UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
Form
10-Q
x
QUARTERLY
REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES
EXCHANGE ACT OF 1934
For the
quarterly period ended September 30, 2010 or
¨
TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES
EXCHANGE ACT OF 1934
For the
transition period from ______ to ______
Commission
File Number 333-140633
INNOLOG
HOLDINGS CORPORATION
(Exact
name of registrant as specified in its charter)
Nevada
|
|
68-0482472
|
(State
or other jurisdiction of
incorporation
or organization)
|
|
(IRS
Employer
Identification
Number)
|
4000 Legato Road, Suite 830,
Fairfax, Virginia 22033
(703)
766-1412
Indicate
by check mark whether the registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes
þ
No
¨
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files.
¨
Yes
¨
No The registrant is
not yet subject to this requirement.
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
the definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act.
Large
accelerated filer
¨
|
Accelerated
filer
¨
|
Non-accelerated
filer
¨
(Do
not check if a smaller reporting company)
|
Smaller
reporting company
þ
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).
¨
Yes
þ
No
APPLICABLE
ONLY TO CORPORATE ISSUERS
Indicate
the number of shares outstanding of each of the issuer's classes of common
stock, as of the latest practicable date.
13,629,774
shares of common stock, $0.001 par value, outstanding on November 18,
2010.
INNOLOG
HOLDINGS CORPORATION
REPORT
ON FORM 10-Q
QUARTER
ENDED SEPTEMBER 30, 2010
TABLE
OF CONTENTS
|
|
Page
Number
|
PART
I - FINANCIAL INFORMATION
|
|
|
|
|
|
Item
1. Financial Statements (Unaudited)
|
|
1
|
|
|
|
Consolidated
Balance Sheets - September 30, 2010 and December 31, 2009
|
|
1
|
|
|
|
Consolidated
Statements of Operations For the
Three
and Nine Months Ended September 30, 2010 and 2009
|
|
2
|
|
|
|
Consolidated
Statements of Cash Flows For the Nine Months Ended September 30, 2010 and
2009
|
|
4
|
|
|
|
Notes
to Consolidated Financial Statements
|
|
6
|
|
|
|
Forward-Looking
Statements
|
|
|
|
|
|
Item
2. Management’s Discussion and Analysis of Financial Condition and Results
of Operations
|
|
26
|
|
|
|
Item
3. Quantitative and Qualitative Disclosures About Market
Risk
|
|
32
|
|
|
|
Item
4. Controls and Procedures
|
|
32
|
|
|
|
PART
II - OTHER INFORMATION
|
|
|
|
|
|
Item
1. Legal Proceedings
|
|
33
|
|
|
|
Item
1A. Risk Factors
|
|
33
|
|
|
|
Item
2. Unregistered Sales of Equity Securities and Use of
Proceeds
|
|
33
|
|
|
|
Item
3. Defaults Upon Senior Securities
|
|
33
|
|
|
|
Item
4. Removed and Reserved
|
|
33
|
|
|
|
Item
5. Other Information
|
|
33
|
|
|
|
Item
6. Exhibits
|
|
34
|
|
|
|
Signatures
|
|
36
|
PART
I – FINANCIAL INFORMATION
Item
1: Financial Statements.
INNOLOG
HOLDINGS CORPORATION AND SUBSIDIARY
CONSOLIDATED
BALANCE SHEETS
|
|
September 30, 2010
|
|
|
December 31, 2009
|
|
|
|
(Unaudited)
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
Current
Assets
|
|
|
|
|
|
|
Cash
|
|
$
|
-
|
|
|
$
|
9,278
|
|
Accounts
receivable, net
|
|
|
1,141,953
|
|
|
|
1,729,594
|
|
Prepaid
expenses and other current assets
|
|
|
929
|
|
|
|
929
|
|
Total
Current Assets
|
|
|
1,142,882
|
|
|
|
1,739,801
|
|
|
|
|
|
|
|
|
|
|
Property
and equipment, net
|
|
|
25,161
|
|
|
|
11,911
|
|
Goodwill
|
|
|
-
|
|
|
|
3,056,238
|
|
Other
assets
|
|
|
21,278
|
|
|
|
16,346
|
|
Total
Assets
|
|
$
|
1,189,321
|
|
|
$
|
4,824,296
|
|
|
|
|
|
|
|
|
|
|
LIABILITES
AND STOCKHOLDERS' DEFICIENCY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
Liabilities
|
|
|
|
|
|
|
|
|
Cash
overdraft
|
|
$
|
23,906
|
|
|
$
|
-
|
|
Line
of credit, bank
|
|
|
497,570
|
|
|
|
497,570
|
|
Accounts
payable
|
|
|
2,228,185
|
|
|
|
2,606,946
|
|
Accrued
salaries and benefits
|
|
|
1,807,312
|
|
|
|
726,096
|
|
Accrued
interest
|
|
|
160,125
|
|
|
|
-
|
|
Other
accrued liabilities
|
|
|
532,608
|
|
|
|
-
|
|
Due
to former stockholder
|
|
|
314,682
|
|
|
|
183,631
|
|
Deferred
rent
|
|
|
34,608
|
|
|
|
754
|
|
Notes
Payable
|
|
|
370,000
|
|
|
|
-
|
|
Notes
payable, affiliates
|
|
|
1,769,384
|
|
|
|
1,499,384
|
|
Total
current liabilities
|
|
|
7,738,380
|
|
|
|
5,514,381
|
|
|
|
|
|
|
|
|
|
|
Long
Term Liabilities
|
|
|
|
|
|
|
|
|
Contingent
consideration payable, net of discount of $515,000
|
|
|
-
|
|
|
|
515,000
|
|
Note
payable, former stockholders
|
|
|
-
|
|
|
|
1,285,000
|
|
Total
Long Term Liabilities
|
|
|
-
|
|
|
|
1,800,000
|
|
|
|
|
|
|
|
|
|
|
COMMITMENTS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders'
Deficiency
|
|
|
|
|
|
|
|
|
Common
stock, $0.001 par value, 200,000,000 shares authorized; 13,629,774 shares
issued and outstanding
|
|
|
13,630
|
|
|
|
20,000
|
|
Preferred
stock, $0.001 par value; 50,000,000 shares authorized; 37,364,758 shares
issued and outstanding
|
|
|
37,365
|
|
|
|
-
|
|
Additional
paid in capital
|
|
|
862,653
|
|
|
|
520,000
|
|
Due
from affiliates, net
|
|
|
-
|
|
|
|
(218,811
|
)
|
Accumulated
deficit
|
|
|
(7,462,707
|
)
|
|
|
(2,811,274
|
)
|
Total
Stockholders' Deficiency
|
|
|
(6,549,059
|
)
|
|
|
(2,490,085
|
)
|
|
|
|
|
|
|
|
|
|
Total
Liabilities and Stockholders' Deficiency
|
|
$
|
1,189,321
|
|
|
$
|
4,824,296
|
|
INNOLOG
HOLDINGS CORPORATION AND SUBSIDIARY
CONSOLIDATED
STATEMENTS OF OPERATIONS
(UNAUDITED)
|
|
For
the three months
|
|
|
For
the three months
|
|
|
For
the nine
|
|
|
For
the period from
|
|
|
|
ended
September 30,
|
|
|
ended
September 30,
|
|
|
months
ended
|
|
|
March
23, 2009(inception)
|
|
|
|
2010
|
|
|
2009
|
|
|
September
30, 2010
|
|
|
Through
September 30, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
1,407,778
|
|
|
$
|
2,005,340
|
|
|
$
|
4,629,952
|
|
|
$
|
4,412,451
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct
costs
|
|
|
695,439
|
|
|
|
1,246,959
|
|
|
|
2,203,099
|
|
|
|
2,622,072
|
|
Indirect
contract costs, of which $84,630, $44,950, $253,570, and $89,900 were
charged by an affiliate
|
|
|
1,292,154
|
|
|
|
831,267
|
|
|
|
3,537,639
|
|
|
|
1,803,978
|
|
Management
fees, affiliate
|
|
|
157,170
|
|
|
|
299,666
|
|
|
|
470,920
|
|
|
|
599,332
|
|
Costs
not allocable to contracts
|
|
|
283,385
|
|
|
|
81,367
|
|
|
|
356,974
|
|
|
|
118,072
|
|
Bad
debt expense, affiliate
|
|
|
41,525
|
|
|
|
-
|
|
|
|
268,638
|
|
|
|
-
|
|
Impairment
of goodwill
|
|
|
3,056,238
|
|
|
|
-
|
|
|
|
3,056,238
|
|
|
|
-
|
|
Total
operating expenses
|
|
|
5,525,911
|
|
|
|
2,459,259
|
|
|
|
9,893,508
|
|
|
|
5,143,454
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
from operations
|
|
|
(4,118,133
|
)
|
|
|
(453,919
|
)
|
|
|
(5,263,556
|
)
|
|
|
(731,003
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
Income (Expenses)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain
on debt extinguishment
|
|
|
-
|
|
|
|
-
|
|
|
|
1,360,551
|
|
|
|
-
|
|
Merger
expenses
|
|
|
(45,922
|
)
|
|
|
-
|
|
|
|
(705,570
|
)
|
|
|
-
|
|
Other
income
|
|
|
-
|
|
|
|
-
|
|
|
|
203
|
|
|
|
5,199
|
|
Interest
expense
|
|
|
(229,828
|
)
|
|
|
(25,517
|
)
|
|
|
(339,250
|
)
|
|
|
(566,047
|
)
|
Unrealized
gain on fair value of consideration payable
|
|
|
515,000
|
|
|
|
-
|
|
|
|
515,000
|
|
|
|
-
|
|
Total
other income (expenses)
|
|
|
239,250
|
|
|
|
(25,517
|
)
|
|
|
830,934
|
|
|
|
(560,848
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
before income tax provision
|
|
|
(3,878,883
|
)
|
|
|
(479,436
|
)
|
|
|
(4,432,622
|
)
|
|
|
(1,291,851
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
tax provision
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Loss
|
|
$
|
(3,878,883
|
)
|
|
$
|
(479,436
|
)
|
|
$
|
(4,432,622
|
)
|
|
$
|
(1,291,851
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
per share - basic and diluted
|
|
$
|
(0.28
|
)
|
|
|
(0.05
|
)
|
|
|
(0.33
|
)
|
|
|
(0.15
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average number of shares
|
|
|
13,629,774
|
|
|
|
8,882,455
|
|
|
|
13,629,774
|
|
|
|
8,882,455
|
|
INNOLOG
HOLDINGS CORPORATION AND SUBSIDIARY
CONSOLIDATED
STATEMENT OF STOCKHOLDERS' DEFICIENCY
(UNAUDITED)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ADDITIONAL
|
|
|
|
|
|
|
|
|
TOTAL
|
|
|
|
COMMON
STOCK
|
|
|
PREFERRED
STOCK
|
|
|
PAID
IN
|
|
|
ACCUMULATED
|
|
|
DUE
FROM
|
|
|
STOCKHOLDERS'
|
|
|
|
SHARES
|
|
|
AMOUNT
|
|
|
SHARES
|
|
|
AMOUNT
|
|
|
CAPITAL
|
|
|
DEFICIT
|
|
|
AFFILIATES,
NET
|
|
|
DEFICIENCY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
December 31, 2009
|
|
|
8,882,455
|
|
|
$
|
20,000
|
|
|
|
-
|
|
|
$
|
-
|
|
|
$
|
520,000
|
|
|
$
|
(2,811,274
|
)
|
|
$
|
(218,811
|
)
|
|
$
|
(2,490,085
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recapitalization
due to
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
reverse
merger
|
|
|
4,747,319
|
|
|
|
(6,370
|
)
|
|
|
36,964,758
|
|
|
|
36,965
|
|
|
|
6,370
|
|
|
|
-
|
|
|
|
-
|
|
|
|
36,965
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred
stock issued
|
|
|
|
|
|
|
-
|
|
|
|
400,000
|
|
|
|
400
|
|
|
|
336,283
|
|
|
|
-
|
|
|
|
-
|
|
|
|
336,683
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Due
from affiliates
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(218,811
|
)
|
|
|
218,811
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(4,432,622
|
)
|
|
|
-
|
|
|
|
(4,432,622
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
SEPTEMBER 30, 2010
|
|
|
13,629,774
|
|
|
$
|
13,630
|
|
|
|
37,364,758
|
|
|
$
|
37,365
|
|
|
$
|
862,653
|
|
|
$
|
(7,462,707
|
)
|
|
$
|
-
|
|
|
$
|
(6,549,059
|
)
|
INNOLOG
HOLDINGS CORPORATION AND SUBSIDIARY
CONSOLIDATED
STATEMENT OF CASH FLOWS (UNAUDITED)
|
|
|
|
|
For
the period
|
|
|
|
For
the nine
|
|
|
March
23, 2009
|
|
|
|
months
ended
|
|
|
(inception)
through
|
|
|
|
September 2010
|
|
|
September 30, 2009
|
|
CASH
FLOWS FROM OPERATING ACTIVITIES:
|
|
|
|
|
|
|
Net
loss
|
|
$
|
(4,432,622
|
)
|
|
$
|
(1,291,851
|
)
|
Adjustments
to reconcile net loss to net
|
|
|
|
|
|
|
|
|
cash
used in operating activities:
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
17,095
|
|
|
|
37,230
|
|
Accrued
loss on contracts in progress
|
|
|
-
|
|
|
|
(140,445
|
)
|
Impairment
of goodwill
|
|
|
3,056,238
|
|
|
|
-
|
|
Gain
on extinguishment of debt
|
|
|
(1,360,551
|
)
|
|
|
-
|
|
Unrealized
gain on fair value of consideration payable
|
|
|
(515,000
|
)
|
|
|
-
|
|
Merger
expense related to issuance of stock
|
|
|
351,648
|
|
|
|
-
|
|
Bad
debt expense, affiliates
|
|
|
268,638
|
|
|
|
-
|
|
Amortization
of debt issuance costs
|
|
|
12,000
|
|
|
|
520,000
|
|
Changes
in assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
587,641
|
|
|
|
154,850
|
|
Prepaid
expenses and other assets
|
|
|
(4,932
|
)
|
|
|
322
|
|
Deferred
rent
|
|
|
33,854
|
|
|
|
(50,858
|
)
|
Billings
in excess of contract costs and related earnings
|
|
|
-
|
|
|
|
(29,112
|
)
|
Accounts
payable and accrued expenses
|
|
|
1,504,645
|
|
|
|
439,455
|
|
|
|
|
|
|
|
|
|
|
Net
cash used in operating activities
|
|
|
(481,346
|
)
|
|
|
(360,409
|
)
|
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Payment
for purchase of Innovative Logistics Techniques, Inc
|
|
|
-
|
|
|
|
(750,000
|
)
|
Advances
to affiliates
|
|
|
(268,638
|
)
|
|
|
(32,494
|
)
|
Advances
on note receivable, affiliates
|
|
|
-
|
|
|
|
(740,000
|
)
|
Property
and equipment purchased
|
|
|
(30,345
|
)
|
|
|
(9,114
|
)
|
|
|
|
|
|
|
|
|
|
Net
cash used in investing activities
|
|
|
(298,983
|
)
|
|
|
(1,531,608
|
)
|
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Borrowings
under line of credit, bank
|
|
|
-
|
|
|
|
497,570
|
|
Due
to Factor
|
|
|
-
|
|
|
|
(129,598
|
)
|
Borrowings
on notes payable, others
|
|
|
370,000
|
|
|
|
-
|
|
Borrowings
on note payable, affiliate
|
|
|
770,000
|
|
|
|
1,499,384
|
|
Repayments
on note payable, affiliate
|
|
|
(500,000
|
)
|
|
|
-
|
|
Net
borrowings from related party payables
|
|
|
131,051
|
|
|
|
6,299
|
|
Issuance
of common stock
|
|
|
-
|
|
|
|
20,000
|
|
|
|
|
|
|
|
|
|
|
Net
cash provided by financing activities
|
|
|
771,051
|
|
|
|
1,893,655
|
|
|
|
|
|
|
|
|
|
|
NET
CHANGE IN CASH
|
|
|
(9,278
|
)
|
|
|
1,638
|
|
CASH
- BEGINNING OF PERIOD
|
|
|
9,278
|
|
|
|
-
|
|
CASH
- END OF PERIOD
|
|
$
|
-
|
|
|
$
|
1,638
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL
DISCLOSURE OF CASH FLOW INFORMATION:
|
|
|
|
|
|
|
|
|
Cash
paid during the period for interest
|
|
$
|
179,125
|
|
|
|
46,047
|
|
INNOLOG
HOLDINGS CORPORATION AND SUBSIDIARY
CONSOLIDATED
STATEMENT OF CASH FLOWS (CONTINUED)
SUPPLEMENTAL
DISCLOSURES OF NONCASH INVESTING AND FINANCING ACTIVITIES:
During
the nine months ended September 30, 2010, the Company issued 1,000,000 shares of
Series A preferred stock with a fair value of $10,000 in conjunction with the
extinguishment of the seller note payable of $1,285,000, as well as the accrued
interest
of $85,551.
On March
31, 2009, Innolog Holdings Corporation purchased all of the capital
stock of Innovative Logistics Techniques, Inc for $2,835,000. In
conjunction with the acquisition, liabilities were assumed as
follows:
Fair
value of assets acquired
|
|
$
|
5,531,222
|
|
Cash
paid
|
|
|
(750,000
|
)
|
Notes
payable and liabilities incurred
|
|
|
(2,085,000
|
)
|
Liabilities
assumed
|
|
$
|
2,696,222
|
|
During
the period March 23, 2009 (inception) through December 31, 2009, amounts due
from affiliates, net of payables, in the amount of $218,811, have
been reclassified to stockholders' deficiency.
During
the period March 23, 2009 (inception) through June 30, 2009, the Company granted
warrants with a fair value of $520,000 in conjunction with
debt.
INNOLOG
HOLDINGS CORPORATION AND SUBSIDIARY
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note
1: Organization and Nature of Business
Innolog
Holdings Corporation (“Holdings” or “Innolog”) was formed on March 23, 2009 as a
holding company for the purpose of acquiring companies that provide services
primarily to federal government entities. Its wholly owned subsidiary is
Innovative Logistics Techniques, Inc. (“Innovative”). Holdings was
previously a wholly owned subsidiary of Galen Capital Corporation (“Galen”). In
June 2010, Holdings was spun out and the stockholders of Galen became the
stockholders of Holdings.
Innovative
Logistics Techniques, Inc. (“Innovative”), a Virginia corporation, formed in
March 1989, is a solutions oriented organization providing supply chain
logistics and information technology solutions to clients in the public and
private sector. Innovative's services and solutions are provided to a wide
variety of clients, including the Department of Defense, Department of Homeland
Security and civilian agencies in the federal government and state and local
municipalities, as well as selected commercial organizations.
As more
fully described in Note 2, on October 15, 2009, uKarma Corporation (“uKarma”), a
publicly traded Nevada corporation, and Galen entered into an agreement to merge
(the "Merger Agreement") in a reverse merger transaction. In June 2010, the
rights to merge were assigned directly to Holdings. The merger transaction was
closed on August 17, 2010, and the Holdings stockholders have become the
controlling stockholders of uKarma and the business of Holdings will
continue.
Holdings
and its wholly owned subsidiaries are referred to herein as the
“Company.”
Note
2: Merger Agreement
On August
11, 2010, uKarma, GCC Merger Sub Corp., it’s wholly-owned Nevada subsidiary
(“Merger Sub”), Galen, and Holdings, entered into an Amended and Restated Merger
Agreement (“New Agreement”). The New Agreement provided that
Holdings would be merged with Merger Sub such that Innolog would be a
wholly owned subsidiary of uKarma (“Acquisition”). Pursuant to the
Acquisition, Holdings common shareholders received one share of uKarma common
stock for every share of Holdings common stock they held (“Common Stock
Ratio”). Likewise, holders of Holdings Series A Preferred Stock
received one share of uKarma Series A Convertible Preferred Stock for
every share of Holdings Series A Preferred Stock they held. Holders of
options and warrants to purchase Holdings common stock received comparable
options and warrants to purchase uKarma common stock with the exercise price and
number of underlying uKarma shares proportional to the Common Stock Ratio.
Holdings would also pay uKarma $525,000 in cash (which included past advances
from Galen) in connection with the intended acquisition.
uKarma
completed the acquisition of all of the equity interests of
Innolog held by all equity holders of Holdings (“Innolog Owners”)
through the issuance of 8,882,455 shares of common stock of uKarma and
36,964,758 restricted shares of Series A Convertible Preferred Stock to the
Innolog Owners. Immediately prior to the Merger Agreement transaction, uKarma
had 4,747,319 shares of common stock issued and outstanding. Immediately after
the issuance of the shares to the Innolog Owners, uKarma had 13,629,774 shares
of common stock issued and outstanding and 36,964,758 shares of Series A
Convertible Preferred Stock issued and outstanding.
INNOLOG
HOLDINGS CORPORATION AND SUBSIDIARY
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note
2: Merger Agreement (continued)
As a
result of the Acquisition, the Holdings shareholders became the controlling
shareholders, and Holdings became uKarma’s wholly owned subsidiary. In
connection with acquiring Holdings, uKarma indirectly acquired the business and
operations of Holdings’ wholly owned subsidiary, Innovative.
All of
uKarma’s directors and officers resigned, and designees of Holdings were
appointed as new directors and officers of the Company following the
Closing. On August 16, 2010, the name of uKarma Corporation was changed to
Innolog Holdings Corporation.
Concurrently
with the Merger, uKarma’s current existing operations were assigned to a wholly
owned subsidiary called Awesome Living, Inc. (“AL”). The Board of
Directors and shareholders of uKarma holding a majority of the then outstanding
common stock approved a spin-off of AL equity securities to uKarma’s common
shareholders of record as of August 12, 2010. This spin off is subject to
approval by the Securities and Exchange Commission (“SEC”). These financial
statements are presented reflecting the spin off.
Since the
owners and management of the Company possessed voting and operating control of
the combined company after the share exchange, the transaction constituted a
reverse acquisition for accounting purposes, as contemplated by FASB ASC 805-40
and corresponding ASC 805-10-55-10, 12 and 13. Under this accounting, the
entity that issues shares (uKarma – the legal acquirer) is identified as the
acquiree for accounting purposes. The entity whose shares are acquired
(Holdings) is the accounting acquirer.
For SEC
reporting purposes, Holdings is treated as the continuing reporting entity that
acquired uKarma. The reports filed after the transaction have been
prepared as if Holdings (accounting acquirer) were the legal successor to
uKarma’s reporting obligation as of the date of the acquisition.
Therefore, all financial statements filed subsequent to the transaction reflect
the historical financial condition, results of operations and cash flows of
Holdings for all periods presented.
In
connection with the reverse acquisition, all share and per share amounts of
Holdings have been retroactively adjusted to reflect the legal capital structure
of uKarma pursuant to FASB ASC 805-40-45-1.
The
following sets forth the consolidated statements of operations of Innolog on a
pro forma basis for the year ended December 31, 2009 and the period from March
23, 2009 (inception) through September 30, 2009. The pro forma statements of
operations data give effect to the transactions as if they had occurred on March
23, 2009. The pro forma balance sheet gives effect to the transactions as if
they had occurred on March 23, 2009. The pro forma financial statements are
provided for informational purposes only, are unaudited, and not necessarily
indicative of future results or what the operating results or financial
condition of the Company would have been had the Merger been consummated on the
dates assumed. The following pro forma financial statements should be read in
conjunction with the historical financial statements and the accompanying notes
thereto.
INNOLOG
HOLDINGS CORPORATION AND SUBSIDIARY
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Innolog
Holdings Corporation
Pro
Forma Balance Sheet
December
31, 2009
|
|
Innolog
|
|
|
Ukarma
|
|
|
Pro
forma
|
|
|
|
|
|
|
Audited
|
|
|
Audited
|
|
|
Adjustments
|
|
|
Combined
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
9,278
|
|
|
$
|
85
|
|
|
$
|
(85
|
)
(a)
|
|
$
|
9,278
|
|
Accounts
receivable, net
|
|
|
1,729,594
|
|
|
|
146,172
|
|
|
|
(146,172
|
)
(a)
|
|
|
1,729,594
|
|
Prepaid
expenses and other current assets
|
|
|
929
|
|
|
|
67,380
|
|
|
|
(67,380
|
)
(a)
|
|
|
929
|
|
Other
current assets
|
|
|
-
|
|
|
|
18,476
|
|
|
|
(18,476
|
)
(a)
|
|
|
-
|
|
Total
current assets
|
|
|
1,739,801
|
|
|
|
232,113
|
|
|
|
|
|
|
|
1,739,801
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
Fixed Assets
|
|
|
873,025
|
|
|
|
27,984
|
|
|
|
(27,984
|
)
|
|
|
873,025
|
|
Less:
Accumulated Depreciation
|
|
|
(861,114
|
)
|
|
|
(9,742
|
)
|
|
|
9,742
|
|
|
|
(861,114
|
)
|
Net
Fixed Assets
|
|
|
11,911
|
|
|
|
18,242
|
|
|
|
(18,242
|
)
(a)
|
|
|
11,911
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill
|
|
|
3,056,238
|
|
|
|
-
|
|
|
|
|
|
|
|
3,056,238
|
|
Other
assets
|
|
|
16,347
|
|
|
|
283,221
|
|
|
|
(283,221
|
)
(a)
|
|
|
16,347
|
|
Total
Other Assets
|
|
|
3,072,585
|
|
|
|
283,221
|
|
|
|
|
|
|
|
3,072,585
|
|
Total
Assets
|
|
$
|
4,824,296
|
|
|
$
|
533,576
|
|
|
$
|
(533,576
|
)
|
|
$
|
4,824,296
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities And Stockholders'
Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trade
accounts payable
|
|
$
|
2,606,946
|
|
|
$
|
318,396
|
|
|
$
|
(318,396
|
)
(a)
|
|
$
|
2,606,946
|
|
Accrued
salaries and benefits
|
|
|
726,096
|
|
|
|
-
|
|
|
|
|
|
|
|
726,096
|
|
Other
accrued liabilities
|
|
|
-
|
|
|
|
176,546
|
|
|
|
(176,546
|
)
(a)
|
|
|
-
|
|
Line
of Credit, Bank
|
|
|
497,570
|
|
|
|
-
|
|
|
|
|
|
|
|
497,570
|
|
Notes
Payable Affiliates
|
|
|
1,499,384
|
|
|
|
10,819
|
|
|
|
(10,819
|
)
(a)
|
|
|
1,499,384
|
|
Due
to former stockholder
|
|
|
183,631
|
|
|
|
-
|
|
|
|
|
|
|
|
183,631
|
|
Deferred
Rent
|
|
|
754
|
|
|
|
-
|
|
|
|
|
|
|
|
754
|
|
Total
Current Liabilities
|
|
|
5,514,381
|
|
|
|
505,761
|
|
|
|
(505,761
|
)
|
|
|
5,514,381
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long
Term Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contingent
consideration payable
|
|
|
515,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
515,000
|
|
Notes
Payable former stockholders
|
|
|
1,285,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,285,000
|
|
Total
Long Term Liabilities
|
|
|
1,800,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,800,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders'
Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
stock (13,629,864 shares issued and outstanding; $.001 par
value)
|
|
|
20,000
|
|
|
|
52,795
|
|
|
|
(59,165
|
)
(c)
|
|
|
13,630
|
|
Additional
paid-in capital
|
|
|
520,000
|
|
|
|
7,807,670
|
|
|
|
(7,838,265
|
)
(b)(c)
|
|
|
489,405
|
|
Preferred
Stock
|
|
|
-
|
|
|
|
-
|
|
|
|
36,965
|
(d)
|
|
|
36,965
|
|
Due
from affiliates, net
|
|
|
(218,811
|
)
|
|
|
-
|
|
|
|
|
|
|
|
(218,811
|
)
|
Retained
earnings
|
|
|
(2,811,274
|
)
|
|
|
(7,832,650
|
)
|
|
|
7,832,650
|
(b)
|
|
|
(2,811,274
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Stockholders' Equity
|
|
|
(2,490,085
|
)
|
|
|
27,815
|
|
|
|
(27,815
|
)
|
|
|
(2,490,085
|
)
|
Total
Liabilities and Stockholders' Equity
|
|
$
|
4,824,296
|
|
|
$
|
533,576
|
|
|
$
|
(533,576
|
)
|
|
$
|
4,824,296
|
|
(a) Gives
effect to the distribution of uKarma assets and liabilities to the former
stockholders of uKarma with terms of the merger agreement.
(b) Gives
effect to the elimination of uKarma accumulated deficit upon closing of the
merger as Innolog is the surviving entity for
accounting
purpose,
(Continued)
INNOLOG
HOLDINGS CORPORATION AND SUBSIDIARY
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Pro
Forma balance sheet
For
the Year Ended December 31, 2009
(c)
Reflects the 11.120904 reverse split of uKarma common shares at
merger to 4,747,319 shares and the issuance of 8,882,545 common shares to former
Innolog stockholders per the merger agreement.
(d) Reflects
the issuance of 36,964,758 shares of Series A Convertible Preferred Stock per
the merger agreement.
Innolog
Holdings Corporation
Pro
Forma Statement of Operations
For
the period ended March 23, 2009 (inception) through September 30,
2009
|
|
Innolog
|
|
|
uKarma
|
|
|
|
|
|
|
|
|
|
Unaudited
|
|
|
Unaudited
|
|
|
Pro
forma
|
|
|
Combined
|
|
|
|
09/30/09
|
|
|
09/30/09
|
|
|
Adjustments
|
|
|
09/30/09
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
Contract
Revenue
|
|
$
|
4,412,451
|
|
|
$
|
20,619
|
|
|
$
|
(20,619
|
)
(a)
|
|
$
|
4,412,451
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct
costs
|
|
|
2,622,072
|
|
|
|
1,226
|
|
|
|
(1,226
|
)
(a)
|
|
|
2,622,072
|
|
Indirect
contract costs
|
|
|
1,803,978
|
|
|
|
1,505,698
|
|
|
|
(1,505,698
|
)
(a)
|
|
|
1,803,978
|
|
Management
fee, affiliate
|
|
|
599,332
|
|
|
|
-
|
|
|
|
-
|
|
|
|
599,332
|
|
Costs
not allocable to contracts
|
|
|
118,072
|
|
|
|
-
|
|
|
|
-
|
|
|
|
118,072
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Operating Expenses
|
|
|
5,143,454
|
|
|
|
1,506,924
|
|
|
|
(1,506,924
|
)
|
|
|
5,143,454
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
from Operations
|
|
|
(731,003
|
)
|
|
|
(1,486,305
|
)
|
|
|
1,486,305
|
|
|
|
(731,003
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
Income (expenses)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
Income
|
|
|
5,199
|
|
|
|
-
|
|
|
|
|
|
|
|
5,199
|
|
Interest
Expense
|
|
|
(566,047
|
)
|
|
|
(19,172
|
)
|
|
|
19,172
|
(a)
|
|
|
(566,047
|
)
|
Merger
Expense
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
other income (expense)
|
|
|
(560,848
|
)
|
|
|
(19,172
|
)
|
|
|
19,172
|
|
|
|
(560,848
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
before income tax provision
|
|
|
(1,291,851
|
)
|
|
|
(1,505,477
|
)
|
|
|
1,505,477
|
|
|
|
(1,291,851
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
tax provision
|
|
|
-
|
|
|
|
800
|
|
|
|
(800
|
)
(a)
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Income (Loss)
|
|
$
|
(1,291,851
|
)
|
|
$
|
(1,506,277
|
)
(c)
|
|
|
1,506,277
|
|
|
$
|
(1,291,851
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
and diluted
|
|
$
|
(0.15
|
)
|
|
$
|
(0.41
|
)
|
|
|
|
|
|
$
|
(0.10
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average number of shares
Basic
and diluted
|
|
|
8,882,455
|
|
|
|
3,656,360
|
|
|
|
(b)
|
|
|
12,538,815
|
|
(a) Gives
effect to the spin off of uKarma's operations.
(b) Gives
the effect to the 11.120904 reverse split of uKarma common shares at
merger to 4,747,319 shares and the issuance of 8,882,455 common shares to former
Innolog stockholders per the merger agreement.
(c)
Includes uKarma's operating results for the nine months ended September 30,
2009.
(Continued)
INNOLOG
HOLDINGS CORPORATION AND SUBSIDIARY
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Innolog
Holdings Corporation
Pro
Forma Statement of Operations
For
the three months ended September 30, 2009
|
|
Innolog
|
|
|
uKarma
|
|
|
|
|
|
|
|
|
|
Unaudited
|
|
|
Unaudited
|
|
|
Pro
forma
|
|
|
Combined
|
|
|
|
09/30/09
|
|
|
09/30/09
|
|
|
Adjustments
|
|
|
09/30/09
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
Contract
Revenue
|
|
$
|
2,005,340
|
|
|
$
|
2,796
|
|
|
$
|
(2,796
|
)
(a)
|
|
$
|
2,005,340
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct
costs
|
|
|
1,246,959
|
|
|
|
82
|
|
|
|
(82
|
)
(a)
|
|
|
1,246,959
|
|
Indirect
contract costs
|
|
|
831,267
|
|
|
|
751,631
|
|
|
|
(751,631
|
)
(a)
|
|
|
831,267
|
|
Management
fee, affiliate
|
|
|
299,666
|
|
|
|
-
|
|
|
|
-
|
|
|
|
299,666
|
|
Costs
not allocable to contracts
|
|
|
81,367
|
|
|
|
-
|
|
|
|
-
|
|
|
|
81,367
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Operating Expenses
|
|
|
2,459,259
|
|
|
|
751,713
|
|
|
|
(751,713
|
)
|
|
|
2,459,259
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
from Operations
|
|
|
(453,919
|
)
|
|
|
(748,917
|
)
|
|
|
748,917
|
|
|
|
(453,919
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
Income (expenses)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
Income
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
-
|
|
Interest
Expense
|
|
|
(25,517
|
)
|
|
|
(4,605
|
)
|
|
|
4,605
|
(a)
|
|
|
(25,517
|
)
|
Merger
Expense
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
other income (expense)
|
|
|
(25,517
|
)
|
|
|
(4,605
|
)
|
|
|
4,605
|
|
|
|
(25,517
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
before income tax provision
|
|
|
(479,436
|
)
|
|
|
(753,522
|
)
|
|
|
753,522
|
|
|
|
(479,436
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
tax provision
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Income (Loss)
|
|
$
|
(479,436
|
)
|
|
$
|
(753,522
|
)
|
|
|
753,522
|
|
|
$
|
(479,436
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
and diluted
|
|
$
|
(0.05
|
)
|
|
$
|
(0.16
|
)
|
|
|
|
|
|
$
|
(0.04
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average number of shares
Basic
and diluted
|
|
|
8,882,455
|
|
|
|
4,747,319
|
|
|
|
|
(b)
|
|
|
13,629,774
|
|
(a) Gives
effect to the spin off of uKarma's operations.
(b) Gives
the effect to the 11.120904 reverse split of uKarma common shares at
merger to 4,747,319 shares and the issuance of 8,882,455 common shares to former
Innolog stockholders per the merger agreement.
INNOLOG
HOLDINGS CORPORATION AND SUBSIDIARY
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note
3: Going Concern
The
accompanying financial statements have been prepared in conformity with
generally accepted accounting principles, which contemplate continuation of the
Company as a going concern. However, the Company has sustained substantial
operating losses in the prior year and increasing losses in the current periods,
and has a stockholders’ deficit (defined as total assets minus total
liabilities) of $6,549,059 and $2,490,085 at September 30, 2010 and December 31,
2009, respectively. There are many delinquent claims and obligations, such
as payroll taxes, employee income tax withholdings, employee benefit plan
contributions, loans payable and accounts payable, that could ultimately cause
the Company to cease operations.
The
Company anticipates it may not have sufficient cash flows to fund its operations
over the next twelve months without the completion of additional
financing. The consolidated financial statements do not include any
adjustments relating to the recoverability and classification
of asset
carrying amounts or the amounts and classification of liabilities that might
result should the Company be unable to continue as a going concern.
The
report from the Company’s independent registered public accounting firm relating
to the December 31, 2009 consolidated financial statements states that there is
substantial doubt about the Company’s ability to continue as a going
concern.
Management
believes that actions presently being taken such as continued expense reduction,
the implementation of a renewed sales effort and the capital financing efforts
of the Company will help to revise the Company’s operating and financial
requirements.
Note
4: Summary of Significant Accounting Policies
Accounting
Standards Codification:
During
2009, the Company adopted changes issued by the Financial Accounting Standards
Board (“FASB”) to the authoritative hierarchy of Generally Accepted Accounting
Principles (“GAAP”). These changes establish the FASB Accounting Standards
Codification (“ASC”) as the source of authoritative accounting principles
recognized by the FASB to be applied by
nongovernmental
entities in the preparation of financial statements in conformity with GAAP. The
codification itself does not change GAAP. Other than the manner in which new
accounting guidance is referenced, the adoption of these changes had no impact
on the financial statements.
Principles
of Consolidation:
The
consolidated financial statements include the assets, liabilities and operating
results of Holdings and it’s wholly owned subsidiary since the date of the
acquisition. All significant intercompany accounts and transactions have
been eliminated in consolidation.
Use of
Estimates:
Management
uses estimates and assumptions in preparing these financial statements in
accordance with accounting principles generally accepted in the United States of
America. Those estimates and assumptions affect the reported amounts of assets
and liabilities, the disclosure of contingent assets and liabilities, and the
reported revenues and expenses. Actual results could vary from the
estimates.
INNOLOG
HOLDINGS CORPORATION AND SUBSIDIARY
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 4: Summary of Significant
Accounting Policies
(Continued)
Contract
Revenue Recognition:
Revenue
on cost-plus-fee contracts is recognized to the extent of costs incurred plus a
proportionate amount of fees earned. Revenue on fixed-price contracts is
recognized on the percentage-of-completion method based on costs incurred in
relation to total estimated costs. Revenue on time-and-materials contracts is
recognized at contractual rates as hours and out of pocket expenses are
incurred. Anticipated losses on contracts are recognized in the period they are
first determined. In accordance with industry practice, amounts relating to
long-term contracts, including retainages, are classified as current assets
although an undeterminable portion of these amounts is not expected to be
realized within one year. Because of inherent uncertainties in estimating costs,
it is at least reasonably possible that the estimates used will change within
the near term.
Concentration
of Credit Risk:
The
Company maintains its cash, which, at times may exceed federally insured limits,
in bank deposit accounts with a high credit quality financial institution. The
Company believes it is not exposed to any significant credit risk with regards
to those accounts. Accounts receivable principally consist of amounts due from
the federal government and large prime federal government contractors.
Management believes associated credit risk is not significant.
Allowance
for Doubtful Accounts:
The
Company provides an allowance for doubtful accounts equal to the estimated
collection losses that will be incurred in collection of all receivables.
Estimated losses are based on historical
collection
experience coupled with review of the current status of existing
receivables. There was no allowance for doubtful accounts required at
September 30, 2010 and December 31, 2009.
Property
and Equipment:
Property
and equipment are stated at cost and depreciated by the straight-line method
over estimated useful lives which are as follows:
Office
furniture and equipment
|
3
to 5 years
|
Computer
hardware and software
|
2
to 5 years
|
Leasehold
improvements and lease acquisition costs are amortized over the shorter of the
life of the applicable lease or the life of the asset. Maintenance and repairs
are charged to operations when incurred. Betterments and renewals are
capitalized. When property and equipment are sold or otherwise disposed of, the
asset account and related accumulated depreciation account are relieved, and any
gain or loss is included in operations.
INNOLOG
HOLDINGS CORPORATION AND SUBSIDIARY
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 4: Summary of Significant
Accounting Policies
(Continued)
Long-Lived
Assets:
The
Company reviews for the impairment of long-lived assets and certain identifiable
intangibles whenever events or changes in circumstances indicate that the
carrying amount of any asset may not be recoverable. An impairment loss
would be recognized when the estimated undiscounted future cash flows expected
to result from the use of the asset and its eventual disposition is less than
the carrying amount. If impairment is indicated, the amount of the loss to be
recorded is based on an estimate of the difference between the carrying amount
and the fair value of the asset. Fair value is based upon discounted
estimated cash flows expected to result from the use of the asset and its
eventual disposition and other valuation methods.
Goodwill:
In
accordance with FASB ASC 350, “Intangibles – Goodwill and Other”, goodwill is
tested for impairment at least annually. Based on factors discussed in Note 3,
an impairment loss of $3,056,238 was recognized for the period ended September
30, 2010.
Income
Taxes:
The
Company and its subsidiary file a consolidated federal income tax return. Income
taxes are accounted for using the asset and liability method under FASB ASC 740,
"Accounting for Income Taxes", whereby deferred tax assets and liabilities are
recognized for future tax consequences attributable to differences between the
financial statement carrying amounts of assets and liabilities, and their
respective tax basis, and operating loss and tax credit carry forwards. Deferred
tax assets and liabilities are measured using enacted tax rates expected to
apply to taxable income
in the
years in which those temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and
liabilities due to a change in tax rates is recognized as income in
the
period that includes the enactment date. Estimates of the realization of
deferred tax assets are based-on the scheduled reversal of deferred tax
liabilities, projected future taxable income, and tax planning
strategies.
Stock
Based Compensation:
The
Company accounts for stock based compensation in accordance with FASB ASC
505-50, “Equity Based Payments to Non-Employees”. Under the fair value
recognition provisions of FASB ASC 505-50, the Company measures stock based
compensation cost at the grant date based on the fair value of the award and
recognizes expense over the requisite service period.
Debt
issuance costs are capitalized and amortized over the term of the related
loan.
INNOLOG
HOLDINGS CORPORATION AND SUBSIDIARY
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 4: Summary of Significant
Accounting Policies
(Continued)
Fair
Value Measurements:
FASB ASC
820, “Fair Value Measurements and Disclosures”, establishes a framework for
measuring fair value. That framework provides a fair value hierarchy
that prioritizes the inputs to valuation techniques 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
measurements)
and the lowest priority to unobservable inputs (level 3 measurements). The three
levels of the fair value hierarchy under FASB ASC 820 are described as
follows:
|
Level
1:
|
Inputs
to the valuation methodology are unadjusted quoted prices for
identical assets or liabilities in active markets that the plan has
the ability to access.
|
|
Level
2:
|
Inputs
to the valuation methodology
include:
|
|
·
|
quoted
prices for similar assets or liabilities in active
markets;
|
|
·
|
quoted
prices for identical or similar assets or liabilities in inactive
markets;
|
|
·
|
inputs
other than quoted prices that are observable for the assets or
liability;
|
|
·
|
inputs
that are derived principally from or corroborated by observable market
data by correlation or other means.
|
If the
asset or liability has a specified (contractual) term, the level 2 input must be
observable for substantially the full term of the asset or
liability.
|
Level
3:
|
Inputs
to the valuation methodology are unobservable and significant to the fair
value measurement.
|
The asset
or liability’s fair value measurement level within the fair value hierarchy is
based on the lowest level of any input that is significant to the fair value
measurement. Valuation techniques used need to maximize the use of observable
inputs and minimize the use of
unobservable
inputs.
The
following is a description of the valuation methodologies used for assets and
liabilities measured at fair value:
The
carrying values of accounts receivable, accounts payable, accrued expenses,
notes payable, and the line of credit payable approximate fair value due to the
short term maturities of these instruments.
Contingent
consideration payable is based on the revenues and earnings projections of
Innovative discounted by the rate of the seller note.
INNOLOG
HOLDINGS CORPORATION AND SUBSIDIARY
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 4: Summary of
Significant Accounting Policies
(Continued)
Fair
Value Measurements (Continued):
The
preceding methods described may produce a fair value calculation that may not be
indicative of net realizable value or reflective of future fair values.
Furthermore, although the Company believes its valuation methods are appropriate
and consistent with other market participants, the use of different
methodologies or assumptions to determine the fair value of certain financial
instruments could result in a different fair value measurement at the reporting
date.
The
Company has determined that the contingent consideration liability falls within
level three of the hierarchy. The following table sets forth a summary of
the changes in the fair value of such liability for the period from January 1,
2010 to September 30, 2010:
|
|
Contingent
Consideration
|
|
|
|
|
|
Balance,
beginning of year
|
|
$
|
515,000
|
|
Changes
in fair value
|
|
|
(515,000
|
)
|
|
|
|
|
|
|
|
$
|
-
|
|
Recent
Accounting Pronouncements:
Management
does not believe that any recently issued, but not yet effective accounting
standards, if adopted, will have a material effect on the Company's financial
statements.
Note
5: Business Combination
On March
31, 2009, Holdings acquired Innovative, whereby Holdings acquired all of the
outstanding shares of common stock of Innovative. The purpose of the
acquisition was to allow the Company to become involved in providing services to
federal government entities. The total purchase price for Innovative was
$2,835,000 and consisted of the following (at fair value):
Cash
|
|
$
|
100,000
|
|
Short
Term Note
|
|
|
50,000
|
|
Seller
Note (1)
|
|
|
1,285,000
|
|
2,500,000
shares of Galen common stock (2)
|
|
|
85,000
|
|
Capital
contribution
|
|
|
600,000
|
|
Contingent
note payable (3)
|
|
|
715,000
|
|
|
|
|
|
|
|
|
$
|
2,835,000
|
|
(Continued)
INNOLOG
HOLDINGS CORPORATION AND SUBSIDIARY
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 5: Business
Combination
(Continued)
|
(1)
|
The
purchase agreement was amended in May 2010 and this note was converted
into 1,000,000 shares of Series A preferred stock of
Holdings.
|
|
(2)
|
Fair
value of Galen’s common shares issued was determined on the basis of the
fair value of Innovative. These shares were exchanged for 285,453 shares
of Holdings common stock in May
2010.
|
|
(3)
|
The
fair value of the contingent consideration was based on the revenues and
earnings projections of Innovative. The contingent note payable
requires Holdings to pay the former stockholders up to $900,000 in three
years based on the performance of Innovative and up to 10% of the net
income of Innovative of years four and five. As of March 31, 2009,
based on management’s estimates, Holdings expected that the aggregate
undiscounted amount of contingent consideration to be paid was
approximately $900,000. This was discounted to present value using
an 8% discount rate and amounted to $715,000 at the date of
acquisition. As of December 31, 2009, this amount was reduced to
$515,000 and as of September 30, 2010, this amount was reduced to
zero.
|
Goodwill
in the amount of $4,056,238 was recognized in the acquisition and was
attributable to the excess of the purchase price paid over the fair value of the
net assets acquired, as there were no other intangibles qualifying for separate
recognition. Due to the increase in the Company’s net liabilities during
2009 and cash flow shortfalls, an impairment loss of $1,000,000 was recorded at
December 31, 2009. Due to a decline in ongoing revenues and the
uncertainties described in Note 3, an additional impairment loss of the balance
of goodwill in the amount of $3,056,238 was made at September 30,
2010.
The
following table summarizes the approximate fair values of the assets acquired
and liabilities assumed at the date of acquisition:
Current
Assets
|
|
$
|
1,325,138
|
|
Other
Assets
|
|
|
100,657
|
|
Fixed
Assets
|
|
|
49,189
|
|
Goodwill
|
|
|
4,056,238
|
|
Liabilities
assumed
|
|
|
(2,696,222
|
)
|
|
|
$
|
2,835,000
|
|
Note
6: Major Customers
Revenues
from prime contracts and subcontracts with U.S. Government agency customers in
aggregate accounted for approximately 100% of total revenues for the nine months
ended September 30, 2010
and the
period from March 23, 2009 (inception) to September 30,
2009.
INNOLOG
HOLDINGS CORPORATION AND SUBSIDIARY
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note
7: Accounts Receivable
Accounts
receivable consisted of the following as of September 30, 2010 and December 31,
2009:
|
|
September
30, 2010
|
|
|
December 31, 2009
|
|
Billed
receivables
|
|
$
|
876,893
|
|
|
$
|
1,543,115
|
|
Unbilled
receivables
|
|
|
265,060
|
|
|
|
186,479
|
|
|
|
$
|
1,141,953
|
|
|
$
|
1,729,594
|
|
Contract
receivables from prime contracts and subcontracts with U.S. Government agency
customers in aggregate accounted for approximately 100% and 97% of total
contract receivables at September 30, 2010 and December 31, 2009,
respectively.
Note
8: Line of Credit
In April
2009, Holdings entered into a credit agreement with Eagle Bank under which it
may borrow up to $500,000. Borrowings under the agreement are guaranteed by
seven individuals, which are directly or indirectly related to Holdings. The
borrowings are payable upon the bank’s demand. Interest is payable monthly at
the bank’s prime rate (as defined) plus 1%. At September 30, 2010, the
interest rate was 5%.
Note
9: Seller Note Payable and Earn out Note Payable
Seller
Note Payable:
In March
2009, when Holdings purchased Innovative, part of the purchase consideration was
a note payable of $1,285,000, payable over three years. In May 2010, Innolog
retired this note, including accrued interest, by granting the note holders
1,000,000 shares of Innolog’s $0.001 par value Series A Convertible Preferred
Stock, which was valued at $0.01 per share. At the date of the debt
extinguishment, the debt amount including accrued interest of $85,551, exceeded
the aggregate market value of the shares granted, and accordingly a gain of
$1,360,551 has been recognized.
Contingent
Consideration Payable:
In March
2009, as part of the purchase transaction, Holdings estimated that contingent
consideration due to the former stockholders amounted to $900,000. As
specified in the agreement, the earn out is based on certain revenue and net
income targets over the next five years, and is
payable
annually. The amount payable has been discounted to present value using an 8%
discount rate and amounted to $515,000 at December 31, 2009 and was reduced
to zero as of September 30, 2010.
INNOLOG
HOLDINGS CORPORATION AND SUBSIDIARY
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note
10: Notes Payable
During
the three months ended September 30, 2010, the Company received funds from
individuals totaling $370,000, which mature at various dates in 2010.
Repayment dates on certain of the notes amounting to $225,000 have been extended
through January 21, 2011. Interest charges vary between 6% per annum to a
flat fee , therefore, $57,613 has been accrued as of September 30, 2010. In
addition, these individuals were granted warrants to purchase 370,000 shares of
Innolog common stock at a price of $0.50 per share. The loans that
matured on September 30, 2010 amounting to $145,000 have not been repaid and are
in default.
Note
11: Related Party Transactions
Loans
from Affiliates:
In March
2009, Holdings and Innovative (the “Borrowers”) entered into an agreement (the
“Loan Agreement”) with eight individuals (the “Lenders”) who are directly or
indirectly related to Holdings, under which the Borrowers may borrow up to
$2,000,000. The total borrowings as of September 30, 2010 amounted to
$1,499,384, collaterized by substantially all assets of both Borrowers and
guaranteed by Galen. Repayment of the loan is due at the Lenders’
demand.
In order
to make the loan to the Borrowers, the Lenders borrowed $1,499,384 from Eagle
Bank. The promissory note to Eagle Bank matures in March 2011 and interest
is payable monthly at the bank’s prime rate (as defined) plus 1%. Interest
is directly paid by the Company to the bank on a monthly basis.
In
addition to the interest due to the bank, the Company granted warrants to the
Lenders under which they may purchase 1,760,000 shares of the Company’s common
stock, with a strike price of $0.023 per share. The warrants expire on
March 31, 2014. The fair value of these warrants amounted to $520,000 and was
amortized to interest expense during the period ended September 30,
2009.
INNOLOG
HOLDINGS CORPORATION AND SUBSIDIARY
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 11: Related
Party Transactions
(Continued)
Loans
from Former Stockholder:
As of
September 30, 2010 and December 31, 2009, loans from former stockholder
consisted of the following:
|
|
September
30, 2010
|
|
|
December
31, 2009
|
|
Note,
interest of 15% and principal was originally due on December 31, 2009 and
there is no newly stated due date as of the date of financial
statements. The note will be converted to 30,000 shares of preferred
stock of Holdings.
|
|
$
|
57,332
|
|
|
$
|
57,332
|
|
|
|
|
|
|
|
|
|
|
Note,
interest of $19,600 and principal of $196,000, payable in two
installments, $107,800 on April 30, 2010 and $107,800 on May 30, 2010.
Additional interest payments of $15,200 were due on April 15, 2010 and May
15, 2010. In addition, 196,000 warrants of Holdings were granted.
Repayment of $37,000 has been made toward the principal
balance.
|
|
|
159,000
|
|
|
|
120,000
|
|
|
|
|
|
|
|
|
|
|
Note,
interest of $13,000 and principal due on July 9, 2010.
In
addition,
65,000 warrants were granted.
|
|
|
65,000
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Note,
interest of $3,000 and principal due on July 17, 2010. In
addition, 15,000 warrants were granted.
|
|
|
8,350
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Note,
interest of $5,000 and principal due on September 12,
2010.
In addition, 25,000 warrants were granted.
|
|
|
25,000
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
-
|
|
|
|
6,299
|
|
|
|
$
|
314,682
|
|
|
$
|
183,631
|
|
The above
noted outstanding loans had not been paid off as of the date of these financial
statements and are in default. Interest expense incurred on these loans
amounted to $89,900 for the nine months ended September 30,
2010.
Management
Fees, Affiliate:
Pursuant
to an Executive Management Agreement with Galen entered into on April 1, 2009,
the Company is being charged a management fee of $100,000 per month or an amount
not to exceed 15% of the gross revenue of the Company earned during the previous
twelve month period effective with the consummation of the agreement. Total
management fees amounted to $724,490 and
$689,232
for the nine months ended September 30, 2010 and period from March 23,
2009
(inception) to September 30, 2009, respectively. The agreement expired on
September 30, 2010.
INNOLOG
HOLDINGS CORPORATION AND SUBSIDIARY
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 11: Related
Party Transactions
(Continued)
Note
Receivable, Affiliate:
In April
2009, Holdings entered into an interest-free credit agreement with an affiliate
under which the affiliate could borrow up to $1,500,000 through April 15, 2010.
As of December 31, 2009, the outstanding balance was $740,000. On
June 15, 2010, the amount outstanding under this note was forgiven. As
such, this receivable was reclassified to equity as of December 31,
2009.
Due from
Galen:
As of
June 30, 2010, amounts due from Galen amounted to $725,815. Of this amount,
management of Innolog and Galen identified that $498,702 represented operating
expenses incurred by Galen on behalf of Innolog, mainly consisting of rent and
office expense, consulting fees, health care expense and other corporate
overhead. Thus, this amount was charged to expense by the Company during the six
months ended June 30, 2010. Management of Galen and Innolog determined
that the balance of $227,113 was related to Galen and deemed uncollectible.
Thus, this amount was written off during the six months ended June 30,
2010.
During
the three months ended September 30, 2010, amounts due from Galen amounted to
$367,612. Of this amount, management of Innolog and Galen identified that
$326,087 represents operating expenses incurred by Galen on behalf of Innolog,
mainly consisting of consulting fees, rent expense, and health care expense.
Thus, this amount was charged to expense by the Company during the three months
ended September 30, 2010. Management of Galen and Innolog has determined
that the balance of $41,525 was related to Galen and deemed uncollectible. Thus,
this amount has been written off.
Notes
Payable, Affiliates:
During
the nine months ended September 30, 2010, the Company received loans totaling
$500,000 from affiliates, of which $250,000 are still
outstanding as of September 30, 2010 and mature at various dates in 2010. The
maturity date on one of the notes amounting to $50,000 has been extended to
January 9, 2011. Interest of $52,500 has been accrued as of September 30, 2010.
In addition, these affiliates were granted warrants to purchase 725,000 shares
of Innolog common stock at a price of $0.50 per share. Subsequent to September
30, 2010, one of the affiliates was granted warrants to purchase 150,000 shares
of Innolog common stock at a price of $0.01 per share. The loans that matured as
of October 31, 2010 amounting to $200,000 have not been repaid and are in
default.
Loan from
Controller:
Innovative’s
controller loaned the Company $20,000 on July 9, 2010 and the loan was due on
August 9, 2010. The controller was granted warrants to purchase 20,000 shares of
Innolog common stock at a price of $0.50 per share. Interest expense amounted to
$4,000 and has been accrued as of September 30, 2010. The loan has not been
repaid and is in default.
INNOLOG
HOLDINGS CORPORATION AND SUBSIDIARY
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note
12: Costs not Allocable to Contracts
Costs not
allocable to contracts consisted of unallowable entertainment, late fees and
penalties, finance charges, bad debt expense and other expenses. Total
costs not allocable to contracts amounted to $625,612 and $118,072 for the nine
months ended September 30, 2010 and the period from March 23, 2009 (inception)
to September 30, 2009, respectively.
Note
13: Commitments and Contingencies
Leases:
The
Company leases office space in Washington, D.C.; Orlando, Florida; Springfield,
Virginia; and McLean, Virginia; under operating leases expiring at various dates
through 2013. The premises leases contain scheduled rent increases and require
payment of property taxes, insurance and certain maintenance costs. The minimum
future commitments under lease agreements existing as of September 30, 2010, are
approximately as follows:
Year
ending December 31,
|
|
|
|
2010
|
|
$
|
397,000
|
|
2011
|
|
|
980,000
|
|
2012
|
|
|
222,000
|
|
2013
|
|
|
33,000
|
|
|
|
$
|
1,632,000
|
|
Total
rent expense amounted to $752,873 and $322,006 for the nine months ended
September 30, 2010 and the period from March 23, 2009 (inception) to September
30, 2009, which include a straight-line rent adjustment of approximately $35,000
and ($50,857), respectively.
In 2010,
Innovative vacated its office space prior to expiration of the lease. There has
been no agreement reached between Innovative and the former landlord to settle
the breach. The landlord subsequently filed a lawsuit against the Company under
which it pursued total damages of approximately $1,000,000, which approximates
the rent charges for the remaining term of the lease. The monthly rent amount
has been accrued and is included in other accrued liabilities on the balance
sheet. The commitment is included in the future lease commitment schedule.
The outcome of the lawsuit is undetermined as of the date of these financial
statements.
Late
Deposit of Payroll Taxes and Employee Income Tax Withholdings:
During
2009 and 2010, the Company has been late in making deposits of federal and state
employer payroll taxes, as well as employee income tax withholdings. As of
September 30, 2010 and December 31, 2009, the total of payroll tax accrued and
income tax withheld balances including penalties and interest, amounted to
$1,396,241 and $277,762, respectively, which is included in accrued salaries and
benefits on the balance sheet.
INNOLOG
HOLDINGS CORPORATION AND SUBSIDIARY
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 13: Commitments and
Contingencies
(Continued)
Employment
Agreement:
On April
1, 2009, Innovative entered into an employment agreement with its President and
Chief Executive Officer through March 31, 2014, which provides for a minimum
annual salary of $198,000. At September 30, 2010, the total commitment,
excluding incentives, was $693,000.
Contracts:
Substantially
all of the Company’s revenues have been derived from prime or subcontracts with
the U.S. government. These contract revenues are subject to adjustment upon
audit by the Defense Contract Audit Agency. Audits have been finalized
through 2005. Management does not expect the results of future audits to have a
material effect on the Company’s financial position or results of
operations.
Note
14: Income Taxes
The
Company’s effective income tax rate is lower than what would be expected if the
federal statutory rate were applied to income from continuing operations
primarily because of the deferred tax asset being fully reserved.
Temporary
differences giving rise to the deferred tax assets consist primarily of the
excess of the goodwill and other intangible assets for tax reporting
purposes over the amount for financial reporting purposes, and net operating
loss carry forwards. The Company’s ability to utilize the federal and
state tax assets is uncertain, therefore the deferred tax asset is fully
reserved.
At
September 30, 2010, the Company had a net deferred tax asset which was fully
reserved.
Effective
January 1, 2009, the Company has adopted the provisions of FASB ASC 740, “Income
Tax” which clarifies the accounting for uncertainty in tax positions. FASB ASC
740 requires the
recognition
of the impact of a tax position in the financial statements if that position is
more likely than not of being sustained on a tax return upon examination by the
relevant taxing authority, based on the technical merits of the position. The
adoption of FASB ASC 740 had no effect on the Company’s financial position or
results of operations. At September 30, 2010, the Company has no unrecognized
tax benefits.
The
Company recognizes interest and penalties related to income tax matters in
interest expense and operating expenses, respectively. As of September 30,
2010, the Company has no accrued interest and penalties related to uncertain tax
positions.
INNOLOG
HOLDINGS CORPORATION AND SUBSIDIARY
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note
15: Employee Benefit Plan
Innovative
has a defined contribution employee benefit plan covering all full time
employees who elect to participate. The plan provides for elective salary
deferrals by employees and annual elective matching contributions. There was no
employer contribution for the nine months ended September 30, 2010.
Innovative
has been late in making deposits of employee deferrals in the amount of
$185,477. The Department of Labor is reviewing Innovative’s employee benefit
plan document as well as other records to determine the status of compliance.
The outcome is undetermined as of the date of these financial
statements.
Note
16: Capital Stock
Common
Stock:
As of
December 31, 2009, 100,000,000 shares of $.001 par value common stock were
authorized and 20,000,000 shares of common stock were issued and
outstanding. In May 2010, the Company consummated a .44-for-1 reverse
stock split, thereby decreasing the number of issued and outstanding shares to
8,882,455, and increasing the par value of each share to $0.0023. All
references in the accompanying consolidated financial statements to the number
of common shares and per-share amounts through the period ended December 31,
2009 were restated to reflect the reverse stock split.
In
connection with the merger with uKarma, uKarma’s Articles of Incorporation were
amended such that there are 200,000,000 shares of $.001 par value common stock
authorized and
13,629,774
shares of common stock issued and outstanding. The common stock amount has been
changed from $20,000 to $13,630 to reflect the change in par value.
Preferred
Stock:
The
Company has authorized 50,000,000 shares of preferred stock, with a par value
$0.001 per share (“Preferred Stock”). The Preferred Stock may be issued from
time to time in series having such designated preferences and rights,
qualifications and to such limitations as the Board of Directors may
determine.
The
Company has designated 38,000,000 shares of the preferred stock as Series A
Convertible Preferred Stock (“Series A Stock”). The holders of Series A Stock
have voting rights with a $2.00 liquidation preference per share, and may
convert each share of Series A Stock into one share of common stock at any
time. Series A Stock converts automatically upon the occurrence of an
offering meeting certain criteria and the sale of the Company. Holders of the
Series A Stock are entitled to accrue dividends based on the prior fiscal year’s
net income equal to 10% of such net income. As of September 30, 2010, there were
37,364,758 shares of Series A Stock outstanding.
INNOLOG
HOLDINGS CORPORATION AND SUBSIDIARY
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 16: Capital Stock
(Continued)
Stock
Warrant Activity:
On March
31, 2009, the Company granted 4,000,000 warrants to various affiliated
individuals in conjunction with their guarantee of the Company’s line of credit
(Note 8) and their loans to the Company (Note 11). The warrants had an
exercise price of $0.01 and a life of five years. All warrants were fully
vested on the date of grant. The fair value of the warrants was $520,000
and was charged to interest expense for the period from March 23, 2009
(inception) to September 30, 2009. In May 2010, these warrants were reversed on
a .44 to 1 basis to 1,760,000 shares with an exercise price of $.023 as a result
of the reverse stock split.
The
following assumptions were used in arriving at the fair value of the above noted
warrants:
Expected
dividend yield
|
|
|
0
|
%
|
Expected
volatility
|
|
|
70
|
%
|
Average
risk free interest rate
|
|
|
1.67
|
%
|
Expected
life (in years)
|
|
|
2.5
|
|
For the
three months ended June 30, 2010, the Company granted 39,106,857 warrants to
various individuals in conjunction with the individuals lending the Company
working capital (Notes 8 and 11) or in conjunction with the assignment of the
merger rights with a public company. The warrants have an exercise price of $.50
and a life of five years. All warrants were fully vested on the date of the
grant. The Company has determined through a Black Scholes analysis that the fair
value of the warrants was zero at the time of issue.
The
following assumptions were used in arriving at the fair value of the above noted
warrants:
Expected
dividend yield
|
|
|
0
|
%
|
Expected
volatility
|
|
|
67
|
%
|
Average
risk free interest rate
|
|
|
1.79
|
%
|
Expected
life (in years)
|
|
|
5.0
|
|
For the
three months ended September 30, 2010, the Company granted 1,515,000 warrants to
various individuals in conjunction with the individuals lending the Company
working capital (Notes 10 and 11). The warrants have an exercise price of $.50
and a life of five years. All warrants were fully vested on the date of the
grant. The Company has determined through a Black Scholes analysis that the fair
value of the warrants was zero at the time of issue.
The
following assumptions were used in arriving at the fair value of the above noted
warrants:
Expected
dividend yield
|
|
|
0
|
%
|
Expected
volatility
|
|
|
68.64
|
%
|
Average
risk free interest rate
|
|
|
1.27
|
%
|
Expected
life (in years)
|
|
|
5.0
|
|
(Continued)
INNOLOG
HOLDINGS CORPORATION AND SUBSIDIARY
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 16: Capital Stock
(Continued)
Stock
Warrant Activity (Continued):
A summary
of Holdings’ warrant activity and related information is as
follows:
Warrant Summary
|
|
Warrants
|
|
|
Weighted Average
Exercise Price
|
|
Outstanding,
beginning of year
|
|
|
1,760,000
|
|
|
$
|
.0227
|
|
Granted
|
|
|
40,621,857
|
|
|
$
|
0.50
|
|
Merger
with uKarma
|
|
|
140,006
|
|
|
$
|
10.47
|
|
Exercised
|
|
|
-
|
|
|
$
|
-
|
|
Forfeited/Expired
|
|
|
-
|
|
|
$
|
-
|
|
Outstanding,
end of period
|
|
|
42,521,863
|
|
|
$
|
0.5131
|
|
At
September 30, 2010, there were 42,521,863 warrants outstanding and
exercisable. These warrants had a weighted average exercise price of
$0.5131 and a weighted average remaining life of 4.68 years.
Stock
Option Plan:
Upon
merger with uKarma on August 17, 2010, the Company assumed uKarma’s existing
stock option plan, the Deferred Stock and Restricted Stock Plan (the “Plan”),
under which employees, officers, directors, consultants and other service
providers may be granted non-qualified and/or incentive stock options.
Generally, all options granted expire five years from the date of grant.
All options have an exercise price equal to or higher than the fair value of the
Company’s stock on the date the options are granted. Options generally
vest over three years with the exception of the initial grants of 2010, which
vested immediately.
A summary
of the status of stock options issued by the Company as of September 30, 2010 is
presented in the following table. Shares have been adjusted to reflect uKarma’s
reverse stock split of 11.120904 to 1 effective as of the date of
merger:
|
|
Number of Shares
|
|
|
Weighted Average
Exercise Price
|
|
Outstanding
at beginning of year
|
|
|
476,130
|
|
|
$
|
2.22
|
|
Granted
|
|
|
13,429,500
|
|
|
$
|
0.50
|
|
Exercised/Expired/Cancelled
|
|
|
(453,650
|
)
|
|
|
-
|
|
Outstanding
at end of period
|
|
|
13,451,980
|
|
|
$
|
0.5029
|
|
|
|
|
|
|
|
|
|
|
Exercisable
at end of period
|
|
|
12,892,480
|
|
|
$
|
0.503
|
|
(Continued)
INNOLOG
HOLDINGS CORPORATION AND SUBSIDIARY
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 16: Capital Stock
(Continued)
Stock
Option Plan (Continued):
The fair
value of the stock options granted is estimated on the date of grant using the
Black-Scholes option valuation model. This model uses the assumptions listed in
the table below. Expected volatilities are based on the estimated volatility of
the Company’s stock. The risk-free rate for periods within the expected life of
the option is based on the U.S. Treasury yield curve in effect at the time of
grant.
Weighted
average fair value per options granted
|
|
$
|
0.00
|
|
Risk
free interest rate
|
|
|
1.27
|
%
|
Expected
dividend yield
|
|
|
0
|
%
|
Expected
lives
|
|
60
months
|
|
Expected
volatility
|
|
|
68.64
|
%
|
Item
2: Management’s discussion and analysis of financial condition and results of
operations
The
following discussion and analysis of the results of operations and financial
condition of Innolog Holdings Corporation and its wholly owned subsidiary,
Innovative Logistics Techniques, Inc., for the nine months ended September 30,
2010 and 2009 should be read in conjunction with the consolidated financial
statements and the notes to those financial statements that are included in the
Current Report on Form 8-K,as amended, that we filed with the Securities and
Exchange Commission on August 16, 2010. References to “the Company,” “we,”
“our,” or “us” in this discussion refer to Innolog Holdings Corporation and its
subsidiary.
Our
discussion includes forward-looking statements. When used in this report,
the words “anticipate,” “believe,” “estimate,” “expect,” “future,” “intend,”
“may,” “plan,” or the negative of these terms and similar expressions identify
forward-looking statements. Such statements reflect our current view with
respect to future events and are subject to risks, uncertainties, assumptions
and other factors relating to our industry, our operations and results of
operations and any businesses that we may acquire. Should one or more of
these risks or uncertainties materialize, or should the underlying assumptions
prove incorrect, actual results may differ significantly from those anticipated,
believed, estimated, expected, intended or planned. Some, but not all, of
these risks include, among other things:
|
·
|
whether we will continue to
receive the services of certain officers and
directors;
|
|
·
|
whether we can successfully
integrate our subsidiary, which was recently acquired, into our
business;
|
|
·
|
whether we can implement our
business plan by acquiring other businesses compatible with
ours;
|
|
·
|
whether budgetary pressures in
the federal and state governments will result in a reduction in spending
which will be disadvantageous to
us;
|
|
·
|
whether we can obtain funding
when and as we need it; and
|
|
·
|
other uncertainties, all of
which are difficult to predict and many of which are beyond our
control.
|
Although
we believe that the expectations reflected in the forward-looking statements are
reasonable, we cannot guarantee future results, levels of activity, performance
or achievements. Except as required by applicable law, including the securities
laws of the United States, we do not intend to update any of the forward-looking
statements to conform these statements to actual results.
Overview
We are a
holding company designed to make acquisitions of companies in the government
services industry.
Our first acquisition,
Innovative Logistics Techniques, Inc., is a solutions oriented
provider of logistics
services primarily to agencies of the U.S. government, but also to state and
local agencies and to private businesses. We provide tools to our
customers which allow them to manage the flow of goods, information or other
resources through the integration of information, transportation, inventory,
warehousing, material handling and security. Our goal is to expand our
business, not only through the acquisition of new contracts but also through the
acquisition of companies in the government services industry. Our home
office is located in Fairfax, Virginia, although we have five additional offices
located in Washington D.C., Tennessee and Florida.
The
federal government is the largest consumer of services and solutions in the
United States. We believe that the federal government’s spending in
national security and homeland security programs will continue to increase in
the next several years, driven by the continued need for sophisticated
intelligence gathering and information sharing, increased reliance on technology
service providers due to shrinking ranks of government technical professionals
and the continuing impact of federal procurement reforms. For example,
federal government spending on information technology has consistently increased
in each year since 1980. INPUT, an independent federal government market
research firm, expects this trend to continue, with federal government spending
on information technology forecasted to increase from approximately $76 billion
in federal fiscal year 2009 to $90 billion in federal fiscal year 2014.
Moreover, this data may not fully reflect government spending on
classified intelligence programs, operational support services to our armed
forces and complementary technical services, which include sophisticated systems
engineering.
Across
the national security community, we see the following trends that will continue
to drive increased spending and dependence on technology support
contractors:
|
·
|
Increased
spending on defense and intelligence to combat terrorist
threats;
|
|
·
|
increased
spending on cyber security;
|
|
·
|
continuing
focus on information sharing, data interoperability and
collaboration;
|
|
·
|
reliance
on technology service providers;
|
|
·
|
inherent
weaknesses of federal personnel
systems.
|
Critical
Accounting Policies and Estimates
Management’s
discussion and analysis of our financial condition and results of operations is
based on our consolidated financial statements, which have been prepared in
accordance with accounting principles generally accepted in the United
States. The preparation of these financial statements requires us to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and the disclosure of contingent assets and liabilities at the date
of the financial statements as well as the reported net sales and expenses
during the reporting periods. On an ongoing basis, we evaluate our
estimates and assumptions. We base our estimates on historical experience
and on various other factors that we believe are reasonable under the
circumstances, the results of which form the basis for making judgments about
the carrying value of assets and liabilities that are not readily apparent from
other sources. Actual results may differ from these estimates under
different assumptions or conditions.
While our
significant accounting policies are more fully described in Note 4 to our
consolidated financial statements, we believe that the following accounting
policies are the most critical to aid you in fully understanding and evaluating
this discussion and analysis:
Use of
Estimates:
Management
uses estimates and assumptions in preparing these financial statements in
accordance with accounting principles generally accepted in the United States of
America. Those estimates and assumptions affect the reported amounts of
assets and liabilities, the disclosure of contingent assets and liabilities, and
the reported revenues and expenses. Actual results could vary from the
estimates.
Contract
Revenue Recognition:
Revenue
on cost-plus-fee contracts is recognized to the extent of costs incurred plus a
proportionate amount of fees earned. Revenue on fixed-price contracts is
recognized on the percentage-of-completion method based on costs incurred in
relation to total estimated costs. Revenue on time-and-materials contracts
is recognized at contractual rates as hours and out of pocket expenses are
incurred. Anticipated losses on contracts are recognized in the period
they are first determined. In accordance with industry practice, amounts
relating to long-term contracts, including retainages, are classified as current
assets although an undeterminable portion of these amounts is not expected to be
realized within one year. Because of inherent uncertainties in estimating
costs, it is at least reasonably possible that the estimates used will change
within the near term.
Allowance
for Doubtful Accounts:
The
Company provides an allowance for doubtful accounts equal to the estimated
collection losses that will be incurred in collection of all receivables.
Estimated losses are based on historical collection experience coupled with a
review of the current status of existing receivables. There was no
allowance for doubtful accounts required at September 30, 2010 and December 31,
2009.
Long-Lived
Assets:
The
Company reviews for the impairment of long-lived assets and certain identifiable
intangibles whenever events or changes in circumstances indicate that the
carrying amount of any asset may not be recoverable. An impairment loss
would be recognized when the estimated undiscounted future cash flows expected
to result from the use of the asset and its eventual disposition is less than
the carrying amount. If impairment is indicated, the amount of the loss to
be recorded is based on an estimate of the difference between the carrying
amount and the fair value of the asset. Fair value is based upon
discounted estimated cash flows expected to result from the use of the asset and
its eventual disposition and other valuation methods.
Goodwill:
In
accordance with FASB ASC 350, “Intangibles – Goodwill and Other”, goodwill is
tested for impairment at least annually. An impairment loss of $1,000,000
was recognized for the period ended December 31, 2009 and an impairment loss of
$3,056,238 was recognized for the nine months ended September 30,
2010.
Income
Taxes:
Income
taxes are accounted for using the asset and liability method under FASB ASC 740,
“Accounting for Income Taxes”, whereby deferred tax assets and liabilities are
recognized for future tax consequences attributable to differences between the
financial statement carrying amounts of assets and liabilities, and their
respective tax basis, and operating loss and tax credit carry forwards.
Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on
deferred tax assets and liabilities due to a change in tax rates is recognized
as income in the period that includes the enactment date. Estimates of the
realization of deferred tax assets are based on the scheduled reversal of
deferred tax liabilities, projected future taxable income, and tax planning
strategies.
Stock
Based Compensation:
The
Company accounts for stock based compensation in accordance with FASB ASC
505-50, “Equity Based Payments to Non-Employees”. Under the fair value
recognition provisions of FASB ASC 505-50, the Company measures stock based
compensation cost at the grant date based on the fair value of the award and
recognizes expense over the requisite service period.
Fair
Value Measurements:
FASB ASC
820, Fair Value Measurements and Disclosures (“FASB ASC 820”), establishes a
framework for measuring fair value. That framework provides a fair value
hierarchy that prioritizes the inputs to valuation techniques 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 measurements) and
the lowest priority to unobservable inputs (level 3 measurements). The three
levels of the fair value hierarchy under FASB ASC 820 are described as
follows:
Level 1:
Inputs to the valuation methodology are unadjusted quoted prices for identical
assets or liabilities in active markets that the plan has the ability to
access.
Level 2:
Inputs to the valuation methodology include:
|
§
|
quoted
prices for similar assets or liabilities in active
markets;
|
|
§
|
quoted
prices for identical or similar assets or liabilities in inactive
markets;
|
|
§
|
inputs
other than quoted prices that are observable for the assets or
liability;
|
|
§
|
inputs
that are derived principally from or corroborated by observable market
data by correlation or other means.
|
If the
asset or liability has a specified (contractual) term, the level 2 input must be
observable for substantially the full term of the asset or
liability.
Level 3:
Inputs to the valuation methodology are unobservable and significant to the fair
value measurement.
The asset
or liability’s fair value measurement level within the fair value hierarchy is
based on the lowest level of any input that is significant to the fair value
measurement. Valuation techniques used need to maximize the use of
observable inputs and minimize the use of unobservable inputs.
The
following is a description of the valuation methodologies used for assets and
liabilities measured at fair value.
§
The
carrying values of accounts receivable, accounts payable, accrued expenses,
notes payable to former stockholders, and the line of credit payable approximate
fair value due to the short term maturities of these instruments.
§
Contingent
consideration payable is based on the revenues and earnings projections of
Innovative discounted by the rate of the seller note.
The
preceding methods described may produce a fair value calculation that may not be
indicative of net realizable value or reflective of future fair values.
Furthermore, although the Company believes its valuation methods are appropriate
and consistent with other market participants, the use of different
methodologies or assumptions to determine the fair value of certain financial
instruments could result in a different fair value measurement at the reporting
date.
The
Company has determined that the contingent consideration liability falls within
level three of the hierarchy.
Recent
Accounting Pronouncements:
Management
does not believe that any recently issued, but not yet effective accounting
standards, if adopted, will have a material effect on our financial
statements.
Results
of Operations
Comparison
of Three Month and Nine Month Periods Ended September 30, 2010
and 2009
The
following table sets forth the results of our operations for the periods
indicated:
|
|
Three Months
Ended September 30,
2010
(unaudited)
|
|
|
% of
Sales
|
|
|
Three Months Ended
September 30,
2009
(unaudited)
|
|
|
% of
Sales
|
|
|
Nine Months
Ended September 30,
2010
(unaudited)
|
|
|
% of
Sales
|
|
|
March 23 (inception)
through September 30,
2009
(unaudited)
|
|
|
% of
Sales
|
|
Contract
Revenue
|
|
$
|
1,407,778
|
|
|
|
100.0
|
|
|
|
2,005,340
|
|
|
|
100.0
|
|
|
|
4,629,952
|
|
|
|
100.0
|
|
|
|
4,412,451
|
|
|
|
100.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct
Costs
|
|
|
(695,439
|
)
|
|
|
(49.4
|
)
|
|
|
(1,246,959
|
)
|
|
|
(62.2
|
)
|
|
|
(2,203,099
|
)
|
|
|
(47.6
|
)
|
|
|
(2,622,072
|
)
|
|
|
(59.4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of Operations
|
|
|
(4,830,472
|
)
|
|
|
(343.1
|
)
|
|
|
(1,212,300
|
)
|
|
|
(60.5
|
)
|
|
|
(7,690,409
|
)
|
|
|
(166.1
|
)
|
|
|
(2,521,382
|
)
|
|
|
(57.1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
Loss
|
|
|
(4,118,133
|
)
|
|
|
(292.5
|
)
|
|
|
(453,919
|
)
|
|
|
(22.7
|
)
|
|
|
(5,263,556
|
)
|
|
|
(113.7
|
)
|
|
|
(731,003
|
)
|
|
|
(16.5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
income
|
|
|
515,000
|
|
|
|
36.6
|
|
|
|
|
|
|
|
|
|
|
|
1,875,754
|
|
|
|
40.5
|
|
|
|
5,199
|
|
|
|
0.12
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
Expense
|
|
|
(275,750
|
)
|
|
|
(19.6
|
)
|
|
|
(25,517
|
)
|
|
|
(1.3
|
)
|
|
|
(1,044,820
|
)
|
|
|
(22.6
|
)
|
|
|
(566,047
|
)
|
|
|
(12.8
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
Before Income Tax
|
|
|
(3,878,883
|
)
|
|
|
(275.5
|
)
|
|
|
(479,436
|
)
|
|
|
(24.0
|
)
|
|
|
(4,432,622
|
)
|
|
|
(95.7
|
)
|
|
|
(1,291,851
|
)
|
|
|
(29.2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
Tax Expense
|
|
|
-
|
|
|
|
-
|
%
|
|
|
-
|
|
|
|
-
|
%
|
|
|
-
|
|
|
|
-
|
%
|
|
|
-
|
|
|
|
-
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Loss
|
|
$
|
(3,878,883
|
)
|
|
|
(275.5
|
)
|
|
|
(479,436
|
)
|
|
|
(24.0
|
)
|
|
|
(4,432,622
|
)
|
|
|
(95.7
|
)
|
|
|
(1,291,851
|
)
|
|
|
(29.2
|
)
|
The
results for the nine months ended September 30, 2010 cannot be compared with the
same period in 2009 as the numbers presented are from March 23, 2009 (inception)
through September 30, 2009.
Contract Revenues.
Revenues for the three month period ended September 30, 2010 were
decreased by 42.4% over the previous year. The majority of this decrease
is attributed to short term contracts where the Company had sub contractors
supplying most of the work, thereby generating a very small margin to the
Company. It is our plan to replace these contracts with more profitable
contracts in the future.
Direct Costs.
Direct
costs decreased as a percentage of revenue for the reasons stated
above.
Costs of Operations.
The costs of operations include indirect contract costs, which are
reimbursed under the contracts, management fees paid to an affiliate and costs
not allocable to contracts. Overall, for the three months period ended
September 30, 2010, these expenses were increased by 298% from the previous
year. The largest increase in costs of operations was a goodwill
impairment expense of $3,056,238. Other costs included indirect contract
costs in the amount of $326,087 which were incurred by the Company’s affiliates,
Galen Capital Corporation and GCC, on behalf of the Company, and consisted
mainly of rent expense, consulting fees, and health care expenses, and costs not
allocable to contracts of $283,385 consisting mainly of marketing
expenses. Additionally, $41,525 which was previously lent to Galen and GCC
was deemed uncollectible and was written off during the three months ended
September 30, 2010.
Operating Loss.
The
Company increased its operating loss by 807% in the three months
ended September 30, 2010 from the previous year. The largest increase was
due to an increase in indirect contract costs as discussed above. Excluding the
one time expenses such as the write off of goodwill, the operating loss
increased by 134%.
Other Income.
Other
income for the three and nine months ended September 30, 2010 increased by
$515,000 and $1.8 million, respectively, due to a one time unrealized gain
on the fair value of consideration payable and a gain on debt extinguishment in
the amount of $1.36 million as a result of converting a note payable to former
stockholders into preferred stock, respectively.
Other Expenses.
Other
expenses for the three and nine month periods ended September 30, 2010 were made
up of interest expense and merger expenses.
Net Loss.
Our net loss
for the three and nine month periods ended September 30, 2010 was $3,878,883 and
$4,432,622, respectively. Excluding one time expenses such as goodwill
impairment, merger expenses, and one time gains on debt extinguishment and
consideration payable, the net loss for the three months and nine months ended
September 30, 2010 was $1,291,723 and $1,185,814, respectively.
Liquidity
and Capital Resources
Cash
Flows
Net cash
used in
operating
activities was $481,346 for the nine months ended September 30, 2010, while net
cash flow used in operating activities was $360,409 for the period March 23,
2009 (inception) through September 30, 2009.
Net cash
flow used in investing activities was $298,983 for the nine months ended
September 30, 2010 and $1,531,608 for the period March 23, 2009 (inception)
through September 30, 2009. These funds were used as payment for the
purchase of Innovative Logistics Techniques, Inc. and repayments of borrowings
from affiliates.
Net cash
flow provided by financing activities was $771,051 for the nine months ended
September 30, 2010 and $1,893,655 for the period March 23, 2009 (inception)
through September 30, 2009. Receipts of cash flow from financing
activities primarily consisted of borrowings from others, affiliates, and the
line of credit from a bank.
Material
Impact of Known Events on Liquidity
Other
than as discussed herein, there are no known events that are expected to have a
material impact on our short-term or long-term liquidity.
Capital
Resources
We have
financed our operations primarily through cash flows from operations and
borrowings. Since the Company is currently still operating at a negative
cash flow, continued short term borrowings are necessary to cover working
capital needs. Typically, these loans are provided by our affiliates
although they are under no obligation to provide funding to us.
Aside
from needing cash for our operations, we may require additional cash due to
changes in business conditions or other future developments, including any
investments or acquisitions we may decide to pursue. To the extent it
becomes necessary to raise additional cash in the future, we may seek to raise
it through the sale of debt or equity securities, funding from joint-venture or
strategic partners, debt financing or loans, issuance of common stock or a
combination of the foregoing. We currently do not have any binding
commitments for, or readily available sources of, additional financing.
However, we are in discussions with several sources for financing
commitments. We cannot provide any assurances that we will be able to
secure the additional cash or working capital we may require to continue our
operations.
At
September 30, 2010 we had cash on hand of zero. We will need
additional financing to fund our operations over the next 12 months. The
consolidated financial statements do not include any adjustments relating to the
recoverability and classification of asset carrying amounts or the amount and
classification of liabilities that might result should we be unable to continue
as a going concern. There are many delinquent claims and obligations, such
as payroll taxes, employee income tax withholdings, employee benefit plan
contributions, loans payable and accounts payable, that could ultimately cause
the Company to cease operations.
Because
of our historic net losses and low working capital position, our independent
auditors, in their report on our financial statements for the year ended
December 31, 2009, expressed substantial doubt about our ability to continue as
a going concern.
Contractual
Obligations and Off-Balance Sheet Arrangements
Loan
and Line of Credit
In March
2009, Innolog Holdings Corporation and Innovative Logistics Techniques, Inc.
entered into an agreement with eight individuals, some of which are directors of
the Company, to borrow up to $2,000,000 under a loan due on demand. The
loan is secured by the assets of both borrowers. In March 2009, Innolog
Holdings Corporation entered into a $500,000 line of credit with Eagle Bank due
on demand. The line of credit is guaranteed by eight individuals, some of
which are directors of the Company. The line of credit bears interest at
the prime rate plus 1%. At September 30, 2010, the interest rate was
5%. At September 30, 2010, both the loan and the line of credit were
outstanding in the amounts of $1,499,384 and $497,570,
respectively.
Seller
Note Payable and Earn Out Note Payable
In March
2009, when Innolog Holdings Corporation purchased Innovative Logistics
Techniques, Inc., part of the purchase price was financed with a Seller Note
Payable of $1,285,000 payable over three years. In May 2010 this note,
including accrued interest of $85,551, was converted into 1,000,000 shares of
Series A Preferred Stock with a fair value of $10,000. This resulted in a
gain on debt extinguishment of $1,360,551. In April 2009, the Company
issued a $900,000 earn out note payable to the former owners of
Innovative. This earn out is based on certain revenue and net income
targets over the next 3 years. The value of this earn out has been reduced
to zero as of September 30, 2010.
Loans
From Former Stockholder
As of
September 30, 2010 loans from a former stockholder totaled
$314,682.
Loans
From Related Parties
During
the three months ended September 30, 2010, we received loans totaling $500,000
from affiliates, of which $250,000 are still outstanding as of September 30,
2010.
Loans
From Individuals
During
the three months ended September 30, 2010, we borrowed $370,000 from various
individuals not related to us.
Contractual
Obligations
We have
certain fixed contractual obligations and commitments that include future
estimated payments. Changes in our business needs, cancellation
provisions, changing interest rates, and other factors may result in actual
payments differing from the estimates. We cannot provide certainty
regarding the timing and amounts of payments. We have presented below a
summary of the most significant assumptions used in our determination of amounts
presented in the tables, in order to assist in the review of this information
within the context of our consolidated financial position, results of
operations, and cash flows.
The
following table summarizes our contractual obligations as of September 30, 2010,
and the effect these obligations are expected to have on our liquidity and cash
flows in future periods.
|
|
Total
|
|
|
Less than 1
year
|
|
|
1-3 Years
|
|
|
3-5 Years
|
|
|
5 Years +
|
|
Contractual Obligations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bank
Indebtedness
|
|
$
|
497,570
|
|
|
|
497,570
|
|
|
|
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Other
Indebtedness
|
|
|
2,139,384
|
|
|
|
2,139,384
|
|
|
|
|
|
|
|
-
|
|
|
|
-
|
|
Operating
Leases
|
|
|
1,632,000
|
|
|
|
397,000
|
|
|
|
1,235,000
|
|
|
|
|
|
|
|
|
|
Totals:
|
|
$
|
4,268,954
|
|
|
|
3,033,954
|
|
|
|
1,235,000
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Off-Balance
Sheet Arrangements
We have
not entered into any other financial guarantees or other commitments to
guarantee the payment obligations of any third parties. We have not
entered into any derivative contracts that are indexed to our shares and
classified as stockholders’ equity or that are not reflected in our financial
statements. Furthermore, we do not have any retained or contingent
interest in assets transferred to an unconsolidated entity that serves as
credit, liquidity or market risk support to such entity. We do not have
any variable interest in any unconsolidated entity that provides financing,
liquidity, market risk or credit support to us or engages in leasing, hedging or
research and development services with us.
Item
3: Quantitative and Qualitative Disclosures about Market Risk
As a
smaller reporting company we are not required to provide this
information.
Item
4: Controls and Procedures.
Evaluation
of Disclosure Controls and Procedures
As of
September 30, 2010, we carried out an evaluation, under the supervision of and
with the participation of our chief executive officer and chief financial
officer, of the effectiveness of the design and operation of our disclosure
controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the
Securities Exchange Act of 1934, as amended (the “Exchange Act”)).
Disclosure controls and procedures are designed to ensure that information
required to be disclosed in the reports we file or submit under the Exchange Act
is recorded, processed, summarized and reported within the time periods
specified in the SEC’s rules and forms, and that such information is accumulated
and communicated to our management, including our chief executive officer and
chief financial officer, to allow timely decisions regarding required
disclosures.
Based on
that evaluation, our chief executive officer and chief financial officer has
concluded that as of September 30, 2010, our disclosure controls and procedures
were effective.
Changes
in Internal Controls
During
the quarter covered by this report, there was no change in our internal control
over financial reporting (as defined in Rule 13a-15(f) of the Exchange Act) that
has materially affected, or is reasonably likely to materially affect, our
internal control over financial reporting.
PART
II - OTHER INFORMATION
Item
1: Legal Proceedings.
Not
applicable.
Item
1A: Risk Factors.
As a
smaller reporting company we are not required to provide this
information.
Item
2: Unregistered Sales of Equity Securities and Use of Proceeds.
On August
13, 2010, and as more fully described in the Current Report on Form 8-K that we
filed with the Securities and Exchange Commission on August 16, 2010, as it was
amended, in connection with the consummation of the merger pursuant to which we
acquired all of the equity interests of Innolog Holdings Corporation (“IHC”), we
issued 8,882,455 shares of our common stock and 36,964,758 shares of our
Series A Preferred Stock to the IHC stockholders in exchange for 100% of the
capital stock of IHC. We also issued 44,351,857 warrants to purchase
common stock in exchange for 44,351,857 warrants to purchase IHC common
stock. The issuance of the common stock to the IHC stockholders was exempt
from registration under the Securities Act of 1933, as amended, pursuant to
Section 4(2) and Regulation D thereof. We made this determination based on
the representations of the IHC stockholders which included, in pertinent part,
that all but nine of the stockholders were accredited investors within the
meaning of Rule 501 of Regulation D promulgated under the Securities Act.
Of the nine stockholders indicating they were not accredited investors, they
represented that they were sophisticated investors or were represented by
purchaser representatives that were sophisticated investors. All persons
were provided disclosure statements in compliance with Rule 506 and Regulation
D. All IHC stockholders represented that they were acquiring our
securities for investment purposes for their own respective accounts and not as
nominees or agents and not with a view to the resale or distribution thereof,
and that each owner understood that the securities may not be sold or otherwise
disposed of without registration under the Securities Act or an applicable
exemption therefrom.
On August
11, 2010, the Executive Committee of the Board of Directors approved the
issuance of 400,000 shares of the Company’s Series A Convertible Preferred Stock
to a lender in consideration of a loan and consulting services provided to the
Company. It was determined that the shares had no value at the
time of issue. We relied on Section 4(2) of the Securities Act of 1933, as
amended, as providing an exemption from registering the sale of these securities
because the investor was an accredited investor and represented his intention to
acquire the securities for investment only and not with a view to distribute or
sell the securities. No general advertising or solicitation was used in
selling the securities.
Item
3: Defaults Upon Senior Securities.
Loans
from a former shareholder in the amount of $289,682 plus accrued interest of
$89,900, loans from affiliates in the amount of $220,000 plus accrued interest
of $51,500, and loans from individuals in the amount of $145,000 plus accrued
interest of $12,613 have matured and are in default. As of the date of
this filing, none of the noteholders has made a demand for
repayment.
Item
4: Removed and Reserved.
Item
5: Other Information.
Not
applicable.
Item
6: Exhibits.
EXHIBIT
|
|
DESCRIPTION
|
|
|
|
2.1
|
|
Amended
and Restated Merger Agreement by and among the Company and
Innolog Holdings Corporation as amended dated August 11, 2010
(2)
|
|
|
|
2.2
|
|
Articles
of Merger between GCC Merger Sub Corporation and Innolog Group Corp. filed
with the Secretary of State of Nevada on August 18, 2010
(3)
|
|
|
|
3.1
|
|
Articles
of Incorporation
(1)
|
|
|
|
3.2
|
|
Bylaws
(2)
|
|
|
|
3.3
|
|
Certificate
of Amendment to the Articles of Incorporation
(2)
|
|
|
|
4.1
|
|
Certificate
of Designation of Preferences, Rights and Limitations of Series A
Convertible Preferred Stock
(2)
|
|
|
|
10.1
|
|
Promissory
Note in the principal amount of $20,000 issued by Innolog Holdings
Corporation in favor of Ram Agarwal dated July 9, 2010
(2)
|
|
|
|
10.2
|
|
Promissory
Note in the principal amount of $100,000 issued by Innolog Holdings
Corporation in favor of James Warring dated July 13, 2010
(2)
|
|
|
|
10.3
|
|
Promissory
Note in the principal amount of $34,500 issued by Innolog Holdings
Corporation in favor of Thomas Jackson dated July 20, 2010
(2)
|
|
|
|
10.4
|
|
Promissory
Note in the principal amount of $65,500 issued by Innolog Holdings
Corporation in favor of Robert Hacker dated July 20, 2010
(2)
|
|
|
|
10.5
|
|
Promissory
Note in the principal amount of $25,000 issued by Innolog Holdings
Corporation in favor of John Morrison dated July 21, 2010
(2)
|
|
|
|
10.6
|
|
Promissory
Note in the principal amount of $125,000 issued by Innolog Holdings
Corporation in favor of Melvin D. Booth dated July 8, 2010
(2)
|
|
|
|
10.7
|
|
Promissory
Note in the principal amount of $125,000 issued by Innolog Holdings
Corporation in favor of Galen Capital Group, LLC dated July 21, 2010
(2)
|
|
|
|
10.8
|
|
Amendment
to Engagement Letter between Emerging Companies LLC and Innolog Holdings
Corporation dated July 29, 2010
(2)
|
|
|
|
10.9
|
|
Promissory
Note dated August 11, 2010 in the principal amount of $75,000 issued by
Innovative Logistics Techniques, Inc. in favor of Farzin
Ferdowsi*
|
|
|
|
10.10
|
|
Secured
Promissory Note and Settlement Agreement dated September 15, 2010 in the
principal amount of $45,000 issued by Innolog Holdings Corporation,
Innovative, Logistics Techniques, Inc., Galen Capital Corporation, Galen
Capital Group, LLC and GCC Capital Group, LLC in favor of Kay M. Kumbinner
Trust*
|
|
|
|
10.11
|
|
Promissory
Note dated August 12, 2010 in the principal amount of $50,000 issued by
Innolog Holdings Corporation in favor of Ian
Reynolds*
|
|
|
|
10.12
|
|
Promissory
Note dated August 12, 2010 in the principal amount of $25,000 issued by
Innolog Holdings Corporation in favor of Verle
Hammond*
|
|
|
|
10.13
|
|
Promissory
Note dated August 24, 2010 in the principal amount of $50,000 issued by
Innolog Holdings Corporation in favor of Evan
Morris*
|
|
|
|
10.14
|
|
Promissory
Note dated August 30, 2010 in the principal amount of $25,000 issued by
Innolog Holdings Corporation in favor of Isabelle
Chester*
|
|
|
|
31.1
|
|
Rule
13a-14(a)/15d-14(a) Certification of Chief Executive
Officer*
|
|
|
|
31.2
|
|
Rule
13a-14(a)/15d-14(a) Certification of Principal Financial Officer and
Principal Accounting Officer *
|
|
|
|
32.1
|
|
Section
906 Certificate of Chief Executive Officer, Principal Financial Officer
and Principal Accounting Officer
*
|
* Filed
herewith.
(1) Filed
with the Securities and Exchange Commission on February 12, 2007 as an exhibit
to the Company’s registration statement on Form SB-2 and incorporated herein by
reference.
(2) Filed
with the Securities and Exchange Commission on August 16, 2010 as an exhibit to
the Company’s Current Report on Form 8-K and incorporated herein by
reference.
(3) Filed
with the Securities and Exchange Commission on October 15, 2010 as an exhibit to
the Company’s Amendment No. 3 to Current Report on Form 8-K and incorporated
herein by reference.
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
|
INNOLOG
HOLDINGS CORPORATION
|
|
|
|
Dated:
November 22,
2010
|
By:
|
/s/ William P.
Danielczyk
|
|
|
|
|
Name:
|
William
P. Danielczyk
|
|
Title
:
|
Executive
Chairman of the Board
|
|
|
Principal
Executive Officer
|
|
|
|
Dated:
November 22,
2010
|
By:
|
/s/ Michael J. Kane
|
|
Name:
|
Michael
J. Kane
|
|
Title:
|
Treasurer
|
|
|
Principal
Financial
Officer
|