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EX-31.2 - Inova Technology Inc.ex31-2.htm
EX-31.1 - Inova Technology Inc.ex31-1.htm
EX-32.1 - Inova Technology Inc.ex32-1.htm
EX-32.2 - Inova Technology Inc.ex32-2.htm


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 

 
FORM 10-Q
 

 
(Mark One)

x
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
  
For the quarterly period ended  October 31, 2009
  
  
¨
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)

Nevada
98-0204280
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)

2300 W. Sahara Ave. Suite 800 Las Vegas, NV 89102
(Address of principal executive offices)

89146
(800) 757-9808
(Postal Code)
(Issuer's telephone number)

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 ¨ 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).

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):
 
Large accelerated filer ¨ Accelerated Filer ¨ Non-accelerated Filer ¨ Smaller reporting Company x
 
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 December 21, 2009: 2,483,210
 
In September 2009, Inova started trading on OTCBB stock exchange under the symbol INVA.OB and no longer trades as a pink sheets company.
 
 
Inova Technology Inc.
 
Form 10-K
 
 
 

 
 
 
Inova Technology, Inc. and Subsidiaries
Consolidated Balance Sheets (unaudited)
 
   
10/31/09
   
4/30/2009
 
ASSETS
           
             
Current assets
           
Cash
  $ 359,137     $ 1,087,894  
Accounts receivables, net
    -       262,734  
Contracts receivable, net
    1,860,217       1,818,482  
Inventory
    104,398       71,725  
Cost in excess of billings
    149,323       38,324  
Prepaid and other current assets
    60,657       64,781  
                 
Total current assets
    2,533,732       3,343,940  
                 
Fixed assets, net
    1,507,011       1,886,955  
Intangible assets, net
    858,327       1,218,140  
Goodwill
    8,164,342       8,164,342  
Other Assets
    40,504       42,212  
                 
Total assets
  $ 13,103,916     $ 14,655,589  
                 
LIABILITIES AND STOCKHOLDERS' EQUITY
               
                 
Current liabilities
               
Accounts payable
  $ 1,986,111     $ 2,022,593  
Accrued liabilities
    708,609       705,169  
Deferred income
    379,764       404,190  
Current maturities of long-term debt (net of unamortized
               
discount of $1,982,447 and $1,047,015)
    2,390,635       3,589,814  
Current maturities of long-term debt (related party)
    1,500,000       1,590,985  
                 
Total current liabilities
    6,965,119       8,312,751  
                 
Long term debt (related party)
    142,532       142,532  
Long term debt - net of current maturities (net of unamortized
               
discount of $400,218 and $183,514)
    1,960,736       2,267,782  
                 
Total liabilities
    9,068,387       10,723,065  
                 
Stockholders' equity
               
Convertible preferred stock, $0.001 par value; 25,000,000
    1,500       1,500  
shares authorized; 1,500,000 and 1,500,000
               
 issued and outstanding, respectively
               
Common stock, $0.001 par value; 7,500,000 and 600,000
    2,483       2,427  
shares authorized; 2,483,210 and 2,427,060 shares
               
outstanding, respectively
               
Additional paid-in capital
    10,363,597       7,966,774  
Non-controlling interest
    2,748,744       -  
Accumulated deficit
    (9,080,795 )     (4,038,177 )
                 
Total stockholders' equity
    4,035,529       3,932,524  
                 
Total liabilities and stockholders' equity
  $ 13,103,916     $ 14,655,589  
 
See notes to consolidated financial statements


Inova Technology, Inc. and Subsidiaries
Consolidated Statements of Operations
For the three months ended October 31, 2009 and 2008 (unaudited)
 
   
2009
   
2008
 
             
Revenues
  $ 4,129,896     $ 6,781,040  
                 
Cost of revenues
    (2,014,542 )     (4,956,556 )
Selling, general and administrative
    (1,695,060 )     (1,313,350 )
Depreciation & amortization expense
    (354,754 )     (301,988 )
                 
                 
Operating income
    65,540       209,146  
                 
Other income (expense):
               
Interest expense
    (870,355 )     (516,360 )
                 
                 
Net loss
  $ (804,815 )   $ (307,214 )
                 
                 
                 
Basic and diluted loss per share:
               
                 
    Loss per share
  $ (0.32 )   $ (0.13 )
    Weighted average common shares
    2,479,026       2,426,643  
 
See notes to consolidated financial statements
 

Inova Technology, Inc. and Subsidiaries
Consolidated Statements of Operations
For the six months ended October 31, 2009 and 2008 (unaudited)

     
2009
   
2008
 
               
Revenues
    $ 9,064,570     $ 12,673,355  
                   
Cost of revenues
    (5,137,300 )     (8,996,785 )
Selling, general and administrative     (3,175,800 )     (2,454,605 )
 Depreciation & amortization expense     (736,676 )     (448,080 )
                   
                   
 
Operating income
    14,794       773,885  
                   
Other income (expense):
               
  Loss on derivative     (2,344,340 )     -  
 
Interest expense
    (1,609,874 )     (779,283 )
                   
                   
                   
Net loss
    $ (3,939,420 )   $ (5,398 )
                   
                   
                   
Basic and diluted loss per share:
               
    Loss per share
  $ (1.60 )   $ (0.00 )
    Weighted average common shares
    2,457,874       2,426,643  
 
See notes to consolidated financial statements


Inova Technology, Inc. and Subsidiaries
Consolidated statements of cash flows (unaudited)
For the 6 months ended October 31, 2009 and 2008
 
   
2009
   
2008
 
CASH FLOWS OPERATING ACTIVITIES
           
  Net loss   $ (3,939,420 )   $ (5,398 )
Adjustments to reconcile net loss to net cash used provided by
               
operating activities:
               
Depreciation expense
    376,863       185,123  
Loss on sale of assets
    7,459       -  
Amortization expense - loan discounts, deferred financing costs
    989,285       453,363  
Amortization expense - intangible
    359,813       262,957  
Stock issued for services
    115,649       -  
Derivative loss
    2,344,340       -  
Management fees
    -       30,000  
Additional Interest expense
    -       126,340  
Changes in operating assets and liabilities:
               
  Increase (decrease) in accounts receivable
    220,999       (1,377,427 )
  Increase (decrease) in inventory
    (32,673 )     (115,062 )
  Increase (decrease) in cost in excess of billing
    (110,999 )     128,311  
  Increase (decrease) in prepaid assets
    1,455       (643 )
  Increase (decrease) in A/P and accrued expenses
    32,299       2,099,809  
  Increase (decrease) in deferred income
    (24,426 )     115,380  
Net cash provided by operating activities of operations
    340,644       1,902,753  
                 
CASH FLOW INVESTING ACTIVITIES
               
  Cash acquired from acquisition - Trakkers
    -       66,614  
  Purchase of Trakkers/Tesselon
    -       (2,717,900 )
Net cash used in investing activities
    -       (2,651,286 )
                 
CASH FLOW FINANCING ACTIVITIES
               
Proceeds from notes payable, net of original issue discounts
    1,259,216       3,412,023  
Repayments made on notes payable
    (2,237,632 )     (2,014,832 )
Proceeds from notes payable - related parties
    10,736       56,031  
Repayments made on notes payable - related parties
    (101,721 )     (92,532 )
Net cash provided by financing activities
    (1,069,401 )     1,360,690  
NET CHANGE IN CASH
    (728,757 )     612,157  
CASH AT BEGINNING OF YEAR
    1,087,894       12,167  
CASH AT END OF PERIOD
  $ 359,137     $ 624,324  
                 
SUPPLEMENTAL INFORMATION:
               
Interest paid
  $ 528,475     $ 174,546  
Income taxes paid
    -       -  
                 
NON-CASH INVESTINGAND FINANCING ACTIVITIES:
               
Common stock issued for partial payment of notes payable
  $ -     $ 1,087,247  
Seller financed purchase of Trakkers
    -       2,028,089  
Preferred stock issued to acquire Trakkers/Tesselon
    -       120,573  
Beneficial conversion feature discount on notes payable
    -       280,942  
Discount to notes payable on relative fair value of warrants
    1,077,054       166,183  
Cumulative effect of change in accounting principle - reclassification of derivaitive liability
               
      3,952,290       -  
Reclass to non-controlling interest
    2,748,744       -  
 
See notes to consolidated financial statements
 
 
INOVA TECHNOLOGY, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

NOTE 1 –BASIS OF PRESENTATION

The accompanying unaudited interim consolidated financial statements of Inova 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 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.

DERIVATIVE FINANCIAL INSTRUMENTS

Inova does not use derivative instruments to hedge exposures to cash flow, market, or foreign currency risks. Inova evaluates all of it financial instruments to determine if such instruments are derivatives or contain features that qualify as embedded derivatives. For derivative financial instruments that are accounted for as liabilities, the derivative instrument is initially recorded at its fair value and is then re-valued at each reporting date, with changes in the fair value reported as charges or credits to income. For option-based derivative financial instruments, Inova uses the Black-Scholes option-pricing model to value the derivative instruments at inception and subsequent valuation dates. The classification of derivative instruments, including whether such instruments should be recorded as liabilities or as equity, is re-assessed at the end of each reporting period. Derivative instrument liabilities are classified in the balance sheet as current or non-current based on whether or not net-cash settlement of the derivative instrument could be required within 12 months of the balance sheet date.

RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

In November 2008, the FASB issued EITF Issue 08-8, Accounting for an Instrument (or an Embedded Feature) with a Settlement Amount That Is Based on the Stock of an Entity’s Consolidated Subsidiary (“EITF No. 08-8”). This Issue was effective for fiscal years beginning on or after December 15, 2008, and interim periods within those fiscal years, with early adoption prohibited. EITF No. 08-8 supersedes EITF No. 00-6 and amends ASC 815-15 (EITF 00-19) such that provided that the subsidiary is a substantive entity, instruments indexed to the stock of a subsidiary could be considered indexed to the entity’s own stock within the consolidated financial statements. As a result of adopting EITF 08-8 during the quarter ended July 31, 2009, we have reclassified $2,748,744 from additional paid-in capital to non-controlling interest in our consolidated balance sheet as of October 31, 2009.  This amount reflects the fair value of warrants granted to third parties that can be exercised into stock of our consolidated subsidiaries, Desert Communications, Inc and Trakkers, LLC.

In May 2009, the FASB issued ASC 855 (SFAS No. 165), “Subsequent Events”, which provides guidance to establish general standards of accounting for and disclosures of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. ASC 855 (SFAS 165) also requires entities to disclose the date through which subsequent events were evaluated as well as the rationale for why that date was selected. This disclosure should alert all users of financial statements that an entity has not evaluated subsequent events after that date in the set of financial statements being presented. SFAS 165 is effective for interim and annual periods ending after June 15, 2009. Since ASC 855 (FAS 165) at most requires additional disclosures, the adoption did not have a material impact on Inova’s consolidated financial position, results of operations or cash flows.
 
NOTE 2 – RELATED PARTY TRANSACTIONS

Loans payable from related parties 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 is $142,532.

During the three months ended October 31, 2009 Inova had paid off the loan payable from Advisors, LLC with an amount of $142,532.

Seller notes with a balance of $1,500,000 were established in connection with the Desert Communications, Inc. purchase. They have interest rates of 7%, are secured and are due in December of 2009.
 
NOTE 3 –NOTES PAYABLE

Line of Credit with IBM Credit LLC:

Desert Communications, Inc. has a $2.5 million line of credit with IBM Credit LLC. This revolving line of credit has an interest rate of prime plus 2% and is secured by the assets of Desert. Payments are made based on a borrowing base calculation which determines availability.  During the 6 months ending October 31, Desert borrowed $726,217 and incurred $1,414,670 in cash payment against this line resulted a notes payable of $727,499.
 
 
Debentures - Boone:

In the first quarter of fiscal year 2010 we issued additional notes payable of $120,750 and $168,000 due in December 2009.  These notes had original issue discounts of $23,750  In the second quarter of fiscal year 2010 we issued notes payable of $137,788 and $181,570 due in June 2010 and on demand.  These notes had original issue discounts of $51,358. They are secured by all assets including the shares Inova holds of each of Inova’s subsidiaries.

These loans have the following financial requirements:

1) Maintain cash plus availability under IBM $2.5 million line of credit of $250,000 or greater;

2) EBITDA of $1.8 million for 12 month period ending December 31, 2009

3) No concentration above $2.5 million to any supplier through the IBM facility;

4) No concentration above 20% to any single customer;

5) No single accounts payable more than the greater of $300,000 or 20% of the accounts receivable balance under 60 days. The portion beyond 90 days past due must be less than 10% of the total accounts receivable.

As of October 31, 2009, Inova was not in compliance with the customer, accounts receivable and accounts payable concentration covenants,  however Inova received a waiver from Boone as of October 31, 2009.

The following is a summary of all notes payable with unamortized discounts as of October 31, 2009:

   
Principal
   
Unamortized
   
Carrying
 
   
Amount
   
Discount
   
Amount
 
Boone
  $ 2,747,057       1,961,008     $ 786,049  
                         
Ascendiant
    500,000       396,800       103,200  
                         
IBM – Trakkers Lease Facility
    420,647       24,857       395,790  
                         
Other debt
    4,708,864       -       4,708,864  
                         
Total
  $ 8,376,568     $ 2,382,665     $ 5,993,903  
 
In conjunction with the notes payable issued during the first quarter of fiscal 2010, 129,171 Inova warrants, 6 Desert warrants and warrants equal to 13.5% of Trakkers were issued to Boone. The warrants expire in 2014. They have an aggregated exercise price of $200. The fair value of these warrants was calculated using the Black-Scholes Model using these assumptions (1) 2.5% to 4.5% discount rate, (2) warrant life of 5 years, (3) expected volatility of 165% to 347%, and (4) zero expected dividends. The warrants were determined to be derivative liabilities under ASC 815-15 (EITF 07-05) and ASC 815-20 (FAS 133).  The fair value of these warrants at the inception of the notes was $1,065,786.  Accordingly, this resulted in a full discount to the notes of $288,750 and a loss on derivative liabilities of $800,786.  The loss is included in loss on derivatives in the consolidated statement of operations.  For more information on the derivative liabilities see Note 4.

In conjunction with the $137,788 note payable issued during the second quarter of fiscal 2010, 45,238 Inova warrants and 5 Desert warrants were issued to Boone. They have an aggregated exercise price of $200. The fair value of these warrants was calculated using the Black-Scholes Model using these assumptions (1) 2.5% discount rate, (2) warrant life of 5 years, (3) expected volatility of 347%, and (4) zero expected dividends. These warrants were not determined to be derivative liabilities under ASC 815-15. The relative fair value of the warrants at the inception of the notes was determined to be $60,358 and was recorded as a discount to the note to be amortized through maturity of the note using the effective interest method.

Inova signed a put option agreement with Boone whereby anytime between 2010 and 2013, Boone can require Inova to repurchase from Boone up to 129,171 shares of Common Stock for $187,500. In addition, during the quarter ended October 31, 2009, put options that previously could not be exercised until 2010 for $1,000,000  of possible warrant exercises were accelerated to October 30, 2009.  The put options are not in effect until Boone exercises their warrants. As of October 31, 2009, the warrants had not been exercised.  
 
Registration rights:
 
In connection with the debentures, warrants, and put option agreement, Inova entered into a registration agreement that Inova file a registration statement with the Securities and Exchange Commission (“SEC”) covering the resale of the underlying shares. The amount of shares to be registered is equal to the lesser of all shares issued under the agreements or one-third of the number of issued and outstanding shares of common stock held by non-affiliates. If Inova fails to file this registration statement within 90 calendar days, then Inova must pay two percent (2%) of the purchase price paid for the unregistered securities.
 
Inova analyzed the registration right arrangement under the guidance of ASC 815-15 and determined that the contingent obligation to make future payments under the registration payment arrangement is not probable and can not be reasonably estimated at inception because currently Boone has not yet exercised the outstanding warrants. Consequently, no liability was recorded as of October 31, 2009 and Inova has received a waiver from Boone that granted an extension from today until year-end to be filed with the SEC.

All discounts will be amortized over the life of the notes using the effective interest method.

 
Other significant debt transactions during the 6 months ended October 31, 2009:

During the six months ended October 31, 2009, Inova made the following cash repayments on its outstanding notes payable:
 
Notes payable to Boone/Ascendiant/Agile
 
$
640,522
 
Notes payable to IBM
   
1,476,790
 
Notes payable to Other
   
161,406
 
Notes payable to Desert/Trakkers/Right Tag previous owners
   
60,635
 
  
       
Total cash paid
 
$
2,339,353
 
 
During the six months ended October 31, 2009, Inova received the following debt proceeds:

Notes payable to Boone
  $ 532,999  
Notes payable to IBM
    726,217  
         
Total cash received
  $ 1,259,216  
 
During the six months ended October 31, 2009, Inova recognized $961,616 of interest expense on the loan discounts originated from its financing arrangements with Boone, Ascendiant and Agile.

Ascendiant Note

Modification:

In July 2009, Inova modified the terms of its $500,000 note with Ascendiant to extend the due date from December 2009 to December 2010.  Also the interest rate on the note is now the higher of (i) Prime Rate plus 3% or (ii) 18%.

Inova evaluated the extension event under ASC 470-60 and ASC 470-50. Because the investors did not grant concessions on this outstanding loan, the transaction was not accounted for as troubled debt restructuring. Consequently, Inova evaluated these transactions under ASC 470-50 “Debtor’s Accounting for a Modification or Exchange of Debt Instruments” to determine if the modification was substantial. As a result, no gain or loss was recorded on the date of the extension since the modification in terms is not considered significant.
 
The Ascendiant note has the same covenants in place as the Boone notes described above.  As of October 31, 2009, Inova was not in compliance with some covenants.  Because of this, the note is in default as of October 31, 2009.  The default interest rate is 18% and therefore no different than the modified rate above.  In addition, while in default the note is due on demand and therefore classified as short term debt in our consolidated balance sheet.

In October 2009, Inova modified the terms of its $1,528,089 note with Trakkers to extend the first principal payment date from September 2009 to December 2010. 

Inova evaluated the extension event under ASC 470-60. Because the investors did not granted a concessions on this outstanding loan, the transaction was not accounted for as troubled debt restructuring. Consequently, Inova evaluated these transactions under ASC 470-50 “Debtor’s Accounting for a Modification or Exchange of Debt Instruments” to determine if the modification was substantial. As a result, the debt modification was not substantial and therefore the new debt terms will be accounted for prospectively..
 
NOTE 4 - DERIVATIVE LIABILITIES

In June 2008, the FASB finalized ASC 815-15, "Determining Whether an Instrument (or Embedded Feature) is indexed to an Entity's Own Stock". The EITF lays out a procedure to determine if an equity-linked financial instrument (or embedded feature) is indexed to its own common stock. The EITF is effective for fiscal years beginning after December 15, 2008. 1,904,634 warrants to purchase Inova’s common stock, 92 warrants to purchase Desert Communications, Inc. common stock,  warrants to purchase 19.44% of Trakkers, LLC, and two conversion options embedded in notes payable agreements that were previously classified in equity were reclassified to derivative liabilities on May 1, 2009 as a result of this EITF. Inova estimated the fair value of these liabilities as of May 1, 2009 to be $4,886,427 by recording a reduction of $2,526,150 to Additional Paid In Capital, $1,103,198 to Accumulated Deficit and an increase of $1,257,078 to discounts on notes payable to which these instruments were related. The effect of this adjustment was recorded as a cumulative effect of change in accounting principle in our consolidated statement of stockholders’ equity. In addition, warrants granted in association with notes payable issued during the first quarter described in Note 3 above also were recorded as derivative liabilities at inception.  The fair value of the derivative liabilities at inception was $1,065,786.

The fair value of these liabilities was estimated to be $7,495,766 at July 31, 2009. The $1,543,545 change in fair value is reported in our consolidated statement of operations as a loss on derivatives.

Variables used in the Black-Scholes option-pricing model to value these derivative liabilities include (1) 1.89% to 3.41% risk-free interest rate, (2) warrant life is the contractual life of these warrants, (3) expected volatility 212% to 550%, and (4) zero expected dividends.

Inova amended the above warrant and convertible note agreements as of June 30, 2009 and July 31, 2009 to remove the provisions that triggered derivative accounting under ASC 815-15. Specifically, the sections in the agreements related to issuing anti-dilutive warrants based on a measure other than one linked to the company’s stock price were removed. As a result of these amendments, the $7,495,766 derivative liability created during the quarter while the provisions were still effective was moved to additional paid in capital when the documents were modified.

 
NOTE 5 –SEGMENT INFORMATION

Inova has three reportable segments, one providing IT solutions and services, one providing network solutions and one which manufactures standards compliant and durable RFID (Radio Frequency Identification) equipment.  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.

6 month Segment info:
 
   
Corp
   
Edgetech
   
Scanners/RFID
   
Desert
   
Total
 
Net sales
    -       180,983       1,023,890       7,859,697       9,064,570  
Net loss/(income)
    4,262,994       (58,638 )     681,881       (946,817 )     3,939,420  
Assets (gross)
    5,063,626       102,435       5,543,079       2,394,776       13,103,916  
 
NOTE 6 - WARRANTS

Summary information regarding warrants is as follows:
 
During the six months ended October 31, 2009, Inova granted 129,171 warrants, 6 Desert warrants and warrants equal to 13.5% of Trakkers in several issuances related to monies borrowed under term loans. These warrants vest immediately. In addition to warrants granted with notes payable described in Note 3, Inova issued 106,160 warrants under anti-dilution provisions within the warrant agreements.  They have an aggregated exercise price of $200. The fair value of these warrants was calculated using the Black-Scholes Model using these assumptions (1) 2.5% to 4.5% discount rate, (2) warrant life of 5 years, (3) expected volatility of 165% to 347%, and (4) zero expected dividends. The warrants were determined to be derivative liabilities under ASC 815-15.  The fair value of these warrants at the inception of the notes was $1,065,786.

On August 28, 2009, Inova granted 45,238 warrants and 5 Desert with notes payable described in Note 3. They have an aggregated exercise price of $200. The fair value of these warrants was calculated using the Black-Scholes Model using these assumptions (1) 2.5% discount rate, (2) warrant life of 5 years, (3) expected volatility of 347%, and (4) zero expected dividends. The relative fair value of the warrants at the inception of the notes was $60,358.

The warrants above are subject to a put option agreement whereby anytime between June 10, 2010 and June 10, 2012, the lender can require Inova to repurchase the above warrant shares for $187,500. If Inova fails to make the required payment within 30 days, the repurchase price will become a convertible note that is convertible into the same number of warrant shares.  In addition, during the quarter ended October 31, 2009, put options that previously could not be exercised until 2010 for $1,000,000  of possible warrant exercises were accelerated to October 30, 2009.  The put options are not in effect until Boone exercises their warrants. As of October 31, 2009, the warrants had not been exercised.

Warrants to purchase Inova common stock:
     
Outstanding at April 30, 2009
   
2,033,541
 
Granted
   
280,569
 
Exercised
   
-
 
Expired
   
-
 
Outstanding at October 31, 2009
   
2,314,110
 
         
Warrants to purchase Desert Communications, Inc. common stock: 743 total shares outstanding
       
Outstanding at April 30, 2009
   
92
 
Granted
   
11
 
Exercised
   
-
 
Expired
   
-
 
Outstanding at October 31, 2009
   
103
 
         
Warrants to purchase Trakkers, LLC common stock:
       
Outstanding at April 30, 2009
   
19.44%
 
Granted
   
13.50%
 
Exercised
   
-
 
Expired
   
-
 
Outstanding at October 31, 2009
   
32.94%
 
 
 
NOTE 7 – COMMON STOCK

32,500 shares of common stock valued at $65,000 were issued to a third party as payment of commission on a note payable.

2,500 shares of common stock valued at $5,000 were issued to a third party as payment for investor relations services.

21,150 shares of common stock valued at $45,649 were issued to former owners of Inova subsidiaries as payment for earn-outs.

NOTE 8 – SUBSEQUENT EVENTS

The Desert sellers have agreed to defer their $1.5 million note due in December. This is part of a debt restructure done with Boone so the sellers will be paid 7% interest until June, 2010. The interest paid from June, 2010 until the newer Boone notes are paid off will be 10%. The principal will be paid from free cash flow and is expected to be paid off in September, 2014.
 
Inova evaluated subsequent events through December 21, 2009.

 
 
The information contained in this Manageent’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 OCTOBER 31, 2009

Net revenues decreased from $6,781,040 in the three-month period ending October 31, 2008 to $4,129,895 for the three-month period ending October 31, 2009. The decrease in revenue is due to changes in the timing of various projects, in addition to the worldwide economic slowdown.

Cost of sales decreased from $4,956,556 in the three-month period ending October 31, 2008 to $2,014,542 for the three-month period ending October 31, 2009. The decrease came from the revenue decrease described above. Costs as a percent of revenue declined from 73% to 48% due to more profitable jobs in some subsidiaries.

Operating expenses increased from $1,615,338 for the three months ending October 31, 2008 to $2,049,813 for the same period in 2009. This was mainly due to the expansion of the Company with the acquisition of Trakkers in September 2008.

Net loss increased from ($307,214) for the three months ending October 31, 2008 to ($804,815) for the same period in 2009. This is due to an increase in interest and depreciation expense.

RESULTS OF OPERATIONS FOR THE SIX MONTH PERIOD ENDED OCTOBER 31, 2009

Net revenues decreased from $12,673,355 in the six-month period ending October 31, 2008 to $9,064,569 for the six-month period ending October 31, 2009. The decrease in revenue is due to changes in the timing of various projects and the worldwide economic slowdown.

Cost of sales decreased from $8,996,785 in the six-month period ending October 31, 2008 to $5,137,300 for the six-month period ending October 31, 2009. The decrease came from the revenue decrease described above.

Operating expenses increased from $2,902,685 for the six months ending October 31, 2008 to $3,912,475 for the same period in 2009. This was mainly due to the expansion of the Company with the acquisition of Trakkers in September, 2008.

Net loss increased from ($5,398) for the six months ending October 31, 2008 to ($3,939,420) for the same period in 2009. This is due to a one-time loss on derivatives of $2,344,340, an increase in interest expense and the depreciation and other costs from newly acquired Trakkers. The loss on derivatives was added back to additional paid in capital so had no net impact on total equity.
 
LIQUIDITY AND CAPITAL RESOURCES

Cash provided by operations for the six month period ended October 31, 2009 was $340,643 as compared to cash provided by operations of $1,902,753 for the six months ended October 31, 2008. This change is primarily due to lower revenues combined with fixed expenses associated with the Trakkers acquisition in September, 2008. Cash used in investing activities for the six month period ended October 31, 2009 was $0, as compared to $2,651,286 for the six months ended October 31, 2008. Cash used by financing activities for the period ended October 31, 2009 was $1,069,400, as compared to $1,360,690 for the six months ended October 31, 2008.

Our operating activities for the six months ended October 31, 2009, have generated adequate cash to meet our operating needs. As of October 31, 2009, we had cash and cash equivalents totaling $359,137, and accounts receivable of $1,860,217.
 
Boone has agreed to restructure its debt for Desert to defer principal payments until June, 2010. From June 2010 thru September 2011 the newer notes of  approximately $726,000 (including $550,000 to fund December, 2009) will be paid. Then from September 2011 thru February 2014 the balance of the original notes will be paid.
 
The new interest rate on the note is 17.5% and $1,000,000 of warrants are anticipated to be exercised in July 2010 with related put liabilities starting to be paid in September 2011. The restructure fee associated with these restructures is $20,000.
 
Boone has agreed to restructure its debt for Trakkers. In calendar 2010 $135,977 will be paid, and the remainder of the notes will be amortized out of free cash flow until 2013. The interest rate of the note will be 17.5%.
 
 
EBITDA

EBITDA for the 3 month period is $427,921. EBITDA is Earnings before interest, tax, depreciation and amortization:
 
EBITDA
 
31-Oct-09
 
       
Net income
    (804,815 )
         
Interest
    870,355  
         
Tax
    7,626  
         
Depreciation/Amortization
    354,755  
         
EBITDA
    427,921  
 
Management believes that existing cash, cash equivalents, together with any cash generated from operations will be sufficient to meet normal operating requirements including capital expenditures for the next twelve months. 
 

(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.
 
 
PART II


None


None


Not Applicable.

Item 4. Other Information

None
 
Item 5. Exhibits
 
(A) 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.

     
Dated: December 21, 2009
By:
/s/ Adam Radly                 
  
  
Adam Radly
  
  
Chief Executive Officer
  
  
  
Dated: December 21, 2009
By:
/s/ Bob Bates                     
  
  
Bob Bates
  
  
Chief Financial Officer