- Quarterly Report (10-Q)

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, 2011or

o 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 o

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

o 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.

15,129,973 shares of common stock, $0.001 par value, outstanding on November 18, 2011.

INNOLOG HOLDINGS CORPORATION

REPORT ON FORM 10-Q

QUARTER ENDED September 30, 2011

TABLE OF CONTENTS

PART I - FINANCIAL INFORMATION		Page Number

Item 1. Financial Statements (Unaudited)		3

Condensed Consolidated Balance Sheets – September 30, 2011 and December 31, 2010		3

Condensed Consolidated Statements of Operations For the Three Months and Nine Months Ended September 30, 2011 and 2010		4

Condensed Consolidated Statements of Cash Flows For the Nine Months Ended September 30, 2011 and 2010		5

Notes to Condensed Consolidated Financial Statements		7

Forward-Looking Statements		25

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		25

Item 3. Quantitative and Qualitative Disclosures About Market Risk		31

Item 4. Controls and Procedures		31

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		35

PART I – FINANCIAL INFORMATION

Item 1: Financial Statements.


INNOLOG HOLDINGS CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
AS OF SEPTEMBER 30, 2011 AND DECEMBER 31, 2010

	September 30, 2011			December 31, 2010
	(Unaudited)
ASSETS
Current Assets
Accounts receivable, net	$	360,688		$	741,478
Prepaid expenses and other current assets		11,063			32,565
Total Current Assets		371,751			774,043

Property and equipment, net		23,595			23,702
Other assets		67,580			11,633
Total Assets	$	462,926		$	809,378

LIABILITIES AND STOCKHOLDERS' DEFICIENCY

Current Liabilities
Cash overdraft	$	116,049		$	61,223
Line of credit, bank		497,570			497,570
Accounts payable		2,334,610			2,253,197
Accrued salaries and benefits		2,936,295			2,113,327
Accrued interest		459,247			193,740
Other accrued liabilities		1,090,515			1,228,279
Accrued contract loss		-			47,782
Deferred rent		24,495			33,258
Notes payable, others		881,500			471,905
Notes payable, affiliates		2,475,734			2,235,734
Total current liabilities		10,816,015			9,136,015


COMMITMENTS

Stockholders' Deficiency
Common stock, $0.001 par value, 200,000,000 shares authorized; 15,129,973 and 13,629,973 shares issued and outstanding at September 30, 2011 and December 31, 2010, respectively		15,130			13,630
Preferred stock, $0.001 par value; 50,000,000 shares authorized; 36,894,758 and 37,394,758 shares issued and outstanding at September 30, 2011 and December 31, 2010, respectively		36,895			37,395
Additional paid in capital		1,015,323			862,923
Accumulated deficit		(11,420,437	)		(9,240,585	)
Total Stockholders' Deficiency		(10,353,089	)		(8,326,637	)

Total Liabilities and Stockholders' Deficiency	$	462,926		$	809,378

INNOLOG HOLDINGS CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 2011 AND
FOR THE THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 2010
(UNAUDITED)


	For the three months ended September 30, 2011			For the three months ended September 30, 2010 (as restated)			For the nine months ended September 30, 2011			For the nine months ended September 30, 2010 (as restated)

Revenues	$	1,139,166		$	1,407,778		$	3,731,666		$	4,629,952

Operating expenses
Direct costs		561,119			695,439			1,768,817			2,203,099
Operating expenses		1,269,695			1,347,271			3,646,129			3,648,928
Management fees, affiliate		-			241,800			-			724,490
Bad debt expense, affiliate		-			185,163			27,000			185,163
Impairment of goodwill		-			3,056,238						3,056,238
Total operating expenses		1,830,814			5,525,911			5,441,946			9,817,918

Loss from operations		(691,648	)		(4,118,133	)		(1,710,280	)		(5,187,966	)

Other Income (Expenses)
Gain on debt extinguishment		-			-			-			1,360,551
Other income					33						203
Merger expenses		-			(45,922	)		-			(705,570	)
Legal Settlement		-			-			586,510			-
Interest expense		(401,830	)		(229,828	)		(1,056,082	)		(339,250	)
Unrealized Gain on fair value of consideration payable					515,000						515,000
Total other income (expenses)		(401,830	)		239,283			(469,572	)		830,934

Loss before income tax provision		(1,093,478	)		(3,878,850	)		(2,179,852	)		(4,357,032	)

Income tax provision		-			-			-			-

Net Loss	$	(1,093,478	)	$	(3,878,850	)	$	(2,179,852	)	$	(4,357,032	)

Loss per share - basic and diluted	$	(0.08	)		(0.28	)		(0.15	)		(0.32	)

Weighted average number of shares		14,307,629			13,629,774			14,307,629			13,629,774

INNOLOG HOLDINGS CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2011 AND
FOR NINE MONTHS ENDED SEPTEMBER 30, 2010
(UNAUDITED)


	For the nine months			For the nine months
	ended September 30,			ended September 30,
	2011			2010 (as restated)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss	$	(2,179,852	)	$	(4,357,032	)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization		1,435			17,095
Amortization of debt issuance cost		-			12,000
Stock based compensation		153,400			-
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		-			185,163
Accrued loss on contracts		(47,782	)		-
Changes in assets and liabilities:
Accounts receivable		380,790			587,641
Prepaid expenses and other assets		(34,445	)		(24,778	)
Deferred rent		(8,763	)		33,854
Due to related party		-			79,770
Accounts payable and accrued expenses		1,032,124			1,504,645

Net cash used in operating activities		(703,093	)		(429,307	)

CASH FLOWS FROM INVESTING ACTIVITIES:
Advances to affiliates		-			(185,163	)
Property and equipment purchased		(1,328	)		(30,345	)

Net cash used in investing activities		(1,328	)		(215,508	)

CASH FLOWS FROM FINANCING ACTIVITIES:
Cash overdraft		54,826			-
Borrowings on notes payable,others		1,082,500			370,000
Repayments on notes payable,others		(677,905	)		-
Borrowings on notes payable, affiliates		764,000			815,486
Repayments on notes payable, affiliates		(519,000	)		(549,949	)

Net cash provided by financing activities		704,421			635,537

NET CHANGE IN CASH		-			(9,278	)

CASH - BEGINNING OF PERIOD		-			9,278

CASH - END OF PERIOD	$	-		$	-

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest	$	757,625		$	179,125

INNOLOG HOLDINGS CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CASH FLOWS (CONTINUED)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2011 AND
FOR NINE MONTHS ENDED SEPTEMBER 30, 2010
(UNAUDITED)

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.

During the nine months ended September 30, 2010, the Company entered two credit notes totaling $359,405. Of this amount, $279,636 was recorded as a dividend to Galen.

INNOLOG HOLDINGS CORPORATION AND SUBSIDIARY

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 1: Basis of Presentation

The accompanying unaudited condensed financial statements of Innolog Holdings Corporation, and its wholly owned subsidiary, have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission for Form 10-Q. Accordingly, certain information and footnote disclosures, normally included in financial statements prepared in accordance with generally accepted accounting principles, have been condensed or omitted pursuant to such rules and regulations.

In the opinion of management, these financial statements reflect all normal recurring and other adjustments necessary for a fair presentation, and to make the financial statements not misleading. These financial statements should be read in conjunction with the audited consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2010. Operating results for interim periods are not necessarily indicative of operating results for the entire fiscal year or any other future periods.

Note 2: Organization and Nature of Business

Innolog Holdings Corporation (“Holdings” or “Innolog”) was formed as a holding company on March 23, 2009 for the purpose of acquiring companies that provide services primarily to federal government entities. Its wholly owned subsidiaries are Innolog Group Corporation and 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., 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 3, 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 became the controlling stockholders of uKarma and the business of Holdings continued. Under this transaction, Innolog Holdings Corporation's name was changed to Innolog Group Corporation and became a wholly owned subsidiary of uKarma Corporation. uKarma Corporation's name was changed to Innolog Holdings Corporation.

Innolog Holdings Corporation and its wholly owned subsidiary are referred to herein as the “Company.”

Note 3: 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 stockholders 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 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 also paid 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 8,882,545 shares of common stock of uKarma and 36,964,758 restricted shares of convertible Series A Preferred Stock to the Innolog Owners. Immediately prior to the Merger Agreement transaction, uKarma had 4,747,428 shares of common stock issued and outstanding. Immediately after the issuance of the shares to the Innolog Owners, uKarma had 13,629,973 shares of common stock issued and outstanding and 36,964,758 shares of convertible Series A preferred stock issued and outstanding.

As a result of the Acquisition, Holdings’ stockholders became the controlling stockholders, 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. Effective at merger, 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 stockholders of uKarma holding a majority of the then outstanding common stock approved a spin-off of AL equity securities to uKarma’s common stockholders of record as of August 12, 2010. 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 Financial Accounting Standards Board ( “ FASB ” ) Accounting Standards Codification (“ASC”) 805, “Business Combinations.” 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.

Note 4: 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 since inception, and had a stockholders’ deficiency (defined as total assets minus total liabilities) of $10,353,089 and $8,326,637 at September 30, 2011 and December 31, 2010, respectively. There are delinquent claims and obligations, such as payroll taxes, employee income tax withholdings, employee benefit plan contributions, delinquent 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, 2010 consolidated financial statements states that there is substantial doubt about the Company’s ability to continue as a going concern.

On August 11, 2011, the Company entered into an engagement with DME Securities LLC. , a registered broker/dealer as the exclusive placement agent and financial advisor to the company in connection with up to $10,000,000 in debt/equity financing. In addition, DME will work with the Company regarding M&A targets, to perform the due diligence on these targets, and to advise the Company on potential up listing to either the American Stock Exchange or Nasdaq.

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 as outlined by the engagement of DME will help to revise the Company’s operating and financial requirements.

Note 5: Summary of Significant Accounting Policies

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.

Reclassifications:

Certain items in prior financial statements are reclassified to conform to the current presentation.

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:

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.

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.

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. Goodwill was written off during the nine months ended September 30, 2010.

Income Taxes:

The Company files a consolidated federal income tax return. Income taxes are accounted for using the asset and liability method under FASB ASC 740, “ Income Tax”, 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.

The Company applies the provisions of FASB ASC 740, 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 to be sustained on a tax return upon examination by the relevant taxing authority, based on the technical merits of the position. At September 30, 2011, the Company has no unrecognized tax benefits.

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:

Debt issurance costs are capitalized and amortized over the term of the related loan.

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 .

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 that was part of the acquisition of Innovative in 2009, falls within level three of the hierarchy. The balance was written down to zero during 2010.

Earnings (loss) per Share:

Basic earnings (loss) per share (“EPS”) is computed by dividing net income (loss) available to common stockholders by the weighted average number of common shares outstanding during the period, excluding the effects of any potentially dilutive securities. Diluted EPS gives effect to the dilutive potential of shares of common stock outstanding during the period including stock options or warrants, using the treasury stock method (by using the average stock price for the period to determine the number of shares assumed to be purchased from the exercise of stock options or warrants), and convertible debt or convertible preferred stock, using the if-converted method. Diluted EPS excludes the dilutive potential of shares of common stock if their effect is anti-dilutive.

The computation of basic and diluted loss per share for the three and nine months ended September 30, 2011 and September 30, 2010 is equivalent since the Company reported a net loss and the effect of any common stock equivalents would be anti-dilutive.

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 6: Major Customers

Revenues from prime contracts and subcontracts with U.S. Government agency customers in aggregate accounted for 100% of total revenues for the nine months ended September 30, 2011 and September 30, 2010.

Note 7: Accounts Receivable

Accounts receivable consisted of the following as of September 30, 2011 and December 31, 2010:

	September 30, 2011			December 31, 2010
Billed receivables	$	482,622		$	672,466
Unbilled receivables (billings in excess of earnings)		(86,344	)		158,124
Reserve for bad debts		(35,590	)		(89,112	)
	$	360,688		$	741,478

Contract receivables from prime contracts and subcontracts with U.S. Government agency customers in aggregate accounted for 100% of total contract receivables at September 30, 2011 and December 31, 2010.

Note 8: Line of Credit

On June 14, 2011, Holdings renewed a credit agreement with Eagle Bank under which it may borrow up to $500,000. Borrowings under the agreement are guaranteed by seven individuals, who are directly or indirectly related to Holdings. The borrowings are due on July 15, 2012, if not demanded earlier. Interest is payable monthly at the bank’s prime rate (as defined) plus 1%. At September 30, 2011, the interest rate was 5.25%.

Note 9: Notes Payable, Others

As of September 30, 2011 and December 31, 2010, $881,500 and $471,905 were outstanding, respectively, on notes payable to individuals, trusts, and corporations not related to the Company, of which maturity dates vary from October 11, 2010 to November 8, 2011. Some of the notes are collateralized by the Company’s accounts receivable. Interest charges are a percentage per annum or a flat fee as detailed in each note. For new notes during 2011, the lenders were granted warrants to purchase 3,240,000 shares of Innolog common stock at a strike price ranging from $0.01 per share to $0.50 per share. The value of these warrants was $16,660. The entire amount was charged to expense during the nine months ended September 30, 2011. In addition, for one of the notes in the amount of $100,000, the lender received 452,000 shares of Series A Convertible Preferred Stock and for other notes totaling $150,000 the lender received 500,000 shares of common stock from the former sole stockholder of the Company, Galen. In exchange, the Company issued 1,000,000 shares of its common stock to Galen. The value of these shares was $64,700 on the date of the loan. The entire amount was charged to expense during the nine months ended September 30, 2011 since the loan was due in March 2011. Of these loans, $706,500 have matured and are in default. Additional interest and late fees are due upon default as defined in each note.

Note 10: Related Party Transactions

Notes Payable, affiliates:

Holdings and Innovative (the “Borrowers”) have entered into an agreement (the “Loan Agreement”) with seven 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, 2011 and December 31, 2010 amounted to $1,499,384, collateralized by substantially all assets of the 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 has a maturity date of July 15, 2012 if not demanded earlier and interest was 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. At September 30, 2011, the interest rate was 5.25%. In addition to the interest due to the bank, on June 22, 2011, the Company granted warrants to the Lenders under which they may purchase 4,500,000 common shares of the Company’s common stock, with a strike price of $0.06 per share. The warrants expire on June 30, 2016. The fair value of these warrants amounted to $45,000 and was amortized to interest expense during the nine months ended September 30, 2011. Additional interest incurred on this loan amounted to approximately $59,000 and $56,000 during the nine months ended September 30, 2011 and 2010.

In March 2010, Galen assigned a note payable due to a director of the Company in the amount of $325,000 to the Company. Of this amount $279,636 was treated as a dividend to Galen, which was the sole stockholder at the time, and $45,364 related to expenses incurred by Galen on behalf of the Company. This note was due on June 30, 2010. In March 2011, the note was amended. Principal and interest of $32,500 are due on or prior to the maturity date of March 21, 2012. Warrants to purchase 325,000 of the Company’s common stock at a strike price of $.50 were granted in conjunction with this note. There was no interest incurred on this note during the nine months ended September 30, 2010. A total of $32,500 of interest was accrued during the nine months ended September 30, 2011. This loan and due from former stockholders are included in the totals below.

As of September 30, 2011 and December 31, 2010, $976,350 and $736,350 were outstanding, respectively, on their notes payable to related parties. Maturity dates vary from July 9, 2011 to March 21, 2012. These parties were granted warrants to purchase 500,000 shares of Innolog common stock. The strike price to purchase the common stock ranges from $0.06 to $0.50 per share with a 5 year expiration date. Interest is charged at a flat fee, as defined in each agreement. Additional interest and late fees are due upon default. Of these notes, $422,350 were in default as of September 30, 2011. Total interest and fees incurred on these notes amounted to $180,467 during the nine months ended September 30, 2011. Total interest and fees accrued on these notes amounted to $172,725 and $37,705 as of September 30, 2011 and December 31, 2010.

Management Fees, Affiliate:

Pursuant to an Executive Management Agreement with Galen entered into on April 1, 2009, the Company was being charged a management fee of $100,000 per month limited to 15% of the gross revenue of the Company for each twelve month period, effective with the consummation of the agreement. Management fees amounted to zero and $724,490 during the nine months ended September 30, 2011 and 2010, respectively. In addition, during the nine months ended September 30, 2010, Galen charged the Company $832,673 for costs incurred by Galen in excess of the management fees. The agreement expired on September 30, 2010.

Dividends to Galen:

In April 2009, the Company 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. As of December 31, 2009, amounts due to three of the Company’s affiliates under common control amounted to $521,189. There was no interest charged on these payables and no scheduled due date. As of December 31, 2009, these amounts were offset and $218,811 was presented as an offset to equity. In June 2010, the $740,000 due under the note receivable was forgiven, and the amount due to affiliates was offset against the $740,000 and treated as a dividend during 2010 since all of these amounts related to the Company’s sole stockholder or affiliates under common control at the time.

During the nine months ended September 30, 2010, net advances to Galen amounted to $832,673 and represented operating expenses incurred by Galen on behalf of Innolog, mainly consisting of consulting fees, payroll, rent expense, and health care expense. Thus, this amount was charged to expense by the Company during the nine months ended September 30, 2010.

Consulting Agreement:

In May 2010, Emerging Companies, LLC entered into an agreement with the Company to provide consulting services to the Company relating to merger and acquisition transactions, interfacing with the public markets and other advisors, and other core business advisory services. Two of the Company’s executive officers and directors are members of Emerging Companies, LLC. On July 29, 2010, the agreement was amended so that the advisor was granted warrants to purchase 500,000 shares of the Company’s common stock at $.50 per share.

Legal Fees:

During the nine months ended September 30, 2011, the Company incurred legal fees in the amount of $195 ,000 on behalf of its executive officer in defense of an investigation by a governmental agency.

Note 11: Commitments and Contingencies

Leases:

The Company leases office space in Washington, D.C.; Orlando, Florida; Fairfax, Virginia; and Brentwood, Tennessee 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, 2011 are approximately as follows:

Year ending December 31,
2011	$	75,000
2012		294 ,000
2013		202,000
2014		174,000
2015		178,000
Thereafter		121,000
	$	1,044,000

Total rent expense amounted to $229,720 and $752,873 for the nine months ended September 30, 2011 and 2010, respectively.

In 2010, Innovative vacated its office space prior to expiration of the lease. 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. On February 14, 2011, Innovative entered into a settlement agreement in which it agreed to a payment of $350,000 on May 31, 2011. In the event Innovative did not make the payment timely, it agreed to a confessed judgment in the amount of $936,510 and this amount was included in other accrued liabilities on the balance sheet as of March 31, 2011 and December 31, 2010. In July 2011 , the settlement agreement was amended to extend the $350,000 payment to August 8, 2011. The entire $350,000 was paid in full by August 8, 2011. As such, $586,510 was recognized as a gain from legal settlement during the nine months ended September 30, 2011.

Late Deposit of Payroll Taxes and Employee Income Tax Withholdings:

During 2011, 2010, and part of 2009, the Company has not made deposits of federal and state employer payroll taxes, as well as employee income tax withholdings. As of September 30, 2011 and December 31, 2010, the total of payroll tax accrued and income tax withheld balances including penalties and interest, amounted to $3,426,815 and $1,791,250, respectively. The Company is currently in discussions with the taxing authorities to develop a payment plan. On March 17, 2011 the taxing authorities filed a notice of federal tax lien in the amount of $321,494 in Fairfax, VA.

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, 2011, the total commitment, excluding incentives, was $495,000.

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.

Delinquent payables

The Company has been delinquent in numerous payables to different parties of which some filed lawsuits against the Company. All necessary accruals have been made as of September 30, 2011 and December 31, 2010 and are included in accounts payable and other accrued liabilities.

Note 12: 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, 2011, the Company had ne t operating loss carry forwards of approximately $7.2 million for federal and Virginia state tax purposes expiring through 2030 .

The Company has not filed its 2010 Federal and State income tax returns, and is delinquent in such filings.

The Company recognizes interest and penalties related to income tax matters in interest expense and operating expenses, respectively. As of September 30, 2011, the Company has no accrued interest and penalties related to uncertain tax positions.

Note 13: 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 were no employer contributions for the nine months ended September 30, 2011 and 2010.

Innovative has been late in making deposits of employee deferrals in the amount of $181,500. 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 14: 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 8,882,545, and increasing the par value of each share to $0.0023.

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 13,629,973 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.

During the nine months ended September 30, 2011, 500,000 shares of preferred stock were converted to 500,000 shares of common stock, and 1,000,000 shares of common stock were issued in connection with a note payable. See note 9.

As of September 30, 2011, there were 15,129,973 shares of common stock outstanding .

Preferred Stock:

The Company has authorized 50,000,000 shares of preferred stock, with a par value of $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.

During the nine months ended September 30, 2011, 500,000 shares of preferred stock were converted to 500,000 shares of common stock.

As of September 30, 2011, there were 36,894,758 shares of Series A Stock outstanding and no dividends have been accrued .

Dividends:

During the nine months ended September 30, 2010, the Company assumed two notes payable from Galen totaling $359,405. Of this amount, $279,636 was recorded as dividends to Galen.

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 10). The warrants had an exercise price of $0.01 per share 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 December 31, 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.