UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark One)
| x | QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
| | For the quarterly period ended July 31, 2008 |
| | |
| o | TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT |
| | For the transition period from ______________ to _____________ |
| | |
| | Commission file number | 000-27397 |
INOVA TECHNOLOGY INC.
(Exact name of small business issuer in its charter)
| Nevada | | 98-0204280 |
(State or other jurisdiction of incorporation or organization) | | (I.R.S. Employer Identification No.) |
233 Wilshire Blvd, Suite 400,
Santa Monica, CA, 90401
(Address of principal executive offices)
| 89146 | | (310) 857-6666 |
| (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 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 15, 2008: 964,870,775
| Transitional Small Business Disclosure Format (Check one): | Yes o | No x |
Inova Technology, Inc. and Subsidiaries
Consolidated Balance Sheets (unaudited)
| | | July 31, | | April 30, | |
| | | 2008 | | 2008 | |
| ASSETS | | | | | |
| | | | | | |
| Current assets | | | | | |
| Cash | | $ | 256,805 | | $ | 12,167 | |
| Accounts receivables, net | | | - | | | 769,918 | |
| Contract receivables, net | | | 3,067,870 | | | 2,233,252 | |
| Inventory | | | 103,658 | | | 101,679 | |
| Cost in excess of billing | | | 180,958 | | | 198,655 | |
| Prepaid and other current assets | | | 580,771 | | | 234,645 | |
| | | | | | | | |
| Total current assets | | | 4,190,062 | | | 3,550,316 | |
| | | | | | | | |
| Fixed assets, net | | | 186,268 | | | 183,926 | |
| Intangible assets, net | | | 737,224 | | | 845,332 | |
| Goodwill | | | 5,904,782 | | | 5,904,782 | |
| | | | | | | | |
| Total assets | | $ | 11,018,336 | | $ | 10,484,356 | |
| | | | | | | | |
| LIABILITIES AND STOCKHOLDERS EQUITY | | | | | | | |
| | | | | | | | |
| Current liabilities | | | | | | | |
| Accounts payable | | $ | 2,382,941 | | $ | 1,746,889 | |
| Accrued liabilities | | | 146,233 | | | 270,061 | |
| Deferred income | | | 520,475 | | | 403,792 | |
| Note payable - related parties | | | 227,237 | | | 1,200,855 | |
| Note payable, net | | | 1,205,722 | | | 2,648,678 | |
| | | | | | | | |
| Total current liabilities | | | 4,482,608 | | | 6,270,275 | |
| | | | | | | | |
| | | | | | | | |
| Long term debt - net of current maturities | | | 3,181,738 | | | 2,812,133 | |
| | | | | | | | |
| Total liabilities | | | 7,664,346 | | | 9,082,408 | |
| | | | | | | | |
| Stockholders' equity | | | | | | | |
| Convertible preferred stock, $0.001 par value; 25,000,000 | | | - | | | 4,951 | |
| shares authorized; 0 and 4,951,000 issued and outstanding | | | | | | | |
| Common stock, $0.001 par value; 3,000,000,000 shares | | | 964,871 | | | 600,000 | |
| authorized; 964,870,775 shares and 600,000,000 | | | | | | | |
| shares issued and outstanding, respectively | | | | | | | |
| Additional paid-in capital | | | 4,064,963 | | | 2,774,658 | |
| Accumulated deficit | | | (1,675,844 | ) | | (1,977,661 | ) |
| | | | | | | | |
| Total stockholders' equity | | | 3,353,990 | | | 1,401,948 | |
| | | | | | | | |
| Total liabilities and stockholders' equity | | $ | 11,018,336 | | $ | 10,484,356 | |
Inova Technology, Inc. and Subsidiaries
Consolidated Statements of Income
For the three months ended July 31, 2008 and July 31, 2007 (unaudited)
| | | 07/31/08 | | 07/31/07 | |
| | | | | | |
| Revenues | | $ | 5,892,315 | | $ | 385,112 | |
| | | | | | | | |
| Cost of revenues | | | (4,040,229 | ) | | (145,263 | ) |
| Operating expenses | | | (1,287,347 | ) | | (140,197 | ) |
| | | | | | | | |
| Operating income | | | 564,739 | | | 99,652 | |
| | | | | | | | |
| Interest expense | | | (262,923 | ) | | (31,695 | ) |
| | | | | | | | |
| Net income | | $ | 301,816 | | $ | 67,957 | |
| | | | | | | | |
| | | | | | | | |
| Basic and diluted income per share | | $ | 0.00 | | $ | 0.00 | |
| | | | | | | | |
| Weighted average common shares | | | 964,870,775 | | | 600,000,000 | |
Inova Technology, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
For the three months ended July 31, 2008 and 2007 (unaudited)
| | | July 31, 2008 | | July 31, 2007 | |
| | | | | | |
| CASH FLOWS OPERATING ACTIVITIES | | | | | |
| Net income | | $ | 301,816 | | $ | 67,957 | |
| | | | | | | | |
| Adjustments to reconcile net income to cash provided by | | | | | | | |
| operating activities: | | | | | | | |
| Amortization expense | | | 277,875 | | | 2,225 | |
| Depreciation expense | | | 9,214 | | | - | |
| Accrued management fees | | | 30,000 | | | - | |
| Interest expense from conversion of debt to equity | | | 126,340 | | | - | |
| Changes in operating assets and liabilities: | | | | | | | |
| Increase (decrease) in A/P and accrued expenses | | | 649,024 | | | 40,878 | |
| Increase (decrease) in accounts receivable | | | (64,700 | ) | | 31,190 | |
| Increase (decrease) in deferred income | | | 116,683 | | | - | |
| Increase (decrease) in inventory | | | 15,718 | | | 540 | |
| Increase (decrease) in prepaid/other assets | | | (346,126 | ) | | 10,784 | |
| | | | | | | | |
| Net cash provided by operating activities | | | 1,115,844 | | | 153,574 | |
| | | | | | | | |
| CASH FLOWS FROM INVESTING ACTIVITIES | | | | | | | |
| Purchase of fixed assets | | | (11,556 | ) | | (2,215 | ) |
| | | | | | | | |
| Net cash used in investing activities | | | (11,556 | ) | | (2,215 | ) |
| | | | | | | | |
| CASH FLOWS FROM FINANCING ACTIVITIES | | | | | | | |
| Proceeds from loans | | | 671,125 | | | 110,000 | |
| Repayment of loans | | | (1,493,075 | ) | | (237,508 | ) |
| Repayment of loans - related parties | | | (37,700 | ) | | - | |
| | | | | | | | |
| Net cash used in financing activities | | | (859,650 | ) | | (127,508 | ) |
| | | | | | | | |
| NET CHANGE IN CASH | | | 244,638 | | | 23,851 | |
| CASH AT BEGINNING OF PERIOD | | | 12,167 | | | 22,847 | |
| | | | | | | | |
| CASH AT END OF PERIOD | | $ | 256,805 | | $ | 46,698 | |
| | | | | | | | |
| SUPPLEMENTAL INFORMATION: | | | | | | | |
| Interest paid | | $ | 42,209 | | $ | 15,127 | |
| Income taxes paid | | | - | | | - | |
| | | | | | | | |
| NONCASH INVESTING AND FINANCING ACTIVITIES: | | | | | | | |
| Discount on note payable - BCF | | $ | 280,942 | | $ | 54,427 | |
| Discount on note payable - Warrants | | | 166,183 | | | 54,428 | |
| Common stock issued for debt | | | 1,087,247 | | | - | |
| Preferred stock converted to common stock | | | 120,573 | | | - | |
| Net liabilities assumed under the Right Tag acquisition | | | - | | | 111,572 | |
INOVA TECHNOLOGY, INC.
(Unaudited)
NOTE 1 –BASIS OF PRESENTATION
The accompanying unaudited interim consolidated financial statements of Inova have been prepared in accordance with accounting principles generally accepted in the United States of America and the rules of the Securities and Exchange Commission and should be read in conjunction with the audited financial statements and notes thereto contained in Inova’s latest Annual Report filed with the SEC on Form 10-KSB. 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-KSB have been omitted.
NOTE 2 – RELATED PARTY TRANSACTIONS
Loans payable from related parties consists of advances from existing shareholders. These notes are unsecured, bear interest at 7% to 8%, and are repayable in two to three years. Amount due to Southbase is $137,192 and due to Advisors, LLC is $90,045.
During the three months ended July 31, 2008, 7,959,084 shares of common stock were issued to Advisors, LLC as partial payment of a note payable and accounts payable.
NOTE 3 –NOTES PAYABLE
Note Payable - Ascendiant:
In July 2008, a note payable of $500,000 was issued for 1.5 years by Ascendiant. It is secured by all assets of Desert and $300,000 escrow for a potential acquisition.
This loan has the following financial requirements:
1) Maintain availability under IBM $2.5 million line of credit of $250,000 or greater;
2) 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;
3) No concentration above $2.5 million to any supplier through the IBM facility;
4) No concentration above 20% to any single customer;
5) No single accounts payable more than the greater of $300,000 or 20% of the accounts receivable balance under 60 days. The portion beyond 90 days past due must be less than 10% of the total accounts receivable.
As of July 31, 2008, the minimum time to measure had not elapsed, therefore, no determination of compliance was made as of that date.
52,896,558 warrants were issued to Ascendiant with this note. The warrants expire in July 2013. They have an aggregated exercise price of $200. The fair value of these warrants was calculated using the Black-Scholes Model using these assumptions (1) 3% discount rate, (2) warrant life of 5 years, (3) expected volatility of 365%, and (4) zero expected dividends. The warrants relative fair value created a discount of $166,183.
Inova signed a put option agreement with Ascendiant whereby anytime between January 1, 2010 and July 1, 2013, Ascendiant can require Inova to repurchase from Ascendiant up to 48,978,294 shares of Common Stock for $250,000. The Put is not in effect until Ascendiant exercises their warrants. As of July 31, 2008, the warrants had not been exercised.
Inova analyzed the notes and warrants for derivative accounting consideration under SFAS 133 and EITF 00-19. Inova determined that derivative accounting is not applicable. Inova then analyzed the conversion option under EITF 98-5 and EITF 0-27 and determined there was a beneficial conversion feature resulting in a discount to the note of $280,942.
Inova entered into a registration agreement with Ascendiant 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. Regristrable 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 Bonne an amount in cash, as partial liquidated damages and not as a penalty, equal to 2.00% of the aggregate purchase price paid by Ascendiant pursuant to the Purchase Agreement for any unregistered Registrable Securities then held by Ascendiant. 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 EITF 00-19-b and determined that the contingent obligation to make future payments under the registration payment arrangement is not probable and can not be reasonably estimated at inception because currently Ascendiant has not yet exercised the outstanding warrants and the registration right arrangement would not be effective until the warrants are exercised and become Common Shares.
All discounts will be amortized over the life of the notes using the effective interest method. A summary of the activity on this note for the three month ended July 31, 2008 is as follows:
| Gross proceeds from the note | | $ | 500,000 | |
| Less: Discount related to the origination fees imposed by the lender | | | (52,875 | ) |
| Less: relative fair value of warrants granted | | | (166,183 | ) |
| Less: beneficial conversion feature discount | | | (280,942 | ) |
| Add: amortization of discount | | | 3,954 | |
| | | | | |
| Carrying amount of the note as of July 31, 2008 | | $ | 3,954 | |
Other debt transactions during the three months ended July 31, 2008:
The original Boone Note was $1,792,000 with the option to increase to $2,016,000. Inova borrowed additional $224,000 from Boone during the quarter ended July 31, 2008. The terms of this additional borrowing are the same as the original Boone borrowing.
During the quarter ended July 31, 2008, Inova made the following cash repayments on its outstanding notes payable:
| Notes payable to Desert previous owners | | $ | 265,389 | |
| Boone Note | | | 518,597 | |
| IBM line of credit | | | 482,531 | |
| | | | | |
| Total cash paid | | $ | 1,266,517 | |
During the three months ended July 31, 2008, Inova recognized $165,813 amortization expense on the loan discounts originated from its financing arrangement with Boone and Agile.
During fiscal 2007 and 2008, Inova issued more common shares to its related parties than the number of shares previously authorized. These shares were authorized by the board to be issued to the related parties of the Company for the conversion of preferred stock and certain outstanding debts. In July 2008, number of authorized shares was increased to 3,000,000,000 shares. 356,911,705 shares previously agreed to be issued to the related parties were issued. These shares were valued at $1,156,937 and additional interest expense of $234,886 was recorded by Inova for the excess fair value.
During the first quarter of 2009, 7,959,084 common shares were issued to a related party as partial payment of a note payable and account payable with carrying values totaling $46,163.
NOTE 5 –SEGMENT INFORMATION
Inova has three reportable segments, one providing IT solutions and services, one providing hardware and cabling and one which manufactures standards compliant and durable RFID (Radio Frequency Identification) equipment. Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly in deciding how to allocate resources and in assessing performance.
| | | EdgeTech | | RightTag | | DCI | | Total | |
| Sales | | $ | 87,318 | | $ | 16,598 | | $ | 5,788,399 | | $ | 5,892,315 | |
| Cost of sales | | | 53,886 | | | 7,629 | | | 3,979,077 | | | 4,040,592 | |
| Operating income (expense) | | | (250,670 | ) | | (11,720 | ) | | 827,130 | | | 564,740 | |
| Interest expense | | | 23,522 | | | - | | | 239,401 | | | 262,923 | |
NOTE 6 – SUBSEQUENT EVENT
On September 2, 2008, Inova purchased 40% of the outstanding stock of Innophone for $40,000. Inova also has the right to buy an additional 400,000,000 shares at a future date. Innophone is an internet protocol company that owns IP addresses.
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, 2008
Net revenues increased from $385,112 in the three-month period ending July 31, 2007 to $5,892,315 for the three-month period ending July 31, 2008. This is due to the revenues from the newly-acquired Desert Communications.
Operating expenses increased from $140,197 for the three months ending July 31, 2007 to $1,287,347 for the same period in 2008. This was mainly due to the expenses from the newly-acquired Desert Communications.
Net income from continuing operations decreased from $67,957 for the three months ending July 31, 2007 to $301,817 for the same period in 2008. This is due to the profit from the newly-acquired Desert Communications.
LIQUIDITY AND CAPITAL RESOURCES
Cash provided by operations for the three month period ended July 31, 2008 was $1,115,844, as compared to cash provided by operations of $153,574 for the three months ended July 31, 2007. The change is primarily due to the acquisition of Desert. Cash used in investing activities for the three month period ended July 31, 2008 was $11,556, as compared to $2,215 for the three months ended July 31, 2007. The change was due to fixed asset purchases. Cash used for financing activities for the three month period ended July 31, 2008 was $859,650, as compared to $127,508 for the three months ended July 31, 2007. The change was due to significant loan repayments.
Our operating activities for the three months ended July 31, 2008, have generated adequate cash to meet our operating needs. As of July 31, 2008, we had cash and cash equivalents totaling $256,805, and accounts receivable of $3,067,870.
Management believes that existing cash, cash equivalents, together with any cash generated from operations will be sufficient to meet normal operating requirements including capital expenditures for the next twelve months.
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.
PART II
None.
None.
Not Applicable.
None.
(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 |
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 15, 2008 | By: | /s/ Adam Radly |
| | | Adam Radly |
| | | Chief Executive Officer |
| | | |
| Dated: September 15, 2008 | By: | /s/ Bob Bates |
| | | Bob Bates |
| | | Chief Financial Officer, |
