NOTE 5 – PROPERTY AND EQUIPMENT
Property and equipment consisted of the following at April 30, 2012 and 2013:
| | Life | | | 2013 | | | | 2012 | |
| Office equipment | 2 to 10 years | | $ | 101,475 | | | $ | 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 | | | | 2,021,560 | |
| | | | | | | | | | |
| Subtotal | | | | 2,601,340 | | | | 2,600,715 | |
| Less: accumulated depreciation | | | | (2,430,834) | | | | (1,900,511 | ) |
| | | | | | | | | | |
| Total | | | $ | 170,506 | | | $ | 700,204 | |
Depreciation expense totaled $530,324 and $355,056 in 2013 and 2012, respectively. Depreciation on scanners is included cost of revenues in the consolidated statements of operations. For the years ended April 30, 2013 and 2012, $497,848 and $319,416 of depreciation expense was included in cost of revenues, respectively.
NOTE 6 – GOODWILL AND INTANGIBLES
RightTag:
An impairment analysis on the goodwill was performed at April 30, 2013 and 2012 and $142,795 of impairment to goodwill was recorded in 2013 due to a decline in customers and related revenues.
Desert:
In December 2007 when Inova acquired Desert, Inova accounted for the acquisition using the purchase method of accounting for business combinations. As a result, $3,315,918 was recorded as goodwill.
An impairment analysis on the goodwill was performed at April 30, 2013 and 2012 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. There was $698,883 of goodwill balance as of April 30, 2013 and 2012.
An impairment analysis on the goodwill was performed at April 30, 2013 and 2012 and $0 of impairment to goodwill was recorded.
Goodwill and Intangible Assets consists of the following as of April 30, 2012 and 2013:
| Goodwill | | 2013 | | | 2012 | |
| RightTag | | $ | 0 | | | $ | 142,795 | |
| Desert | | | 3,315,918 | | | | 3,315,918 | |
| Trakkers/Tesselon | | | 698,883 | | | | 698,883 | |
| | | | | | | | | |
| Total | | $ | 4,014,801 | | | $ | 4,157,596 | |
NOTE 7 – RELATED-PARTY TRANSACTIONS
A summary of changes in related-party payable accounts for the years ended April 30, 2013 and 2012 is as follows:
| | | 2013 | | | 2012 | |
| Beginning balance | | $ | 1,832,220 | | | $ | 1,643,113 | |
Less: repayments made on related-party payable | | | (57,000 | ) | | | - | |
Reclassification of accrued interest to related party note payable | | | - | | | | 189,107 | |
Reclassification of third party payable to related party note payable | | | | | | | - | |
Assignment of related party note payable to a third party | | | (50,000 | ) | | | - | |
| Total related-party payable | | | $1,725,220 | | | $ | 1,832,220 | |
Related-party payable account consisted of the following as of April 30, 2013 and 2012:
| | | 2013 | | | 2012 | |
Due to Southbase, entity related to CEO. Matures May 2017, 7%, unsecured | | $ | 85,532 | | | $ | 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 | | | | 1,389,107 | |
Due to CEO and President of Trakkers. Matured February 2010 (in default), 7%, unsecured | | | 250,581 | | | | 300,581 | |
| Total related-party payable | | | 1,725,220 | | | | 1,832,220 | |
| Less: current maturities | | | (1,639,688 | ) | | | ( 1,689,688 | ) |
| | | | | | | | | |
Long-term portion of related-party payable | | $ | 85,532 | | | $ | 142,532 | |
Advisors, LLC & Web’s Biggest, Inc.
Advisors, LLC is a company owned by Paul Aunger, a former director of the Company. The Company had a consulting agreement with Advisors, LLC for payments of $1,000 per month thru January 31, 2013. Advisors, LLC owns Web’s Biggest, Inc.
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 former director of the Company. The fair value of the stock was recorded to expense during the quarters ended July 31 and October 31, 2011.
During fiscal 2013, 25,074 shares of common stock with a fair value of $17,000 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 January 31, 2013.
No amounts were owed to Advisors, LLC as of April 30, 2013 and 2012.
Southbase International, Limited(“Southbase”)
Southbase International is a company related to Adam Radly, our CEO. The Company has a consulting agreement with Southbase earning fees of $20,000 per month for software development and consulting fees. Fees are earned on a month to month basis only if Southbase provides the related services. If no services are provided, then Southbase will not earn its monthly fee. Since April of 2013, Southbase has not provided any software development or consulting services.
Desert Sellers
There are notes payable to the previous owners of Desert Communications in the amount of $1,389,106 and accrued interest of $913,403 and $667,284 as of April 30, 2013 and 2012. 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 Desert sellers that remain as employees are paid bonuses based on the operating results of Desert. As of April 30, 2013 and 2012, $0 and $30,305 of bonuses owed to the Desert sellers and are included in accrued liabilities in the consolidated balance sheet.
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, 528,964 warrants to purchase Inova common stock were issued with this note. As of April 30, 2013 and 2012, this note was in default and due on demand and as a result.
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, 2013 and 2012, 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%.
26,448 warrants were issued to Ascendiant with this note. The warrants expired 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 30,959 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.
Put Option Exercise
On April 8, 2010 Ascendiant exercised 24,489 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, 2013 and 2012.
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 $150 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, 2013 and 2012, $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% . 87,470 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.
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 138,515 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, 2013 and 2012, 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 116,974 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, 2013 and 2012, 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 301,114 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 74,442 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.
Paid-In Kind Interest & Legal Fees
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, 2013 and 2012, a total of $18,932 and $73,204 of interest was recognized and recorded to the principal balance of all loans from Boone Lenders, LLC except the convertible put notes described below.
During fiscal 2013, Inova agreed to pay certain legal fees on behalf of Boone. It was agreed that these amounts would be added to the outstanding principal balance of Boones’s notes. During fiscal 2013, a total of $222,751 of legal fees were added to the principal balance of Boone’s notes and a total of $118,877 was repaid.
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 4,681 additional warrants to purchase Inova common stock as a result of this clause. During fiscal 2009, the Company issued 80,310 additional warrants to purchase Inova common stock as a result of this clause. During fiscal 2010, the Company issued 21,232 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, 15,246 Inova warrants and 7 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 274,764 warrants to purchase Inova common stock and 78 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 80,310 warrants to purchase Inova common stock and 32 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 57,683 shares of Inova common stock and 32 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.
During the quarter ended July 31, 2010, Boone exercised warrants to purchase 301,114 shares of Inova common stock and 131 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 74,442 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) $7.50 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 $4.05.
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 9 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, 2013 and 2012 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, 12,500 warrants to purchase Inova common stock were issued with this note. This note is secured by all tangible and intangible assets of Inova.
12,500 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 43 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 $4.05 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 $300 per share (previously convertible at $4.05 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 15,000 shares of common stock for the conversion of $60,750 of debt to Agile Opportunity Fund, LLC at a conversion price of $4.05.
During the three months ended July 31, 2011, Inova issued 6,667 shares of common stock for the conversion of $25,250 of Agile debt and sold 3,333 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 $184,000. The lenders have historically granted waivers for these registration rights penalties and therefore management believes the likelihood of this payment to be remote.
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.
The Asher notes contain provisions that cause the principal balances to increase by 150% upon default of the notes. Due to default provisions being triggered in certain notes during fiscal 2013, the principal balances increased by $83,250. This amount was recorded to interest expense during fiscal 2013.
During the year ended April 30, 2012, Inova issued 42,224 shares of common stock to convert $32,000 of Asher debt.
During the year ended April 30, 2013, Inova issued 908,280 shares of common stock to convert $142,530 of Asher debt.
During the year ended April 30, 2013 and 2012, Inova made the following cash repayments on its outstanding notes payable:
| | | 2013 | | | 2012 | |
| Notes payable to Boone/Ascendiant/Agile | | $ | | | | $ | - | |
| IBM | | | 24,959 | | | | 142,604 | |
Notes payable to Desert/Trakkers/RightTag previous owners | | | | | | | | |
| Notes payable to other | | | 57,298 | | | | 13,708 | |
| | | | | | | | | |
| Total cash paid | | $ | 82,257 | | | $ | 156,312 | |
A summary of changes in notes payable for the years ended April 30, 2013 and 2012 is as follows:
| | | 2013 | | | 2012 | |
| Beginning balance | | $ | 11,736,412 | | | $ | 11,604,738 | |
| Gross proceeds from the notes payable | | | 37,500 | | | | 82,500 | |
| Additions due to legal fees capitalized | | | 103,874 | | | | - | |
| Additons due to Asher default | | | 83,250 | | | | - | |
| Less: repayments made on notes payable | | | (82,257 | ) | | | (156,312 | ) |
| Less: conversion | | | (142,530 | ) | | | (57,250 | ) |
| Add: paid in kind interest | | | 18,932 | | | | 73,204 | |
| Less: other | | | - | | | | 425 | |
| Add: Extension of capital lease | | | 21,276 | | | | | |
Less: discounts to notes payable from derivative liabilities | | | (50,000 | ) | | | (364,500 | ) |
| Add: amortization of discount | | | 1,639 | | | | 364,500 | |
Add: reclassification of accrued interest to notes
payable | | | - | | | | 189,107 | |
| Total notes payable | | $ | 11,728,096 | | | $ | 11,736,412 | |
Notes payable consisted of the following as of April 30, 2013 and 2012:
| Lender | | 2013 | | | 2012 | |
| Boone Lenders, LLC | | $ | 7,005,982 | | | $ | 6,883,176 | |
| Ascendiant Opportunity Fund, LLC | | | 1,153,930 | | | | 1,153,930 | |
| Agile Opportunity Fund, LLC | | | 173,500 | | | | 173,500 | |
| Lease Facility Desert Communications, Inc.* | | | 66,500 | | | | 70,183 | |
| Desert Sellers - Related Parties | | | 1,389,107 | | | | 1,389,107 | |
| Trakkers, LLC Sellers | | | 1,469,105 | | | | 1,769,686 | |
| Southbase, LLC - Related Party | | | 85,532 | | | | 142,532 | |
| Other debt | | | 384,440 | | | | 154,298 | |
| Total | | $ | 11,728,096 | | | $ | 11,736,412 | |
The following are the future minimum payments for the notes payable:
| Year | | Amount | |
| 2013 | | $ | 11,642,564 | |
| 2014 | | | - | |
| 2015 | | | - | |
| 2016 and after | | | 85,532 | |
| | | | | |
| Total notes payable | | | 11,728,096 | |
| Less: current maturities | | | (11,642,564 | ) |
| | | | | |
| Notes payable, net of current maturities | | $ | 85,532 | |
The Boone, NETF, Ascendiant, Agile, IBM, Southbase and certain seller notes are secured by UCC’s in Nevada, Texas and Montana, where the company’s assets reside. These are the collectively the senior and junior secured creditors.
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 15,281 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 301,114 shares of Inova common stock and 131 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 74,442 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 $671,245 as of April 30, 2013 using a Monte Carlo simulation model.
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) $3,000 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 70,385 and 113,677 warrants at April 30, 2013 and 2012 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, 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 | |
| Change in fair value | | | (114,398 | ) |
Reclassification of derivative liabilities to additional paid-in
capital due to conversion of related notes payable | | | (426,955 | ) |
| ASC 815-15 (EITF 00-19) Additions | | | 200,859 | |
| Balance at April 30, 2013 | | $ | 1,123,715 | |
The following table summarizes the derivative gain recorded as a result of the derivative liabilities above:
| | | Year Ended | | | Year Ended | |
| Derivative gain (loss) | | April 30, 2013 | | | April 30, 2012 | |
Excess of fair value of derivative
liabilities over note payable | | $ | (151,498 | ) | | $ | (160,492 | ) |
| Change in fair value | | | 114,398 | | | | 1,428,991 | |
| Total | | $ | 37,100 | | | $ | 1,268,499 | |
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.
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 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, 2013 and 2012 is $446,102 and $450,671, 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 $211,058 and $117,788 for fiscal 2013 and 2012, respectively. No real estate is owned by the Inova companies.
Litigation:
In May, 2010 Ascendiant filed suit for collection of the $1,847,038 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; judgment was granted for the amount of the existing debt. Boone has obtained a Temporary Restraining Order (“TRO”) in New York against one of the two Ascendiant entities for 1 of the 2 notes which prevents Ascendiant Opportunity Fund from collecting on the debt due.
A judgment for $1,279,219 in favor of George Jones has been entered against Inova Technology, Inc and one subsidiary Inova Technology Holdings LLC and includes an order to pay $20,000 per month to Jones. The judgment does not apply to any of Inova's operating subsidiaries. In order to ensure that Inova's operating subsidiaries are not affected, the Company has filed motions requesting TRO’s that prevent Jones from pursuing any collection activity against Inova's primary operating subsidiaries Desert Communications and Trakkers. The TRO's have been granted. Inova has also filed a motion to have the judgment set aside in addition to appealing the judgment. Inova has also commenced litigation in Nevada against Mr Jones and his related party attorney, Sean Kneafsey, seeking damages in excess of $1,000,000 for fraud on the court, practicing law without a license and other claims. Jones is in last position behind all other creditors. Inova has accrued $1,279,219 related to this judgment as of April 30, 2013.
NOTE 11 – CAPITAL LEASES
Equipment leases:
Assets under capital leases, included in property and equipment, consisted of the following at April 30:
| | | 2013 | | | 2012 | |
| Vehicle | | $ | 18,492 | | | $ | 18,492 | |
| Revenue-producing equipment | | | 917,056 | | | | 917,056 | |
| Less: accumulated depreciation | | | (865,263 | ) | | | (715,185 | ) |
| | | | | | | | | |
| Net assets under capital leases | | $ | 70,285 | | | $ | 220,363 | |
NOTE 12 – PROFIT SHARING PLAN
A 401K plan was established in September 2008. Employer contributions are made each pay period and a total of $42,812 was contributed for the year ending April 30, 2013 and $88,110 for the year ending April 30, 2012.
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, 2013, for federal income tax and alternative minimum tax reporting purposes, Inova had approximately $4,629,000 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 2033.
At April 30, 2013, deferred tax assets consisted of the following:
| | | United | | | | | | | |
| | | States | | | Canada | | | Total | |
| NOL at April 30, 2013 | | $ | 4,541,000 | | | $ | 89,000 | | | $ | 4,630,000 | |
| Estimated tax rate | | | 35 | % | | | 20 | % | | | N/A | |
| | | | | | | | | | | | | |
| Deferred tax assets | | | 1,589,000 | | | | 18,000 | | | | 1,607,000 | |
| Valuation allowance | | | (1,589,000 | ) | | | (18,000 | ) | | | (1,607,000 | ) |
| | | | | | | | | | | | | |
| Net deferred tax assets | | $ | - | | | $ | - | | | $ | - | |
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 2013 or 2012 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, 2013 and 2012. 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:
| | · | 6,667 shares of common stock for the conversion of $25,250 of Agile debt and sold 3,333 shares of common stock for $10,000. |
| | · | 42,224 shares of common stock for the conversion of $32,000 of Asher debt |
| | · | 69,444 shares of common stock for settlement of accounts payable |
| | · | 29,333 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 2013:
Inova purchased intellectual property from Southbase International Limited (“Southbase), a related party due to ownership in Southbase by Inova’s CEO. Inova issued 123,153 shares of common stock for the intellectual property, for a total value of $73,892, based on the Inova stock trading price on the closing date.
| | · | 908,280 shares of common stock for the conversion of $142,530 of third party debt. |
| | | |
25,074 shares of common stock with a fair value of $17,000 were issued to Advisors, LLC for services rendered. Advisors, LLC is controlled by a former director of the Company. The fair value of the stock was recorded to expense.
As a result of conversion of debt described above, Inova settled derivative liabilities with a fair value of $426,955 on the conversion dates. This amount was reclassified to additional paid-in capital.
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, 2013 and 2012.
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, 2013 and 2012.
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 has been 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”.
The shares are in the process of being distributed as of this date.
NOTE 16 – WARRANTS
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, 2011 | | | 113,677 | | | $ | 3.00 | | | $ | 676,196 | | | | 2.56 | |
| Granted | | | - | | | | - | | | | | | | | | |
| Exercised | | | - | | | | - | | | | | | | | | |
| Forfeited | | | - | | | | - | | | | | | | | | |
| Expired | | | (15,281 | ) | | | 0.00 | | | | | | | | | |
| Outstanding at April 30, 2012 | | | 98,395 | | | $ | 3.00 | | | $ | 77,441 | | | | 1.57 | |
| | | | | | | | | | | | | | | | | |
| Granted | | | - | | | | - | | | | | | | | | |
| Exercised | | | - | | | | - | | | | | | | | | |
| Forfeited | | | - | | | | - | | | | | | | | | |
| Expired | | | (22,543 | ) | | | 13.31 | | | | | | | | | |
| Outstanding at April 30, 2013 | | | 75,853 | | | $ | 0.00 | | | $ | 39,414 | | | | 1.21 | |
| | | | | | | | | | | | Weighted | |
| | | | | | Weighted | | | | | | average | |
| | | | | | average | | | Aggregate | | | remaining | |
| | | | | | exercise | | | intrinsic | | | contractual | |
| Warrants to purchase Trakkers common stock | | Warrants | | | price | | | value | | | life (years) | |
| Outstanding at April 30, 2011 | | | 13.50 | % | | $ | - | | | $ | 10,606 | | | | 3.18 | |
| Granted | | | - | | | | - | | | | | | | | | |
| Exercised | | | - | | | | - | | | | | | | | | |
| Forfeited | | | - | | | | - | | | | | | | | | |
| Expired | | | - | | | | - | | | | | | | | | |
| Outstanding at April 30, 2012 | | | 13.50 | % | | $ | - | | | $ | - | | | | 2.18 | |
| Granted | | | - | | | | - | | | | | | | | | |
| Exercised | | | - | | | | - | | | | | | | | | |
| Forfeited | | | - | | | | - | | | | | | | | | |
| Expired | | | - | | | | - | | | | | | | | | |
| Outstanding at April 30, 2013 | | | 13.50 | % | | $ | - | | | $ | - | | | | 1.18 | |
NOTE 17 – MAJOR CUSTOMERS AND MAJOR VENDORS
During fiscal 2013 and 2012, revenues generated from three customers were approximately 36 % and 45% of total revenues. These revenues were generated by Desert from its customers in network solution contracts.
During fiscal 2013 and 2012, purchases from four vendors totaled approximately 77 % and 81% 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:
For the year ended April 30, 2013:
| | | RFID | | | DCI | | | Corporate | | | Total | |
| | | | | | | | | | | | | | | | | |
| Revenues | | | 1,194,888 | | | | 17,486,102 | | | | - | | | | 18,680,990 | |
| Cost of revenues | | | (177,178 | ) | | | (13,660,614 | ) | | | - | | | | (13,837,792 | ) |
| | | | | | | | | | | | | | | | | |
| Gross profit | | | 1,017,710 | | | | 3,825,488 | | | | - | | | | 4,843,198 | |
| | | | | | | | | | | | | | | | | |
| Operating costs | | | (1,366,775 | ) | | | (4,193,034 | ) | | | (1,728,192 | ) | | | (7,288,001 | ) |
| | | | | | | | | | | | | | | | | |
| Operating income | | | (349,065 | ) | | | (367,546 | ) | | | (1,728,192 | ) | | | (2,444,803 | ) |
| | | | | | | | | | | | | | | | | |
| Interest expense | | | (664,729 | ) | | | (356,976 | ) | | | (2,980,473 | ) | | | (4,002,178 | ) |
| Interest income | | | - | | | | - | | | | - | | | | - | |
| Other income | | | - | | | | - | | | | (179,257 | ) | | | (179,257 | ) |
| | | | | | | | | | | | | | | | | |
| Net income (loss) | | | (1,013,794 | ) | | | (724,522 | ) | | | (4,887,922 | ) | | | (6,626,238 | ) |
| | | | | | | | | | | | | | | | | |
| Total assets | | | 1,063,263 | | | | 1,612,761 | | | | 3,389,810 | | | | 6,065,834 | |
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 | |
NOTE 19 – SUBSEQUENT EVENTS
In May and July 2013, the Company issued three notes payable for a total of $146,500. These notes are all convertible into common stock at various percentages of Inova’s market price.
In May, June, and July 2013, the company converted $111,250 of notes payable and $8,196 of accrued interest to Asher for 1,220,414 shares of the company’s common stock.
In May, June, and July 2013, the company converted $61,000 of notes payable for 923,487 shares of the company’s common stock.
We issued a proxy in May indicating the majority shareholders had voted to increase the authorized shares to 2 billion (2,000,000,000). As a result of the reverse split described below, this number was reduced to 20,000,000.
We approved a 100:1 reverse split on June 17, 2013. All share and per share amounts have been adjusted retroactively to reflect this split.
In July 2013, Inova assigned $50,000 of related party debt to a third party. The note was immediately amended to make it convertible into shares of Inova’s common stock. Subsequently, $10,000 of principal was converted into 194,704 shares of common stock.
There are no disagreements with our accountant on accounting and financial disclosure.
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 Accounting 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 Accounting 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, 2013:
| | · | 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, revenue and certain expense accounts. |
The transactional controls of 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.
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:
Our directors and executive officers as of the date of this Report are as follows:
| | Name | Age | Position |
| | Adam Radly | 44 | Chief Executive Officer, President, Treasurer |
| | | | |
| | Bob Bates | 44 | Chief Accounting Officer |
| | Subsidiary executives: | | VP Administration, Desert Chief Executive Officer, Trakkers, Righttag, Tesselon Chief Executive Officer, Desert Communications, Inc |
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. Mr. Radly has subsequently done 8 other acquisitions and numerous financing transactions.
Bob Bates, Chief Accounting 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 Orion Financial Group. Mr. Bates' company, HP Accounting Inc., provides the accounting services of 3 staff to Inova on a consulting basis. He is not an officer of the company.
Senior Management
The 5 executives that comprise the management of the Inova Companies have over 135 years of experience in various industries, multiple continents, in public and private companies. There are 2 MBA’s, a CPA, a Phd and CVA and CFE. They have experience at such companies as Hewlett Packard, KPMG and other multi-national companies, leading large and small corporations, in such positions as CEO, COO and CFO.
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.
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.
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, 2013, and is referred to below as 2013. The previous fiscal year ended April 30, 2012 and is referred to as 2012 below.
SUMMARY COMPENSATION TABLE
| Name and principal | | | Management
fee/salary | | | Stock
Awards/Bonus | | | | |
| position | Year | | ($) | | | ($) | | | Total ($) | |
| Adam Radly, Chairman and CEO | 2013 | | | 0 | | | | -0- | | | | 0 | |
| Adam Radly, Chairman and CEO | 2012 | | | | | | | -0- | | | | 0 | |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| Bob Bates, CAO (HP Accounting) | 2013 | | | 120,000 | | | | -0- | | | | 120,000 | |
| Bob Bates, CAO (HP Accounting) | 2012 | | | 120,000 | | | | -0- | | | | 120,000 | |
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 was $240,000 annually 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 are paid to various companies related to him and not paid to him personally. The amounts in the table above represent the total compensation paid in relation to work provided by Mr Radly and staff of his entities. As of April 5, 2013 no consulting/software development work is being done so no further accruals/payments are being made at this time.
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- | | | | 11,250 | (1) | |
Equity compensation plans not
approved by security holders | | | -0- | | | | -0- | | | | -0- | | |
| Total | | | -0- | | | | -0- | | | | 11,250 | (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, 2013 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, 2013 are deemed outstanding.
Percentage of beneficial ownership is based upon 1,820,241 shares of common stock outstanding at April 30, 2013. 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 | 320,580 Common Stock, $0.001 Par Value (2) | 18% |
| | | |
| Paul Aunger- related entities | 276,127 | 7% |
| | (1) | The address for these owners is 2300 W. Sahara Ave. Suite 800 Las Vegas, Nevada 89102 |
| | (2) | This does not reflect the unissued anti-dilution shares attributed to the Southbase note agreement |
A company related to our Chairman and CEO, Adam Radly, has loaned the Company money. The amount outstanding under this loan is $85,532. 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, this transaction was not accounted for until July 2008, when the authorized shares were increased to a level sufficient enough to allow this.
AUDIT FEES
Our fees for fiscal 2013 and 2012 totaled $70,000 and $70,000 respectively.
AUDIT-RELATED FEES
Our fees for fiscal 2013 and 2012 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 2013 and 2012 totaled $0 and $0 respectively.
None of the above fees were subject to audit committee pre-approval requirements.
PART IV.
(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 |
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: August 5, 2013
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 | | August 5, 2013 |
| | | | | |
| /s/ Bob Bates | | Bob Bates | | |
| | | Chief Accounting Officer | | August 5, 2013 |
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