S-1 1 invas171712.htm

 

As filed with the Securities and Exchange Commission on July xxxx, 2012 Registration No. xxxx

  

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM S-1

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

INOVA TECHNOLOGY, INC

(Exact Name of Registrant as Specified in Its Charter)

 

 

         
Nevada   3990   98-0204280

(State or other jurisdiction of

incorporation or organization)

 

(Primary Standard Industrial

Classification Code Number)

 

(I.R.S. Employer

Identification Number)

 

 

     

         2300 W. Sahara Ave. Suite 800 Las Vegas, Nevada 89102

Telephone: 800-507-2810

Facsimile: 866 467 7940

   

(Address, Including Zip Code, and Telephone Number,

Including Area Code, of Principal Executive Offices)

 

(Name, Address, Including Zip Code and Telephone Number,

Including Area Code, of Agent for Service)

 

 

 

COMMUNICATIONS TO:

 

Bob Bates, CPA HP Accounting

1819 Polk St. #314 San Francisco, CA 94109

415-264-0984 617-208-2968 fax

 

APPROXIMATE DATE OF PROPOSED SALE TO THE PUBLIC: From time to time after the effective date of this Registration Statement.

If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, as amended (the “Securities Act”), other than securities offered only in connection with dividend or interest reinvestment plans, check the following box.    ☑

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.    ☐

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.☐

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.    ☐

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

 

             
Large accelerated filer     Accelerated filer  
       
Non-accelerated filer   ☐  (Do not check if a smaller reporting company)   Smaller reporting company  

 

 
 
 

 

CALCULATION OF REGISTRATION FEE

 

             
 

Title of Each Class of

Securities to be Registered

  Amount to be
Registered
 

Proposed

Maximum

Aggregate

Offering Price (1)

 

Amount of
Registration

Fee

Common stock, $0.001 par value per share (2)   375,000,000   $3,750,000   $430
             
             
Total           430
 
 
                         

 

(1) Estimated solely for the purpose of calculating the amount of the registration fee pursuant to Rule 457(o) under the Securities Act of 1933, as amended.

 

(2) Includes  shares of our common stock that the underwriter has the option to purchase to cover over-allotments, if any.

 

 

 
 
 

THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES AND WE ARE NOTSOLICITING AN OFFER TO BUY THESE SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.

 

SUBJECT TO COMPLETION, DATED JULY xxxx, 2012

PRELIMINARY PROSPECTUS

[            ] Shares of Common Stock

 

 

We are registering 375,000,000 shares shares for sale on behalf of our Company.

 

This prospectus relates to the offering of up to 375,000,000 shares of common stock of Inova Technology, Inc. (the “Company”) in a self-underwritten direct public offering, without any participation by underwriters or broker-dealers. The shares will be sold through the efforts of our officers and directors.

 

The proposed offering price is $0.01 per share (the “Offering Price”). The offering period will begin on the date this registration statement is declared effective by the Securities and Exchange Commission (the “SEC”) and continue, unless earlier terminated, until 5:00 P.M. Local Time, on  xxxx, 20112(the “Offering Period”). There is no minimum number of shares to be sold under this offering.

The public offering price for the common stock offered hereby is estimated to be $0.01 per share. Our common stock is quoted on the OTC Bulletin Board under the symbol “INVA.OB”. On July __, 2012, the last reported sale price for our common stock was $0.01 per share.

 

We are conducting this offering as a "self-underwriting" through our officers and directors, and therefore, we will pay no underwriting fees or commissions.

 

1. We are not using an underwriter for this offering of shares.

 

2. We have no arrangement to place the proceeds from this offering in an escrow, trust or similar account.   Any funds raised from sales of shares to the public pursuant to this offering will be immediately available to us for our use and retained by us regardless of whether or not there are any additional sales under this offering.

 

This offering will be on a continuous and best efforts basis. Shares offered by us, to the public, up to 375,000,000 shares will only be offered for a period for up to 9 months after the effectiveness of the offering with any unsold shares from such 375,000,000offered, being deregistered.  The offering does not have a minimum or maximum purchase.

 

We will receive proceeds at $0.01 per share from sale of up to 375,000,000shares to be offered for the first 9 months after the effectiveness of the offering.

 

The information in this prospectus is not complete and may be changed.  We may not sell these securities until the date that the registration statement relating to these securities, which has been filed with the Securities and Exchange Commission, becomes effective.  This prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any state where the offer or sale is not permitted.

 

Investing in our securities involves certain risks, including those set forth in the “Risk Factors” section beginning on page xxxx of this prospectus as well as those set forth in any prospectus supplement that should be considered in connection with an investment in our securities.

 

                 
    Per Share     Total  
Public Offering Price per share   $     .01         $     .01      
Underwriting discounts and commission   $       0           $      0         
Offering Proceeds to Inova, before expenses(1)   $   $3,750,000               $       3,750,000        

 

(1) We estimate that the total expenses of this offering will be approximately $3,500.

NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE ADEQUACY OR ACCURACY OF THE PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.

 

The date of this prospectus is                     , 2012.

 

 
 

 

 TABLE OF CONTENTS

 

PART I -  INFORMATION REQUIRED IN PROSPECTUS Page No.
ITEM 1. Front of Registration Statement and Outside Front Cover Page of Prospectus  
ITEM 2. Prospectus Cover Page 1
ITEM 3. Prospectus Summary Information, Risk Factors and Ratio of Earnings to Fixed Charges 3
ITEM 4. Use of Proceeds 12
ITEM 5. Determination of Offering Price 13
ITEM 6. Dilution 13
ITEM 7. Selling Security Holders 13
ITEM 8. Plan of Distribution 13
ITEM 9. Description of Securities 15
ITEM 10. Interest of Named Experts and Counsel 15
ITEM 11. Information with Respect to the Registrant 16
  a. Description of Business 16
  b. Description of Property 21
  c. Legal Proceedings 21
  d. Market for Common Equity and Related Stockholder Matters 21
  e. Financial Statements    22
  f. Selected Financial Data 23
  g. Supplementary Financial Information 23
  h. Management’s Discussion and Analysis of Financial Condition and Results of Operations 23
  i. Changes In and Disagreements With Accountants on Accounting and Financial Disclosure 26
  j. Quantitative and Qualitative Disclosures About Market Risk 26
  k. Directors and Executive Officers 26
  l. Executive and Directors Compensation 27
  m. Security Ownership of Certain Beneficial Owners and Management 32
  n. Certain Relationships, Related Transactions, Promoters And Control Persons 31
ITEM 11 A. Material Changes 31
ITEM 12. Incorporation of Certain Information by Reference 31
ITEM 12 A. Disclosure of Commission Position on Indemnification for Securities Act Liabilities 31
PART II – INFORMATION NOT REQUIRED IN PROSPECTUS  
ITEM 13. Other Expenses of Issuance and Distribution 33
ITEM 14. Indemnification of Directors and Officers 33
ITEM 15. Recent Sales of Unregistered Securities 34
ITEM 16. Exhibits and Financial Statement Schedules 34
ITEM 17. Undertakings 34
  Signatures 36

Securities offered through this prospectus will not be sold through dealers, but will be sold on a direct participation basis only.

Unless otherwise stated or the context otherwise requires, the terms “INOVA Technology,” “we,” “us,” “our” and the “Company” refer to INOVA Technology, Inc.

You should rely only on the information contained in this prospectus. We have not authorized anyone to provide you with additional or different information. The information contained in this prospectus is accurate only as of the date on the front cover of this prospectus, regardless of the time of delivery of this prospectus or of any sale of our common stock.

No dealer, salesperson or any other person is authorized in connection with this offering to give any information or make any representations about us, the securities offered hereby or any matter discussed in this prospectus, other than those contained in this prospectus and, if given or made, the information or representations must not be relied upon as having been authorized by us. This prospectus does not constitute an offer to sell or a solicitation of an offer to buy any security other than the securities offered by this prospectus, or an offer to sell or a solicitation of an offer to buy any securities by anyone in any circumstance in which the offer or solicitation is not authorized or is unlawful.

CAUTIONARY STATEMENT REGARDING

FORWARD-LOOKING STATEMENTS

This prospectus, including the sections titled “Prospectus Summary”, “Management’s Discussion and Analysis of Financial Condition and Results of Operations”, “Description of Business”, “Risk Factors” and other sections generally, contains certain statements that constitute “forward-looking statements”. These forward-looking statements include certain statements regarding intent, belief or current expectations about matters (including statements as to “beliefs,” “expectations,” “anticipations,” “intentions” or similar words). Forward-looking statements are also statements that are not statements of historical fact. Because these statements are based on factors that involve risks and uncertainties, actual results may differ materially from those expressed or implied by the forward-looking statements. These factors include, among others:

 

    our ability to achieve and maintain profitability;

 

    the price volatility of the Common Stock;

 

    the historically low trading volume of the Common Stock;

 

    our ability to manage and fund our growth;

 

    our ability to attract and retain qualified personnel;

 

    litigation;

 

    our ability to compete with current and future competitors;

 

    our ability to obtain additional financing;

 

    general economic and business conditions;

 

    our ability to continue as a going concern;

 

    our ability to do business overseas;

 

    other risks and uncertainties included in the section of this document titled “Risk Factors”; and

 

    other factors discussed in our other filings made with the Commission.

The subsequent forward-looking statements relating to the matters described in this document and attributable to us or to persons acting on our behalf are expressly qualified in their entirety by such factors. Actual events or results may differ materially from those discussed in forward-looking statements as a result of various factors, including, without limitation, the risks outlined under “Risk Factors” and matters described in this Prospectus generally. In light of these risks and uncertainties, there can be no assurance that the forward-looking statements contained in this Prospectus will in fact occur. We have no obligation to publicly update or revise these forward-looking statements to reflect new information, future events, or otherwise, except as required by applicable laws, and we caution you not to place undue reliance on these forward looking statements.

Third Party Data

 

This prospectus also contains estimates and other information concerning our industry which are based on industry publications, surveys and forecasts, including those generated by us. This information involves a number of assumptions and limitations, and you are cautioned not to give undue weight to these estimates. Although we believe the information in these industry publications, surveys and forecasts is reliable, we have not independently verified the accuracy or completeness of the information. The industry in which we operate is subject to a high degree of uncertainty and risk due to a variety of factors, including those described in “Risk Factors”.

 

PROSPECTUS SUMMARY

This summary highlights selected information contained elsewhere in this prospectus and does not contain all the information that you need to consider in making your investment decision. You should carefully read this entire prospectus, as well as the information to which we refer you, before deciding whether to invest in the common stock. You should pay special attention to the “Risk Factors” section of this prospectus to determine whether an investment in the common stock is appropriate for you.

This registration statement, including the exhibits and schedules thereto, contains additional relevant information about us and our capital stock. We file annual, quarterly, and current reports, proxy statements, and other information with the SEC. You may read and copy any document we file at the SEC’s public reference room at 2300 W. Sahara Ave. Suite 800 Las Vegas, NV 89102. You can also request copies of the documents, upon payment of a duplicating fee, by writing the Public Reference Section of the SEC. Please call the SEC at 1-800-SEC-0330 for further information on the public reference room. These SEC filings are also available to the public from the SEC’s web site at http://www.sec.gov.

About INOVA Technology, Inc.

 

Organization and History of the Company

 

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

 

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

 

In 2006, Edgetech bought certain assets of Data Management, Inc. (“Data Management”), a Nevada corporation, in exchange for 25,000,000 shares of convertible preferred stock. The convertible preferred stock used to acquire Data Management represented approximately 90% of the voting stock of Edgetech on a fully diluted basis. Concurrently, Edgetech sold its wholly-owned subsidiary, Web’s Biggest Limited, to Advisors LLC in exchange for 25,000,000 shares of convertible preferred stock of Edgetech Services, Inc. held by Advisors LLC.  The 25,000,000 convertible preferred shares issued to buy Data Management were the same 25,000,000 convertible preferred shares received from the sale of Web’s Biggest.  

 

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

 

On May 1, 2007, Inova acquired Right Tag, Inc. from Right Tag’s shareholders for $325,000 plus an earn out paid to Mr. Chander and Right Tag’s other shareholders based on Right Tag’s gross profit over the next five years.

 

On December 21, 2007, the Company acquired Texas-based Desert Communications (“Desert”) for $5.9 million, consisting of $3.3 million paid in cash and $2.6 million notes payable. Funding for the acquisition was obtained from IBM and Boone Opportunity Lenders (“Boone”). IBM provided part of a $2.5 million line of credit and Boone Opportunity Lenders provided a $1.8 million debenture. Inova also signed a $2.3 million promissory note payable to the previous owners of Desert.

 

Inova Technology acquired Trakkers, LLC and a related entity Tesselon, LLC on September 1, 2008. Inova acquired Trakkers and Tesselon for $6.1 million including $500,000 cash, $2.3 million to be paid under notes payable, $2 million paid in the form of a seller note and $1.3 million of redeemable preferred stock (non-convertible and nonvoting). In order to fund the acquisition of Trakkers, Inova raised money in the form of debt financing from its existing shareholders (including two private equity groups) and one major existing lender.

 

In October 2010, the Company completed a forward stock split on a 20 shares for every 1 share basis of its common stock. Prior to the stock split, the Company had 2,876,232 shares issued and outstanding. After the stock split, the Company had 57,524,640 shares issued and outstanding.

 

Summary of Business Operations

 

Inova Technology, Inc. (“Inova” or “the Company”) operates in three segments and owns 100% of all subsidiaries: (1) providing information technology (IT) solutions and services through its Edgetech Services subsidiary, (2) providing radio frequency identification (RFID) products through its Trakkers (Montana) and RightTag (California) subsidiaries, and (3) providing network solutions through its Desert Communications subsidiary (Texas). We have approximately 55 employees and offices in Nevada, Texas and Montana.

 

Our principal executive offices are located at 2300 W. Sahara Ave. Suite 800, Las Vegas, Nevada 89102. Our telephone number is 800-507-2810. Our website can be accessed at http://www.inovatechnology.com, which is not incorporated in and is not a part of this report.

Our Business Operations and our Proprietary Technologies

RightTag, Inc.

 

RightTag is a research and development company that has the ability to create new Radio Frequency Identification Devices (“RFID”) products and solutions and customized RFID solutions for customers requiring customized solutions that cannot be addressed with standard off the shelf products (that are ready to use when purchased). RightTag has developed proprietary RFID Scanners (sold under the RightTag brand), certain custom RFID tags and has also developed a proprietary RFID motherboard that can be placed into any product to transform it into an RFID scanner. RightTag has not filed patent applications for these technologies, underlying products.

 

Trakkers, LLC

Trakkers has developed “lead tracking” and “lead retrieval” solutions for the trade show industry that use RFID, bar code and magnetic stripe technologies. These solutions have been internally designed and developed and are proprietary and patent pending. Patent applications have been filed with the United States Patent and Trademark Office (“USPTO”). We have also filed a patent application that applies to all members of the European Union. While Trakkers’ technology is currently being applied to the trade show industry, the technology may be applied to many other verticals.

 

The “Mi” is Trakkers’ flagship product. The Mi is a scanner that reads RFID, 1 & 2 D bar code and magnetic strip (“mag strip”) – all in one device approximately the size of an iPhone. The reason for including the ability to read RFID, bar code and mag strip is that different trade shows use different technologies. The Mi device also has a GPRS (General packet radio service) capability which means that data read by the device can be sent using the mobile phone network to any location that has mobile phone service. The Mi also has a touch screen and can be blue tooth enabled and or WiFi enabled if required. The Mi was entirely internally developed by Trakkers and RightTag. Trakkers outsources the manufacturing of the Mi to a third party contract manufacturer named Artec.

 

Edgetech Services, Inc.

 

Edgetech provides IT services and IT services personnel to corporations that require third party contractors to perform specific tasks within certain projects. Edgetech’s contribution to Inova’s revenue for the most recent 4 fours quarters has been negligible.

 

Desert Communications, Inc.

 

Since its inception in 1994, Desert Communications (DCI) has designed, sold, installed and provided support for over fifty school districts across Texas and New Mexico. DCI offers a wide variety of technology solutions which include the design, installation and support of LAN (local area network) and WAN (wide area network) computer networks, structured cabling systems and staff development.

 

 DCI employees Novell and Microsoft engineers as well as Cisco Certified Personnel and has two BICSI(Building Industry Consulting Service International) certified RCDD’s (Registered Communications Distribution Designer) on staff.

 

 

DCI is an authorized Commscope Business Partner and has certified designers, installers and administrators on staff. This authorization allows DCI to sell, install and support the Systimax and Uniprise Structured Cabling Systems. Additionally, DCI is authorized to design, install and warrant Ortronix, Siemon, Panduit and Wiremold cabling systems.

 

Partnering with some of the industry’s leading technology companies, DCI is able to provide a wide range of core technology solutions. As a Premier Cisco Partner as well as HP Elite Partner, DCI is able to install complete networking solutions from LAN/WAN, Internetworking, VPN, VoIP, Video, SAN, Archive, Backup and Firewall/Security implementation for small and large networks. As a Novell Gold Partner and a Microsoft reseller DCI is able to implement file and print server services, application servers, business and administration email and desktop management. DCI is offers internet solutions including e-mail, proxy services, content filtering, web hosting, and DNS services.

 

DCI has assisted school districts utilize funding from local district budgets and different sources through various State and Federal Grants, E-Rate Funds, and Texas Infrastructure Fund Grants.

DCI has an extensive list of completed projects for customers that include local and state government clients and school districts and health care facilities in the west Texas region.

 

Desert has a backlog of approximately $21 million of awarded and funded contracts, at the time of this filing.

 

 

Risk Factors

An investment in our common stock involves a high degree of risk. You should carefully consider the risks described under “Risk Factors” beginning on page xxxx of this prospectus, as well as other information included in this prospectus, including our financial statements and the notes thereto, before making an investment decision.

The Offering

The following summary contains basic information about the offering and our common stock and is not intended to be complete. It does not contain all the information that is important to you. For a more complete understanding of our common stock, please refer to the section of this prospectus entitled “Description of Capital Stock.”

 

Issuer INOVA Technology, Inc, a Nevada corporation.

 

Common stock offered by us Shares of common stock, par value $0.001 per share.

 

Common stock outstanding after this offering 451,373,445 shares of common stock.(1)(2)

 

Use of Proceeds We intend to use the net proceeds from the sale of our common stock in this offering for debt repayment, working capital and general corporate purposes.

 

Market and trading symbol for the common stock Our common stock is listed and traded on the Over-the-Counter Bulletin Board under the symbol “INVA”

 

 

Unless otherwise specifically stated, information throughout this prospectus assumes that none of our outstanding options or warrants to purchase shares of our common stock were exercised.

 

 

SUMMARY FINANCIAL DATA

In the table below we provide you with historical selected financial data for each of the years ended April 30, 2011 and April 30, 2010 and January 31, 2012, derived from our audited financial statements included elsewhere in this prospectus.

You should read the historical selected financial information presented below in conjunction with the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section and our financial statements and the notes to those financial statements included elsewhere in this prospectus. Historical results are not necessarily indicative of the results that may be expected for any future period.

 

 

  For the Period Ended January 31 For the Years Ended April 30
  2012 2011 2010
STATEMENT OF OPERATIONS:      
Revenues  $                                             3,738,630  $               22,121,789  $          21,032,779
Cost of goods sold  $                                          (2,631,874)  $               15,245,413  $          14,340,559
Operating expenses  $                                          (1,362,926)  $               (8,777,553)  $          (7,531,895)
Loss from operations  $                                              (256,170)  $               (1,901,177)  $             (839,675)
Interest and other expense  $                                              (401,263)  $               (1,449,200)  $          (6,223,364)
       
Net loss  $                                              (657,433)  $               (3,350,377)  $          (7,063,039)
       
Net loss per common share, basic and diluted  $                                                     (0.01)  $                          (0.06)  $                    (0.14)
       
Weighted average common shares outstanding, basic and diluted  $                                          77,444,179  $               58,560,338  $          50,093,080
       
  January 31, April 30,
  2012 2011 2010
STATEMENT OF FINANCIAL CONDITION:      
Working capital  $                                        (15,012,442)  $             (15,278,148)  $       (15,378,190)
Total assets  $                                             7,307,216  $                  8,159,997  $          12,460,556
Total liabilities  $                                          17,694,090  $               18,375,166  $          19,499,368
Total shareholders' deficit  $                                        (10,386,874)  $             (10,215,169)  $          (7,038,812)

 

 

RISK FACTORS

You should carefully consider the risks described below before making an investment decision. Our business, financial condition, results of operations or cash flows could be materially adversely affected by any of these risks. The valuation for the Company could also decline due to any of these risks, and you may lose all or part of your investment. This document also contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of several factors, including the risks faced by us described below and elsewhere in this prospectus. In assessing these risks, you should also refer to the other information contained in this prospectus, including our financial statements and related notes.

Risks Related to Our Business

Our independent registered public accounting firm has issued an opinion with an explanatory paragraph to the effect that there is substantial doubt about our ability to continue as a going concern.

Our independent registered public accounting firm has issued an opinion with an explanatory paragraph to the effect that there is substantial doubt about our ability to continue as a going concern. This unqualified opinion with an explanatory paragraph could have a material adverse effect on our business, financial condition, results of operations and cash flows. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources” and Notes to our financial statements for the fiscal year ended April 30, 2011 and period ending January 31, 2012, included elsewhere in this prospectus.

We have no committed sources of capital and do not know whether additional financing will be available when needed on terms that are acceptable, if at all. This going concern statement from our independent registered public accounting firm may discourage some investors from purchasing our stock or providing alternative capital financing. The failure to satisfy our capital requirements will adversely affect our business, financial condition, results of operations and prospects.

Unless we raise additional funds, either through the sale of equity securities or one or more collaborative arrangements, we will not have sufficient funds to continue operations. Even if we take these actions, they may be insufficient, particularly if our costs are higher than projected or unforeseen expenses arise.

 

When due, we may be unable to repay or secure an extension on the $11,564,148  in secured and unsecured promissory notes outstanding as at January 31, 2012. If we are unable to reach an agreement with our note holders, the note holders could foreclose on our assets, which ultimately could require us to curtail or cease our operations.

We do not currently have, and do not expect to attain, adequate funds for repayment of these notes from our current operations. Although we intend to continue to finance our operations, including the repayment of these notes, through a combination of internal cash flow and private sales of debt and equity securities, we may not be able to continue to generate cash flow to repay the notes or secure additional financing to repay the notes on acceptable terms, if at all. If we are unable to secure financing to repay the notes we will seek to renegotiate the notes. However, there is no guarantee that all note holders will accept any offer we may make and some or all of the note holders may request additional concessions from us for any accommodation we do secure. Any such additional consideration would likely be offered to all such note holders. Any terms we may be able to secure may not be favorable to us. Unfavorable terms would adversely impact our business, financial condition and/or results of operations. In the event we are unable to secure additional financing sufficient to pay the notes prior to the maturity date and we are not able to renegotiate the terms of the notes the note holders will have the option to either foreclose, which would have material adverse consequences on our business operations, financial condition, results of operations and cash flows and possibly result in the failure of our business.

We have a history of operating losses, and we expect our operating losses to continue for the foreseeable future. If we fail to obtain additional financing, we will be unable to execute our business plan and/or we may not be able to continue as a going concern.

We expect our operating losses to continue for the foreseeable future, as we continue to expend substantial resources to expand our current businesses. Our accumulated deficit was ($17,008,263) as of January 31, 2012. It is possible that we will never generate sufficient revenue to achieve and sustain profitability. Even if we achieve profitability, we may not be able to sustain or increase profitability.

 

We financed our operations since inception primarily through private sales of our common stock and preferred stock, issuance of convertible promissory notes and issuance of secured and unsecured promissory notes. 

 

Even if we are successful in raising additional equity capital to fund our operations, we will still be required to raise an additional substantial amount of capital in the future to fund our development initiatives and to achieve profitability. Our ability to fund our future operating requirements will depend on many factors, including but not limited to the following:

 

    ability to obtain funding from third parties;

 

    progress on research and development programs;

 

    time and costs required to gain third party approvals;

 

    costs of manufacturing, marketing and distributing its products;

 

    costs of filing, prosecuting and enforcing patents, patent applications, patent claims and trademarks;

 

    status of competing products; and

 

    market acceptance and third-party reimbursement of its products, if successfully developed.

There are no assurances that future funding will be available on favorable terms or at all. If additional funding is not obtained, we will need to reduce, defer or cancel development programs and planned initiatives, to the extent necessary. The failure to fund our capital requirements would have a material adverse effect on our business, financial condition and results of operations.

Failure to achieve and maintain effective internal controls in accordance with Section 404 of the Sarbanes-Oxley Act of 2002 could have a material adverse effect on our business and operating results. In addition, current and potential stockholders could lose confidence in our financial reporting, which could have a material adverse effect on our stock price.

Effective internal controls are necessary for us to provide reliable financial reports and effectively prevent fraud. If we cannot provide reliable financial reports or prevent fraud, our operating results could be harmed. We are required to document and test our internal control procedures in order to satisfy the requirements of Section 404 of the Sarbanes-Oxley Act, which requires annual management assessments of the effectiveness of our internal controls over financial reporting. During the course of our testing, we may identify deficiencies which we may not be able to remediate in time for compliance with the requirements of Section 404. In addition, if we fail to maintain the adequacy of our internal controls, as such standards are modified, supplemented or amended from time to time; we may not be able to ensure that we can conclude on an ongoing basis that we have effective internal controls over financial reporting in accordance with Section 404 of the Sarbanes-Oxley Act. Failure to achieve and maintain an effective internal control environment could also cause investors to lose confidence in our reported financial information, which could have a material adverse effect on our stock price.

 

Our future indebtedness could adversely affect our financial health.

We have and may continue to incur a significant amount of indebtedness to finance our operations and growth. Any such indebtedness could result in negative consequences to us, including:

 

    increasing our vulnerability to general adverse economic and industry conditions;

 

    requiring a portion of our cash flow from operations be used for the payment of interest on our debt, thereby reducing our ability to use our cash flow to fund working capital, capital expenditures and general corporate requirements;

 

    limiting our ability to obtain additional financing to fund future working capital, capital expenditures and general corporate requirements;

 

    limiting our flexibility in planning for, or reacting to, changes in our business;

 

    placing us at a competitive disadvantage to competitors who have less indebtedness; and

 

    as the majority of our assets are pledged under a significant portion of our outstanding debt, the failure to meet the terms and conditions of the debt instruments, or a failure to timely rearrange the current terms and conditions of the notes, if so required, will result in us having no access to certain portions of our own technology.

 

We may not be able to meet our product development and commercialization milestones.

We have established internal product and commercialization milestones and dates for achieving development goals related to technology and design improvements of our products. To achieve these milestones we must complete substantial additional research, development and testing of our products and technologies. Product development and testing are subject to unanticipated and significant delays, expenses and technical or other problems. We cannot guarantee that we will successfully achieve our milestones. Our business strategy depends on acceptance by key market participants and end-users of our products.

 

We are dependent on third party suppliers and vendors for the supply of key components for some of our products.

We are dependent on third parties to manufacture the key components needed for our RFID scanners. Accordingly, a supplier’s failure to supply components in a timely manner, or to supply components that meet our quality, quantity and cost requirements, technical specifications, or the inability to obtain alternative sources of these components on a timely basis or on terms acceptable to us, would create delays in production of our products or increase unit costs of production. Certain of the components contain proprietary products of our suppliers, or the processes used by our suppliers to manufacture these components are proprietary. If we are required to replace any of our suppliers, while we should be able to obtain comparable components from alternative suppliers at comparable costs, this would create a delay in production. If we experience such delays or our third party suppliers and vendors fail to supply us with components that meet our quality, quantity, or cost standards, we may lose our customers or be subject to product liability claims. Our applications require extensive commercial testing and will take long periods of time to commercialize.

We have not devoted any significant resources towards the marketing and sale of our products, we expect to face intense competition in the markets in which we do business, and expect to rely, to a significant extent, on the marketing and sales efforts of third parties that we do not control.

We expect that the marketing and sale of our RFID products will be conducted by a combination of independent manufactures representatives, third-party strategic partners, distributors, or OEMs. Consequently, commercial success of our products will be dependent largely on the efforts of others. We intend to enter into additional strategic marketing and distribution agreements or other collaborative relationships to market and sell our products. However, we may not be able to identify or establish appropriate relationships in the future. Even if we enter into these types of relationships, we cannot assure you that the distributors with which we form relationships will focus adequate resources on selling our products or will be successful in selling them.

We will face intense competition in the markets for our RFID products. We will compete directly with currently available products, some of which may be less expensive. The companies that make these other products may have established sales relationships and more name-brand recognition in the market than we do. In addition, some of those companies may have significantly greater financial, marketing, manufacturing and other resources.

We depend on our intellectual property and failure to protect it could enable competitors to market products with similar features that may reduce demand for our products.

We filed a patent application relating to our primary RFID scanner (the “Mi”) in the United and Europe. These patent applications often make reference to applications for, and in some instances, are application patents relating to materials we are developing. Our patent applications may or may not mature into issued patents.

Our success depends, to a significant extent, on the technology that is incorporated in our product. If we are unable to protect our intellectual property, competitors could use our intellectual property to market products similar to our products, which could reduce demand for our products. We may be unable to prevent unauthorized parties from attempting to copy or otherwise obtain and use our products or technology. Policing unauthorized use of our technology is difficult, and we may not be able to prevent misappropriation of our technology, particularly in foreign countries where the laws may not protect our intellectual property as fully as those in the United States. Others may circumvent trade secrets, trademarks and copyrights that we own or may own. Any such infringements, or any alleged infringements, could have a material adverse effect on our business, results of operations, and financial condition.

 

Some of our intellectual property is not covered by any patent or patent application. We seek to protect this proprietary intellectual property, which includes intellectual property that may not be patented or patentable, in part by confidentiality agreements with our distributors and employees. These agreements afford only limited protection and may not provide us with adequate remedies for any breach or prevent other persons or institutions from asserting rights to intellectual property arising out of these relationships. In addition, we cannot assure you that these agreements will not be breached, that we will have adequate remedies for any such breach or that the parties to such agreements will not assert rights to intellectual property arising out of these relationships.

 

 

 Our products employ technology that may unknowingly infringe on the proprietary rights of others, and, as a result, we could become liable for significant damages and suffer other harm.

We cannot assure you that our technologies and products do not or will not infringe on the proprietary rights of third parties or that third parties will not assert infringement claims against us in the future. We cannot assure you that a third party will not claim infringement by us with respect to these patents, other patents or proprietary rights, or that we would prevail in any such proceeding. Any such infringement claim, whether meritorious or not, could:

 

    be time-consuming;

 

    result in costly litigation or arbitration and the diversion of technical and management personnel, as well as the diversion of financial resources from business operations;

 

    require us to develop non-infringing technology or seek to enter into royalty or licensing agreements; or

 

    require us to cease use of any infringing technology.

We may not be successful in developing non-infringing technologies. Royalty or licensing agreements, if required, may not be available on terms acceptable to us, or at all, and could significantly harm our business and operating results. A successful claim of infringement arising from the existence of a ‘submarine patent’ or another existing patent against us or our failure or inability to license the infringed or similar technology could require us to pay substantial damages and could harm our business. In addition, to the extent we agree to indemnify customers or other third parties against infringement of the intellectual property rights of others, a claim of infringement could disrupt or terminate their ability to use, market or sell our products.

We may be exposed to lawsuits and other claims if our products malfunction, which could increase our expenses, harm our reputation and prevent us from growing our business.

Any liability for damages resulting from malfunctions of our products could be substantial, increase our expenses and prevent us from growing or continuing our business. Potential customers may rely on our products for critical needs, such as backup power. A malfunction of our products could result in warranty claims or other product liability. In addition, a well-publicized actual or perceived problem could adversely affect the market’s perception of our products. This could result in a decline in demand for our products, which would reduce revenue and harm our business. Further, since our products are used in devices that are manufactured by other manufacturers, we may be subject to product liability claims even if our products do not malfunction.

 

Our key employees are critical to our success and the loss of any key employees could impair our ability to execute our strategy and grow our business.

Our future success depends, to a significant extent, on the continued service of our executive officers and other key technical, sales and senior management personnel and their ability to execute our growth strategy. The loss of the services of any of our senior level management or other key employees could harm our business. Our future performance will depend, in part, on our ability to retain management personnel and for our executive officers to work together effectively. Our executive officers may not be successful in carrying out their duties or running our business. Any dissent among executive officers could impair our ability to make strategic decisions.

 If we fail to attract, retain and motivate qualified employees, we may be unable to execute our business strategy.

Our future success will depend in part on our ability to attract and retain highly qualified individuals, including researchers, engineers, sales and marketing personnel and management. Competition for these individuals may become intense, and it may become increasingly difficult to attract, assimilate and retain these highly qualified persons. Competitors and others may attempt to recruit our employees. Should we experience attrition or need to augment our staff, the cost of securing personnel may be significantly higher than currently experienced and thus negatively impact our financial position.

Our failure to manage our growth could harm our business.

We may grow in the number of our employees, the size of our physical facilities and the scope of our operations. Any expansion would likely place a significant strain on our senior management team and other internal and external resources. Furthermore, we may be required to hire additional senior management personnel. Our ability to manage growth will depend in part on our ability to continue to enhance our operating, financial and management information systems. Our personnel, systems and controls may be unable to support any growth we may experience and as a result, our financial results would suffer.

Our revenue and operating results may fluctuate significantly as a result of factors outside of our control, which could cause the value of our business to decline.

Unless and until we establish a predictable sales record for our products, we expect our revenue and operating results to vary significantly from quarter to quarter. As a result, quarterly comparisons of our financial results are not necessarily meaningful and you should not rely on them as an indication, in any manner, of our future performance. In addition, due to our stage of development, we cannot predict our future revenue or results of operations accurately. As a consequence, our operating results may fall below the expectations of investors, which could cause the valuation of our company to decline.

 

If our products fail to meet certain technical standards, we could be subject to claims, fines or other penalties and we may be curtailed from conducting our business operations.

Our products may fail and result in legal claims against the Company. Depending on the nature of the claim, our current insurance policies may not adequately reimburse us for costs incurred by reason of said claims.

Government Spending & Regulation

The vast majority of our revenue is generated from network solutions projects completed for school districts in Texas. Any change in the amount of government spending for any reason, specifically in a program known as “Erate”, could significantly adversely impact our revenues.

Risks Related to This Offering and an Investment in Our Securities

 

We have not and do not intend to pay dividends on our common stock.

The payment of dividends upon our capital stock is solely within the discretion of our board of directors and dependent upon our financial condition, results of operations, capital requirements, restrictions contained in our future financing instruments and any other factors our board of directors may deem relevant. We have never declared or paid a dividend on our common stock and, because we have very limited resources, we do not anticipate declaring or paying any dividends on our common stock in the foreseeable future. Rather, we intend to retain any future earnings for the continued operation and expansion of our business. It is unlikely, therefore, that the holders of our common stock will have an opportunity to profit from anything other than potential appreciation in the value of our common shares held by them.

 

Our executive officers and directors have significant shareholdings, which may lead to conflicts with other shareholders over corporate governance matters.

Our directors and officers as a group, beneficially own or control approximately 80% of our outstanding common stock. Acting together, these shareholders would be able to significantly influence all matters that our shareholders vote upon, including the election of directors, mergers or other business combinations.

Unless an active trading market develops for our securities, shareholders may have difficulty or be unable to sell their shares of common stock.

We cannot predict the extent to which an active public market for our common stock will develop or be sustained. Our common stock is currently quoted on the OTC Bulletin Board under the symbol “INVA.” However, currently there is not an active trading market for our common stock, meaning that the number of persons interested in purchasing shares of our common stock at or near ask prices at any given time may be relatively small or non-existent, and there can be no assurance that an active trading market may ever develop or, if developed, that it will be maintained. There are a number of factors that contribute to this situation, including, without limitation, the fact that we are a small development-stage company that is relatively unknown to stock analysts, stock brokers, institutional investors and others in the investment community that generate or influence sales volume, and even if we came to the attention of such persons, they tend to be risk-averse and would be reluctant to follow an unproven, development-stage company such as ours or purchase or recommend the purchase of shares of our common stock until such time we become more seasoned and viable.

As a consequence, our stock may be characterized by a lack of liquidity, sporadic trading, larger spreads between bid and ask quotations, and other conditions that may affect shareholders’ ability to re-sell our securities. Moreover, there may be periods of several days or more when trading activity in our shares is minimal or non-existent, as compared to a seasoned issuer which has a large and steady volume of trading activity that will generally support continuous sales without an adverse effect on share price. Unless an active trading market for our common stock is developed and maintained, shareholders may be unable to sell their common stock and any attempted sale of such shares may have the effect of lowering the market price of our common stock and a shareholder’s investment could be a partial or complete loss.

 

Since our common stock is thinly traded, it is more susceptible to extreme rises or declines in price and shareholders may not be able to sell their shares at or above the price paid.

Since our common stock is thinly traded, its trading price is likely to be highly volatile and could be subject to extreme fluctuations in response to various factors, many of which are beyond our control, including:

 

    the trading volume of our shares;

 

    the number of securities analysts, market-makers and brokers following our common stock;

 

    new products or services introduced or announced by us or our competitors;

 

    actual or anticipated variations in quarterly operating results;

 

    conditions or trends in our business industries;

 

    announcements by us of significant contracts, acquisitions, strategic partnerships, joint ventures or capital commitments;

 

    additions or departures of key personnel;

 

    sales of our common stock;

 

    general stock market price and volume fluctuations of publicly-quoted, and particularly microcap, companies; and

 

    material legal action.

Shareholders, including but not limited to those who hold shares as a result of the exercise or conversion of our convertible securities and warrants, may have difficulty reselling shares of our common stock, either at or above the price paid, or even at fair market value. The stock markets often experience significant price and volume changes that are not related to the operating performance of individual companies, and because our common stock is thinly traded it is particularly susceptible to such changes. These broad market changes may cause the market price of our common stock to decline regardless of how well we perform as a company. Price fluctuations in such shares are particularly volatile and subject to manipulation by market-makers, short-sellers and option traders.

Our common stock is currently and may in the future be subject to the “penny stock” regulations, which are likely to make it more difficult to sell.

The trading price of our common stock is currently below $5 per share. As such, our common stock is subject to the “penny stock” rules. The SEC has adopted rules that regulate broker-dealer practices in connection with transactions in penny stocks. These rules generally have the result of reducing trading in such stocks, restricting the pool of potential investors for such stocks, and making it more difficult for investors to sell their shares once acquired. Prior to a transaction in a penny stock, a broker-dealer is required to:

 

    deliver to a prospective investor a standardized risk disclosure document that provides information about penny stocks and the nature and level of risks in the penny stock market;

 

    provide the prospective investor with current bid and ask quotations for the penny stock;

 

    explain to the prospective investor the compensation of the broker-dealer and its salesperson in the transaction;

 

    provide investors monthly account statements showing the market value of each penny stock held in their account; and

 

    make a special written determination that the penny stock is a suitable investment for the purchaser and receive the purchaser’s written agreement to the transaction.

These requirements may have the effect of reducing the level of trading activity in the secondary market for a stock that is subject to the penny stock rules. Since our common stock is subject to the penny stock rules, investors in our common stock may find it more difficult to sell their shares.

Shares eligible for future sale may adversely affect the market.

From time to time, certain of our stockholders may be eligible to sell all or some of their shares of common stock by means of ordinary brokerage transactions in the open market pursuant to Rule 144, promulgated under the Securities Act, subject to certain limitations. In general, pursuant to Rule 144, non-affiliate stockholders may sell freely after six months subject only to the current public information requirement (which disappears after one year). Affiliates may sell after six months subject to the Rule 144 volume, manner of sale (for equity securities), current public information and notice requirements

You will experience immediate dilution in the book value per share of the common stock you purchase.

Because the price per share of our common stock being offered is substantially higher than the book value per share of our common stock, you will suffer substantial dilution in the net tangible book value of the common stock you purchase in this offering. Based on an assumed offering price of $.01 per share, if you purchase shares of common stock in this offering, you will suffer immediate and substantial dilution of $.12 per share in the net tangible book value of the common stock at January 31, 2012. See the section entitled “Dilution” below for a more detailed discussion of the dilution you will incur if you purchase common stock in this offering.

A large number of shares may be sold in the market following this offering, which may depress the market price of our common stock.

A large number of shares may be sold in the market following this offering, which may depress the market price of our common stock. Sales of a substantial number of shares of our common stock in the public market following this offering could cause the market price of our common stock to decline. If there are more shares of common stock offered for sale than buyers are willing to purchase, then the market price of our common stock may decline to a market price at which buyers are willing to purchase the offered shares.

 

Funds raised in this offering are available for immediate use and at the discretion of our management.

The funds raised from this offering of our common stock will be available to the Company for immediate use and such uses as to be determined by our management.  Only Adam Radly, our CEO, will have access to the funds raised. You will not have the right to withdraw your funds during the offering.

 

We cannot provide any assurances that existing creditors of the Company will not garnish any such funds for payment of amounts owed to them. 

We may not be able to raise sufficient capital to grow our business or continue operations.

We hope to raise $3,750,000 in this offering. However, even if we are able to sell the entire offering, this amount may not be enough to grow our business and fund our operations.   

 

 We may in the future issue more shares which could cause a loss of control by our present management and current stockholders.

 

We may issue further shares as consideration for the cash or assets or services out of our authorized but unissued common stock that would, upon issuance, represent a majority of the voting power and equity of our Company.  The result of such an issuance would be those new stockholders and management would control our Company, and persons unknown could replace our management at this time.  Such an occurrence would result in a greatly reduced percentage of ownership of our Company by our current shareholders, which could present significant risks to investors.

 

 

DETERMINATION OF OFFERING PRICE

The public offering price of the shares offered by this prospectus has been determined by reviewing and considering the following factors:

 

    our history and our prospects;

 

    the industry in which we operate;

 

    our past and present operating results;

 

    the previous experience of our executive officers; and

 

    the general condition of the securities markets at the time of this offering.

The offering price stated on the cover page of this prospectus should not be considered an indication of the actual value of the shares. That price is subject to change as a result of market conditions and other factors, and we cannot assure you that the shares can be resold at or above the public offering price.

USE OF PROCEEDS

Based on an assumed offering price of $.01 per share, we estimate the gross proceeds from the sale of 375,000,000 shares of common stock will be approximately $3.75 million.

We estimate that we will receive net proceeds of $3.75 million. We currently intend to use the net proceeds of this offering for working capital and general corporate purposes, and repayment of certain indebtedness with a summary of the use of proceeds shown below:

 

         
Working capital   $        559,000
Debt         1,500,000
Expansion         1,687,500
Net Proceeds        
Expense (legal/accounting)              3,500
         
Total Gross Proceeds   $    3,750,000
         

 

In addition, we may use a portion of any net proceeds to acquire complementary products, technologies or businesses. We will have significant discretion in the use of any net proceeds. Investors will be relying on the judgment of our management regarding the application of the proceeds of any sale of our common stock. We may invest the net proceeds temporarily until we use them for their stated purpose.

 

IF less than 100% of the MAXIMUM SHARES ARE SOLD, we will allocate funds according to the table below. We anticipate that amounts raised below 50% of the maximum will result in limited revenue from expansion of operations during the short-term. Expansion of operations includes such items marketing expenditures and, if available, a small acquisition.  

 

Allocation of funds               
                
Amount raised  $375,000    750,000    1,875,000    2,812,500    3,750,000 
                          
Allocation                         
Debt reduction        187,500    750,000    1,125,000    1,500,000 
Working capital   187,500    187,500    187,500    375,000    559,000 
Expansion   187,500    375,000    937,500    1,312,500    1,687,500 
TOTAL   375,000    750,000    1,875,000    2,812,500    3,746,500 

 

IF ONLY 25% OF THE MAXIMUM SHARES ARE SOLD, we will continue with utilizing working capital and expansion. However, there would be insufficient funds available for furtherance of the plan of operations as detailed later in this prospectus under the heading "PLAN OF OPERATION."

 

 

IN THE EVENT THAT ONLY 50% OF THE MAXIMUM SHARES ARE SOLD (APPROXIMATELY $1,875,000), we will be able to further the plan of operation; however, our activities will continue to be restricted.

 

IF 75% OF THE MAXIMUM SHARES UNDERLYING ARE SOLD (APPROXIMATELY $2,812,500), there will be sufficient funds to pay a significant portion of all budgeted expenditure items.

 

 

 

DESCRIPTION OF BUSINESS

 

Organization and History of the Company

 

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

 

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

 

In 2006, Edgetech bought certain assets of Data Management, Inc. (“Data Management”), a Nevada corporation, in exchange for 25,000,000 shares of convertible preferred stock. The convertible preferred stock used to acquire Data Management represented approximately 90% of the voting stock of Edgetech on a fully diluted basis. Concurrently, Edgetech sold its wholly-owned subsidiary, Web’s Biggest Limited, to Advisors LLC in exchange for 25,000,000 shares of convertible preferred stock of Edgetech Services, Inc. held by Advisors LLC.  The 25,000,000 convertible preferred shares issued to buy Data Management were the same 25,000,000 convertible preferred shares received from the sale of Web’s Biggest.  

 

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

 

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

 

On December 21, 2007, the Company acquired Texas-based Desert Communications (“Desert”) for $5.9 million, consisting of $3.3 million paid in cash and $2.6 million notes payable. Some of the notes are still outstanding.

 

On September 1, 2008, the Company acquired Trakkers and Tesselon for $6.1 million including $500,000 cash, $2.3 million in promissory notes, $2 million paid in the form of a seller note and $1.3 million of redeemable preferred stock (non-convertible and nonvoting).

In October 2010, the Company completed a forward stock split on a 20 shares for every 1 share basis of its common stock. Prior to the stock split, the Company had 2,876,232 shares issued and outstanding. After the stock split, the Company had 57,524,640 shares issued and outstanding.

 

Summary of Business Operations

 

Inova Technology Inc. (Inova) operates in three segments: providing information technology (IT) solutions and services through its Edgetech Services subsidiary, providing radio frequency identification (RFID) products through its Trakkers and RightTag subsidiaries and providing network solutions through its Desert Communications subsidiary. We have approximately 55 employees and offices in Nevada, Texas and Montana.

Our principal executive offices are located at 2300 W. Sahara Ave. Suite 800 Las Vegas, Nevada 89102. Our telephone number is 800 507 2810. Our website can be accessed at http://www.inovatechnology.com.

Our Business Operations and our Proprietary Technologies

 

Two of our subsidiaries (Trakkers and RightTag) own proprietary technologies.

RightTag

RightTag is essentially an R & D company that has the ability to create new RFID products and solutions and customized RFID solutions for customers requiring solutions that cannot be addressed with off the shelf products. RightTag has developed proprietary RFID Scanners (sold under the RightTag brand), certain custom RFID tags and has also developed a proprietary RFID mother board that can be placed into any product to transform it into an RFID scanner. RightTag has not filed patent applications for these technologies.

Trakkers

Trakkers has developed “lead tracking” and “lead retrieval” solutions for the trade show industry that use RFID, bar code and mag stripe technologies. These solutions have been internally designed and developed and are proprietary and patent pending. Patent applications have been filed in the USA. We have also filed a European patent application that applies to all European countries that are members of the European Union. While Trakkers’ technology is currently being applied to the trade show industry, the technology may be applied to many other verticals.

 

 

The “Mi” is Trakkers’ flagship product. The Mi is a scanner that reads RFID, 1 & 2 D bar code and mag strip – all in one device approximately the size of an iPhone. The reason for including the ability to read RFID, bar code and mag strip is that different trade shows use different technologies. The Mi device also has a GPRS capability which means that data read by the device can be sent using the mobile phone network to any location that has mobile phone service. The Mi also has a touch screen and can be blue tooth enabled and or WiFi enabled if required. As far as management is aware, the Mi is the only device in the world that has this combination of features and functionality. The Mi was entirely internally developed by Trakkers and RightTag. Trakkers outsources the manufacturing of the Mi to a third party contract manufacturer.

 

Products

 

“Mi”

 

The Mi is Trakkers’ flagship product. The Mi is a scanner that reads RFID, 1 & 2 D bar code and mag strip – all in one device approximately the size of an iPhone. The reason for including the ability to read RFID, bar code and mag strip is that different trade shows use different technologies. The Mi device also has a GPRS capability which means that data read by the device can be sent using the mobile phone network to any location. This makes device wireless over any distance (i.e. not just wireless over blue tooth distance or WiFi distances). The Mi also has a touch screen and can be blue tooth enabled and or wifi enabled if required.

 

The Mi was entirely internally developed by Trakkers and RightTag (provided the RFID component in the Mi). It is a proprietary product and is patent pending. Trakkers outsources the manufacturing of the Mi to a contract manufacturer, Artec..

 

 

T3g

The Trakkers T3g is the lead tracking system using industry standard two-dimensional barcode, magnetic stripe and RFID readers. The large, sharp, color video display constantly displays date and time, number of sales leads, and currently scanned information for easy scan and read verification. An internal GPRS modem (General Packet Radio Service, is a mobile data service associated with cell phone technology) facilitates the transfer of data real-time to an internet portal, such as Trakkers’ trademarked, MyZebi.com (refer below). Overall, the Trakkers T3g supplies the most secure, convenient and advanced lead retrieval system in the industry. The T3g’s GPRS functionality is unprecedented among lead tracking peers.

 

 

 

P304Pro (2D Scanner)

The P304PRO is the industrial handheld laser scanner for unsurpassed high-volume 2D barcode scanning. The scanner provides time saving features like spot mode and smart raster to deliver unrivaled sub-second decoding on both 1D and 2D symbols. When high productivity scanning is required, the P304PRO delivers 560 scans per second, and the large LED enhancing window and extra loud 75dB twin beepers make the "good read" feedback hard to miss.

 

 

 

Edgetech Services

 

Edgetech provides IT services and IT services personnel to corporations that require third party contractors to perform specific tasks within certain projects. Edgetech’s contribution to Inova’s revenue for the most recent 4 fours quarters has been negligible.

 

Desert Communications

 

Since its inception in 1994, DCI has designed, sold, installed and provided support for over fifty school districts across Texas and New Mexico. DCI offers a wide variety of technology solutions which include the design, installation and support of LAN and WAN computer networks, structured cabling systems and staff development.

 

DCI employees Novell and Microsoft engineers as well as Cisco Certified Personnel and has two BICSI certified RCDD’s on staff.

 

DCI is an authorized Commscope Business Partner and has certified designers, installers and administrators on staff. This authorization allows DCI to sell, install and support the Systimax and Uniprise Structured Cabling Systems. Additionally, DCI is authorized to design, install and warrant Ortronix, Siemon, Panduit and Wiremold cabling systems.

 

Partnering with some of the industry’s leading technology companies, DCI is able to provide a wide range of core technology solutions. As a Premier Cisco Partner as well as HP Elite Partner, DCI is able to install complete networking solutions from LAN/WAN, Internetworking, VPN, VoIP, Video, SAN, Archive, Backup and Firewall/Security implementation for small and large networks. As a Novell Gold Partner and a Microsoft reseller Desert Communications, Inc. is able to implement file and print server services, application servers, business and administration email and desktop management. DCI is offers internet solutions including e-mail, proxy services, content filtering, web hosting, and DNS services.

Desert Communications, Inc. has successfully helped school districts utilize funding from local district budgets and different sources through various State and Federal Grants, E-Rate Funds, and Texas Infrastructure Fund Grants.

DC has an extensive list of completed projects for customers that include local and state government clients and school districts and health care facilities in the west Texas region.

 

Desert has a backlog of approximately $21 million of awarded and funded contracts, at the time of this filing.

Products – Sales and Marketing Strategies

 

Wireless Pont of Sale

 

Wireless point of sale (wireless POS or WPOS) is the use of wireless devices to facilitate order-taking or payment for products or services. WPOS can streamline many processes and may include the ability to record and track customer orders, finalize sales, connect to other systems in a network, and manage inventory.

 

Wireless POS is particularly useful in taxis, restaurants, outdoor stadiums and COD (cash on delivery) shipping services. Wireless POS can also be used to make credit card transactions more secure because customers never lose sight of the credit card and, therefore, do not risk anyone copying the data from their credit card while it is out of their sight.

 

Trakkers has adapted the software in the Mi scanner to enable credit card processing. A prototype of this device has already been developed and is being tested at the time of this IM. The WPOS Mi is deliberately being designed to offer more features and functionality than current WPOS credit card processing devices. The advantages of the Mi in addition to the ability to read credit cards are:

 

  • Built in ability to read 1 & 2 D bar code and RFID. For retailers that have attached bar codes or RFID tags to the products being sold, the sales representative can scan the bar code or RFID tag to input pricing information as opposed to entering this information manually. The ability to read 1 & 2 D bar code and RFID also means that the Mi will work with all technologies and reduces the likelihood that the unit will have to be upgraded in the near future.
  • Touch screen
  • Software that can be adapted for many different application
  • Generally smaller and more attractive than products from competitors.
  • Can be wifi enabled allowing access to the internet via wifi instead of via GPRS

Competition and Barriers to Entry

The barriers to entry in our network solutions (Desert Communications) and IT services (Edgetech Services) businesses are very low. There are a large number of competitors in these industries and there may be many more in the future. While there are some barriers to entry in our RFID businesses (Trakkers and RightTag) for potential small competitors the barriers are very low for larger potential competitors.

Government Spending & Regulation

The vast majority of our revenue is generated from network solutions projects completed for school districts in Texas. Any change in the amount of government spending for any reason, specifically in a program known as “Erate”, could significantly adversely impact our revenues.

The Schools and Libraries Program of the Universal Service Fund, commonly known as "E-Rate," is administered by the Universal Service Administrative Company (USAC) under the direction of the Federal Communications Commission (FCC), and provides discounts to assist most schools and libraries in the United States to obtain affordable telecommunications and Internet access. It is one of four support programs funded through a Universal Service fee charged to companies that provide interstate and/or international telecommunications services. Desert has been involved with this program since its inception in 1997 and has generated over $50 million of sales through the program.

 

E-Rate funding is requested under four categories of service: (1) telecommunications services; (2) Internet access; (3) internal connections; and (4) basic maintenance of internal connections. Discounts range from 20% to 90% of the costs of eligible services, depending upon the level of poverty and the urban/rural status of the population served. Eligible schools, school districts, and libraries may apply individually or as part of a consortium. Applicants must provide additional resources including end-user equipment (e.g., computers, telephones, etc.), software, professional development, and the other elements that are necessary to utilize the connectivity funded by the Schools and Libraries Program.

 

The following is a summary of the process schools and libraries follow to apply for and receive E-rate discounts, which includes preparing a technology plan, opening the competitive process (Form 470), seeking discounts on eligible services (Form 471), confirming the receipt of services (Form 486), and invoicing for services (Forms 472 and 474).

 

4

 
 

The Technology Plan Shows How Technology Will Improve Education or Library Services

 

The first step for most schools, school districts, and libraries that intend to apply for E -rate discounts is to prepare a technology plan. This plan sets out how technology will be used to achieve specific curriculum reforms or library service improvements. It guides planning and investment – both for E-rate funds and for the other resources needed to take advantage of technology. A technology plan designed to improve education or library services must contain the following five components:

 

(1) Clear goals and a realistic strategy for using telecommunications and information technology;

 

(2)Professional development strategy to ensure that staff knows how to use these new technologies;

 

(3)A assessment of the telecommunication services, hardware, software, and other services needed;

 

(4)Sufficient budget to acquire and support the non-discounted elements of the plan: the hardware, soft-ware, professional development, and other services that will be needed to implement the strategy; and

 

(5)Evaluation process that enables the school or library to monitor progress toward the specified goals. Before discounted services begin, an SLD-certified technology plan approver must approve their technology plans.

 

Applicants can locate SLD-certified approvers by using a search tool available on the website. However, applicants who seek discounts only for basic local, cellular, PCS and/or long distance telephone service (wireline or wireless) and/or voice mail need not prepare technology plans.

 

 

The FCC Form 470 Opens a Competitive Process for the Services Desired

 

After the technology plan has been developed and the applicant has identified the products and services needed to implement the plan, the applicant submits to the SLD a Form 470, Description of Services Requested and Certification Form, either online or on paper. The SLD posts completed forms on the website to notify service providers that the applicant is seeking the products and services identified.

 

Applicants must wait at least 28 days after the Form 470 is posted to the website and, if applicable, at least 28 days after a Request for Proposal (RFP) is publicly available, and consider all bids received before selecting the service provider to provide the services desired. In addition, applicants must comply with all applicable state and local procurement rules and regulations and competitive bidding requirements. A complete description of the requirements associated with the Form 470 can be found in the Form 470 Instructions, and are summarized as follows:

 

(1)An applicant cannot seek discounts for services in a category of service on the Form 471 if those services in those categories were not indicated on a Form 470;

 

(2)The application must be completed by the entity that will negotiate with potential service providers;

 

(3)The application cannot be completed by a service provider who will participate in the competitive process as a bidder. If a service provider is involved in preparing the Form 470 and that service provider appears on the associated Form 471, this will taint the competitive process and lead to denial of funding requests that rely on that Form 470;

 

(4)The applicant is responsible for ensuring an open, fair competitive process and selecting

 

the most cost-effective provider of the desired services;

 

5

 
 

(5) The applicant should carefully consider whether to receive discounts on bills or reimbursements for services paid in full; and

 

(6)The applicant must save all competing bids for services to be able to demonstrate that the chosen bid is the most cost-effective, with price being the primary consideration. As with all documents that may be requested as part of an audit or other inquiry, such bids must be saved for at least five years after the last date of service delivered.

 

Once an applicant has signed a multi -year contract in a prior funding year pursuant to a posted Form 470, it need not submit a new Form 470 to be eligible to apply for discounts on the services provided under that multi-year contract for future funding years.

 

After the SLD has successfully posted a Form 470 to the website, the SLD sends the applicant a Form 470 Receipt Notification Letter that provides important information, including the “Allowable Vendor Selection/Contract Date,” the earliest date the applicant can select a service provider, execute a contract, and submit a complete Form 471.

 

 

The FCC Form 471 Seeks Funding for Eligible Services Competitively Bid

 

Having selected the service provider, the applicant is ready to complete the Form 471, entitled “Services Ordered and Certification Form”, which is the actual request for funding. Because the amount of funding available each year is capped at $2.25 billion, and demand in most years has significantly exceeded funds available, FCC rules prescribe a filing window during which all Forms 471 that are filed are treated as if simultaneously received. Once the filing window opens, the applicant can submit the Form 471 either online or by paper.

 

The Form 471 is used to calculate the discount percentage to which the applicant is entitled. In general, the E-rate discount is based on the percent of the local school district population eligible for the National School Lunch Program. The Form 471 also lists the individual funding requests, which must be separated by service category and service provider. Some of the key aspects of the process include:

 

All window filing requirements must be met in order for an application to be considered with all others received in that timeframe;

 

Schools and libraries are required to pay the non-discount portion of the services for which they receive discounts. The funding necessary to pay this portion must be budgeted and approved before submission of the Form 471;

 

Funding requests should be limited to the cost of eligible services to be delivered to eligible entities for eligible purposes. If 30% or more of a request is ineligible, the entire request will be denied;

 

Applicants should be sure they can truthfully and correctly make these certifications. The SLD checks the accuracy of the certifications made by applicants and denies funding if one or more of the certifications is found to be untrue. False statements on the Form 471 (and other FCC forms) can result in civil and/or criminal liability;

 

Form 471 cannot be processed without the required attachment(s), which must contain detailed information about the products and services ordered so that the SLD can verify eligibility; and

 

The Form 471 Receipt Acknowledgment Letter provides important information to the applicant and the service provider, including a summary of the data from the Form 471.

 

 

 

 

6

 
 

The Funding Commitment Decision Letter Contains SLD Decisions on Funding Requests

 

Once the Form 471 has been reviewed, the SLD issues one or more Funding Commitment Decision Letters (FCDLs) to both the applicant and the service provider, setting out its decisions for each funding request. If an applicant believes any of its funding requests have been incorrectly reduced or denied, the applicant can appeal the SLD decision(s), either to the SLD or to the FCC. Appeals must be received or postmarked no later than 60 days after the date of the SLD decision letter.

 

The FCC Form 486 Tells SLD that Delivery of Services Has Begun

 

In order to help the SLD ensure that it pays service providers only for services that have actually been delivered, the applicant submits the Form 486, entitled “Receipt of Service Confirmation Form”, listing each separate funded request for which the delivery of services has begun. However, applicants who have confirmed that delivery of services will begin in July of the Funding Year may be able to file the Form 486 early (on or before July 31 of the Funding Year). The Form 486 also tells the SLD that the applicant’s technology plan – if required – has been approved, and informs the SLD of the applicant’s status of compliance with the Children’s Internet Protection Act (CIPA). Funding may be reduced if the Form 486 is received or postmarked after the deadline listed later in this document.

 

The Invoice (FCC Form 472 or FCC Form 474) Tells SLD to Pay the Service Provider

 

The SLD must receive an invoice in order to pay the discount amount on services for which funds have been committed. If applicants receive discounts on their bills from service providers, the service providers must submit the Form 474, entitled “Service Provider Invoice Form”, to receive payment for the discounts they have provided. If applicants wish to request reimbursement for services for which they have already paid in full, they must submit the Form 472, “Billed Entity Applicant Reimbursement Form”. The SLD bases the billing mode for each funding request – discounting or reimbursement – on the first type of invoice it processes for payment. Note that payment will not be made on a Form 472 or a Form 474 received or postmarked after the deadline listed later in this document. Receipt of discounts or reimbursements completes the E-rate process.

 

Retention of Records and Audits

 

Applicants MUST maintain their records for at least five years after the last date of service delivered to be able to comply with audits and other inquiries or investigations. USAC and the FCC visit a sample of applicants to ensure services have been delivered in compliance with FCC rules.

 

Employees

As of July, 2012, we employed approximately 55 full-time employees. None of the employees are subject to a collective bargaining agreement. We consider our relations with our employees to be good.

Offices

Our corporate headquarters is located at 2300 W. Sahara Ave. Suite 800 Las Vegas, NV 89102.

b. DESCRIPTION OF PROPERTY

(a) Real Estate  
(b) Title to properties. None.
(c) Oil and Gas Prospects. None.
(d) Patents. None (2)

 

 

 

LEGAL PROCEEDINGS

We are not currently a party to any material pending legal proceedings. In the ordinary course of business, we may become a party to various legal proceedings generally involving contractual matters, infringement actions, product liability claims and other matters.

From time to time, claims are made against us in the ordinary course of our business, which could result in litigation. Claims and associated litigation are subject to inherent uncertainties and unfavorable outcomes could occur, such as monetary damages, fines, penalties or injunctions prohibiting us from selling one or more products or engaging in other activities. The occurrence of an unfavorable outcome in any specific period could have a material adverse effect on our results of operations for that period or future periods.

DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS

The following table sets forth the names and ages of all of our directors and executive officers as of July __, 2012. All of the directors will serve until the next annual meeting of shareholders and until their successors are elected and qualified, or until their earlier death, retirement, resignation or removal. There are no arrangements or understandings between any director or executive officer and any other person pursuant to which the director or executive officer was selected.

 

         
Name   Age   Position
Adam Radly   43   President, Chief Executive Officer and Chairman of the Board of Directors
         
Bob Bates   43   Chief Financial Officer

Paul Aunger

Alex Lightman

 

52

 

48

 

Corporate Secretary and Director

 

Director

         
         

 

Directors and Executive Officers

Biographical information with respect to our executive officers and directors is provided below. There are no family relationships between any of our executive officers or directors.

Adam Radly has been our Chief Executive Officer since 2005. 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.

Bob Bates has been our CFO since 2007 and 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 also a director of Catalyst Group.

 

Paul Aunger. Mr. Aunger became a director and the Company’s Secretary on November 22, 2005. He is managing partner of Advisors, LLC and has been for more than 5 years and founder of the Web’s Biggest search engine. Prior to founding Web’s Biggest, Paul founded News Canada Inc. (www.newscanada.com ) in 1981 with Mr. Richard D. Smith. He was President of News Canada until it merged with MDC Communications Corporation (www.mdccorp.com ) in 1997.

 

Alex Lightman is the CEO and chairman of Innofone.com, the first public company focused exclusively on developing applications for Internet Protocol version 6 (IPv6) and has been for more than 5 years. Lightman also founded IPv6 Summit, Inc. He became a director of Inova in 2008.

Non-Employee Directors

The Board members serve for the latter of a period of one year or until the next annual meeting of shareholders.

Our executive officers are appointed by our board of directors and hold office until removed by the Board.

 

Conflicts of Interest – General.

Our directors and officers are, or may become, in their individual capacities, officers, directors, controlling shareholder and/or partners of other entities engaged in a variety of businesses. Thus, there exist potential conflicts of interest including, among other things, time, efforts and corporation opportunity, involved in participation with such other business entities. While each officer and director of our business is engaged in business activities outside of our business, the amount of time they devote to our business will be up to approximately __ hours per week.

 

Conflicts of Interest – Corporate Opportunities

Presently no requirement contained in our Articles of Incorporation, Bylaws, or minutes which requires officers and directors of our business to disclose to us business opportunities which come to their attention. Our officers and directors do, however, have a fiduciary duty of loyalty to us to disclose to us any business opportunities which come to their attention, in their capacity as an officer and/or director or otherwise. Excluded from this duty would be opportunities which the person learns about through his involvement as an officer and director of another company. We have no intention of merging with or acquiring an affiliate, associate person or business opportunity from any affiliate or any client of any such person.

 
 

 

SUMMARY COMPENSATION TABLE

Summary Compensation Table

Name and principal position (a) Year (b) Salary ($) (c ) Bonus ($) (d) Stock Awards($)(2)(f) Option Awards ($) (2)(f) Non-Equity Incentive Plan (g) Non-qualified Deferred Compensation Earnings ($)(h) All other compensation (%)(i) Total ($)(j)
Adam Radly:  2011  $                -    -   -   -   -   -   -   $                -  
Chief Executive Officer, President, and Chairman of the Board of Directors (1) 2010  $                -    -   -   -   -   -   -   $                -  
Bob Bates: Chief Financial Officer 2011  $      120,000  -   -   -   -   -   -   $      120,000
Chief Financial Officer 2010  $      120,000  -   -   -   -   -   -   $      120,000
DIRECTORS COMPENSATION TABLE            
Paul Aunger 2010  -   -   -   -   $      48,000  -   $      28,000  - 
Secretary/Director 2011  -   -   -   -   -   -   $      48,000  - 
Alex Lightman 2010  -   -   -   -   -   -   $      12,000  - 
Director 2011  -   -   -   -   -   -   $      12,000  - 
Jeff Mandelbaum 2010  -   -   -   -   -   -   $      12,000  - 
Director 2011  -   -   -   -   -   -   $              -    - 

 

 

Narrative Disclosure to Summary Compensation Table

Employment Agreements

Officer Employment Agreement

 

Adam Radly. We are not a party to an employment agreement with Mr. Radly. My 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 year (the 12 months ending April 2011) was $240,000, per the management fee agreement. These payments are reflected in the executive compensation for Mr. Radly in our filings because he has disclosed that he has an interest in these companies.

 

Bob Bates (services provided by HP Accounting at the rate of $11,000 per month)All of our officers and/or directors will continue to be active in other companies. All officers and directors have retained the right to conduct their own independent business interests.

It is possible that situations may arise in the future where the personal interests of the officers and directors may conflict with our interests. Such conflicts could include determining what portion of their working time will be spent on our business and what portion on other business interest. To the best ability and in the best judgment of our officers and directors, any conflicts of interest between us and the personal interests of our officers and directors will be resolved in a fair manner which will protect our interests. Any transactions between us and entities affiliated with our officers and directors will be on terms which are fair and equitable to us. Our Board of Directors intends to continually review all corporate opportunities to further attempt to safeguard against conflicts of interest between their business interests and our interests.

We have no intention of merging with or acquiring an affiliate, associated person or business opportunity from any affiliate or any client of any such person.

Directors receive no compensation for serving.

Security Ownership of Certain Beneficial Owners

The following table sets forth information as of the date of this prospectus as to each person or group who is known to us to be the beneficial owner of more than 5% of our outstanding voting securities and as to the security and percentage ownership of each of our executive officers and directors and of all of our officers and directors as a group.

Beneficial ownership is determined under the rules of the SEC and generally includes voting or investment power over securities and therefore the officer may not be the actual owner of the securities but if the officer has the power to influence the voting rights attached to the securities then these securities have been included in this table. The number of shares shown as beneficially owned in the tables below are calculated pursuant to Rule 13d-3(d)(1) of the Exchange Act. Under Rule 13d-3(d)(1), shares not outstanding that are subject to options, warrants, rights or conversion privileges exercisable within 60 days are deemed outstanding for the purpose of calculating the number and percentage owned by such person, but not deemed outstanding for the purpose of calculating the percentage owned by each other person listed.

 

Applicable percentage ownership in the following table is based on approximately 76,373,445 shares of common stock outstanding as of April 30, 2011 plus, for each individual, any securities that individual has the right to acquire within 60 days of April 30, 2011.

 

       
Name of Beneficial Owner  Common Stock
Beneficially  Owned
Number of Shares of
Common Stock
  Percentage of
Class
Adam Radly and related entities (1)   35,700,884    47%
Paul Aunger and related entities (2)   25,104,522    33%
Alex Lightman   0      
Bob Bates   0      

 

 

1) Southbase, LLC and Southbase International

2) Advisors, LLC

CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS

 

Companies in which our CEO, Mr. Radly, has an interest (and therefore are defined as “related” to Mr. Radly) provide various services to the Company that do not include his services as CEO of Inova. The total amount paid to these entities in the most recent fiscal year (the 12 months ending April 2011) was $240,000. These payments are reflected in the executive compensation segments for Mr. Radly in our filings because he has disclosed that he has an interest in these companies. Mr. Radly provides his services as CEO at no cost to Inova.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with “Summary Financial Data” and our financial statements and related notes appearing elsewhere in this prospectus. In addition to historical information, this discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of certain factors, including, but not limited, to those set forth under “Risk Factors” and elsewhere in this prospectus.

REVENUES

 

Revenue and cost recognition

 

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

 

IT network design and implementation:

 

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

 

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

 

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

 

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

 

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

 

Rental income for RFID items:

 

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

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES

Our selling, general and administrative expenses consist primarily of payroll and related benefits, share-based compensation, professional fees, marketing and other infrastructure costs such as insurance, information technology and occupancy expenses.

 

 

RESULTS OF OPERATIONS

April 30, 2011 COMPARED TO April 30, 2010

RESULTS OF OPERATIONS FOR THE YEAR ENDED APRIL 30, 2011 COMPARED TO YEAR ENDED APRIL 30, 2010

Total revenues (net sales) increased from $21,032,779 for the twelve month period ending April 2010 to $22,121,789 for the twelve month period ending April 30, 2011. This is primarily the result of an increase in awarded contracts compared to the previous year. Over 90% of the revenues are from Desert Communications, with the rest coming from Trakkers/Right Tag.

The Company’s selling, general and administrative expenses increased from $5,202,442 for the twelve months ending April 30, 2010 to $5,731,783 for the same period in 2011. This is primarily the result of the loss on transfer of assets under Desert’s credit facility and legal expenses and payroll from Desert Communications and Trakkers.

Last fiscal year, the Company reported a net loss from continuing operations of $7,063,039 as compared to a loss of $3,350,377 for the fiscal year ended April 30, 2011. The decreased loss is due to the $2.5 million interest charge in 2010 that resulted from defaulted notes accelerating discount amortization

As of the date of the filing the Company is attempting to restructure its debt with Boone and some other creditors. If successful there would be a significant decrease in the current portion of debt outstanding, interest rate reductions and extended maturity dates. If unsuccessful, we will continue to be in default on these loans and incur additional interest expense.

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

The other item impacting equity in fiscal 2011 is a one-time $2.5 million impairment charge to goodwill due to the curtailment of contracts in Trakkers.

 

LIQUIDITY AND CAPITAL RESOURCES

As of April 30, 2011, we had cash and cash equivalents totaling $396,140, current assets were $2,954,486, current liabilities were $18,232,634 and total stockholders’ deficit was $10,215,169. Working capital deficit decreased from $(15,378,190) at April 30, 2010 to $(15,278,148) at April 30, 2011.

The working capital increased due to higher cash in 2011 as compared to 2010. Since we are attempting to modify most of the notes some lenders have agreed to us not making payments currently. This has caused the notes to be in default and therefore are showing as current liabilities. It is not likely the company will be required to pay significant principal in the near future.

Both main subsidiaries (Trakkers and Desert) have working capital turn ratios 3 to 4 times higher than industry averages for their respective comparable companies.

As shown in the accompanying financial statements, we have incurred recurring losses from operations, we have an accumulated deficit and negative working capital as of April 30, 2011. These conditions raise substantial doubt as to our ability to continue as a going concern. While we have significant EBITDA we are not able to make all required debt payments currently. Management is trying to raise additional capital through sales of stock and refinancing debt. The financial statements do not include any adjustments that might be necessary if we are unable to continue as a going concern.

We have filed a registration statement on Form S-1 with the SEC for a contemplated public offering of common stock for gross proceeds of up to 3.75 million dollars. We have not engaged an underwriter for this public offering.

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

13
 

LIQUIDITY AND CAPITAL RESOURCES

 

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

 

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

 

As of the date of the filing the Company is attempting to restructure its debt with Boone and some other creditors. If successful there would be a significant decrease in the current portion of debt outstanding, interest rate reductions and extended maturity dates. If unsuccessful, we will continue to be in default on these loans and incur additional interest expense.

EBITDA for the years ending April 30, 2011 and 2010 was $1,595,054 and $ 1,981,979. EBITDA is Earnings before interest, tax, depreciation and amortization. Inova also excludes the non-cash loss on derivative liabilities and impairment charges from its EBITDA calculation.

    Year ended    Year ended 
EBITDA   April 30, 2011    April 30, 2010 
Net loss  $(3,350,377)  $(7,063,039)
           
Interest   2,310,272    5,704,217 
           
Tax   80,746    59,626 
           
Depreciation/Amortization   865,390    1,167,469 
           
Impairment loss   2,525,375    1,594,073 
           
Derivative (gain) loss   (836,353)   519,633 
           
EBITDA  $1,595,053   $1,981,979 

 

 

 

 

 

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

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

7

Table of Contents

 

 

 

ECONOMY AND INFLATION

Except as disclosed herein, we have not experienced any significant cancellation of orders due to the downturn in the economy and only a small number of customers requested delays in delivery or production of orders in process. Our management believes that inflation has not had a material effect on our results of operations.

Our management believes that inflation has not had a material effect on our results of operations

OFF-BALANCE SHEET ARRANGEMENTS

We do not have any off balance sheet arrangements that are reasonably likely to have a current or future effect on our financial condition, revenues, results of operations, liquidity or capital expenditures.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

The preparation of the accompanying financial statements and related disclosures in conformity with U.S. GAAP requires us to make judgments, assumptions and estimates that affect the amounts reported in the accompanying financial statements and the accompanying notes. The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses, and related disclosure of contingent assets and liabilities. When making these estimates and assumptions, we consider our historical experience, our knowledge of economic and market factors and various other factors that we believe to be reasonable under the circumstances. Actual results could differ from these estimates. The following critical accounting policies are significantly affected by judgments, assumptions and estimates used in the preparation of the financial statements:

 

Stock-Based Compensation

 

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

Derivative Financial Instruments

 

Inova does not use derivative instruments to hedge exposures to cash flow, market, or foreign currency risks. Inova evaluates all of it financial instruments to determine if such instruments are derivatives or contain features that qualify as embedded derivatives. For derivative financial instruments that are accounted for as liabilities, the derivative instrument is initially recorded at its fair value and is then re-valued at each reporting date, with changes in the fair value reported as charges or credits to income. For option-based simple derivative financial instruments, Inova uses the Black-Scholes option-pricing model to value the derivative instruments at inception and subsequent valuation dates. For complex embedded derivatives, Inova uses a Monte Carlo simulation model to value the derivative instruments at inception and subsequent valuation dates. The classification of derivative instruments, including whether such instruments should be recorded as liabilities or as equity, is re-assessed at the end of each reporting period. Derivative instrument liabilities are classified in the balance sheet as current or non-current based on whether or not net-cash settlement of the derivative instrument could be required within 12 months of the balance sheet date.

Taxes

Income taxes are provided for the tax effects of transactions reported in the financial statements and consist of taxes currently due plus deferred taxes resulting from temporary differences. Such temporary differences result from differences in the carrying value of assets and liabilities for tax and financial reporting purposes. The deferred tax assets and liabilities represent the future tax consequences of those differences, which will either be taxable or deductible when the assets and liabilities are recovered or settled. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized.

RECENT ACCOUNTING PRONOUNCEMENTS

Recent accounting pronouncements issued by FASB (including EITF), the AICPA and the SEC did not or are not believed by management to have a material impact on the Company’s present or future financial statements.

MARKET FOR COMMON EQUITY

The following table lists the high and low closing sales prices for each quarter on the OTCBB for our common shares for the past two fiscal years and are adjusted for our 20 for 1 stock split November 8, 2010.  There are approximately 54 shareholders of record, 1 of which is a holder for several hundred individuals. The below quotations reflect inter-dealer prices, without retail mark-up, mark-down or commission and may not represent actual transactions.

    High    Low
4/30/2011   .06     .07  
1/31/2011   .20     .40  
10/31/2010   .03     .20  
7/31/2010   .02     .05  
4/30/2010   .13     .05  
1/31/2010   .13     .03  
10/31/2009   .15     .08  
7/31/2009   .13     .05  

 

 

 

Transfer Agent

Our transfer agent is Transfer Online located at 512 SE Salmon Street, Portland, OR 97214, telephone 503.227.2950.

Dividend Policy

We have not declared or paid any dividends and do not intend to pay any dividends in the foreseeable future to the holders of our common stock. We intend to retain future earnings, if any, for use in the operation and expansion of our business. Any future decision to pay dividends on common stock will be at the discretion of our board of directors and will depend on our financial condition, results of operations, capital requirements and other factors our board of directors may deem relevant.

DILUTION

Our net tangible book value as of April 30, 2011 was approximately ($13,691,689), or ($.17) per share of our common stock. Our net tangible book value per share represents our total tangible assets less total liabilities divided by the number of shares of our common stock outstanding on April 30, 2011. Assuming that we issue all of the shares of our common stock offered by us at the public offering price of $.01 per share, and after deducting the commissions and estimated offering expenses payable by us, our  net tangible book value as of April 30, 2011 would have been approximately $(9.9) million, or ($.13) per share of our common stock. This amount represents an immediate increase in net tangible book value of $.04 per share to our existing stockholders and an immediate dilution in net tangible book value of $.12 per share to new investors purchasing shares of our common stock in this offering.

 

We determine dilution by subtracting the adjusted net tangible book value per share after this offering from the public offering price per share of our common stock. The following items influence the dilution in net tangible book value per share to new investors:

 

    Public offering price per unit

 

    Net tangible book value per share as of April 30, 2011

 

    Increase per share attributable to sale of common stock to investors

 

    Dilution per share to investors

 

    Dilution as a percentage of the offering price

The following shares were not included in the above calculation:

 

 

    0 shares of our common stock reserved for issuance under various outstanding warrant agreements, at a weighted average exercise price of $0.07 per share

 

     

11,367,655 warrants underlying our debt and issued for services

954,525,984 shares to be issued after debt is converted

Unless otherwise specifically stated, information throughout this prospectus assumes that none of our outstanding options or warrants to purchase shares of our common stock are exercised and from the exercise of the Underwriter’s Warrant.

 

CAPITALIZATION

 

             
    April 30, 2011      
Common stock issued and outstanding     76,373,445      
Common stock underlying warrants     11,367,655      
Common stock underlying convertible promissory notes     954,525,984      
Options     -      
             
      1,042,267,084      
             

 

 

    on a pro forma as adjusted to give effect to the issuance of the common stock offered hereby and the use of proceeds, as described in the section entitled “Use of Proceeds.”

 

 

DILUTION

We are registering 375,000,000 shares of our common stock for sale to the public.

  Comparative Data

The following table sets forth with respect to existing shareholders and new investors, a comparison of the number of our shares of common stock purchased the percentage ownership of such Shares, the total consideration paid, the percentage of total consideration paid and the average price per Share.  All percentages are computed based upon cumulative shares and consideration assuming sale of all shares in the line item as compared to maximum in each previous line.

  Shares Purchased (1) Total Consideration Average
  Number Percent (2) Amount Percent (3) Price/Share
1) Existing Shareholders            76,173,445 100%  $       5,313,883.00 100%  $            0.07
           
2) New Shareholders          375,000,000 83%  $  375,000,000.00 41%  $            0.01

 

“Net tangible book value” is the amount that results from subtracting the total liabilities and intangible assets from the total assets of an entity.  Dilution occurs because we determined the offering price based on factors other than those used in computing book value of our stock.  Dilution exists because the book value of shares held by existing stockholders is lower than the offering price offered to new investors.

 

(1)   76,373,445 shares were issued to all shareholders at $.07 per share average.
(2)   Percentage relates to total percentage of shares sold up to such increment.
(3)   Percentage relates to total percentage of capital raised post offering.

 

Following is a table detailing dilution to investors if 25%, 50%, 75%, or 100% of the shares in the offering are sold.

 

      25%     50%     75%     100%
Net tangible book value per share prior to stock sale   $ (.17)   $ (.17)   $ (.17)   $ (.17)
Net tangible book value per share after stock sale (1)   $ 0.(13)   $ 0.(13)   $ 0.(13)   $ 0.(13)
Average cost of shares owned by current stockholders per share   $ 0.07   $ 0.07   $ 0.07   $ 0.07

 

 As at April 30, 2011, the net tangible book value of our stock was $(.17) per share.  If we are successful in achieving selling shares at the offering price, the pro forma net tangible book value of our stock would be as shown in chart above.  That would represent an immediate increase in net tangible book value per share and per share dilution to new investors as shown in chart above, assuming the shares are sold at the offering price of $0.01 per share.  Our existing stockholders have purchased a total of 76,373,445 shares at an average cost of $0.07 per share.  The book value of the stock held by our existing stockholders will increase per share, while new purchaser’s book value will decrease from purchase price of $0.01 per share, as shown in chart above, to the net tangible book value.

 

DESCRIPTION OF CAPITAL STOCK

The following is a brief description of our capital stock, including their material terms and provisions and as such terms and provisions are applied to our certificate of incorporation, as amended, or our certificate of incorporation, and our restated bylaws, or our bylaws, copies of which have been filed with the SEC and are also available upon request from us, and applicable corporate laws of the State of Nevada.

Authorized Capital

We are authorized to issue shares of stock to be designated respectively “common stock” and “preferred stock” and collectively referred to herein as “capital stock.” The total number of shares of capital stock which we have the authority to issue are 525,000,000, consisting of 500,000,000 shares of common stock, par value $0.001 per share, and 25,000,000 shares of preferred stock, par value $0.01 per share.

Common Stock

We have approximately 100,420,845 shares of common stock issued and 76,373,445 outstanding as of July __, 2012. Each shareholder of our common stock is entitled to a pro rata share of cash distributions made to shareholders, including dividend payments. The holders of our common stock are entitled to one vote for each share of record on all matters to be voted on by shareholders. There is no cumulative voting with respect to the election of our directors or any other matter. The holders of our common stock are entitled to receive dividends when, as and if declared by our board of directors from funds legally available therefore. Cash dividends are at the sole discretion of our board of directors. In the event of our liquidation, dissolution or winding up, the holders of common stock are entitled to share ratably in all assets remaining available for distribution to them after payment of our liabilities and after provision has been made for each class of stock, if any, having any preference in relation to our common stock. Holders of shares of our common stock have no conversion, preemptive or other subscription rights, and there are no redemption provisions applicable to our common stock.

 

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, 2010 and 2009.

 

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, 2010 and 2009.

 

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 has now determined it is best for the company to elect option 3) and therefore will settle the instrument by issuing 10% ownership of Trakkers LLC on the third anniversary of the agreement.  Because the one year period from the original issuance of the preferred stock has passed, the Company can no longer change the method of redemption.  At inception of the instrument, the company determined the fair value of the preferred stock was $1,307,506.  Because the instrument will now be settled with subsidiary stock, Inova has classified the instrument as non-controlling interest in the consolidated balance sheet as of April 30, 2010 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”.

 

WARRANTS

 

Fiscal 2010

During the year ended April 30, 2010, in connection with financing arrangements with its lenders, Inova granted warrants to purchase 14,634,620 shares of Inova’s common stock, warrants to purchase 70.96 shares of Desert Communications, Inc. common stock, and warrants to purchase 13.5% of Trakkers, LLC. (See Note 8) Each warrant can be exercised for a total of $100 for an aggregate exercise price of $1,200 for all warrant shares. All warrants vest immediately and have contractual terms ranging from 5-7 years. All of the warrants issued prior to July 31, 2009 contained anti-dilution provisions that may result in the issuance of additional warrants. Under the provision, if Inova sells or issues common stock or an option to purchase common stock at a price that reflects an equity valuation of Inova of less than $10,000,000 (a “dilutive issuance”), the holder is entitled to receive additional warrants so that the warrant is exercisable into the same percentage of common stock as was outstanding immediately prior to the dilutive issuance.

During the year ended April 30, 2010, an additional 2,123,200 warrants to purchase Inova common stock were issued to various lenders under the anti-dilution provision above. The anti-dilution warrants have the same terms as the original instruments, mainly an exercise price of $100 for all warrant shares and contractual terms ranging from 5-7 years. On July 31, 2009, the warrant agreements were amended to remove the anti-dilution provisions. See Note 9.

The warrant shares are subject to various put option agreements whereby for various periods ranging from April 2010 to February 2014, the lenders can require Inova to repurchase 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. See Note 9. The exercise period for these put options was accelerated to April 1, 2010 as a result of the debt restructuring described in Note 8.

On March 22, 2010 Boone exercised warrants to purchase 5,768,300 shares of Inova common stock and 31.59 shares of Desert common stock. Contemporaneously, Boone exercised the related put options, requiring Inova to repurchase the warrant shares from Boone for $1,000,000. See Notes 8 and 9.

42

On April 8, 2010, Ascendiant exercised warrants to purchase 2,448,905 shares of Inova common stock. Contemporaneously, Ascendiant exercised the related put options, requiring Inova to repurchase the warrant shares from Boone for $375,000. See Notes 8 and 9.

 

 

45

Fiscal 2011

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

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

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

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, 2008   12,575,100   $ 0.31   $ 1,817,116     3.85  
Granted   28,095,720     0.00              
Exercised   -     -              
Forfeited   -     -              
Expired   -     -              
Outstanding at April 30, 2009   40,670,820   $ 0.10   $ 2,472,218     3.90  
Granted   16,757,820     0.00              
Exercised   (8,217,205 )   0.00              
Forfeited   -     -              
Expired   (1,050,000 )   .07              
Outstanding at April 30, 2010   48,161,435   $ 0.05   $ 2,720,778     4.11  
Granted   1,000,000     0.18              
Exercised   (37,793,780 )   .00              
Forfeited   -     -              
Expired                        
Outstanding at April 30, 2011   11,367,655   $ 0.03   $ 676,196     2.56  

43

 

                      Weighted  
          Weighted           average  
          average     Aggregate     remaining  
          exercise     intrinsic     contractual  
Warrants to purchase Desert common stock   Warrants     price     value     life (years)  
Outstanding at April 30, 2008   -   $ -   $ -     0.00  
Granted   91.53     0.00              
Exercised   -     -              
Forfeited   -     -              
Expired   -     -              
Outstanding at April 30, 2009   91.53   $ -   $ 992,060     4.57  
Granted   70.96     0.00              
Exercised   (31.59 )   0.00              
Forfeited   -     -              
Expired   -     -              
Outstanding at April 30, 2010   130.90   $ 0.00   $ 1,072,842     5.10  
Granted         0.00              
Exercised   (130.90 )   0.00              
Forfeited   -     -              
Expired   -     -              
Outstanding at April 30, 2011   0   $ 0.00   $       0  

 

                      Weighted  
          Weighted           average  
          average     Aggregate     remaining  
          exercise     intrinsic     contractual  
Warrants to purchase Trakkers common stock   Warrants     price     value     life (years)  
Outstanding at April 30, 2008   -   $ -   $ - $     0.00  
Granted   19.44%     0.00              
Exercised   -     -              
Forfeited   -     -              
Expired   -     -              
Outstanding at April 30, 2009   19.44%   $ -   $ 998,491     4.35  
Granted   13.50%     0.00              
Exercised   -     -              
Forfeited   -     -              
Expired   -     -              
Outstanding at April 30, 2010   32.94%   $ -   $ 1,082,932     3.69  
Granted   %     0.00              
Exercised   19.44     -              
Forfeited   -     -              
Expired   -     -              
Outstanding at April 30, 2011   13.50%   $ -   $ 10,606     3.18  

 

 

UNDERWRITING

 

This offering is self-underwritten direct public offering, without any participation by underwriters or broker-dealers. The shares will be sold through the efforts of our officers and directors.

 

INTERESTS OF NAMED EXPERTS AND COUNSEL

The financial statements as of April 30, 2010 and 2009 and for years then ended included in this Prospectus have been so included in reliance on the report of MaloneBailey, LLP (“MB”), an independent registered public accounting firm (the report on the financial statements contains an explanatory paragraph regarding the Company’s ability to continue as a going concern) appearing elsewhere herein, given on the authority of said firm as experts in auditing and accounting.

MB has not been employed by us on a contingent basis with respect to the sale or registration under this prospectus of the securities to be sold by us. MB does not own an interest in us.

INDEMNIFICATION, LIMITATION OF LIABILITY, AND

DISCLOSURE OF COMMISSION POSITION ON INDEMNIFICATION

FOR SECURITIES ACT LIABILITIES

 

The Nevada Business Corporation Act requires us to indemnify officers and directors for any expenses incurred by any officer or director in connection with any actions or proceedings, whether civil, criminal, administrative, or investigative, brought against such officer or director because of his or her status as an officer or director, to the extent that the director or officer has been successful on the merits or otherwise in defense of the action or proceeding. The Nevada Business Corporation Act permits a corporation to indemnify an officer or director, even in the absence of an agreement to do so, for expenses incurred in connection with any action or proceeding if such officer or director acted in good faith and in a manner in which he or she reasonably believed to be in or not opposed to the best interests of us and such indemnification is authorized by the stockholders, by a quorum of disinterested directors, by independent legal counsel in a written opinion authorized by a majority vote of a quorum of directors consisting of disinterested directors, or by independent legal counsel in a written opinion if a quorum of disinterested directors cannot be obtained.

 

The Nevada Business Corporation Act prohibits indemnification of a director or officer if a final adjudication establishes that the officer's or director's acts or omissions involved intentional misconduct, fraud, or a knowing violation of the law and were material to the cause of action. Despite the foregoing limitations on indemnification, the Florida Business Corporation Act may permit an officer or director to apply to the court for approval of indemnification even if the officer or director is adjudged to have committed intentional misconduct, fraud, or a knowing violation of the law.

 

The Nevada Business Corporation Act also provides that indemnification of directors is not permitted for the unlawful payment of distributions, except for those directors registering their dissent to the payment of the distribution.

 

According to our bylaws, we are authorized to indemnify our directors to the fullest extent authorized under Nevada Law subject to certain specified limitations.

 

Insofar as indemnification for liabilities arising under the Securities Act of 1933 (the “Act”) may be permitted to directors, officers and persons controlling us pursuant to the foregoing provisions or otherwise, we are advised that, in the opinion of the Securities and Exchange Commission, such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable.

 
 

 

WHERE YOU CAN FIND FURTHER INFORMATION

We filed with the Securities and Exchange Commission (the “Commission”) a Registration Statement on Form S-1, as amended, under the Securities Act with respect to the common stock being offered in this offering. Although this prospectus, which forms a part of the Registration Statement, contains all of the material information set forth in the Registration Statement, parts of the Registration Statement are omitted in accordance with the rules and regulations of the Commission.

The omitted information may be inspected and copied, at prescribed rates, at the public reference facilities maintained by the Commission at Judiciary Plaza, 100 F Street, NE, Washington, D.C. 20549. The public may obtain information on the operation of the Public Reference Room by calling the Commission at 1-800-SEC-0330. The Commission maintains an Internet site at http://www.sec.gov that contains reports, proxy and information statements and other information regarding issuers that file electronically with the Commission. For further information with respect to our company and the securities being offered in this offering, reference is hereby made to the Registration Statement, including the exhibits thereto and the financial statements, notes, and schedules filed as a part thereof.

The Registration Statement, including all exhibits and schedules and amendments, has been filed with the Commission through the Electronic Data Gathering, Analysis and Retrieval (EDGAR) system. Copies of all of our filings with the Commission may be viewed on the Commission’s internet web site at http://www.sec.gov. We also maintain a website at http://www.INOVAtechnology.com. We may include our public filings on our website, and will include such information to the extent required by applicable law and the rules and regulations of any exchange on which our shares are listed.

 

 

CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND

FINANCIAL DISCLOSURE

 

 

The Company has not changed its auditors during the previous 2 years and has not had any disagreements with its auditors.

 

 

 

 
 

 

 

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

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

We have audited the accompanying consolidated balance sheets of Inova Technology, Inc. (“Inova”), as of April 30, 2011 and 2010 and the related consolidated statements of operations, changes in stockholders’ equity and cash flows for the years ended April 30, 2011 and 2010. These consolidated financial statements are the responsibility of Inova’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

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

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Inova as of April 30, 2011 and 2010 and the results of its consolidated operations and its consolidated cash flows for the years ended April 30, 2011 and 2010 in conformity with accounting principles generally accepted in the United States of America.

The accompanying financial statements have been prepared assuming that Inova will continue as a going concern. Inova incurred losses from operations for fiscal 2011 and 2010 and has a working capital deficit as of April 30, 2011. These factors raise substantial doubt about Inova’s ability to continue as a going concern. Management's plans in regard to these matters are described in Note 3. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.

MALONEBAILEY, LLP
www.malonebailey.com
Houston, Texas
August 8, 2011

INOVA TECHNOLOGY, INC.
CONSOLIDATED BALANCE SHEETS

    April 30, 2011     April 30, 2010  
ASSETS  
             
Current assets            
Cash $ 396,140   $ 336,746  
Accounts receivables   184,789     109,500  
Contract receivables, net of allowance of $21,746 and $21,822   782,286     2,011,853  
Credit facility receivable   1,230,596     952,562  
Inventory   100,471     93,335  
Costs in excess of billing and estimated earnings   229,039     290,329  
Prepaid and other current assets   31,165     46,423  
             
Total current assets   2,954,486     3,840,748  
             
Fixed assets, net   149,104     185,017  
Revenue earning equipment, net   892,690     1,250,929  
Intangible assets, net   -     463,976  
Goodwill, net   4,157,596     6,669,454  
Other Assets   6,121     50,432  
             
Total assets $ 8,159,997   $ 12,460,556  
             
LIABILITIES AND STOCKHOLDERS' DEFICIT  
             
Current liabilities            
Accounts payable $ 950,149   $ 2,152,657  
Accrued liabilities   2,861,923     1,465,859  
Deferred income   442,669     424,872  
Derivative liabilities   2,515,687     5,607,940  
Notes payable - related parties   1,200,000     1,650,000  
Notes payable, net of unamortized discount of $0 and $134,816   10,262,206     7,917,610  
Total current liabilities   18,232,634     19,218,938  
             
Notes payable - net of current maturities   -     137,898  
Notes payable - related parties, net of current maturities   142,532     142,532  
             
Total liabilities   18,375,166     19,499,368  
             
Stockholders' deficit            
Convertible preferred stock, $0.001 par value; 25,000,000 shares
authorized; 1,500,000 shares issued and outstanding (As of
April 30, 2011 and 2010, shares are included in non-controlling interest)
  -     -  
Common stock, $0.001 par value; 150,000,000 shares
authorized; 61,263,909 and 56,338,300 shares issued and outstanding
  61,264     56,338  
Additional paid-in capital   4,937,526     4,768,432  
Non-controlling interest   1,307,506     1,307,506  
Accumulated deficit   (16,521,465 )   (13,171,088 )
             
Total stockholders' deficit   (10,215,169 )   (7,038,812 )
             
Total liabilities and stockholders' deficit $ 8,159,997   $ 12,460,556  

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

INOVA TECHNOLOGY, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
For the years ended April 30, 2011 and 2010

    2011     2010  
Revenues $ 22,121,789   $ 21,032,779  
             
Cost of revenues   (15,245,413 )   (14,340,559 )
Selling, general and administrative   (5,731,783 )   (5,202,442 )
Depreciation expense   (69,942 )   (80,405 )
Amortization expense   (450,453 )   (654,975 )
Impairment loss   (2,525,375 )   (1,594,073 )
             
Operating loss   (1,901,177 )   (839,675 )
             
Other income (expense):            
Interest income   24,719     -  
Other income   -     486  
Gain (Loss) on derivative liabilities   836,353     (519,633 )
Interest expense   (2,310,272 )   (5,704,217 )
             
Net loss $ (3,350,377 ) $ (7,063,039 )
             
Basic and diluted income (loss) per share $ (0.06 ) $ (0.14 )
             
Weighted average common shares outstanding   58,560,338     50,093,080  

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

INOVA TECHNOLOGY, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS EQUITY
Years ended April 30, 2011 and 2010

    Common Stock     Preferred Stock     Additional     Non-Controlling     Retained        
    Shares     Par (0.001)     Shares     Par (0.001)     Paid-in Capital     Interest     Deficit     Total  
Balances at April 30, 2009   49,011,580   $ 49,012     1,500,000   $ 1,500   $ 5,734,201   $ -   $ (5,951,584 ) $ (166,871 )
                                                 
Cumulative effect of change in accounting principle                                                
- reclassification of derivative liabilities   -     -     -     -     (232,642 )   -     (156,465 )   (389,107 )
Reclassification of derivative liabilities to additional paid-in capital   -     -     -     -     680,779     -     -     680,779  
Reclassification of derivative liabilities from additional paid-in capital   -     -     -     -     (614,945 )   -     -     (614,945 )
Reclassification of preferred stock to non-controlling interest   -     -     -     (1,500 )   (1,306,006 )   1,307,506     -     -  
Common stock issued for cash   1,762,960     1,763     -     -     93,237     -     -     95,000  
Common stock issued for services   4,140,760     4,141     -     -     245,748     -     -     249,889  
Common stock issued for prior year accrued liabilities   423,000     423     -     -     45,226     -     -     45,649  
Common stock issued for conversion of notes payable   1,000,000     1,000     -     -     39,500     -     -     40,500  
Discount on notes payable from beneficial conversion feature   -     -     -     -     83,333     -     -     83,333  
Net loss                                       (7,063,039 )   (7,063,039 )
Balances at April 30, 2010   56,338,300     56,338     1,500,000     -     4,768,432     1,307,506     (13,171,088 )   (7,038,812 )
                                                 
Common stock issued for services   3,425,609     3,426     -     -     105,344     -     -     108,770  
Common stock issued for conversion of notes payable   1,500,000     1,500     -     -     59,250     -     -     60,750  
Common stock warrants issued for services   -     -     -     -     56,500     -     -     56,500  
Reclassification of derivative liabilities from additional paid-in capital   -     -     -     -     (52,000 )   -     -     (52,000 )
Net loss   -     -     -     -     -     -     (3,350,377 )   (3,350,377 )
Balances at April 30, 2011   61,263,909   $ 61,264     1,500,000   $ -   $ 4,937,526   $ 1,307,506   $ (16,521,465 ) $ (10,215,169 )

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

INOVA TECHNOLOGY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended April 30, 2011 and 2010

    2011     2010  
CASH FLOWS FROM OPERATING ACTIVITIES            
Net loss $ (3,350,377 ) $ (7,063,039 )
Adjustments to reconcile net loss to net cash used provided by operating activities:            
Depreciation expense, $344,995 and $432,089 included in cost of revenues   414,937     512,494  
Amortization expense - loan discounts and deferred financing costs   128,900     4,358,975  
Amortization expense - intangible   450,453     654,975  
Paid in kind interest   183,401     -  
Impairment loss   2,525,375     1,594,073  
Stock issued for services   108,770     249,889  
Warrants issued for services   56,500     -  
Write off of accounts payable   -     (254,839 )
Derivative (gain) loss   (836,353 )   519,633  
Changes in operating assets and liabilities:            
Accounts receivable   1,154,278     (40,137 )
Credit facility receivable   (278,034 )   (952,562 )
Inventory   (7,136 )   (21,610 )
Costs in excess of billing and estimated earnings   61,290     (252,005 )
Prepaid expenses and other current assets   15,258     10,139  
Other assets   44,311     -  
Accounts payable and accrued expenses   193,562     967,830  
Deferred revenues   17,797     20,682  
Net cash provided by operating activities of operations   882,932     304,498  
             
CASH FLOW INVESTING ACTIVITIES            
Purchase of fixed assets   (20,785 )   (40,876 )
Net cash used in investing activities   (20,785 )   (40,876 )
             
CASH FLOW FINANCING ACTIVITIES            
Proceeds from sale of stock   -     95,000  
Proceeds from notes payable   103,500     2,015,181  
Repayments made on notes payable   (456,253 )   (3,183,966 )
Proceeds from notes payable - related parties   -     160,736  
Repayments made on notes payable - related parties   (450,000 )   (101,721 )
Net cash used in financing activities   (802,753 )   (1,014,770 )
             
NET CHANGE IN CASH   59,394     (751,148 )
CASH AT BEGINNING OF YEAR   336,746     1,087,894  
CASH AT END OF YEAR $ 396,140   $ 336,746  
             
SUPPLEMENTAL INFORMATION:            
Interest paid $ 584,547   $ 851,845  
Income taxes paid $ -   $ -  
             
NON-CASH INVESTINGAND FINANCING ACTIVITIES:            
Common stock issued for partial payment of notes payable and accrued liabilities $ -   $ 45,649  
Common stock issued for conversion of debt   60,750     40,500  
Discount on notes payable from beneficial conversion features and warrants   -     83,333  
Cumulative effect of change in accounting principle-reclassification of derivative liability   -     420,162  
Reclassification of preferred stock to non-controlling interest   -     1,307,506  
Reclassification of derivative liabilities to additional paid-in capita   -     680,779  
Reclassification of derivative liabilities from additional paid-in capita   52,000     614,945  
Reclassification of put notes from derivative liabilities   2,307,900     1,375,000  
Financed fixed asset purchase   -     18,492  
Discount on notes payable from derivative liabilities   -     1,000,499  

See summary of accounting policies and notes to consolidated financial statements

INOVA TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 – HISTORY AND ORGANIZATION OF THE COMPANY

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

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NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of consolidation

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

Use of estimates

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

Reclassifications

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

Cash and cash equivalents

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

Accounts receivable

Trade and other accounts receivable are carried at face value less any provisions for uncollectible accounts considered necessary. Accounts receivable primarily include contract receivables from customers in Texas. Bad debt expense is recognized based on management’s estimate of likely losses per year, based on past experience and an estimate of current year uncollectible amounts. The allowance for doubtful accounts was $21,746 and $21,822 as of April 30, 2011 and 2010, respectively.

Inventory

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

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Property and equipment

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

Intangible assets

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

Impairment of long-lived assets

The Company reviews the carrying value of its definite lived intangible assets at least annually. Other long-lived assets, including intangibles, are reviewed whenever events or changes in circumstances indicate that the historical-cost carrying value of an asset may no longer be appropriate. The Company assesses recoverability of the asset by comparing the undiscounted future net cash flows expected to result from the asset to its carrying value. If the carrying value exceeds the undiscounted future net cash flows of the asset, an impairment loss is measured and recognized. An impairment loss is measured as the difference between the net book value and the fair value of the long-lived asset. Impairment charges of $13,517 and $99,185 were recorded for the years ended April 30, 2011 and 2010, respectively.

Goodwill and other indefinite intangibles

Goodwill and other intangibles with indefinite lives are not amortized but are reviewed for impairment at least annually, or more frequently if an event or circumstance indicates that an impairment may have occurred. To test for impairment, the fair value of each reporting unit is compared to the related net book value, including goodwill. If the net book value of the reporting unit exceeds the fair value, an impairment loss is measured and recognized. An income approach is utilized to estimate the fair value of each reporting unit. The income approach is based on the projected debt-free cash flow, which is discounted to the present value using discount factors that consider the timing and risk of cash flows. Impairment charges of $2,511,858 and $1,494,888 were recorded for the years ended April 30, 2011 and 2010, respectively.

Embedded conversion features

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

Income taxes

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

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Revenue and cost recognition

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

IT network design and implementation:

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

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

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

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

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

Rental income for RFID items:

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

Stock based compensation

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

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Basic and diluted net income (loss) per share

Basic loss per share is computed using the weighted average number of shares of common stock outstanding during each period. Diluted loss per share includes the dilutive effects of common stock equivalents on an “as if converted” basis. For the years ended April 30, 2011 and 2010, potential dilutive securities had an anti-dilutive effect and were not included in the calculation of diluted net loss per common share.

Financial Instruments

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

Transfers and Servicing of Financial Assets and Liabilities

The Company accounts for transfers and servicing of financial assets and liabilities in accordance with ASC 860-10 (formerly SFAS 140) “Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities”. When the conditions are met for the transfer of assets or liabilities to qualify as a sale, the assets or liabilities are derecognized and the gain or loss on the sale is determined at the date of transfer based upon the amount at which the assets and liabilities are transferred less any fees, discounts and other charges. The Company recognizes any servicing assets and servicing liabilities at their fair value using the fair value measurement method as prescribed by ASC 860-10. As of April 30, 2011 and 2010, the Company’s servicing asset consisted of a gross margin receivable due from a third party that purchased accounts receivable and accounts payable from us. The carrying amounts of our gross margin receivable approximates its fair value due to its relatively short maturity.

Derivative Financial Instruments

Inova does not use derivative instruments to hedge exposures to cash flow, market, or foreign currency risks. Inova evaluates all of it financial instruments to determine if such instruments are derivatives or contain features that qualify as embedded derivatives. For derivative financial instruments that are accounted for as liabilities, the derivative instrument is initially recorded at its fair value and is then re-valued at each reporting date, with changes in the fair value reported as charges or credits to income. For option-based simple derivative financial instruments, Inova uses the Black-Scholes option-pricing model to value the derivative instruments at inception and subsequent valuation dates. For complex embedded derivatives, Inova uses a Monte Carlo simulation model to value the derivative instruments at inception and subsequent valuation dates. The classification of derivative instruments, including whether such instruments should be recorded as liabilities or as equity, is re-assessed at the end of each reporting period. Derivative instrument liabilities are classified in the balance sheet as current or non-current based on whether or not net-cash settlement of the derivative instrument could be required within 12 months of the balance sheet date.

Fair Value Measurements

In September 2006, the FASB issued ASC 820 which defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. The provisions of ASC 820 were effective January 1, 2008. As defined in ASC 820, fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (exit price). The Company utilizes market data or assumptions that market participants would use in pricing the asset or liability, including assumptions about risk and the risks inherent in the inputs to the valuation technique. These inputs can be readily observable, market corroborated, or generally unobservable. The Company classifies fair value balances based on the observability of those inputs. ASC 820 establishes a fair value hierarchy that prioritizes the inputs used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (level 1 measurement) and the lowest priority to unobservable inputs (level 3 measurement).

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

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

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

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

The following tables set forth assets and liabilities measured at fair value on a recurring and non-recurring basis by level within the fair value hierarchy as of April 30, 2011 and 2010. As required by ASC 820, financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. The Company’s assessment of the significance of a particular input to the fair value measurement requires judgment, and may affect the valuation of fair value assets and liabilities and their placement within the fair value hierarchy levels.

Liabilities Measured at Fair Value on
a Recurring Basis
  April 30, 2011  
    Level 1     Level 2     Level 3     Total  
Derivative and warrant liabilities   -     -   $ 2,515,687   $ 2,515,687  

 

    April 30, 2010  
    Level 1     Level 2     Level 3     Total  
Derivative and warrant liabilities   -     -   $ 5,607,940   $ 5,607,940  

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

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Assets Measured at Fair Value on a Non-Recurring Basis April 30, 2011        
    Level 1     Level 2     Level 3     Total     Gain (Loss)  
Goodwill & Intangible Assets   -     -   $ 4,157,596   $ 4,157,596   $ 2,525,375  

 

  April 30, 2010        
    Level 1     Level 2     Level 3     Total     Gain (Loss)  
Goodwill & Intangible Assets   -     -   $ 7,133,430   $ 7,133,430   $ 1,594,073  

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

In accordance with the provisions of ASC 360-10 “Accounting for the Impairment and Disposal of Long-Lived Assets”, for the year ended April 30, 2010, long-lived intangible assets with a carrying amount of $563,161 were written down to their fair value of $463,976, resulting in an impairment charge of $99,185, which was included in earnings for the year ended April 30, 2010.

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

In accordance with the provisions of ASC 350-20 “Goodwill and Other Intangible Assets”, for the year ended April 30, 2010, goodwill with a carrying amount of $8,164,342 was written down to its implied fair value of $6,669,454, resulting in an impairment charge of $1,494,888, which was included in earnings for year ended April 30, 2010.

Recent accounting pronouncements

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

NOTE 3 – GOING CONCERN

As shown in the accompanying financial statements, we have incurred a losses of $3,350,377 and $7,063,039 for the years ended April 30, 2011 and 2010, and have an accumulated deficit of $16,521,465 and negative working capital of $15,278,148 as of April 30, 2011. These conditions raise substantial doubt as to our ability to continue as a going concern. The consolidated financial statements contained herein do not include any adjustments relating to the recoverability and classification of recorded asset amounts or amounts and classification of liabilities that might be necessary should we be unable to continue in existence. Our ability to continue as a going concern is dependent upon our ability to generate sufficient cash flows to meet our obligations on a timely basis, to obtain additional financing as may be required, and ultimately to attain profitable operations. However, there is no assurance that profitable operations or sufficient cash flows will occur in the future. Management is trying to raise additional capital through sales of stock and refinancing debt.

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NOTE 4 – CONTRACT RECEIVABLES & CREDIT FACILITY RECEIVABLE

    30-Apr-11     30-Apr-10  
Completed contracts $ 669,486   $ 1,897,777  
Contracts in progress   112,800     114,076  
Total contract receivables $ 782,286   $ 2,011,853  

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

    30-Apr-11     30-Apr-10  
Costs incurred on uncompleted contracts $ 1,016,219   $ 587,038  
Estimated earnings   581,875     372,457  
Less: billings to date   (1,369,055 )   (669,165 )
Total $ 229,039   $ 290,329  

Included in the accompanying balance sheet under the following captions:

    30-Apr-11     30-Apr-10  
Costs and estimated earnings in excess of billings on uncompleted contracts $ 229,039   $ 290,329  
Billings in excess of costs and estimated earnings on uncompleted contracts   -     -  
Total $ 229,039   $ 290,329  

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Credit Facility Receivable:

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

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

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

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

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

The Company accounts for its transfers of accounts receivable to NETF under each of these agreements in accordance with the provision of ASC 860-10 (formerly SFAS 140) “Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities” as sales of such accounts receivable balances. The gain or loss on sales of receivables NETF is determined at the date of transfer based upon the amount at which they are transferred to NETF less any fees, discounts and other charges provided under the agreements. The Company has determined that all transfers of receivables and payables to NETF under the above agreement qualify as sales because (1) the transferred assets and liabilities have been isolated from Desert (2) NETF has the right to pledge or exchange the assets and (3) Desert does not maintain effective control over the transferred assets. During fiscal 2011 and 2010, the Company recognized a loss on these sales of $296,829 and $66,227, which is the amount of fees incurred on gross margin advances noted above. As of April 30, 2011 and 2010, the gross margin receivable owed to Desert as a result of the servicing agreement was $1,230,596 and $952,562. The carrying amounts of our gross margin receivable approximates its fair value due to its relatively short maturity.

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

During the year ended April 30, 2010, Desert sold approximately $4.5 million of accounts receivable to NETF and NETF assumed approximately $3 million in accounts payable related to these assets.

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

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NOTE 5 – PROPERTY AND EQUIPMENT

Property and equipment consisted of the following at April 30, 2011 and 2010:

    Life     2011     2010  
Office equipment   2 to 10 years   $ 100,850   $ 92,900  
Office furniture   7 to 8 years     37,504     37,504  
Vehicles   3 to 5 years     275,857     299,010  
Leasehold improvements   3.25     164,944     164,944  
Scanners (revenue earning equipment)   5 years     2,011,023     2,088,518  
                   
Subtotal         2,590,178     2,682,876  
Less: accumulated depreciation         (1,548,384 )   (1,246,930 )
                   
Total       $ 1,041,794   $ 1,435,946  

Depreciation expense totaled $414,937 and $512,494 in 2011 and 2010, respectively. Depreciation on scanners is included cost of revenues in the consolidated statements of operations. For the years ended April 30, 2011 and 2010, $344,995 and $432,089 of depreciation expense was included in cost of revenues, respectively. During the year ended April 30, 2011, Inova wrote off $113,483 of fixed assets that were fully depreciated during the year.

NOTE 6 – GOODWILL AND INTANGIBLES

RightTag:

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

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

An impairment analysis on the goodwill was performed at April 30, 2011 and 2010 and no impairment to goodwill was recorded.

Desert:

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

An impairment analysis on the goodwill was performed at April 30, 2011 and 2010 and no impairment to goodwill was recorded.

Web’s Biggest:

In June 2005 when Inova acquired Web’s Biggest, it was recorded as a reverse acquisition whereby Web’s Biggest purchased Inova’s assets and liabilities to be recorded at fair value. In 2008, Inova completed its valuation of the assets and liabilities acquired in the Web’s Biggest merger. Pursuant to the valuation, purchase price of $360,641 was assigned to the customer list acquired and the remaining $2,612,304 was assigned to goodwill.

An impairment analysis at April 30, 2010 was undertaken and impairment to goodwill of $1,494,888 was recorded; all goodwill was impaired as of April 30, 2010 due to there being no remaining customers or active contracts associated with this business segment as of April 30, 2010.

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Trakkers:

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

An impairment analysis on the goodwill was performed at April 30, 2011 and 2010 and $2,511,858 and $0 of impairment to goodwill was recorded.

Goodwill and Intangible Assets consists of the following as of April 30, 2010 and 2011:

Goodwill   2011     2010  
RightTag $ 142,795   $ 142,795  
Desert   3,315,918     3,315,918  
Trakkers/Tesselon   698,883     3,210,741  
             
Total $ 4,157,596   $ 6,669,454  

 

Intangible Assets   Life     2011     2010  
Desert – customer list   3 years   $ 498,930   $ 498,930  
Trakkers/Tesselon – customer list   3 years     496,179     496,179  
Trakkers – employment agreements   3 years     525,534     525,534  
                   
Subtotal         1,520,643     1,520,643  
Less: accumulated amortization         (1,520,643 )   (1,056,667 )
                   
Total       $ -   $ 463,976  

For the years ended April 30, 2011 and 2010, Inova recorded amortization expenses of $450,453 and $654,975, respectively.

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NOTE 7 – RELATED-PARTY TRANSACTIONS

A summary of changes in related-party payable account for the years ended April 30, 2011 and 2010 is as follows:

    2011     2010  
Beginning balance $ 1,792,532   $ 1,733,517  
Proceeds from the related-party payable   -     150,000  
Less: repayments made on related-party payable   (450,000 )   (90,985 )
             
Total related-party payable $ 1,342,532   $ 1,792,532  

Related-party payable account consisted of the following as of April 30, 2010 and 2011:

    2011     2010  
Due to Southbase, entity related to CEO. Matures May 2017, 7%, unsecured $ 142,532   $ 142,532  
             
Due to Desert sellers, notes obtain from acquisition. Matured December 2010 (in default), 18%, secured by all common stock of Desert   1,200,000     1,500,000  
             
Due to Desert sellers, working capital facility, 18% Matured December 2010, unsecured   -     150,000  
             
Total related-party payable   1,342,532     1,792,532  
Less: current maturities   (1,200,000 )   (1,650,000 )
             
Long-term portion of related-party payable $ 142,532   $ 142,532  

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Advisors, LLC & Web’s Biggest, Inc.

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

In April, 2010 Advisors, LLC purchased 1,762,960 shares of common stock for $95,000. In addition, 890,760 shares with a fair value of $46,765 were issued for consulting services provided.

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

No amounts were owed to Advisors, LLC as of April 30, 2011 and 2010.

Southbase International, Limited(“Southbase”)

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

During fiscal 2010, Southbase, International received 2,500,000 shares of Inova common stock with a fair value of $130,000 for partial payment of outstanding amounts owed.

Desert Sellers

There are notes payable to the previous owners of Desert Communications in the amount of $1,200,000 and accrued interest of $619,451 and $315,466 as of April 30, 2011 and 2010. 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%. See Note 8 below for the accounting impact of this modification. During fiscal 2011, $300,000 was repaid on the these notes.

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

The Desert sellers are paid bonuses based on the operating results of Desert. As of April 30, 2011 and 2010, $37,475 and $217,622 of bonuses owed to the Desert sellers and are included in accrued liabilities in the consolidated balance sheet.

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NOTE 8 – NOTES PAYABLE

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

In July 2008, a note payable of $500,000 with an original issue discount of $52,875 was issued for 1.5 years by Ascendiant. It is secured by all assets of Desert. The note is convertible into shares of Inova common stock at $0.075 per share. In addition, 52,896,400 warrants to purchase Inova common stock were issued with this note. As a result of the conversion feature and warrants, a discount of $447,125 was recorded to be amortized over the term of the note using the effective interest method. See below for information on the accounting for the conversion feature and warrants. As of April 30, 2011 and 2010, this note was in default and due on demand and as a result, all of the remaining unamortized discount has been amortized as of April 30, 2010. During the years ended April 30, 2010 $456,370 of the discount was amortized to interest expense.

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, 2011 and 2010, 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%.

Inova analyzed the conversion option for derivative accounting consideration under ASC 815 “Derivatives and Hedging”. Inova determined that derivative accounting is not applicable. Inova then analyzed the conversion option under ASC 470-20 “Debt with Conversion and Other Options” and determined there was a beneficial conversion feature resulting in a discount to the note of $182,642.

2,644,820 warrants with a fair value of $264,483 were issued to Ascendiant with this note. The warrants expire in July 2013. They have an aggregated exercise price of $200. The warrant shares are subject to a put option agreement whereby anytime between January 1, 2010 and July 1, 2013, Ascendiant can require Inova to repurchase from Ascendiant the warrant shares for $250,000. Under ASC 815-40 “Put Warrants”, warrants for put shares should be classified as liabilities and measured at fair value at the end of each reporting period with the change in fair value recorded to earnings. As a result, the fair value of these warrants was recorded as a derivative liability. Upon exercise of the put option, if Inova does not repurchase the shares within 30 days, the resulting liability with become a convertible note that is convertible into shares of Inova common stock.

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

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During fiscal 2010, the Company adopted ASC 815-15 "Determining Whether an Instrument (or Embedded Feature) is indexed to an Entity's Own Stock". As a result of the adoption, the conversion option above was reclassified from equity to a liability. See Note 10 below.

Note Modification

In July 2009, Inova modified the terms of its $500,000 note with Ascendiant to extend the maturity date from December 2009 to December 2010. In addition, the interest rate on the note increased to the higher of (i) Prime Rate plus 3% or (ii) 18% and the put option described above was increased from $250,000 to $375,000.

Inova evaluated the extension event under ASC 470-60 “Troubled Debt Restructurings”. Because the investors did not grant concessions 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. The modification was determined to be not substantial and as a result, no gain or loss was recorded on the date of the extension.

Put Option Exercise

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

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

Other Amounts Owed to Ascendiant

There is a contested commission note to Ascendiant Securities for originally for $78,000 of commissions. As of April 30, 2011 and 2010, $278,930 was owed for this note. The note is included in notes payable in the consolidated balance sheet. The note originally bore interest at 11.25%, but is now in default and bears interest at 18%. The Company is contesting this note due to the original circumstances surrounding it. Ascendiant has claimed to be the broker that introduced Inova to Boone and accordingly claims certain commissions from transactions between Inova and Boone. Inova disputes this claim.

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

Fiscal 2008

During fiscal 2008, Inova issued a note to Boone for $1,792,000 with an original issue discount of $192,000 due in November 2012. The note bears interest at Prime+3% or 11.25% . 8,746,960 warrants to purchase Inova common stock were issued to Boone with this note. The warrants expire in November 2012 and have an aggregate exercise price of $100. As a result of the warrants and the original issue discount, a total discount of $1,184,799 was recorded to be amortized over the term of the note using the effective interest method. See below for information on the accounting for the warrants.

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The warrant shares are subject to a put option agreement whereby anytime between June 10, 2010 and June 10, 2013, Boone can require Inova to repurchase from Boone the warrant shares for $1,300,000. Under ASC 815-40 “Put Warrants”, warrants for put shares should be classified as liabilities and measured at fair value at the end of each reporting period with the change in fair value recorded to earnings. As a result, the fair value of these warrants was recorded as a derivative liability. Upon exercise of the put option, if Inova does not repurchase the shares within 30 days, the resulting liability with become a convertible note. The exercise period for this put option was accelerated to April 1, 2010 as a result of the debt restructuring below. $1,000,000 of put options were exercised as of April 30, 2010, see “Convertible Put Exercise Note” below.

Fiscal 2009

During fiscal 2009, Inova issued several notes to Boone for an aggregate principal amount of $3,373,763 with aggregate original issue discounts of $339,600. The notes bear interest at Prime+3% or 11.25% . The notes were due at various dates from March 2009 through March 2011. In connection with these notes, Inova granted warrants to purchase 13,851,540 shares of Inova's common stock, warrants to purchase 92 shares of Desert Communications, Inc. common stock, and warrants to purchase 19.44% of Trakkers, LLC. The warrants expire at various dates from April 2013 through February 2014 and have an aggregated exercise price of $1,300. As a result of the warrants and the original issue discounts, a total discount of $2,869,883 was recorded to be amortized over the term of the notes using the effective interest method. See below for information on the accounting for the warrants. As of April 30, 2011 and 2010, all of these notes were in default and due on demand and as a result, all remaining unamortized discounts were amortized as of April 30, 2010. During the years ended April 30, 2011 and 2010, $0 and $2,182,298 of the discount was amortized to interest expense.

The warrant shares are subject to various put option agreements whereby anytime between January 2010 and January 1, 2013, Boone can require Inova to repurchase from Boone the warrant shares for $1,574,250. Under ASC 815-40 “Put Warrants”, warrants for put shares should be classified as liabilities and measured at fair value at the end of each reporting period with the change in fair value recorded to earnings. As a result, the fair value of these warrants was recorded as a derivative liability. Upon exercise of the put option, if Inova does not repurchase the shares within 30 days, the resulting liability with become a convertible note. The exercise period for these put options was accelerated to April 1, 2010 as a result of the debt restructuring below. $1,000,000 of put options were exercised as of April 30, 2010, see “Convertible Put Exercise Note” below.

Fiscal 2010

During fiscal 2010, Inova issued several notes to Boone for an aggregate principal amount of $1,128,856 with aggregate original issue discounts of $178,357. The notes bear interest at Prime+3% or 11.25% . The notes were due at various dates from December 2009 through February 2011. In connection with these notes, Inova granted warrants to purchase 11,697,440 shares of Inova's common stock, warrants to purchase 64 shares of Desert Communications, Inc. common stock, and warrants to purchase 1.44% of Trakkers, LLC. The warrants expire at various dates from May 2014 through January 2017 and have an aggregated exercise price of $800. As a result of the warrants and the original issue discounts, a total discount of $978,857 was recorded to be amortized over the term of the notes using the effective interest method. See below for information on the accounting for the warrants. As of April 30, 2011 and 2010, all of these notes were in default and due on demand and as a result, all remaining unamortized discounts were amortized as of April 30, 2010. During the year ended April 30, 2011 and 2010, $0 and $978,857 of the discount was amortized to interest expense.

The warrant shares are subject to various put option agreements whereby for various periods ranging from April 2010 to February 2014, Boone can require Inova to repurchase from Boone the warrant shares for $534,900. Under ASC 815-40 “Put Warrants”, warrants for put shares should be classified as liabilities and measured at fair value at the end of each reporting period with the change in fair value recorded to earnings. As a result, the fair value of these warrants was recorded as a derivative liability. Upon exercise of the put option, if Inova does not repurchase the shares within 30 days, the resulting liability with become a convertible note. The exercise period for these put options was accelerated to April 1, 2010 as a result of the debt restructuring below. $1,000,000 of put options were exercised as of April 30, 2010, see “Convertible Put Exercise Note” below.

Fiscal 2011

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

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

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Paid-In Kind Interest

Boone is capitalizing and charging paid in kind interest on several of its notes. Each period, at a rate mutually agreed to by the Company and Boone, interest is recognized on the outstanding principal balance and added to the principal balance of the note. This started in May 2010 for Boone’s notes as a temporary arrangement which can be cancelled at any time. The interest rates range from 11% to 20% on various notes.

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

Anti-Dilution Warrants

All of the warrants granted above contained dilutive issuance clauses in their agreements. Under these clauses, based on future issuances of Inova common stock or other convertible instruments, Inova can be required to issue additional warrants to Boone. During fiscal 2008, the Company issued 468,120 additional warrants to purchase Inova common stock with a fair value of $37,450 as a result of this clause. During fiscal 2009, the Company issued 8,031,040 additional warrants to purchase Inova common stock with a fair value of $845,192 as a result of this clause. During fiscal 2010, the Company issued 2,123,200 additional warrants to purchase Inova common stock with a fair value of $212,320 as a result of this clause. These warrants are also subject to the put option agreements described above. As a result, these warrants are also classified as liabilities under ASC 815-40. See Note 9 for more information.

Debt Restructuring

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

In conjunction with the $836,446 restructured note payable, 1,524,640 Inova warrants and 7.01 Desert warrants were issued to Boone with a fair value of $190,168. They have an aggregated exercise price of $200. The fair value of the warrants at the inception of the notes was recorded as a discount to the note to be amortized through maturity of the note using the effective interest method. This discount was combined with remaining unamortized discounts on the 6 notes included in the restructuring. As of April 30, 2011 and 2010, this note was in default and due on demand and as a result, all of the remaining unamortized discount was amortized as of April 30, 2010. During the year ended April 30, 2011 and 2010, $0 and $654,621 of the discount was amortized to interest expense.

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

Inova evaluated the extension event above under ASC 470-60 “Troubled Debt Restructurings”. Because the investors did not grant concessions 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. The modification was determined not to be substantial and as a result, no gain or loss was recorded on the date of the extension. In addition, all previously unamortized discounts associated with previous notes will be amortized over the maturity of the new note.

Convertible Put Exercise Note

On March 22, 2010 Boone exercised $1,000,000 of its put options, requiring Inova to repurchase from Boone up to 5,768,300 shares of Inova common stock and 31.59 shares of Desert common stock for $1,000,000. Since Inova did not repurchase the shares within 30 days a 2 year $1,000,000 convertible note was established by Boone at a 24% interest rate. A discount of $200,000 was recorded on this note as a result of the conversion options, see below. As of April 30, 2010, this notes was in default and due on demand and as a result, all of the remaining unamortized discount has been amortized to interest expense as of April 30, 2010.

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

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

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

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

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

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

Inova analyzed the instruments above under ASC 815 “Derivatives and Hedging” and determined that these instruments should be classified as liabilities and recorded at fair value due to their being no explicit limit to the number of shares to be delivered upon settlement of the above conversion options. The fair value of the instruments was determined using a Monte Carlo simulation model utilizing present value and various probabilities of events. This amount is included in derivative liabilities in the consolidated balance sheet. See Note 10 for more information on derivatives and the valuation model.

Covenants

All Boone loans have the following financial requirements:

  • Maintain cash plus availability under IBM $2.5 million line of credit of $250,000 or greater;
  • EBITDA of $1.7 million for any fiscal year;
  • No concentration above $2.5 million to any supplier through the IBM facility;
  • No concentration above 20% to any single customer;
  • No single accounts payable more than the greater of $300,000 or 20% of the accounts receivable balance under 60 days. The portion beyond 90 days past due must be less than 10% of the total accounts receivable.

Inova was not in compliance with these covenants as of April 30, 2011 and 2010 and as a result, these notes are in default.

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

In February 2008, Inova borrowed $250,000 under a note payable from Agile Opportunity Fund, LLC. This note has an interest rate of 18% per annum and it matures on December 31, 2010. The note was convertible into shares of Inova common stock at $0.10 per share. In addition, 1,250,000 warrants to purchase Inova common stock were issued with this note. As a result of the conversion feature and warrants, a discount of $150,000 was recorded to be amortized over the term of the note using the effective interest method. See below for information on the accounting for the conversion feature and warrants. During the years ended April 30, 2010 and 2009, $40,337 and $109,663 of the discount was amortized to interest expense. This note is secured by all tangible and intangible assets of Inova.

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Inova analyzed the conversion option for derivative accounting consideration under ASC 815 “Derivatives and Hedging”. Inova determined that derivative accounting is not applicable. Inova then analyzed the conversion option under ASC 470-20 “Debt with Conversion and Other Options” and determined there was a beneficial conversion feature resulting in a discount to the note of $50,000.

1,250,000 warrants with a fair value of $100,000 were issued to Agile with this note. These warrants expire in February 2013. They have an exercise price of $0.10 per share. The warrant shares are subject to a put option agreement whereby anytime between February 2010 and February 2013, Agile can require Inova to repurchase from Agile the warrant shares for $100,000. Under ASC 815-40 “Put Warrants”, warrants for put shares should be classified as liabilities and measured at fair value at the end of each reporting period with the change in fair value recorded to earnings. As a result, the fair value of these warrants was recorded as a derivative liability. Upon exercise of the put option, if Inova does not repurchase the shares within 30 days, the resulting liability with become a convertible note that is convertible into shares of Inova common stock.

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

During fiscal 2010, the Company adopted ASC 815-15 "Determining Whether an Instrument (or Embedded Feature) is indexed to an Entity's Own Stock". As a result of the adoption, the conversion option above was reclassified from equity to a liability. See Note 9 below.

Note Modification

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

Inova evaluated the extension event 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 present value of the future cash flows under the modified debt exceeded the present value of the future cash flows under the old debt by more than 10%, the debt modification was determined to be substantial and accordingly the debt was extinguished. Inova evaluated the new debt instrument under ASC 470-20 “Debt with Conversion and Other Options” and determined that it contained a beneficial conversion feature with an intrinsic value of $83,333. This amount was recorded as a discount to the note to be amortized until maturity using the effective interest method.

Conversions

On March 30, 2010 Agile converted $40,500 of its debt to 1,000,000 shares of Inova stock at an exercise price of $0.0405 per share.

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

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 $144,000. The lenders have historically granted waivers for these registration rights penalties and therefore management believes the likelihood of this payment to be remote.

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Line of Credit with IBM Credit LLC:

Desert Communications, Inc. had a $2.5 million line of credit with IBM Credit LLC. This revolving line of credit had an interest rate of prime plus 2% and was secured by the assets of Desert. Payments are made based on a borrowing base calculation which determines availability. During the year ended April 30, 2010, Desert borrowed $726,217 and repaid $2,142,169 against this line. The outstanding balance on this line of credit was $0 as of April 30, 2010.

The $2.5 million line of credit Desert had with IBM Credit LLC has been paid off and replaced with a similar facility with GTF as described above in Note 4.

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 during the year ended April 30, 2010:

Trakkers Sellers Notes Modification

In October 2009, Inova modified the terms of its $1,528,089 note with Trakkers former owners to extend the first principal payment date from September 2009 to December 2010. The notes are now in default.

Inova evaluated the extension event 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. As a result, the debt modification was not substantial and therefore the new debt terms will be accounted for prospectively.

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. When the conversion option becomes effective, it will be classified as a liability due to there being no explicit limit to the number of shares to be issued under ASC 815-15. The note is due on December 8, 2011 and is unsecured.

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Desert Sellers Notes Modification.

On December 1, 2009, the sellers agreed to extend the maturity of these notes through December 1, 2010. As a result of the extension, the interest rate increased to 18%. Prior to December 1, 2009, the interest rate was 7%

Inova evaluated the extension event 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. As a result, the debt modification was not substantial and therefore the new debt terms will be accounted for prospectively.

During the year ended April 30, 2011 and 2010, Inova made the following cash repayments on its outstanding notes payable:

    2011     2010  
Notes payable to Boone/Ascendiant/Agile $ 210,000   $ 640,522  
Line of credit from IBM   114,643     2,142,169  
Notes payable to Desert/Trakkers/RightTag previous owners   450,000     122,713  
Notes payable to other   131,610     380,283  
             
Total cash paid $ 906,253   $ 3,285,687  

A summary of changes in notes payable for the years ended April 30, 2011 and 2010 is as follows:

    2011     2010  
Beginning balance $ 9,848,040   $ 6,360,729  
Gross proceeds from the notes payable   103,500     2,572,705  
Non-cash additions due to put note exercises   2,307,900     1,375,000  
Less: repayments made on notes payable   (906,253 )   (3,285,687 )
Less: conversion   (60,750 )      
Add: paid in kind   183,401        
Less: debt discount from warrants, original issue discounts and conversion options         (1,533,682 )
Add: amortization of discount   128,900     4,358,975  
             
Total notes payable $ 11,604,900   $ 9,848,040  

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Notes payable consisted of the following as of April 30, 2011 and 2010:

          April 30, 2011                 April 30, 2010        
    Principal     Unamortized     Carrying     Principal     Unamortized     Carrying  
Lender   Amount     Discount     Amount     Amount     Discount     Amount  
Boone Lenders, LLC $ 6,809,972     -   $ 6,809,972   $ 4,378,671   $ (10,450 ) $ 4,368,221  
Ascendiant Opportunity Fund, LLC   1,153,930     -     1,153,930     1,153,930     -     1,153,930  
Agile Opportunity Fund, LLC   198,750           198,750     409,500     (108,122 )   301,378  
IBM - Trakkers, LLC