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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 January 31, 2012

 

 

 

[ ] 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 February 29, 2012: 73,915,085

1
 

 

Inova Technology Inc.

 

Form 10-Q

 

Table of Contents

 

PART I                 Page
Item 1 Financial Statements             3, 4, 5, 6
Item 2 Management Discussion and Analysis of Financial Condition and Result of Operations 13
Item 4.  Submission of Matters to a Vote of Security Holders       14
PART II                  
Item 1.  Legal Proceedings             15
Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds     15
Item 3.  Defaults Upon Senior Securities           15
Item 4.  Other Information             15
Item 5 Exhibits               15
                   
SIGNATURES               16

 

 

 

 

 

2
 

 

 

INOVA TECHNOLOGY, INC.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
               
          January 31, 2012   April 30, 2011
               
ASSETS          
               
Current assets          
  Cash      $        515,287    $       396,140
  Accounts receivable                155,275             184,789
  Contract receivables, net of allowance of $21,746 and $21,822                 517,648             782,286
  Credit facility receivable             1,227,319          1,230,596
  Inventory                  90,641             100,471
  Costs in excess of billing and estimated earnings                  19,655             229,039
  Prepaid and other current assets                  13,291                31,165
               
    Total current assets             2,539,116          2,954,486
               
  Fixed assets, net                128,679             149,104
  Revenue earning equipment, net                481,825             892,690
  Goodwill, net             4,157,596          4,157,596
  Other Assets                           -                    6,121
               
Total assets      $    7,307,216    $    8,159,997
               
LIABILITIES AND STOCKHOLDERS' DEFICIT          
               
Current liabilities          
  Accounts payable      $        367,645    $       950,149
  Accrued liabilities             4,372,351          2,861,923
  Deferred income                417,892             442,669
  Derivative  Liabilities     972,054   2,515,687
  Notes payable - related parties             1,200,000          1,200,000
  Notes payable          10,221,616        10,262,206
    Total current liabilities          17,551,558        18,232,634
               
  Notes payable - related parties, net of current maturities                142,532             142,532
               
Total liabilities          17,694,090        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; 73,915,085 and 61,263,909 shares issued and outstanding                  73,915                61,264
  Additional paid-in capital             5,239,968          4,937,526
  Accumulated deficit        (17,008,263)      (16,521,465)
  Total Inova Technology, Inc. stockholders' deficit        (11,694,380)      (11,522,675)
  Non-controlling interest             1,307,506          1,307,506
    Total stockholders' deficit        (10,386,874)      (10,215,169)
               
Total liabilities and stockholders' deficit      $    7,307,216    $    8,159,997
               
See summary of accounting policies and notes to unaudited consolidated financial statements

 

3
 

 

 

 

INOVA TECHNOLOGY, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
For the three months ended January 31, 2012 and 2011
(Unaudited)
         
    2012   2011
         
Revenues  $    3,738,630    $    4,394,716
         
Cost of revenues       (2,631,874)         (2,971,818)
Selling, general and administrative       (1,343,704)         (1,570,774)
Depreciation expense            (19,222)            (111,424)
         
  Operating loss          (256,170)            (259,300)
         
Other income (expense):      
  Gain (Loss) on derivative liabilities            159,990                57,107
  Interest expense          (561,253)            (595,337)
         
Net loss  $      (657,433)    $      (797,530)
         
Basic and diluted income (loss) per share  $            (0.01)    $            (0.01)
         
Weighted average common shares outstanding      71,444,179        59,505,370
         
See summary of accounting policies and notes to unaudited consolidated financial statements

 

 

 

4
 

 

INOVA TECHNOLOGY, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
For the nine months ended January 31, 2012 and 2011
(Unaudited)
         
    2012   2011
         
Revenues  $  14,444,892    $  17,068,621
         
Cost of revenues    (10,485,211)      (11,400,574)
Selling, general and administrative       (4,003,397)         (5,039,471)
Depreciation expense            (64,288)            (367,520)
         
  Operating loss          (108,004)              261,056
         
Other income (expense):      
  Gain (Loss) on derivative liabilities         1,675,209           2,444,063
  Other income              10,997                           -
  Gain (Loss) on debt extinguishment              87,582                           -
  Interest expense       (2,152,582)         (1,705,237)
         
Net income (loss)  $      (486,798)    $        999,882
         
Net income (loss) per share      
  Basic  $            (0.01)    $              0.02
  Diluted  $            (0.01)    $              0.01
         
Weighted average common shares outstanding      
  Basic      65,325,212        57,886,954
  Diluted      65,325,212      172,794,729
         
See summary of accounting policies and notes to unaudited consolidated financial statements

 

5
 

INOVA TECHNOLOGY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the nine months ended January 31, 2012 and 2011
(Unaudited)
             
        2012   2011
CASH FLOWS FROM OPERATING ACTIVITIES      
  Net loss  $      (486,798)    $        999,882
  Adjustments to reconcile net loss to net cash used provided by       
  operating activities:      
    Depreciation expense            392,542              329,977
    Amortization expense - loan discounts and deferred financing costs             282,000              108,122
    Amortization expense - intangible                         -              365,214
    Paid in kind interest              33,197              134,472
    Stock issued for services              72,000                60,770
    Gain on debt extinguishment            (87,582)                           -
    Warrants issued for services                         -                56,500
    Derivative (gain) loss       (1,675,209)         (2,444,063)
  Changes in operating assets and liabilities:      
      Accounts receivable            294,152           1,479,392
      Credit facility receivable                3,277              677,307
      Inventory                9,830              (13,293)
      Costs in excess of billing and estimated earnings            209,384              123,021
      Prepaid expenses and other current assets                7,361                33,993
      Other assets              16,634                45,170
      Accounts payable and accrued expenses         1,092,099            (446,150)
      Deferred revenues            (24,777)              (32,884)
Net cash provided by operating activities of operations            138,110           1,477,430
             
CASH FLOW INVESTING ACTIVITIES      
      Purchase of fixed assets                         -              (15,410)
Net cash used in investing activities                          -              (15,410)
             
CASH FLOW FINANCING ACTIVITIES      
    Proceeds from sales of common stock              10,000                           -
    Proceeds from notes payable              82,500                           -
    Repayments made on notes payable          (111,463)            (355,194)
    Repayments made on notes payable - related parties                         -            (150,000)
Net cash used in financing activities             (18,963)            (505,194)
             
NET CHANGE IN CASH            119,147              956,826
CASH AT BEGINNING OF YEAR            396,140              336,746
CASH AT END OF YEAR  $        515,287    $    1,293,572
             
SUPPLEMENTAL INFORMATION:      
  Interest paid  $        165,845    $        112,664
  Income taxes paid  $          30,000    $          30,000
             
NON-CASH INVESTING AND FINANCING ACTIVITIES:      
  Reclassification of derivative liabilities to notes payable                         -           2,307,900
  Reclassification of warrants issued to derivative liability                         -                52,000
  Common stock issued for conversion of debt              45,251                40,500
  Common stock issued for conversion of accounts payable - related party            125,000                           -
  Settlement of derivative liabilities through note conversions              62,842                           -
  Discount on notes payable from derivative liabilities            282,000                           -
             
See summary of accounting policies and notes to unaudited consolidated financial statements

 

,

 

6
 

 

 

 

 

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 January 31, 2012, Inova measured its derivative liabilities using Level 3 inputs as defined by ASC 820 with a total fair value of $972,054.

 

Reclassifications

 

Certain prior year amounts have been reclassified to conform to the current year presentation.

 

7
 

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 January 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 to 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 our CEO, Adam Radly, was $142,532 as of January 31, 2012.

 

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 January 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 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 January 31, 2012, Inova had $770,804 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)   553,604  
Excess of fair value of derivative liabilities over related debt   (105,456)  
Settlement of derivative liabilities   (62,842 )
Change in fair value   (1,675,209 )
Balance at January 31, 2012 $  972,054  

 

 

 

 

As a result of note conversions described in Note 8. Inova recalssified $62,842 of derivative liabilities to additional paid-in capital during the nine months ended January 31, 2012

 

 

 

8
 

 

 

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 202% to 307%, (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 nine month segment information:

 

    Trakkers,         Desert              
    LLC &         Communications,              
    RightTag,         Inc.     Corporate     Total  
    Inc.                        
Revenues $ 1,128,567         13,316,325     -     14,444,892  
Net income (loss)   (334,195)         237,608     (390,211)     (486,798)  
Total assets   1,727,766         2,215,994     3,363,456     7,307,216  

 

 

 

 

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 January 31, 2012 $11,367,655 $0.03  $       60,670 $1.81
           
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 January 31, 2012 $13.50  $        -    $       10,606 $2.67

 

 

 

 

All warrants above were exercisable as of January 31, 2012.

 

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.

 

During the three months ended January 31, 2012, Inova issued 1,379,310 shares of common stock for the conversion of $12,000 of debt.

 

In November 2011, Inova converted $125,000 of related party accounts payable into 6,944,444 shares of common stock and issued 1,333,333 shares of common stock with a fair value of $24,000 for services.

 

As a result of conversion of debt described above, Inova settled derivative liabilities with a fair value of $62,842 on the conversion dates. This amount was reclassified to additional paid-in capital.

 

 

NOTE 8 – DEBT

 

The following table summarizes outstanding debt as of January 31, 2012 and April 30, 2011:

 

  January 31, 2012 April 30,     2011
  Carrying Amount Carrying Amount
Lender $6,843,169 $6,809,972
Boone Lenders, LLC 1,153,930 1,153,930
Ascendiant Opportunity Fund, LLC 173,500 198,750
Agile Opportunity Fund, LLC    
IBM - Trakkers, LLC 109,117 212,362
Lease Facility 1,200,000 1,200,000
Desert Communications, Inc. Sellers 1,769,686 1,769,686
Trakkers, LLC - Related Party 142,532 142,532
Asher Enterprises, Inc. 166,000 103,500
Other debt 6,214 14,006
Total $11,564,148 $11,604,738

 

 

 

 

 

 

Of the total outstanding debt, $11,287,040 was in default as of January 31, 2012. Principal owed to Boone Lenders, LLC (“Boone”) increased due to the paid-in kind interest described below.

 

11
 

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 nine months ended January 31, 2012, a total of $33,197 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.

 

During the three months ended January 31, 2012, Inova issued 1,379,310 shares of common stock for the conversion of $12,000 of Asher debt.

 

 

 

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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 JANUARY 31, 2012

 

Net revenues decreased from $4,394,716 in the three-month period ending January 31, 2011 to $3,738,630 for the three-month period ending January 31, 2012. The decrease in revenue is due to changes in the timing of various projects in Desert.

 

Cost of sales decreased from $2,971,818 in the three-month period ending January 31, 2011 to $2,631,874 for the three-month period ending January 31, 2012. The decrease is a result of the revenue increase described above.

 

Operating expenses decreased from $1,570,774 for the three months ending January 31, 2011 to $1,343,704 for the same period in 2012. This was mainly due to the decrease in legal expense and decrease in loss on transfer of assets to GTF.

 

Net income decreased from ($797,530) for the three months ending January 31, 2011 to net income of $(657,433) for the same period in 2012. This is due to a non-cash derivative gain of $159,990 for the three months ended January 31, 2012.

 

 

 

RESULTS OF OPERATIONS FOR THE NINE MONTH PERIOD ENDED JANUARY 31, 2012

 

Net revenues decreased from $17,068,621 in the nine-month period ending January 31, 2011 to $14,444,892 for the nine-month period ending January 31, 2012. The decrease in revenue is due to changes in the timing of various projects in Desert.

 

Cost of sales decreased from $11,400,574 in the nine-month period ending January 31, 2011 to $10,485,211 for the nine-month period ending January 31, 2012. The decrease is a result of the revenue decrease described above.

 

Operating expenses decreased from $5,039,471 for the nine months ending January 31, 2011 to $4,003,397 for the same period in 2012. This was mainly due to the decrease in payroll expense.

 

Net income decreased from $999,882 for the nine months ending January 31, 2011 to net loss of $(486,798) for the same period in 2012. This is due to a non-cash derivative gain of $2,444,063 for the nine months ended January 31, 2011 and an increase in interest expense.

 

 

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LIQUIDITY AND CAPITAL RESOURCES

 

Cash provided by operations for the nine month period ended January 31, 2012 was $138,110 as compared to cash provided by operations of $1,477,430 for the nine months ended January 31, 2011. Cash used in investing activities for the nine month period ended January 31, 2012 was $0, as compared to $15,410 for the nine months ended January 31, 2011. Cash used by financing activities for the nine months ended January 31, 2012 was $18,963, as compared to $505,194 used in financing activities for the nine months ended January 31, 2011.

 

Our operating activities for the three months ended January 31, 2012, have generated adequate cash to meet our operating needs. As of January 31, 2012, we had cash and cash equivalents totaling $515,287, and receivables of $1,900,242.

 

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 nine months ended January 31, 2012 is $678,119. EBITDA is Earnings before interest, tax, depreciation and amortization:

 

EBITDA January 31, 2012
Net income (486,798)
Interest 2,152,582
Derivative gain (1,675,209)
Loss on transfer of assets 251,997
Tax 43,005
Depreciation/Amortization 392,542
EBITDA 678,119

 

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 and 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: March 21, 2012 By: /s/ Adam Radly

Adam Radly

Chief Executive Officer

 

Dated: March 21, 2012 By: /s/ Bob Bates

Bob Bates

Chief Financial Officer

 

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