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

FORM 10-K

☑ ANNUAL REPORT UNDER SECTION 13 OR 15 (D) OF THE SECURITIES EXCHANGE ACT OF 1934

For Fiscal Year Ended April 30, 2012

Commission File # 000-27397

INOVA TECHNOLOGY, INC.
(Exact name of registrant as specified in its charter)

NEVADA
(State or other jurisdiction of incorporation or organization)

98-0204280
(IRS Employer Identification Number)

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

800-507-2810
(Registrant's telephone no., including area code)

SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: NONE

SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: COMMON STOCK, $0.001 PAR VALUE

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes ☐ No ☐

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
Yes ☐ No ☐

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 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.
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).
Yes ☐ No ☐

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer ☐ Accelerated filer ☐ Non-accelerated filer ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ☐ No ☑

Number of shares of the registrant's common stock outstanding as of July 26, 2012 was: 76,373,445.

DOCUMENTS INCORPORATED BY REFERENCE

None

Inova Technology Inc.

Form 10-K

Table of Contents

    Page
PART I
Item 1. Description of Business 4
Item 1A Risk Factors 4
Item 2. Description of Property 4
Item 3. Legal Proceedings 5
Item 4. Submission of Matters to a Vote of Security Holders 5
     
PART II
Item 5. Market for Common Equity and Related Stockholder Matters 6
Item 6 Selected Financial Data 6
Item 7. Management’s Discussion and Analysis of Financial Condition and result of Operations 6
Item 8. Financial Statements 10
Item 9 Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 47
Item 9A. Controls and Procedures 47
     
PART III
Item 10. Directors, Executive Officers, and Corporate Governance 48
Item 11. Executive Compensation 49
Item 12. Security Ownership of Certain Beneficial Owners and Management 50
Item 13. Certain Relationships and Related Transactions 51
Item 14. Principal Accountant Fees and Services 51
     
PART IV
Item 15. Exhibits 52

 

PART I

Item 1. Description of Business

Organization and History of the Company

Inova Technology Inc. (the “Company”) was incorporated in Nevada in 1997, as Newsgurus.com, Inc. The company changed its name to Secure Enterprise Solutions Inc. in 2002, then to Edgetech Services Inc. (“Edgetech”) In 2007, the Company assumed its present name of Inova Technology, Inc.

In 2005, Edgetech entered into an agreement with the shareholders of Web’s Biggest, Inc., Mr. Xavier Roy of Los Angeles, California, and Advisors LLC, (collectively, “Web’s Biggest”) which resulted in Edgetech issuing 25 million convertible preferred shares to the shareholders of Web’s Biggest in consideration for 100% of the outstanding capital of Web’s Biggest and $250,000 be used for general working capital of Edgetech.

In 2006, Edgetech bought certain assets of Data Management, Inc., a Nevada corporation in exchange for 25 million convertible preferred shares. The convertible shares used to acquire it represented approximately 90% of the voting stock of Edgetech on a fully diluted basis. Concurrently, Edgetech sold its wholly-owned subsidiary, Web’s Biggest Limited, to Advisors LLC in exchange for 25 million convertible preferred shares of Edgetech Services, Inc. held by Advisors LLC. The 25 million convertible preferred shares given to buy Data Management were the same 25 million convertible preferred shares received from the sale of Web’s Biggest.

Prior to these transactions described above, the Company was controlled by Advisors LLC, an entity related to Mr. Paul Aunger, an officer and director of the registrant. When the transactions described above were completed, this resulted in a change of control of the Company and the controlling shareholder became Southbase International Ltd., an entity related to Mr. Adam Radly, an officer and director of the Company. Prior to these transactions, the unaffiliated shareholders of the Company owned approximately 10% of the Registrant and they continued to own approximately 10% of the Company on a fully diluted basis.

On May 1, 2007, Inova also acquired RightTag Inc. (“RightTag”), a manufacturer of radio frequency identification (“RFID”) products.

On December 21, 2007, Inova acquired Texas-based Desert Communications (“Desert”) for $5.9 million ($3.3 million paid in cash and $2.6 million to be paid under notes payable).

On September 1, 2008, Inova acquired Trakkers, LLC (“Trakkers”) and Tesselon, LLC (“Tesselon”) for $6.1 million including $500,000 cash, $2.3 million to be paid under notes payable, $2 million paid in the form of a seller note and $1.3 million of redeemable preferred stock (non-convertible and nonvoting).

Description of the Company’s Business

Inova is a technology holding company. Inova has five subsidiaries. These subsidiaries and their respective businesses are listed below:

Subsidiary/Division Business
Edgetech Services Inc. IT services and consulting
Trakkers LLC RFID rentals
RightTag, Inc. Manufacturer of radio frequency identification (RFID) Products
   
Inova Technology Holdings Holding company
Desert Communications, Inc. IT consulting and sales and computer network solutions

Item 1A. Risk Factors

Safe Harbor Statement under the Private Securities Litigation Reform Act of 1995: Except for historical information, the forward-looking matters discussed in this news release are subject to certain risks and uncertainties which could cause the Company's actual results and financial condition to differ materially from those anticipated by the forward-looking statements including, but not limited to, the Company's liquidity and the ability to obtain financing, the timing of regulatory approvals, uncertainties related to corporate partners or third-parties, product liability, the dependence on third parties for manufacturing and marketing, patent risk, copyright risk, competition, and the early stage of products being marketed or under development, as well as other risks indicated from time to time in the Company's filings with the Securities and Exchange Commission. The Company assumes no obligation to update or supplement forward-looking statements that become untrue because of subsequent events.

Item 2. Description of Property

Inova does not own any real estate property.

4

Leases:

There is an office lease for Desert, effective May 2008 until August 2011. Rent is payable at $6,300 per month including tax. The lease has not been renewed to date and Desert plans to continue on a month-to-month basis.

There is an office lease for Trakkers, effective until April 2013. Rent is payable at $3,300 per month including tax.

Rent expense was $117,788 and $115,492 for fiscal 2012 and 2011, respectively. No real estate is owned by the Inova companies.

Item 3. Legal Proceedings

In 2011 Ascendiant filed suit for collection of the $833,906 principal and interest described in Note 10. The suit is pending.

Item 4. Submission of Matters to a Vote of Security Holders and Small Business Issuer Purchases of Securities

No matters were submitted to a vote of security holders through solicitation or otherwise during the fourth quarter of the fiscal year covered by this report.

5

PART II.

Item 5. Market for Common Equity and Related Stockholder Matters

The Company’s common stock is traded on the OTCBB  under the symbol “INVA” Our CUSIP No. is 45776L209.

  High Low
04/30/2012 .025 .008
01/31/2012 .03 .018
10/31/2011 .056 .025
07/31/2011 .08 .045
04/30/2011 .06 .07
01/31/2011 .20 .40
10/31/2010 .03 .20
07/31/2010 .02 .05

 

The above table lists the high and low closing sales prices for each quarter on the OTCBB for our common shares for the past two fiscal years and are adjusted for our 400 to 1 reverse stock split which was effective on November 12, 2008 and a forward 20:1 split October, 2010. There are approximately 56 shareholders of record, 1 of which is a holder for several hundred individuals. The below quotations reflect inter-dealer prices, without retail mark-up, mark-down or commission and may not represent actual transactions.

There are no restrictions that limit our ability to pay dividends on our common stock. We have not declared any dividends since incorporation and we do not anticipate doing so in the foreseeable future. Our present policy is to retain future earnings for use in our operations and expansion of our business.

Item 6. Selected Financial Data

N/A

Item 7. Management’s Discussion and Analysis of Financial Condition and Results 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 Company’s Consolidated Financial Statements.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

Intangible assets

Intangible assets with definite lives are recorded at cost and amortized using the straight-line method over their estimated useful lives.

6

Impairment of long-lived assets

The Company reviews the carrying value of its definite lived intangible assets at least annually. Other long-lived assets, including intangibles, are reviewed whenever events or changes in circumstances indicate that the historical-cost carrying value of an asset may no longer be appropriate. The Company assesses recoverability of the asset by comparing the undiscounted future net cash flows expected to result from the asset to its carrying value. If the carrying value exceeds the undiscounted future net cash flows of the asset, an impairment loss is measured and recognized. An impairment loss is measured as the difference between the net book value and the fair value of the long-lived asset.

Goodwill and other indefinite intangibles

Goodwill and other intangibles with indefinite lives are not amortized but are reviewed for impairment at least annually, or more frequently if an event or circumstance indicates that an impairment may have occurred. To test for impairment, the fair value of each reporting unit is compared to the related net book value, including goodwill. If the net book value of the reporting unit exceeds the fair value, an impairment loss is measured and recognized. An income approach is utilized to estimate the fair value of each reporting unit. The income approach is based on the projected debt-free cash flow, which is discounted to the present value using discount factors that consider the timing and risk of cash flows.

Embedded conversion features

The Company evaluates embedded conversion features within convertible debt and convertible preferred stock under ASC 815 “Derivatives and Hedging” to determine whether the embedded conversion feature should be bifurcated from the host instrument and accounted for as a derivative at fair value with changes in fair value recorded in earnings. If the conversion feature does not require derivative treatment under ASC 815, the instrument is evaluated under ASC 470-20 “Debt with Conversion and Other Options” for consideration of any beneficial conversion feature.

Revenue and cost recognition

Inova has four sources of revenues: IT network design and implementation from Desert, computer equipment sales from Desert, IT consulting services from Edgetech, and sales of RFID items from RightTag rental income from Trakkers/Tesselon. Revenue that is received before it is earned is classified as deferred revenue.

IT network design and implementation:

Revenues from fixed-price contracts are recognized on the percentage-of-completion method, measured by the percentage of cost incurred to date to estimated total cost for each contract. This method is used because management considers total cost to be the best available measure of progress on the contracts. Because of inherent uncertainties in estimating costs, it is at least reasonably possible that the estimates used will change within the near term.

Contract costs include all direct material and labor costs and those indirect costs related to contract performance, such as indirect labor, supplies, tools, repairs, and depreciation. Selling, general and administrative costs are charged to expense as incurred. Provisions for estimated losses on uncompleted contracts are made in the period in which such losses are determined. Changes in job performance, job conditions, and estimated profitability may result in revisions to costs and income, which are recognized in the period in which the revisions are determined. Changes in estimated job profitability resulting from job performance, job conditions, contract penalty provisions, claims, change orders, and settlements, are accounted for as changes in estimates in the current period.

The asset, “Costs and estimated earnings in excess of billings on uncompleted contracts,” represents revenues recognized in excess of amounts billed. The liability, “Billings in excess of costs and estimated earnings on uncompleted contracts,” represents billings in excess of revenues recognized.

Computer equipment sales, IT consulting services & sales of RFID items:

Revenue is recognized when persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, the price is fixed or determinable, and collectability is reasonably assured.

Rental income for RFID items:

The Company follows Staff Accounting Bulletin No. 104 recognizing RFID rental income. Revenue generally is realized or realizable and earned when all of the following criteria are met: (1) persuasive evidence of an arrangement exists; (2) delivery has occurred or services have been rendered; (3) the seller’s price to the buyer is fixed or determinable; and (4) collectability is reasonably assured. A rental contract term can be daily or weekly. Consistent with SAB 104, the Company’s policy recognizes revenue from equipment rentals in the period earned on a straight-line basis, over the contract term, regardless of the timing of the billing to customers. Revenue from the sale of new and used equipment and parts is recognized at the time of delivery to, or pick-up by, the customer and when all obligations under the sales contract have been fulfilled, risk of ownership has been transferred and collectability is reasonably assured. Services revenue is recognized at the time the services are rendered.

7

Stock based compensation

ASC 718, “Accounting for Stock-Based Compensation" established financial accounting and reporting standards for stock-based employee compensation plans. It defines a fair value based method of accounting for an employee stock option or similar equity instrument. In January 2006, Inova implemented ASC 718, and accordingly, Inova accounts for compensation cost for stock option plans in accordance with ASC 718. Inova accounts for share based payments to non-employees in accordance with ASC 505-50 “Accounting for Equity Instruments Issued to Non-Employees for Acquiring, or in Conjunction with Selling, Goods or Services”.

RESULTS OF OPERATIONS FOR THE YEAR ENDED APRIL 30, 2012 COMPARED TO YEAR ENDED APRIL 30, 2011

Total revenues (net sales) decreased from $22,121,789 for the twelve month period ending April 2011 to $21,207,693 for the twelve month period ending April 30, 2012. This is primarily the result of a decrease in awarded contracts compared to the previous year.

The Company’s selling, general and administrative expenses decreased from $5,731,783 for the twelve months ending April 30, 2011 to $5,583,358 for the same period in 2012. This is primarily the result of the loss on transfer of a decrease in sales.

Last fiscal year, the Company reported a net loss from continuing operations of $3,350,377 as compared to a loss of $1,249,171 for the fiscal year ended April 30, 2012. The decreased loss is due to the decrease in operating loss of $1.7m.

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.

We are exploring various ways to address our debt including restructuring the debt with current lenders and refinancing with new lenders. However, there can be no assurance that the Company will be successful.

8

EBITDA for the years ending April 30, 2012 and 2011 was $529,920 and $ 1,595,053 for the year ending April 30, 2011. EBITDA is Earnings before interest, tax, depreciation and amortization. Inova also excludes the non-cash loss on derivative liabilities and impairment charges from its EBITDA calculation.

    Year ended       Year ended  
EBITDA   April 30, 2012       April 30, 2011  
Net loss $ ( 1,249,171)     $ (3,350,377 )
               
Interest   2,384,562       2,310,272  
               
Tax   72,964       80,746  
               
Depreciation/Amortization    355,056       865,390  
               
Impairment loss           2,525,375  
               
Gain on derivative liabilities, gain on debt extinguishment and loss on transfer of financial assets and liabilities   ( 1,033,491)       (836,353 )
               
EBITDA $ 529,920     $ 1,595,053  

 

LIQUIDITY AND CAPITAL RESOURCES

As of April 30, 2012, we had cash and cash equivalents totaling $752,011, current assets were $3,816,640, current liabilities were $19,669,156 and total stockholders’ deficit was $11,137,248. Working capital deficit decreased from $(15,287,148) at April 30, 2011 to $(15,852,516) at April 30, 2012.

The working capital increased due to higher cash in 2012 as compared to 2011. Since we are attempting to modify most of the notes, some lenders have agreed to us not making payments currently. This has caused the notes to be in default and, therefore, are shown as current liabilities. It is not likely the company will be required to make significant principal payments in the near future.

As shown in the accompanying financial statements, we have incurred recurring losses from operations and have an accumulated deficit and negative working capital as of April 30, 2012. These conditions raise substantial doubt as to our ability to continue as a going concern. While we have significant EBITDA we are not able to make all required debt payments currently. Management is trying to raise additional capital through sales of stock and refinancing debt. The financial statements do not include any adjustments that might be necessary if we are unable to continue as a going concern.

OFF-BALANCE SHEET ARRANGEMENTS

None.

9

Item 8. Financial Statements

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors
Inova Technology, Inc.
Santa Monica, California

We have audited the accompanying consolidated balance sheets of Inova Technology, Inc. and its subsidiaries (collectively“Inova”), as of April 30, 2012 and 2011 and the related consolidated statements of operations, changes in stockholders’ equity and cash flows for the years then ended. These consolidated financial statements are the responsibility of Inova’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatements. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Inova technology, Inc and its subsidiaries as of April 30, 2012 and 2011 and the results of their consolidated operations and their consolidated cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America.

The accompanying financial statements have been prepared assuming that Inova will continue as a going concern. Inova incurred losses from operations for the years ended April 30, 2012 and 2011 and has a working capital deficit as of April 30, 2012. These factors raise substantial doubt about Inova’s ability to continue as a going concern. Management's plans in regard to these matters are described in Note 3. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.

MALONEBAILEY, LLP
www.malonebailey.com
Houston, Texas
July 30, 2012

INOVA TECHNOLOGY, INC.          
CONSOLIDATED BALANCE SHEETS          
                         
          April 30, 2012   April 30, 2011          
ASSETS              
                         
Current assets                    
  Cash      $           752,011    $          396,140          
  Accounts receivable, net of allowance of $81,283 and $0                   107,471                184,789          
  Contract receivables, net of allowance of $21,746 and $21,746                1,126,221                782,286          
  Credit facility receivable                1,477,930             1,230,596          
  Inventory                     98,921                100,471          
  Costs in excess of billing and estimated earnings                   201,602                229,039          
  Prepaid and other current assets                     52,484                  31,165          
                         
    Total current assets                3,816,640             2,954,486          
                         
  Fixed assets, net                   113,308                149,104          
  Revenue earning equipment, net                   586,896                892,690          
  Goodwill, net                4,157,596             4,157,596          
  Other assets                            -                      6,121          
                         
Total assets      $        8,674,440    $       8,159,997          
                         
LIABILITIES AND STOCKHOLDERS' DEFICIT              
                         
Current liabilities                    
  Accounts payable      $        1,739,006    $          950,149          
  Accrued liabilities                4,479,224             2,861,923          
  Deferred income                   395,781                442,669          
  Derivative liabilities                1,461,265             2,515,687          
  Notes payable - related parties                1,689,688             1,500,581          
  Notes payable              9,904,192           9,961,625          
    Total current liabilities              19,669,156           18,232,634          
                         
  Notes payable - related parties, net of current maturities                   142,532                142,532          
                         
Total liabilities              19,811,688           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; 500,000,000 shares                    
    authorized; 76,364,065 and 61,263,909 shares issued and outstanding                     76,364                  61,264          
  Additional paid-in capital                5,249,518             4,937,526          
  Accumulated deficit            (17,770,636)         (16,521,465)          
  Total Inova Technology, Inc stockholders' deficit            (12,444,754)         (11,522,675)          
  Non-controlling interest                1,307,506             1,307,506          
    Total stockholders' deficit            (11,137,248)         (10,215,169)          
                         
Total liabilities and stockholders' deficit      $        8,674,440    $       8,159,997          
                         
See summary of accounting policies and notes to consolidated financial statements.          
                         
                         
                         

INOVA TECHNOLOGY, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
For the years ended April 30, 2012 and 2011
       
    2012    2011 
           
Revenues  $21,207,693   $22,121,789 
           
Cost of revenues   (15,809,385)   (15,245,413)
Selling, general and administrative   (5,583,358)   (5,731,783)
Impairment loss   —      (2,525,375)
Amortization   —      (450,453)
Depreciation expense   (35,640)   (69,942)
           
Operating loss   (220,690)   (1,901,177)
           
Other income (expense):          
Gain on derivative liabilities   1,268,499    836,353 
Interest income   —      24,719 
Gain on debt extinguishment   87,582    —   
Interest expense   (2,384,562)   (2,310,272)
           
Net loss  $(1,249,171)  $(3,350,377)
           
Basic and diluted loss per share  $(0.02)  $(0.06)
           
Weighted average common shares outstanding   67,470,101    58,560,338 
           
See summary of accounting policies and notes to consolidated financial statements.          

See summary of accounting policies and notes to consolidated financial statements.

INOVA TECHNOLOGY, INC.  
CONSOLIDATED STATEMENT OF STOCKHOLDERS EQUITY  
For the years ended April 30, 2012 and 2011  
                   
   Common Stock  Preferred Stock  Additional   Non-Controlling   Retained     
   Shares   Par (0.001)   Shares   Par (0.001)   Paid-in Capital   Interest   Deficit   Total   
Balances at April 30, 2010     56,338,300  $      56,338      1,500,000  $                -  $         4,768,432  $            1,307,506  $ (13,171,088)  $   (7,038,812)  
                   
Common stock issued for services       3,425,609            3,426                     -                    -                105,344                               -                       -           108,770  
Common stock issued for conversion of notes payable       1,500,000            1,500                     -                    -                  59,250                               -                       -             60,750  
Common stock warrants issued for services                      -                    -                     -                    -                  56,500                               -                       -             56,500  
Reclassification of derivative liabilities from additional paid-in capital                      -                    -                     -                    -                (52,000)                               -                       -            (52,000)  
Net loss                      -                    -                     -                    -                            -                               -       (3,350,377)       (3,350,377)  
Balances at April 30, 2011     61,263,909          61,264      1,500,000                    -             4,937,526                1,307,506     (16,521,465)     (10,215,169)  
                   
Common stock issued for services       2,933,333            2,933                     -                    -                  69,067                               -                       -             72,000  
Common stock issued for conversion of notes payable       4,889,046            4,889                     -                    -                  52,361                               -                       -             57,250  
Common stock issued for cash          333,333               333                     -                    -                    9,667                               -                       -             10,000  
Common stock issued for settlement of accounts payable       6,944,444            6,945                     -                    -                118,055                               -                       -           125,000  
Reclassification of derivative liabilities from additional paid-in capital                      -                    -                     -                    -                  62,842                               -                       -             62,842  
Net loss                      -                    -                     -                    -                            -                               -       (1,249,171)       (1,249,171)  
Balances at April 30, 2012     76,364,065  $      76,364      1,500,000  $                -  $         5,249,518  $            1,307,506  $ (17,770,636)  $ (11,137,248)  
                   
See summary of accounting policies and notes to consolidated financial statements.  
                   

INOVA TECHNOLOGY, INC.  
CONSOLIDATED STATEMENTS OF CASH FLOWS  
For the years ended April 30, 2012 and 2011  
               
        2012   2011  
CASH FLOWS FROM OPERATING ACTIVITIES        
  Net loss  $      (1,249,171)    $      (3,350,377)  
  Adjustments to reconcile net loss to net cash used provided by         
  operating activities:        
    Depreciation expense, $319,416 and $344,995 included in cost of revenues               355,056                 414,937  
    Amortization expense - loan discounts and deferred financing costs                364,500                 128,900  
    Amortization expense - intangible                          -                 450,453  
    Paid in kind interest                 73,204                 183,401  
    Bad debt expense 81,283   -
    Gain on sale of asset                 (2,929)                            -  
    Gain on debt extinguishment               (87,582)                            -  
    Impairment loss                          -              2,525,375  
    Stock issued for services                 72,000                 108,770  
    Warrants issued for services                          -                   56,500  
    Derivative gain          (1,268,499)               (836,353)  
  Changes in operating assets and liabilities:        
      Accounts receivable             (347,900)              1,154,278  
      Credit facility receivable             (247,334)               (278,034)  
      Inventory                   1,550                   (7,136)  
      Costs in excess of billing and estimated earnings                 27,437                   61,290  
      Prepaid expenses and other current assets               (21,855)                   15,258  
      Other assets                          -                   44,311  
      Accounts payable and accrued expenses            2,727,348                 193,562  
      Deferred revenues               (46,888)                   17,797  
Net cash provided by operating activities of operations               430,220                 882,932  
               
CASH FLOW INVESTING ACTIVITIES        
        Purchase of fixed assets               (10,537)                 (20,785)  
Net cash used in investing activities                (10,537)                 (20,785)  
               
CASH FLOW FINANCING ACTIVITIES        
      Proceeds from notes payable                 82,500                 103,500  
      Common stock issued for cash                 10,000                            -  
      Repayments made on notes payable             (156,312)               (456,253)  
      Repayments made on notes payable - related parties                          -               (450,000)  
Net cash used in financing activities                (63,812)               (802,753)  
               
NET CHANGE IN CASH               355,871                   59,394  
CASH AT BEGINNING OF YEAR               396,140                 336,746  
CASH AT END OF YEAR  $           752,011    $           396,140  
               
SUPPLEMENTAL INFORMATION:        
  Interest paid  $           637,852    $           584,547  
  Income taxes paid  $             72,964    $                      -  
               
NON-CASH INVESTINGAND FINANCING ACTIVITIES:        
  Common stock issued for conversion of notes payable                 57,250                   60,750  
  Reclassification of derivative liabilities to notes payable                 62,842                            -  
  Reclassification of derivative liabilities from additional paid-in capital                          -                   52,000  
  Reclassification of put notes from derivative liabilities                          -              2,307,900  
  Accrued interest reclassified to related party notes payable               189,107                            -  
  Common stock issued for settlement of accounts payable               125,000                            -  
  Discount on notes payable from derivative liabilities               364,500                            -  
               
See summary of accounting policies and notes to consolidated financial statements  
               
               

INOVA TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 – HISTORY AND ORGANIZATION OF THE COMPANY

Inova Technology, Inc( “ we”,”us”, “inova”, “the company”)was incorporated in Nevada on May 16, 1997, as Newsgurus.com, Inc. and changed its name to Secure Enterprise Solutions Inc. on January 10, 2002, then to Edgetech Services Inc. and on August 17, 2006 to Inova Technology, Inc.

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NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of consolidation

These consolidated financial statements include the accounts of Inova Technology, Inc. and its wholly owned subsidiaries Edgetech Services, Inc. (“Edgetech”), RightTag, Inc. (“RightTag”), Desert Communications, Inc. (“Desert”), Inova Technology Holdings, LLC., Trakkers, LLC (“Trakkers”) and Tesselon, LLC (“Tesselon”). Significant inter-company accounts and transactions have been eliminated.

Use of estimates

The preparation of financial statements in accordance with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amount of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements and the reported amount of revenues and expenses during the year. Actual results could differ from these estimates.

Reclassifications

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

Cash and cash equivalents

For purposes of the statement of cash flows, Inova considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents.

Accounts receivable

Trade and other accounts receivable are carried at face value less any provisions for uncollectible accounts considered necessary. Accounts receivable primarily include contract receivables from customers in Texas. Bad debt expense is recognized based on management’s estimate of likely losses per year, based on past experience and an estimate of current year uncollectible amounts. The allowance for doubtful accounts was $103,029 and $21,746 as of April 30, 2012 and 2011, respectively.

Inventory

Inventories are stated at the lower of cost or market. Cost is determined by the average cost method for all inventories. Inventories consist primarily of components and finished products held for sale. Rapid technological change and new product introductions and enhancements could result in excess or obsolete inventory. To minimize this risk, Inova evaluates inventory levels and expected usage on a periodic basis and records adjustments as required.

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Property and equipment

Property and equipment, including revenue–producing rental equipment are carried at cost, less accumulated depreciation and amortization. Additions are capitalized and maintenance and repairs are charged to expense as incurred. Depreciation and amortization is provided principally on the straight-line basis method over the estimated useful lives of the assets. When property is retired or otherwise disposed of, the related cost and accumulated depreciation are removed from the accounts and any resulting gains or losses are credited or charged to operations.

Intangible assets

Intangible assets with definite lives are recorded at cost and amortized using the straight-line method over their estimated useful lives.

Impairment of long-lived assets

The Company reviews the carrying value of its definite lived intangible assets at least annually. Other long-lived assets, including intangibles, are reviewed whenever events or changes in circumstances indicate that the historical-cost carrying value of an asset may no longer be appropriate. The Company assesses recoverability of the asset by comparing the undiscounted future net cash flows expected to result from the asset to its carrying value. If the carrying value exceeds the undiscounted future net cash flows of the asset, an impairment loss is measured and recognized. An impairment loss is measured as the difference between the net book value and the fair value of the long-lived asset. Impairment charges of $0 and $13,517 were recorded for the years ended April 30, 2012 and 2011, respectively.

Goodwill and other indefinite intangibles

Goodwill and other intangibles with indefinite lives are not amortized but are reviewed for impairment at least annually, or more frequently if an event or circumstance indicates that an impairment may have occurred. To test for impairment, the fair value of each reporting unit is compared to the related net book value, including goodwill. If the net book value of the reporting unit exceeds the fair value, an impairment loss is measured and recognized. An income approach is utilized to estimate the fair value of each reporting unit. The income approach is based on the projected debt-free cash flow, which is discounted to the present value using discount factors that consider the timing and risk of cash flows. Impairment charges of $0 and $2,511,858 were recorded for the years ended April 30, 2012 and 2011, respectively.

Embedded conversion features

Inova evaluates embedded conversion features within convertible debt and convertible preferred stock under ASC 815 “Derivatives and Hedging” to determine whether the embedded conversion feature should be bifurcated from the host instrument and accounted for as a derivative at fair value with changes in fair value recorded in earnings. If the conversion feature does not require derivative treatment under ASC 815, the instrument is evaluated under ASC 470-20 “Debt with Conversion and Other Options” for consideration of any beneficial conversion feature.

Income taxes

Inova uses the liability method of accounting for income taxes. Under this method, deferred income taxes are recorded to reflect the tax consequences on future years of temporary differences between the tax basis of assets and liabilities and their financial amounts at year-end. Inova provides a valuation allowance to reduce deferred tax assets to their net realizable value.

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Revenue and cost recognition

Inova has five sources of revenues: Information technology (“IT”) network design and implementation from Desert, computer equipment sales from Desert, IT consulting services from Edgetech, sales of radio frequency identification (“RFID”) items from RightTag and rental income from Trakkers and Tesselon. Revenue that is received before it is earned is classified as deferred revenue.

IT network design and implementation:

Revenues from fixed-price contracts are recognized on the percentage-of-completion method, measured by the percentage of cost incurred to date to estimated total cost for each contract. This method is used because management considers total cost to be the best available measure of progress on the contracts. Because of inherent uncertainties in estimating costs, it is at least reasonably possible that the estimates used will change within the near term.

Contract costs include all direct material and labor costs and those indirect costs related to contract performance, such as indirect labor, supplies, tools, repairs, and depreciation. Selling, general and administrative costs are charged to expense as incurred. Provisions for estimated losses on uncompleted contracts are made in the period in which such losses are determined. Changes in job performance, job conditions, and estimated profitability may result in revisions to costs and income, which are recognized in the period in which the revisions are determined. Changes in estimated job profitability resulting from job performance, job conditions, contract penalty provisions, claims, change orders, and settlements, are accounted for as changes in estimates in the current period.

The asset, “Costs and estimated earnings in excess of billings on uncompleted contracts,” represents revenues recognized in excess of amounts billed. The liability, “Billings in excess of costs and estimated earnings on uncompleted contracts,” represents billings in excess of revenues recognized.

Computer equipment sales, IT consulting services & sales of RFID items:

Revenue is recognized when persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, the price is fixed or determinable, and collectability is reasonably assured.

Rental income for RFID items:

The Company follows Staff Accounting Bulletin (“SAB”) No. 104 recognizing RFID rental income. Revenue generally is realized or realizable and earned when all of the following criteria are met: (1) persuasive evidence of an arrangement exists; (2) delivery has occurred or services have been rendered; (3) the seller’s price to the buyer is fixed or determinable; and (4) collectability is reasonably assured. A rental contract term can be daily or weekly. Consistent with SAB 104, the Company’s policy recognizes revenue from equipment rentals in the period earned on a straight-line basis, over the contract term, regardless of the timing of the billing to customers. Revenue from the sale of new and used equipment and parts is recognized at the time of delivery to, or pick-up by, the customer and when all obligations under the sales contract have been fulfilled, risk of ownership has been transferred and collectability is reasonably assured. Services revenue is recognized at the time the services are rendered.

Stock based compensation

ASC 718, “Accounting for Stock-Based Compensation" established financial accounting and reporting standards for stock-based employee compensation plans. It defines a fair value based method of accounting for an employee stock option or similar equity instrument. In January 2006, Inova implemented ASC 718, and accordingly, Inova accounts for compensation cost for stock option plans in accordance with ASC 718. Inova accounts for share based payments to non-employees in accordance with ASC 505-50 “Accounting for Equity Instruments Issued to Non-Employees for Acquiring, or in Conjunction with Selling, Goods or Services”.

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Basic and diluted net income (loss) per share

Basic loss per share is computed using the weighted average number of shares of common stock outstanding during each period. Diluted loss per share includes the dilutive effects of common stock equivalents on an “as if converted” basis. For the years ended April 30, 2012 and 2011, potential dilutive securities had an anti-dilutive effect and were not included in the calculation of diluted net loss per common share.

Financial Instruments

The carrying amount of our financial instruments, consisting of cash equivalents, accounts receivable, accounts and notes payable, short-term borrowings and certain other liabilities, approximate their fair value due to their relatively short maturities. The carrying amount of our long-term debt approximates fair value since the stated rate of interest approximates a market rate of interest.

Transfers and Servicing of Financial Assets and Liabilities

The Company accounts for transfers and servicing of financial assets and liabilities in accordance with ASC 860-10 (formerly SFAS 140) “Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities”. When the conditions are met for the transfer of assets or liabilities to qualify as a sale, the assets or liabilities are derecognized and the gain or loss on the sale is determined at the date of transfer based upon the amount at which the assets and liabilities are transferred less any fees, discounts and other charges. The Company recognizes any servicing assets and servicing liabilities at their fair value using the fair value measurement method as prescribed by ASC 860-10. As of April 30, 2012 and 2011, the Company’s servicing asset consisted of a credit facility receivable due from a third party that purchased accounts receivable and accounts payable from us. The carrying amount of our credit facility receivable approximates its fair value due to its relatively short maturity.

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 simple derivative financial instruments, Inova uses the Black-Scholes option-pricing model to value the derivative instruments at inception and subsequent valuation dates. For complex embedded derivatives, Inova uses a Monte Carlo simulation 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.

Fair Value Measurements

In September 2006, the FASB issued ASC 820 which defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. The provisions of ASC 820 were effective January 1, 2008. 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).

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The three levels of the fair value hierarchy defined by ASC 820 are as follows:

Level 1 – Quoted prices are available in active markets for identical assets or liabilities as of the reporting date. Active markets are those in which transactions for the asset or liability occur in sufficient frequency and volume to provide pricing information on an ongoing basis. Level 1 primarily consists of financial instruments such as exchange-traded derivatives, marketable securities and listed equities.

Level 2 – Pricing inputs are other than quoted prices in active markets included in level 1, which are either directly or indirectly observable as of the reported date. Level 2 includes those financial instruments that are valued using models or other valuation methodologies. These models are primarily industry-standard models that consider various assumptions, including quoted forward prices for commodities, time value, volatility factors, and current market and contractual prices for the underlying instruments, as well as other relevant economic measures. Substantially all of these assumptions are observable in the marketplace throughout the full term of the instrument, can be derived from observable data or are supported by observable levels at which transactions are executed in the marketplace. Instruments in this category generally include non-exchange-traded derivatives such as commodity swaps, interest rate swaps, options and collars.

Level 3 – Pricing inputs include significant inputs that are generally less observable from objective sources. These inputs may be used with internally developed methodologies that result in management’s best estimate of fair value.

The following tables set forth assets and liabilities measured at fair value on a recurring and non-recurring basis by level within the fair value hierarchy as of April 30, 2012 and 2011. As required by ASC 820, financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. The Company’s assessment of the significance of a particular input to the fair value measurement requires judgment, and may affect the valuation of fair value assets and liabilities and their placement within the fair value hierarchy levels.

Liabilities Measured at Fair Value   April 30, 2012  
    Level 1     Level 2     Level 3     Total  
Derivative and warrant liabilities   -     -   $ 1,461,265   $ 1,461,265  
       
    April 30, 2011  
    Level 1     Level 2     Level 3     Total  
Derivative and warrant liabilities   -     -   $ 2,515,687   $ 2,515,687  

 

The derivatives listed above are carried at fair value. The fair value amounts in current period earnings associated with the Company’s derivatives resulted from Level 3 fair value methodologies; that is, the Company’s pricing inputs include significant inputs that are generally less observable from objective sources. These inputs may be used with internally developed methodologies that result in management’s best estimate of fair value.

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In accordance with the provisions of ASC 360-10 “Accounting for the Impairment and Disposal of Long-Lived Assets”, for the year ended April 30, 2011, long-lived intangible assets with a carrying amount of $13,517 were written down to their fair value of $0, resulting in an impairment charge of $13,517, which was included in earnings for the year ended April 30, 2011.

In accordance with the provisions of ASC 350-20 “Goodwill and Other Intangible Assets”, for the year ended April 30, 2011, goodwill with a carrying amount of $6,669,454 was written down to its implied fair value of $4,157,596, resulting in an impairment charge of $2,511,858, which was included in earnings for year ended April 30, 2011.

Recent accounting pronouncements

Inova does not expect the adoption of recently issued accounting pronouncements to have a significant impact on our results of operations, financial position or cash flow.

NOTE 3 – GOING CONCERN

As shown in the accompanying financial statements, we have incurred losses of $1,249,171 and $3,350,377 for the years ended April 30, 2012 and 2011, and have an accumulated deficit of $17,770,636 and negative working capital of $15,852,516 as of April 30, 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.

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NOTE 4 – CONTRACT RECEIVABLES & CREDIT FACILITY RECEIVABLE

    30-Apr-12    30-Apr-11 
Completed contracts  $945,905   $669,486 
Contracts in progress   180,316    112,800 
Total contract receivables  $1,126,221   $782,286 

Costs, estimated earnings, and billings on uncompleted contracts are summarized as follows:

    30-Apr-12    30-Apr-11 
Costs incurred on uncompleted contracts  $1,414,293   $1,016,219 
Estimated earnings   432,821    581,875 
Less: billings to date   (1,645,512)   (1,369,055)
Total  $201,602   $229,039 

Included in the accompanying balance sheet under the following captions:

    30-Apr-12       30-Apr-11  
Costs and estimated earnings in excess of billings on uncompleted contracts $ 201,602     $ 229,039  
Billings in excess of costs and estimated earnings on uncompleted contracts   -       -  
Total $ 201,602     $ 229,039  

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Credit Facility Receivable:

On December 30, 2009, the Company entered into a series of related agreements with New England Technology Finance, LLC (“NETF”) providing for NETF to purchase eligible accounts receivable balances and to finance qualified purchases (as defined). This facility is comprised of three components: (1) an Asset Purchase and Liability Assumption Agreement (the “APLA”), under which NETF finances certain of the Company's qualified product purchases in connection with consummating sales to customers and (2) an Asset Purchase Agreement (the “APA”), and (3) a Master Servicing Agreement (“MSA”).

Qualified product purchases financed by NETF under the APLA are repaid from collections of accounts receivable balances that the Company generates from its sales of such products to customers. The Company transfers title to the invoices to NETF at the time these sales are financed and delivery is made to the customer. The Company pays contractual financing and servicing fees to NETF for its financing of these purchases in an amount that is equal to a percentage of the gross profit margin on such sales. The percentages fees vary based on the (a) amount of gross profit on such sales, and (b) number of days in which the receivables from such sales remain uncollected.

NETF remits periodically to the Company an amount equal to the monthly gross profit margin on the sales less the contractual fees. The APLA also provides for the Company to repurchase, after 90 days, at NETF’s request, any amounts that remain by the customer at a repurchase price equal to the outstanding balance due on the account. NETF pre-approves all product purchases and the credit worthiness of the Company's customers under this arrangement as a precondition to financing the sale.

Under the APA, the Company transfers eligible accounts receivable to NETF in exchange for advances of up to 75% of their gross amount less the amount of any liability to a third party assumed by NETF with respect to the purchased accounts. NETF charges the Company fees (the “Discount Factor”) in an amount equal to the LIBOR rate plus 4% per annum on advances made at the time of the transfer. The Company also retains servicing rights under the MSA. Under the terms of the MSA, the Company manages collections and other ongoing interactions with its customers in exchange for fees amounting to approximately 20% of the gross invoice amount NETF settles fees payable to the Company under this arrangement net of the Discount Factor.

The APA also provides for the Company to repurchase, after 90 days, at NETF’s request, any amounts that remain unpaid by the customer at a repurchase price equal to 75% of the outstanding balance due on the account; however such repurchases are limited to 15% of all receivables transferred to NETF under this arrangement. In addition, NETF pre-approves the credit worthiness of the Company's customers under this arrangement as a precondition to purchasing any invoice.

The Company accounts for its transfers of accounts receivable to NETF under each of these agreements in accordance with the provision of ASC 860-10 (formerly SFAS 140) “Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities” as sales of such accounts receivable balances. The gain or loss on sales of receivables NETF is determined at the date of transfer based upon the amount at which they are transferred to NETF less any fees, discounts and other charges provided under the agreements. The Company has determined that all transfers of receivables and payables to NETF under the above agreement qualify as sales because (1) the transferred assets and liabilities have been isolated from Desert (2) NETF has the right to pledge or exchange the assets and (3) Desert does not maintain effective control over the transferred assets. During fiscal 2012 and 2011, the Company recognized a loss on these sales of $322,590 and $296,829, which is the amount of fees incurred on gross margin advances noted above. As of April 30, 2012 and 2011, the credit facility receivable owed to Desert as a result of the servicing agreement was $1,477,930 and $1,230,596.

During the year ended April 30, 2012, Desert sold approximately $15.9 million of accounts receivable to NETF and NETF assumed approximately $10.4 million in accounts payable related to these assets.

During the year ended April 30, 2011, Desert sold approximately $14.5 million of accounts receivable to NETF and NETF assumed approximately $9 million in accounts payable related to these assets.

This facility contains customary affirmative and negative covenants as well as specific provisions related to the quality of the accounts receivables sold. The Company has also indemnified NETF for the risk of loss under any transferred balances except for loss incurred as a result of customer credit risk.

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NOTE 5 – PROPERTY AND EQUIPMENT

Property and equipment consisted of the following at April 30, 2012 and 2011:

    Life     2012       2011  
Office equipment   2 to 10 years   $ 100,850     $ 100,850  
Office furniture   7 to 8 years     37,504       37,504  
Vehicles   3 to 5 years     275,857       275,857  
Leasehold improvements   3.25     164,944       164,944  
Scanners (revenue earning equipment)   5 years     2,021,560       2,011,023  
                     
Subtotal         2,600,715       2,590,178  
Less: accumulated depreciation         (1,900,511 )     (1,548,384 )
                     
Total       $ 700,204     $ 1,041,794  

Depreciation expense totaled $355,056 and $414,937 in 2012 and 2011, respectively. Depreciation on scanners is included cost of revenues in the consolidated statements of operations. For the years ended April 30, 2012 and 2011, $319,416 and $344,995 of depreciation expense was included in cost of revenues, respectively.

NOTE 6 – GOODWILL AND INTANGIBLES

RightTag:

In May 2007 when Inova acquired RightTag, Inova accounted for the acquisition using the purchase method of accounting for business combinations. The purchase price and costs associated with the acquisition exceeded the fair value of net assets acquired by $436,572, which was preliminarily assigned to goodwill.

During 2008, Inova completed the valuation of the intangible assets acquired in the RightTag transaction. Pursuant to the valuation, purchase price of $135,702 was assigned to the customer list acquired and the remaining $300,870 was assigned to goodwill. During fiscal 2009, goodwill impairment of $158,075 was recorded, resulting in a carrying value of $142,795. The customer list was fully amortized during fiscal 2010.

An impairment analysis on the goodwill was performed at April 30, 2012 and 2011 and no impairment to goodwill was recorded.

Desert:

In December 2007 when Inova acquired Desert, Inova accounted for the acquisition using the purchase method of accounting for business combinations. The purchase price and costs associated with the acquisition exceeded the fair value of net assets acquired by $4,275,000, of which $860,555 was assigned to the customer list and employment agreements acquired and the remaining $3,315,918 was assigned to goodwill. The customer list and employment agreements were fully amortized as of April 30, 2011.

An impairment analysis on the goodwill was performed at April 30, 2012 and 2011 and no impairment to goodwill was recorded.

Trakkers:

In September 2008 when Inova acquired Trakkers, Inova accounted for the acquisition using the purchase method of accounting for business combinations. The purchase price and costs associated with the acquisition exceeded the fair value of net assets acquired by $4,232,454, of which $1,021,713 for were assigned to customer list and employment agreements and the remaining $3,210,741 was assigned to goodwill. The customer list and employment agreements were fully amortized as of April 30, 2011.

An impairment analysis on the goodwill was performed at April 30, 2012 and 2011 and $0 and $2,511,858 of impairment to goodwill was recorded.

Goodwill and Intangible Assets consists of the following as of April 30, 2012 and 2011:

 Goodwill    2012    2011 
 RightTag   $142,795   $142,795 
 Desert    3,315,918    3,315,918 
 Trakkers/Tesselon    698,883    698,883 
             
 Total   $4,157,596   $4,157,596 

 

For the years ended April 30, 2012 and 2011, Inova recorded amortization expenses of $0 and $450,453, respectively.

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NOTE 7 – RELATED-PARTY TRANSACTIONS

A summary of changes in related-party payable accounts for the years ended April 30, 2012 and 2011 is as follows:

    2012    2011 
Beginning balance  $1,643,113   $2,093,113 
Less: repayments made on related-party payable   —      (450,000)
Reclassification of accrued interest to related party note payable
   

189,107

      
Total related-party payable  $1,832,220   $1,643,113 

Related-party payable account consisted of the following as of April 30, 2012 and 2011:

    2012    2011 
Due to Southbase, entity related to CEO. Matures May 2017, 7%, unsecured  $142,532   $142,532 
           
Due to Desert sellers, notes obtain from acquisition. Matured December 2010 (in default), 18%, secured by all common stock of Desert   1,389,107    1,200,000 
 
Due to Harish Chander, CEO and President of Trakkers. Matured
February 2010 (in default), 7%, unsecured
   300,581   300,581 
Total related-party payable   1,832,220    1,643,113 
Less: current maturities   (1,689,688)   (1,500,581)
           
Long-term portion of related-party payable  $142,532   $142,532 

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Advisors, LLC & Web’s Biggest, Inc.

Advisors, LLC is a company owned by Paul Aunger, a director of the Company. The Company has a consulting agreement with Advisors, LLC for payments of $1,000 per month. Advisors, LLC owns Web’s Biggest, Inc.

During fiscal 2011, 2,248,649 shares of common stock with a fair value of $96,000 were issued to Advisors, LLC for services rendered. Advisors, LLC is controlled by a director of the Company. The fair value of the stock was recorded to expense during the quarter ended October 31, 2010.

During fiscal 2012, 2,933,333 shares of common stock with a fair value of $72,000 were issued to Advisors, LLC for services rendered. Advisors, LLC is controlled by a director of the Company. The fair value of the stock was recorded to expense during the quarters ended July 31 and October 31, 2011.

No amounts were owed to Advisors, LLC as of April 30, 2012 and 2011.

Southbase International, Limited(“Southbase”)

Southbase is a company related to Adam Radly, our CEO. The Company has a consulting agreement with Southbase earning fees of $20,000 per month.

In November 2011, Inova converted $125,000 of related party accounts payable into 6,944,444 shares of common stock.

Desert Sellers

There are notes payable to the previous owners of Desert Communications in the amount of $1,389,106 and accrued interest of $667,284 and $619,451 as of April 30, 2012 and 2011. The notes are secured by all of the common stock of Desert. On December 1, 2009, the sellers agreed to extend the maturity of these notes through December 1, 2010. The notes are now in default. As a result of the extension, the interest rate increased to 18%. Prior to December 1, 2009, the interest rate was 7%. During fiscal 2011, $300,000 was repaid on these notes.

The sellers also participated in a working capital facility and loaned $150,000 to the Company during fiscal 2010. The note bears interest at 18%, is due December, 2010 and is unsecured. This note was repaid in fiscal 2011.

The Desert sellers are paid bonuses based on the operating results of Desert. As of April 30, 2012 and 2011, $30,305 and $37,475 of bonuses owed to the Desert sellers and are included in accrued liabilities in the consolidated balance sheet.

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NOTE 8 – NOTES PAYABLE

Convertible Note Payable – Ascendiant Opportunity Fund, LLC (“Ascendiant”):

In July 2008, a note payable of $500,000 with an original issue discount of $52,875 was issued for 1.5 years by Ascendiant. It is secured by all assets of Desert. The note is convertible into shares of Inova common stock at $0.075 per share. In addition, 52,896,400 warrants to purchase Inova common stock were issued with this note. As of April 30, 2012 and 2011, this note was in default and due on demand.

This loan has the following financial requirements:

·Maintain cash plus availability under IBM $2.5 million line of credit of $250,000 or greater;
·EBITDA of $1.7 million for 12 month period ending December 31, 2008 and $300,000 for each 3-month period beginning December 31, 2007;
·No concentration above $2.5 million to any supplier through the IBM facility;
·No concentration above 20% to any single customer;
·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 April 30, 2012 and 2011, the Company was not in compliance with these covenants. As a result the note is in default and the interest rate increased from 15% to 18%.

2,644,820 warrants were issued to Ascendiant with this note. The warrants expire in July 2013. They have an aggregated exercise price of $200. The warrant shares are subject to a put option agreement whereby anytime between January 1, 2010 and July 1, 2013, Ascendiant can require Inova to repurchase from Ascendiant the warrant shares for $250,000. 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 these warrants was recorded as a derivative liability. Upon exercise of the put option, if Inova does not repurchase the shares within 30 days, the resulting liability with become a convertible note that is convertible into shares of Inova common stock.

The convertible note and warrant agreements both contain dilutive issuance clauses. Under these clauses, based on future issuances of Inova common stock or other convertible instruments, the conversion price of the note above can be adjusted downward or the Company can be required to issue additional warrants to Ascendiant. During fiscal 2009, the Company issued 3,095,940 additional warrants to purchase Inova common stock with a fair value of $309,594 as a result of this clause. These warrants are also subject to the put option agreement described above. As a result, these warrants are also classified as liabilities under ASC 815-40.

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Put Option Exercise

On April 8, 2010 Ascendiant exercised 2,448,900 warrants to purchase Inova common stock and concurrently exercised its put option, requiring Inova to repurchase the shares acquired from the warrant exercise from Ascendiant for $375,000. The $375,000 note is included in notes payable in the consolidated balance sheet as of April 30, 2012 and 2011.

Since Inova did not repurchase the shares within 30 days, on May 8, 2010 a one year $375,000 convertible note was established by Ascendiant at a 20% interest rate. The note is convertible into shares of Inova common stock at $1.50 per share and is unsecured.

Other Amounts Owed to Ascendiant

There is a contested commission note to Ascendiant Securities for originally for $78,000 of commissions. As of April 30, 2012 and 2011, $278,930 was owed for this note. The note is included in notes payable in the consolidated balance sheet. The note originally bore interest at 11.25%, but is now in default and bears interest at 18%. The Company is contesting this note due to the original circumstances surrounding it. Ascendiant has claimed to be the broker that introduced Inova to Boone and accordingly claims certain commissions from transactions between Inova and Boone. Inova disputes this claim.

Notes Payable – Boone Lenders, LLC (“Boone”):

Fiscal 2008

During fiscal 2008, Inova issued a note to Boone for $1,792,000 with an original issue discount of $192,000 due in November 2012. The note bears interest at Prime+3% or 11.25% . 8,746,960 warrants to purchase Inova common stock were issued to Boone with this note. The warrants expire in November 2012 and have an aggregate exercise price of $100.

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The warrant shares are subject to a put option agreement whereby anytime between June 10, 2010 and June 10, 2013, Boone can require Inova to repurchase from Boone the warrant shares for $1,300,000. 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 these warrants was recorded as a derivative liability. Upon exercise of the put option, if Inova does not repurchase the shares within 30 days, the resulting liability with become a convertible note. The exercise period for this put option was accelerated to April 1, 2010 as a result of the debt restructuring below. $1,000,000 of put options were exercised as of April 30, 2010, see “Convertible Put Exercise Note” below.

Fiscal 2009

During fiscal 2009, Inova issued several notes to Boone for an aggregate principal amount of $3,373,763 with aggregate original issue discounts of $339,600. The notes bear interest at Prime+3% or 11.25% . The notes were due at various dates from March 2009 through March 2011. In connection with these notes, Inova granted warrants to purchase 13,851,540 shares of Inova's common stock, warrants to purchase 92 shares of Desert Communications, Inc. common stock, and warrants to purchase 19.44% of Trakkers, LLC. The warrants expire at various dates from April 2013 through February 2014 and have an aggregated exercise price of $1,300. As of April 30, 2012 and 2011, all of these notes were in default and due on demand

The warrant shares are subject to various put option agreements whereby anytime between January 2010 and January 1, 2013, Boone can require Inova to repurchase from Boone the warrant shares for $1,574,250. 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 these warrants was recorded as a derivative liability. Upon exercise of the put option, if Inova does not repurchase the shares within 30 days, the resulting liability with become a convertible note. The exercise period for these put options was accelerated to April 1, 2010 as a result of the debt restructuring below. $1,000,000 of put options were exercised as of April 30, 2010, see “Convertible Put Exercise Note” below.

Fiscal 2010

During fiscal 2010, Inova issued several notes to Boone for an aggregate principal amount of $1,128,856 with aggregate original issue discounts of $178,357. The notes bear interest at Prime+3% or 11.25% . The notes were due at various dates from December 2009 through February 2011. In connection with these notes, Inova granted warrants to purchase 11,697,440 shares of Inova's common stock, warrants to purchase 64 shares of Desert Communications, Inc. common stock, and warrants to purchase 1.44% of Trakkers, LLC. The warrants expire at various dates from May 2014 through January 2017 and have an aggregated exercise price of $800. As of April 30, 2012 and 2011, all of these notes were in default.

The warrant shares are subject to various put option agreements whereby for various periods ranging from April 2010 to February 2014, Boone can require Inova to repurchase from Boone the warrant shares for $534,900. 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 these warrants was recorded as a derivative liability. Upon exercise of the put option, if Inova does not repurchase the shares within 30 days, the resulting liability with become a convertible note. The exercise period for these put options was accelerated to April 1, 2010 as a result of the debt restructuring below. $1,000,000 of put options were exercised as of April 30, 2010, see “Convertible Put Exercise Note” below.

Fiscal 2011

During the quarter ended July 31, 2010, Boone exercised warrants to purchase 30,111,440 shares of Inova common stock and 130.90 shares of Desert common stock. Contemporaneously, Boone exercised the related put options, requiring Inova to repurchase the warrants shares from Boone for $1,515,900. Under the put option agreement, if Inova fails to repurchase the warrant shares from Boone, the put option liability will become a convertible note. Inova did not repurchase the warrant shares and accordingly, the put option became a convertible note during the quarter ended July 31, 2010.

During the quarter ended October 31, 2010, Boone exercised warrants to purchase 7,444,240 shares of Inova common stock and 19.44% of Trakkers common stock. Contemporaneously, Boone exercised the related put options, requiring Inova to repurchase the warrants shares from Boone for $792,000. Under the put option agreement, if Inova fails to repurchase the warrant shares from Boone, the put option liability will become a convertible note. Inova did not repurchase the warrant shares and accordingly, the put option became a convertible note in November 2010.

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Paid-In Kind Interest

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 years ended April 30, 2012 and 2011, a total of $73,204 and $183,401 of interest was recognized and recorded to the principal balance of all loans from Boone Lenders, LLC except the convertible put notes described below.

Anti-Dilution Warrants

All of the warrants granted above contained dilutive issuance clauses in their agreements. Under these clauses, based on future issuances of Inova common stock or other convertible instruments, Inova can be required to issue additional warrants to Boone. During fiscal 2008, the Company issued 468,120 additional warrants to purchase Inova common stock as a result of this clause. During fiscal 2009, the Company issued 8,031,040 additional warrants to purchase Inova common stock as a result of this clause. During fiscal 2010, the Company issued 2,123,200 additional warrants to purchase Inova common stock as a result of this clause. These warrants are also subject to the put option agreements described above. As a result, these warrants are also classified as liabilities under ASC 815-40. See Note 9 for more information.

Debt Restructuring

In the third quarter of fiscal 2010 Inova restructured several of its previously issued notes payable to Boone to extend the maturity dates, modify the interest rate and payment terms. Inova combined 6 previous notes that had due dates ranging from December 16, 2009 through December 30, 2010 into one $836,446 note payable. The original notes had interest rates of Prime + 3% or 11.25% . The new note has an interest rate of 17.5% . Starting in December 2010, principal payments will be made out of Desert Communication Inc.’s (“DCI”) free cash flow which is defined by the agreement as DCI’s earnings before interest, taxes, depreciation and amortization (“EBITDA”) subject to various adjustments. The note is secured by all assets including the shares Inova holds of each of Inova’s subsidiaries. In addition, in conjunction with the debt restructuring, all put options that previously could not be exercised until future periods were accelerated to April 1, 2010.

In conjunction with the $836,446 restructured note payable, 1,524,640 Inova warrants and 7.01 Desert warrants were issued to Boone with a fair value of $190,168. They have an aggregated exercise price of $200

All previous warrant grants and their associated put options under the notes included in the above restructuring are now combined into this note. This includes the warrants granted in conjunction with the restructuring mentioned above. The total warrants under this note as of the date of the restructuring was 27,476,420 warrants to purchase Inova common stock and 78.1 warrants to purchase Desert common stock, all of which are subject to aggregate put options of $2,213,500. In March 2010, $1,000,000 of these put options were exercised for 8,031,040 warrants to purchase Inova common stock and 31.59 warrants to purchase Desert common stock. See “Convertible Put Exercise Note” section below.

Convertible Put Exercise Note

On March 22, 2010 Boone exercised $1,000,000 of its put options, requiring Inova to repurchase from Boone up to 5,768,300 shares of Inova common stock and 31.59 shares of Desert common stock for $1,000,000. Since Inova did not repurchase the shares within 30 days a 2 year $1,000,000 convertible note was established by Boone at a 24% interest rate.

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During the quarter ended July 31, 2010, Boone exercised warrants to purchase 30,111,440 shares of Inova common stock and 130.90 shares of Desert common stock. Contemporaneously, Boone exercised the related put options, requiring Inova to repurchase the warrants shares from Boone for $1,515,900. Under the put option agreement, if Inova fails to repurchase the warrant shares from Boone, the put option liability will become a convertible note. Inova did not repurchase the warrant shares and accordingly, the put option became a convertible note during the quarter ended July 31, 2010. The note is due on May 21, 2012 and bears interest at 22%. The note is currently in default.

During the quarter ended January 31, 2011, Boone exercised warrants to purchase 7,444,240 shares of Inova common stock and 19.44% of Trakkers common stock. Contemporaneously, Boone exercised the related put options, requiring Inova to repurchase the warrants shares from Boone for $792,000. Under the put option agreement, if Inova fails to repurchase the warrant shares from Boone, the put option liability will become a convertible note. Inova did not repurchase the warrant shares and accordingly, the put option became a convertible note during the quarter ended January 31, 2011. The note is due on January 31, 2012 and bears interest at 20%. The note is currently in default.

The conversion options are subject to reset provisions that can reduce the conversion prices based on subsequent equity or rights offerings by Desert, Trakkers or Inova below the prices above.

The notes are convertible into shares of Desert or Trakkers common stock at an amount equal to (A) 350% of Desert or Trakkers’s EBITDA for the 12 full-months preceding such date, minus (i) the aggregate amount of Desert’s indebtedness to the initial Holder at such date and (ii) the aggregate amount of the Company’s indebtedness to the Desert Sellers at such date, divided by (B) the total number of issued and outstanding shares of common stock at such date.

The notes are also convertible into shares of Inova common stock at the lower of (i) $0.075 per share of Inova common stock and (ii) the lowest per share price of Inova common stock conversion price in effect at April 22, 2010 in any warrant, option, convertible note or other instrument that has been issued by Inova or that is otherwise convertible or exchangeable into Inova, after taking into effect any applicable reset or other conversion or exchange price adjustments. As of April 30, 2011, the lowest per share price in effect was $0.0405.

The conversion options are subject to reset provisions that can reduce the conversion prices based on subsequent equity or rights offerings by Desert or Inova below the prices above.

Inova analyzed the instruments above under ASC 815 “Derivatives and Hedging” and determined that these instruments 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. The fair value of the instruments was determined using a Monte Carlo simulation model utilizing present value and various probabilities of events. This amount is included in derivative liabilities in the consolidated balance sheet. See Note 10 for more information on derivatives and the valuation model.

Covenants

All Boone loans have the following financial requirements:

·Maintain cash plus availability under IBM $2.5 million line of credit of $250,000 or greater;
·EBITDA of $1.7 million for any fiscal year;
·No concentration above $2.5 million to any supplier through the IBM facility;
·No concentration above 20% to any single customer;
·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.

Inova was not in compliance with these covenants as of April 30, 2012 and 2011 and as a result, these notes are in default.

Note Payable - Agile Opportunity Fund, LLC (“Agile”):

In February 2008, Inova borrowed $250,000 under a note payable from Agile Opportunity Fund, LLC. This note has an interest rate of 18% per annum and it matures on December 31, 2010. The note was convertible into shares of Inova common stock at $0.10 per share. In addition, 1,250,000 warrants to purchase Inova common stock were issued with this note. This note is secured by all tangible and intangible assets of Inova.

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1,250,000 warrants were issued to Agile with this note. These warrants expire in February 2013. They have an exercise price of $0.10 per share. The warrant shares are subject to a put option agreement whereby anytime between February 2010 and February 2013, Agile can require Inova to repurchase from Agile the warrant shares for $100,000. 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 these warrants was recorded as a derivative liability. Upon exercise of the put option, if Inova does not repurchase the shares within 30 days, the resulting liability with become a convertible note that is convertible into shares of Inova common stock.

The convertible note and warrant agreements both contain dilutive issuance clauses. Under these clauses, based on future issuances of Inova common stock or other convertible instruments, the conversion price of the note above can be adjusted downward or the Company can be required to issue additional warrants to Inova. During fiscal 2009, the Company issued 4,260 additional warrants to purchase Inova common stock.

Note Modification

In December 2009, Inova modified the terms of its $250,000 note with Agile to extend the first principal payment date from December 2009 to December 2010. It also increased the original issue discount by $50,000 and reduced the conversion price to $0.0405 per share.

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. 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.

Conversions

During fiscal 2011, Inova issued 1,500,000 shares of common stock for the conversion of $60,750 of debt to Agile Opportunity Fund, LLC at a conversion price of $0.0405.

During the three months ended July 31, 2011, Inova issued 666,667 shares of common stock for the conversion of $25,250 of Agile debt and sold 333,333 shares of common stock to Agile for $10,000.

Registration Rights for Ascendiant, Boone and Agile Notes

Inova entered into a registration rights agreement with Ascendiant, Boone and Agile requiring that a filing be done for the number of Registrable Securities equal to the lesser of (i) the total number of Registrable Securities and (ii) one-third of the number of issued and outstanding shares of Common Stock that are held by non-affiliates. Registrable securities are (i) all Warrant Shares (ii) any additional shares of Common Stock issuable in connection with any anti-dilution provisions in the Warrants (iii) all Put Shares (iv) any securities issued or issuable upon any stock split, dividend or other distribution, recapitalization or similar event. Inova shall pay to each party an amount in cash, as partial liquidated damages and not as a penalty, equal to 2.00% of the aggregate purchase price paid by each party pursuant to the original note agreements for any unregistered Registrable Securities then held by each party. The parties agree that Inova shall not be liable for liquidated damages under this Agreement with respect to any Warrants or Warrant Shares. Inova analyzed the registration right arrangement under the guidance of FSP ASC 815-15-b and determined that the contingent obligation to make future payments under the registration payment arrangement is not probable.

If Inova were required to pay the 2% penalty for not filing registration statements, the estimated penalty would be approximately $164,000. The lenders have historically granted waivers for these registration rights penalties and therefore management believes the likelihood of this payment to be remote.

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Working Capital Facility:

The Company entered into a tri-party secured agreement in April, 2010 whereby Agile ($150,000), Boone ($100,000) and the former owners of Desert Communications ($150,000) provided amounts totaling $400,000 to Desert Communications. This was in the form of a Note due December, 2010 bearing interest at a rate of 20% and containing the same covenants all Boone documents require. Fees of $10,450 were paid to Boone in conjunction with this debt and were recorded as a discount to the note.

During fiscal 2011 Agile and Desert sellers were paid off and Boone's balance was paid down to $50,000.

Other significant debt transactions:

Asher

On March 7, 2011, Inova borrowed $103,500 from 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. The note is due on December 8, 2011 and is unsecured.

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. 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 fourth quarter of fiscal 2012, $82,500 of debt issued to Asher matured. As a result of the maturity, the debt became convertible. 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 $137,536, resulting in a full discount to the note of $82,500 and a day one loss on derivatives of $55,036. Because the note already matured, the entire discount was amortized to interest expense during the three months ended April 30, 2012.

During the year ended April 30, 2012, Inova issued 4,222,379 shares of common stock to convert $32,000 of Asher debt.

 

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During the year ended April 30, 2012 and 2011, Inova made the following cash repayments on its outstanding notes payable:

    2012       2011  
Notes payable to Boone/Ascendiant/Agile $ -     $ 210,000  
IBM   142,604       114,643  
Notes payable to Desert/Trakkers/RightTag previous owners     -     450,000  
Notes payable to other   13,708       131,610  
               
Total cash paid $ 156,312     $ 906,253  

A summary of changes in notes payable for the years ended April 30, 2012 and 2011 is as follows:

    2012       2011  
Beginning balance $ 11,604,738     $ 9,848,040  
Gross proceeds from the notes payable   82,500       103,500  
Non-cash additions due to put note exercises   -       2,307,900  
Less: repayments made on notes payable   (156,312 )     (906,253 )
Less: conversion   (57,250)       (60,750 )
Add: paid in kind interest   73,204       183,401  
Less: other   425       (162)  
Less: discounts to notes payable from derivative liabilities   (364,500)       -  
Add: amortization of discount   364,500       128,900  
Add: reclassification of accrued interest to notes payable          189,107       -  
Total notes payable $ 11,736,412     $ 11,604,738  

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Notes payable consisted of the following as of April 30, 2012 and 2011:

                     
                     
Lender     2012           2011  
Boone Lenders, LLC   $ 6,883,176         $ 6,809,972  
Ascendiant Opportunity Fund, LLC     1,153,930           1,153,930  
Agile Opportunity Fund, LLC     173,500           198,750  
IBM - Trakkers, LLC                    
Lease Facility Desert Communications, Inc.     70,183           212,362  
Desert Sellers     1,389,107           1,200,000  
Trakkers, LLC Sellers     1,769,686           1,769,686  
Southbase, LLC - Related Party     142,532           142,532  
Other debt     154,298           117,506  
Total   $ 11,736,412         $ 11,604,738  

The following are the future minimum payments for the notes payable:

Year   Amount  
2012 $ 11,593,880  
2013   -  
2014   -  
2015   -  
2016 and after   142,532  
       
Total notes payable   11,736,412  
Less: current maturities   (11,593,880 )
       
Notes payable, net of current maturities $ 142,532  

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NOTE 9 - 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 Ascendiant, Agile and Boone in conjunction with the debt offerings noted above were recorded as derivative liabilities at inception. The liabilities were subsequently measured at fair value at the end of each reporting period with the changes recorded to earnings.

Boone Convertible Put Exercise Note

As discussed in Note 9, Inova determined that the instruments embedded in the convertible put notes exercised by Boone during fiscal 2010 and 2011 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. The fair value of the embedded conversion option in the $1,000,000 convertible put note was determined to be $200,000 as of April 30, 2010 using a Monte Carlo simulation model. Because the number of shares to be issued upon settlement cannot be determined under this instrument, 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), all other share-settleable instruments must be reclassified from equity to liabilities. Inova had two conversion options embedded in notes payable agreements (Ascendiant and Agile) and 1,528,140 warrants to purchase Inova common stock that were classified in equity as of the date that the Boone put note became convertible.

During the quarter ended July 31, 2010, Boone exercised warrants to purchase 30,111,440 shares of Inova common stock and 130.90 shares of Desert common stock. Contemporaneously, Boone exercised the related put options, requiring Inova to repurchase the warrants shares from Boone for $1,515,900. Under the put option agreement, if Inova fails to repurchase the warrant shares from Boone, the put option liability will become a convertible note. Inova did not repurchase the warrant shares and accordingly, the put option became a convertible note during the quarter ended July 31, 2010.

Additionally, Inova determined that the instruments embedded in a second convertible put note exercised by Boone during fiscal 2011 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. During the quarter ended January 31, 2011, Boone exercised warrants to purchase 7,444,240 shares of Inova common stock and 19.44% of Trakkers common stock. Contemporaneously, Boone exercised the related put options, requiring Inova to repurchase the warrants shares from Boone for $792,000. Under the put option agreement, if Inova fails to repurchase the warrant shares from Boone, the put option liability will become a convertible note. Inova did not repurchase the warrant shares and accordingly, the put option became a convertible note during the quarter ended January 31, 2011.

The fair value of the embedded conversion options in the $1,000,000, $1,515,900 and $792,000 convertible put notes was determined to be $593,950 as of April 30, 2012 using a Monte Carlo simulation model.

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These notes are convertible into shares of Desert or Trakkers common stock at an amount equal to (A) 350% of the subsidiary’s EBITDA for the 12 full-months preceding such date, minus (i) the aggregate amount of the subsidiary’s indebtedness to the initial Holder at such date and (ii) the aggregate amount of the Company’s indebtedness to the subsidiary’s Sellers at such date, divided by (B) the total number of issued and outstanding shares of common stock at such date. The note is also convertible into shares of Inova common stock at the lower of (i) $30 per share of Inova common stock and (ii) the lowest per share price of Inova common stock conversion price in effect in any warrant, option, convertible note or other instrument that has been issued by Inova or that is otherwise convertible or exchangeable into Inova, after taking into effect any applicable reset or other conversion or exchange price adjustments. The conversion options are subject to reset provisions that can reduce the conversion prices based on subsequent equity or rights offerings by Desert, Trakkers or Inova below the prices above. As a result of the exercise, the put option liabilities were transferred from derivative liabilities to notes payable during the quarter.

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 7,038,475 and 11,367,655 warrants at April 30, 2012 and 2011 to purchase Inova common stock that are classified as liabilities as a result of the provisions of the convertible put notes.

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

Derivative Liabilities      
Balance at April 30, 2010 $ 5,607,940  
ASC 815-15 (EITF 00-19) Additions   52,000  
Change in fair value   (836,353 )
Put exercise reclass to debt   (2,307,900 )
Balance at April 30, 2011 $ 2,515,687  
Change in fair value   (1,428,991 )
Reclassification of derivative liabilities to additional paid-in capital due to conversion of related notes payable   (62,842)  
ASC 815-15 (EITF 00-19) Additions   437,411  
Balance at April 30, 2012 $ 1,461,265  

 

 

 

 

The following table summarizes the derivative gain recorded as a result of the derivative liabilities above:

    Year Ended    Year Ended 
Derivative gain   April 30, 2012    April 30, 2011 
Excess of fair value of derivative liabilities over note payable  $(160,492)  $—   
Change in fair value   1,428,991    836,353 
Total  $1,268,499   $836,353 

Valuation Models

Inova values its warrant derivatives and simple conversion option derivatives using the Black-Scholes option-pricing model. Assumptions used include (1) .20% to 3.20% risk-free interest rate, (2) warrant life is the remaining contractual life of the warrants, (3) expected volatility 233% to 315%, (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) 0.19% risk free rate, (2) conversion prices as set forth in the agreement, (3) expected Inova stock price volatility of 236%, (4) expected Desert and Trakkers 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 are exercisable. When both are exercisable Inova assumed that the more valuable of the two would be exercised.

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NOTE 10 – COMMITMENTS AND CONTINGENCIES

Earn Outs:

As part of the Trakkers acquisition an earn-out of 5% annually of all revenues generated by Trakkers less than $2.5 million and 10% of any revenues greater than $2.5 million for 5 years was established.

As part of the Right Tag acquisition an earn-out was established: Gross Profit for Right Tag for the 12 months period (“Earn Out Period”) ending April 2008 x 100%, Gross Profit for Right Tag for the 12 months period ending April 2009 x 100%, Gross Profit for Right Tag for the 12 months period ending April 2010 x 40%, Gross Profit for Right Tag for the 12 month period ending April 2011 x 20%, and Gross Profit Right Tag for for the 12 month period April 2012 x 15%. Each payment will be comprised of 50% cash and 50% stock of Inova and will be paid 45 days after final date for calculation of the Earn Out for each Earn Out Period.

The amount payable under these earn outs as of April 30, 2012 and 2011 is $450,671 and $335,574, respectively.

Leases:

There is an office lease for Desert, effective May 2008 until August 2011. Rent is payable at $6,300 per month including tax. The lease has not been renewed to date and Desert plans to continue on a month-to-month basis.

There is an office lease for Trakkers, effective until April 2013. Rent is payable at $3,300 per month including tax.

Rent expense was $117,788 and $115,492 for fiscal 2012 and 2011, respectively. No real estate is owned by the Inova companies.

Litigation:

In May, 2010 Ascendiant filed suit for collection of the $833,906 principal and interest. The suit was stayed to New York and Inova and Desert have been dismissed. Ascendiant filed a new suit in a different California court for the same action; the suit is pending.

NOTE 11 – CAPITAL LEASES

Equipment leases:

Assets under capital leases, included in property and equipment, consisted of the following at April 30:

    2012    2011 
Vehicle  $18,492   $18,492 
Revenue-producing equipment   917,056    917,056 
Less: accumulated depreciation   (715,185)   (531,774)
           
Net assets under capital leases  $220,363   $403,774 

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NOTE 12 – PROFIT SHARING PLAN

A 401K plan was established in September 2008. Employer contributions are made each pay period and a total of $88,110 was contributed for the year ended April 30, 2012 and $151,889 for the year ended April 30, 2011.

NOTE 13 – INCOME TAX

Inova uses the liability method, where deferred tax assets and liabilities are determined based on the expected future tax consequences of temporary differences between the carrying amounts of assets and liabilities for financial and income tax reporting purposes.

At April 30, 2012, for federal income tax and alternative minimum tax reporting purposes, Inova had approximately $708,000 of unused net operating losses available for carry forward to future years. The benefit from carry-forward of such net operating losses will expire in various years through 2032. As a result of an internal revenue service audit during fiscal 2012, the company significantly reduced its estimated net operating losses available for carry forward purposes.

At April 30, 2011, deferred tax assets consisted of the following:

    United           
    States    Canada    Total 
NOL at April 30, 2011  $4,900,000   $89,000   $4,989,000 
Estimated tax rate   35%   20%   N/A 
                
Deferred tax assets   1,715,000    18,000    1,733,000 
Valuation allowance   (1,715,000)   (18,000)   (1,733,000)
                
Net deferred tax assets  $—     $—     $—   

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At April 30, 2012, deferred tax assets consisted of the following:

    United           
    States    Canada    Total 
NOL at April 30, 2012  $708,000   $89,000   $797,000 
Estimated tax rate   35%   20%   N/A 
                
Deferred tax assets   248,000    18,000    266,000 
Valuation allowance   (248,000)   (18,000)   (266,000)
                
Net deferred tax assets  $—     $—     $—   

There are no federal income taxes payable in 2012 or 2011 as a result of the operating losses recorded during those years. Based on a number of factors, including the lack of a history of profits, management believes that there is sufficient uncertainty regarding the realization of deferred tax assets, and, accordingly, has not booked an income tax benefit as of April 30, 2012 and 2011. All losses incurred can be carried forward for seven years for Canadian income tax purposes and twenty years for United States income tax purposes.

NOTE 14 – COMMON STOCK

During fiscal 2012 Inova issued:

·666,667 shares of common stock for the conversion of $25,250 of Agile debt and sold 333,333 shares of common stock for $10,000.

 

·4,222,379 shares of common stock for the conversion of $32,000 of Asher debt

 

·6,944,444 shares of common stock for settlement of accounts payable

 

·2,933,333 shares of common stock for services with a fair value of $72,000

 

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.

 

During fiscal 2011:

2,248,649 shares of common stock with a fair value of $96,000 were issued to Advisors, LLC for services rendered. Advisors, LLC is controlled by a director of the Company. The fair value of the stock was recorded to expense.

On August 3, 2010, Inova entered into an agreement with a public relations firm. Under the terms of the agreement, Inova issued 2% of its outstanding common shares at the inception of the agreement as an advance and non-refundable fee for future services. This resulted in the issuance of 1,126,960 shares of common stock with a fair value of $11,270. This amount was expensed during the quarter ended October 31, 2010.

During the quarter ended October 30, 2010 50,000 shares of common stock with a fair value of $1,500 were issued to a public relations firm for services rendered. The fair value of the stock was recorded to expense during the quarter ended October 30, 2010.

On October 20, 2010 the Board of Directors approved a resolution to complete the issue of a stock dividend to all current shareholders. The ratio will be 20 new shares for every one share held by all shareholders as at the record date. The authorized shares of the company will be adjusted by the same ratio. All share and per share amounts have been adjusted retroactively as if the dividend occurred on the first day of the first period presented.

Inova issued 1,500,000 shares of common stock for the conversion of $60,750 of debt to Agile Opportunity Fund, LLC.

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NOTE 15 – REDEEMABLE PREFERRED STOCK & NON-CONTROLLING INTEREST

Series A Preferred Stock

Inova has authorized an undesignated amount of Series A preferred shares. Each Series A preferred share is convertible into common stock at the rate of 1 to 0.06. There were no shares of Series A preferred stock issued as of April 30, 2012 and 2011.

Series B Convertible Preferred Stock

Inova has authorized 5,000 non-restricted Series B preferred shares to be issued for each acquisition with more than $40 million in sales or $10 million in EBITDA and 5,000 non-restricted Series B preferred shares authorized to be issued for each acquisition with less than $40 million in sales. Each Series B preferred share is convertible into common stock at the rate of 1 to 100. There were no shares of Series B preferred stock issued as of April 30, 2012 and 2011.

Series B Redeemable Preferred Stock

On September 1, 2008, 1,500,000 shares of redeemable preferred stock were issued in conjunction with the purchase of Trakkers and Tesselon. This is redeemable Series B, non-voting preferred, which has a dissolution value of $1 per share. The agreement was amended on December 18, 2008 and again in July 2009. The original and first amended preferred stock agreements were determined to have errors and did not represent the intent of both parties causing both to be amended. Inova must determine the method of redemption of the preferred stock any time over the one year period from issuance and when redeemed Inova may choose from the following 3 redemption options: 1) $1,500,000 payment of cash 2) Issuance of 375,000 common shares 3) Transfer of 10% of the Trakkers/Tesselon companies. Option 2) requires the company to issue the 375,000 common shares in three annual installments of 125,000 common shares each beginning no later than October 31, 2010. If elected, options 1) and 3) are due on the third anniversary of the issuance of the preferred stock. During 2009, the company originally anticipated that it would select option 2 and therefore classified the fair value of the preferred stock as a component of stockholders’ equity as of April 30, 2009. Management later determined it is best for the company to elect option 3) and therefore will settle the instrument by issuing 10% ownership of Trakkers LLC on the third anniversary of the agreement. Because the one year period from the original issuance of the preferred stock has passed, the Company can no longer change the method of redemption. At inception of the instrument, the company determined the fair value of the preferred stock was $1,307,506. Because the instrument will now be settled with subsidiary stock, Inova has classified the instrument as non-controlling interest in the consolidated balance sheet as of April 30, 2012 and 2011 in accordance with ASC 810-10-45-17A and ASC 815-40-15-5C (formerly EITF 08-08) “Accounting for an Instrument (or an Embedded Feature) with a Settlement Amount That Is Based on the Stock of an Entity’s Consolidated Subsidiary”. As of April,30, 2012, Inova had not issued the 10 % interest in trakkers to the original sellers. Inova is currently in the process of determining if this settlement option is in conflict with other secured creditors of trakkers.

NOTE 16 – WARRANTS

Fiscal 2011

During the quarter ended July 31, 2010, Boone exercised warrants to purchase 30,111,440 shares of Inova common stock and 130.90 shares of Desert common stock. Contemporaneously, Boone exercised the related put options, requiring Inova to repurchase the warrants shares from Boone for $1,515,900. Under the put option agreement, if Inova fails to repurchase the warrant shares from Boone, the put option liability will become a convertible note. Inova did not repurchase the warrant shares and accordingly, the put option became a convertible note during the quarter ended July 31, 2010. See Note 8.

During the quarter ended October 31, 2010, Boone exercised warrants to purchase 7,682,340 shares of Inova common stock and 19.44% of Trakkers common stock. Contemporaneously, Boone exercised the related put options, requiring Inova to repurchase the warrants shares from Boone for $792,000. Under the put option agreement, if Inova fails to repurchase the warrant shares from Boone, the put option liability will become a convertible note. Inova did not repurchase the warrant shares and accordingly, the put option became a convertible note in November 2010. See Note 8.

Inova issued 1,000,000 warrants to a public relations firm with a fair value of $56,500 that were fully vested and non-forfeitable on the date of grant. The fair value of these warrants was reclassified to derivative liabilities at $52,000 due to provisions in certain convertible note agreements (described in Note 9) that cause all share-settable instruments issued by Inova to be classified as liabilities.

Fiscal 2012

During fiscal 2012, 1,528,142 warrants to purchase Inova common stock expired unexercised.

The following tables summarize common stock warrants outstanding by entity:

                   Weighted 
         Weighted         average 
         average    Aggregate    remaining 
         exercise    intrinsic    contractual 
Warrants to purchase Inova common stock   Warrants    price    value    life (years) 
Outstanding at April 30, 2010   48,161,435   $0.05   $2,720,778    4.11 
Granted   1,000,000    0.18           
Exercised   (37,793,780)   .00           
Forfeited   —      —             
Expired                    
Outstanding at April 30, 2011   11,367,655   $0.03   $676,196    2.56 
Granted   —      —             
Exercised   —      —             
Forfeited   —      —             
Expired   (1,528,142)   0.00           
Outstanding at April 30, 2012   9,839,513   $0.03   $77,441    1,57 

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                       Weighted
         Weighted             average
         average         Aggregate   remaining
         exercise         intrinsic   contractual
Warrants to purchase Desert common stock   Warrants    price         value   life (years)
Outstanding at April 30, 2010   130.90   $0.00        $1,072,842   5.10
Granted        0.00           
Exercised   (130.90)   0.00           
Forfeited   —      —             
Expired   —      —             
Outstanding at April 30, 2011 and 2012   0   $0.00    $        0

 

                   Weighted 
         Weighted         average 
         average    Aggregate    remaining 
         exercise    intrinsic    contractual 
Warrants to purchase Trakkers common stock   Warrants    price    value    life (years) 
Outstanding at April 30, 2010   32.94%  $—     $1,082,932    3.69 
Granted        0.00           
Exercised   19.44%   —             
Forfeited   —      —             
Expired   —      —             
Outstanding at April 30, 2011   13.50%  $—     $10,606    3.18 
Granted   —      —             
Exercised   —      —             
Forfeited   —      —             
Expired   —      —             
Outstanding at April 30, 2012   13.50%  $—     $—      2.18 

NOTE 17 – MAJOR CUSTOMERS AND MAJOR VENDORS

During fiscal 2012 and 2011, revenues generated from three customers were approximately 45% and 43% of total revenues. These revenues were generated by Desert from its customers in network solution contracts.

During fiscal 2012 and 2011, purchases from four vendors totaled approximately 81% and 63% of total purchases. These purchases were made by Desert.

NOTE 18 – SEGMENT INFORMATION

Inova has two reportable segments, one providing RFID products (RFID) and one providing network solutions (DCI). 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 is the summary of operations by segment:

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For the year ended April 30, 2012:

    RFID    DCI    Corporate    Total 
Revenues   1,642,242    19,565,451    0    21,207,693 
                     
Cost of revenues   (241,916)   (15,248,053)   0    (15,489,969)
                     
Gross profit   1,400,326    4,317,398    0    5,717,724 
                     
Operating costs   (1,698,103)   (3,436,431)   (803,896)   (5,938,430)
                     
Operating income   (297,777)   880,967    (803,896)   (220,706)
                     
Interest expense   (350,830)   (310,324)   (1,723,408)   (2,384,562)
                     
Interest income   0    16    0    16 
                     
Other income   0    0    1,356,081    1,356,081 
                     
Net income (loss)   (648,607)   570,659    (1,171,223)   (1,249,171)
                     
Total assets   1,758,797    3,517,143    3,398,500    8,674,440 

For the year ended April 30, 2011:

    RFID    DCI    Corporate    Total 
Revenues   2,041,870    20,079,919    —      22,121,789 
                     
Cost of revenues   (635,206)   (14,610,207)   —      (15,245,413)
                     
Gross profit   1,406,664    5,469,712    —      6,876,376 
                     
Operating costs   (3,910,601)   (3,957,810)   (72,790)   (7,941,201)
                     
Operating income   (2,503,937)   1,511,902    (72,790)   (1,064,825)
                     
Interest expense   (656,936)   (418,978)   (1,234,358)   (2,310,272)
                     
Other income   —      24,720    —      24,720   
                     
Net income (loss)   (3,160,873)   1,117,644    (1,307,148)   (3,350,377)
                     
Total assets   2,114,081    2,639,220    3,406,696    8,159,997 

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NOTE 19 – SUBSEQUENT EVENTS

The company refinanced its lease with IBM for $77,500 until July, 2013.

In July 2012, the company purchased certain intellectual property from Southbase International Limited, a company controlled by Inova’s CEO. The purchase price is $100,000 and will be paid with 12,315,270 shares of Inova common stock.

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Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

There are no disagreements with our accountant on accounting and financial disclosure.

Item 9A. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in the reports that it files or submits under the Securities Exchange Act of 1934, as amended (the "Act") is accumulated and communicated to the issuer's management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. It should be noted that the design of any system of controls is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions, regardless of how remote. As of the end of the period covered by this Annual Report, we carried out an evaluation, under the supervision and with the participation of our Chief Financial Officer and Chief Executive Officer, of the effectiveness of the design and operation of our disclosure controls and procedures. Based on this evaluation, our Chief Financial Officer and Chief Executive Officer have concluded that the Company’s disclosure controls and procedures are not effective due to the identification of material weaknesses in our internal controls.

Changes in Internal Controls over Financial Reporting

We have not yet made any changes in our internal controls over financial reporting that occurred during the period covered by this report on Form 10-K that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

Management’s Annual Report on Internal Control Over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act. Our internal control system was designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes, in accordance with generally accepted accounting principles. Because of inherent limitations, a system of internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate due to change in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Our management conducted an evaluation of the effectiveness of our internal control over financial reporting using the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control—Integrated Framework. Based on its evaluation, our management concluded that our internal controls over financial reporting are not effective due to material weaknesses in areas covering impairment determination, revenue recognition and supervisory responsibilities.

In assessing the effectiveness of our internal control over financial reporting, management identified the following material weakness in internal control over financial reporting as of April 30, 2012:

  • Deficiencies in Segregation of Duties. The Chief Executive Officer and the Chief Financial Officer are actively involved in the preparation of the financial statements, and therefore cannot provide an independent review. The company may establish an audit committee this year, which should address this problem.
  • Deficiencies in Recording Transactions.  Inova failed to properly record material transactions related to its credit facility receivable, goodwill, fixed assets, derivative liabilities, equity and certain expense accounts.

The transactional controls of revenue, cash and assets for the subsidiaries are adequate.

This annual report does not include an attestation report of the Company’s registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to the attestation by the Company’s registered public accounting firm pursuant to temporary rules of the SEC that permit the Company to provide only management’s report in this annual report.

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PART III.

Item 10. Directors, Executive Officers and Corporate Governance

Our directors and executive officers as of the date of this Report are as follows:

  Name Age Position
  Adam Radly 43 Chief Executive Officer, President, Treasurer
  Paul Aunger 53 Secretary, Director
  Bob Bates 43 Chief Financial Officer
  Alex Lightman 49 Director

Adam Radly, President, Chief Executive Officer, Chairman and Treasurer

Mr. Radly became Chief Executive Officer of Inova after the merger with Web’s Biggest. Mr. Radly was previously the founder and CEO of Isis Communications. While he was CEO of Isis, the company’s revenue increased from zero to $22 million. He also complete an IPO for Isis raising A$50 million. During his tenure, Isis completed eight acquisitions, and raised an additional $30 million from U.S. institutional investors in a secondary offering. Isis later merged with AAV Ltd.

Paul Aunger, Secretary

Mr. Aunger became a director and the Company’s Secretary on November 22, 2005. He is managing partner of Advisors, LLC.

Bob Bates, Chief Financial Officer

Bob is a CPA, CVA and CFE with over 20 years experience as a Controller and CFO for various public and private entities in several countries. He was with Allied Capital (NYSE) as Controller and has worked for other Billion dollar companies. He also worked with KPMG. He is a director of Catalyst Group.

Mr. Alex Lightman, Director

Mr. Alex Lightman has been a director since August 2008. He was the founding CEO and Chairman of IPv6 Summit, Inc., a leading organizer of international IPv6 events and consultants to government and industry on IPv6 applications, training, and promotion. Mr. Lightman has nearly 20 years of high technology management experience and, in addition, has experience in politics (including work for US Senator), consulting, the oil drilling industry, and the renewable energy industry. Mr. Lightman is the author of Brave New Unwired World (Wiley, 2002) and a 1983 graduate of the Massachusetts Institute of Technology. He has attended graduate school at the Kennedy School of Government (Harvard University) and the University of Phoenix.

Director Independence

The full Board of Directors fulfills the role of the Audit Committee. We do not have an Audit Committee financial expert. The Board believes that due to the Company’s small size, an audit committee is unnecessary and would impose high costs in comparison to the potential benefits.

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SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

Section 16(a) of the Securities Exchange Act of 1934 requires the Company's directors and executive officers, and persons who own more than ten percent of a registered class of the Company's equity securities, to file with the Securities and Exchange Commission (the "SEC”) initial reports of ownership and reports of changes in ownership of common stock and other equity securities of our Company. Officers, directors and greater than ten percent stockholders are required by SEC regulation to furnish our Company with copies of all Section 16(a) forms they file.

Based on our review of the Section 16(a) forms filed with the SEC, no director, officer, or 10% beneficial owner of our securities failed to timely file any report required under Section 16(a). To our knowledge, none of the above persons failed to report a reportable transaction.

We do not have a code of ethics that applies to our principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions. We have not adopted a formal code of ethics because we have determined that such a code would be an unnecessary and bureaucratic practice given the small size of the Company's management; however we endeavor to carry out our responsibilities in accordance with required laws and regulations.

Item 11. Executive Compensation.

The following describes the cash and stock compensation paid to our directors and officers during the two past fiscal years. Our fiscal year ends on April 30. As a result, our most recent fiscal year ended April 30, 2012, and is referred to below as 2012. The previous fiscal year ended April 30, 2011 and is referred to as 2011 below.

SUMMARY COMPENSATION TABLE

Name and principal        Management fee    Stock      
position   Year    ($)    Awards ($)    Total ($) 
Adam Radly, Chairman and CEO   2011         -0-    0,000 
Adam Radly, Chairman and CEO   2012    0    -0-    0,000 
Paul Aunger, Secretary and Director   2011    0    48,000    48,000 
Paul Aunger, Secretary and Director   2012    0    48,000    48,000 
Bob Bates, CFO (HP Accounting)   2011    120,000    -0-    120,000 
Bob Bates, CFO (HP Accounting)   2012    120,000    -0-    120,000 
Alex Lightman, Director   2011    12,000    -0-    12,000 
Alex Lightman, Director   2012    12,000    -0-    12,000 

Other related party information:

We are not a party to an employment agreement with Mr Radly. Mr Radly has agreed to provide his services at no cost to the Company. Companies in which Mr Radly has an interest (and therefore are defined as “related” to Mr Radly) do provide additional services to the Company that do not include his services as CEO of Inova. The total amount earned by these entities in the most recent fiscal years (the 12 months ending April 2011 and 2012) was $240,000, per the management fee agreement. These amounts are reflected in the executive compensation for Mr. Radly in our filings because he has disclosed that he has an interest in these companies.

The management fees payable for work provided by Mr Radly and Mr Aunger are paid to various companies related to them and not paid to them personally. The amounts in the table above represent the total compensation paid in relation to work provided by Mr Radly and Mr Aunger and staff of their entities.

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Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

The following table describes the equity compensation available to our management.

Equity Compensation Plan Information  
                Number of securities  
                remaining available for  
    Number of securities to be     Weighted-average exercise     future issuance under  
    issued upon exercise of     price of outstanding     equity compensation plans  
    outstanding options,     options, warrants and     (excluding securities  
    warrants and rights     rights     reflected in column (a))  
                   
Plan category   (a)     (b)     (c)  
Equity compensation plans approved by security holders   -0-     -0-     1,125,000 (1)
Equity compensation plans not approved by security holders   -0-     -0-     -0-  
Total   -0-     -0-     1,125,000 (1)

 

(1) Includes 5,000 non-restricted Class B preferred shares authorized to be issued for each acquisition with more than $40 million in sales or $10 million in EBITDA and 5,000 non-restricted Class B preferred shares authorized to be issued for each acquisition with less than $40 million in sales. Each Class B preferred share is convertible into common stock at the rate of 1 to 100.

The following table sets forth certain information known to us with respect to beneficial ownership of our common stock as of April 30, 2012 by each person known by us to beneficially own 5% or more of our outstanding common stock; each of our directors; each of the Named Executive Officers; and all of our directors and Named Executive Officers as a group.

In general, a person is deemed to be a "beneficial owner" of a security if that person has or shares the power to vote or direct the voting of such security, or the power to dispose or direct the disposition of such security. In computing the number of shares beneficially owned by a person and the percentage ownership of that person, shares of common stock subject to options or debentures held by that person that are currently exercisable or convertible or exercisable or convertible within 60 days of April 30, 2011 are deemed outstanding.

Percentage of beneficial ownership is based upon 62,273,289 shares of common stock outstanding at April 30, 2011. To our knowledge, except as set forth in the footnotes to this table and subject to applicable community property laws, each person named in the table has sole voting and investment power with respect to the shares set forth opposite such person's name.

  Number of Shares Beneficially  
Name and Address of Beneficial Owner (1) Owned Percent of Class
Adam Radly - CEO and related entities 35,700,884 Common Stock, $0.001 Par Value 47%
     
Paul Aunger-Secretary and related entities 25,104,522 33%

(1) The address for these owners is 2300 W. Sahara Ave. Suite 800 Las Vegas, Nevada 89102

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Item 13. Certain Relationships and Related Transactions

A company related to our Chairman and CEO, Adam Radly, has loaned the Company money. The amount outstanding under this loan is $142,532. Interest is accruing at the rate of 7% per year.

In December 2007, a company related to our CEO agreed to convert $600,000 of cash loaned to the Company plus the interest accrued on the loan into 464,912 common shares of the Company. However, as discussed above, this transaction was not accounted for until July 2008, when the authorized shares were increased.

Item 14. Principal Accountant Fees and Services

AUDIT FEES

Our fees for fiscal 2012 and 2011 totaled $70,000 and $70,000 respectively.

AUDIT-RELATED FEES

Our fees for fiscal 2012 and 2011 totaled $45,000 and $45,000, respectively.

TAX FEES

There were no tax fees paid to our principal accountants in the last two fiscal years.

ALL OTHER FEES

Our fees for fiscal 2012 and 2011 totaled $0 and $0 respectively.

None of the above fees were subject to audit committee pre-approval requirements.

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PART IV.

Item 15. Exhibits

(A) Exhibits

Exhibit   Description
Number    
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 the Chief Executive Officer required by Rule 13a - 14(b) or Rule 15d - 14(b) and 18 U.S.C. 1350
32.2   Certification of the Chief Financial Officer required by Rule 13a - 14(b) or Rule 15d - 14(b) and 18 U.S.C. 1350
99.1   Certificate Pursuant to NRS 78.209 of Amendment of Articles of Incorporation

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SIGNATURES

INOVA TECHNOLOGY INC.

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

INOVA TECHNOLOGY, INC.

By: /s/ Adam Radly
Adam Radly, Chief Executive Officer
Date: July 30, 2012

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the date indicated.

Signature   Name and Title   Date
         
/s/ Adam Radly   Adam Radly    
    Chairman and CEO   July 30, 2012
         
/s/ Bob Bates   Bob Bates    
    CFO   July 30, 2012
         
/s/ Paul Aunger   Paul Aunger    
    Secretary and Director   July 30, 2012