SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB/A
Amendment No. 2
(Mark One)
[X] Quarterly report under Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the quarterly period ended March 31, 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
------ ----------
(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 XX No
-------- --------
As of May 12, 2005, the number of outstanding shares of the issuer's common
stock, $0.001 par value, was 5,096,332 shares.
TRANSITIONAL SMALL BUSINESS DISCLOSURE FORMAT: Yes [ ] No [X]
1
TABLE OF CONTENTS
ITEM 1. FINANCIAL STATEMENTS ............................................... 3
Consolidated Unaudited Balance Sheet as of
March 31, 2005 (restated)........................................... 3
Consolidated Unaudited Statements of Operations for the
Quarters ended March 31, 2005 and March 31, 2004 (restated)......... 4
Consolidated Unaudited Statements of Cash Flows for the
Quarters ended March 31, 2005 and March 31, 2004 (restated)......... 5
Notes to Consolidated Financial Statements.......................... 6
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............................................................ 14
SIGNATURES................................................................... 14
2
NOVA COMMUNICATIONS LTD.
Consolidated Balance Sheets
March 31, December 31,
2005 2004
----------------- -----------------
(restated) (restated)
Assets
------
Current assets:
Cash $ 58,981 $ 4,057
Receivable from related party 115,622 57,480
Prepaid expenses 5,000 5,000
----------------- -----------------
Total current assets 179,603 66,537
Equipment, net 214,343 101,896
Advances receivable 18,000 18,000
----------------- -----------------
$ 411,946 $ 186,433
================= =================
Liabilities and Net Capital Deficiency
--------------------------------------
Current liabilities:
Accounts payable $ 339,507 $ 205,447
Payable to related party 69,276 17,693
Accrued payroll and payroll related liabilities 227,689 224,791
Income taxes payable 4,000 3,200
Accrued professional fees 358,172 191,022
Notes payable and accrued interest subject to
conversion into an indeterminable number of shares of
common stock 212,247 204,647
Derivative liabilities 134,859 118,545
----------------- -----------------
Total current liabilities 1,345,750 965,345
Payable to related parties 493,510 436,510
Net capital deficiency:
Preferred stock; no par value; authorized 200,000 shares
(100,000 shares in 2004); outstanding 100,000 shares 100 100
Common stock; $.001 par value; authorized 500,000,000
shares; issued and outstanding 4,996,332 shares
(4,981,332 shares in 2004) 4,996 4,981
Common stock to be issued 169 169
Additional paid in capital 22,934,902 22,919,467
Retained deficit (24,367,481) (24,140,139)
----------------- -----------------
Net capital deficiency (1,427,314) (1,215,422)
----------------- -----------------
$ 411,946 $ 186,433
================= =================
See accompanying notes.
3
NOVA COMMUNICATIONS LTD.
Consolidated Statements of Operations
Three months ended March 31
--------------------------------------
2005 2004
----------------- -----------------
(restated) (restated)
Revenues $ 145,000 $ -
Operating expenses:
Selling expenses 10,385 -
General and administrative expenses 331,179 1,420,254
Research and development expenses 3,254 -
----------------- -----------------
Total operating expenses 344,818 1,420,254
----------------- -----------------
Net loss from operations (199,818) (1,420,254)
Other income (expenses):
Change in fair value of derivative liabilities (16,314) 13,693
Interest expense (10,410) (9,800)
----------------- -----------------
Other income (expense) (26,724) 3,893
----------------- -----------------
Net loss from operations before provision for income taxes (226,542) (1,416,361)
Provision for income taxes - State of California 800 -
----------------- -----------------
Net loss $ (227,342) $ (1,416,361)
================= =================
Net loss per common share $ (.046) $ (.490)
================= =================
See accompanying notes.
4
NOVA COMMUNICATIONS LTD.
Consolidated Statements of Cash Flows
Three months ended March 31
--------------------------------------
2005 2004
----------------- -----------------
(restated) (restated)
Cash flows from operating activities:
Net loss $ (227,342) $ (427,932)
Adjustment to reconcile net loss to net cash provided by
(used in) operating activities:
Shares issued in exchange for services - 1,315,500
Change in fair value of derivative liabilities 16,314 (13,693)
Amortization of beneficial conversion feature 18,750 -
Changes in assets and liabilities:
Receivable from related parties, net (6,559) -
Accounts payable 134,060 (1,001)
Accrued liabilities 175,148 99,090
----------------- -----------------
110,371 (16,465)
Cash flows from investing activities:
Advances paid - (210,000)
Capital expenditures (112,447) -
----------------- -----------------
(112,447) (210,000)
Cash flows from financing activities -
Advances received from related party 57,000 176,000
----------------- -----------------
Net change in cash 54,924 (50,465)
Cash at beginning of period 4,057 51,451
----------------- -----------------
Cash at end of period $ 58,981 $ 986
================= =================
Supplemental schedule of noncash financing activities:
Common stock issued in exchange for accrued legal fees $ 15,450 $ -
================= =================
Common stock issued in exchange for accrued payroll $ - $ 180,000
================= =================
See accompanying notes.
5
NOVA COMMUNICATIONS LTD.
Consolidated Notes to Financial Statements
March 31, 2005
1. Summary of significant accounting policies
------------------------------------------
BUSINESS: Nova Communications Ltd. (the "Company" or "Nova") is
incorporated under the laws of the State of Nevada.
BUSINESS COMBINATIONS AND BASIS OF CONSOLIDATION: On August 30, 2004,
the Company acquired 51% of Aqua Xtremes, Inc. ("Aqua") in a business
combination accounted for as a purchase. Aqua designs, manufactures,
and markets water sports equipment. In December 2004, Aqua formed
Xtreme Engines, Inc. ("Engines") and owns 100% of its common stock.
Engines manufactures jet-powered engines for use in Aqua's water sports
equipment.
The consolidated financial statements include the accounts of Nova and
its 51% owned subsidiary Aqua and Aqua's 100% owned subsidiary Engines
from the date of Aqua's purchase and Engines formation. All
intercompany accounts and transactions have been eliminated.
Losses exceed the minority interest in the equity capital of Aqua.
Accordingly, losses applicable to the minority interest are charged
against Nova as there is no obligation of the minority stockholder to
guarantee such losses. If future earnings of Aqua do materialize, Nova
will be credited to the extent of such losses previously absorbed.
Effective May 9, 2005, Nova acquired the remaining 49% of the issued
and outstanding common stock of Aqua.
INTERIM REPORTING: Nova's year-end for accounting and tax purposes is
December 31. Aqua and Engines' year-end for tax purposes is June 30. In
the opinion of Management, the accompanying consolidated financial
statements as of March 31, 2005 and 2004 and for the three months then
ended, consisting of only normal recurring adjustments, except as noted
elsewhere in the notes to the consolidated financial statements,
necessary to present fairly its financial position, results of its
operations and cash flows. The results of operations for the three
months ended March 31, 2005 and 2004 are not necessarily indicative of
the results to be expected for the full year.
RESTATEMENT OF CONSOLIDATED FINANCIAL STATEMENTS TO REFLECT DERIVATIVE
ACCOUNTING: The Company has restated its previously issued interim
financial statements to reflect additional non-operating gains related
to the classification of and accounting for certain financial
instruments with embedded derivative features.
The Company determined that it had not accounted for the embedded
conversion feature of its convertible notes payable as a derivative
instrument pursuant to SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," as amended, and Financial
Accounting Standards Board's Emerging Issues Task Force ("EITF") Issue
No. 00-19, "Accounting for Derivative Financial Instruments Indexed to,
and Potentially Settled in A Company's Own Stock".
6
NOVA COMMUNICATIONS LTD.
Consolidated Notes to Financial Statements
March 31, 2005
1. Summary of significant accounting policies (continued)
------------------------------------------------------
RESTATEMENT OF CONSOLIDATED FINANCIAL STATEMENTS TO REFLECT DERIVATIVE
ACCOUNTING (CONTINUED): The Company estimated the fair value of the
conversion feature of its notes payable to be $134,859 as of March 31,
2005 and is reported in the accompanying consolidated balance sheet as
derivative liabilities. Under EITF No. 00-19, this amount is reported
separate from the convertible notes payable as derivative liabilities.
Further, under SFAS No. 133, any change in fair value of derivative
liabilities during the period is reported as other income or expense in
the statement of operations. The Company recognized other expense for
the change in fair value of derivative liabilities in the consolidated
statement of operations of $16,314 for the three months ended March 31,
2005 (other income of $131,976 for the three months ended march 31,
2004).
CASH EQUIVALENTS: For purposes of the statement of cash flows, the
Company and its subsidiaries consider cash equivalents to be highly
liquid instruments if, when purchased, their original due dates were
within three months.
EQUIPMENT: Equipment is carried at cost. Depreciation is computed using
the straight-line method over the estimated useful lives of the
depreciable assets, which range from five to fifteen years.
REVENUE RECOGNITION: Revenues consist of the sale of dealerships and
are recognized when dealership agreements are signed.
STOCK OPTIONS AND WARRANTS: The Company uses a fair value based method
of accounting for stock based compensation to employees.
The Company also accounts for stock options and warrants issued to
non-employees for services under the fair value method of accounting.
DERIVATIVE INSTRUMENTS: In connection with the issuance of convertible
notes payable, the terms of certain notes payable provide for principal
and interest to be converted into an indeterminable number of shares of
the Company's common stock. This variable conversion feature is
determined to be an embedded derivative instrument and the Company has
accounted for these derivatives pursuant to SFAS No. 133, "Accounting
for Derivative Instruments and Hedging Activities," as amended and
Financial Accounting Standards Board's Emerging Issues Task Force
("EITF") Issue No. 00-19, "Accounting for Derivative Financial
Instruments Indexed to, and Potentially Settled in A Company's Own
Stock". Under EITF No. 00-19, the estimated fair value of the embedded
derivative instrument is reported separate from the notes payable on
the date of issuance as derivative liabilities.
Derivative liabilities are reported at fair value as of the balance
sheet date and any change in fair value during the period is reported
as other income or expense in the statement of operations.
7
NOVA COMMUNICATIONS LTD.
Consolidated Notes to Financial Statements
March 31, 2005
1. Summary of significant accounting policies (continued)
------------------------------------------------------
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 4,985,999 for the three months ended March
31, 2005 (2,891,111 for the three months ended March 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 anti-dilutive.
USE OF ESTIMATES: The process of preparing financial statements in
conformity with generally accepted accounting principles requires the
use of estimates and assumptions regarding certain types of assets,
liabilities, revenues and expenses. Management of the Company has made
certain estimates and assumptions regarding the collectability of notes
receivable. Such estimates and assumptions primarily relate to
unsettled transactions and events as of the date of the financial
statements. Accordingly, upon settlement, actual results may differ
from estimated amounts.
2. Operations
----------
Aqua has begun manufacturing and marketing revolutionary water sports
equipment. One of its most notable products is the Xboard(TM), a
jet-powered personal watercraft.
To date, the Company has been dependent upon advances from shareholders
and debt and equity financing for development and operations. The
Company will continue to be dependent upon these sources until the
Company ultimately achieve profitability, if ever. However, there can
be no assurances that the Company will be able to continue to receive
advances from shareholders or raise additional debt or equity
financing.
The consolidated financial statements as of March 31, 2005 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. Advances receivable
-------------------
The Company has advanced funds to a company for cash flow purposes. The
advances are unsecured, non-interest bearing, and due on demand.
4. Equipment
---------
Equipment consisted of the following at:
March 31, December 31,
2005 2004
------------- -------------
Furniture and fixtures $ 56,060 $ 56,060
Equipment not yet placed in service 179,993 67,546
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Total equipment $ 236,053 $ 123,606
============= =============
8
NOVA COMMUNICATIONS LTD.
Consolidated Notes to Financial Statements
March 31, 2005
4. Equipment (continued)
---------------------
Total equipment $ 236,053 $ 123,606
Less accumulated depreciation (21,710) (21,710)
------------- -------------
Equipment, net $ 214,343 $ 101,896
============= =============
5. Notes payable subject to conversion into an indeterminable number of
-----------------------------------------------------------------------
shares of common stock
----------------------
Notes payable are due one year from the issuance date of the note with
interest at a rate of 8% and 10% per annum. The notes, including unpaid
interest, are convertible, in whole or in part, at any time after six
months from the date of the note at the option of the holder. The notes
are convertible at the option of the Company upon ten days written
notice after six months from the date of the note or at the time of any
public offering by the Company in an aggregate amount of no less than
$10,000,000, or upon any merger or acquisition to which the Company is
a party. The notes may be converted at a price per share equal to 70%
of the closing bid price of the Company's common stock on the date of
the notice of conversion. There is no limit on the number of shares of
common stock that would be required to by issued upon conversion of the
notes payable and the number of shares required to be issued could
exceed the number of shares of the Company's common stock currently
authorized. The Company would have been required to issue 49,372,762
shares of its common stock if the principal and accrued interest of the
notes were converted as of March 31, 2005.
Subsequent to March 31, 2005, the Company issued additional notes
payable aggregating $25,000, which bear interest at a rate of 20% per
annum, and convertible into share of common stock at a rate of 85% of
the closing bid price of the Company's common stock on the date of
conversion if converted within one year from the date of the note or
90% if converted after one year at the option of the Company.
6. Receivable from and payable to related party
--------------------------------------------
Palaut Management, Inc. ("Palaut") provides the Company with management
consulting services. For cash flow purposes, the Company occasionally
pays expenses on behalf of Palaut and Palaut pays expenses on behalf of
the Company. Close family members of a stockholder of Nova control
Palaut. Receivables from a related party reported as a current asset
and payables to a related party reported as a current liability are
amounts owed from and to Palaut.
7. Preferred stock
---------------
The Company's preferred stock may be voting or have other rights and
preferences as determined from time to time by the Board of Directors.
In December 2004, the Company designated all of its authorized
preferred stock, consisting of 100,000 shares, as Series "A". On
January 17, 2005, the Board of
9
NOVA COMMUNICATIONS LTD.
Consolidated Notes to Financial Statements
March 31, 2005
7. Preferred stock (continued)
---------------------------
Directors amended the rights of its 100,000 Series "A" preferred stock
to be convertible, at the option of the Company, into 1,000,000 shares
of its common stock. The Company has reserved 1,000,000 shares of its
common stock to be issued in the event of conversion of its Series "A"
preferred stock.
Also on January 17, 2005, the Board of Directors of the Company
increased the authorized preferred shares to 200,000.
On May 9, 2005, the Company designated the additional 100,000 shares of
its authorized preferred stock as Series "B". The Board of Directors
also determined the Series "B" preferred stock to have a par value of
$0.001 per share, receive dividends in the same manner as holders of
common stock, be entitled to 250 votes per share on all matters which
shareholder have the right to vote, and in the event of liquidation, be
entitled to be paid out of the assets of the corporation available for
distribution in the same manner as holders common stock.
8. Common stock
------------
On March 3, 2005, the Board of Directors authorized the issuance of
15,000 shares of common stock of the Company in exchange for $15,450 of
accrued legal fees. Management of the Company valued the shares issued
at $1.03 per share, the closing bid price of the Company's common stock
on the date of issuance. Management of the Company estimated the value
of the Company's shares granted after considering the historical trend
of the trading prices for its common stock and the limited volume of
shares being traded.
On January 21, 2004, the Board of Directors authorized the issuance of
60,000 shares of common stock of the Company in exchange for $180,000
of accrued payroll. Management of the Company valued the shares issued
at $3.00 per share, the closing bid price of the Company's common stock
on the date of issuance. Management of the Company estimated the value
of the Company's shares granted after considering the historical trend
of the trading prices for its common stock and the limited volume of
shares being traded.
During the three months ended March 31, 2004, the Company issued an
aggregate of 273,500 shares of its common stock in exchange for
consulting and management services aggregating $820,500. Management of
the Company valued the shares issued at $3.00 per share, the closing
bid price of the Company's common stock on the date of issuance.
Management of the Company estimated the value of the Company's shares
granted after considering the historical trend of the trading prices
for its common stock and the limited volume of shares being traded.
10
NOVA COMMUNICATIONS LTD.
Consolidated Notes to Financial Statements
March 31, 2005
9. Stock based compensation
------------------------
During the three months ended March 31, 2004, the Company issued
160,000 shares of its common stock to its president and 5,000 to an
employee as compensation for services aggregating $495,000. Management
of the Company valued the shares issued at $3.00 per share, the closing
bid price of the Company's common stock on the date of issuance.
Management of the Company estimated the value of the Company's shares
granted after considering the historical trend of the trading prices
for its common stock and the limited volume of shares being traded.
10. Other subsequent events
-----------------------
Effective May 9, 2005, Nova exchanged 100,000 shares of its Series "B"
Preferred Stock and a Subordinated Convertible Non-Negotiable
Promissory Note in the principal amount of $100,000 for the remaining
49% of the issued and outstanding common stock of Aqua. The promissory
note will be repaid solely from its conversion into 40,000,000 shares
of common stock of the Company. The Company has reserved 40,000,000
shares of its common stock to be issued upon conversion of the note.
ITEM 2. MANAGEMENT'S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Management's discussion and analysis should be read in conjunction with the
financial statements and the notes thereto.
RESULTS OF OPERATIONS
Three months ended March 31, 2005 compared to the three months ended March 31,
2004:
During the three months ended March 31, 2004, the Company was actively
seeking companies in which to merge or invest as well as provide advances toward
the development of water sports equipment. Since August 2004, the Company,
through its subsidiaries, has devoted all of its efforts to design, manufacture,
and market water sports equipment.
11
Total revenues were $145,000 for the three months ended March 31, 2005
compared to no revenues for the three months ended March 31, 2004. Revenues for
2005 consisted of the sales of marketing rights for Aqua Xtremes' water sports
equipment.
Selling expenses for the three months ended March 31, 2005 aggregated
$10,385 compared to no selling expenses for the three months ended March 31,
2004. Selling expenses for 2005 consisted of salaries. There were no selling
expenses for the three months ended March 31, 2004 because there were no
marketing activities being conducted by the Company. General & administrative
expense for the three months ended March 31, 2005 aggregated $331,179 compared
to $1,420,254 for the three months ended March 31, 2004. The difference of
$1,089,075 consisted of the following: (1) during the three months ended March
31, 2004, the Company incurred $820,500 of consulting and management expenses
compared to no such expenses for the three months ended March 31, 2004, (2)
during the three months ended March 31, 2004 the Company incurred $495,000 of
salaries compared to only $120,000 for the three months ended March 31, 2005;
and (3) operating expenses of $107,895 were incurred in the three months ended
March 31, 2005 relating to Aqua Xtremes, Inc. and Xtreme Engines, Inc. that were
not incurred during the three months ended March 31, 2004. The consulting and
management expenses in 2004 were incurred in connection with the Company seeking
other companies in which to merge or invest. Salaries expense decreased $375,000
in 2005 compared to 2004 as a result of the resignation of the then-existing
President of the Company effective December 31, 2004.
FINANCIAL POSITION & LIQUIDITY AND CAPITAL RESOURCES
As of March 31, 2005 compared to December 31, 2004:
The Company's total assets as of March 31, 2005 were $411,946 compared
to $186,433 as of December 31, 2004. The increase of $225,513 during the quarter
consisted of the following: (1) cash received from the sale of Aqua Xtreme's
marketing rights aggregated $145,000 and (2) capital expenditures for equipment
for Aqua Xtreme and Xtreme Engines aggregated $112,447.
The Company's current liabilities as of March 31, 2005 were $1,406,413
compared to $1,042,322 as of December 31, 2004. The increase of $364,091 during
the quarter consisted of the following: (1) accounts payable increased $134,060
due to a lack of cash flow, (2) accrued professional fees increased by $239,150
during the quarter resulting from routine corporate regulatory and compliance
activities. During the three months ended March 31, 2005, the Company received
additional advances of $57,000 from a related party for Aqua Xtreme and Xtreme
Engines cash flow purposes.
12
ITEM 3. CONTROLS AND PROCEDURES
As of March 31, 2005 the Company carried out an evaluation, under the
supervision and with the participation of the Company's management, including
the Company's Chief Executive Officer and President, of the effectiveness of the
design and operation of the Company's disclosure controls and procedures
pursuant to Rule 13a-14 of the Securities Exchange Act of 1934. Based upon that
eva1uation, these principal executive officers and principal financial officer
concluded that the Company's disclosure controls and procedures are effective in
timely alerting them to material information relating to the Company, including
its consolidated subsidiaries, required to be included in the Company's periodic
SEC filings. There have been no significant changes in internal controls or in
other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation.
13
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8K
(a) Exhibits.
--------
Exhibit
Number Description of Document
2 Articles and Agreement of Merger Between Nova Communications
Ltd. and First Colonial Ventures, Ltd. - July 21, 1999
(Incorporated by reference)
3(3)(i)(1) First Colonial Ventures, Ltd. Articles of Incorporation - March
25, 1985 (Incorporated by reference)
3(3)(i)(2) First Colonial Ventures, Ltd. Amendment to Articles of
Incorporation - August 12, 1985 (Incorporated by reference)
3(3)(i)(3) First Colonial Ventures, Ltd. Amendment to Articles of
Incorporation -September 3, 1985 (Incorporated by reference)
3(3)(i)(4) First Colonial Ventures, Ltd. Amendment to Articles of
Incorporation -February 3, 1992 (Incorporated by reference)
3(3)(i)(5) Nova Communications Ltd Articles of Incorporation - July 13.
1999 (Incorporated by reference)
3(3)(ii)(1) Bylaws (Incorporated by reference)
31.1 Rule 13a-14(a)/15d-14(a) Certification
31.2 Section 1350 Certification
32.1 Rule 13a-14(a)/15d-14(a) Certification
32.2 Section 1350 Certification
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.
May 30, 2006 ENCOMPASS HOLDINGS, INC.
By: /s/ ARTHUR N. ROBINS
--------------------------
Arthur N. Robins
Chief Executive Officer
By: /s/ LESLIE I. HANDLER
--------------------------
Leslie I. Handler, President
14