SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(Mark One)
[X] Quarterly report under Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the quarterly period ended December 31,
2005
[ ] Transition report under Section 13 or 15(d) of the Exchange Act
for the transition period from __________ to __________.
Commission File Number: 000-31451
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ENCOMPASS HOLDINGS, INC.
------------------------
(Exact name of small business issuer as specified in its charter)
NEVADA 95-4756822
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1005 Terminal Way, Suite 110, Reno, Nevada 89502
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(Address of principal executive office) (Zip Code)
(775) 324-8531
----------------
(Issuer's telephone number)
NOVA COMMUNICATIONS LTD.
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(Former name, former address, and former fiscal year, if changed since last
report)
Check whether the issuer: (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes X No
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As of February 13, 2006, the number of outstanding shares of the issuer's common
stock, $0.001 par value, was 11,945,907 shares.
TRANSITIONAL SMALL BUSINESS DISCLOSURE FORMAT: Yes [ ] No [X]
1
TABLE OF CONTENTS
ITEM 1. FINANCIAL STATEMENTS ............................................... 3
Consolidated Unaudited Balance Sheets as of December 31, 2005
and June 30, 2005............................................. 3
Consolidated Unaudited Statements of Operations for the Quarters
December 31, 2004 and 2005.................................... 4
Consolidated Unaudited Statement of Cash Flows for the
Quarters ended December 31, 2004 and 2005..................... 5
Notes to Consolidated Financial Statements.......................... 7
ITEM 2. MANAGEMENT'S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS .............................................. 11
ITEM 3. CONTROLS AND PROCEDURES............................................. 13
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS............................................................ 13
SIGNATURES................................................................... 13
2
ENCOMPASS HOLDINGS, INC.
(Formerly known as Nova Communications Ltd.)
Condensed Consolidated Balance Sheets
December 31, June 30,
2005 2005
----------------- -----------------
Assets
Current assets:
Cash $ 311,460 $ 46,296
Accounts receivable, less allowance for uncollectible accounts 520,767 401,415
Receivable from related party 27,678 67,603
Prepaid expenses 202,778 326,344
Other current assets 24,036 82,509
----------------- -----------------
Total current assets 1,086,719 924,167
Equipment, net 9,765,458 10,107,551
Other assets:
Note receivable - 147,036
Deposits & other 416,283 325,075
Other assets 3,000 3,000
----------------- -----------------
Total other assets 419,283 475,111
----------------- -----------------
$ 11,271,460 $ 11,506,829
================= =================
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 1,343,769 $ 1,185,731
Accrued liabilities 789,962 915,693
Unearned revenue 512,206 521,027
Long-term debt due within one year 2,463,780 1,858,257
Other current liabilities 170,000 265,000
----------------- -----------------
Total current liabilities 5,279,717 4,745,708
Long-term debt to related parties 103,971 241,152
Long-term debt 2,675,414 2,369,694
Net capital deficiency:
Preferred stock; $.001 par value; authorized 200,000
shares; outstanding 200,000 shares 200 200
Common stock; $.001 par value; authorized 500,000,000 shares;
issued and outstanding 11,945,907 shares
(6,001,332 shares at June 30, 2005) 11,946 6,001
Common stock to be issued 8,703,927 8,703,927
Convertible promissory note and accrued interest 105,140 101,140
Additional paid in capital 24,063,228 22,998,916
Retained deficit (29,672,083) (27,659,909)
----------------- -----------------
Total stockholders' equity 3,212,358 4,150,275
----------------- -----------------
$ 11,271,460 $ 11,506,829
================= =================
See accompanying notes.
3
ENCOMPASS HOLDINGS, INC.
(Formerly known as Nova Communications Ltd.)
Condensed Consolidated Statements of Operations
Three months ended Six months ended
December 31 December 31
----------------------------------- -----------------------------------
2005 2004 2005 2004
---------------- ----------------- ----------------- ----------------
Revenues $ 1,196,958 $ - $ 2,316,374 $ -
Cost of goods sold 266,145 - 542,184 -
---------------- ----------------- ----------------- ----------------
Gross profit 930,813 - 1,774,190
Operating expenses:
General & administrative 1,533,610 713,327 3,273,544 1,019,205
Research & development 457,926 1,209,705 458,573 1,209,705
---------------- ----------------- ----------------- ----------------
1,991,536 1,923,032 3,732,117 2,228,910
---------------- ----------------- ----------------- ----------------
Net loss from operations (1,060,723) (1,923,032) (1,957,927) (2,228,910)
Other expenses:
Interest expense, net (18,287) (15,786) (40,971) (25,559)
Loss on disposal of
equipment (1,277) - (1,277) -
---------------- ----------------- ----------------- ----------------
(19,564) (15,786) (42,248) (25,559)
---------------- ----------------- ----------------- ----------------
Net income from operations
before provision for income
taxes (1,080,287) (1,938,818) (2,000,175) (2,254,469)
Provision for income taxes 12,000 800 12,000 800
---------------- ----------------- ----------------- ----------------
Net loss from continuing operations (1,092,287) (1,939,618) (2,012,175) (2,255,269)
Net gain on disposal of
discontinued operations, net
of provision for income taxes - 139,517 - 139,517
---------------- ----------------- ----------------- ----------------
Net loss $ (1,092,287) $ (1,800,101) $ (2,012,175) $ (2,115,752)
================ ================= ================= ================
Net loss per common share $ (.111) $ (.404) $ (.236) $ (.488)
================ ================= ================= ================
See accompanying notes.
4
ENCOMPASS HOLDINGS, INC.
(Formerly known as Nova Communications Ltd.)
Condensed Consolidated Statements of Cash Flows
Three months ended Six months ended
December 31 December 31
----------------------------------- -----------------------------------
2005 2004 2005 2004
---------------- ----------------- ----------------- ----------------
Cash flows from operating activities:
Net loss $ (1,092,287) $ (1,800,101) $ (2,012,175) $ (2,115,752)
Adjustment to reconcile net
loss to net cash provided by
(used in) operating
activities:
Provision for uncollectible
accounts - 723,506 - 723,506
Depreciation &
amortization 251,460 - 554,657 -
Unearned revenue 62,072 - (8,821) -
Shares issued in exchange
for services 469,988 998,599 806,757 1,310,207
Loss on disposal of
equipment 1,271 - 1,271 -
Changes in assets and
liabilities:
Receivables (162,675) - (119,352) -
Other assets 47,528 (23,000) 90,831 (23,000)
Accounts payable (212,061) 40,273 158,038 41,242
Accrued liabilities 65,165 612,797 8,270 613,616
---------------- ----------------- ----------------- ----------------
(569,539) 552,074 (520,524) 549,819
Cash flow from discontinued
operations - (508,230) - (508,230)
Cash flows from investing
activities:
Capital expenditures - - (58,299) -
Advances received from
(paid to) related parties 30,715 (39,787) 39,925 (39,787)
---------------- ----------------- ----------------- ----------------
30,715 (39,787) (18,374) (39,787)
Cash flows from financing
activities:
Proceeds from long-term
debt 1,000,000 - 1,000,000 -
Principal payments on long-
term debt (101,953) - (88,757) -
Principal payments on long-
term debt to related parties (61,265) - (107,181) -
---------------- ----------------- ----------------- ----------------
836,782 - 804,062 -
---------------- ----------------- ----------------- ----------------
Net change in cash $ 297,958 $ 4,057 $ 265,164 $ 1,802
================ ================= ================= ================
Continued on next page.
5
ENCOMPASS HOLDINGS, INC.
(Formerly known as Nova Communications Ltd.)
Condensed Consolidated Statements of Cash Flows (continued)
Three months ended Six months ended
December 31 December 31
----------------------------------- -----------------------------------
2005 2004 2005 2004
---------------- ----------------- ----------------- ----------------
Cash at beginning of period $ 13,502 $ - $ 46,296 $ 2,255
Net change in cash 297,958 4,057 265,164 1,802
---------------- ----------------- ----------------- ----------------
Cash at end of period $ 311,460 $ 4,057 $ 311,460 $ 4,057
================ ================= ================= ================
Supplemental disclosure of
non-cash investing and
financing activities:
Notes receivable exchanged
for equipment $ 137,500 $ - $ 137,500 $ -
================ ================= ================= ================
Notes payable converted to
common stock $ 175,000 $ 15,000 $ 175,000 $ 110,000
================ ================= ================= ================
Payable to related party
exchanged for preferred
stock $ - $ 442,732 $ - $ 442,732
================ ================= ================= ================
See accompanying notes.
6
ENCOMPASS HOLDINGS, INC.
(Formerly known as Nova Communications Ltd.)
Notes to Condensed Consolidated Financial Statements
December 31, 2005
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
COMPANY: Effective January 27, 2006, Nova Communications Ltd. changed
its name to Encompass Holdings, Inc. ("Encompass" or "the Company").
BUSINESS COMBINATIONS AND BASIS OF CONSOLIDATION: The consolidated
condensed financial statements include the accounts of Encompass,
AquaXtremes, Inc., Xtreme Engines, Inc., Rotary Engine Technology,
Inc., NACIO Systems, Inc., and Interactive Holding Group, Inc. since
their acquisitions and Kadfield, Inc. until its divestiture. All
intercompany accounts and transactions have been eliminated.
On August 30, 2004, the Company acquired 51% of Realized Development,
Inc. Realized Development, Inc. changed its name to AquaXtremes, Inc.
("Aqua") in December 2004. On May 9, 2005, the Company acquired the
remaining 49% of Aqua.
In December 2004, Aqua formed Xtreme Engines, Inc. ("Engines") and owns
100% of its common stock.
Effective April 1, 2005, the Company acquired 100% of NACIO Systems,
Inc. ("NACIO"). NACIO owns 100% of Interactive Holding Group, Inc.
("IHG").
Effective December 2, 2005, Engines acquired 100% of Malibu
Construction, a dormant entity. Malibu Construction changed its name to
Rotary Engine Technology, Inc ("Rotary").
The Company disposed of its' common stock of Kadfield effective
December 31, 2004.
INTERIM REPORTING: The Company's year-end for accounting purposes is
June 30. In the opinion of Management, the accompanying consolidated
condensed financial statements as of December 31, 2005 and 2004 and for
the three and six months then ended, consisting of only normal
recurring adjustments, except as noted elsewhere in the notes to the
condensed consolidated financial statements, necessary to present
fairly its financial position, results of its operations and cash
flows. The results of operations for the three and six months ended
December 31, 2005 and 2004 are not necessarily indicative of the
results to be expected for the full year.
REVENUE RECOGNITION: Revenues for NACIO consist of dedicated Internet
access fees; hosting, co-location and ESF fees; sales of third party
hardware and software; fees for systems and technical integration and
administration; fees for power and server connection and connectivity
services.
Monthly service revenue related to Internet access, hosting,
co-location and ESF is recognized over the period services are
provided. Service and equipment installation revenue is recognized at
completion of installation and upon commencement of
7
ENCOMPASS HOLDINGS, INC.
(Formerly known as Nova Communications Ltd.)
Notes to Condensed Consolidated Financial Statements
December 31, 2005
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
REVENUE RECOGNITION (CONTINUED): services. Payments received in advance
of providing services are deferred until the period such services are
provided, except in the case of non-refundable payments including
last-month deposits, which are recognized when service is initiated.
Equipment sales and installation revenue are recognized when
installation is completed.
Revenues for IHG consist of computer software compliance monitoring
services and products. Service revenues related to software compliance
monitoring are generally billed annually and recognized ratably over
the period services are provided. Software product sales are recognized
when software is provided.
Revenues for Aqua consist of the sale of dealerships and are recognized
when dealership agreements are signed.
NET LOSS PER COMMON SHARE: Net loss per common share is computed by
dividing net loss by the weighted average number of common shares
outstanding during the period. The weighted average number of common
stock shares outstanding was 9,806,557 for the three months ended
December 31, 2005 and 8,536,231 for the six months ended December 31,
2005 (4,460,977 for the three months ended December 31, 2004 and
4,335,776 for the six months ended December 31, 2004). Common stock to
be issued is not considered to be a common stock equivalent as the
effect on net loss per common share would be dilutive.
2. OPERATIONS
The Company's operating strategies focus on the development of
recreational water sports products and operating and managing its high
speed Internet access and enterprise server facilities.
The Company has begun selling distributorships for its recreational
water sports products and expects to begin manufacturing and selling
those products in 2006.
Management of the Company believes that operations from the sale of
these products will be profitable by the fourth quarter of 2006 and
that the Company will recover its development costs within five years.
The Company also purchased NACIO effective April 1, 2005. Since its
acquisition, management has pursued aggressive cost cutting programs
and eliminated unprofitable products. Management believes these actions
will enable NACIO to achieve profitable operations.
Also, the Company entered into an agreement for up to $2,500,000 of
additional financing for the development of its recreational water
sports products. The Company
8
ENCOMPASS HOLDINGS, INC.
(Formerly known as Nova Communications Ltd.)
Notes to Condensed Consolidated Financial Statements
December 31, 2005
2. OPERATIONS (CONTINUED)
received $1,000,000 in November 2005 and $700,000 in January 2006 under
the agreement.
The Company is dependent upon its ability to obtain additional capital
and debt financing until it ultimately achieves profitability, if ever.
The consolidated financial statements do not reflect adjustments
relating to the recorded asset amounts, or the amounts of liabilities
that would be necessary should the Company not be able to continue in
existence.
3. CONVERTIBLE NOTES PAYABLE
On November 29, 2005, the Company entered into a Security Purchase
Agreement whereby the Company obtained financing for up to $2,500,000.
The borrowings are secured by the Company's common stock and bear
interest at 8%. The notes are convertible into shares of the Company's
common stock at the option of the holder. Under the terms of the
Security Purchase Agreement, the Company also agreed to issue warrants
for the purchase of up to 3,500,000 shares of its common stock.
The Company has reserved 59,055,556 shares of its common stock for
issuance upon conversion of the notes and warrants.
During November 2005, the Company borrowed $1,000,000 under the
Security Purchase agreement and issued warrants for the purchase of
1,400,000 shares of its common stock. In January 2006, the Company
borrowed an additional $700,000 under the Security Purchase agreement
and issued warrants for the purchase of 979,380 shares of its common
stock. The warrants are exercisable at $.50 per share in whole or in
part and are subject to other exercise restrictions.
4. COMMON STOCK
In October 2005, the Board of Directors authorized the issuance of
163,100 shares of common stock of the Company in exchange for legal
services. Management of the Company valued the shares issued at $.19
per share, the closing bid price of the Company's common stock on the
date of issuance.
In November 2005, the Board of Directors authorized the issuance of an
aggregate of 2,000,000 shares of common stock of the Company in
exchange for consulting services. Management of the Company valued the
shares issued at the closing bid price of the Company's common stock
on the date of issuance. The shares issued were valued at an average
price of $.245 per share.
9
4. COMMON STOCK (CONTINUED)
Also in November 2005, the Board of Directors authorized the issuance
of 500,000 shares of common stock of the Company in exchange for
accrued management fees. Management of the Company valued the shares
issued at $.26 per share, the closing bid price of the Company's common
stock on the date of issuance.
In December 2005, the Board of Directors authorized the issuance of
200,000 shares of common stock of the Company in exchange for legal
services. Management of the Company valued the shares issued at $.20
per share, the closing bid price of the Company's common stock on the
date of issuance.
Also in December 2005, holders of notes payable converted $175,000 of
their notes and $60,713 of accrued interest into 1,270,714 shares of
common stock of the Company.
In July, 2005, the Board of Directors authorized the issuance of an
aggregate of 2,160,700 shares of common stock of the Company in
exchange for accrued legal fees, management & consulting services.
Management of the Company valued the shares issued at $.28 per share,
the closing bid price of the Company's common stock on the date of
issuance.
5. SUBSEQUENT EVENTS
Management of Rotary is currently negotiating for the purchase of
certain equipment to be used for the manufacture of rotary engines to
be used in the Company's recreational water sports products. If the
agreement is consummated, Rotary will issue 49% of its common stock for
the equipment valued at approximately $3,060,000.
10
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Management's discussion and analysis contains various forward-looking statements
within the meaning of the Securities and Exchange Act of 1934. These statements
consist of any statement other than a recitation of historical fact and can be
identified by the use of forward looking terminology such as "may", "expect",
"anticipate", "estimates", or "continue" or use of negative or other variations
of comparable terminology. We caution that these statements are further
qualified by important factors that could cause actual results to differ
materially from those contained in our forward looking statements, that these
forward looking statements are necessarily speculative, and there are certain
risks and uncertainties that could cause actual events or results to differ
materially from those referred to in our forward looking statements.
Management's discussion and analysis should be read in conjunction with the
financial statements and the notes thereto.
RESULTS OF OPERATIONS
SIX MONTHS ENDED DECEMBER 31, 2005 COMPARED TO THE SIX MONTHS ENDED DECEMBER 31,
2004 AND THREE MONTHS ENDED DECEMBER 31, 2005 COMPARED TO THE THREE MONTHS ENDED
DECEMBER 31, 2004:
Six months ended December 31 Increase
-------------------------------------- --------------------------------------
2005 2004 Amount %
------------------ ------------------ ------------------ ------------------
Revenue $ 2,316,374 $ - $ 2,316,374 -
================== ================== ================== ==================
Three months ended December 31 Increase
-------------------------------------- --------------------------------------
2005 2004 Amount %
------------------ ------------------ ------------------ ------------------
Revenue $ 1,196,958 $ - $ 1,196,958 -
================== ================== ================== ==================
Revenue for the six and three months ended December 31, 2005 resulted relates
entirely to the Company's acquisition of NACIO Systems, Inc. effective April 1,
2005.
Six months ended December 31 Increase
-------------------------------------- --------------------------------------
2005 2004 Amount %
------------------ ------------------ ------------------ ------------------
Cost of goods sold $ 542,184 $ - $ 542,184 -
================== ================== ================== ==================
Three months ended December 31 Increase
-------------------------------------- --------------------------------------
2005 2004 Amount %
------------------ ------------------ ------------------ ------------------
Cost of goods sold $ 266,145 $ - $ 266,145 -
================== ================== ================== ==================
Cost of goods sold for the six and three months ended December 31, 2005 resulted
relates entirely to the Company's acquisition of NACIO Systems, Inc. effective
April 1, 2005.
Six months ended December 31 Increase
-------------------------------------- --------------------------------------
2005 2004 Amount %
------------------ ------------------ ------------------ ------------------
General & administrative $ 3,273,544 $ 1,019,205 $ 2,254,339 221.2
================== ================== ================== ==================
11
Three months ended December 31 Increase
-------------------------------------- --------------------------------------
2005 2004 Amount %
------------------ ------------------ ------------------ ------------------
General & administrative $ 1,533,610 $ 713,327 $ 820,283 115.0
================== ================== ================== ==================
General & administrative expenses for the six and three months ended December
31, 2005 resulted relates entirely to the Company's acquisition of NACIO
Systems, Inc. effective April 1, 2005.
Six months ended December 31 Decrease
-------------------------------------- --------------------------------------
2005 2004 Amount %
------------------ ------------------ ------------------ ------------------
Research & development $ 458,573 $ 1,209,705 $ (751,132) (62.1)
================== ================== ================== ==================
Three months ended December 31 Decrease
-------------------------------------- --------------------------------------
2005 2004 Amount %
------------------ ------------------ ------------------ ------------------
Research & development $ 457,926 $ 1,209,705 $ (751,779) (62.1)
================== ================== ================== ==================
Research & development expense related to the Company's recreational water
sports equipment. That research & development is funded entirely from debt and
equity financing. During the six months ended December 31, 2005 the Company was
unable to continue its research & development efforts until additional debt &
equity financing was obtained. On November 29, 2005, the Company entered into a
Security Purchase Agreement where by it obtained financing for up to $2,500,000.
Also on that date, they received $1,000,000 under the agreement to continue its
research and development activities.
FINANCIAL POSITION & LIQUIDITY AND CAPITAL RESOURCES
AS OF DECEMBER 31, 2005 COMPARED TO JUNE 30, 2005:
Increase
December 31, June 30, -----------------------------
2005 2005 Amount %
-------------------- ------------------ ------------- --------------
Cash $ 311,460 $ 46,296 $ 265,164 572.8
==================== ================== ============= ==============
The increase in cash results from the receipt of $1,000,000 on November 29, 2005
under the Security Purchase Agreement.
Increase
December 31, June 30, -----------------------------
2005 2005 Amount %
-------------------- ------------------ ------------- --------------
Long-term debt:
Current portion $ 2,463,780 $ 1,858,257
Long-term debt 2,675,414 2,369,694
-------------------- ------------------
$ 5,139,194 $ 4,227,951 $ 1,091,243 25.8
==================== ================== ============= ==============
The increase in long-term debt is a result of the receipt of $1,000,000 on
November 29, 2005 under the Security Purchase Agreement.
12
ITEM 3. CONTROLS AND PROCEDURES
As of February 14, 2006, an evaluation was performed under the supervision and
with the participation of the Company's management, including the Principal
Executive Officer, of the effectiveness of the design and operation of the
Company's disclosure controls and procedures. Based on that evaluation, the
Company's management, including the Chief Executive Officer concluded that the
Company's disclosure controls and procedures were effective as of February 14,
2006. There have been no significant changes in the Company's internal controls
or in other factors that could significantly affect internal controls subsequent
to February 14, 2006.
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS
(a) Exhibits.
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Exhibit
Number Description of Document
3.1 Articles of Incorporation as Amended *
3.2 By laws *
31.1 Rule 13a-14(a)/15d-14(a) Certification
31.2 Rule 13a-14(a)/15d-14(a) Certification
32.1 Section 1350 Certification
32.2 Section 1350 Certification
* Filed by reference to a prior filing of the Registrant.
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Date: February 14, 2006 ENCOMPASS HOLDINGS, INC.
By: /s/ ARTHUR N. ROBINS
----------------------------
Arthur N. Robins
Chief Executive Officer
13