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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, 2011

 

[  ] 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 (I.R.S. Employer Identification No.)
organization)  

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

89102 (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).

[   ] Yes   [ X ] No

State the number of shares of outstanding of each of the issuer’s classes of common equity, as of November 30, 2011: 64,267,378

Inova Technology Inc.

Form 10-Q

Table of Contents

  PART I Page
Item 1. Financial Statements 3
Item 2. Management Discussion and Analysis of Financial Condition and Result of Operations 14
Item 4. Submission of Matters to a Vote of Security Holders 15
  PART II  
Item 1. Legal Proceedings 16
Item 2 Unregistered Sales of Equity Securities and Use of Proceeds 16
Item 3. Defaults Upon Senior Securities 16
Item 4. Other Information 16
Item 5. Exhibits 16
     
Signatures 17

 

 

 
 

 

INOVA TECHNOLOGY, INC.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
               
          October 31, 2011   April 30, 2011
               
ASSETS    
               
Current assets          
  Cash      $           655,681    $          396,140
  Accounts receivables                   139,730                184,789
  Contract receivables, net of allowance of $21,746 and $21,822, respectively                   302,538                782,286
  Credit facility receivable                1,531,304             1,230,596
  Inventory                   106,939                100,471
  Costs in excess of billing and estimated earnings                   219,412                229,039
  Prepaid and other current assets                       9,217                  31,165
               
    Total current assets                2,964,821             2,954,486
               
  Fixed assets, net                   147,557                149,104
  Revenue earning equipment, net                   630,335                892,690
  Goodwill, net                4,157,596             4,157,596
  Other assets                            -                      6,121
               
Total assets      $        7,900,309    $       8,159,997
               
LIABILITIES AND STOCKHOLDERS' DEFICIT
               
Current liabilities          
  Accounts payable      $           590,018    $          950,149
  Accrued liabilities                3,908,236             2,861,923
  Deferred income                   540,927                442,669
  Derivative liabilities                1,194,887             2,515,687
  Notes payable - related parties                1,200,000             1,200,000
  Notes payable              10,276,992           10,262,206
    Total current liabilities              17,711,060           18,232,634
               
  Notes payable - related parties, net of current maturities                   142,532                142,532
               
Total liabilities              17,853,592           18,375,166
               
Stockholders' deficit          
  Convertible preferred stock, $0.001 par value; 25,000,000 shares          
    authorized; 1,500,000 shares issued and outstanding (The cost of the           
     shares are included in non-controlling interest)                              -                            -
  Common stock, $0.001 par value; 150,000,000 shares          
    authorized; 64,257,998 and 62,263,909 shares issued and outstanding                     64,258                  61,264
  Additional paid-in capital                5,025,783             4,937,526
  Accumulated deficit            (16,350,830)         (16,521,465)
  Total Inova Technology, Inc. stockholders' deficit            (11,260,789)         (11,522,675)
  Non-controlling interest                1,307,506             1,307,506
    Total stockholders' deficit              (9,953,283)         (10,215,169)
               
Total liabilities and stockholders' deficit      $        7,900,309    $       8,159,997
               
See summary of accounting policies and notes to unaudited consolidated financial statements

 
 

INOVA TECHNOLOGY, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
For the three months ended October 31, 2011 and 2010
(Unaudited)
         
    2011   2010
         
Revenues  $        5,658,150    $        4,805,677
         
Cost of revenues          (4,301,072)            (2,700,907)
Selling, general and administrative          (1,083,783)            (2,102,165)
Depreciation and amortization expense               (26,211)                 (21,938)
         
  Operating income (loss)               247,084                 (19,333)
         
Other income (expense):      
  Gain (Loss) on derivative liabilities               824,336                   51,562
  Other income                   6,210                            -
  Interest expense             (814,401)               (412,197)
         
Net income (loss)  $           263,229    $         (379,968)
         
Net income (loss) per share      
  Basic  $                 0.00    $               (0.01)
  Diluted  $               (0.00)    $               (0.01)
Weighted average common shares outstanding      
  Basic          62,942,954            57,820,711
  Diluted        314,902,950            57,820,711
         
See summary of accounting policies and notes to unaudited consolidated financial statements

 
 

INOVA TECHNOLOGY, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
For the six months ended October 31, 2011 and 2010
(Unaudited)
         
    2011   2010
         
Revenues  $      10,706,262    $      12,673,905
         
Cost of revenues          (7,853,337)            (8,428,756)
Selling, general and administrative          (2,659,693)            (3,468,697)
Depreciation and amortization expense               (45,066)               (256,096)
         
  Operating income (loss)               148,166                 520,356
         
Other income (expense):      
  Gain (Loss) on derivative liabilities            1,515,219              2,386,956
  Other income                 10,997                            -
  Gain (Loss) on debt extinguishment                 87,582                            -
  Interest expense          (1,591,329)            (1,109,900)
         
Net income (loss)  $           170,635    $        1,797,412
         
Net income (loss) per share      
  Basic  $                 0.00    $                 0.03
  Diluted  $               (0.01)    $                 0.02
Weighted average common shares outstanding      
  Basic          62,288,279            57,075,455
  Diluted          87,355,292            77,240,940
         
See summary of accounting policies and notes to unaudited consolidated financial statements

 

 
 

INOVA TECHNOLOGY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the six months ended October 31, 2011 and 2010
(Unaudited)
             
        2011   2010
CASH FLOWS FROM OPERATING ACTIVITIES      
  Net income  $           170,635    $        1,797,412
  Adjustments to reconcile net income to net cash used provided by       
  operating activities:      
    Depreciation expense                263,902                 220,525
    Amortization expense - loan discounts               282,000                   92,643
    Amortization expense - intangible                          -                 254,342
    Gain on debt extinguishment               (87,582)                            -
    Paid in kind interest                 33,197                 129,608
    Stock issued for services                 48,000                   60,770
    Warrants issued for services                          -                   56,500
    Derivative (gain) loss          (1,515,219)            (2,386,957)
  Changes in operating assets and liabilities:      
      Accounts receivable               524,807              1,287,883
      Credit facility receivable             (300,708)               (264,130)
      Inventory                 (6,468)                   (6,680)
      Costs in excess of billing and estimated earnings                   9,627                 163,320
      Prepaid expenses and other current assets                 21,948                   28,782
      Other assets                   6,121                   36,236
      Accounts payable and accrued expenses               686,184            (1,074,586)
      Deferred revenues                 98,258                 (13,715)
Net cash provided by operating activities of operations                234,702                 381,953
             
CASH FLOW INVESTING ACTIVITIES      
        Purchase of fixed assets                          -                 (30,210)
Net cash used in investing activities                           -                 (30,210)
             
CASH FLOW FINANCING ACTIVITIES      
      Proceeds from notes payable                 82,500                            -
      Proceeds from sale of common stock                 10,000                            -
      Repayments made on notes payable               (67,661)                 (89,289)
Net cash used in financing activities                  24,839                 (89,289)
             
NET CHANGE IN CASH                259,541                 262,454
CASH AT BEGINNING OF YEAR               396,140                 336,746
CASH AT END OF YEAR  $           655,681    $           599,200
             
SUPPLEMENTAL INFORMATION:      
  Interest paid  $           129,197    $           303,498
  Income taxes paid  $             30,000    $             30,000
             
NON-CASH INVESTING AND FINANCING ACTIVITIES:      
  Common stock issued for conversion of debt                 33,251                            -
  Reclassification of derivative liabilities to notes payable                          -              1,515,900
  Reclassification of warrants issued to derivative liability                          -                   52,000
  Discount on notes payable from derivative liabilities               282,000                            -
             
See summary of accounting policies and notes to unaudited 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 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 October 31, 2011, Inova measured its derivative liabilities using Level 3 inputs as defined by ASC 820 with a total fair value of $1,194,887.

Reclassifications

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 October 31, 2011. 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 October 31, 2011.

Desert Sellers

Seller notes with a balance of $1,200,000 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.

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 October 31, 2011, 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 11,367,655 warrants to purchase Inova common stock that are classified as liabilities as a result of the provisions of the convertible put notes. As of October 31, 2011, Inova had $993,637 of derivative liabilities as a result of these provisions.

The following table summarizes the derivative liabilities included in the consolidated balance sheet:

Derivative Liabilities      
Balance at April 30, 2011 $  2,515,687  
Extinguishment of derivative liabilities (see Note 8)   (253,730)  
Addition of derivative liabilities (see Note 8)   553,605  
Excess of fair value of derivative liabilities over related debt   (105,456)  
Change in fair value   (1,515,219 )
Balance at October 31, 2011 $  1,194,887  

Valuation Models

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 six month segment information:

    Trakkers,         Desert              
    LLC &         Communications,              
    RightTag,         Inc.     Corporate     Total  
    Inc.                        
Revenues $ 806,343         9,899,919     -     10,706,262  
Net income (loss)   (182,323)         304,497     48,461     170,635  
Total assets   1,921,693         2,620,201     3,358,415     7,900,309  

9

NOTE 6 – WARRANTS

 

The following tables summarize common stock warrants outstanding by entity:

Warrants to purchase Inova common stock Warrants Weighted average exercise price Aggregate intrinsic value Weighted average remaining contractual life (years)  
 
 
 
 
Outstanding at April 30, 2011 11,367,655  $            0.03           676,196 2.56  
Granted                         -                              -        
Exercised                         -                              -        
Forfeited                         -                              -        
Expired                         -                              -        
Outstanding at October 31, 2011 11,367,655  $           0.03  $     152,344 2.06  
           
Warrants to purchase Trakkers common stock Warrants Weighted average exercise price Aggregate intrinsic value Weighted average remaining contractual life (years)  
 
 
 
 
Outstanding at April 30, 2011        13.50 $                -     $          10,606 3.18  
Granted                       -                                -        
Exercised                       -                                -        
Forfeited                       -                                -        
Expired                       -                                -        
Outstanding at October 31, 2011                  13.50  $                 -  $          10,606 2.67  
           

 

All warrants above were exercisable as of October 31, 2011.

10

NOTE 7 – COMMON STOCK

During the three months ended July 31, 2011, Inova issued 666,667 shares of common stock for the conversion of $25,251 of Agile debt and sold 333,333 shares of common stock for $10,000.

During the three months ended October 31, 2011, Inova issued 394,089 shares of common stock for the conversion of $8,000 of debt and 1,600,000 shares of common stock for $48,000 of services rendered.

NOTE 8 – DEBT

The following table summarizes outstanding debt as of October 31, 2011 and April 30, 2011:

              April 30, 2011             October 31, 2011     
            Carrying             Carrying    
Lender           Amount             Amount  
Boone Lenders, LLC         $  6,809,972   $       $ 6,843,169  
Ascendiant Opportunity Fund, LLC           1,153,930             1,153,930  
Agile Opportunity Fund, LLC           198,750             173,500  
IBM - Trakkers, LLC                            
Lease Facility           212,362             146,755  
Desert Communications, Inc. Sellers           1,200,000             1,200,000  
Trakkers, LLC Sellers           1,769,686             1,769,686  
Southbase, LLC - Related Party           142,532             142,532  
Asher Enterprises, Inc.           103,500             178,000  
Other debt           14,006             11,952  
Total         $ 11,604,738           $ 11,619,524  
                                                   

Of the total outstanding debt, $11,287,040 was in default as of October 31, 2011. 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 October 31, 2011, a total of $15,109 of interest was recognized and recorded to the principal balance of loans from Boone.

On June 20, 2011, the Agile Opportunity Fund, LLC (“Agile”) note from 2008 was amended to allow the principal to be converted to stock at the rate of $0.03 per share (previously convertible at $0.0405 per share). Inova evaluated the amendment under ASC 470-60 “Troubled Debt Restructurings”. Because the investors did not grant a concession 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. Because the change in fair value of the conversion option was greater than 10% of the carrying value of the note, the debt modification was determined to be substantial and accordingly the debt was extinguished.. As a result, the Company extinguished the related derivative liability associated with the conversion option with a fair value of $253,730 on the amendment date and recorded a new derivative liability with a fair value of $344,648 on the same date. (See Note 4) The Company recognized a full discount of $178,500 on the date of the amendment against the related note. Because the note was already in default, the Company immediately amortized this discount to interest expense. In addition, the Company recognized a gain on debt extinguishment of $87,582 as a result of this transaction.

During the three months ended July 31, 2011, Inova issued 666,667 shares of common stock for the conversion of $25,251 of Agile debt.

In May and July of 2011, Inova borrowed $82,500 from Asher Enterprises, Inc. (“Asher”) in an 8% convertible note. The note is convertible 180 days from the issuance date into Inova common stock at a price equal to 61% of the average of the stock’s lowest three prices during the ten trading days prior to conversion. When the conversion option becomes effective, it will be classified as a liability due to there being no explicit limit to the number of shares to be issued under ASC 815-15. The notes are due in November and January, 2012 and are unsecured.

In September 2011, $103,500 of debt issued during fiscal 2011 to Asher matured. As a result of the maturity, the debt became convertible under the same terms as the May and July notes. Due to there being no explicit limit to the number of shares to be issued upon conversion, the conversion option was classified as a liability on the date of maturity. The fair value of the conversion option on the maturity date was $208,956, resulting in a full discount to the note of $103,500 and a day one loss on derivatives of $105,456. Because the note already matured, the entire discount was amortized to interest expense during the three months ended October 31, 2011.

During the three months ended October 31, 2011, Inova issued 394,089 shares of common stock for the conversion of $8,000 of Asher debt.

NOTE 9 – NET INCOME PER SHARE

A reconciliation of the components of basic and diluted net income per common share is presented in the tables below:

  For the three months ended For the six months ended
  October 31, 2011 October 31, 2011
  Income Weighted Average Shares Outstanding Per Share Income Weighted Average Shares Outstanding Per Share
Basic:            
Income attributable to common stock  $     263,229      62,942,954  $      0.00  $  170,635      62,288,279  $        0.00
Effect of Dilutive Securities:            
Stock options                     -        9,116,045              -                    -        9,116,395                -  
Convertible debt        (297,294)    242,843,951        (0.00)     (706,745)      15,950,617           (0.04)
Diluted:            
Income attributable to common stock, including assumed conversions  $     (34,065)    314,902,950  $   (0.00)  $(536,110)      87,355,292  $      (0.01)

 

 

NOTE 10 – SUBSEQUENT EVENTS

In November 2011, Inova converted $125,000 of related party debt into 6,944,444 shares of common stock and issued 1,333,333 shares for services.

 

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 OCTOBER 31, 2011

Net revenues increased from $4,805,677 in the three-month period ending October 31, 2010 to $5,658,150 for the three-month period ending October 31, 2011. The increase in revenue is due to changes in the timing of various projects in Desert.

Cost of sales increased from $2,700,079 in the three-month period ending October 31, 2010 to $4,301,072 for the three-month period ending October 31, 2011. The increase is a result of the revenue increase described above.

Operating expenses decreased from $2,102,165 for the three months ending October 31, 2010 to $1,083,783 for the same period in 2011. This was mainly due to the decrease in payroll expense.

Net income decreased from ($379,968) for the three months ending October 31, 2010 to net income of $263,229 for the same period in 2011. This is due to a non-cash derivative gain of $824,336 for the three months ended October 31, 2011.

 

RESULTS OF OPERATIONS FOR THE SIX MONTH PERIOD ENDED OCTOBER 31, 2011

Net revenues decreased from $12,673,905 in the six-month period ending October 31, 2010 to $10,706,262 for the six-month period ending October 31, 2011. The decrease in revenue is due to changes in the timing of various projects in Desert.

Cost of sales decreased from $8,428,756 in the six-month period ending October 31, 2010 to $7,853,337 for the six-month period ending October 31, 2011. The decrease is a result of the revenue decrease described above.

Operating expenses decreased from $3,468,697 for the six months ending October 31, 2010 to $2,659,693 for the same period in 2011. This was mainly due to the decrease in payroll expense.

Net income decreased from $1,797,412 for the six months ending October 31, 2010 to net income of $170,635 for the same period in 2011. This is due to a non-cash derivative gain of $1,515,219 for the six months ended October 31, 2011.

 

LIQUIDITY AND CAPITAL RESOURCES

Cash provided by operations for the six month period ended October 31, 2011 was $15,866 as compared to cash provided by operations of $381,953 for the six months ended October 31, 2010. Cash used in investing activities for the six month period ended October 31, 2011 was $0, as compared to $30,210 for the six months ended October 31, 2010. Cash provided by financing activities for the six months ended October 31, 2011 was $24,839, as compared to $89,289 used in financing activities for the six months ended October 31, 2010.

Our operating activities for the three months ended October 31, 2011, have generated adequate cash to meet our operating needs. As of October 31, 2011, we had cash and cash equivalents totaling $655,681, and receivables of $1,973,572.

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

EBITDA for the six months ended October 31, 2011 is $481,117. EBITDA is Earnings before interest, tax, depreciation and amortization:

EBITDA   31-October-11  
Net income   170,635  
Interest   1,591,329  
Extinguishment gain   (87,582)  
Derivative gain   (1,515,219)  
Loss on transfer of assets   178,088  
Tax   37,161  
Depreciation/Amortization   263,902  
EBITDA   638,314  

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.

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PART II

Item 1. Legal Proceedings.

None

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

None

Item 3. Defaults Upon Senior Securities

Not Applicable.

Item 4. Other Information

None

Item 5. Exhibits

(A) Exhibits

Exhibit Number   Description
     
31.1   Certification of the Chief Executive Officer required by Rule 13a - 14(a) or Rule 15d - 14(a)
     
31.2   Certification of the Chief Financial Officer required by Rule 13a - 14(a) or Rule 15d - 14(a)
     
32.1   Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes- Oxley Act of 2002
     
32.2   Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes- Oxley Act of 2002

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SIGNATURES

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 16, 2011 By: /s/ Adam Radly                                
    Adam Radly
    Chief Executive Officer
     
Dated: December 16, 2011 By: /s/ Bob Bates                                    
    Bob Bates
    Chief Financial Officer

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