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j_t

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j_t

Re: joedebull post# 10311

Monday, 03/03/2008 6:48:53 AM

Monday, March 03, 2008 6:48:53 AM

Post# of 63001
Some points about 0.4 conversion rates / identities of selling shareholders / debt conversions and more

I've been rereading that last S-1/A regarding the 48 million share offering, and I think I have a better handle on a few things (again .. I think smile ). I know many of you have been around for a while, and I don't presume to "tell you what's what", but I thought I would share some personal observations/moments of insight. Again, some (or all) of this may be obvious to some/most on here, but it was an edifying exercise for me, so I thought i would share some of my discoveries??? :

1) Note the following section from page 38 - 39 of the S-1/A of Feb. 12. This is a good section to actually read yourself.


----snip---(page 38-39)

"SELLING SHAREHOLDERS

The table below sets forth information concerning the resale of the shares of common stock by the selling stockholder. We will not receive any proceeds from the resale of the common stock by the selling stockholder. We will receive proceeds from the exercise of the warrants. Assuming all the shares registered below are sold by the selling stockholder, none of the selling stockholders will continue to own any shares of our common stock.

The following table also sets forth the name of each person who is offering the resale of shares of common stock by this prospectus, the number of shares of common stock beneficially owned by each person, the number of shares of common stock that may be sold in this offering and the number of shares of common stock each person will own after the offering, assuming they sell all of the shares offered.

Name
Cornell Capital Partners, L.P. (3)

Total Shares of Common Stock Issuable Upon Conversion of Notes and/or Warrants

48,000,000

Total Percentage of Common Stock, Assuming Full Conversion(1)

4.08*%

Shares of Common Stock Included in Prospectus

Up to 48,000,000(4)shares

Beneficial Ownership Before the Offering

4,814,000

Percentage of Common Stock Owned Before Offering*

4.99%

Ownership After the Offering (2)

0

Percentage Stock Owned After Offering (2)

-

* This column represents the aggregate maximum number and percentage of shares that the selling stockholders can own at one time (and therefore, offer for resale at any one time) due to their 4.99% limitation.

(1) Applicable percentage ownership is based on 117,549,718 shares of common stock outstanding as of January 9, 2008. 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 that are currently exercisable or exercisable within 60 days of January 9, 2008 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.

(2) Assumes that all shares of common stock being registered will be sold.

(3) 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.

(4) Includes: (i) up to 48,000,000 shares issuable upon conversion of our outstanding principal amount $1,920,000 10% secured convertible debentures, which are convertible into shares of our common stock at a fixed price equal to $.40 per share.

----snip ----


Sooo, this offering is actually a registration and reselling of shares being made on behalf of Cornell. Cornell alone is listed as the single only seller. I then reread the financial agreements and realized something else. Note the financing arrangement with Cornell as reported on pages 6 and 17 - 18 among other places in S-1/A:

----snip---- (page 6)

FINANCING TRANSACTION

On July 21, 2006, we consummated a Securities Purchase Agreement dated July 21, 2006 with Yorkville Advisors LLC (f/k/a Cornell Capital Partners L.P.) (hereinafter referred to as “Yorkville” or “Cornell”) providing for the sale by us to Cornell of our 10% secured convertible debentures in the aggregate principal amount of $2,825,000 of which $1,250,000 was advanced immediately. The second installment of $575,000 was advanced on the date of the filing by us with the Securities and Exchange Commission of a registration statement (as further described below). The last installment of $1,000,000 was advanced three business days after the date the registration statement was declared effective by the Commission. As of September 30, 2007, a $1,920,000 remained outstanding on the convertible debenture.

The debentures mature on the third anniversary of the date of issuance. The holder of the debentures may convert at any time amounts outstanding under the debentures into shares of our common stock at a fixed conversion price per share equal to $0.40. Cornell has agreed not to short any of the shares of common stock. Our obligations under the Purchase Agreement are secured by substantially all of our and our wholly owned subsidiary’s (CoroWare Technologies, Inc.) assets.

Under the Purchase Agreement, we also issued to Cornell five-year warrants to purchase 1,000,000 and 1,500,000 shares of common stock at a price equal to $0.50 and $1.00, respectively, together with three-year warrants to purchase 2,300,000, 2,000,000 and 2,500,000 shares of common stock at a price equal to $0.25, $0.65 and $0.75, respectively.

In connection with the Purchase Agreement, we also entered into a registration rights agreement with Cornell providing for the filing of a registration statement with the Commission registering the common stock issuable upon conversion of the debentures and exercise of the warrants. We are obligated to use our best efforts to cause the registration statement to be filed no later than 30 days after the closing date. In the event of a default of our obligations under the registration rights agreement, including our agreement to file the registration statement with the Commission no later than 30 days after the closing date, or if the registration statement is not declared effective within 120 days after the closing date, we are required to pay to Cornell, as liquidated damages, for each month that the registration statement has not been filed or declared effective, as the case may be, either a cash amount or shares of our common stock equal to 2% of the liquidated value of the debentures.

We have the right to redeem a portion or all amounts outstanding under the Debenture prior to the maturity date at a 10% redemption premium provided that the closing bid price of the common stock is less than the conversion price and there is an effective registration statement covering the shares of common stock issuable upon conversion of the Debentures and exercise of the Warrants. In addition, on the first trading day of each calendar month, Cornell may require us to redeem up to $500,000 of the remaining principal amount of the Debentures per calendar month. However, Cornell may not require us to redeem the Debentures if the closing bid price of the common stock exceeds the conversion price for each of the five consecutive trading days immediately prior to the redemption date, and the registration statement has been declared effective and remains effective on the redemption date. We have the option, in our sole discretion, to settle any requested redemptions by either paying cash or issuing the number of shares of our common stock equal to the cash amount owed divided by a stock price equal to 95% of the lowest daily volume weighted average price of our common stock during the thirty (30) trading days immediately preceding the date of the redemption. "

---snip----

A little long and opaque - sorry, but probably useful for us all to completely understand. Essentially, Innova sold Cornell $2,825,000 of convertible debentures, which pay 10% in interest and which mature (will be converted to common stock) in 3 years time (from the 2006 purchase date). So, for three years, Innova makes interest payments at 10% on the outstanding principal of the $2,825,000 and then converts the remaining principle straight across to Innova stock at 0.4 per share. Fortunately, as of Dec/07 that principal amount had dropped to $1,870,000 due to Cornell already redeeming debenture principal for shares .... (which is also what is causing all the dilution.

In addition, as part of the deal, Cornell gets to buy up to 9,300,000 shares at agreed upon fixed prices (the warrants listed above). The nature of most debentures is that they can usually be redeemed by either party according to certain rules. And this is where the deal gets bad for Innova (I think). After Dec. 1/2006, Cornell can ask for redemption of up to $500,000 worth of debentures A MONTH ... no questions asked. Innova must redeem whatever amount (up to 500K ea. month) Cornell wants. Innova has the choice to repay in cash or stock, but as long as the share price is below 0.4 (40 cents), they have to do it. If Innova chooses to redeem with stock (which they have to because they have no cash), the number of shares is calculated based on 95% of the LOWEST share price (weighted) of the preceding 30 days. I believe this means that Cornell could just watch the stock price and - if they see an up trend over a few weeks - they just ask for all or part of their monthly allowable redemption. As Innova has to provide them / convert an amount of shares that is based on the previous month's low, Cornell should be able to just turn around and dump it for an immediate profit. Do I read that right?! If they see the price is up around .015, they could demand a redemption of up to 500K at .1 or .007 or whatever the lowest rate of the last month was. They could then immediately place it at .015 and realize an immediate profit of .005 - .008 per share?? Is that right??

Of course, Innova can redeem any or all of the principal debenture amount at any time as well (as long as the share price is below .40), but they have to pay a penalty of an extra 10%. Actually, that didn't sound too bad until I realized that Cornell knows there is no way Innova can come up with the cash. It is a pretty sweet deal for Cornell - if Innova makes it big, Cornell wins on the .40 conversion of outstanding debt and the warrants they have for stock (9,300,000 shares). If Innova struggles along (like they are doing) then Cornell makes a guaranteed profit based on the monthly share price spread (and how much the market will absorb). And .....

this is exactly what they are doing. Reading along further, you can find the schedule of redemptions made over the last year and a half (I am assuming they were made at the behest of Cornell).


---snip---- page F-12 of S-1/A

Date -- Principal Redeemed --Number of Shares Issued
January 18,2007 -- $55,000 -- 509,165
March 1,2007 -- $475,000 -- 3,766,851
June 27,2007 -- $25,000 -- 437,827
June 28,2007 -- $75,000 -- 1,313,485
July 23,2007 -- $100,000 -- 2,074,689
August 27,2007 -- $100,000 -- 2,463,054
September 26,2007--$50,000 -- 2,994,012
December 18,2006 --$25,000 -- 189,000

---snip---

All these shares were originally registered for resale on Dec. 1, 2006 during that last "offering" many of you have talked about. Ie. 26,000,000 shares were offered for sale on behalf or Cornell again (17,500,000 in possible redemptions and 9,300,000 set aside for Cornell's warrants). That last filing lists the exact same details about the "Selling Shareholder" - there is only one listed in the prospectus: Cornell Capital Partners, L.P..

If you add the total of shares up above, you find that they are getting pretty close to using up those 17,500,000 "possible" shares that were offered last time around plus some change). I guess it was time for Cornell to top up the share tank.

Finally, another $600,000 in 12% convertible debenture was issued in October/07 to Cornell, so actually there is not much light at the end of the Cornell/debt tunnel


On a related manner regarding shareholder ownership/who owns the company. I don't know how much Cornell actually "owns" of the company at any one time. Please note the breakdown of ownership shown below, and remember, that the single "selling shareholder" is Cornell (see page 38 of the Feb 12. S-1/A):


-----snip----- (page 43 of S-1/A)
Securities Registered *

Shares outstanding that are held by persons other than the selling shareholder, affiliates of company, or affiliates of the selling shareholder

117,549,718 (1)

Shares registered for resale by the selling shareholder or affiliates of selling shareholder in prior registration statements

26,800,000

Shares registered for resale by the selling shareholder or affiliates of the selling shareholder that continue to be held by the selling shareholder or affiliates of the selling shareholder

0

Shares that have been sold in registered resale transactions by the selling shareholder or affiliates of the selling shareholder;

18,172,543

Share registered for resale on behalf of the selling shareholder or affiliates of the selling shareholder in the current transaction

48,000,000

(1) Total number of issued and outstanding shares of the Company as of November 12, 2007

----snip----

From what I read, Cornell didn't hold any common stock on Feb. 12, 2008. They had warrants and the right to convert their $1,870,000 principal that is still outstanding from the original debenture sale and a further $600,000 debenture sale on Oct. 25, 2007. That is, they don't actually "own" the company at any one time based on share ownership percentages; however, they have the right to keep converting debentures at ridiculously low prices. Essentially, at a price of .01 a share, they can acquire 196,842,105 shares (page 42 S-1/A) ... and if the price drops, they get even more. That is enough to own 60 - 70% of the company in a few months .... so they pretty much do own its future.

A final little note here on the debt with Cornell is the line on page 44 of the S-1/A filing:


---snip---

Company’s Financial Ability to Satisfy its Obligations to the Selling Shareholders (... ie. Cornell ...):

The Company believes that it will not have the financial ability to make payments on the overlying securities.

----snip----

Neat, huh? Cornell has a death grip on this company, and the worst part to me is that it actually isn't over a ridiculous sum of money. This horrible agreement, which allows Cornell to redeem 500K a month and manipulate the stock, etc. is only over $1,870,000. Why didn't they use that court case money to pay it off - it was almost the exact same amount? Seems there is a lot of good people here and a new management which is trying to clean house. Can they not find another angel investor/ non-equity based loan to clear out Cornell?

Finally, and then I will stop overloading everyone. The issue of stock ownership by Walt Weisel is laid forth on pages 38 and of the S-!/A:

He owns 4,963,277 shares of common stock as of Feb. 12 and options to buy between several hundred thousand and a few million more??? (I haven't adde all of them up yet .. it is all over the place).

Sooooooo sorry for getting carried away here, but maybe there are some useful ideas out there.


jt

jt
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