduces
manufacturing cycle time, and dramatically decreases the time to market of
motion-based machines, and therefore will greatly improve productivity and
reduce costs in all manufacturing environments.
Licensing of Proprietary Software Solutions - Middleware
RobotScript is a universal programming language based on Microsoft's Visual
Basic(R) Scripting Edition (VBScript(R)) software. It provides a robot language
that is simple to use and easy to learn. From a plain text file, robot
programmers can easily control robot motion, coordinate input and output for
auxiliary equipment and communicate with other PC devices for reporting and data
sharing. Because RobotScript operates in the Windows environment, challenges
common to proprietary control schemes, such as networking and file sharing, are
eliminated. RobotScript can access anything on the operating system or network
as well as utilize the Internet for remote monitoring and control of equipment.
The software can also be easily used to create custom applications specific to
customer needs. A software development kit is provided to allow even novice
developers to quickly create a specialized interface for a particular use in
meeting a customer's need. The proven success of RobotScript has supported the
development of a number of evolutionary, application-specific modules such as
arc-welding, vision systems and automation control. Additional modules are also
in development for other robotic and motion control applications such as:
31
o Guidance Systems
o Sensor Systems
o Voice Control Systems
o Tactile Control Systems
o Laser Welding
o Material Handling
o Medical Applications
o Elder Care Control Systems
o Entertainment Control Systems
o Plasma Cutting
o Autonomous Underwater Vehicles
o Home Land Security Systems
o Security Systems
o Pharmaceutical Production
o TIG/MIG Welding
Gatekeeper is a communication module that serves as the bridge between the
RobotScript programming software and the motion control mechanisms. Gatekeeper
implements a standard protocol that directs the device driver to activate the
appropriate motion control of the robot, input/output of auxiliary equipment and
other devices operating in real time. It is the core software used as a
foundation for all current and future software modules and languages. The Innova
suite of software will be marketed and sold to the service and personal robot
markets through Service Robots, Inc., a wholly-owned subsidiary of Innova.
Generally, the Innova suite of software solutions is referred to as Middleware,
which is connectivity software that consists of a set of enabling services that
allow multiple processes running on one or more machines to interact across a
network. Middleware is essential to migrating mainframe applications to
client/server applications and to providing for communication across
heterogeneous platforms. This technology has evolved to provide for
interoperability in support of the move to client/server architectures.
System Integration, Training and Other Sales Opportunities
In addition to the hardware and software products offered by Innova's
subsidiaries, the organization has additional revenue generating opportunities
arising from service and support which includes training, installation, service,
system integration and fulfilling other customer-specific requirements.
Markets Served
The markets currently served are the Industrial Robot market and the Service and
Personal Robot market, which are discussed below.
Industrial Robots - Market Overview
Installations
According to a report released by the UNITED NATIONS ECONOMIC COMMISSION FOR
EUROPE (UNECE) in cooperation with the INTERNATIONAL FEDERATION OF ROBOTICS
(IFR), of which RWT is a supporting member:
32
o worldwide investment in industrial robots was up 19 percent in 2003 and in the
first half of 2004, orders were up another 18 percent.
Worldwide growth between 2004 and 2007 is forecast at an average annual rate of
about 7 percent.
According to the US-based ROBOTIC INDUSTRIES ASSOCIATION (RIA):
o North American robotic companies posted a 13 percent gain in the first nine
months of 2004.
Estimates are that 800,000 to 1 million robots are currently being used
worldwide. Japan leads with some 352,000 units, followed by the European Union
with 266,000 units and about 121,000 units in the United States. (RIA estimates
142,000 robots are being used in the United States). In Europe, Germany leads
with 113,000 units; Italy has 50,000; Spain 20,000, and the United Kingdom some
14,000 units, according to UNECE.
Installations and Operational Stock of Industrial Robots 2002 and 2003 and
Forecasts for 2004-2007 Number of Units
---------------------- ---------------------------------------- ---------------------------------------------
Yearly Installations Operational Stock at Year End
---------------------- --------- --------- --------- ---------- ----------- ---------- ---------- -----------
Country 2002 2003 2004 2007 2002 2003 2004 2007
---------------------- --------- --------- --------- ---------- ----------- ---------- ---------- -----------
Japan 25,373 31,588 33,200 41,300 350,169 348,734 352,200 349,400
---------------------- --------- --------- --------- ---------- ----------- ---------- ---------- -----------
United States 9,955 12,693 12,800 15,900 103,515 112,390 121,300 145,100
---------------------- --------- --------- --------- ---------- ----------- ---------- ---------- -----------
European Union 26,296 27,114 28,800 34,400 233,769 249,200 266,100 325,900
---------------------- --------- --------- --------- ---------- ----------- ---------- ---------- -----------
Other Europe 582 922 1,000 1,300 11,009 11,409 11,900 14,200
---------------------- --------- --------- --------- ---------- ----------- ---------- ---------- -----------
Asia/Australia 5,123 6,695 7,200 8,900 60,427 65,419 69,900 78,500
---------------------- --------- --------- --------- ---------- ----------- ---------- ---------- -----------
Other Countries 1,466 2,764 3,200 4,500 11,216 13,620 16,500 27,200
---------------------- --------- --------- --------- ---------- ----------- ---------- ---------- -----------
Totals 68,795 81,776 86,200 106,300 770,105 800,772 837,900 940,300
---------------------- --------- --------- --------- ---------- ----------- ---------- ---------- -----------
Source: UNECE, IFR and national robot associations.
Users
The primary users of industrial robots in the United States include automotive
manufacturers and automotive suppliers, food and consumer goods companies,
semiconductor and electronics firms, metalworking companies, plastics and rubber
manufacturers, and increasingly sciences, pharmaceutical, and biomedical
businesses, according to RIA.
Applications
With regard to applications, material handling - historically the largest
application area for robots - increased 36 percent the first nine months of
2004. Double-digit gains were also posted in assembly, arc welding, and material
handling applications, according to RIA.
Sales
The market for the Company's Universal Robot Controller is the Retrofit market.
Virtually all of the 800,000 + older robots have antiquated control systems
which require replacement in order to improve functionality to current standards
of the robotic industry, and to drastically reduce the costs of spare parts.
Currently, owners of these older robots must buy their spare parts from the
Original Equipment Manufacturers (OEMs). Since these spare parts for the
controller are proprietary to the OEM, the costs of these spare parts is very
high, thus providing a substantial profit margin to the OEMs. RWT's Universal
Robotic Controller is a state of the art solution which in management's opinion
provides more features and functionality then the controllers of the robot OEMs.
33
Service Robots - Market Overview
The service robot industry is rapidly emerging and according to many it is
expected to be large. Although a few products/applications have emerged, they
have not, as of 2004, had widespread impact on ancillary goods and services. So,
whether it is a vacuum cleaning robot or a deep-sea remotely operated vehicle,
system controls are OEM specific. However, increasingly the scope of
applications is beginning to expand and we are experiencing an increasing demand
for software to function as the middleware for connectivity, interoperability,
and ease of integration between high-powered software and devices. We are
beginning to see the smart refrigerator and whole house control systems that may
evolve to have a need to communicate with the vacuum cleaning robot and robotic
lawn mower. In the professional service robot sector, robots used for handling
bombs and hazardous materials may evolve such that there is a need to interface
with, for example, Homeland Security systems using vision, audio and data. In
the Defense area, the military recently awarded an $18 billion contract to
Boeing to develop the Future Combat System incorporating robotics and unmanned
military equipment and weapon systems. As the market continues to increasingly
realize the potential of such robotic applications, there will be a substantial
push for open software standards. RWT's RobotScript is now poised to enter this
market as the only proven middleware offering with substantial scope of
applications and functionality throughout all sectors of the Service Robots
market - Professional, Entertainment and Personal.
Professional Use
According to UNECE, at the end of 2003, it is estimated that some 21,000 units
were in operation. The value of professional service robots in use is estimated
at $2.4 billion. This market is expected to grow by 54,000 units between 2004
and 2007. Specific areas of use are:
o Underwater systems
o Cleaning robots
o Laboratory robots
o Demolition and construction o Medical robots o Mobile robot platforms/general
o Defense, rescue, security o Field robots (milking, forestry)
o Entertainment, including Theme Parks.
The unit prices for professional service robots range from less than $10,000 to
more than $300,000. The most expensive service robots are the underwater systems
($300,000), followed by milking robots ($200,000). The average price of a
medical robot is about $150,000.
UNECE suggests that in the coming years, service robots will not only clean
floors, mow lawns and guard homes, they will assist the elderly and handicapped
with sophisticated interactive equipment, carry out surgery, inspect pipes and
hazardous sites, fight fires, and dispose of bombs. UNECE believes there is a
huge worldwide military investment in service robot research and development
that will spur spin-off products for both the consumer and professional markets.
34
Entertainment Use
Robots for entertainment and leisure use, which include toy robots, are forecast
to reach 2.5 million units with a value of $4 billion in the 2004-2007
timeframe, according to UNECE.
Personal Use
At the end of 2003, about 610,000 service robots - autonomous vacuum cleaners
and lawn-mowing robots - were in operation. In 2004-2007 more than 4 million new
units are forecasted with an estimated value of $2.7 billion according to UNECE.
SALES AND MAKETING
The sales and marketing channels employed by Innova include direct sales,
re-sellers, websites, distributors, system integrators and other partners. The
Company is currently in the process of establishing these relationships and has
seven individuals providing sales and marketing support. Over the next twelve
months, we plan to hire additional regional sales managers and several direct
sales representatives as well as collaborate with strategically located system
integrators.
Industrial Controls
The sales for the Universal Robot Controller (URC(TM)) and the Universal
Automation Controller (UAC(TM)) will be directed from the company's offices in
Pontiac and Livonia, Michigan and Ft. Myers, Florida. Offices are located in the
building of the Classic Companies located in Michigan. Classic has been a
long-term systems integrator for our company. RWT will have a sales
representative organization in place in Chicago, Cincinnati, and Atlanta with
systems integrators being supported in each of those areas either from Ft. Myers
or directly from Detroit. This is a model that the company used several years
ago, and it functioned successfully based on territorial splits, commission
splits and properly placed applications engineering support.
As the territories in the southwest and in the lower central U.S. develop, it is
anticipated that sales representative organizations will be used with a direct
support person knowledgeable in applications engineering and our software
capabilities.
Service Robots
The sales, licensing and software applications support for the service robot
activity will initially be headquartered out of Ft. Myers, Florida, until such
time that other areas require support. Another event for the company will be the
service robot conferences and expositions sponsored by Robotics Trends and
supported by other device manufacturers that the Company will be targeting to
license RobotScript(R) as their software development kit.
With respect to the entertainment portion of the future business, a regional
office will be located in Orlando, Florida. This office will be supported
through Ft. Myers and will concentrate primarily on the entertainment and
hospitality industry for service applications and animatronics, while licensing
our software for specific applications.
Innova's Business Development Group is comprised of several high powered
business developers with a focus on the following markets:
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o Entertainment
o Theme Parks
o NASCAR
o Medical
o Healthcare
o Surgery
o Eldercare
o Personal security
o Residential services
o Toys and Hobbies
o Sports
o Education
o Retail
o Hotel and Resorts
o Homeland security
o Aerospace
o NASA
o Military
o Automotive
o Industrial - automation
o Industrial - heavy manufacturing
o Transportation, including airports, railroad and trucking
o Warehousing
Marketing
Our marketing and sales materials will be generated from the home office in Ft.
Myers, Florida using our existing marketing and PR firm, Incomm International,
Inc. Additional high-level support for closing deals at corporate levels will
also be supported out of Ft. Myers, Florida.
Production
The Company's production facilities are located at two locations - Ft. Myers, FL
and Livonia MI. The Ft Myers facility is our center for Research, Engineering,
and Design activities (our RED center) and represents 4,000 square feet. It also
houses our corporate offices and has a capacity for 15 individuals. The Livonia
facility is for the direct production of controllers as well as inventory
management. The facility has over 4,000 square feet of industrial space and has
room for five production employees. As more employees are added, the Company's
plan is to expand into adjacent space at these facilities.
Partners
To date we have established working relationships with the following partners:
o The Classic Companies
o Bola Industries
o Denso Robotics
o Perry Automation
o Shafi System Integrators
o Energid Systems
o Barrett Technologies
36
The Company is continuing to identify outstanding partners with whom we will
work to add the value associated with the Universal Robot Controller and the
Universal Automation Controller.
Competition
We have defined one of our major markets as the industrial robot market. In this
market, there are two broad categories - new robots and used robots (defined as
in place for at least one year). We participate primarily in the used robot
market category but from time to time will participate in the new robot market.
In the used robot market, we believe there is only one other company offering a
product similar to the Company's Universal Robot Controller. In the new robot
market there are 18 companies providing robot controllers with the same or
similar features and functions; these companies are generally referred to as the
robot market Original Equipment Manufacturers (OEMs). Our key market is the
retrofit of the industrial robot installed base of over 800,000 industrial
robots and we believe we are the only company offering these services with its
own proprietary patent protected controllers.
Protection of Trade Secrets and Patents - Significant Litigation
On December 9, 2004, RWT filed a case in the United States District Court for
the Middle District of Florida against ABB, Inc. and ABB Robotics AB. The action
alleges misappropriation of trade secrets, breach of contract and breach of the
covenant of good faith. The action stems from dealings between the parties in
2002. RWT seeks a trial by jury, an injunction prohibiting continued use of
RWT's trade secrets, and money damages. It is possible that ABB, Inc. or ABB
Robotics AB will counterclaim, although no counterclaims have yet been filed.
The action is entitled Robotic Workspace Technologies, Inc. v. ABB, Inc. and ABB
Robotics AB, Case No. 2:04-cv-611-FtM-29-SPC.
RWT Business From 1994 Through 2004
RWT started operations in 1994 with the intent to develop a PC based coordinated
motion controller for industrial robots. Up to that point in time, virtually
everyone in the industry doubted if a PC based controller, using an open
architecture system and based on Microsoft's platform, could ever be developed
and accepted as a standard in the industry. RWT dedicated significant resources
and time, over $6 million and six years, to successfully develop such a
controller and was awarded three pioneer utility patents by the USPTO. RWT
successfully established itself as a provider of a Universal Robot Controller to
the industrial market, and in particular to the automobile industry, the key
market for RWT products. In November 2000, after 10 months of due diligence
verifying source code and the operations of the Universal Robot Controller at
Ford and other production facilities, the Ford Motor Company investment group
invested $3.0 million in RWT and Ford planned a substantial order for RWT's
Universal Robot Controllers. Also, Ford received the first rights to RWT's
development and up to 80% of RWT's production capacity. The Ford Vice President
for Body Assembly, Stamping and Structures joined the RWT Board of Directors.
In June 2001, a joint international press conference announcing the Ford
investment in RWT was held at the 32nd International Robotics Conference and
Exposition. Additionally, 10 Universal Robot Controllers were successfully sold
and installed in non-automotive manufacturing environments. However, the
business of RWT was drastically and adversely affected by the economic recession
and the impact on the automobile industry after the September 11, 2001 attacks
in the US. After the September 11, 2001 attacks, Ford cancelled their planned
orders due to large losses they were incurring and a severe downturn in sales.
The resulting continued downturn in the economy and RWT's inability to raise
additional capital resulted in the termination of all its employees, except the
Chief Executive Officer and several contract employees. RWT substantially shut
down its operations during December 2002.
37
RWT today is building back its business and is re-emerging as a substantial
provider of the Universal Robot Controller for the robotic industry including
the automotive market and other companies in the manufacturing market.
Additionally, it is in the final stages of developing its Universal Automation
Controller that is targeted to the very broad manufacturing markets globally.
And RWT is offering its RobotScript software and related application modules
including Gatekeeper software under licensing agreements, which are targeted to
the service and personal robot market. During the shutdown period, all systems
operating at customers' facilities continued to operate without problems, a
testimony to its superior design of both hardware and software.
Today, with the recovery in the economy and in particular in the manufacturing
sector, the Company is quickly restoring its infrastructure. Sales are in
process along with the reestablishment of operating and production facilities.
Most of the current business activities have been focused on the immediate sales
and production of the Company's Universal Robot Controller. Such business
activities have included the rebuilding of the sales organization and rebuilding
the engineering staff, as well as marketing and production. Today we have seven
individuals supporting the Company in sales activities, six individuals
supporting production activities, and over 8,000 square feet of production
facilities. Seven of these individuals are direct employees and the others are
independent contractors who do not contribute all of their time to the Company's
activities. Individuals previously employed are returning which cuts the
training and start-up period. Sales activities are underway and the company
received its first order for multiple Universal Robot Controllers earlier this
year and recently received an important order from NASA Goddard Space Flight
Center for RWT's high performance controller. However, the lead-time for the
fulfillment of orders is long, usually between six to seven months for new
applications and four to six months for repeat applications. Accordingly,
management does not expect to record any of the current orders as sales until
the fourth quarter of 2005 and the first quarter of 2006.
Activities of Hy-Tech Prior to the Merger With RWT
Innova Holdings, Inc. was previously named Hy-Tech Technology Group, Inc.
(Hy-Tech) and had as its sole operating activities its wholly-owned operating
subsidiary Hy-Tech Computer Systems, Inc. (HTCS). On August 25, 2004, Hy-Tech
completed the reverse acquisition into RWT in which RWT was deemed to be the
"accounting acquirer." Simultaneously, Hy-Tech sold its Hy-Tech Computer
Systems, Inc. subsidiary and discontinued its computer systems sales and
services business. Prior to these transactions, Hy-Tech changed its name to
Innova Holdings, Inc.
In January 31, 2003, HTCS completed a reverse acquisition into SRM Networks, an
Internet service provider and web hosting business, in which HTCS was deemed the
"accounting acquirer". SRM Networks, Inc., a Nevada corporation, was
incorporated on June 8, 2001 and as part of the reverse merger agreement changed
its state of incorporation to Delaware. In connection with the transaction, SRM
Networks, Inc. changed its name to Hy-Tech Technology Group, Inc. and HTCS
discontinued SRM Network's Internet business.
HTCS was formed in 1992 in Fort Myers, Florida as a supplier to the information
technology business. From 1992 through 2002, HTCS was a leading custom systems
builder and authorized distributor of the world's leading computer system and
components. The products sold by HTCS were "Hy-Tech" branded computer systems -
desktops, notebooks and servers, computer components and peripherals, computer
storage products; computer operating systems and office software; Compaq
computer systems - desktop and servers; computer service; and computer warranty
work. At the end of 2003, as a result of substantial losses, the management of
HTCS concluded that the then existing business was not viable, and initiated the
changes necessary to closing its stores, laying off employees and transferring
all business to e-commerce. Negotiations were initiated to acquire RWT and to
divest the old HTCS business, which was accomplished in August 2004. As a
result, Innova is no longer actively selling any of the HTCS products.
On April 29, 2003, Hy-Tech entered into an agreement called an "Option to
Purchase" ("Settlement Agreement") with SunTrust Bank under which Hy-Tech agreed
to settle all pending litigation and satisfy all judgments obtained against the
HTCS subsidiary by SunTrust Bank. Hy-Tech agreed to pay a total of $1.5 million
by August 28, 2003 in full settlement of all of SunTrust's claims of
approximately $3.7 million. Under the terms of the Settlement Agreement, Hy-Tech
delivered $1.0 million dollars to SunTrust on April 29, 2003. This $1.0 million
represents all of the proceeds of the sale of the Convertible Debenture
described below. Hy-Tech also agreed to pay SunTrust three installments of
$65,000 each in June 2003, July 2003 and August 2003, and the balance of
$305,000 on or before August 28, 2003. Hy-Tech used part of the proceeds from
the Factoring Line of Credit to pay the August 28, 2003 installment of $305,000
due to SunTrust Bank, and all other amounts were paid. As a result of this
settlement, Hy-Tech obtained the ownership of the Sun Trust judgment, per the
Settlement Agreement.
38
On April 22, 2003, Hy-Tech entered into an Advisory Agreement (the "Advisory
Agreement") with Altos Bancorp Inc. ("Altos") pursuant to which Altos agreed to
act as the Company's exclusive business advisor for a one year period. Martin
Nielson was President of Altos and subsequently became Chairman and Chief
Executive Officer of Hy-Tech. Altos advised Hy-Tech regarding equity and debt
financings, strategic planning, mergers and acquisitions, and business
developments.
In conjunction with the decision to proceed with the RWT acquisition, the
agreement with Altos was concluded. Altos did not receive any cash compensation
for its services rendered, but will receive 16,133,333 shares of the Company's
common stock.
On April 28, 2003, a merger between Hy-Tech and Sanjay Haryama ("SH"), a Wyoming
corporation, was effected. The merger was based upon an Agreement and Plan of
Merger dated April 28, 2003 among the parties. Pursuant to the merger (i) SH was
merged with and into Hy-Tech; (ii) the SH shareholder exchanged 1,000 shares of
common stock of SH, constituting all of the issued and outstanding capital stock
of SH, for an aggregate of 1,000 shares of Hy-Tech's restricted common stock;
and (iii) SH's separate corporate existence terminated. The SH shareholder was
Coachworks Auto Leasing, which is wholly owned by Jehu Hand. The determination
of the number of shares of Hy-Tech's stock to be exchanged for the SH shares was
based upon arms length negotiations between the parties.
Prior to the merger, SH completed a $1,000,000 financing transaction pursuant to
Rule 504 of Regulation D of the General Rules and Regulations under the
Securities Act of 1933 as amended pursuant to a Convertible Debenture Purchase
Agreement (the "Purchase Agreement") dated April 21, 2003 between SH and an
accredited Colorado investor (the "Investor"). In connection therewith, SH sold
a 1% 1,000,000 Convertible Debenture due April 20, 2008 (the "SH Debenture") to
the Investor. The unpaid principal amount of the SH Debenture was convertible
into unrestricted shares of SH common stock to be held in escrow pending the
repayment or conversion of the SH Debenture. Pursuant to the merger, Hy-Tech
assumed all obligations of SH under the SH Debenture and issued the holder
thereof its 1% $1,000,000 Convertible Debenture due April 28, 2008 (the
"Convertible Debenture") in exchange for the SH Convertible Debenture. The
material terms of the Convertible Debenture were identical to the terms of the
SH Convertible Debenture except that the unpaid principal amount of the
Convertible Debenture was convertible into unrestricted shares of Hy-Tech's
Common Stock (the "Common Stock"). The per share conversion price for the
Convertible Debenture in effect on any conversion date was the lesser of (a)
$0.35 or one-hundred twenty-five percent (125%) of the average of the closing
bid prices per share of Hy-Tech's Common Stock during the five (5) trading days
immediately preceding April 29, 2003 or (b) one hundred percent (100%) of the
average of the three (3) lowest closing bid prices per share of Hy-Tech's Common
Stock during the forty (40) trading days immediately preceding the date on which
the holder of the Convertible Debenture provides the escrow agent with a notice
of conversion. The number of shares of Hy-Tech's Common Stock issuable upon
conversion was also subject to anti-dilution provisions. The Investor's right to
convert the Convertible Debenture was subject to the limitation that the
Investor may not at any time own more than 4.99% of the outstanding Common Stock
of Hy-Tech, unless Hy-Tech was in default of any provision of the Convertible
Debenture or the Investor gives seventy five (75) days advance notice of its
intent to exceed the limitation.
Between the date of the merger and the end of November, 2003, the Convertible
Debenture was fully converted to Common Stock of Hy-Tech.
On April 28, 2003, Hy-Tech announced it had entered into a financing transaction
in which it had received a firm commitment from a private equity fund for the
purchase of a $750,000 convertible debenture from Hy-Tech (the "Second
Debenture"). The Second Debenture was not closed and Hy-Tech arranged for
alternative financing under a Factoring Line of Credit with Platinum Funding
Corporation.
39
In May 2003, Martin Nielson assumed full time responsibilities as Chief
Executive Officer, brought new investors to the company, and was chartered to
transform Hy-Tech away from being a custom systems builder. During the fiscal
year, Hy-Tech took steps necessary to design the new business strategy and
commenced the implementation of this strategy, which also included growth by
acquisition. Among these steps taken were:
o construction of the details of the new plan which led to the decision to
transform and then divest HTCS
o restructuring of the personnel and reduction of costs and writing off of
unproductive assets
o engagement of key professionals
o negotiating with sources of new investment
o identifying and negotiating with acquisition targets.
Concurrent with the steps taken, Hy-Tech aggressively pursued new financing from
debt and equity sources to increase working capital, further reduce liabilities,
and to help negotiate acquisitions to provide a platform for growth.
At the same time and due to the substantial requirement for capital to keep
inventory in multiple outlets and to finance receivables, Hy-Tech faced
significant challenges to produce an adequate return on investment from HTCS. Hy
Tech restructured operations by shifting its sales operations to an online store
operated by a third party. This change was important. It was much more cost
effective and far less capital intensive. HTCS eliminated the overhead of the
local wholesale outlets, and all local costs became variable. Key employees in
the local operations were offered positions with the contracting company, yet
HTCS retained benefit of the sales as part of the deal.
In February 2004, Hy-Tech announced its planned changes which included its
planned acquisition of Robotic Workspace Technologies (RWT) and the intended
divestiture of HTCS. Such changes were in keeping with Hy-Tech's new plan to
grow by acquisitions, to differentiate itself by adding unique technologies, by
converting to e-commerce selling and distribution techniques and by adding
complementary, higher margin services.
Effective July 29, 2004, Hy-Tech changed its name to Innova Holdings, Inc. from
Hy-Tech Technology Group, Inc. Hy-Tech's trading symbol changed to "IVHG".
Simultaneously with the name change, Hy-Tech increased its authorized
capitalization from 101,000,000 shares, consisting of 100,000,000 shares of
common stock, $.001 par value and 1,000,000 shares of preferred stock, $.001 par
value to 910,000,000 shares, consisting of 900,000,000 shares of common stock,
$.001 par value and 10,000,000 shares of preferred stock, $.001 par value.
On July 21, 2004, Hy-Tech entered into an Agreement and Plan of Merger (the
"Agreement") with Robotic Workspace Technologies, Inc. ("RWT"). This transaction
closed on August 25, 2004. The Agreement provided that RWT Acquisition, Inc., a
wholly owned subsidiary of Hy-Tech, will merge into RWT, with RWT continuing as
the surviving corporation. RWT became a wholly owned subsidiary of Hy-Tech. The
shareholders of RWT were issued an aggregate of 280,000,000 shares of Hy-Tech's
common stock as consideration for the merger. RWT's outstanding options were
converted into options to acquire Hy-Tech common stock at the same exchange
ratio at which the RWT shareholders received Hy-Tech common stock. For financial
reporting purposes this transaction was treated as an acquisition of Innova and
a recapitalization of RWT using the purchase method of accounting. RWT's
historical financial statements replaced Innova's for SEC reporting purposes. As
part of the agreement, the Company agreed to indemnify the directors of the
Company from certain liabilities that were in existence on the date of closing
of the sale, which management believes may apply to a maximum of approximately
$500,000 of debt. If the Company issues shares of its common stock or pays cash
to settle any of this debt, it shall issue an equal number of common shares to
the former RWT shareholders, in proportion to their RWT share holdings.
40
The determination of the number of shares of Hy-Tech common stock exchanged for
the RWT common stock was determined in arms length negotiations between the
Boards of Directors of Hy-Tech and RWT. The negotiations took into account the
value of RWT's financial position, results of operations, products, prospects
and other factors relating to RWT's business. At the time of the execution of
the Agreement, there were no material relationships between RWT and Hy-Tech or
any of its affiliates, any director or officer of Hy-Tech, or any associate of
any such officer or director.
On June 23, 2004, Hy-Tech entered into and simultaneously closed an Agreement
with Encompass Group Affiliates, Inc. (Encompass"), pursuant to which Hy-Tech
granted to Encompass exclusive, worldwide, royalty-free, fully paid up,
perpetual and irrevocable licenses to use Hy-Tech's customer list for its
computer and systems related products and its related websites. Hy-Tech also
assigned to Encompass Hy-Tech's rights to enter into acquisitions with
Cyber-Test, Inc., BCD 2000, Inc. and Pacific Magtron International, Inc. Hy-Tech
agreed for a five year period commencing on the closing not to compete with
Encompass (i) in the business of the marketing, sale, integration, distribution
or repair of computer systems, components, equipment or peripherals, and any
related consulting work, and (ii) conducting any business of a nature (A)
engaged in by Encompass or its subsidiaries or (B) engaged in by Hy-Tech at the
time of closing, or (C) engaged in by any of BCD 2000, Inc., Cyber Test, Inc. or
Pacific Magtron International Corp. at the time the stock or assets of which are
acquired by Encompass. For (i) a period of three (3) months following the
closing, Hy-Tech is permitted to sell, in the ordinary course of its business,
any inventory not sold on or prior to the closing and (ii) so long as RWT is
engaged solely in the business of developing or acquiring proprietary computer
technology within the robotics field, Hy-Tech will be permitted to engage in
this business.
Encompass hired Martin Nielson, who had been Hy-Tech's Chief Executive Officer,
as an Executive Officer. Mr. Nielson will continue to serve on Hy-Tech's board
of directors but resigned as Hy-Tech's Chief Executive Officer.
In consideration for the transaction, Encompass assumed all of Hy-Tech's
obligations under certain Convertible Debentures (the "Convertible Debentures")
in the aggregate principal amount of $503,300. The holders of the Convertible
Debentures released Hy-Tech from all claims arising under the Convertible
Debentures.
The determination of the consideration in the Encompass transaction was
determined in arms length negotiations between the Boards of Directors of Hy
Tech and Encompass. The negotiations took into account the value of the assets
sold to Encompass and the consideration received. At the time of the
transaction, there were no material relationships between Encompass and Hy-Tech
or any of its affiliates, any director or officer of Hy-Tech, or any associate
of any such officer or director.
On June 23, 2004, immediately after the closing of the transaction with
Encompass, Hy-Tech entered into a private placement of 125,000 shares of its
Series A Preferred Stock for an aggregate issue price of $125,000 with the
holders of the Convertible Debentures. Each share of the Series A Preferred
Stock (i) pays a dividend of 5%, payable at the discretion of Hy-Tech in cash or
common stock, (ii) is convertible 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 Hy-Tech'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 Hy-Tech five years after issuance at $1.00 per
share plus accrued and unpaid dividends, (v) may be redeemed by Hy-Tech at any
time for $1.30 per share plus accrued and unpaid dividends and (vi) has no
voting rights except when mandated by Delaware law.
In the event that Hy-Tech has not (1) completed the merger with RWT and (2) RWT
has not raised $500,000 in new capital by August 27, 2004, then each of the
holders of the Series A Preferred Stock may elect to convert their shares into
(a) a demand note payable by Hy-Tech in the principal amount equal to the
purchase price of the Series A Preferred Stock plus accrued and unpaid
dividends, with interest at the rate of ten percent (10%) until paid in full and
(b) warrants to purchase 2,500,000 shares of Hy-Tech's common stock at an
exercise price of $.005 per share, with a term of two (2) years' from the date
of issuance, and standard anti-dilution provisions regarding stock splits,
recapitalizations and mergers, for each $25,000 of Series A Preferred Stock
purchased. This issuance of the Series A Preferred Stock was exempt from the
registration requirements of the Securities Act of 1933 (the "Act") pursuant to
section 4(2) of the Act.
41
On August 18, 2004 the Company entered into an agreement with Aegis Funds, Inc
(AFI) to sell all of the issued and outstanding capital stock of HTCS to AFI.
The sale of HTCS to AFI closed on August 25, 2004. At the closing date, for and
in consideration for the transfer to AFI of the HTCS Capital Stock, AFI became
the record and beneficial owner of the HTCS Capital Stock, the Company
transferred as directed by AFI and for the benefit of HTCS the sum of fifteen
thousand dollars ($15,000) in good funds, and the judgment of Sun Trust Bank
against HTCS was transferred to AFI free of all claims and liens. AFI is
controlled by Gary McNear and Craig Conklin, who are directors of the Company.
The transaction was approved by the member of the board of directors who had no
interest in the transaction.
Trademarks and Patents
The Company has the following trademarks and patents:
RWT(TM)
Universal Robot Controller(TM)
URC(TM)
RobotScript(R)
TeachPoint File Creator(TM)
Gatekeeper(TM)
ControlScript(TM)
CMMScript(TM)
MediScript(TM)
Robotic Artists(TM)
Service Robots(TM) SM
RWT Patents
1st Patent number 6,442,451 - awarded September 5, 2002 - Versatile robot
control system - Abstract - An improved, versatile robot control system
comprises a general purpose computer with a general purpose operating system in
electronic communication with a real-time computer subsystem. The general
purpose computer includes a program execution module to selectively start and
stop processing of a program of robot instructions and to generate a plurality
of robot move commands. The real-time computer subsystem includes a move command
data buffer for storing the plurality of move commands, a robot move module
linked to the data buffer for sequentially processing the moves and calculating
a required position for a robot mechanical joint. The real-time computer
subsystem also includes a dynamic control algorithm in software communication
with the move module to repeatedly calculate a required actuator activation
signal from a robot joint position feedback signal.
2nd Patent number 6,675,070 - awarded April 5, 2004 - Automation equipment
control system Abstract - An automation equipment control system comprises a
general purpose computer with a general purpose operating system in electronic
communication with a real-time computer subsystem. The general purpose computer
includes a program execution module to selectively start and stop processing of
a program of equipment instructions and to generate a plurality of move
commands. The real-time computer subsystem includes a move command data buffer
for storing the plurality of move commands, a move module linked to the data
buffer for sequentially processing the moves and calculating a required position
for a mechanical joint. The real-time computer subsystem also includes a dynamic
control algorithm in software communication with the move module to repeatedly
calculate a required actuator activation signal from a joint position feedback
signal.
3rd Patent number: 20040153213 - awarded July 26, 2005, Automation equipment
control system; continuation of previous patent.
42
Research and Development
There were no substantial funds spent on R & D during the last two years.
Employees
At the end of 2004, the Company had two full time employees and several
independent contractors providing services. Today there are seven full time
employees and four full time independent contractors as well as several other
independent contractors not providing full time service supporting the Company.
Contracts
The Company had entered into contracts with two independent contractors, B.
Smith Holdings, Inc. (B.Smith) and Stratex Solutions, LLC (Stratex). The
contract with B. Smith, which became effective January 14, 2005 is for business
development, sales and marketing services and is for a term of five years and is
automatically renewable annually thereafter unless terminated by either party by
giving written notice of no less than 30 days. Under the terms of the contract,
the Company will pay B. Smith a monthly engagement fee of $10,000 provided
certain sales and other objectives are met, a commission on such sales, stock
options equal to 1% of the common stock outstanding on a fully dilutive basis
vesting over a three year period, reimbursement of approved expenses, and a
one-time payment of 6 million shares of common stock. The monthly fee is payable
in cash or common stock at the option of the Company; if common stock, the price
per share shall be $.005 for the two weeks ended January 31, 2005 and thereafter
at the closing bid price on the fifteenth day of the calendar month, or the
closest trading day, for which such fee is earned. B. Smith has agreed to keep
all inventions, trade secrets and other information about the Company
confidential and to not compete with the Company during the term of the
agreement and for one year thereafter. The contract with B. Smith is still in
effect.
The contract with Stratex, effective December 15, 2004, was for certain business
planning, financial and accounting services and is for a term of five years
which is automatically renewable annually thereafter unless terminated by either
party by giving written notice of no less than 30 days. Under the terms of the
contract, the Company will pay Stratex $10,000 monthly for the first 6 months
and $15,000 monthly thereafter, provided certain stipulated objectives are met.
The Company shall have the option to pay Stratex either in cash or common stock;
if common stock, the price per share shall be $.005 through December 15, 2005
and thereafter at the closing bid price on the first trading day of the calendar
month for which such fee is earned. Additionally, the Company will grant to
Stratex stock options equal to 2% of the common stock outstanding on a fully
dilutive basis vesting over a three year period and reimbursement of approved
expenses. If the agreement with Stratex is terminated without just cause or if
there is a change of ownership of the Company or any of its subsidiaries, then
all remaining unexercised outstanding stock options shall immediately vest to
the benefit of Stratex. Stratex is also eligible for incentive fees as
determined by the board of directors. If the agreement with Stratex is
terminated without just cause, Stratex will receive a payment equal to twenty
four months of the full monthly fee payable to Stratex immediately prior to the
termination. Stratex has agreed to keep all inventions, trade secrets and other
information about the Company confidential and to not compete with the Company
during the term of the agreement and for one year thereafter. Eugene V. Gartlan,
President of Stratex, was employed by the Company on June 14, 2005 as the Chief
Financial Officer and the contract with Stratex was simultaneously terminated
with no termination fee required.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE
Malone & Bailey, PC was the independent certifying accountant for the Company
for the fiscal year ended February 29, 2004. The Company's fiscal year was
changed to December 31 when the Company adopted the fiscal year of RWT after the
reverse merger between the Company and RWT.
On September 22, 2004, Malone & Bailey, PLLC was dismissed as the Company's
certifying accountant. The Company engaged Lopez, Blevins, Bork & Associates,
LLP, Three Riverway, Suite 1400, Houston, Texas 77056 as the Company's
certifying accountant for the fiscal year ending December 31, 2004. The
appointment of Lopez, Blevins, Bork & Associates, LLP was approved by the
Company's board of directors.
43
The reports of Malone & Bailey, PLLC on the Company's financial statements for
the fiscal years ended February 28, 2003 and February 29, 2004, contained no
adverse opinion or disclaimer of opinion, nor was either qualified or modified
as to uncertainty, audit scope or accounting principle, except that Malone &
Bailey, PLLC expressed in their reports substantial doubt about the ability of
the Company to continue as a going concern.
During the two most recent fiscal years ended February 29, 2004 and February 28,
2003 and in the subsequent interim periods through the date of dismissal, there
were no disagreements between the Company and Malone & Bailey, PLLC on any
matter of accounting principles or practices, financial statement disclosure, or
auditing scope or procedures, which disagreements, if not resolved to its
satisfaction, would have caused Malone & Bailey, PLLC to make reference to the
subject matter of the disagreement in connection with its reports.
During the two most recent fiscal years ended February 29, 2004 and February 28,
2003 and in the subsequent interim periods through the date of dismissal, Malone
& Bailey, PLLC did not advise the Company that:
(A) Internal controls necessary for the Company to develop reliable financial
statements did not exist;
(B) Information had come to its attention that led it to no longer to be able to
rely on the Company's management's representations or made it unwilling to be
associated with the financial statements prepared by management;
(C) There was a need to expand significantly the scope of its audit, or that
information had come to its attention during such time periods that if further
investigated might: (i) materially impact the fairness or reliability of either
a previously issued audit report or the underlying financial statements, or the
financial statements issued or to be issued covering the fiscal periods
subsequent to the date of the most recent financial statements covered by an
audit report, or (ii) cause it to be unwilling to rely on management's
representations or be associated with the Company's financial statements.
Effective March 5, 2003, the client-auditor relationship between the Company
(previously named Hy-Tech Technology Group, Inc. and SRM Networks, Inc.) and
Quintanilla, a Professional Accountancy Corporation ("Quintanilla") ceased. On
that date, the Company engaged Malone & Bailey, PLLC as its principal
independent public accountant. The decision to engage Malone & Bailey, PLLC was
made by the Company's Finance and Audit Committee in accordance with Section 301
of the Sarbanes-Oxley Act of 2002. The change was based on the relocation of the
Company's principal place of business from California to Florida.
Malone & Bailey, PLLC succeeded Quintanilla. Quintanilla's report on the
financial statements of SRM Networks since its inception on June 8, 2001 through
December 31, 2001 and any later interim period up to and including the date the
relationship with Quintanilla ceased, did not contain any adverse opinion or
disclaimer of opinion and was not qualified or modified as to uncertainty, audit
scope or accounting principles.
In connection with the audit of SRM Network's first and most recent fiscal year
ending December 31, 2001 and any later interim period, including the interim
period up to and including the date the relationship with Quintanilla ceased,
there were no disagreements with Quintanilla on any matters of accounting
principles or practices, financial statement disclosure of auditing scope or
procedure, which disagreements, if not resolved to the satisfaction of
Quintanilla would have caused Quintanilla to make reference to the subject
matter of the disagreements in connection with its report on the Company's
financial statements. Since the Company's inception on June 8, 2001, there were
no reportable events as defined in Item 301(a)(1)(v) of Regulation S-K.
44
The Company authorized Quintanilla to respond fully to any inquiries of any new
auditors hired by the Company relating to their engagement as the Company's
independent accountant. The Company requested that Quintanilla review the
disclosure and Quintanilla was given an opportunity to furnish the Company with
a letter addressed to the Commission containing any new information,
clarification of the Company's expression of its views, or the respect in which
it does not agree with the statements made by the Company herein.
The Company did not previously consult with Malone & Bailey, PLLC regarding
either (i) the application of accounting principles to a specified transaction,
either completed or proposed; or (ii) the type of audit opinion that might be
rendered on the Company's financial statements; or (iii) any matter that was
either the subject matter of a disagreement (as defined in Item 304(a)(1)(iv) of
Regulation S-K and the related instructions) between the Company and
Quintanilla, the Company's previous independent accountant, as there were no
such disagreements or another reportable event (as defined in Item 304(a)(1)(v)
of Regulation S-K) from the Company's inception through December 31, 2001 and
any later interim period, including the interim period up to and including the
date the relationship with Quintanilla ceased. The Company has not received any
written or oral advice concluding there was an important factor to be considered
by the Company in reaching a decision as to an accounting, auditing, or
financial reporting issue. Malone & Bailey, PLLC reviewed the disclosure
required by Item 304(a) before it was filed with the Commission and was provided
an opportunity to furnish the Company with a letter addressed to the Commission
containing any new information, clarification of the Company's expression of its
views, or the respects in which it does not agree with the statements made by
the Company in response to Item 304(a). Malone & Bailey, PLLC did not furnish a
letter to the Commission.
MANAGEMENT
Our directors, principal executive officers and significant employees are as
specified on the following table:
===============================================================================
Name Age Position
---------------- --- -------------------------------------------------
Walter K. Weisel 65 Chairman, Chief Executive Officer, and Director
Martin Nielson 53 Director; Previously Chief Executive Officer
and Chairman of the Board of Directors
Gary F. McNear 60 Director; Previously CFO, Vice President,
and Secretary
Craig W. Conklin 55 Director; Previously Chief Operating Officer
and Vice President
Eugene V. Gartlan 61 Chief Financial Officer
Sheri Aws 44 Secretary
45
WALTER K. WEISEL became the Company's Chairman and Chief Executive Officer on
August 25, 2004, the date the merger closed between the Company and RWT. With
over thirty years experience in the Motion Control market, Mr. Weisel is
recognized as a pioneer and leader in the robotics industry. An original
founding member of the Robotic Industries Association (RIA), the U.S. robot
manufacturers' trade association, Mr. Weisel served three terms as President. He
served on the RIA Board of Directors and Executive Committee and, as a
spokesperson for the industry, served as an advisor to members of the U.S. Trade
Commission and the U.S. Department of Commerce. Mr. Weisel was a founding member
of Robotics International (RI), a member society dedicated to the advancement of
robotic technology. During his term as President the membership grew to over
16,000 members. In 1992 Mr. Weisel was awarded the Joseph F. Engelberger Award,
which recognizes the most significant contribution to the advancement of
robotics and automation in the service of mankind. Each year nominations are
received from 26 nations worldwide. This award has been presented since 1977.
Mr. Weisel has a long record of advancing technology and growing companies that
develop and commercialize technology. Mr. Weisel served 13 years with Prab
Robots, Inc. as Chief Executive Officer, President, and Chief Operating Officer.
During his tenure, Prab Robots, Inc. was transformed into an international
organization and leader in the fields of industrial robots and automation. While
under his direction, Prab Robots, Inc. was taken public in an Initial Public
Offering and Unimation, Inc. and several other companies in the U.S. and Europe
were acquired. By 1990, Prab Robots, Inc. was responsible for the largest
installed base of robots in North America and had developed a very successful
robot retrofit business with customers such as General Motors, Ford, and
Chrysler. Mr. Weisel has served as Chairman and Chief Executive Officer of RWT
since its incorporation in 1994, and continues to serve in that capacity.
MARTIN NIELSON was the Company's Chief Executive Officer and Chairman of the
Board of Directors since May 2003. He resigned effective June 1, 2004. Mr.
Nielson is a principal of Altos Bancorp, Inc., serving as its Chairman and Chief
Executive Officer since November 2002. He has also served as Chief Executive
Officer and director of Inclusion Inc. since September 2000. Mr. Nielson and
Altos were instrumental in assisting the Company in the negotiations that led to
the Company's settlement of its litigation with SunTrust Bank and in securing
the financing that funded that settlement. Mr. Nielson will continue as a
director of the Company. Mr. Nielson is a senior executive with extensive
experience in operations and finance. He has been a business builder for 30
years with such companies as Gap, Businessland, and Corporate Express.
Altos, which is an outgrowth of Nielson's M&A practice during his ten years in
London, is engaged in providing investment banking and business development
services to growth oriented, emerging companies throughout the United States and
Europe. Altos was retained by the Company in 2003 to act as its business
advisor, but that contract was concluded to coincide with the acquisition of RWT
in August 2004. Mr. Nielson is also a director of Advanced Communications, Inc.
GARY F. MCNEAR was the Chief Financial Officer, Vice President and Secretary
since May 2003 through August 25, 2004, and a Director since May 2003. From
January 2003, through May 2003 he served as Chief Executive Officer and Director
of the Company. Mr. McNear has served as the Chief Executive Officer, Chairman
of the Board, and Treasurer of Hy-Tech Computer Systems(HTCS) since HTCS's
inception in November 1992, and was a founding shareholder. Mr. McNear has also
served as Secretary of HTCS since March 2001. HTCS acquired SRM Networks, Inc ,
the previous name of the Company, in a reverse acquisition in January 2003. Mr.
McNear's duties included banking relationships, cash management, and financial
reporting. Mr. McNear's formal education is in Industrial Administration at Iowa
State University. Mr. McNear is a former officer and pilot in the U.S. Air
Force, and a former airline pilot.
CRAIG W. CONKLIN was the Chief Operating Officer and Vice President since May
2003 through August 25, 2004, and a Director since May 2003. From January 2003
through May 2003, he served as President and Director of the Company. Mr.
Conklin has served as President and Director of HTCS since HTCS's inception in
November 1992, and was a founding shareholder. HTCS acquired SRM Networks, Inc,
the previous name of the Company, in a reverse acquisition in January 2003. Mr.
Conklin's duties included marketing and operations of the Company. Mr. Conklin
holds a B.S. in engineering from the Dartmouth College, and an MBA from the Amos
Tuck School of business. Mr. Conklin was formerly employed by Owens-Corning
Fiberglas, Inc. and he successfully operated and sold Golf & Electric Carriages,
Inc., a local distributorship for Club Car Golf Carts.
46
EUGENE V. GARTLAN was appointed Chief Financial Officer of the Company in June
2005. Mr. Gartlan served as a consultant to the company since December 15, 2004
through his wholly owned company, Stratex Solutions, LLC. ("Stratex"), a
business consulting firm. Stratex earned 12,000,000 shares of the Company's
common stock and received reimbursement of business expenses of approximately
$12,000 as consideration for these consulting services. Mr. Gartlan served as
the President of Stratex since June 2003. Stratex's compensation was based on a
monthly salary of $10,000, payable in cash or common stock of the Company at the
option of the Company. The price per share used to determine the number of
shares earned if stock was paid was $.005 per share, the stock price on the date
the Company and Stratex entered into the consulting agreement. No cash salary
has been paid to Stratex. From June 2000 through June 2003 Mr. Gartlan was a
self employed business consultant doing business under the name CFO Strategies
and E. V. Gartlan. From June 2000 to June 2003, Mr. Gartlan was also an
independent contractor with Whitestone Communications, Inc. serving in the
capacity as a Managing Director of this investment banking firm specializing in
mergers and acquisitions in the publishing industry. Mr. Gartlan's prior
experience include positions as Chief Financial Officer of The Thomson
Corporation's Information Publishing Group, Chief Financial Officer with Moody's
Investors Service, Chief Financial Officer with International Data Group as well
as several top financial management positions with The Dun & Bradstreet
Corporation. Mr. Gartlan worked with Price Waterhouse earlier in his career and
is a CPA in New York.
SHERI AWS was appointed Secretary of the Company on September 14, 2004. Ms. Aws
has served as Vice President of Administration of RWT, the Company's wholly
owned subsidiary, since February 2004. Prior to that, Ms. Aws served as
Executive Administrator, General Mortgage Corporation of America, from August
2003 to February 2004; Director of Just for Kids, an after school and summer
camp program for children, from December 2002 to August 2003; Assistant to the
Chief Executive Officer of RWT from December 2002 through February 2004; and
Administrative Assistant to Vice President of Marketing and Sales and Manager of
Proposals and Contracts Administration for RWT.
There is no family relationship between any of our officers or directors. There
are no orders, judgments, or decrees of any governmental agency or
administrator, or of any court of competent jurisdiction, revoking or suspending
for cause any license, permit or other authority to engage in the securities
business or in the sale of a particular security or temporarily or permanently
restraining any of our officers or directors from engaging in or continuing any
conduct, practice or employment in connection with the purchase or sale of
securities, or convicting such person of any felony or misdemeanor involving a
security, or any aspect of the securities business or of theft or of any felony
or any conviction in a criminal proceeding or being subject to a pending
criminal proceeding.
Our directors will serve until the next annual meeting of stockholders. Our
executive officers are appointed by our Board of Directors and serve at the
discretion of the Board of Directors.
CODE OF ETHICS DISCLOSURE COMPLIANCE
The Company has adopted a Code of Ethics that applies to the Company's principal
executive officer, principal financial officer, principal accounting officer and
other employees performing similar functions. The text of the Code of Ethics is
available for inspection on the Company's website.
EXECUTIVE COMPENSATION
Any compensation received by our officers, directors, and management personnel
will be determined from time to time by our Board of Directors. Our officers,
directors, and management personnel will be reimbursed for any out-of-pocket
expenses incurred on our behalf.
47
Summary Compensation Table
The table set forth below summarizes the annual and long-term compensation for
services payable to our executive officers during the years ending December 31,
2004, February 29, 2004 and February 28, 2003.
Innova Holdings, Inc. Summary Compensation Table
Restricted
Name & Position Year Salary Bonus Other Stock Options LTIP All Other
Walter K. Weisel
Chairman and CEO 2004 $150,000 0.000 0 0 5,000,000 0 0
(see note 1 and 3 below) 2003 $150,000 0.000 0 0 0 0 0
2002 $ 37,500 0.000 0 0 0 0 0
Martin Nielson 2004 $100,000 0.000 0 0 5,000,000 0 Note 2
Chairman and CEO 2003 $116,667 0.000 0 0 0 0 Note 2
(see notes 1, 2 and 3 below) 2002 $ 0 0.000 0 0 0 0 0
Note 1. Walter K. Weisel has served as Chairman and CEO of the Company since
August 25, 2004, the date the merger between the Company and RWT closed. Martin
Nielson served as Chairman and CEO of the Company from the beginning of the year
2004 to August 25, 2004.
Note 2. On April 22, 2003, the Company entered into an Advisory Agreement with
AltosBancorp Inc. ("Altos") pursuant to which Altos agreed to act as the
Company's exclusive business advisor for a one year period. Martin Nielson was
President of Altos and subsequently became Chairman and Chief Executive Officer
of the Company. Altos advised the Company regarding equity and debt financings,
strategic planning, mergers and acquisitions, and business developments. In
conjunction with the decision to proceed with the RWT acquisition, the agreement
with Altos was concluded. Altos did not receive any cash compensation for its
services rendered, but will receive 16,133,333 shares of the Company's common
stock (valued at approximately $166,000), of which 10,633,333 shares were earned
in 2004 and 5,500,000 shares were earned in 2003. None of these shares have been
issued to Altos as of this filing date.
Note 3. During the past three years, Walter K. Weisel has not received any cash
compensation. The amounts earned by Mr. Weisel remain accrued by the Company as
of December 31, 2004. Martin Nielson received $80,000 in cash compensation;
$50,000 was paid in 2003 and $30,000 was paid in 2004. The balance earned but
unpaid remains accrued by the Company as of December 31, 2004.
48
Options Granted During Fiscal Year Ending December 31 2004
The following table sets forth information concerning stock options granted to
our executive officers and directors named in the summary compensation table for
the year ending December 31, 2004:
------------------------------- ---------------- ----------------------------------------- ----------------- -----------------------
Number of Percentage of Total
Shares of Options Granted to
Underlying Employees and Directors Exercise Price
Name Options Granted During Fiscal Year Per Share Expiration Date
------------------------------- ---------------- ----------------------------------------- ----------------- -----------------------
Walter K. Weisel 5,000,000 25% $0.01 December 14, 2014
------------------------------- ---------------- ----------------------------------------- ----------------- -----------------------
Martin Nielson 5,000,000 25% $0.01 December 14, 2014
------------------------------- ---------------- ----------------------------------------- ----------------- -----------------------
Options Exercised in the Last Fiscal year and Fiscal Year-End Option values
----------------------- ------------------------ ------------------ ------------------------------------- --------------------------
Number of Shares Underlying Options Value of Unexercised
at Fiscal Year End Options at
Shares Acquired on Fiscal Year End
Name Exercise Value Realized Exercisable Unexercisable Exercisable Unexercisable
----------------------- ------------------------ ------------------ ------------------------------------- --------------------------
Walter K. Weisel 0 0 552,414 5,276,206 0 0
----------------------- ------------------------ ------------------ ------------------------------------- --------------------------
Martin Nielson 0 0 0 5,000,000 0 0
----------------------- ------------------------ ------------------ ------------------------------------- --------------------------
Each of our directors was granted an award of 5,000,000 options during the
fiscal year ended December 31, 2004. No other officer was granted an award of
options nor were there any options exercised during the fiscal year ended
December 31, 2004.
2004 Stock Option Plan
The Company adopted the 2004 stock option plan on April 15, 2004. The Plan
provides for the grant of options intended to qualify as "incentive stock
options," options that are not intended to so qualify or "nonstatutory stock
options" and stock appreciation rights. The total number of shares of common
stock reserved for issuance under the plan is 3,150,000 subject to adjustment in
the event of a stock split, stock dividend, recapitalization or similar capital
change. Additionally, the Company authorized 10,900,000 options to be awarded to
management on October 29, 2003 and on December 15, 2004 authorized options for
32,121,276 shares of common stock for directors and an independent contractor.
The plan is presently administered by the Company's Board of Directors, which
selects the eligible persons to whom options shall be granted, determines the
number of common shares subject to each option, the exercise price therefore and
the periods during which options are exercisable, interprets the provisions of
the plan and, subject to certain limitations, may amend the plan. Each option
granted under the plan shall be evidenced by a written agreement between the
Company and the optionee. Options may be granted to employees (including
officers) and directors and certain consultants and advisors.
49
The exercise price for incentive stock options granted under the plan may not be
less than the fair market value of the common stock on the date the option is
granted, except for options granted to 10% stockholders which must have an
exercise price of not less than 110% of the fair market value of the common
stock on the date the option is granted. The exercise price for nonstatutory
stock options is determined by the board of directors. Incentive stock options
granted under the plan have a maximum term of ten years, except for 10%
stockholders who are subject to a maximum term of five years. The term of
nonstatutory stock options is determined by the Board of Directors. Options
granted under the plan are not transferable, except by will and the laws of
descent and distribution.
Also, the plan allows the Board of Directors to award to an optionee for each
share of common stock covered by an option, a related alternate stock
appreciation right, permitting the optionee to be paid the appreciation on the
option in lieu of exercising the option. The amount of payment to which an
optionee shall be entitled upon the exercise of each stock appreciation right
shall be the amount, if any, by which the fair market value of a share of common
stock on the exercise date exceeds the exercise price per share of the option.
Director's Compensation
The Company has not paid and does not presently propose to pay cash compensation
to any director for acting in such capacity. However, the Company will give the
directors a grant of shares of common stock or options and reimbursement for
reasonable out-of-pocket expenses for attending meetings.
Each of our directors was granted an award of 5,000,000 options during the
fiscal year ended December 31, 2004. The exercise price for these options is
$.01 per share. The options have a term of three years. No other officer was
granted an award of options nor were there any options exercised during the
fiscal year ended December 31, 2004.
Employment Agreements with Executive Officers
Currently there are employment agreements with three executives, Walter Weisel,
Chairman and CEO, Eugene V. Gartlan, CFO and Sheri Aws, Vice President and
Secretary.
Walt Weisel
Mr. Weisel's employment agreement is dated July 19, 2000. Mr. Weisel's salary is
$150,000 per annum plus a bonus at the discretion of the Board of Directors. The
agreement stipulates that Mr. Weisel's salary will be increased to $200,000 and
$250,000 when certain sales and profit objectives are met. The agreement is for
a term of three years and automatically renews for successive one year periods
unless terminated by either party upon not less than sixty days prior to the
renewal date. Mr. Weisel has agreed not to compete with the Company or solicit
its customers or employees for a period of two years following the termination
of his employment. The agreement also requires the Company to pay Mr. Weisel all
accrued compensation, which amounted to $337,500 as of December 31, 2004, upon
receipt of additional capital of no less than $3,000,000.
Eugene Gartlan
On June 30, 2005, the Company and Mr. Gartlan entered into an Employment
Agreement effective as of June 14, 2005. The term of the employment agreement is
five years. The agreement is automatically extended for one year periods unless
terminated on not less than thirty days notice by either party prior to any
termination date. For all the services to be rendered by Mr. Gartlan from June
14, 2005 through December 14, 2005, Mr. Gartlan shall be granted stock options
to purchase 18,000,000 shares of common stock of the Company at the purchase
price of $.036. Such options shall be granted under the terms of the Company's
Stock Option Plan and shall vest equally over a period of three years, or upon
death if sooner. After December 14, 2005, Mr. Gartlan shall be paid a salary of
fifteen thousand dollars per month. The Company shall have the option to pay the
salary in cash or in shares of common stock of the Company registered on Form
S-8. The stock price shall be determined by the market price for the shares on
the first business day of the month in which the salary is earned. If the
Executive is terminated without cause, all remaining outstanding stock options
that have not been exercised by Mr. Gartlan, including stock options to purchase
12,121,276 shares of common stock of the Company awarded by the Board of
Directors of the Company to Stratex Solutions, LLC on April 12, 2005, shall
immediately vest on the effective date of termination. If there is a change of
ownership of the Company or any of its subsidiaries, all remaining outstanding
stock options, including the Stratex Solutions options, that have not been
exercised by Mr. Gartlan, shall immediately vest on the day immediately
preceding the effective date of the change of ownership. Stratex Solutions is
owned by Mr. Gartlan.
50
If employment is terminated by the Company without cause, Mr. Gartlan shall
receive a payment equal to twenty four months of salary paid prior to the
effective date of termination. The Company has the option to make this payment
either in cash or in the common stock of the Company based on the per share
market price of common stock at the time of termination. If during Mr. Gartlan's
employment, the Company enters into an agreement which effectively will result
in a change of control of the ownership of either the Company or Robotic
Workspace Technologies, Inc. ("RWT"), the Company's wholly-owned subsidiary, or
if the Company enters into an agreement which effectively will result in a
change of ownership of the assets of the Company or RWT, Mr. Gartlan shall
receive a payment equal to twenty four months of the salary paid prior to the
effective date of the change of control. The Company shall make such payment in
the common stock of the Company based on a price per share of $.005 if the
effective date of the change of control is December 14, 2005 or sooner;
thereafter the price per share shall be the market price of common stock at the
time of the change in control. Regarding the change of ownership of the assets
of the Company or RWT, such change of ownership shall be deemed to have occurred
if the rights to use the software of Robotic Workspace Technologies, Inc., is
granted or sold in settlement of claims made by the Company or RWT of trade
secret violations or patent infringements, and such rights to use the software
results in a settlement payment to the Company or RWT in a single payment or
multiple payments, other than a long term licensing agreement typical of
software licensing agreements.
Sheri Aws
Ms. Aws is employed as Vice President of Administration by RWT under an
Employment Agreement dated February 24, 2004. Ms. Aws compensation is $45,000
per annum plus a bonus in the discretion of RWT. Ms. Aws compensation will
increase to $60,000 per annum upon completion of the merger between the Company
and RWT and proper financing. The agreement is for a term of one year, and
automatically renews for successive one year periods unless terminated by either
party upon not less than thirty days notice prior to the renewal date. Ms Aws
has agreed not to compete with RWT or solicit its customers or employees for a
period of one year following the termination of her employment.
DESCRIPTION OF PROPERTY
The Company leased office space at 11595 Kelly Road, Ft. Myers, Florida which
had been used as its primary operations. The office space lease, which was for
approximately 1,000 square feet, was with Sunset Concepts, LLC, with monthly
payments of $1,343. The lease commenced in May 2004 and expired in August 2005.
The office lease was cancelable with 30 days notice.
On May 15, 2005 the Company leased 4,000 square feet of space at 15870 Pine
Ridge Road, Ft Myers, Florida which will be used as its primary operations. The
lease is with Gulf To Bay Construction, Inc., with monthly payments of $3,533
through June 1, 2010. The lease has five (5) successive renewal options each for
a period of two (2) years. The rent will increase annually by 3%. The space is
the location of the Company's Research, Design and Engineering center as well as
office space for fifteen (15) employees.
51
On June 15, 2005 the Company entered into a lease with Bola Industries, LLC for
approximately 4,000 square feet of production space located at 30946 Industrial
Road, Livonia Michigan. The lease is on a monthly basis and expires on December
31, 2005. The rent is $3,775 monthly and includes all utilities, use of all
equipment on site including certain heavy equipment, and use of internet
service.
We believe that we can obtain additional facilities required to accommodate our
projected needs without difficulty and at commercially reasonable prices,
although no assurance can be given that the Company will be able to do so.
LEGAL PROCEEDINGS
Except for one lawsuit, which management of the Company believes has no merit
and is not material; there are no lawsuits against the Company as of September
30, 2005. There are no material proceedings to which any director, officer or
affiliate of the Company, any owner of record or beneficially of more than 5% of
the common stock of the Company is a party adverse to the Company.
Innova sold its wholly owned subsidiary and all of its operations in connection
with the acquisition of RWT. As part of the agreement, the Company agreed to
indemnify the directors of the Company from certain liabilities that were in
existence on the date of closing of the sale, which management believes may
apply to a maximum of approximately $500,000 of debt. If the Company issues
shares of its common stock or pays cash to settle this debt on behalf of the
directors or as indemnification, it must issue common shares equal to the value
of the payments made to the RWT shareholders at the time of the acquisition of
RWT, in proportion to their RWT share holdings.
The Company received a subpoena dated May 10, 2005 from the Philadelphia Office
of the Securities and Exchange Commission regarding an investigation the SEC has
commenced captioned In the Matter of Trading Certain OTC Stocks (P-1189). The
SEC subpoena seeks the production of all documents relating to the merger and
financing transactions described in the Company's April 29, 2003 Form 8-K filed
with the SEC. These transactions include the merger with Sanjay Haryama and the
financings with HEM Mutual Assurance Company. In August 2004, the Company
completed a reverse merger with Robotic Workspace Technology, Inc. (RWT).
The subpoena concerns transactions that occurred 16 months before the RWT
merger. The current management of the Company, including Walter Weisel, who took
office as Chief Executive Officer of the Company in August 2004 following the
merger with RWT, intends to cooperate to the fullest extent possible in the
investigation.
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of our common stock as of September 30, 2005, by each person or entity
known by us to be the beneficial owner of more than 5% of the outstanding shares
of common stock, each of our directors and named executive officers, and all of
our directors and executive officers as a group. Beneficial ownership has been
determined in accordance with Rule 13d-3 of the Securities Exchange Act of 1934,
as amended. Generally, a person is deemed to be the beneficial owner of a
security if he has the right to acquire voting or investment power within 60
days.
Percentage ownership in the following table is based on 460,474,045 shares of
common stock outstanding as of September 30, 2005. A person is deemed to be the
beneficial owner of securities that can be acquired by that person within 60
days from September 30, 2005 upon the exercise of options, warrants or
convertible securities, or other rights. Each beneficial owner's percentage
ownership is determined by dividing the number of shares beneficially owned by
that person by the base number of outstanding shares, increased to reflect the
shares underlying options, warrants, convertible securities, or other rights
included in that person's holdings, but not those underlying shares held by any
other person.
52
-------------------------------- -------------------------- --------------------
Name and Address of Beneficial Amount and Nature of Percent of Class
Owner Beneficial Owner
-------------------------------- -------------------------- -------------------
Walter K. Weisel 52,961,380 - Direct(5) 11.5%
17105 San Carlos Blvd.
Suite A6151
Fort Myers Beach, FL, 33931
-------------------------------- -------------------------- -------------------
Martin Nielson 30,085,033 - Direct, 6.3%
17105 San Carlos Blvd. in part through
Suite A6151 Altos Bancorps (1)
Fort Myers Beach,
FL, 33931
--------------------------------- -------------------------- -------------------
Gary McNear 10,235,450 - (2). 2.2%
17105 San Carlos Blvd.
Suite A6151
Ft. Myers Beach,
FL, 33931
--------------------------------- -------------------------- -------------------
Craig Conklin 11,576,950 - (3). 2.5%
17105 San Carlos Blvd.
Suite A6151
Ft. Myers Beach,
FL, 33931
--------------------------------- -------------------------- -------------------
Eugene V. Gartlan 21,023,112 - Direct (4) 4.5%
17105 San Carlos Blvd.
Suite A6151
Ft Myers Beach,
FL 33931
--------------------------------- -------------------------- -------------------
Jerry E. Horne 74,329,227 - Direct 16.1%
17105 San Carlos Blvd.
Suite A6151
Ft. Myers Beach,
FL, 33931
--------------------------------- -------------------------- -------------------
John Murphy 26,671,524 - Direct 5.8%
17105 San Carlos Blvd.
Suite A6151
Ft. Myers Beach,
FL, 33931
--------------------------------- -------------------------- -------------------
Richard K. Wynns and Johanna 48,496,996 - Direct 10.0%
Wynns
17105 San Carlos Blvd
Suite A6151
Fort Myers Beach, FL 33931
--------------------------------- -------------------------- -------------------
Directors and Officers as a 128,916,408 25.9%
Group
--------------------------------- -------------------------- -------------------
53
(1) On April 29, 2003, the Gary F. McNear Revocable Trust ("Gary Trust"), the
Susan M. McNear Revocable Trust ("Susan Trust"), the Craig M. Conklin Revocable
Trust ("Craig Trust") and the Margaret L. Conklin Revocable Trust ("Margaret
Trust") (collectively the "Trusts") entered into a Stock Option and Irrevocable
Proxy Agreement with Altos Bancorp Inc. Martin Nielson is the owner of Altos.
Gary McNear was the Chief Financial Officer, Vice President, Secretary and
Director of The Company; he currently is a director of the Company. Susan McNear
is his wife. Craig M. Conklin was the Chief Operating Officer, Vice President
and a Director of the Company; he currently is a director of the Company.
Margaret Conklin is his wife. The Trusts own an aggregate of 15,838,444 shares
of the Company's Common Stock. The Trusts granted to Altos an option to acquire
10,000,000 of their shares of Common Stock for $.01 per share for a period of
three years. The Trusts also granted to Altos an irrevocable proxy to vote their
shares. The irrevocable proxy is for a term of three years with respect to the
10,000,000 shares of Common Stock held by the Trusts that are subject to the
option to purchase and for a term of six months with respect to the 5,838,444
shares of Common Stock held by the Trusts that are not subject to the option to
purchase. The irrevocable proxy relating to the 5,838,444 shares has expired.
Additionally, Altos and Mr. Nielson earned a fee for services rendered,
compensation as an executive of the Company and reimbursement of expenses which
are expected to be paid in full upon the issuance of an additional 30,085,033
shares; these shares have not to date been formally issued but are included in
the table.
(2) Includes 2,919,224 shares owned by the Susan M. McNear Revocable Trust.
(3) Includes 2,919,224 shares owned by the Margaret L. Conklin Revocable Trust.
(4) Includes (a) 12,000,000 shares earned by Stratex Solutions, LLC ("Stratex"),
a business consulting firm owned by Mr. Gartlan, that served the Company from
December 15, 2004 through June 14, 2005, (b) 5,033,200 shares which Mr. Gartlan
can receive upon the exercise of his conversion rights of 25,166 shares of the
Company's Series B Convertible Preferred Stock and (c) options to acquire
2,323,245 shares that are currently exercisable or exercisable within 60 days
out of a total award of 12,121,276 options to Stratex at an exercise price of
$.005 effective December 15, 2004,. The options vest monthly over the five (5)
year period from the date of grant. Additionally, the amount includes 1,666,667
shares acquired in a private placement in August 2005 at $.015 per share.
(5) Includes 5,000,000 shares awarded to Mr. Weisel in April 2005 for services
performed and options to acquire 828,620 shares that are currently exercisable
or exercisable within 60 days at an exercise price of $.008 per share.
SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS
The following table set forth the information as of December 31, 2004 with
respect to compensation plans under which equity securities of the Company are
authorized for issuance:
54
EQUITY COMPENSATION PLAN INFORMATION
December 31, 2004
---------------------------- -------------------------- -------------------------- --------------------------
Plan Category Number of shares to be Weighted average Number of securities
issued upon exercise of exercise price of remaining available for
outstanding options outstanding options future issuance
---------------------------- -------------------------- -------------------------- --------------------------
Equity compensation plans
approved by security
holders 0 0 0
---------------------------- -------------------------- -------------------------- --------------------------
Equity compensation plans
not approved by security
holders 48,388,141 $.008 18,050,000
---------------------------- -------------------------- -------------------------- --------------------------
Total 48,388,141 $.008 18,050,000
---------------------------- -------------------------- -------------------------- --------------------------
On July 15, 2003 the Company adopted a Stock Option Plan authorizing options on
5,000,000 shares. On October 29, 2003 the Company authorized options on
10,900,000 shares to be issued to senior management. On April 15, 2004 the
Company adopted a Stock Option Plan authorizing options on 3,150,000 shares.
Under all of these plans, the Company issued options for 1,000,000 shares. On
December 15, 2004 the Company authorized 32,121,276 options to be awarded to
directors and an independent contractor and on April 12, 2005 another 67,878,724
options were authorized by the Company. During the nine months ended September
30, 2005 there were 80,719,259 options granted, of which 16,000,000 were
subsequently cancelled, resulting in a net amount of options granted of
64,719,259. Of the options granted and not cancelled, 58,658,621 were granted to
employees and 6,060,638 to an independent contractor. The share purchase options
granted to employees vest annually over three years from the date of grant,
30,658,621 options are exercisable at $0.017 per share, 10,000,000 options are
exercisable at $.023 per share and 18,000,000 options are exercisable at $0.036
per share, and they expire ten years after the grant date. The options granted
to employees were valued using the intrinsic value method and had no value
because the exercise price was equal to the market price on the grant date. The
share purchase options granted to the independent contractor vest monthly over
five years from the date of grant, are exercisable at $0.01 per share, and they
expire ten years after the grant date. During the nine months ended September
30, 2005, $20,958 was recognized as an expense for the fair value of these
options granted to the independent contractor. The Company is planning to file
an S-8 registration statement later this year for the Company's stock option
plan.
Robotic Workspace Technologies, Inc. had a stock option plan in effect at the
time of the merger with the Company, under which plan there were options granted
for the equivalent of 15,266,865 shares of the Company, after adjusting for the
ratio of stock exchange in the merger agreement, which will also be included in
the S-8 filing. There are no remaining shares to be granted under that plan.
Stock Options
There are a total 113,107,400 outstanding options to purchase common equity of
Innova as of September 30, 2005.
Convertible Securities
On June 23, 2004, the Company entered into a private placement of 125,000 shares
of its Series A Preferred Stock for an aggregate issue price of $125,000 with
the holders of the Company's Convertible Debentures. 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 into the number of shares
of common stock equal to $1.00 divided by a 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 and (vi) has no voting rights except when mandated by Delaware law.
In the event that the Company had not completed the merger with RWT and RWT had
not raised $500,000 in new capital by August 27, 2004, then each of the holders
of the Series A Preferred Stock could elect to convert their shares into (a) a
demand note payable by the Company, in the principal amount equal to the
purchase price of the Series A Preferred Stock plus accrued and unpaid
dividends, with interest at the rate of ten percent (10%) until paid in full and
(b) warrants to purchase 2,500,000 shares of the Company's common stock at an
exercise price of $.005 per share, with a term of two (2) years from the date of
issuance, and standard anti-dilution provisions regarding stock splits,
recapitalizations and mergers, for each $25,000 of Series A Preferred Stock
purchased. Since RWT had not raised $500,000 by August 27, 2004 the holders of
the Series A Preferred Stock could have elected to convert their shares into the
demand note but none of the holders elected to do so. This issuance of the
Series A Preferred Stock was exempt from the registration requirements of the
Securities Act of 1933 (the "Act") pursuant to section 4(2) of the Act.
55
In September 2004, the Company authorized $525,000 of Series B Preferred Stock,
convertible into the Company's common stock at the lesser of $.005 per share or
75% of the average closing bid prices over the 20 trading days immediately
preceding the date of conversion. At December 31, 2004 $377,000 of the Series B
Preferred Stock had been sold; as of March 31, 2005 all of the Series B
Preferred Stock was sold. None of the Series B Preferred Stock has been
converted into common stock. This issuance of the Series B Preferred Stock was
exempt from the registration requirements of the Securities Act of 1933 (the
"Act") pursuant to section 4(2) of the Act.
On July 22, 2005 the Company borrowed $30,000 and entered into a short term note
for that amount, the terms of which are: interest at the annual rate of 5%, due
date in six months, and principal and accrued interest are convertible into
common stock of the Company at $0.015 per share. This issuance of a convertible
note was exempt from registration pursuant to Section 4(2) of the Securities Act
of 1933 (the "1933 Act"), and Regulation D promulgated under the 1933 Act.
Subsequent Event. 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 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.
OBLIGATION OF THE COMPANY TO REPAY TO CORNELL CAPITAL PRINCIPAL AND INTEREST DUE
UNDER THE CONVERTIBLE DEBENTURE WITH ALL OF ITS REVENUES, IF ANY, WHEN SUCH
REVENUES ARE RECEIVED
The Company is obligated to 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.
Penny Stock Regulation
Shares of our common stock are subject to rules adopted by the Securities and
Exchange Commission that regulate broker-dealer practices in connection with
transactions in "penny stocks". Penny stocks are generally equity securities
with a price of less than $5.00 (other than securities registered on certain
national securities exchanges or quoted on the NASDAQ system, provided that
current price and volume information with respect to transactions in those
securities is provided by the exchange or system). The penny stock rules require
a broker-dealer, prior to a transaction in a penny stock not otherwise exempt
from those rules, deliver a standardized risk disclosure document prepared by
the Securities and Exchange Commission, which contains the following:
o a description of the nature and level of risk in the market for penny stocks
in both public offerings and secondary trading;
o a description of the broker's or dealer's duties to the customer and of the
rights and remedies available to the customer with respect to violation to such
duties or other requirements of securities' laws;
o a brief, clear, narrative description of a dealer market, including "bid" and
"ask" prices for penny stocks and the significance of the spread between the
"bid" and "ask" price;
o a toll-free telephone number for inquiries on disciplinary actions;
o definitions of significant terms in the disclosure document or in the conduct
of trading in penny stocks; and
o such other information and is in such form (including language, type, size and
format), as the Securities and Exchange Commission shall require by rule or
regulation. Prior to effecting any transaction in penny stock, the broker-dealer
also must provide the customer the following:
o the bid and offer quotations for the penny stock;
o the compensation of the broker-dealer and its salesperson in the transaction;
o the number of shares to which such bid and ask prices apply, or other
comparable information relating to the depth and liquidity of the market for
such stock; and
o monthly account statements showing the market value of each penny stock held
in the customer's account.
56
In addition, the penny stock rules require that prior to a transaction in a
penny stock not otherwise exempt from those rules, the broker-dealer must make a
special written determination that the penny stock is a suitable investment for
the purchaser and receive the purchaser's written acknowledgment of the receipt
of a risk disclosure statement, a written agreement to transactions involving
penny stocks, and a signed and dated copy of a written suitably statement. These
disclosure requirements may have the effect of reducing the trading activity in
the secondary market for a stock that becomes subject to the penny stock rules.
Holders of shares of our common stock may have difficulty selling those shares
because our common stock will probably be subject to the penny stock rules.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
During September and October 2005, we entered into short-term debt obligations
other than in the ordinary course of business. All of the short-term debt bears
interest at the rate of 10% per annum. The following table sets for the names of
the lenders, the amount of the loans, the dates of the loans and the due date of
the loans:
------------------------- ----------------------- ----------------------- --------------------------
Lender Amount of Loan Date of Loan Due Date
------------------------- ----------------------- ----------------------- --------------------------
Eugene Gartlan $40,000 September 19, 2005 December 19, 2005
------------------------- ----------------------- ----------------------- --------------------------
Jerry Horne $50,000 September 22, 2005 October 22, 2005
------------------------- ----------------------- ----------------------- --------------------------
James Marks $30,000 September 22, 2005 October 22, 2005
------------------------- ----------------------- ----------------------- --------------------------
Eugene Gartlan $ 5,000 October 5, 2005 January 5, 2006
------------------------- ----------------------- ----------------------- --------------------------
Rick Wynns $30,000 October 5, 2005 April 5, 2006
------------------------- ----------------------- ----------------------- --------------------------
Rick Wynns $30,000 October 17, 2005 April 17, 2006
------------------------- ----------------------- ----------------------- --------------------------
All of the lenders are shareholders of the Company. Mr. Gartlan is also the
Chief Financial Officer of the Company.
On June 23, 2004, the Company entered into and simultaneously closed an
Agreement with Encompass Group Affiliates, Inc. (Encompass"), pursuant to which
the Company granted to Encompass an exclusive, worldwide, royalty free and fully
paid up perpetual and irrevocable license to use the customer list associated
with its computer and systems related products business and its related
websites; this business was subsequently closed down. Additionally, the Company
assigned to Encompass the Company's rights to enter into acquisitions with three
companies. In consideration for this transaction, Encompass assumed all of the
Company's obligations under certain Convertible Debentures (the "Convertible
Debentures") in the aggregate principal amount of $503,300. The holders of the
Convertible Debentures released the Company from all claims arising under the
Convertible Debentures.
On April 28, 2003, the Company entered into an employment agreement with Gary F.
McNear, as Chief Financial Officer, Vice President, Secretary and Director. Mr.
McNear is no longer an employee of the Company but is currently a director. Mr.
McNear was paid a base salary of $1,500 per week. The agreement was for a term
of two years. Mr. McNear resigned as an employee of the Company upon the close
of the merger with RWT. The agreement restricts Mr. McNear from competing with
the Company, soliciting the Company's customers or employees, and interfering
with the Company's business during the term of the agreement and for one year
thereafter. Mr. McNear agreed to keep the Company's business trade secrets
confidential and not to make use of them. Under the agreement, Mr. McNear was
also granted an option to acquire 500,000 shares of our common stock, at a price
of $.01 per share, expiring five years from the date of grant.
On April 28, 2003, the Company entered into an employment agreement with Craig
W. Conklin, as the Company's Chief Operating Officer, Vice President, and
Director. Mr. Conklin is no longer an employee of the Company but is currently a
director. Mr. Conklin was paid a base salary of $1,500 per week. The agreement
was for a term of two years. The agreement restricts Mr. Conklin from competing
with the Company, soliciting the Company's customers or employees, and
interfering with the Company's business during the term of the agreement and for
one year thereafter. Mr. Conklin agreed to keep the Company's business trade
secrets confidential and not to make use of them. Under the agreement, Mr.
Conklin was also granted an option to acquire 500,000 shares of our common
stock, at a price of $.01 per share, expiring five years from the date of grant.
In January 2003, Craig W. Conklin, the Company's then President, and Gary F.
McNear, the Company's Chief Executive Officer, entered into a consulting
agreement with the Company's subsidiary relating to the negotiation of a reduced
loan amount due SunTrust Bank. Pursuant to the consulting agreement, the
subsidiary agreed to pay each of Messrs. Conklin and McNear six percent of the
discounted amount of the loan due SunTrust Bank. In consideration for six
percent of the discounted amount, Messrs. Conklin and McNear agreed to forego
any compensation due them for the past two years. In connection with the
SunTrust settlement, the Company issued common stock valued at $225,772 to each
of Mr. Conklin and Mr. McNear.
On August 18, 2004 the Company entered into an agreement with Aegis Funds, Inc
(AFI) to sell all of the issued and outstanding capital stock of its subsidiary
Hy-Tech Computer Systems (HTCS) to AFI. The sale of HTCS to AFI closed on August
25, 2004. At the closing date, for and in consideration for the transfer to AFI
of the HTCS Capital Stock, AFI became the record and beneficial owner of the
HTCS Capital Stock, the Company transferred as directed by AFI and for the
benefit of HTCS the sum of fifteen thousand dollars ($15,000) in good funds, and
the judgment of Sun Trust Bank against HTCS was transferred to AFI free of all
claims and liens. AFI is controlled by Gary McNear and Craig Conklin, who are
directors of the Company. The transaction was approved by the member of the
board of directors who had no interest in the transaction.
57
On July 22, 2002, the Company entered into a revolving line of credit of
$225,000 with Fifth Third Bank, Florida, secured by the assets of the Company.
The annual interest rate on unpaid principal is the prime rate plus 2%, due in
monthly installments. Principal and interest were due on July 22, 2003. In
November 2004, a principal shareholder, Jerry E. Horne, loaned the Company
$165,000 to pay down the line of credit with Fifth Third Bank. The loan has the
same terms as the Fifth Third Bank line of credit, except that it remained
unsecured until such time as the Fifth Third Bank line of credit was fully paid,
including principal and accrued interest, and is due upon demand. In January
2005, the Fifth Third Bank line of credit was paid off.
On August 25, 2004 the Company issued 280,000,000 shares of common stock for
100% of the outstanding stock of Robotic Workspace Technology, Inc ("RWT"). For
financial reporting purposes this transaction was treated as an acquisition of
Innova and a recapitalization of RWT using the purchase method of accounting. As
part of this transaction, Walter K. Weisel received 53,172,765 shares of the
Company and Jerry E. Horne received 74,329,227 shares of the Company.
During 2002, 2003 and 2004, the Company leased two buildings from related
parties. The building located at 1826 Boy Scout Drive, Fort Myers, FL consisted
of 4,600 square feet, and the Company leased it for $3,400.00 monthly. The lease
expired December 31, 2010, and the Company had the option of extending it for
five more years with a rent escalation equal to the consumer price index
increase over the term of the first lease period. The building located at 1840
Boy Scout Drive, Fort Myers, FL consisted of 11,320 square feet, and the Company
leased it for $6,325 monthly. Both of these buildings are owned by Lee Coast
Enterprises, Inc. Margaret L. Conklin, (wife of Craig Conklin), as trustee, owns
33% of the stock of Lee Coast Enterprises. Susan McNear, (wife of Gary McNear),
as trustee, owns 33% of the stock of Lee Coast Enterprises. Gary McNear is
President of Lee Coast Enterprises, Inc. Both of these buildings were leased at
market rates. Gary McNear and Craig Conklin are directors of the Company. These
leases were terminated by Lee Coast enterprises and the Company has no remaining
obligations under the lease.
In April 2002, Bradley Conklin, the son of our former President and current
director Craig W. Conklin, Margaret Conklin, the wife of Mr. Conklin, and Susan
McNear, the wife of our former Chief Executive Officer and current director Gary
McNear, loaned Hy-Tech Computer Systems, the Company's previous wholly-owned
subsidiary, an aggregate of $105,000, with interest at the rate of 6% per annum,
due on December 31, 2003, and secured by second mortgages on the building
occupied by Hy-Tech Computer System's Tallahassee, Florida store. Gary McNear,
our director also loaned Hy-Tech Computer Systems $124,369.86. This loan was
unsecured, carried interest at six percent per annum, and was due May 31, 2003.
Craig W. Conklin, our director, also loaned the company $122,520.55. These loans
were all from officers of the Company, or relatives of officers of the Company,
and the total amount of these loans was $352,000. These loans were settled as
part of the sale of Hy-Tech Computer Systems to Aegis Funds, Inc. and are no
longer obligations of the Company.
MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S
COMMON EQUITY AND OTHER STOCKHOLDER MATTERS
Reports to Security Holders
We are a reporting company with the Securities and Exchange Commission, or SEC.
The public may read and copy any materials filed with the SEC at the SEC's
Public Reference Room at 450 Fifth Street N.W., Washington, D.C. 20549. The
public may also obtain information on the operation of the Public Reference Room
by calling the SEC at 1-800-SEC-0330. The SEC maintains an Internet site that
contains reports, proxy and information statements, and other information
regarding issuers that file electronically with the SEC. The address of that
site is http://www.sec.gov.
58
Prices of Common Stock
Since February 2002, we have been eligible to participate in the OTC Bulletin
Board, an electronic quotation medium for securities traded outside of the
NASDAQ Stock Market, and prices for our common stock were published on the OTC
Bulletin Board under the trading symbol "SRMW" until such time as our
acquisition of Hy-Tech Technology Group, Inc. on January 31, 2003 when our
symbol became "HYTT". In August 2004 the name of the Company was changed to
Innova Holdings, Inc. and the trading symbol was changed to "IVHG".
The following table sets forth, for the fiscal quarters indicated, the high and
low closing sales price of our Common Stock as reported on the NASD
Over-the-Counter Bulletin Board for each quarterly period during the fiscal
years ended December 31, 2004 and December 31, 2003 and the nine months ended
September, 30,2005, as reported in MarketWatch, Inc.:
Common Stock
Nine Months Ended
September 30, 2005 High Low
---------- ----------
First quarter $ 0.0320 $ 0.0075
Second quarter $ 0.0670 $ 0.0145
Third quarter $ 0.0420 $ 0.0100
Year Ended December 31, 2004 High Low
---------- ----------
First quarter $ 0.056 $ 0.012
Second quarter $ 0.017 $ 0.006
Third Quarter $ 0.014 $ 0.006
Fourth Quarter $ 0.010 $ 0.005
Year Ended December 31, 2003 High Low
---------- ----------
First quarter $ 2.480 $ 0.630
Second quarter $ 0.800 $ 0.135
Third quarter $ 0.130 $ 0.024
Fourth quarter $ 0.074 $ 0.041
On September 13, 2005, the closing sales price of our common stock was $0.024
There are approximately 106 record holders of common equity.
Dividend Policy
The Company has never declared or paid any cash dividends on its common stock.
The Company anticipates that any earnings will be retained for development and
expansion of its business and does not anticipate paying any cash dividends in
the foreseeable future. Additionally, the Company has issued and has outstanding
$125,000 of Series A Preferred Stock and $525,000 of Series B Preferred Stock
all of which earn a 5% dividend, payable in either cash or common stock of the
Company. Such dividends on these Preferred Stocks will be paid before any
dividends on common stock. The Board of Directors has sole discretion to pay
cash dividends based on the Company's financial condition, results of
operations, capital requirements, contractual obligations and other relevant
factors.
SHARES ELIGIBLE FOR FUTURE SALE
We have outstanding 460,474,045 shares of our common stock. Of these
shares,75,362,931 shares are unrestricted and held by non-affiliates, and are
freely tradable without restriction under the Securities Act. Non-affiliates
59
currently hold 169,495,142 shares of our restricted common stock and affiliates
hold 215,615,972 shares of our restricted common stock. These shares will be
eligible for sale in the public market, subject to certain volume limitations
and the expiration of applicable holding periods under Rule 144 under the
Securities Act. In general, under Rule 144 as currently in effect, a person (or
persons whose shares are aggregated) who has beneficially owned restricted
shares for at least one year (including the holding period of any prior owner or
affiliate) would be entitled to sell within any three-month period a number of
shares that does not exceed the greater of (1) one percent (1%) of the number of
shares of common stock then outstanding or (2) the average weekly trading volume
of the common stock during the four calendar weeks preceding the filing of a
Form 144 with respect to such sale. Sales under Rule 144 are also subject to
certain manner of sale provisions and notice requirements and to the
availability of current public information about us. Under Rule 144(k), a person
who is not deemed to have been an affiliate of us at any time during the three
months preceding a sale, and who has beneficially owned the shares proposed to
be sold for at least two years (including the holding period of any prior owner
except an affiliate), is entitled to sell such shares without complying with the
manner of sale, public information, volume limitation or notice provisions of
Rule 144.
DIVIDENDS
As of the date hereof, no cash dividends have been declared on our common stock.
We presently intend to retain future earnings, if any, for use in our business
and have no present intention to pay cash dividends on our common stock.
DESCRIPTION OF SECURITIES
GENERAL
Innova's authorized capital consists of 900,000,000 shares of common stock, par
value $0.001 per share and 10,000,000 shares of preferred stock, par value
$0.001 per share. As of September 30, 2005, there were 460,474,045 outstanding
shares of common stock and outstanding shares of preferred stock. Set forth
below is a description of certain provisions relating to Innova's capital stock.
For additional information, please refer to Innova's Articles of Incorporation
and By-Laws and the Delaware statutes.
COMMON STOCK
Each outstanding share of common stock has one vote on all matters requiring a
vote of the stockholders. There is no right to cumulative voting; thus, the
holder of fifty percent or more of the shares outstanding can, if they choose to
do so, elect all of the directors. In the event of a voluntary of involuntary
liquidation, all stockholders are entitled to a pro rata distribution after
payment of liabilities and after provision has been made for each class of
stock, if any, having preference over the common stock. The holders of the
common stock have no preemptive rights with respect to future offerings of
shares of common stock. Holders of common stock are entitled to dividends if, as
and when declared by the Board out of the funds legally available therefore. It
is Innova's present intention to retain earnings, if any, for use in its
business. The payment of dividends on the common stock are, therefore, unlikely
in the foreseeable future.
PREFERRED STOCK
Innova is authorized to issue 10,000,000 shares of $0.001 par value preferred
stock. As of September 30, 2005, there were 81,450 shares of Series A Preferred
and 525,000 shares of Series B Preferred outstanding. The preferred stock, which
is commonly known as "blank check preferred", may be issued by the Board of
Directors with rights, designations, preferences and other terms, as may be
determined by the Directors in their sole discretion, at the time of issuance.
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 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 market value of the common Stock at the time 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. As of September 30, 2005,
four holders of 43,450 shares of Series A Preferred Stock had converted their
shares into 8,735,511 shares of Common Stock, including accrued dividends.
60
Each share of the Series B Preferred Stock (i) pays a dividend of 5%, payable at
the discretion of the Company in cash or common stock, (ii) is convertible 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) may be
redeemed by the Company at any time for $1.30 per share plus accrued and unpaid
dividends, (v) ranks junior to the Series A Preferred Stock upon liquidation of
the Company and (vi) has no voting rights except when mandated by Delaware law.
As of September 30, 2005 no holder of the Series B Preferred Stock had converted
their shares into Common Stock.
LIMITATION OF LIABILITY: INDEMNIFICATION
Our Articles of Incorporation include an indemnification provision under which
we have agreed to indemnify directors and officers of Innova from and against
certain claims arising from or related to future acts or omissions as a director
or officer of Innova. Insofar as indemnification for liabilities arising under
the Securities Act of 1933 may be permitted to directors, officers and
controlling persons of Innova pursuant to the foregoing, or otherwise, Innova
has been advised that in the opinion of the SEC, such indemnification is against
public policy as expressed in the Securities Act of 1933 and is, therefore,
unenforceable.
ANTI-TAKEOVER EFFECTS OF PROVISIONS OF THE ARTICLES OF INCORPORATION
Authorized and Unissued Stock
The authorized but unissued shares of our common stock are available for future
issuance without our stockholders' approval. These additional shares may be
utilized for a variety of corporate purposes including but not limited to future
public or direct offerings to raise additional capital, corporate acquisitions
and employee incentive plans. The issuance of such shares may also be used to
deter a potential takeover of Innova that may otherwise be beneficial to
stockholders by diluting the shares held by a potential suitor or issuing shares
to a stockholder that will vote in accordance with Innova's Board of Directors'
desires. A takeover may be beneficial to stockholders because, among other
reasons, a potential suitor may offer stockholders a premium for their shares of
stock compared to the then-existing market price.
The existence of authorized but unissued and unreserved shares of preferred
stock may enable the Board of Directors to issue shares to persons friendly to
current management which would render more difficult or discourage an attempt to
obtain control of our Company by means of a proxy contest, tender offer, merger
or otherwise, and thereby protect the continuity of our Company's management.
EXPERTS
The consolidated financial statements for the years ended December 31, 2004 and
December 31, 2003 included in this prospectus, and incorporated by reference in
the Registration Statement, have been audited by Lopez, Blevins, Bork &
Associates, LLP, independent auditors, as stated in their report appearing with
the financial statements herein and incorporated by reference in the
Registration Statement, and are included in reliance upon the report of such
firm given upon their authority as experts in accounting and auditing.
61
TRANSFER AGENT
The transfer agent for Innova's common stock is Continental Stock Transfer &
Trust, Inc. Its address is 17 Battery Pl., 8th Fl. New York, NY 10004 and its
telephone number is (212) 845-3212.
LEGAL MATTERS
Sichenzia Ross Friedman Ference LLP , New York, New York, will pass upon the
validity of the shares of commons stock offered hereby.
HOW TO GET MORE INFORMATION
We have filed with the Securities and Exchange Commission in Washington, DC, a
registration statement on Form SB-2 under the Securities Act of 1933 with
respect to the shares we are offering. Prior to the effective date of the
registration statement we were subject to the information requirements of the
Securities Exchange Act of 1934 (the ("Exchange Act"). This prospectus does not
contain all of the information set forth in the registration statement, as
permitted by the rules and regulations of the Commission. Reference is hereby
made to the registration statement and exhibits thereto for further information
with respect to Innova and the shares to which this prospectus relates. Copies
of the registration statement and other information filed by the Company with
the Commission can be inspected and copied at the public reference facilities
maintained by the Commission in Washington, DC at 450 Fifth Street, NW,
Washington, DC 20549. In addition, the Commission maintains a World Wide Web
site that contains reports, proxy statements and other information regarding
registrants such as Innova which are filed electronically with the Commission at
the following Internet address: (http:www.sec.gov).
62
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
Innova Holdings, Inc.
Ft Myers Beach, Florida
We have audited the accompanying balance sheet of Innova Holdings, Inc. as of
December 31, 2004 and the related statements of operations, stockholders'
deficit, and cash flows for each of the two years then ended. These financial
statements are the responsibility of Innova's management. Our responsibility is
to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Innova Holdings, Inc. as of
December 31, 2004 and the results of its operations and its cash flows for each
of the two years then ended, in conformity with accounting principles generally
accepted in the United States of America.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 2 to the
financial statements, Innova Holdings, Inc. incurred losses of $1,426,931 and
$203,829 for the years ended December 31, 2004 and 2003, respectively. Innova
Holdings, Inc. will require additional working capital to develop its business
until they either (1) achieves a level of revenues adequate to generate
sufficient cash flows from operations; or (2) obtains additional financing
necessary to support its working capital requirements. These conditions raise
substantial doubt about Innova Holdings, Inc.'s ability to continue as a going
concern. Management's plans in regard to this matter are also described in Note
2. The accompanying financial statements do not include any adjustments that
might result from the outcome of these uncertainties.
As discussed in Note 11 to these audited financial statements, the Company
restated its financial statements.
Lopez, Blevins, Bork & Associates, LLP
Houston, Texas
April 15, 2005
F-1
INNOVA HOLDINGS, INC.
BALANCE SHEET
December 31, 2004
ASSETS
Current assets
Cash $ 2,794
-----------
Total current assets 2,794
Property and equipment, net 7,688
-----------
TOTAL ASSETS $ 10,482
===========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities
Current maturities of long-term debt $ 37,700
Line of credit --
Accounts payable 573,939
Accrued expenses 1,343,478
Notes payable 395,500
Dividend payable 9,850
-----------
Total current liabilities 2,360,467
-----------
Long-term debt 951,400
Mandatorily redeemable series A preferred stock 80,300
Commitments
STOCKHOLDERS' DEFICIT:
Preferred stock, $.001 par value, 10,000,000 shares
authorized, 376,834 shares issued and outstanding 377
Common stock, $.001 par value, 900,000,000 shares
authorized, 371,296,897 shares issued and outstanding 371,297
Additional paid-in capital 3,687,421
Accumulated deficit (7,440,780)
-----------
Total Stockholders' Deficit (3,381,685)
-----------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFCIT $ 10,482
===========
See accompanying summary of accounting policies and notes to financial
statements.
F-2
INNOVA HOLDINGS, INC.
STATEMENTS OF OPERATIONS
Years Ended December 31, 2004 and 2003
2004 2003
------------- -------------
Revenues $ -- $ --
Cost of revenues -- --
------------- -------------
Gross profit -- --
------------- -------------
Operating expenses:
Selling, general and administrative 270,059 172,765
Merger related costs 570,874 --
Outside services 262,050 --
Legal fees 135,869 --
Professional fees 85,763 --
Depreciation and amortization 1,363 626
Gain on sale of assets -- (42,658)
------------- -------------
Total operating expenses 1,325,978 130,733
------------- -------------
Loss from operations 1,325,978 130,733
Interest expense 100,953 73,096
------------- -------------
Net loss $ (1,426,931) $ (203,829)
============= =============
Net loss applicable to common shareholders:
Net loss $ (1,426,931) $ (203,829)
Beneficial conversion of preferred stock (150,100) --
------------- -------------
Net loss applicable to common shareholders $ (1,577,031) $ (203,829)
============= =============
Net loss per share:
Basic and diluted $ (0.00) $ (0.00)
============= =============
Weighted averaged shares outstanding:
Basic and diluted 371,296,897 192,645,050
============= =============
See accompanying summary of accounting policies and notes to financial
statements.
F-3
INNOVA HOLDINGS, INC.
STATEMENTS OF STOCKHOLDERS' DEFICIT
Years Ended December 31, 2004 and 2003
Common Stock Preferred Stock Additional
------------------------- ------------------------- paid-in Accumulated
Shares Amount Shares Amount capital deficit Total
----------- ----------- ----------- ----------- ----------- ----------- -----------
Balance,
December 31, 2002 192,645,050 $ 192,645 -- $ -- $ 3,276,621 $(5,659,920) $(2,190,654)
Net loss -- -- -- -- -- (203,829) (203,829)
----------- ----------- ----------- ----------- ----------- ----------- -----------
Balance,
December 31, 2003 192,645,050 192,645 -- -- 3,276,621 (5,863,749) (2,394,483)
Issuance of common
stock for notes
payable 61,820,488 61,821 -- -- 441,783 -- 503,604
Common stock issued
for services
rendered 25,534,462 25,534 -- -- 182,472 -- 208,006
Issuance of common
stock in connection
with reverse merger
and recapitalization 91,296,897 91,297 -- -- (774,862) -- (683,565)
Issuance of Series B
Preferred Stock -- -- 376,834 377 376,457 -- 376,834
Dividend declared on
preferred stock -- -- -- -- (9,850) -- (9,850)
Beneficial conversion
feature embedded in
mandatorily redeemable
Series A preferred
stock -- -- -- -- 48,300 (3,600) 44,700
Beneficial conversion
feature embedded in
Series B preferred
stock -- -- -- -- 146,500 (146,500) --
Net loss -- -- -- -- -- (1,426,931) (1,426,931)
----------- ----------- ----------- ----------- ----------- ----------- -----------
Balance,
December 31, 2004 371,296,897 $ 371,297 376,834 $ 377 $ 3,687,421 $(7,440,780) $ (3,381,685)
=========== =========== =========== =========== =========== =========== ===========
See accompanying summary of accounting policies and notes to financial
statements.
F-4
INNOVA HOLDINGS, INC
STATEMENTS OF CASH FLOWS
Years Ended December 31, 2004 and 2003
2004 2003
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $(1,426,931) $ (203,829)
Adjustments to reconcile net loss to cash used in
operating activities:
Gain on sale of assets -- (42,658)
Depreciation and amortization 1,363 626
Common stock issued for services rendered 208,006 --
Common stock issued for interest expense 58,629 --
Changes in assets and liabilities:
Accounts payable 226,732 (13,134)
Accrued expenses 610,940 212,901
----------- -----------
CASH FLOWS USED IN OPERATING ACTIVITIES (321,261) (46,094)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from the sale of assets -- 42,658
Additions to property and equipment (5,896) --
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES (5,896) 42,658
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from advances - officers -- 7,500
Proceeds from notes payable - net 158,000 --
Proceeds from investors 391,834 --
Payments on long-term debt (224,999) (11,928)
Proceeds from long-term debt -- 11,500
----------- -----------
CASH FLOW FROM FINANCING ACTIVITIES 324,835 7,072
----------- -----------
NET INCREASE (DECREASE) IN CASH (2,322) 3,636
Cash, beginning of period 5,116 1,480
----------- -----------
Cash, end of period $ 2,794 $ 5,116
=========== ===========
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid $ 99,597 $ 10,403
=========== ===========
Income taxes paid $ -- $ --
=========== ===========
See accompanying summary of accounting policies and notes to financial
statements.
F-5
INNOVA HOLDINGS, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 1 - BASIS OF PRESENTATION
Nature of the Company
Innova Holdings, Inc. is a software technology company providing software
solutions to the industrial robotics industry, service robotics industry and the
personal robotics industry. The Company's plan of operations is to identify,
develop and acquire technology that is or will become a market leader and to
create opportunities to leverage its software into value-added applications when
combined with other software solutions offered by the Innova group of companies.
Innova has two wholly-owned subsidiaries, Robotic Workspace Technologies, Inc.
(RWT) and Service Robots, Inc. RWT delivers its software through the sale of
Control Systems and the licensing of its software to end-user companies, system
integrators, manufacturing support providers, software development companies,
and other partners, primarily in the industrial markets. RWT also offers
complete system development and system integration services. The control systems
include the Universal Robot Controller and the Universal Automation Controller.
The Universal Automation Controller is in the final stages of development. The
proprietary patents, including two pioneer utility patents issued by the USPTO
and one patent pending, are owned by RWT and cover all applications pertaining
to the interface of a general use computer and the mobility of robots,
regardless of specific applications.
Innova's software solutions benefit developers of new technology in the service
and personal robotic markets. Software available for licensing includes
RobotScript, a universal programming language based on Microsoft's Visual
Basic(R) software (VBScript(R)). The Innova suite of software will be marketed
and sold to the service and personal robot markets through Service Robots, Inc.
Use of Estimates
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities at the date of the balance sheet. Actual results could differ from
those estimates.
Cash and Cash Equivalents
Cash and cash equivalents include cash and all highly liquid financial
instruments with purchased maturities of three months or less.
F-6
Fair Value of Financial Instruments
The Company's financial instruments consist of cash and debt. The carrying
amount of these financial instruments approximates fair value due either to
length of maturity or interest rates that approximate prevailing market rates
unless otherwise disclosed in these consolidated financial statements.
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.
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.
Property and Equipment
Property and equipment are stated at cost less accumulated depreciation. Major
renewals and improvements are capitalized; minor replacements, maintenance and
repairs are charged to current operations. Depreciation is computed by applying
the straight-line method over the estimated useful lives which are generally
three to seven years.
Impairment losses are recorded on long-lived assets used in operations when
indicators of impairment are present and the undiscounted cash flows estimated
to be generated by those assets are less than the assets' carrying amount.
Income Taxes
Income taxes are computed using the asset and liability method. Under the asset
and liability method, deferred income tax assets and liabilities are determined
based on the differences between the financial reporting and tax bases of assets
and liabilities and are measured using the currently enacted tax rates and laws.
A valuation allowance is provided for the amount of deferred tax assets that,
based on available evidence, are not expected to be realized. Additionally,
taxes are calculated and expensed in accordance with applicable tax code.
Basic Loss Per Share
The Company is required to provide basic and dilutive earnings (loss) per common
share information. The basic net loss per common share is computed by dividing
the net loss applicable to common stockholders by the weighted average number of
common shares outstanding.
F-7
Diluted net loss per common share is computed by dividing the net loss
applicable to common stockholders, adjusted on an "as if converted" basis, by
the weighted average number of common shares outstanding plus potential dilutive
securities. For the periods ended December 2003 and 2004, potential dilutive
securities had an anti-dilutive effect and were not included in the calculation
of diluted net loss per common share.
Recent Accounting Pronouncements
In January 2003, the Financial Accounting Standards Board ("FASB") issued
interpretation No. 46 ("FIN 46") "Consolidation of Variable Interest Entities."
Until this interpretation, a company generally included another entity in its
consolidated financial statements only if it controlled the entity through
voting interests. FIN 46 requires a variable interest entity, as defined, to be
consolidated by a company if that company is subject to a majority of the risk
of loss from the variable interest entity's activities or entitled to receive a
majority of the entity's residual returns. Certain provisions of FIN 46 became
effective during the quarter ended March 31, 2004, the adoption of which did not
have a material impact on the financial position, cash flows or results of
operations of the Company.
In December 2004, the FASB issued SFAS No. 123 (Revised 2004) "Share-Based
Payment" ("SFAS No. 123R"). SFAS No. 123R addresses all forms of share-based
payment ("SBP") awards, including shares issued under certain employee stock
purchase plans, stock options, restricted stock and stock appreciation rights.
SFAS No. 123R will require the Company to expense SBP awards with compensation
cost for SBP transactions measured at fair value. The FASB originally stated a
preference for a lattice model because it believed that a lattice model more
fully captures the unique characteristics of employee stock options in the
estimate of fair value, as compared to the Black-Scholes model which the Company
currently uses for its footnote disclosure. The FASB decided to remove its
explicit preference for a lattice model and not require a particular valuation
methodology. SFAS No. 123R requires us to adopt the new accounting provisions
beginning in our third quarter of 2005. Although the Company is in the process
of evaluating the impact of applying the various provisions of SFAS No. 123R, we
expect that this statement will have a material impact on our consolidated
results of operations.
In April 2004, the Emerging Issues Task Force ("EITF") issued Statement No.
03-06 "Participating Securities and the Two-Class Method Under FASB Statement
No. 128, Earnings Per Share" ("EITF 03-06"). EITF 03-06 addresses a number of
questions regarding the computation of earnings per share by companies that have
issued securities other than common stock that contractually entitle the holder
to participate in dividends and earnings of the company when, and if, it
declares dividends on its common stock. The issue also provides further guidance
in applying the two-class method of calculating earnings per share, clarifying
what constitutes a participating security and how to apply the two-class method
of computing earnings per share once it is determined that a security is
participating, including how to allocate undistributed earnings to such a
security. EITF 03-06 became effective during the quarter ended June 30, 2004,
the adoption of which did not have an impact on the calculation of earnings per
share of the Company.
F-8
In July 2004, the EITF issued a draft abstract for EITF Issue No. 04-08, "The
Effect of Contingently Convertible Debt on Diluted Earnings per Share" ("EITF
04-08"). EITF 04-08 reflects the Task Force's tentative conclusion that
contingently convertible debt should be included in diluted earnings per share
computations regardless of whether the market price trigger has been met. If
adopted, the consensus reached by the Task Force in this Issue will be effective
for reporting periods ending after December 15, 2004. Prior period earnings per
share amounts presented for comparative purposes would be required to be
restated to conform to this consensus and the Company would be required to
include the shares issuable upon the conversion of the Notes in the diluted
earnings per share computation for all periods during which the Notes are
outstanding.
Stock-Based Compensation
The Company accounts for its stock-based compensation plans under Accounting
Principles Board ("APB") Opinion No. 25, Accounting for Stock Issued to
Employees. The pro forma information below is based on provisions of Statement
of Financial Accounting Standard ("FAS") No. 123, Accounting for Stock-Based
Compensation, as amended by FAS 148, Accounting for Stock-Based
Compensation-Transition and Disclosure, issued in December 2002.
2004 2003
----------- -----------
Net loss applicable to common shareholders $(1,577,031) $ (203,829)
Add: Intrinsic value expense recorded -- --
Deduct: total stock-based employee
compensation determined under fair value
based method -- --
----------- -----------
Pro forma net loss applicable to common
shareholders $(1,577,031) $ (203,829)
=========== ===========
Earnings per share:
Basic and diluted - as reported $ (.00) $ (.00)
Basic and diluted - pro forma $ (.00) $ (.00)
The fair value of each option granted is estimated on the date of grant using
the Black-Scholes option-pricing model with the following weighted average
assumptions used for grants in 2004: no dividend yield and expected volatility
of 80%, risk-free interest rate of 2.75%, and expected lives of 10 years. There
were 1,000,000 options granted in 2003 and 33,962,655 options granted in 2004.
F-9
NOTE 2 - FINANCIAL CONDITION AND GOING CONCERN
Innova Holdings, Inc. has incurred losses for the years ended December 31, 2004
and 2003 of $1,426,931 and $203,829, respectively. Because of these losses, the
Company will require additional working capital to develop its business
operations.
Innova Holdings, Inc. intends to raise additional working capital through
private placements, public offerings and/or bank financing. During 2004, Innova
Holdings, Inc. raised approximately $377,000 from the sale of preferred stock,
$15,000 from the sale of convertible notes which were subsequently converted
into common stock, and $165,000 from debt which was used to pay down a bank line
of credit.
There are no assurances that Innova Holdings, Inc. will be able to either (1)
achieve a level of revenues adequate to generate sufficient cash flow from
operations; or (2) obtain additional financing through either private
placements, public offerings and/or bank financing necessary to support Innova
Holdings, Inc.'s working capital requirements. To the extent that funds
generated from operations and any private placements, public offerings and/or
bank financing are insufficient, Innova Holdings, Inc. will have to raise
additional working capital. No assurance can be given that additional financing
will be available, or if available, will be on terms acceptable to Innova
Holdings, Inc.
These conditions raise substantial doubt about Innova Holdings, Inc.'s ability
to continue as a going concern. The financial statements do not include any
adjustments relating to the recoverability and classification of asset carrying
amounts or the amount and classification of liabilities that might be necessary
should Innova Holdings, Inc. be unable to continue as a going concern.
NOTE 3 - REVERSE MERGER
On August 25, 2004, Innova Holdings, Inc., (previously Hy-Tech Technology, Inc.)
issued 280,000,000 shares of common stock for 100% of the outstanding stock of
Robotic Workspace Technologies, Inc ("RWT"). For financial reporting purposes
this transaction was treated as an acquisition of Innova and a recapitalization
of RWT using the purchase method of accounting. RWT's historical financial
statements replace Innova's in the accompanying financial statements. As part of
this merger, Innova assumed $230,000 of notes payable and $125,000 of redeemable
Series A Preferred Stock which has a mandatory redemption provision. In
addition, the merger agreement requires Innova to issue 37,885,033 shares of
Innova's common stock to its previous management and business advisor for
services rendered up through the merger date; Innova has recorded an accrued
liability for these shares in the amount of $378,850.
The 280,000,000 shares of Innova's common stock issued to RWT shareholders were
comprised of the following:
Shares issued to shareholders as of December 31, 2003 192,645,050
Shares issued to shareholders for conversion of notes payable 61,820,488
Shares issued to shareholders for services rendered 25,534,462
-----------
Total shares issued in reverse merger 280,000,000
===========
Innova sold its wholly owned subsidiary and all of its operations in connection
with the acquisition of RWT. As part of the agreement, the Company agreed to
indemnify the directors of the Company from certain liabilities that were in
existence on the date of closing of the sale, which management believes may
apply to a maximum of approximately $500,000 of debt. If the Company issues
shares of its common stock or pays cash to settle any of this debt, it shall
issue an equal number of common shares to the former RWT shareholders, in
proportion to their RWT share holdings. After the reorganization and stock
purchase there were 371,296,897 shares of common stock outstanding of the
combined entity.
F-10
NOTE 4 - CAPITAL STOCK
Effective July 29, 2004, the Company changed its name to Innova Holdings, Inc.
from Hy-Tech Technology Group, Inc. The Company's trading symbol changed to
"IVHG." Simultaneously with the name change, the Company increased its
authorized capitalization from 101,000,000 shares, consisting of 100,000,000
shares of common stock, $.001 par value and 1,000,000 shares of preferred stock,
$.001 par value to 910,000,000 shares authorized, consisting of 900,000,000
shares of common stock, $.001 par value and 10,000,000 shares of preferred
stock, $.001 par value.
On June 23, 2004, the Company entered into a private placement and sold 125,000
shares of Series A Preferred Stock for $125,000 with the holders of the
Company's Convertible Debentures. 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 and (vi) has no voting rights except when mandated by
Delaware law.
In the event that the Company had not completed the merger with RWT and RWT had
not raised $500,000 in new capital by August 27, 2004, then each of the holders
of the Series A Preferred Stock could elect to convert their shares into (a) a
demand note payable by the Company, in the principal amount equal to the
purchase price of the Series A Preferred Stock plus accrued and unpaid
dividends, with interest at the rate of ten percent (10%) until paid in full and
(b) warrants to purchase 2,500,000 shares of the Company's common stock at an
exercise price of $.005 per share, with a term of two (2) years from the date of
issuance, and standard anti-dilution provisions regarding stock splits,
recapitalizations and mergers, for each $25,000 of Series A Preferred Stock
purchased. Since RWT had not raised $500,000 by August 27, 2004 the holders of
the Series A Preferred Stock could have elected to convert their shares into the
demand note but none of the holders elected to do so.
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.
In September 2004, the Company authorized $525,000 of Series B Preferred Stock.
The terms of the Series B Preferred Stock include the following: 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 Company's common
stock at the lesser of $.005 per share or 75% of the average closing bid prices
over the 20 trading days immediately preceding the date of conversion (iii) has
a liquidation preference of $1.00 per share, (iv) may be redeemed by the Company
at any time up to five years after the issuance date for $1.30 per share plus
accrued and unpaid dividends, (v) ranks junior to the Series A Preferred Stock
upon liquidation of the Company and (vi) has no voting rights except when
mandated by Delaware law.
At December 31, 2004, approximately $377,000 of the Series B Preferred Stock had
been sold; none of the Series B Preferred Stock has been converted into common
stock. Of the $377,000 proceeds received from the issuance of the Series B
Preferred Stock, $146,500 was allocated to the beneficial conversion feature
embedded in the Series B Preferred Stock on the date of issuance, based on a
conversion price of $.005 per share. All of the $146,500 beneficial conversion
feature was amortized through Accumulated Deficit on the date of issuance;
therefore, all of the beneficial conversion feature was amortized as of December
31, 2004. Additionally, the excess of the aggregate fair value of the common
stock to be issued upon conversion over the $377,000 of proceeds received when
the Series B Preferred Sock was issued amounted to $158,500.
F-11
Stock Options:
No compensation cost has been recognized for grants under the stock option plans
since all grants pursuant to these plans have been made at the current estimated
fair values of the Company's common stock at the grant date. There were
33,962,655 options issued for the year ended December 31, 2004. There were
1,000,000 options issued for the year ended December 31, 2003.
The fair value of each option granted is estimated on the date of grant using
the Black-Scholes option-pricing model with the following weighted average
assumptions used for grants in fiscal 2004: zero dividend yield, expected
volatility of 80%, risk-free interest rate of 2.75% and expected lives of 10
years.
The options granted have a weighted average exercise price of $.008 per share
and vest over three years. The maximum term of the options is ten years.
The following table summarizes stock option activity:
Outstanding, December 31, 2002 13,425,486
Granted 1,000,000
Canceled --
Exercised --
---------------
Outstanding, December 31, 2003 14,425,486
Granted 33,962,655
Canceled --
Exercised --
---------------
Outstanding, December 31, 2004 48,388,141
===============
Weighted-average grant-date fair
value of options, granted during
the year $ .008
===============
Weighted-average remaining, years
of contractual life 8.79
===============
NOTE 5 - LINE OF CREDIT
On July 22, 2002, the Company entered into a revolving line of credit of
$225,000 with Fifth Third Bank, Florida, secured by the assets of the Company.
The annual interest rate on unpaid principal is the prime rate plus 2%, due in
monthly installments. Principal and interest were due on July 22, 2003. The line
of credit was paid in January 2005.
NOTE 6 - ACCRUED EXPENSES
On April 22, 2003, the Company entered into an Advisory Agreement (the "Advisory
Agreement") with AltosBancorp Inc. ("Altos") pursuant to which Altos agreed to
act as the Company's exclusive business advisor. Altos advised the Company
regarding equity and debt financings, strategic planning, mergers and
acquisitions, and business developments, including the merger with RWT. Altos
did not receive any cash compensation for services rendered. In August 2004, as
a final determination of compensation, the Company agreed to pay Altos $161,333
in common stock of the Company, or 16,133,333 shares. Martin Nielson is
president of Altos and after entering into the Advisory Agreement became the
Company's Chairman and Chief Executive Officer, for which he received a salary
and expense reimbursement totaling $104,650 and $114,867 in 2004 and 2003,
respectively. Of these amounts, $80,000 was paid in cash and $139,517 will be
paid in common stock of the Company, or 13,951,700 shares. These amounts owed
Altos and Mr. Nielson are recorded on the balance sheet as accrued expenses.
F-12
NOTE 7 - NOTES PAYABLE
On April 17, 2002, the Company borrowed $989,100 under a note agreement with the
Small Business Administration. This loan is secured by the equipment and
machinery assets of the Company and by the personal residence and other assets
of the Company's Chairman and CEO, a principal shareholder and founder of RWT.
The balance outstanding as of December 31, 2004 was $989,100 The annual interest
rate on unpaid principle is 4%, due and payable in monthly installments of
$4,813 beginning September 17, 2002, continuing until April 17, 2032.
In November 2004, a principal shareholder loaned the Company $165,000 to pay
down the line of credit with Fifth Third Bank. The loan has the same terms as
the Fifth Third Bank line of credit, except that it remains unsecured until such
time as the Fifth Third Bank line of credit is fully paid, including principal
and accrued interest, and is due upon demand. In January 2005, the Fifth Third
Bank line of credit was paid off.
In February 2003 the Company issued $230,000 of notes payable, the terms of
which were subsequently modified in July 2003. The notes earn interest at 8%
unless they are in default, in which case they earn interest at 15%; the notes
are currently in default. Additionally, the notes had warrants attached to
purchase 115,000 shares of common stock at $1.50 per share and were exercisable
through February 12, 2005. None of these warrants were exercised.
Future maturities of these notes as of December 31, 2004 were as follows:
Years Ending December 31,
2005 $ 433,200
2006 20,067
2007 20,884
2008 21,633
2009 22,510
Thereafter 866,306
-----------
1,384,600
Less: current portion (433,200)
-----------
$ 951,400
===========
In 2002, the company entered into convertible debt notes totaling $429,966.
Terms were 8% per annum, without payment. Accrued interest earned during the
term was to be paid upon maturity on January 31, 2007. The notes were
F-13
convertible into Class B Convertible Preferred Stock upon certain future events
that did not materialize, including raising $5 million in additional equity. In
March 2004, the notes plus accrued interest were converted into 61,820,488
common shares of Innova Holdings, Inc. The shares were originally converted into
RWT common stock at $.50 a share and then converted into shares of Innova
Holdings, Inc. at 61.37929356 to 1, the effective share exchange ratio for the
merger between RWT and Innova.
NOTE 8 - INCOME TAXES
The Company follows Statement of Financial Accounting Standards Number 109 (SFAS
109), "Accounting for Income Taxes." Deferred income taxes reflect the net
effect of (a) temporary difference between carrying amounts of assets and
liabilities for financial purposes and the amounts used for income tax reporting
purposes, and (b) net operating loss carryforwards. No net provision for
refundable Federal income tax has been made in the accompanying statement of
loss because no recoverable taxes were paid previously. Similarly, no deferred
tax asset attributable to the net operating loss carryforward has been
recognized, as it is not deemed likely to be realized.
The provision for refundable Federal income tax consists of the following:
December 31, 2004
-----------------
Refundable Federal income tax attributable to:
Current Operations $ 480,000
Less, Change in valuation allowance (480,000)
----------
Net refundable amount $ --
==========
The cumulative tax effect at the expected rate of 34% of significant items
comprising our net deferred tax amount is as follows:
December 31, 2004
Deferred tax asset attributable to:
Net operating loss carryover $2,000,000
Less, Change in valuation allowance (2,000,000)
----------
Net deferred tax asset $ --
==========
At December 31, 2004, we had an unused net operating loss carryover
approximating $9,500,000 that is available to offset future taxable income; it
expires beginning in 2020.
F-14
NOTE 9 - COMMITMENTS
Lease Agreements
Rental expense for the operating leases for the years ended December 31, 2004
and 2003 was $17,344 and $21,879, respectively.
The Company leases office space at 11595 Kelly Road, Ft. Myers, Florida as its
primary operations. The office space lease is with Sunset Concepts, LLC, with
monthly payments of $1,343. The lease commenced in May 2004 and expires in
August 2005. The office lease is cancelable with 30 days notice.
There are no future minimum lease payments under non-cancelable operating leases
(with initial or remaining lease terms in excess of one year) as of December 31,
2004.
NOTE 10 - PROTECTION OF TRADE SECRETS AND PATENTS - LITIGATION
On December 9, 2004, Robotic Workspace Technologies, Inc., a wholly owned
subsidiary of Innova Holding, Inc. filed a case in the United States District
Court for the Middle District of Florida against ABB, Inc. and ABB Robotics AB.
The action alleges misappropriation of trade secrets, breach of contract and
breach of the covenant of good faith. The action stems from dealings between the
parties in 2002. RWT seeks a trial by jury and an injunction prohibiting
continued use of RWT's trade secrets and money damages. It is possible that ABB,
Inc. or ABB Robotics AB will counterclaim, although no counterclaims have yet
been filed. The action is entitled Robotic Workspace Technologies, Inc. v. ABB,
Inc. and ABB Robotics AB, Case No. 2:04-cv-611-FtM-29-SPC.
NOTE 11 - RESTATEMENT OF PREVIOUSLY REPORTED FINANCIAL STATEMENTS
There was a misstatement in the originally prepared December 31, 2004 financial
statements discovered in 2005 which related to the beneficial conversion
features of the 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 Series B Preferred Stock issued in September 2004. Management calculated
the values of the beneficial conversion features and determined that of the
$125,000 proceeds received from the issuance of the Series A Preferred Stock,
$48,300 was the amount of the assumed unamortized beneficial conversion feature,
of which $3,600 was amortized through Accumulated Deficit for the year ended
December 31, 2004. Of the $377,000 proceeds received from the issuance of the
Series B Preferred Stock, $146,500 was allocated to the beneficial conversion
feature, all of which was amortized through Accumulated Deficit for the year
ended December 31, 2004. Accordingly, the Balance Sheet, Statement of Operations
and the Statement of Stockholders' Deficit for the year ended December 31, 2004
were restated to reflect the amounts and related amortization of the beneficial
conversion features.
F-15
INNOVA HOLDINGS, INC.
CONSOLIDATED BALANCE SHEET
September 30, 2005
(Unaudited)
ASSETS
Current assets
Cash $ --
Inventory 14,889
-----------
Total current assets 14,889
Property and equipment, net 59,431
Deferred financing cost 100,000
-----------
TOTAL ASSETS $ 174,320
===========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities
Current maturities of long-term debt $ 37,700
Accounts payable 638,239
Accrued expenses 1,402,116
Notes payable 529,450
Dividend payable 25,514
-----------
Total current liabilities 2,633,019
-----------
Long-term debt 951,400
Mandatorily redeemable series A preferred stock 57,211
Commitments
STOCKHOLDERS' DEFICIT:
Preferred stock, $.001 par value, 10,000,000 shares authorized,
525,000 shares issued and outstanding 525
Common stock, $.001 par value, 900,000,000 shares authorized,
460,474,045 shares issued and outstanding 460,475
Additional paid-in capital 5,139,639
Accumulated deficit (9,067,949)
-----------
Total Stockholders' Deficit (3,467,310)
-----------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $ 174,320
===========
The accompanying notes are an integral part of these consolidated financial
statements.
F-16
INNOVA HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
Three and Nine Months Ended September 30, 2005 and 2004
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
2005 2004 2005 2004
-------------- -------------- -------------- --------------
Revenues $ -- $ -- $ -- $ 3,300
-------------- -------------- -------------- --------------
Cost of revenues -- -- -- --
-------------- -------------- -------------- --------------
Gross profit -- -- -- 3,300
-------------- -------------- -------------- --------------
Operating expenses:
Selling, general and administrative 230,571 181,923 570,739 297,214
Outside services 222,467 22,995 375,694 52,372
Legal fees 17,192 79,131 73,212 95,168
Professional fees 17,986 28,538 361,382 49,732
Depreciation and amortization 1,859 585 3,641 1,022
-------------- -------------- -------------- --------------
Total operating expenses 490,075 313,172 1,384,668 495,508
-------------- -------------- -------------- --------------
Loss from operations (490,075) (313,172) (1,384,668) (492,208)
Interest expense (33,101) (21,663) (93,411) (70,008)
-------------- -------------- -------------- --------------
Net loss $ (523,176) $ (334,835) $ (1,478,079) $ (562,216)
============== ============== ============== ==============
Net loss applicable to common shareholders:
Net loss $ (523,176) $ (334,835) $ (1,478,079) $ (562,216)
Beneficial conversion of preferred stock
and promissory note (15,461) (132,500) (161,961) (133,600)
============== ============== ============== ==============
Net loss applicable to common shareholders $ (538,637) $ (467,335) $ (1,640,040) $ (695,816)
============== ============== ============== ==============
Net loss per share:
Basic and diluted $ (0.00) $ (0.00) $ (0.00) $ (0.00)
============== ============== ============== ==============
Weighted averaged shares outstanding:
Basic and diluted 460,474,045 371,296,897 460,474,045 371,296,897
============== ============== ============== ==============
The accompanying notes are an integral part of these consolidated financial
statements.
F-17
INNOVA HOLDINGS, INC
CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months Ended September 30, 2005 and 2004
(Unaudited)
2005 2004
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (1,478,079) $ (562,216)
Adjustments to reconcile net loss to cash used in
operating activities:
Depreciation and amortization 3,641 1,022
Common stock issued for services 585,405 208,004
Common stock issued for interest payment -- 58,639
Option expense for services 20,958
Changes in assets and liabilities:
Accounts payable and accrued expenses 122,938 25,253
Inventory (14,889)
------------ ------------
CASH FLOWS USED IN OPERATING ACTIVITIES (760,026) (269,298)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Additions to Property and Equipment (22,884) (5,895)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES (22,884) (5,895)
------------ ------------
CASH FLOW FROM FINANCING ACTIVITIES
Proceeds from notes payable 163,950 15,000
Proceeds from private placements of common stock 468,000 --
Proceeds from investors in Series B Preferred Stock 148,166 311,834
Payment of principal on note -- (34,533)
------------ ------------
CASH FLOW FROM FINANCING ACTIVITIES 780,116 292,301
------------ ------------
NET INCREASE (DECREASE) IN CASH (2,794) 17,108
Cash, beginning of period 2,794 5,115
------------ ------------
Cash, end of period $ 0 $ 22,223
============ ============
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid $ 19,876 $ --
============ ============
Income taxes paid $ -- $ --
============ ============
NON-CASH TRANACTIONS:
Common stock issued for property and equipment $ 32,500 $ --
============ ============
The accompanying notes are an integral part of these consolidated financial
statements.
F-18
INNOVA HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(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, 2004 as reported in form 10-KSB/A
have been omitted.
NOTE 2 - STOCK BASED COMPENSATION
The Company accounts for its stock-based compensation plans using the intrinsic
value method under Accounting Principles Board ("APB") Opinion No. 25,
Accounting for Stock Issued to Employees. The pro forma information below is
based on provisions of Statement of Financial Accounting Standard ("FAS") No.
123, Accounting for Stock-Based Compensation, as amended by FAS 148, Accounting
for Stock-Based Compensation-Transition and Disclosure, issued in December 2002.
Nine Months Ended September 30,
2005 2004
------------ ------------
Net loss applicable to common shareholders $ (1,640,040) $ (695,816)
Add: Intrinsic value expense recorded -- --
Deduct: total stock-based employee compensation determined
under fair value based method (26,843) --
------------ ------------
Pro forma net loss applicable to common shareholders $ (1,666,883) $ (695,816)
============ ============
Earnings per share:
Basic and diluted - as reported $ (.00) $ (.00)
Basic and diluted - pro forma $ (.00) $ (.00)
F-19
The fair value of each option granted is estimated on the date of grant using
the Black-Scholes option-pricing model with the following weighted average
assumptions used for grants in 2004 and 2005: no dividend yield and expected
volatility of 80% and 150% in 2004 and 2005, respectively, risk-free interest
rate of 2.75%, and expected lives of 10 years.
The options granted have a weighted average exercise price of $0.016 per share
and vest over three and five years. The maximum term of the options is ten
years.
During the nine months ended September 30, 2005 there were 80,719,259 options
granted, 74,658,621 to employees and 6,060,638 to an independent contractor. Of
the 74,658,621 options granted to employees, 16,000,000 were subsequently
cancelled, resulting in a net amount of 58,658,621 options remaining. The share
purchase options granted to employees vest annually over three years from the
date of grant, 30,658,621 options are exercisable at $0.017 per share,
10,000,000 options are exercisable at $.023 per share and 18,000,000 options are
exercisable at $0.036 per share, and they expire ten years after the grant date.
The options granted to employees were valued using the intrinsic value method
and had no value because the exercise price was equal to the market price on the
grant date. The share purchase options granted to the independent contractor
vest monthly over five years from the date of grant, are exercisable at $0.01
per share, and they expire ten years after the grant date. During the nine
months ended September 30, 2005, $20,958 was recognized as an expense for the
fair value of these options granted to the independent contractor.
NOTE 3 - CAPITAL STOCK
On August 25, 2004 the Company issued 280,000,000 shares of common stock for
100% of the outstanding stock of Robotic Workspace Technology, Inc ("RWT"). For
financial reporting purposes this transaction was treated as an acquisition of
Innova and a recapitalization of RWT using the purchase method of accounting.
RWT's historical financial statements replace Innova's in the accompanying
financial statements.
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. The principal of the note is payable in three $100,000
installments due on the 30th, 60th and 90th days following the date the
registration statement for the shares to be issued under the Standby Equity
Distribution Agreement is declared effective by the SEC. The note does not bear
interest except in the event of a default. On June 14, 2005, Innova entered into
a Placement Agent Agreement with Monitor Capital, Inc. a registered
broker-dealer. Pursuant to the Placement Agent Agreement, Innova paid a one-time
placement agent fee of 289,855 restricted shares of common stock equal to
approximately $10,000 based on Innova's stock price on May 4, 2005, when the
term sheet for the Standby Equity Distribution Agreement was signed, for
advising us in connection with the Standby Equity Distribution Agreement. In
connection with this Standby Equity Distribution Agreement, the Company entered
into a Registration Rights agreement with Cornell Capital Partners wherein the
Company agreed to file with the Securities and Exchange Commission a
registration statement for the sale by Cornell of the common stock of the
Company to be purchased by Cornell under the terms of the Standby Equity
Distribution Agreement, along with the one-time commitment fee and the placement
agent fee. Accordingly, the Company filed an SB-2 registration statement with
the Securities and Exchange Commission in August 2005 for a total of 284,
364,726 shares to be sold including 250,000,000 shares estimated to be sold to
Cornell Capital Partners under the Standby Equity Distribution Agreement.
Additionally, 34,364,726 currently issued and outstanding shares were included
in the registration statement for sale by existing shareholders.
F-20
The commitment fee of 2,608,699 shares paid to Cornell and the placement agency
fee paid to Monitor of 289,855 shares have been accounted for as a deferred
financing fee and will be amortized over the period of the financing, which can
be up to twenty-four months from the date the registration statement is declared
effective by the Securities and Exchange Commission. The promissory note of
$300,000 issued to Cornell has not been recorded since it is a contingent fee
payable upon the completion of certain events described further in Note 5 to the
financial statements included in this report.
On June 23, 2004, the Company entered into a private placement and sold 125,000
shares of Series A Preferred Stock for $125,000 with the holders of the
Company's Convertible Debentures. 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, and (vi) has no voting rights except when mandated by
Delaware law.
In the event that the Company had not completed the merger with RWT and RWT had
not raised $500,000 in new capital by August 27, 2004, then each of the holders
of the Series A Preferred Stock could elect to convert their shares into (a) a
demand note payable by the Company, in the principal amount equal to the
purchase price of the Series A Preferred Stock plus accrued and unpaid
dividends, with interest at the rate of ten percent (10%) until paid in full and
(b) warrants to purchase 2,500,000 shares of the Company's common stock at an
exercise price of $.005 per share, with a term of two (2) years from the date of
issuance, and standard anti-dilution provisions regarding stock splits,
recapitalizations and mergers, for each $25,000 of Series A Preferred Stock
purchased. Since RWT had not raised $500,000 by August 27, 2004 the holders of
the Series A Preferred Stock could have elected to convert their shares into the
demand note but none of the holders elected to do so.
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 and $5,000 were amortized through
Accumulated Deficit through December 31, 2004 and June 30, 2005, respectively.
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, and
accrued dividends of $1,250 were converted into 25,510 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, $1,629 of the remaining
beneficial conversion feature was amortized through Accumulated Deficit for the
three months ended September 30, 2005. The total beneficial conversion feature
amortized through Accumulated Deficit associated with the remaining outstanding
Series A Preferred Stock was $6,629 through the nine months ended September 30,
2005.
F-21
In September 2004, the Company authorized $525,000 of Series B Preferred Stock.
Each share of Series B 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 Company's common stock at the lesser of
$.005 per share or 75% of the average closing bid prices over the 20 trading
days immediately preceding the date of conversion (iii) has a liquidation
preference of $1.00 per share, (iv) may be redeemed by the Company at any time
up to five years after the issuance date for $1.30 per share plus accrued and
unpaid dividends, (v) ranks junior to the Series A Preferred Stock upon
liquidation of the Company and (vi) has no voting rights except when mandated by
Delaware law.
At December 31, 2004, approximately $377,000 of the Series B Preferred Stock had
been sold. During the first quarter of 2005, the Company sold $148,000 of the
Series B Preferred Stock, bringing the total sold to $525,000 as of March 31,
2005 and September 30, 2005; none of the Series B Preferred Stock has been
converted into common stock. Of the $148,000 proceeds received from the issuance
of the Series B Preferred Stock, $141,500 was allocated to the beneficial
conversion feature embedded in the Series B Preferred Stock on the date of
issuance, based on a conversion price of $.005 per share. All of the $141,500
beneficial conversion feature was amortized through Accumulated Deficit on the
date of issuance; therefore, all of the beneficial conversion feature was
amortized as of September 30, 2005. Additionally, the excess of the aggregate
fair value of the common stock to be issued upon conversion over the $148,000 of
proceeds received when the Series B Preferred Stock was issued amounted to
$39,400.
In April 2005, the Company obtained an additional $150,000 of funds through the
private placement sale of 12,000,000 shares of the Company's common stock at
$.0125 per share and in May an additional $210,000 of funds were obtained
through the private placement sale of 7,266,667 shares of the Company's common
stock at $.03 per share. Investors in these shares of the Company's common stock
will be given notice in the event that the Company files any registration
statement with the Securities and Exchange Commission for its Common Stock
(excluding any registration statement on Form S-8 or S-4) and shall be entitled
to include any or all of the shares of Common Stock purchased in these
investments in such Registration Statement. In August 2005, such Registration
Statement was filed with the SEC and all of these investors are listed as
selling shareholders.
In July and August 2005 the Company obtained an additional $100,000 of funds
through the private placement sale of 6,666,667 shares of the Company's common
stock at $0.015 per share. This offering ended on August 8, 2005. On July 22,
2005 the Company borrowed $30,000 and entered into a short term note for that
amount, the terms of which are: interest at the annual rate of 5%, due date in
six months, and principal and accrued interest are convertible into common stock
of the Company at $.015 per share. Of the $30,000 proceeds received from the
short term note, $30,000 was allocated to the beneficial conversion feature
embedded in the short term note on the date of issuance, based on a conversion
price of $.015 per share and treated as a discount of the note. The beneficial
conversion feature is being expensed over six (6) months and accordingly $11,450
was expensed to Interest Expense through September 30, 2005. The discount on the
note is being accreted to Notes Payable over six months. Additionally, the
excess of the aggregate fair value of the common stock to be issued upon
conversion over the $30,000 of proceeds received when the short term note was
issued amounted to $38,000.
In 2002, the company entered into convertible debt notes which totaled $429,966
at December 31, 2003. An additional $15,000 of the notes were issued during the
first quarter of 2004. Terms were 8% per annum. Accrued interest earned during
the term was to be paid upon maturity on January 31, 2007. The notes were
convertible into Class B Convertible Preferred Stock upon certain future events
that did not materialize, including raising $5 million in additional equity.
During the first six months of 2004, notes totaling $444,966 plus accrued
interest were converted into 61,820,488 common shares of Innova Holdings, Inc.
The shares were originally converted into RWT common stock at $.50 a share and
then converted into shares of Innova Holdings, Inc. at 61.37929356 to 1, the
effective share exchange ratio for the merger between RWT and Innova.
Additionally, during the first six months of 2004, 16,887,859 shares were issued
for services performed for the Company valued at $137,570 or the equivalent of
$0.008 per share.
F-22
During the nine months ended September 30, 2005 there were 80,719,259 options
granted, of which 16,000,000 were subsequently cancelled, resulting in a net
amount of options granted of 64,719,259. Of the options granted and not
cancelled, 58,658,621 were granted to employees and 6,060,638 to an independent
contractor. The share purchase options granted to employees vest annually over
three years from the date of grant, 30,658,621 options are exercisable at $0.017
per share, 10,000,000 options are exercisable at $.023 per share and 18,000,000
options are exercisable at $0.036 per share, and they expire ten years after the
grant date. The options granted to employees were valued using the intrinsic
value method and had no value because the exercise price was equal to the market
price on the grant date. The share purchase options granted to the independent
contractor vest monthly over five years from the date of grant, are exercisable
at $0.01 per share, and they expire ten years after the grant date. During the
nine months ended September 30, 2005, $20,958 was recognized as an expense for
the fair value of these options granted to the independent contractor.
Additionally, the Company awarded 54,684,016 shares of the Company's common
stock to twenty-four (24) employees, independent contractors and individuals for
services provided to the Company in 2004 and 2005 valued at $581,000 or the
equivalent of $0.01 per share. These amounts were fully accrued during 2004 and
2005.
The Board of Directors of the Company approved all of the stock options and
shares of the Company's common stock awarded.
Stock Options:
No compensation cost has been recognized for grants under the Company's stock
option plans made to employees since all such grants pursuant to these plans
have been made at the then current estimated fair values of the Company's common
stock at the grant date. During the nine months ended September 30, 2005,
$20,958 was recognized as an expense for the fair value of these options granted
to the independent contractor. There were 80,719,259 options issued and
16,000,000 options cancelled for the nine months ended September 30, 2005.
The fair value of each option granted is estimated on the date of grant using
the Black-Scholes option-pricing model with the following weighted average
assumptions used for grants in fiscal 2004 and 2005: zero dividend yield,
expected volatility of 80% and 150% in 2004 and 2005, respectively, risk-free
interest rate of 2.75% and expected lives of 10 years.
The following table summarizes stock option activity:
Outstanding, December 31, 2003 14,425,486
Granted 33,962,655
Cancelled --
Exercised --
-----------
Outstanding, December 31, 2004 48,388,141
Granted 80,719,259
Cancelled 16,000,000
Exercised --
-----------
Outstanding, September 30, 2005 113,107,400
===========
Weighted-average grant-date fair
value of options $ 0.016
===========
Weighted-average remaining years
of contractual life 9.3
===========
F-23
NOTE 4 - LINE OF CREDIT
On July 22, 2002, the Company entered into a revolving line of credit of
$225,000 with Fifth Third Bank, Florida, secured by the assets of the Company.
The annual interest rate on unpaid principal was the prime rate plus 2%, due in
monthly installments. Principal and interest were due on July 22, 2003. In
November 2004, a principal shareholder loaned the Company $165,000 to pay down
the line of credit with Fifth Third Bank. The loan with the principal
shareholder has the same terms as the Fifth Third Bank line of credit, except
that it remains unsecured until such time as the Fifth Third Bank line of credit
is fully paid, including principal and accrued interest, and is due upon demand.
In January 2005, the Fifth Third Bank line of credit was paid off.
NOTE 5 - NOTES PAYABLE
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 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.
-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 not been recorded since it
is a contingent fee payable upon the completion of events described above.
On July 22, 2005 the Company borrowed $30,000 and entered into a short term note
for that amount, the terms of which are: interest at the annual rate of 5%, due
date in six months, and principal and accrued interest are convertible into
common stock of the Company at $.015 per share. During September 2005 the
Company entered into short-term debt obligations other than in the ordinary
course of business totaling $120,000. All of this short-term debt bears interest
at the rate of 10% per annum and is due between thirty and ninety days. All of
the lenders are shareholders of the Company.
NOTE 6 - COMMITMENTS
On May 15, 2005 the Company leased 4,000 square feet of space at 15870 Pine
Ridge Road, Ft Myers, Florida which will be used as its primary operations. The
lease is with Gulf To Bay Construction, Inc., with monthly payments of $3,533
through June 1, 2010. The lease has five (5) successive renewal options each for
a period of two (2) years. The rent will increase annually by 3%. The space is
the location of the Company's Research, Design and Engineering center as well as
office space for fifteen (15) employees.
On June 15, 2005 the Company entered into a lease with Bola Industries, LLC for
approximately 4,000 square feet of production space located at 30946 Industrial
Road, Livonia Michigan. The lease is on a monthly basis and expires on December
31, 2005. The rent is $3,775 monthly and includes all utilities, use of all
equipment on site including certain heavy equipment, and use of internet
service.
F-24
NOTE 7 - SUBSEQUENT EVENTS
On October 7, 2005, the Company 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 October 2005 the Company entered into short-term debt obligations other
than in the ordinary course of business totaling $65,000. 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.
F-25
WE HAVE NOT AUTHORIZED ANY DEALER, SALESPERSON OR OTHER PERSON TO PROVIDE ANY
INFORMATION OR MAKE ANY REPRESENTATIONS ABOUT INNOVA HOLDINGS, INC. EXCEPT THE
INFORMATION OR REPRESENTATIONS CONTAINED IN THIS PROSPECTUS. YOU SHOULD NOT RELY
ON ANY ADDITIONAL INFORMATION OR REPRESENTATIONS IF MADE.
This prospectus does not
constitute an offer to sell,
or a solicitation of an offer
to buy any securities: ----------------------
PROSPECTUS
|_| except the common stock offered by this
prospectus; ----------------------
|_| in any jurisdiction in which the offer or
solicitation is not authorized;
|_| in any jurisdiction where the dealer or other 284,364,726 SHARES
salesperson is not qualified to make the OF COMMON STOCK
offer or solicitation;
|_| to any person to whom it is unlawful to make the INNOVA HOLDINGS, offer or
solicitation; or INC.
|_| to any person who is not a United States resident or who is outside the
jurisdiction of the United States. __________, 2005
The delivery of this prospectus or any accompanying sale does not imply that:
|_| there have been no changes in the affairs of Innova Holdings, Inc. after the
date of this prospectus; or
|_| the information contained in this prospectus is correct after the date of
this prospectus.
Until _________, 2005, all dealers effecting transactions in the registered
securities, whether or not participating in this distribution, may be required
to deliver a prospectus. This is in addition to the obligation of dealers to
deliver a prospectus when acting as underwriters.
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Our Articles of Incorporation include an indemnification provision under which
we have agreed to indemnify directors and officers of Innova from and against
certain claims arising from or related to future acts or omissions as a director
or officer of Innova. Insofar as indemnification for liabilities arising under
the Securities Act of 1933 may be permitted to directors, officers and
controlling persons of Innova pursuant to the foregoing, or otherwise, Innova
has been advised that in the opinion of the SEC such indemnification is against
public policy as expressed in the Securities Act of 1933 and is, therefore,
unenforceable.
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth estimated expenses expected to be incurred in
connection with the issuance and distribution of the securities being
registered. Innova will pay all expenses in connection with this offering.
Securities and Exchange Commission Registration Fee $ 1,441.16
Printing and Engraving Expenses $ 2,500.00
Accounting Fees and Expenses $ 15,000.00
Legal Fees and Expenses $ 50,000.00
Miscellaneous $ 16,058.84
TOTAL $ 85,000.00
ITEM 26. SALES OF UNREGISTERED SECURITIES
On January 31, 2003, the Company acquired 100% of the issued and outstanding
shares of Hy-Tech Computer Systems, Inc., a Florida corporation (Hy-Tech), in
exchange for 16,000,000 shares of the Company's common stock. As a result of the
acquisition of Hy-Tech, the control of the Company shifted to the former
shareholders of Hy-Tech. The following individuals received the following shares
in connection with this transaction:
Name No. of shares
Gary F. McNear Revocable Trust(1) 3,959,612
Susan M. McNear Revocable Trust(2) 3,959,612
Craig W. Conklin Revocable Trust(3) 3,959,612
Margaret L. Conklin Revocable Trust(4) 3,959,612
Jeff Sarver 161,552
(1) Gary F. McNear, the Company's chief executive officer following the
transaction, serves as trustee of the Gary F. McNear Revocable Trust.
(2) Susan M. McNear is the wife of Gary F. McNear, the Company's chief executive
Officer following the transaction, and she serves as trustee of the Susan M.
McNear Revocable Trust.
(3) Craig W. Conklin, the Company's president following the transaction, serves
as trustee of the Craig W. Conklin Revocable Trust.
II-1
(4) Margaret L. Conklin is the wife of Craig W. Conklin, the Company's new
president, and she serves as trustee of the Margaret L. Conklin Revocable Trust.
These shares were issued in a private placement under section 4(2) of the
Securities Act as amended. Neither the Registrant nor any person acting on its
behalf offered or sold the securities by means of any form of general
solicitation or general advertising. All purchasers represented in writing that
they acquired the securities for their own accounts and without a view to
distribution. A legend was placed on the stock certificates stating that the
securities have not been registered under the Securities Act and cannot be sold
or otherwise transferred without an effective registration or an exemption
therefrom.
On April 28, 2003, a merger between the Company and Sanjay Haryama ("SH"), a
Wyoming corporation, was effected. The merger was based upon an Agreement and
Plan of Merger dated April 28, 2003 among the parties. Pursuant to the merger
(i) SH was merged with and into the Company; (ii) the SH shareholder exchanged
1,000 shares of common stock of SH, constituting all of the issued and
outstanding capital stock of SH, for an aggregate of 1,000 shares of the
Company's restricted common stock; and (iii) SH's separate corporate existence
terminated. The SH shareholder was Coachworks Auto Leasing, which was wholly
owned by Jehu Hand. The determination of the number of shares of the Company's
stock to be exchanged for the SH shares was based upon arms length negotiations
between the parties.
Prior to the merger, SH completed a $1,000,000 financing transaction pursuant to
Rule 504 of Regulation D of the General Rules and Regulations under the
Securities Act of 1933 as amended pursuant to a Convertible Debenture Purchase
Agreement (the "Purchase Agreement") dated April 21, 2003 between SH and HEM
Mutual Assurance Company, an accredited Colorado investor (the "Investor"). In
connection therewith, SH sold a 1% $1,000,000 Convertible Debenture due April
20, 2008 (the "SH Debenture") to the Investor. The unpaid principal amount of
the SH Debenture was convertible into unrestricted shares of SH common stock to
be held in escrow pending the repayment or conversion of the SH Debenture.
Pursuant to the merger, the Company assumed all obligations of SH under the SH
Debenture and issued the holder thereof its 1 % $1,000,000 Convertible Debenture
due April 28, 2008 (the "Convertible Debenture") in exchange for the SH
Convertible Debenture. The material terms of the Convertible Debenture are
identical to the terms of the SH Convertible Debenture except that the unpaid
principal amount of the Convertible Debenture is convertible into unrestricted
shares of the Company's Common Stock (the "Common Stock"). The per share
conversion price for the Convertible Debenture in effect on any conversion date
was the lesser of (a) $0.35 or one-hundred twenty-five percent (125%) of the
average of the closing bid prices per share of the Company's Common Stock during
the five (5) trading days immediately preceding April 29, 2003 or (b) one
hundred percent (100%) of the average of the three (3) lowest closing bid prices
per share of the Company's Common Stock during the forty (40) trading days
immediately preceding the date on which the holder of the Convertible Debenture
provides the escrow agent with a notice of conversion. The number of shares of
the Company's Common Stock issuable upon conversion was also subject to
anti-dilution provisions. The Investor's right to convert the Convertible
Debenture was subject to the limitation that the Investor may not at any time
own more than 4.99% of the outstanding Common Stock of the Company, unless the
Company is in default of any provision of the Convertible Debenture or the
Investor gives seventy five (75) days advance notice of its intent to exceed the
limitation.
II-2
Between the date of the merger with SH and the end of November, 2003, the
Convertible Debenture was fully converted into 25,633,328 shares of Common Stock
of the Company.
On April 28, 2003, Hy-Tech announced it had entered into a financing transaction
in which it had received a firm commitment from a private equity fund for the
purchase of a $750,000 convertible debenture from Hy-Tech (the "Second
Debenture"). The Second Debenture was not closed and Hy-Tech arranged for
alternative financing under a Factoring Line of Credit with Platinum Funding
Corporation.
On May 22, 2003, the Company entered into an Assignment of Claim with Robert
Cohen ("Cohen"), pursuant to which the Company issued 1,500,000 shares of
restricted Common Stock to Cohen and Cohen assigned to the Company all of
Cohen's rights in and to all legal claims Cohen held against Imperium Capital,
Inc. and Myron Gushlak arising out of their securities transactions in a trading
account they maintained at Sterling Financial Investment Group, Inc., a
registered broker-dealer. Cohen was granted piggyback registration rights in the
event that the Company files a registration statement with the SEC. To be
included in this registration statement, Cohen must agree that he may not offer
for sale or sell any of the shares of common stock underlying the replacement
notes and the warrants until he has received notice from the Company that all of
the shares of HEM Mutual Assurance ("HEM") included in the registration
statement have been sold or that HEM no longer has the right to acquire shares
of common stock from the Company which the Company is obligated to include in
the registration statement.
These securities were sold under the exemption from registration provided by
Section 4(2) of the Securities Act and/ or Regulation D thereunder. Neither the
Registrant nor any person acting on its behalf offered or sold the securities by
means of any form of general solicitation or general advertising. All purchasers
represented in writing that they acquired the securities for their own accounts
and without a view to distribution. A legend was placed on the stock
certificates stating that the securities have not been registered under the
Securities Act and cannot be sold or otherwise transferred without an effective
registration or an exemption therefrom.
During November 2003, the Company issued an aggregate of 1,000,000 shares of it
common stock to The Macreport.net, Inc. and 100,000 shares of its common stock
to Elite Financial Communications Group, Inc., investor relations firms, in
consideration of services rendered to the Company.
II-3
On January 7, 2004, the company issued 3,450,000 shares of its common stock to
Genesis Technology, Inc. and 300,000 to Elite Financial Communications Group,
Inc., the designee of Genesis Technology, Inc., in settlement of certain claims
Genesis Technology, Inc had asserted against the Company.
On April 26, 2004, the Company issued 156,250 shares of common stock to Edward
R. Pekarek in connection with a settlement of certain claims Mr. Pekarek had
asserted against the Company.
On April 27, 2004, the Company issued 7,500,000 shares to Robotic Workspace
Technologies, Inc. ("RWT"), in consideration for RWT agreeing that for a period
of ninety (90) days following the issuance, RWT will shall not seek or solicit
any offers to engage in a transaction, or negotiate the terms of any
transaction, that would supersede an acquisition transaction that was proposed
between the Company and RWT. These shares were subsequently cancelled after the
merger with RWT.
These securities were sold under the exemption from registration provided by
Section 4(2) of the Securities Act. Neither the Registrant nor any person acting
on its behalf offered or sold the securities by means of any form of general
solicitation or general advertising. All purchasers represented in writing that
they acquired the securities for their own accounts and without a view to
distribution. A legend was placed on the stock certificates stating that the
securities have not been registered under the Securities Act and cannot be sold
or otherwise transferred without an effective registration or an exemption
therefrom.
On June 23, 2004, the Company entered into a private placement of 125,000 shares
of its Series A Preferred Stock for an aggregate issue price of $125,000. Twenty
five thousand shares were sold to each of JKL Capital LP, a limited partnership
owned by Jeffrey Kwit, Maximum Ventures, Inc., a corporation owned by Susan
Mirman, David H. Boshart, individually, David H. and Elizabeth F Boshart as
tenants in common, and David H. Boshart, Bruce H. Boshart and Bethany
Maahs-Hoasberg, as tenants in common. 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 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 market value of the
common Stock at the time 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.
In the event that the Company has not (1) completed the merger with RWT and (2)
RWT has not raised $500,000 in new capital by August 27, 2004, then each of the
holders of the Series A Preferred Stock may elect to convert their shares into
(a) a demand note payable by the Company, in the principal amount equal to the
purchase price of the Series A Preferred Stock plus accrued and unpaid
dividends, with interest at the rate of ten percent (10%) until paid in full and
(b) warrants to purchase 2,500,000 shares of the Company's common stock at an
exercise price of $.005 per share, with a term of two (2) years' from the date
of issuance, and standard anti-dilution provisions regarding stock splits,
recapitalizations and mergers, for each $25,000 of Series A Preferred Stock
purchased.
II-4
In August 2004, the Company entered into a private placement of 525,000 shares
of its Series B Preferred Stock for an aggregate issue price of $525,000. 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 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) may be redeemed by the
Company at any time for $1.30 per share plus accrued and unpaid dividends, (v)
ranks junior to the Series A Preferred Stock upon liquidation of the Company and
(vi) has no voting rights except when mandated by Delaware law.
The following table sets forth the names and number of shares of Series B
Preferred Stock purchased in the private placement:
------------------------------------------ --------------------
Alan B. & Patricial A. Canfield 20,000
------------------------------------------ --------------------
Charles Burton Adams 25,000
------------------------------------------ --------------------
Daniel McNeill 5,000
------------------------------------------ --------------------
David C. Yerger 4,000
------------------------------------------ --------------------
David W. Vaughn 3,000
------------------------------------------ --------------------
Etta Lou Jess 3,000
------------------------------------------ --------------------
Eugene V. Gartlan 25,166
------------------------------------------ --------------------
Fielding Thomas Da Meron 10,000
------------------------------------------ --------------------
II-5
------------------------------------------ --------------------
James & Rebecca Marks, JTICWROS 25,000
------------------------------------------ --------------------
Jeffrey Bertoia 5,000
------------------------------------------ --------------------
Jem Wynns 3,500
------------------------------------------ --------------------
Jennifer V. Yerger 1,000
------------------------------------------ --------------------
Johana Lisik 49,834
------------------------------------------ --------------------
John & Cindy Lisik 4,500
------------------------------------------ --------------------
John & Mary Ranalli 2,000
------------------------------------------ --------------------
Jon & Steven Joos 10,000
------------------------------------------ --------------------
Ken Kareta 10,000
------------------------------------------ --------------------
Larry & Kelly Wynns 15,000
------------------------------------------ --------------------
Mark & Tommye Humphries 5,000
------------------------------------------ --------------------
Melvin Ketchel 10,000
------------------------------------------ --------------------
Neal & Mary Bennett 5,000
------------------------------------------ --------------------
Paul & Kathryn Ireson 13,000
------------------------------------------ --------------------
Reynaert Management Group 25,000
------------------------------------------ --------------------
Richard & Johanna Wynns JTWROS 112,500
------------------------------------------ --------------------
Richard D. Jess 20,000
------------------------------------------ --------------------
Richard J. Bertoia 5,000
------------------------------------------ --------------------
Richie & Amanda Wynns 1,000
------------------------------------------ --------------------
Robert & Barbara Ihrig 42,000
------------------------------------------ --------------------
Robert & Muriel Sandbo 10,000
------------------------------------------ --------------------
Robert D. & Elizabeth Jess 10,000
------------------------------------------ --------------------
Robert Lewis 11,000
------------------------------------------ --------------------
Scott & Julianna Puras 12,500
------------------------------------------ --------------------
Sharon Lightner 2,000
------------------------------------------ --------------------
Stephen A. Puras 3,000
------------------------------------------ --------------------
Steven Ranalli 2,000
------------------------------------------ --------------------
Timothy & Regina Powers 5,000
------------------------------------------ --------------------
Helmuth Twietmeyer 10,000
------------------------------------------ --------------------
Total Shares 525,000
------------------------------------------ --------------------
II-6
With respect to the sale of these securities, all transactions were exempt from
registration pursuant to Section 4(2) of the Securities Act of 1933 (the "1933
Act"), and Regulation D promulgated under the 1933 Act. In each instance, the
purchaser had access to sufficient information regarding Innova so as to make an
informed investment decision. More specifically, Innova had a reasonable basis
to believe that each purchaser was an "accredited investor" as defined in
Regulation D of the 1933 Act and otherwise had the requisite sophistication to
make an investment in the Company's securities.
In April 2005, the Company obtained an additional $150,000 of funds through the
private placement sale of 12,000,000 shares of the Company's common stock at
$.0125 per share and in May and June an additional $218,000 of funds were
obtained through the private placement sale of 7,266,667 shares of the Company's
common stock at $.03 per share. These private placements were exempt from
registration under the Securities Act of 1933, as amended, pursuant to section
rule 506 thereunder. Investors in these shares of the Company's common stock
will be given notice in the event that the Company files any registration
statement with the Securities and Exchange Commission for its Common Stock
(excluding any registration statement on Form S-8 or S-4) and shall be entitled
to include any or all of the shares of Common Stock purchased in these private
placements in such Registration Statement.
The following table sets forth the names and number of shares of Common Stock
purchased in the private placement:
-------------------------------------------------------------------
Richard K. & Johanna Wynns, JTWROS 12,266,667
-------------------------------------------------------------------
Harold C. Claypool 2,000,000
-------------------------------------------------------------------
Michael Etchison 4,000,000
-------------------------------------------------------------------
Kenneth Martin 1,000,000
-------------------------------------------------------------------
Total Private placement 19,266,667
-------------------------------------------------------------------
With respect to the sale of these securities, all transactions were exempt from
registration pursuant to Section 4(2) of the Securities Act of 1933 (the "1933
Act"), and Regulation D promulgated under the 1933 Act. In each instance, the
purchaser had access to sufficient information regarding Innova so as to make an
informed investment decision. More specifically, Innova had a reasonable basis
to believe that each purchaser was an "accredited investor" as defined in
Regulation D of the 1933 Act and otherwise had the requisite sophistication to
make an investment in the Company's securities.
In July and August 2005 the Company obtained an additional $100,000 of funds
through the private placement sale of 6,666,667 shares of the Company's common
stock at $0.015 per share. This offering ended on August 8, 2005. This private
placement was exempt from registration under the Securities Act of 1933, as
amended, pursuant to section rule 506 thereunder. The following table sets forth
the names and number of shares of Common Stock purchased in the private
placement:
Lee Johnson 666,667
-------------------------------------------------------------------
Richard K. Wynns 1,000,000
-------------------------------------------------------------------
Eugene V. Gartlan(1) 1,666,667
-------------------------------------------------------------------
James Snyder 1,666,667
-------------------------------------------------------------------
Scott Cray 1,666,667
-------------------------------------------------------------------
II-7
(1) Eugene V. Gartlan is the Chief Financial Officer of the Company.
Additionally, on July 22, 2005 the Company borrowed $30,000 and entered into a
short term note for that amount, the terms of which are: interest at the annual
rate of 5%, due date in six months, and principal and accrued interest are
convertible into common stock of the Company at $.015 per share.
With respect to the sale of these securities, all transactions were exempt from
registration pursuant to Section 4(2) of the Securities Act of 1933 (the "1933
Act"), and Regulation D promulgated under the 1933 Act. In each instance, the
purchaser had access to sufficient information regarding Innova so as to make an
informed investment decision. More specifically, Innova had a reasonable basis
to believe that each purchaser was an "accredited investor" as defined in
Regulation D of the 1933 Act and otherwise had the requisite sophistication to
make an investment in the Company's securities.
II-8
ITEM 27. EXHIBITS
EXHIBIT NO.
2.1 Exchange Agreement (1)
2.2 Agreement and Plan of Merger dated as of April 29, 2003 between The
Company and Sanjay Haryama (4)
2.3 Certificate of Merger between The Company and Sanjay Haryama as filed with
the Delaware Secretary of State on April 29, 2003. (4)
2.4 Agreement and Plan of Merger among the Company, RWT Acquisition, Inc and
Robotic Workspace Technologies, Inc. dated July 21, 2004. (5)
2.5 Agreement between the Company and Encompass Group Affiliates, Inc. dated
June 23, 2004. (5)
2.6 Agreement between the Company and Aegis Finance, Inc. dated August 18,
2004 (9)
3.1 Articles of Incorporation (2)
3.2 Bylaws (2)
3.3 Certificate of Amendment to Articles of Incorporation (3)
3.4 Certificate of Amendment to Articles of Incorporation (6)
4.1 Certificate of Designation of Series A Preferred Stock (5)
4.2 Certificate of Designation of Series B Preferred Stock(9)
5.1 Opinion of Robert L. Davidson, Esq. re: Legality *
10.1 Advisory Agreement between The Company and Altos Bancorp Inc. dated April
22, 2003 (4)
10.2 Stock Option and Irrevocable Proxy Agreement among Altos Bancorp, Inc.,
the Gary F. McNear Trust, the Susan M. McNear Trust, the Craig W. Conklin
Trust and the Margaret L. Conklin Trust (4)
10.3 Convertible Debenture Purchase Agreement dated as of April 21, 2003
between Sanjay Haryama and HEM Mutual Assurance LLC. (4)
10.4 Convertible Debenture Purchase Agreement dated as of April 28, 2003
between The Company and HEM Mutual Assurance Fund Limited. (4)
10.5 Option Purchase Agreement between the Company and SunTrust Bank (4)
10.6 License Agreement between the Company and Encompass Group Affiliates, Inc.
dated June 23, 2004 for customer list (5)
II-9
10.7 License Agreement between the Company and Encompass Group Affiliates, Inc.
dated June 23, 2004 for website (5)
10.8 Assumption Agreement between the Company and Encompass Group Affiliates,
Inc. dated June 23, 2004 (5)
10.9 Noncompetition and Nondisclosure Agreement between the Company and
Encompass Group Affiliates, Inc. dated June 23, 2004 (5)
10.10 Employment Agreement of Sheri Aws dated February 24, 2004 (7)
10.11 Renewal Promissory Note payable to Fifth Third Bank, Florida for $225,000
effective July 22, 2003 (8)
10.12 Security Agreement in favor of Fifth Third Bank, Florida effective July
22, 2003 (8)
10.13 Consulting Agreements with Stratex Solutions, LLC(9)
10.14 Business Development Agreement with B. Smith Holdings, Inc (9)
10.15 Employment Agreement with Walter K. Weisel dated July 19, 2000 (9)
10.16 Standby Equity Distribution Agreement with Cornell Capital Partners, LP
dated June 14, 2005 (10)
10.17 Registration Rights with Cornell Capital Partners, LP dated June 14, 2005
(10)
10.18 Amended Escrow Agreement with Cornell Capital Partners, LP and Baxter,
Baker, Sidle, Conn & Jones, P.A., dated September 26, 2005 (12)
10.19 Promissory Note for $300,000 issued to Cornell Capital Partners, LP dated
June 14, 2005 (10)
10.20 Placement Agent Agreement with Monitor Capital Inc. dated June 14, 2005
(10)
10.21 Employment Agreement of Eugene Gartlan (11)
10.22 Amendment to Standby Equity Distribution Agreement to appoint new escrow
agent dated September 26, 2005 (12)
14.1 Code of Ethics(9)
23.1 Consent of Robert L. Davidson, Esq.*
23.2 Consent of Independent Public Accountants*
(1) Incorporated by reference to the Form 8-K filed on February 4, 2003.
(2) Incorporated by reference to the Form SB-2 filed on August 7, 2001.
(3) Incorporated by reference to the Form 10-KSB filed on April 24, 2003.
II-10
(4) Incorporated by reference to the Form 8-K filed on May 13, 2003.
(5) Incorporated by reference to the Form 8-K filed on August 8, 2004.
(6) Incorporated by reference to the Form 14C filed on June 30, 2004.
(7) Incorporated by reference to the Form 8-K filed on September 28, 2004.
(8) Incorporated by reference to the Form 8-K filed on January 11, 2005.
(9) Incorporated by reference to the Form 10-KSB filed on April 19, 2005.
(10) Incorporated by reference to the Form 8-K filed on June 16, 2005.
(11) Incorporated by reference to the Form 8-K filed on July 6, 2005.
(12) Incorporated by reference to the Form SB-2/A filed on September 30, 2005
* Filed herewith.
ITEM 28. UNDERTAKINGS
The undersigned registrant hereby undertakes:
(1) To file, during any period in which it offers or sells securities, a
post-effective amendment to this registration statement to:
(i) Include any prospectus required by Sections 10(a)(3) of the Securities Act
of 1933 (the "Act");
(ii) Reflect in the prospectus any facts or events arising after the effective
date of the Registration Statement (or the most recent post-effective amendment
thereof) which, individually or in the aggregate, represent a fundamental change
in the information set forth in the Registration Statement. Notwithstanding the
foregoing, any increase or decrease in volume of securities offered (if the
total dollar value of securities offered would not exceed that which was
registered) and any deviation from the low or high end of the estimated maximum
offering range may be reflected in the form of prospectus filed with the
Commission pursuant to Rule 424(b) if, in the aggregate, the changes in volume
and price represent no more than 20 percent change in the maximum aggregate
offering price set forth in the "Calculation of Registration Fee" table in the
effective Registration Statement;
(iii) Include any additional or changed material information on the plan of
distribution;
(2) That, for the purpose of determining any liability under the Act, each such
post-effective amendment shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment any of
the securities that remain unsold at the end of the offering.
Insofar as indemnification for liabilities arising under the Act may be
permitted to directors, officers and controlling persons of the small business
issuer pursuant to the foregoing provisions, or otherwise, the small business
issuer has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the small business issuer of
expenses incurred or paid by a director, officer or controlling person of the
small business issuer in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the small business issuer will,
unless in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the Act and
will be governed by the final adjudication of such issue.
II-11
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form SB-2 and authorized this registration
statement to be signed on our behalf by the undersigned.
Date: November 28, 2005 INNOVA HOLDINGS, INC.
By: /s/ Walter K. Weisel
-----------------------------------
Walter K. Weisel
Chief Executive Officer
In accordance with the Securities Exchange Act, this report has been signed
below by the following persons on behalf of the registrant and in the capacities
and on the dates indicated.
Date: November 28, 2005 By: /s/ Walter K. Weisel
-----------------------------------
Walter K. Weisel,
Chief Executive Officer
Date: November 28, 2005 By: /s/ Eugene V. Gartlan
-----------------------------------
Eugene V. Gartlan,
Chief Financial Officer and
Principal Accounting Officer
Date: November 28, 2005 By: /s/ Gary McNear
-----------------------------------
Gary McNear, Director
Date: November 28, 2005 By: /s/ Martin Nielson
-----------------------------------
Martin Nielson, Director
Date: November 28, 2005 By: /s/ Craig Conklin
-----------------------------------
Craig Conklin, Director
II-12