SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB/A
(Mark One)
[X] Quarterly report under Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the quarterly period ended September 30,
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.
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(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
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(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
-------- --------
As of November 16, 2005, the number of outstanding shares of the issuer's common
stock, $0.001 par value, was 10,975,193 shares.
TRANSITIONAL SMALL BUSINESS DISCLOSURE FORMAT: Yes [ ] No [X]
1
TABLE OF CONTENTS
ITEM 1. FINANCIAL STATEMENTS ............................................... 3
Consolidated Unaudited Balance Sheets as of September 30, 2005
and June 30, 2004 (restated).................................. 3
Consolidated Unaudited Statements of Operations for the Quarters
September 30, 2004 and 2005 (restated)........................ 4
Consolidated Unaudited Statement of Cash Flows for the
Quarters ended September 30, 2005 and 2004 (restated)......... 5
Notes to Consolidated Financial Statements.......................... 6
ITEM 2. MANAGEMENT'S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS .............................................. 10
ITEM 3. CONTROLS AND PROCEDURES............................................. 12
PART II - OTHER INFORMATION
ITEM 2. SALES OF UNREGISTERED SECURITIES AND USE OF PROCEEDS................ 12
ITEM 6. EXHIBITS............................................................ 12
SIGNATURES................................................................... 12
2
NOVA COMMUNICATIONS LTD.
Consolidated Condensed Balance Sheets
September 30, June 30,
2005 2005
------------------ ------------------
(restated) (restated)
Assets
------
Current assets:
Cash $ - $ 46,296
Accounts receivable, less allowance for uncollectible accounts 358,092 401,415
Receivable from related party 148,256 67,603
Prepaid expenses 270,462 326,344
Other current assets 23,004 82,509
------------------ ------------------
Total current assets 799,814 924,167
Equipment, net 10,164,471 10,107,551
Other assets:
Note receivable 139,923 147,036
Deposits & other 422,221 325,075
Other assets 4,942 3,000
------------------ ------------------
Total other assets 567,086 475,111
------------------ ------------------
$ 11,531,371 $ 11,506,829
================== ==================
Liabilities and Stockholders' Equity
------------------------------------
Current liabilities:
Accounts payable $ 1,569,331 $ 1,185,731
Accrued liabilities 1,153,752 899,569
Unearned revenue 450,134 521,027
Notes payable and accrued interest subject to conversion into
an indeterminable number of shares of common stock 166,961 163,459
Derivative liabilities 123,281 117,749
Long-term debt due within one year 1,871,183 1,858,257
Other current liabilities 119,863 -
------------------ ------------------
Total current liabilities 5,454,505 4,745,792
Long-term debt to related parties 195,236 241,152
Long-term debt 2,369,964 2,369,694
Stockholders' equity:
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 8,162,032 shares (6,001,332
shares at June 30, 2005) 8,162 6,001
Common stock to be issued 8,703,927 8,703,927
Convertible promissory note and accrued interest 101,140 101,140
Additional paid in capital 23,043,168 22,809,499
Retained deficit (28,344,931) (27,470,576)
------------------ ------------------
Total stockholders' equity 3,511,666 4,150,191
------------------ ------------------
$ 11,531,371 $ 11,506,829
================== ==================
See accompanying notes.
3
NOVA COMMUNICATIONS LTD.
Consolidated Condensed Statements of Operations
Three months ended
September 30
---------------------------------------
2005 2004
------------------ ------------------
(restated) (restated)
Revenues $ 1,119,416 $ -
Cost of goods sold 276,039 -
------------------ ------------------
Gross profit 843,377 -
General and administrative expenses 1,685,593 305,878
Research and development expenses 647 -
------------------ ------------------
Net loss from operations (842,863) (305,878)
Other income (expenses):
Change in fair value of derivative liabilities (8,808) 30,398
Interest expense (22,684) (9,773)
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Total other income (expenses) (31,492) 20,625
------------------ ------------------
Net loss from operations before provision for income taxes (874,355) (285,253)
Provision for income taxes - State of California - 800
------------------ ------------------
Net loss $ (874,355) $ (286,053)
================== ==================
Net loss per common share $ (.145) $ (.076)
================== ==================
See accompanying notes.
4
NOVA COMMUNICATIONS LTD.
Consolidated Condensed Statements of Cash Flows
Three months ended
September 30
---------------------------------------
2005 2004
------------------ ------------------
(restated) (restated)
Cash flows from operating activities:
Net loss $ (874,355) $ (286,053)
Adjustment to reconcile net loss to net cash provided by
(used in) operating activities:
Depreciation & amortization 295,017 -
Shares issued in exchange for compensation & services 226,056 317,500
Change in fair value of derivative liabilities 8,808 (30,398)
Unearned revenue (70,893) -
Provision for income taxes - 800
Changes in assets and liabilities:
Receivables 43,323 -
Other assets 16,299 -
Checks issued in excess of bank deposits - 181
Accounts payable 383,600 969
Other liabilities 387,242 (12,674)
------------------ ------------------
415,097 (9,675)
Cash flows from investing activities:
Capital expenditures (351,937) -
Repayment of advances to related parties 7,113 -
Advances paid to related parties (80,653) -
------------------ ------------------
(425,477) -
Cash flows from financing activities:
Advances received from related parties - 7,420
Repayment to related parties (45,916) -
Proceeds from convertible notes payable 10,000 -
------------------ ------------------
(35,916) 7,420
------------------ ------------------
Net change in cash (46,296) (2,255)
Cash at beginning of period 46,296 -
------------------ ------------------
Cash at end of period $ - $ -
================== ==================
Supplemental schedule of noncash financing activities:
Common stock issued in exchange for accrued payroll $ - $ 180,000
================== ==================
Notes and accrued interest converted into common stock $ 9,774 $ 211,954
================== ==================
See accompanying notes.
5
NOVA COMMUNICATIONS LTD.
Consolidated Notes to Financial Statements
September 30, 2005
1. Summary of significant accounting policies
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BUSINESS COMBINATIONS AND BASIS OF CONSOLIDATION: The consolidated
condensed financial statements include the accounts of Nova,
AquaXtremes, Inc., Xtreme Engines, 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").
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 September 30, 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
condensed 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 September 30, 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 correctly 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".
The Company estimated the fair value of the conversion feature of its
notes payable to be $123,281 as of September 30, 2005 and is reported
in the accompanying consolidated balance sheet as derivative
liabilities. Under EITF No. 00-19, this
6
NOVA COMMUNICATIONS LTD.
Consolidated Notes to Condensed Financial Statements
September 30, 2005
1. Summary of significant accounting policies (continued)
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RESTATEMENT OF CONSOLIDATED FINANCIAL STATEMENTS TO REFLECT DERIVATIVE
ACCOUNTING (CONTINUED): 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 $8,808 for the three months ended September 30, 2005
(other income of $30,398 for the three months ended September 30,
2004).
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.
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 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 is
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 recognized ratably over the
period services are provided. Software product sales are recognized
when software is provided.
7
NOVA COMMUNICATIONS LTD.
Consolidated Notes to Condensed Financial Statements
September 30, 2005
1. Summary of significant accounting policies (continued)
------------------------------------------------------
REVENUE RECOGNITION (CONTINUED): 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 6,048,177 for the three months ended
September 30, 2005 (3,751,503 for the three months ended September 30,
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
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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.
The Company is dependent upon its ability to obtain additional capital
and debt financing until the Company ultimately achieve 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. Notes payable subject to conversion into an indeterminable number of
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shares of common stock
----------------------
Notes payable are due one year from the issuance date of the note with
interest at rates ranging from 8% to 20% 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
8
NOVA COMMUNICATIONS LTD.
Consolidated Notes to Condensed Financial Statements
September 30, 2005
3. Notes payable subject to conversion into an indeterminable number of
-----------------------------------------------------------------------
shares of common stock (continued)
----------------------------------
ten days written notice after six months and one year 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 prices per share ranging from 70% to 90% 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 1,655,356 shares of its common stock
if the principal and accrued interest of the notes were converted as of
September 30, 2005.
4. Common stock
------------
During the three months ended September 30, 2005, the Board of
Directors authorized the issuance 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. 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.
9
ITEM 2. 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.
EXECUTIVE LEVEL OVERVIEW
The Company's operating strategies focus on the development of recreational
water sports products 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 has also devoted substantial efforts in the operations of NACIO by
pursuing aggressive cost cutting programs and eliminated unprofitable products.
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.
Revenues for IHG consist of computer software compliance monitoring services and
products.
Revenues for Aqua to date consist of the sale of dealerships.
Nova Communications LTD presently has executive offices at 55 Leveroni Court,
Novato CA. NACIO's enterprise server facilities are also located at that
address. Currently, the only significant business risk of NACIO's operations is
that the electricity to power the ESF is obtained from a single-source supplier,
Pacific Gas & Electric. NACIO has available back-up power generators sufficient
to continue to power their enterprise server facilities in the event of
short-term power losses. However, if the supply of power to NACIO by Pacific Gas
& Electric were delayed or curtailed, the ability of NACIO to provide services
to its customers could be adversely affected.
10
RESULTS OF OPERATIONS
---------------------
Three months ended September 30, 2005 compared to the three months ended
------------------------------------------------------------------------
September 30, 2004:
-------------------
Three months ended June 30:
----------------------------------------------------------
2005 2004 Increase %
------------ ------------ ------------- ------------
Sales $ 1,119,416 $ - $ 1,119,416 -%
============ ============ ============= ============
The increase in sales was attributable to the two factors: (1) the purchase of
NACIO effective April 1, 2005, and (2) Aqua began selling dealerships.
Three months ended June 30:
---------------------------------------------------------
2005 2004 Increase %
------------ ------------ ------------ ------------
Cost of sales $ 276,039 $ - $ 276,039 -%
============ ============ ============ ============
The increase in the cost of sales was attributable to the purchase of NACIO
effective April 1, 2005. Cost of sales related entirely to NACIO's products.
Three months ended June 30:
----------------------------------------------------------
2005 2004 Increase %
------------ ------------ ------------ -------------
General and administrative expenses $ 1,739,934 $ 305,878 $ 1,434,056 469%
============ ============ ============ =============
The increase in selling, general & administrative expenses was attributable to
two factors: the purchase of NACIO effecting April 1, 2005, and (2) the issuance
of common stock for services increased $289,339.
FINANCIAL POSITION & LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 2005 compared to June 30, 2005:
September 30, June 30,
2005 2005 (decrease) %
-------------- ------------- ------------- -------------
Accounts receivable, net $ 138,196 $ 401,415 $ (263,219) (65.6)
============== ============= ============= =============
The decrease in accounts receivable was attributed to NACIO placing a priority
in collecting accounts receivable more timely.
11
ITEM 3. CONTROLS AND PROCEDURES
As of September 30, 2005, 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 September 30,
2005. There have been no significant changes in the Company's internal controls
or in other factors that could significantly affect internal controls subsequent
to September 30, 2005.
PART II - OTHER INFORMATION
ITEM 2. SALES OF UNREGISTERED SECURITIES AND USE OF PROCEEDS
On or about August 18, 2005, the Company issued 400,000 shares of its common
stock to Barry Davis in consideration of the payment of $4,400.00.
On or about September 1, 2005, the Company issued 20,000 shares of its common
stock to Philip Rodriquez upon the exercise by Mr. Rodriquez of the conversion
rights under the Company's Convertible Promissory Note dated November 14, 2003
in the principal amount of $5,000. In addition to the principal of $5,000, Mr.
Rodriquez converted accrued interest in the amount of approximately $608.00
ITEM 6. EXHIBITS AND REPORTS ON FORM 8K
(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.
May ___, 2006 ENCOMPASS HOLDINGS, INC.
By: /s/ ARTHUR N. ROBINS
--------------------------
Arthur N. Robins
Chief Executive Officer
By: /s/ LESLIE I. HANDLER
--------------------------
Leslie I. Handler, President and
Acting Chief Financial Officer
12