|• FOR THE QUARTERLY PERIOD ENDED JULY 31, 2012 • EXHIBIT 31.1 • EXHIBIT 31.2 • EXHIBIT 32.1 • EXHIBIT 32.2|
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
x QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended July 31, 2012
o TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
For the transition period from ______________to _____________
Commission file number 000-27397
INOVA TECHNOLOGY INC.
(Exact name of small business issuer in its charter)
2300 W. Sahara Ave. Suite 800 Las Vegas, NV 89102
(Address of principal executive offices)
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.
x Yes o No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
x Yes o No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “large accelerated filler”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
o Yes x No
State the number of shares of outstanding of each of the issuer’s classes of common equity, as of September 12, 2012: 88,688,715
Inova Technology Inc.
Table of Contents
Item 1. Financial Statements
See summary of accounting policies and notes to consolidated financial statements.
INOVA TECHNOLOGY, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 –BASIS OF PRESENTATION
The accompanying unaudited interim consolidated financial statements of Inova Technology, Inc. (“we”, “our”, “Inova” or the “Company”) have been prepared in accordance with accounting principles generally accepted in the United States of America and the rules of the Securities and Exchange Commission (“SEC”) and should be read in conjunction with the audited financial statements and notes thereto contained in Inova’s latest Annual Report filed with the SEC on Form 10-K. In the opinion of management, all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of financial position and the results of operations for the interim periods presented have been reflected herein. The results of operations for interim periods are not necessarily indicative of the results to be expected for the full year. Notes to the consolidated financial statements that would substantially duplicate the disclosure contained in the audited financial statements for the most recent fiscal year as reported in Form 10-K have been omitted.
Fair Value Measurements
Financial Accounting Standards Board Accounting Standards Codification (“ASC”) 820 defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. As defined in ASC 820, fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (exit price). The Company utilizes market data or assumptions that market participants would use in pricing the asset or liability, including assumptions about risk and the risks inherent in the inputs to the valuation technique. These inputs can be readily observable, market corroborated, or generally unobservable. The Company classifies fair value balances based on the observability of those inputs. ASC 820 establishes a fair value hierarchy that prioritizes the inputs used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (level 1 measurement) and the lowest priority to unobservable inputs (level 3 measurement).
As of July 31, 2012, Inova measured its derivative liabilities using Level 3 inputs as defined by ASC 820 with a total fair value of $1,238,323.
Certain prior year amounts have been reclassified to conform to the current year presentation.
NOTE 2 – GOING CONCERN
As shown in the accompanying consolidated financial statements, we have an accumulated deficit and negative working capital and are in default on the majority of our notes payable as of July 31, 2012. These conditions raise substantial doubt as to our ability to continue as a going concern. The consolidated financial statements contained herein do not include any adjustments relating to the recoverability and classification of recorded asset amounts or amounts and classification of liabilities that might be necessary should we be unable to continue in existence. Our ability to continue as a going concern is dependent upon our ability to generate sufficient cash flows to meet our obligations on a timely basis, to obtain additional financing as may be required, and ultimately to attain profitable operations. However, there is no assurance that profitable operations or sufficient cash flows will occur in the future. Management is trying to raise additional capital through sales of stock and refinancing debt.
NOTE 3 – RELATED PARTY TRANSACTIONS
Note Payable to Southbase, LLC
Loans payable from Southbase, LLC consists of advances from existing shareholders. These notes are unsecured, bear interest at 7%, and are due in May 21, 2017. The amount due to Southbase, LLC, a company related to Adam Radly, was $142,532 as of July 31, 2012.
Seller notes with a balance of $1,389,107 relate to the Desert Communications, Inc. (“Desert”) purchase in December of 2007. They have interest rates of 18%, are secured by all of the common stock of Desert Communications, Inc. and were due in December of 2010. The notes are now in default.
Seller notes with a balance of $300,581, to the president of Trakkers, relate to the Trakkers purchase in 2008. They have interest rates of 7-10%, are secured by all of the member units of Trakkers and were due in 2011. The notes are now in default.
NOTE 4 - DERIVATIVE LIABILITIES
ASC 815-40 Put Warrant Liabilities
Under ASC 815-40 “Put Warrants”, warrants for put shares should be classified as liabilities and measured at fair value at the end of each reporting period with the change in fair value recorded to earnings. As a result, the fair value of the warrants granted to Inova’s debt holders in prior years were recorded as derivative liabilities at inception. These liabilities are subsequently measured at fair value at the end of each reporting period with the changes recorded to earnings. As of July 31, 2012, Inova had $201,250 of derivative liabilities as a result of these provisions.
ASC 815-15 Conversion Option and Warrant Liabilities
During fiscal 2010, Inova determined that the instruments embedded in a convertible put note exercised by one of Inova’s lenders should be classified as liabilities and recorded at fair value due to their being no explicit limit to the number of shares to be delivered upon settlement of the above conversion options.
Because the number of shares to be issued upon settlement cannot be determined under these instruments, Inova cannot determine whether it will have sufficient authorized shares at a given date to settle any other of its share-settleable instruments. As a result of this, under ASC 815-15 “Accounting for Derivative Financial Instruments Indexed to and Potentially Settled in, a Company's Own Stock” (formerly EITF 00-19), the conversion options noted above and all other share-settleable instruments are classified as liabilities. Inova has three conversion options embedded in notes payable agreements and 8,839,513 warrants to purchase Inova common stock that are classified as liabilities as a result of the provisions of the convertible put notes. As of July 31, 2012, Inova had $1,037,073 of derivative liabilities as a result of these provisions.
The following table summarizes the derivative liabilities included in the consolidated balance sheet:
Inova values its warrant derivatives and simple conversion option derivatives using the Black-Scholes option-pricing model. Assumptions used include (1) 4% risk-free interest rate, (2) warrant life is the remaining contractual life of the warrants, (3) expected volatility 261% to 390%, (4) zero expected dividends (5) exercise prices as set forth in the agreements, (6) common stock price of the underlying share on the valuation date, and (7) number of shares to be issued if the instrument is converted.
Inova valued the conversion options and reset provisions under its convertible put exercise note with Boone using a Monte Carlo simulation model utilizing present value and various probabilities of events. Assumptions used include (1) 0.34% risk free rate, (2) conversion prices as set forth in the agreement, (3) expected Inova stock price volatility of 261%, (4) expected Desert stock price volatility of 25%, and (6) common stock price of the underlying share on the valuation date. Inova valued the note as a combination of the underlying debt payment and series of two options. Since the options are mutually exclusive, the Monte Carlo simulation was used to estimate when either of the options is exercisable. When both are exercisable Inova assumed that the more valuable of the two would be exercised.
NOTE 5 –SEGMENT INFORMATION
Inova has three reportable segments, one providing management support to the other subsidiaries (Edgetech Services, Inc.), one providing network solutions (Desert Communications, Inc.) and one which manufactures standards compliant and durable RFID (Radio Frequency Identification) equipment (Trakkers, LLC & RightTag, Inc). Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly in deciding how to allocate resources and in assessing performance.
The following table presents three month segment information:
NOTE 6 – WARRANTS
The following tables summarize common stock warrants outstanding by entity:
All warrants above were exercisable as of July 31, 2012.
NOTE 7 – COMMON STOCK
During the three months ended July 31, 2012, Inova purchased the intellectual property from Southbase International Limited (“Southbase), a related party due to ownership in Southbase by Inova’s CEO. The intellectual property purchased is a license to use ShopInova, an iPhone application, and its related intellectual property rights. Inova issued 12,315,270 shares of common stock for the intellectual property, for a total value of $73,892, based on the Inova stock trading price on the closing date.
NOTE 8 – DEBT
The following table summarizes outstanding debt as of July 31, 2012 and April 30, 2012:
Of the total outstanding debt, $11,125,175 was in default as of July 31, 2012. Principal owed to Boone Lenders, LLC (“Boone”) increased due to the paid-in kind interest described below.
Boone is capitalizing and charging paid in kind interest on several of its notes. Each period, at a rate mutually agreed to by the Company and Boone, interest is recognized on the outstanding principal balance and added to the principal balance of the note. This started in May 2010 for Boone’s notes as a temporary arrangement which can be cancelled at any time. The interest rates range from 11% to 20% on various notes.
For the three months ended July 31, 2012, a total of $18,932 of interest was recognized and recorded to the principal balance of loans from Boone.
Item 2. Management Discussion and Analysis of Financial Condition and Result of Operations.
The information contained in this Management’s Discussion and Analysis of Financial Condition and Results of Operation contains “forward looking statements.” Actual results may materially differ from those projected in the forward looking statements as a result of certain risks and uncertainties set forth in this report. Although our management believes that the assumptions made and expectations reflected in the forward looking statements are reasonable, there is no assurance that the underlying assumptions will, in fact, prove to be correct or that actual future results will not be materially different from the expectations expressed in this Annual Report. The following discussion should be read in conjunction with the unaudited Consolidated Financial Statements and related Notes included in Item 1.
RESULTS OF OPERATIONS FOR THE THREE MONTH PERIOD ENDED JULY 31, 2012
Net revenues increased from $5,048,112 in the three-month period ending July 31, 2011 to $6,476,909 for the three-month period ending July 31, 2012. The increase in revenue is due to changes in the timing of various projects in Desert.
Cost of sales increased from $3,442,847 in the three-month period ending July 31, 2011 to $4,933,480 for the three-month period ending July 31, 2012. The increase is a result of the revenue increase described above.
Operating expenses decreased from $1,704,183 for the three months ending July 31, 2011 to $1,455,336 for the same period in 2012. This was mainly due to the decrease in the loss on transfer of assets.
Net loss increased from $92,594 for the three months ending July 31, 2011 to a net loss of $117,598 for the same period in 2012. This is due to higher cost of sales.
LIQUIDITY AND CAPITAL RESOURCES
Cash used in operations for the three month period ended July 31, 2011 was $57,101 as compared to cash provided by operations of $140,447 for the three months ended July 31, 2012. Cash used in investing activities for the three month period ended July 31, 2011 and July 31, 2012 was $0. Cash provided by financing activities for the period ended July 31, 2011 was $56,187, as compared to $14,257 used in financing activities for the three months ended July 31, 2012.
Our operating activities for the three months ended July 31, 2012, have generated adequate cash to meet our operating needs. As of July 31, 2011, we had cash and cash equivalents totaling $878,201, and receivables of $1,708,799.
As of the date of the filing the Company is attempting to restructure its debt with Boone and some other creditors. If successful there would be a significant decrease in the current portion of debt outstanding, interest rate reductions and extended maturity dates. If unsuccessful, we will continue to be in default on these loans and incur additional interest expense.
EBITDA for the 3 month period is $228,969. EBITDA is Earnings before interest, tax, depreciation and amortization:
Item 4. Controls and Procedures
(a) Evaluation of disclosure controls and procedures.
Management has evaluated, with the participation of our Chief Executive Officer and Chief Financial Officer, the effectiveness of our disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) as of the end of the period covered by this report and concluded that our disclosure controls and procedures were not effective to ensure that all material information required to be disclosed in this Quarterly Report on Form 10-Q has been made known to them in a timely fashion. We are in the process of improving our internal control over financial reporting in an effort to remediate these deficiencies through improved supervision and training of our accounting staff. These deficiencies have been disclosed to our Board of Directors. We believe that this effort is sufficient to fully remedy these deficiencies and we are continuing our efforts to improve and strengthen our control processes and procedures. Our Chief Executive Office, Chief Financial Officer and directors will continue to work with our auditors and other outside advisors to ensure that our controls and procedures are adequate and effective.
(b) Changes in internal controls
There have been no significant changes in our internal controls over financial reporting that occurred during the fiscal quarter covered by this report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Item 1. Legal Proceedings.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
Item 3. Defaults Upon Senior Securities
Item 4. Other Information
Item 5. Exhibits
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant has caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.