Attached files

file filename
EXCEL - IDEA: XBRL DOCUMENT - Inova Technology Inc.Financial_Report.xls
EX-32.2 - EXHIBIT 32.2 - Inova Technology Inc.ex32_2.htm
EX-32.1 - EXHIBIT 32.1 - Inova Technology Inc.ex32_1.htm
EX-31.2 - EXHIBIT 31.2 - Inova Technology Inc.ex31_2.htm
EX-31.1 - EXHIBIT 31.1 - Inova Technology Inc.ex31_1.htm


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

FORM 10-Q

(Mark One)

xQUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended July 31, 2013

oTRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT

Commission file number 000-27397

INOVA TECHNOLOGY INC.
(Exact name of small business issuer in its charter)

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

2300 W. Sahara Ave. Suite 800 Las Vegas, NV 89102
(Address of principal executive offices)
 
89146
(800) 757-9808
(Postal Code)
(Issuer's telephone number)

Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
x Yes o No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
x Yes o No

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

Large accelerated filer o
Accelerated Filer o
Non-accelerated Filer o
Smaller reporting Company x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
o Yes x No
 
State the number of shares of outstanding of each of the issuer’s classes of common equity, as of September 16, 2013: 12,932,190



 
 

 
 
Inova Technology Inc.

Form 10-Q

Table of Contents

 
 
 
 
 
 
 
 

 
 
Item 1. Financial

INOVA TECHNOLOGY, INC.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
 
   
July 31, 2013
   
April 30, 2013
 
             
ASSETS
             
Current assets
           
Cash
    172,796       378,785  
 Accounts receivable, net of allowance of $81,283 and $81,283
    68,019       100,233  
Contract receivables, net of allowance of $21,746 and $21,746
    671,926       703,838  
Credit facility receivable
    1,117,009       485,673  
Inventory
    102,430       114,652  
Costs in excess of billing and estimated earnings
    134,832       13,123  
Prepaid and other current assets
    99,008       84,223  
                 
Total current assets
    2,366,020       1,880,527  
                 
Fixed assets, net
    74,617       81,458  
Revenue earning equipment, net
    31,578       89,048  
Goodwill, net
    4,014,801       4,014,801  
                 
Total assets
  $ 6,487,016     $ 6,065,834  
                 
LIABILITIES AND STOCKHOLDERS' DEFICIT
                 
Current liabilities
               
Accounts payable
    903,985     $ 646,185  
Accrued liabilities
    9,809,081       9,106,174  
Deferred income
    397,250       564,773  
Derivative liabilities
    1,027,349       1,123,715  
Notes payable - related parties
    1,492,188       1,639,688  
Notes payable
    10,274,594       10,002,876  
Total current liabilities
    23,904,447       23,083,411  
                 
Notes payable - related parties, net of current maturities
    85,532       85,532  
                 
Total liabilities
    23,989,979       23,168,943  
                 
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; 20,000,000 shares
               
authorized; 4,785,008 and 1,820,241 shares issued and outstanding
    4,785       1,820  
Additional paid-in capital
    6,696,090       5,984,439  
Accumulated deficit
    (25,492,747 )     (24,396,874 )
Total Inova Technology, Inc stockholders' deficit
    (18,791,872 )     (18,410,615 )
Non-controlling interest
    1,288,909       1,307,506  
Total stockholders' deficit
    (17,502,963 )     (17,103,109 )
                 
Total liabilities and stockholders' deficit
  $ 6,487,016     $ 6,065,834  
 
See summary of accounting policies and notes to unaudited consolidated financial statements.
 
 
3

 
 
INOVA TECHNOLOGY, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
For the three months ended July 31, 2013 and 2012
(Unaudited)
   
2013
   
2012
 
             
Revenues
  $ 7,610,714     $ 6,476,909  
                 
Cost of revenues
    (6,319,794 )     (4,933,480 )
Selling, general and administrative
    (1,390,417 )     (1,336,364 )
Depreciation expense
    (64,313 )     (118,972 )
                 
Operating loss
    (163,810 )     88,093  
                 
Other income (expense):
               
Gain (Loss) on derivative liabilities
    (122,915 )     222,942  
Interest expense
    (809,148 )     (428,633 )
                 
Net loss
  $ (1,095,873 )   $ (117,598 )
                 
Basic and diluted income (loss) per share
  $ (0.49 )   $ (0.15 )
                 
Weighted average common shares outstanding-basic
    2,234,176       774,467  
 
See summary of accounting policies and notes to unaudited consolidated financial statements.
 
 
 
 
 
 
 
4

 
 
INOVA TECHNOLOGY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the three months ended July 31, 2013 and 2012
(Unaudited)
 
   
2013
   
2012
 
CASH FLOWS FROM OPERATING ACTIVITIES
           
Net loss
  $ (1,095,873 )   $ (117,598 )
Adjustments to reconcile net loss to net cash used provided by
               
operating activities:
               
Depreciation expense
    64,313       118,347  
Amortization of debt discount
    130,982       -  
Amortization expense - loan discounts and deferred financing costs
    -          
Paid in kind interest
    -       18,932  
Bad debt expense (recovery)
    -          
Gain on sale of asset
    -          
Gain on debt extinguishment
    -          
Stock issued for services
    78,310          
Legal expenses paid directly by third party debtholder
    295,556       -  
Derivative loss (gain)
    122,915       (222,942 )
Changes in operating assets and liabilities:
               
Accounts receivable
    64,126       416,405  
Credit facility receivable
    (631,336 )     586,418  
Inventory
    12,222       (150 )
Costs in excess of billing and estimated earnings
    (121,709 )     48,511  
Prepaid expenses and other current assets
    (14,785 )     3,897  
Accounts payable
    257,798       -  
Accrued expenses
    715,933       (699,915 )
Deferred revenues
    (167,523 )     (11,458 )
Net cash used in operating activities of operations
    (289,071 )     140,447  
                 
CASH FLOW INVESTING ACTIVITIES
               
Purchase of fixed assets
    -          
Net cash used in investing activities
    -       -  
                 
CASH FLOW FINANCING ACTIVITIES
               
Proceeds from notes payable
    21,500          
Common stock issued for cash
    -          
Sale of Tesselon, LLC units
    61,582       -  
Repayments made on notes payable
    -       (14,257 )
Net cash provided by financing activities
    83,082       (14,257 )
                 
NET CHANGE IN CASH
    (205,989 )     126,190  
CASH AT BEGINNING OF YEAR
    378,785       752,011  
CASH AT END OF YEAR
  $ 172,796     $ 878,201  
                 
SUPPLEMENTAL INFORMATION:
               
Interest paid
  $ -     $ 92,271  
Income taxes paid
  $ 18,496     $ 21,904  
                 
NON-CASH INVESTINGAND FINANCING ACTIVITIES:
               
Common stock issued for conversion of notes payable
    190,346          
Reclassification of derivative liabilities to notes payable
    -          
Accrued interest reclassified to related party notes payable
    -          
Purchase of patent with stock
            73,892  
Common stock issued for settlement of accounts payable
    -          
Settlement of derivative liabilities due to conversion of related notes payable
    365,782          
Assignment of related party debt to third party
    147,500          
Discount on notes payable from derivative liabilities
    (146,500 )        
Change in non-controlling interest from sale of Tesselon, LLC units
    80,179       -  
 
See summary of accounting policies and notes to unaudited consolidated financial statements.
 
 
5

 
INOVA TECHNOLOGY, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

NOTE 1 –BASIS OF PRESENTATION

The accompanying unaudited interim consolidated financial statements of Inova Technology, Inc. (“we”, “our”, “Inova” or the “Company”) have been prepared in accordance with accounting principles generally accepted in the United States of America and the rules of the Securities and Exchange Commission (“SEC”) and should be read in conjunction with the audited financial statements and notes thereto contained in Inova’s latest Annual Report filed with the SEC on Form 10-K. In the opinion of management, all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of financial position and the results of operations for the interim periods presented have been reflected herein. The results of operations for interim periods are not necessarily indicative of the results to be expected for the full year. Notes to the consolidated financial statements that would substantially duplicate the disclosure contained in the audited financial statements for the most recent fiscal year as reported in Form 10-K have been omitted.

Fair Value Measurements

Financial Accounting Standards Board Accounting Standards Codification (“ASC”) 820 defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. As defined in ASC 820, fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (exit price). The Company utilizes market data or assumptions that market participants would use in pricing the asset or liability, including assumptions about risk and the risks inherent in the inputs to the valuation technique. These inputs can be readily observable, market corroborated, or generally unobservable. The Company classifies fair value balances based on the observability of those inputs. ASC 820 establishes a fair value hierarchy that prioritizes the inputs used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (level 1 measurement) and the lowest priority to unobservable inputs (level 3 measurement).
          
The following table sets forth by level with the fair value hierarchy the Company’s financial assets and liabilities measured at fair value on July 31, 2013.
 
   
Level 1
   
Level 2
   
Level 3
   
Total
 
Assets
                       
None
  $ -     $ -     $ -     $ -  
                                 
Liabilities
                               
Derivative liabilities
  $ -     $ -     $ 1,027,350     $ 1,027,350  
 
As of July 31, 2013, Inova measured its derivative liabilities using Level 3 inputs as defined by ASC 820 with a total fair value of $1,027,350.  See Note 4.

Reclassifications

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

NOTE 2 – GOING CONCERN

As shown in the accompanying consolidated financial statements, we have an accumulated deficit and negative working capital and are in default on the majority of our notes payable as of July 31, 2013. 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.
 
 
6

 
 
NOTE 3 – RELATED PARTY TRANSACTIONS

Note Payable to Southbase, LLC

Loans payable from Southbase, LLC consists of advances from existing shareholders. These notes are unsecured, bear interest at 7%, and are due in May 21, 2017. The amount due to Southbase, LLC, a company related to Adam Radly, was $85,532 as of July 31, 2013.

Desert Sellers

Seller notes with a balance of $1,389,107 relate to the Desert Communications, Inc. (“Desert”) purchase in December of 2007. They have interest rates of 18%, are secured by all of the common stock of Desert Communications, Inc. and were due in December of 2010. The notes are now in default.

Trakkers President

Seller notes with a balance of $103,081, to the president of Trakkers, relate to the Trakkers purchase in 2008. They have interest rates of 7-10%, are secured by all of the member units of Trakkers and were due in 2011. The notes are now in default.  During the three months ended July, 31, 2013, 147,500 of the balance was assigned to third parties.

NOTE 4 - DERIVATIVE LIABILITIES

ASC 815-40 Put Warrant Liabilities

Under ASC 815-40 “Put Warrants”, warrants for put shares should be classified as liabilities and measured at fair value at the end of each reporting period with the change in fair value recorded to earnings. As a result, the fair value of the warrants granted to Inova’s debt holders in prior years were recorded as derivative liabilities at inception. These liabilities are subsequently measured at fair value at the end of each reporting period with the changes recorded to earnings. As of July 31, 2013, Inova had $639,828 of derivative liabilities as a result of these provisions.

ASC 815-15 Conversion Option and Warrant Liabilities

During fiscal 2010, Inova determined that the instruments embedded in a convertible put note exercised by one of Inova’s lenders should be classified as liabilities and recorded at fair value due to their being no explicit limit to the number of shares to be delivered upon settlement of the above conversion options.
 
Because the number of shares to be issued upon settlement cannot be determined under these instruments, Inova cannot determine whether it will have sufficient authorized shares at a given date to settle any other of its share-settleable instruments. As a result of this, under ASC 815-15 “Accounting for Derivative Financial Instruments Indexed to and Potentially Settled in, a Company's Own Stock” (formerly EITF 00-19), the conversion options noted above and all other share-settleable instruments are classified as liabilities. Inova has three conversion options embedded in notes payable agreements and 8,839,513 warrants to purchase Inova common stock that are classified as liabilities as a result of the provisions of the convertible put notes. As of July 31, 2013, Inova had $387,522 of derivative liabilities as a result of these provisions.
 
 
7

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

Derivative Liabilities
     
Balance at April 30, 2013
 
$
1,123,715
 
Settlement of derivative liabilities due to conversion of related notes payable
   
(365,780
)
Additonal derivatives added due to convertible notes payable issued
   
146,500
 
Change in fair value
   
122,915
 
Balance at July 31, 2013
 
$
1,027,350
 

Valuation Models

Inova values its warrant derivatives and simple conversion option derivatives using the Black-Scholes option-pricing model. Assumptions used include (1) 0.11% - 0.15% risk-free interest rate, (2) warrant life is the remaining contractual life of the warrants, (3) expected volatility 338% to 392%, (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) 0.11% risk free rate, (2) conversion prices as set forth in the agreement, (3) expected Inova stock price volatility of 392%, (4) expected Desert stock price volatility of 25%, and (6) common stock price of the underlying share on the valuation date. Inova valued the note as a combination of the underlying debt payment and series of two options. Since the options are mutually exclusive, the Monte Carlo simulation was used to estimate when either of the options is exercisable. When both are exercisable Inova assumed that the more valuable of the two would be exercised.

NOTE 5 –SEGMENT INFORMATION

Inova has three reportable segments, one providing management support to the other subsidiaries (Edgetech Services, Inc.), one providing network solutions (Desert Communications, Inc.) and one which manufactures standards compliant and durable RFID (Radio Frequency Identification) equipment (Trakkers, LLC & RightTag, Inc). Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly in deciding how to allocate resources and in assessing performance.
 
The following table presents three month segment information:
 
   
Trakkers,
                   
   
LLC &
   
Desert
             
   
RightTag,
   
Communications,
             
   
Inc.
    Inc.     Corporate     Total  
                                 
Revenues
    379,905       7,230,809       -       7,610,714  
                                 
Cost of revenues
    61,781       6,258,013       -       6,319,794  
                                 
Gross profit
    318,124       972,796       -       1,290,920  
                                 
Operating costs
    482,184       924,546       48,000       1,454,730  
                                 
Operating income
    (164,060 )     48,250       (48,000 )     (163,810 )
                                 
Interest expense
    110,355       75,000       623,793       809,148  
                                 
Interest income
    -       -       -          
                                 
Other income
    -       -       122,915       122,915  
                                 
Net income (loss)
    (274,415 )     (26,750 )     (794,708 )     (1,095,873 )
                                 
Total assets
    991,378       2,105,828       3,389,810       6,487,016  
 
 
8

 
 
NOTE 6 – WARRANTS

The following tables summarize common stock warrants outstanding by entity:


             
Weighted
 
     
Weighted
     
average
 
     
average
 
Aggregate
 
remaining
 
Warrants to purchase Inova common
   
exercise
 
intrinsic
 
contractual
 
stock
Warrants
 
price
 
value
 
life (years)
 
Outstanding at April 30, 2013
   
75,853
   
$
0.00
   
$
39,414
     
1.21
 
Granted
   
-
     
-
                 
Exercised
   
-
     
-
                 
Forfeited
   
-
     
-
                 
Expired
   
(1,959)
     
0.26
                 
Outstanding at July 31, 2013
   
73,894
   
$
0.00
   
$
39,414
     
0.01
 

             
Weighted
 
     
Weighted
     
average
 
     
average
 
Aggregate
 
remaining
 
Warrants to purchase Trakkers
   
exercise
 
intrinsic
 
contractual
 
common stock
Warrants
 
price
 
value
 
life (years)
 
Outstanding at April 30, 2013
   
13.50
   
$
-
   
$
       
1.18
 
Granted
   
-
     
-
                 
Exercised
   
-
     
-
                 
Forfeited
   
-
     
-
                 
Expired
   
-
     
-
                 
Outstanding at July 31, 2013
   
13.50
   
$
-
   
$
       
.92
 
 
All warrants above were exercisable as of July 31, 2013.
 
 
9

 
 
NOTE 7 – EQUITY

During the three months ended July 31, 2013, Inova issued:
 
 
·
2,338,605  shares of common stock for the conversion of $190,346 of third party debt and accrued interest.
 
·
559,359 shares of common stock related to anti-dilution notes, valued at $78,310 of compensation expense.
 
·
66,802 shares of common stock to all shareholders as a result of rounding errors from the stock split which occurred in fiscal 2013
 
In May 2013, 61,582 units of Tesselon, LLC were sold to the president of Trakkers, LLC for $61,582.  The units represent 1.1% ownership of Tesselon, LLC, which has a majority ownership in Righttag, Inc, and Trakkers, LLC.   As a result of the transaction, the Company recorded $18,579 to non-controlling interest which represents the non-controlling interest’s share of the net assets of these entities with a resulting credit to additional paid-in capital of $80,179.  For the three months ended July 31, 2013, the non-controlling interest’s share of the earnings of these entities was nominal.
 
 
NOTE 8 – DEBT

The following table summarizes outstanding debt as of July 31, 2013 and April 30, 2012:

   
July 31,
   
April 30,
 
   
2013
   
2013
 
   
Carrying
   
Carrying
 
Lender
 
Amount
   
Amount
 
             
Boone Lenders, LLC
 
$
7,301,538
   
$
7,005,982
 
Ascendiant Opportunity Fund, LLC
   
1,153,930
     
1,153,930
 
Agile Opportunity Fund, LLC
   
173,500
     
173,500
 
IBM - Trakkers, LLC
               
                 
Lease Facility
   
66,500
     
66,500
 
Desert Communications, Inc. Sellers
   
1,389,107
     
1,389,107
 
Trakkers, LLC Sellers
   
1,469,105
     
1,469,105
 
Southbase, LLC - Related Party
   
85,532
     
85,532
 
                 
Other
   
213,102
     
384,440
 
Total
 
$
11,852,314
   
$
11,728,096
 

Of the total outstanding debt, $11,605,760 was in default as of July 31, 2013. Principal owed to Boone Lenders, LLC (“Boone”) increased due to the paid-in kind interest described below. $295,556 of legal fees were added to the Boone notes.

On several notes with Boone, interest as accrued is converted to principal. 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.

NOTE 9 – SUBSEQUENT EVENTS
 
Subsequent to July 31, 2013, third parties converted $107,506 of their debt for 7,843,216 shares of common stock.
 
In July 2013, Inova assigned $94,444 of related party debt to a third party. The note is convertible into shares of Inova’s common stock.
 
 
10

 
 
Item 2. Management Discussion and Analysis of Financial Condition and Result of Operations.

The information contained in this Management’s Discussion and Analysis of Financial Condition and Results of Operation contains “forward looking statements.” Actual results may materially differ from those projected in the forward looking statements as a result of certain risks and uncertainties set forth in this report. Although our management believes that the assumptions made and expectations reflected in the forward looking statements are reasonable, there is no assurance that the underlying assumptions will, in fact, prove to be correct or that actual future results will not be materially different from the expectations expressed in this Annual Report. The following discussion should be read in conjunction with the unaudited Consolidated Financial Statements and related Notes included in Item 1.

RESULTS OF OPERATIONS FOR THE THREE MONTH PERIOD ENDED JULY 31, 2013

Net revenues increased from $6,476,909 in the three-month period ending July 31, 2012 to $7,610,714 for the three-month period ending July 31, 2013. The increase in revenue is due to changes in the timing of various projects in Desert.

Cost of sales increased from $4,933,480 in the three-month period ending July 31, 2012 to $6,319,794 for the three-month period ending July 31, 2013. The decrease is a result of the revenue increase described above.

Operating expenses increased from $1,336,364 for the three months ending July 31, 2012 to $1,390,417 for the same period in 2013. This was mainly due to the increase in professional fees from legal expenses.

Net loss increased from $117,598 for the three months ending July 31, 2012 to a net loss of $1,095,873 for the same period in 2013. This is mainly due to higher interest expense and professional fees and lower gross profit.


LIQUIDITY AND CAPITAL RESOURCES

Cash used by operations for the three month period ended July 31, 2013 was $289,071 as compared to cash provided by operations of $140,447 for the three months ended  July 31, 2012. Cash used in investing activities for the three month period ended July 31, 2012 and July 31, 2013 was $0. Cash provided by financing activities for the period ended July 31, 2012 was $83,082, as compared to $14,257 used in financing activities for the three months ended July 31, 2013.
 
 
11

 

Our operating activities for the three months ended July 31, 2013, have generated adequate cash to meet our basic operating needs, but only sufficient to service debt on a limited basis. As of July 31, 2013, we had cash and cash equivalents totaling $172,796, and receivables of $1,856,954.

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, and may face additional financial or legal issues.

Desert’s projects sometimes require bonding. Our ability to obtain bonding is related to our financial condition; if we are unable to obtain boding at certain times this could affect our ability to accept projects we win bids on.

EBITDA

Management believes adjusted EBITDA provides a more useful measure of company performance. This is because there are several measures included in GAAP net income which are related to warrant/derivative accounting. We consider these items to be unrelated to operating income and performance, and they do not impact our cash flow or debt service. However there is a limitation in using Adjusted EBITDA; each company may use a different definition of Adjusted EBITDA and therefore it is hard to compare them to each other. For example our company might use different add-backs to net income than our competitors, thus making it more difficult to compare us to them. We compensate for this by regularly including adjusted EBITDA in our filings so that our performance can be measured over time.

GAAP Financial statements: We therefore advise readers to refer to the GAAP financial statements as the format of those is standardized and uniform in comparison with any other audited company. In these we show net income as ($1,095,873) for the 3 months ending July 31, 2013. In addition, working capital ratios and other liquidity measures, total debt and debt/equity ratio are common measures used by companies to measure performance. These statements are audited whereas the adjusted EBITDA amounts are not opined to by the auditors but are a management tool.

Adjusted EBITDA for the 3 months ending July 31, 2013 was $158,911. Adjusted EBITDA is Earnings before interest, tax, depreciation, legal fees and amortization. Inova also excludes the non-cash loss on derivative liabilities, gain on debt extinguishment, and impairment charges from its adjusted EBITDA calculation. Non-cash loss on derivative liabilities, gain on debt extinguishment, impairment charges, depreciation and amortization are excluded from adjusted EBITDA because they do not require cash payments.

Adjusted EBITDA
 
31-July-13
 
Net income (loss)
   
(1,095,873
Interest, fees
   
809,148
 
Derivative (gain) loss
   
122,915
 
Tax
   
18,496
 
Legal fees
   
239,382
 
Depreciation/Amortization
   
64,313
 
Adjusted EBITDA
   
158,911
 

Item 4. Controls and Procedures

(a) Evaluation of disclosure controls and procedures.

Management has evaluated, with the participation of our Chief Executive Officer and Chief Financial Officer, the effectiveness of our disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) as of the end of the period covered by this report and concluded that our disclosure controls and procedures were not effective to ensure that all material information required to be disclosed in this Quarterly Report on Form 10-Q has been made known to them in a timely fashion. We are in the process of improving our internal control over financial reporting in an effort to remediate these deficiencies through improved supervision and training of our accounting staff. These deficiencies have been disclosed to our Board of Directors. We believe that this effort is sufficient to fully remedy these deficiencies and we are continuing our efforts to improve and strengthen our control processes and procedures. Our Chief Executive Office, Chief Financial Officer and directors will continue to work with our auditors and other outside advisors to ensure that our controls and procedures are adequate and effective.

(b) Changes in internal controls

There have been no significant changes in our internal controls over financial reporting that occurred during the fiscal quarter covered by this report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
 
 
12

 
 
PART II

Item 1. Legal Proceedings.

None

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

None

Item 3. Defaults Upon Senior Securities

Not Applicable.

Item 4. Other Information

None

Item 5. Exhibits

(A) Exhibits

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

 

SIGNATURES

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

Dated: September 16, 2013
By:
 
/s/ Adam Radly
 
     
Adam Radly
     
Chief Executive Officer
       
Dated: September 16, 2013
By:
 
/s/ Bob Bates
 
     
Bob Bates
     
Chief Accounting Officer
 
 
 
 
 
 14