Item 7.
Management’s
Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis
of our results of operations and financial condition for the fiscal years ended December 31, 2012 and 2011 should be read in conjunction
with our consolidated financial statements and the notes to those consolidated financial statements that are included elsewhere
in this report.
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, and we have one additional office
located in Washington D.C.
The federal government
is the largest consumer of services and solutions in the United States. Given the current focus on the nation’s increasing
debt levels, the rate of growth in federal spending is not expected to grow as rapidly as it has over the last 10 years. However,
we believe that the federal government’s spending will continue to increase, albeit at a slower pace, driven by the expansion
of national security and homeland security programs, the continued need for sophisticated intelligence gathering and information
sharing, increased reliance on technology service providers due to shrinking ranks of government technical professionals, the continuing
impact of federal procurement reforms and the need to identify cost reductions and increase agency efficiencies. For example, federal
government spending on information technology has consistently increased each year since 1980. INPUT, an independent federal government
market research firm, expects this trend to continue. Federal government spending on information technology increased from approximately
$76 billion in federal fiscal year 2009 to $84 billion in federal fiscal year 2011 and is projected to increase to $91 billion
in federal fiscal year 2016. 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 we believe 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
Our management’s
discussion and analysis of our financial condition and results of operations are 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 3 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:
Cash and cash equivalents:
For the purpose of
the statements of cash flows, we consider all highly liquid investments purchased with original maturities of three months or less
to be cash equivalents.
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 review of the current status of
existing receivables.
The allowance for doubtful accounts amounted to $46,566 and $35,590 at December 31, 2012 and 2011,
respectively.
Long-Lived Assets:
The Company follows
Accounting Standards Codification subtopic 360-10, Property, Plant and Equipment (“ASC 360-10”). ASC 360-10 requires
those long-lived assets and certain identifiable intangibles held and used by the Company be
reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of any asset may not
be recoverable. Events relating to recoverability may include significant unfavorable changes in business conditions, recurring
losses, or a forecasted inability to achieve break-even operating results over an extended period.
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. The Company
did not recognized an impairment loss during the year ended December 31, 2012 and 2011.
Income Taxes:
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 to be 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 December 31, 2012, the Company has no unrecognized tax benefits.
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.
Stock Based Compensation:
The Company follows
Accounting Standards Codification subtopic 718-10, Compensation (ASC 718-10”) which requires that all share-based payments
to both employees and non employees be recognized in the income statement based on their fair values at the grant date 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.
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 consolidated
financial statements.
Results of Operations
Comparison of Years Ended December 31, 2012 and 2011
The following table
sets forth the results of our operations for the periods indicated as a percentage of net sales:
|
|
Year Ended
|
|
|
|
|
|
Year Ended
|
|
|
|
|
|
|
December 31,
|
|
|
% of
|
|
|
December 31,
|
|
|
% of
|
|
|
|
2012
|
|
|
Sales
|
|
|
2011
|
|
|
Sales
|
|
Contract revenue
|
|
$
|
5,103,110
|
|
|
|
100
|
%
|
|
$
|
4,770,738
|
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct costs
|
|
|
3,001,953
|
|
|
|
58.8
|
%
|
|
|
2,315,856
|
|
|
|
48.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other operating expenses
|
|
|
3,954,771
|
|
|
|
77.5
|
%
|
|
|
4,598,017
|
|
|
|
96.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bad debts, affiliate
|
|
|
-
|
|
|
|
-
|
|
|
|
29,672
|
|
|
|
0.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating loss
|
|
|
(1,853,614
|
)
|
|
|
(36.3
|
)%
|
|
|
(2,172,807
|
)
|
|
|
(45.5
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income
|
|
|
80,839
|
|
|
|
1.6
|
%
|
|
|
586,510
|
|
|
|
12.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other expenses
|
|
|
(3,112,915
|
)
|
|
|
(61.0
|
)%
|
|
|
(1,441,492
|
)
|
|
|
(30.2
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before income tax
|
|
|
(4,885,690
|
)
|
|
|
(95.7
|
)%
|
|
|
(3,027,789
|
)
|
|
|
(63.5
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expense
|
|
|
-
|
|
|
|
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(4,885,690
|
)
|
|
|
(95.7
|
)%
|
|
$
|
(3,027,789
|
)
|
|
|
(63.5
|
)%
|
Contract Revenues.
Revenues for the twelve months period ended December 31, 2012 increased almost 7% over the previous year as the company has started
to generate additional revenue from new and old contracts and from equipment and hardware sales purchased on behalf of our customers.
On September 26,
2012 the Company was informed that it did not win the re-compete of its Army contract. The company filed a protest and on
November 9, 2012 was informed that the Army is taking corrective action. Instead of moving forward with the award to the
other company, the Army intends to reevaluate the proposals and make another source selection decision, which results in
Innolog being back in competition as a candidate to win the re-compete. As of this date the Company has not had any
communications on the results.
On March 6, 2013, the
management of Innovative Logistics Techniques, Inc., a wholly owned subsidiary of Innolog Holdings Corporation (the “Registrant”), received
a letter from the Department of the Navy notifying the company that contract N00173-08-C-2042 was expiring on April 30, 2013 and
was not being renewed.
Direct Costs.
Direct costs increased as a percentage of revenue for the twelve months ended December 31, 2012 due to better allocation of direct
costs to contracts versus the previous year and in the mix of contracts with a lower gross margin.
Other Operating
Expenses.
Operating expenses include indirect contract costs and costs not allocable to contracts. For the twelve months ended
December 31, 2012 and 2011 these expenses included increased penalties relating to the non- payment of various payroll taxes and
tax withholdings. For the twelve months period ended December 31, 2012, these expenses decreased by 14% from the previous year.
The decrease occurred mostly in indirect contract costs in the areas of general and administrative expenses, rent, and fringe benefits.
Operating Loss.
The Company decreased its operating loss by 14.7% in the twelve months ended December 31, 2012 from the previous year. This was
due to a decrease in indirect contract costs as discussed above.
Other Income.
For the twelve months ended December 31, 2012 other income relates to a gain on debt extinguishment and in 2011a legal settlement
relating to former leased office space.
Other Expenses.
Other expenses for the twelve months ended December 31, 2012 were made up of interest expense of $2,903,476 and the amortization
of debt discount of $209,439 and for the twelve months ended December 31, 2011 were made up of interest expense of $1,441,492.
Interest expense increased due to an increase in debt.
Net Loss.
For
the twelve months ended December 31, 2012 and 2011, our net loss was $4,885,690 versus a net loss of $3,027,789. The increase in
net loss is attributable to an increase in interest expense.
Liquidity and Capital Resources
Cash Flows
Net cash used in
operating activities was $1,437,186 for the twelve months ended December 31, 2012 and $721,268 for the twelve months ended
December 31, 2011. Cash was used primarily to support operating losses.
Net cash flow used
in investing activities was $11,717 for the twelve months ended December 31, 2012 and $4,771 for the twelve months ended December
31, 2011. In 2012 and 2011 cash was used in investing activities for equipment purchases.
Net cash flow provided
by financing activities was $1,484,289 for the twelve months ended December 31, 2012 and $726,039 for the twelve months ended December
31, 2011. Receipts of cash flow from financing activities during the twelve months ended December 31, 2012 and 2011 primarily consisted
of borrowings from and payments to related and non-related party lenders.
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 significant short term borrowings are necessary to cover working capital needs. Typically, these loans are
provided by our affiliates or other individuals 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 December 31, 2012
we had $35,386 of cash on hand. We will need significant additional financing to fund our operations over the next 12 months. The
Company has sustained substantial operating losses since inception, and had a stockholders’ deficit (defined as total assets
minus total liabilities) of $13,477,080 and $11,165,636 at December 31, 2012 and 2011, respectively. There are many 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.
We may not have sufficient
cash flows to fund our 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.
Because of our historic
net losses and negative working capital position, our independent auditors, in their report on our consolidated financial statements
for the year ended December 31, 2012, expressed substantial doubt about our ability to continue as a going concern.
Contractual Obligations and Off-Balance Sheet Arrangements
Loan
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 December 31, 2012 and 2011 amounted to $2,000,000 and $1,499,384, respectively, collateralized by substantially all assets
of the Borrowers and guaranteed by Galen. Repayment of the loan is due on May 31, 2017. In order to make the loan to the Borrowers,
the Lenders borrowed $1,000,000 from Eagle Bank and $1,000,000 from Reliant Bank. The promissory note to Eagle Bank has a maturity
date of August 26, 2013 and interest is payable monthly at the bank’s prime rate (as defined) plus 1% with a minimum rate
of 7.5%. The promissory note to Reliant Bank has a maturity date of March 28, 2014 and interest is payable monthly at fixed rate
of 7.0%. In addition, the Reliant Bank loan is secured by a $250,000 deposit, of which $165,000 was deposited by the Company. Interest
is directly paid by the Company to the banks on a monthly basis.
Loans From Related Parties
During the year ended
December 31, 2012, we received loans totaling $3,037,529 from related parties including convertible notes payable and paid back
loans totaling $708,571. As of the year ended December 31, 2012 the outstanding balance was $4,777,159. Of these loans $982,159
were in default as of December 31, 2012.
Loans From Unrelated Parties
During the year ended
December 31, 2012, we received loans totaling $1,980,000 from unrelated parties and paid back loans totaling $2,065,000. As of
the year ended December 31, 2012 the outstanding balance was $812,000. Of these loans $662,000 were in default as of December 31,
2012.
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 December 31, 2012, 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
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Other indebtedness
|
|
|
5,589,159
|
|
|
|
1,839,159
|
|
|
|
-
|
|
|
|
3,750,000
|
|
|
|
-
|
|
Operating leases
|
|
|
709,000
|
|
|
|
236,000
|
|
|
|
352,000
|
|
|
|
121,000
|
|
|
|
-
|
|
Totals:
|
|
$
|
6,298,159
|
|
|
$
|
2,075,159
|
|
|
$
|
352,000
|
|
|
$
|
3,871,000
|
|
|
$
|
-
|
|
Late deposit of payroll taxes and employee income tax withholdings
At December
31, 2012, the Company is delinquent with filing and remitting payroll taxes of approximately $4,071,610 including estimated penalties
and interest related to payroll taxes withheld since December 31, 2009. The Company has recorded the delinquent payroll taxes,
which are included in accrued expenses on the balance sheet. Although the Company has not entered into any formal repayment agreements
with the applicable tax authorities, management plans to make payment as funds become available. Penalties and interest amounts
are subject to increase based on a number of factors that can cause the estimated liability to increase further. Interest and penalties
were accrued in an amount estimated to cover the ultimate liability As of December 31, 2012 and 2011, the total of payroll tax
accrued and income tax withheld balances including penalties and interest, amounted to $4,071,610 and $3,694,635, 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.
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 years ended December
31, 2012 and 2011, respectively.
Innovative has been
late in making deposits of employee deferrals. In November 2012, the Department of Labor filed a complaint against the company.
See legal section for more details.
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 8. Financial Statements
INNOLOG HOLDINGS CORPORATION AND SUBSIDIARY
CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2012 AND
2011
INDEX
|
Page
|
Report of Independent Registered Public Accounting Firm
|
F-1
|
Consolidated Balance Sheets
|
F-2
|
Consolidated Statements of Operations
|
F-3
|
Consolidated Statements of Stockholders’ Deficit
|
F-4
|
Consolidated Statements of Cash Flows
|
F-5 - F-6
|
Notes to Consolidated Financial Statements
|
F-7
|
REPORT OF INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM
To the Board of Directors and Stockholders
of
Innolog Holdings Corporation
We have audited the accompanying consolidated
balance sheets of Innolog Holdings Corporation (the “Company”) and its subsidiary as of December 31, 2012 and 2011,
and the related consolidated statements of operations, stockholder’s deficiency, and cash flows for the two years in the
period ended December 31, 2012. These consolidated financial statements are the responsibility of the Company’s management.
Our responsibility is to express an opinion on these consolidated financial statements based on our audit.
We have conducted our audit in accordance
with the standards of the Public Company Accounting Oversight Board (United States of America). Those standards require that we
plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material
misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial
reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures
that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s
internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial
statements referred to above present fairly, in all material respects, the financial position of Innolog Holdings Corporation and
subsidiary as of December 31, 2012 and 2011, and the results of their operation and their cash flow for each of the two years ended
December 31, 2012, in conformity with accounting principles generally accepted in the United States of America.
The accompanying financial statements have
been prepared assuming that the Company will continue as a going concern. As discussed in Note 2 to the consolidated financial
statements, the Company has sustained substantial operating losses since inception. These conditions raise substantial doubt about
its ability to continue as a going concern. Management’s plans regarding those matters also are described in Note 2. The
consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
/s/RBSM LLP
New York, NY
April 15, 2013
INNOLOG HOLDINGS CORPORATION AND SUBSIDIARY
CONSOLIDATED
BALANCE SHEETS
AS OF DECEMBER 31, 2012 AND 2011
|
|
2012
|
|
|
2011
|
|
|
|
|
|
|
|
|
ASSETS
|
|
|
|
Current Assets
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
35,386
|
|
|
$
|
-
|
|
Accounts receivable, net
|
|
|
327,472
|
|
|
|
418,617
|
|
Prepaid expenses and other current assets
|
|
|
1,338
|
|
|
|
11,062
|
|
Total current assets
|
|
|
364,196
|
|
|
|
429,679
|
|
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
|
22,281
|
|
|
|
20,343
|
|
Restricted cash
|
|
|
165,000
|
|
|
|
-
|
|
Other assets
|
|
|
109,261
|
|
|
|
64,965
|
|
Total Assets
|
|
$
|
660,738
|
|
|
$
|
514,987
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current Liabilities
|
|
|
|
|
|
|
|
|
Cash overdraft
|
|
$
|
-
|
|
|
$
|
97,100
|
|
Line of credit, bank
|
|
|
-
|
|
|
|
497,570
|
|
Accounts payable
|
|
|
2,956,288
|
|
|
|
2,525,149
|
|
Accrued salaries, benefits and payroll taxes
|
|
|
3,612,039
|
|
|
|
3,128,947
|
|
Accrued interest
|
|
|
1,304,212
|
|
|
|
769,163
|
|
Other accrued liabilities
|
|
|
2,150,765
|
|
|
|
1,240,398
|
|
Deferred rent
|
|
|
24,496
|
|
|
|
24,495
|
|
Notes payable, others
|
|
|
812,000
|
|
|
|
897,000
|
|
Notes payable, affiliates
|
|
|
1,027,159
|
|
|
|
2,500,801
|
|
Total current liabilities
|
|
|
11,886,959
|
|
|
|
11,680,623
|
|
|
|
|
|
|
|
|
|
|
Long Term Liabilities
|
|
|
|
|
|
|
|
|
Notes payable,
affiliates
|
|
|
2,000,000
|
|
|
|
-
|
|
Convertible notes payable,
affiliates net of debt discount of $1,499,141
as of December 31, 2012
|
|
|
250,859
|
|
|
|
-
|
|
Total long term liabilities
|
|
|
2,250,859
|
|
|
|
-
|
|
COMMITMENTS AND CONTINGENCIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders' Deficiency
|
|
|
|
|
|
|
|
|
Common stock, $0.001 par value, 200,000,000 shares authorized;
|
|
|
|
|
|
|
|
|
17,974,538 and 15,129,973 shares issued and outstanding
|
|
|
|
|
|
|
|
|
at December 31, 2012 and 2011, respectively
|
|
|
17,975
|
|
|
|
15,130
|
|
Preferred stock, $0.001 par value; 50,000,000 shares authorized;
|
|
|
|
|
|
|
|
|
Series A Convertible: 38,000,000 shares designated;
|
|
|
|
|
|
|
|
|
36,894,758 shares issued and outstanding
|
|
|
|
|
|
|
|
|
at December 31, 2012 and 2011
|
|
|
36,895
|
|
|
|
36,895
|
|
Series B Convertible: 7,800,000 shares designated: 0 shares
|
|
|
|
|
|
|
|
|
issued and outstanding at December
31, 2012 and
2011
|
|
|
-
|
|
|
|
-
|
|
Additional paid in capital
|
|
|
3,622,115
|
|
|
|
1,050,713
|
|
Accumulated deficit
|
|
|
(17,154,065
|
)
|
|
|
(12,268,374
|
)
|
Total stockholders' deficiency
|
|
|
(13,477,080
|
)
|
|
|
(11,165,636
|
)
|
|
|
|
|
|
|
|
|
|
Total Liabilities and Stockholders' Deficiency
|
|
$
|
660,738
|
|
|
$
|
514,987
|
|
The accompanying notes are an integral
part of the consolidated financial statements.
INNOLOG HOLDINGS
CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 2012 AND 2011
|
|
2012
|
|
|
2011
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
5,103,110
|
|
|
$
|
4,770,738
|
|
|
|
|
|
|
|
|
|
|
Operating expenses
|
|
|
|
|
|
|
|
|
Direct costs
|
|
|
3,001,953
|
|
|
|
2,315,856
|
|
Operating expenses
|
|
|
3,954,771
|
|
|
|
4,598,017
|
|
Bad debt expense, affiliate
|
|
|
-
|
|
|
|
29,672
|
|
Total operating expenses
|
|
|
6,956,724
|
|
|
|
6,943,545
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(1,853,614
|
)
|
|
|
(2,172,807
|
)
|
|
|
|
|
|
|
|
|
|
Other Income (Expenses)
|
|
|
|
|
|
|
|
|
Amortization of debt discount
|
|
|
(209,439
|
)
|
|
|
-
|
|
Gain on debt extinguishment
|
|
|
80,645
|
|
|
|
-
|
|
Gain on legal settlement
|
|
|
-
|
|
|
|
586,510
|
|
Other income
|
|
|
194
|
|
|
|
-
|
|
Interest expense
|
|
|
(2,903,476
|
)
|
|
|
(1,441,492
|
)
|
Total other income (expenses)
|
|
|
(3,032,076
|
)
|
|
|
(854,982
|
)
|
|
|
|
|
|
|
|
|
|
Loss before income tax provision
|
|
|
(4,885,690
|
)
|
|
|
(3,027,789
|
)
|
|
|
|
|
|
|
|
|
|
Income tax provision
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Net Loss
|
|
$
|
(4,885,690
|
)
|
|
$
|
(3,027,789
|
)
|
|
|
|
|
|
|
|
|
|
Loss per share - basic and diluted
|
|
$
|
(0.31
|
)
|
|
$
|
(0.21
|
)
|
|
|
|
|
|
|
|
|
|
Weighted average number of shares – basic and diluted
|
|
$
|
15,924,581
|
|
|
|
14,514,905
|
|
The accompanying notes are an integral
part of the consolidated financial statements
INNOLOG HOLDINGS
CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIENCY
FOR THE YEARS ENDED DECEMBER 31, 2012 AND 2011
|
|
COMMON STOCK
|
|
|
SERIES A CONVERTIBLE PREFERRED STOCK
|
|
|
ADDITIONAL
PAID IN
|
|
|
ACCUMULATED
|
|
|
TOTAL STOCKHOLDERS
|
|
|
|
SHARES
|
|
|
AMOUNT
|
|
|
SHARES
|
|
|
AMOUNT
|
|
|
CAPITAL
|
|
|
DEFICIT
|
|
|
DEFICIENCY
|
|
Balance, December 31, 2010
|
|
|
13,629,973
|
|
|
$
|
13,630
|
|
|
|
37,394,758
|
|
|
$
|
37,395
|
|
|
$
|
862,923
|
|
|
$
|
(9,240,585
|
)
|
|
$
|
(8,326,637
|
)
|
Series A preferred stock converted into common stock
|
|
|
500,000
|
|
|
|
500
|
|
|
|
(500,000
|
)
|
|
|
(500
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
--
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock issued as an inducement to note holder
|
|
|
1,000,000
|
|
|
|
1,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
63,700
|
|
|
|
-
|
|
|
|
64,700
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants granted for services
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
124,090
|
|
|
|
-
|
|
|
|
124,090
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(3,027,789
|
)
|
|
|
(3,027,789
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2011
|
|
|
15,129,973
|
|
|
$
|
15,130
|
|
|
|
36,894,758
|
|
|
$
|
36,895
|
|
|
$
|
1,050,713
|
|
|
$
|
(12,268,374
|
)
|
|
$
|
(11,165,636
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series A convertible preferred stock issued
|
|
|
-
|
|
|
|
-
|
|
|
|
300,000
|
|
|
|
300
|
|
|
|
2,700
|
|
|
|
-
|
|
|
|
3,000
|
|
Series A preferred stock converted into common stock
|
|
|
300,000
|
|
|
|
300
|
|
|
|
(300,000
|
)
|
|
|
(300
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Common stock issued for accrued services
|
|
|
869,565
|
|
|
|
870
|
|
|
|
-
|
|
|
|
-
|
|
|
|
59,130
|
|
|
|
-
|
|
|
|
60,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock issued for interest expenses
|
|
|
625,000
|
|
|
|
625
|
|
|
|
-
|
|
|
|
-
|
|
|
|
36,875
|
|
|
|
|
|
|
|
37,500
|
|
Common stock issued upon exercise of warrants
|
|
|
1,050,000
|
|
|
|
1,050
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(1,050
|
)
|
|
|
-
|
|
|
|
--
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants granted for settlement of notes payable and services
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
765,166
|
|
|
|
-
|
|
|
|
765,166
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beneficial conversion feature on issuance of convertible note and warrants
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,708,581
|
|
|
|
-
|
|
|
|
1,708,581
|
|
Net loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(4,885,690
|
)
|
|
|
(4,885,690
|
)
|
Balance, December 31, 2012
|
|
|
17,974,538
|
|
|
$
|
17,975
|
|
|
|
36,894,758
|
|
|
$
|
36,895
|
|
|
$
|
3,622,115
|
|
|
$
|
(17,154,064
|
)
|
|
$
|
(13,477,079
|
)
|
The accompanying notes are an integral
part of the consolidated financial statements.
INNOLOG HOLDINGS CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2012 AND 2011
|
|
2012
|
|
|
2011
|
|
CASH FLOWS FROM OPERATING ACTIVITIES:
|
|
|
|
|
|
|
Net loss
|
|
$
|
(4,885,690
|
)
|
|
$
|
(3,027,789
|
)
|
Adjustments to
reconcile net loss to net cash used in operating activities:
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
9,780
|
|
|
|
8,130
|
|
Stock based compensation
|
|
|
729,462
|
|
|
|
188,790
|
|
Amortization of debt discount
|
|
|
209,439
|
|
|
|
-
|
|
Gain on legal settlement
|
|
|
(80,645
|
)
|
|
|
(586,510
|
)
|
Bad debt expense, affiliates
|
|
|
-
|
|
|
|
29,672
|
|
Accrued loss on contracts
|
|
|
-
|
|
|
|
(47,782
|
)
|
Common stock issued for interest expenses
|
|
|
37,500
|
|
|
|
-
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
91,145
|
|
|
|
293,189
|
|
Prepaid expenses and other assets
|
|
|
(34,572
|
)
|
|
|
(31,829
|
)
|
Deferred rent
|
|
|
-
|
|
|
|
(8,763
|
)
|
Accounts payable and accrued expenses
|
|
|
2,486,397
|
|
|
|
2,461,624
|
|
|
|
|
|
|
|
|
|
|
Net cash used in operating activities
|
|
|
(1,437,186
|
)
|
|
|
(721,268
|
)
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Property and equipment purchased
|
|
|
(11,717
|
)
|
|
|
(4,771
|
)
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(11,717
|
)
|
|
|
(4,771
|
)
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Cash overdraft
|
|
|
(97,100
|
)
|
|
|
35,877
|
|
Restricted cash
|
|
|
(165,000
|
)
|
|
|
-
|
|
Net borrowings from former stockholder
|
|
|
-
|
|
|
|
(251,350
|
)
|
Borrowings on advances from affiliates
|
|
|
-
|
|
|
|
229,317
|
|
Borrowings on note payable, others
|
|
|
1,980,000
|
|
|
|
1,466,500
|
|
Repayments on note payable, others
|
|
|
(2,065,000
|
)
|
|
|
(1,046,405
|
)
|
Borrowings on note payable, affiliate/related party
|
|
|
3,037,529
|
|
|
|
816,500
|
|
Repayments on note payable, affiliate/related party
|
|
|
(708,571
|
)
|
|
|
(524,400
|
)
|
Repayment of LOC
|
|
|
(497,570
|
)
|
|
|
|
|
Net cash provided by financing activities
|
|
|
1,484,289
|
|
|
|
726,039
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCREASE IN CASH AND CASH EQUIVALENTS
|
|
|
35,386
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
CASH AND CASH EQUIVALENTS - BEGINNING OF PERIOD
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
CASH AND CASH EQUIVALENTS - END OF PERIOD
|
|
$
|
35,386
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
|
|
|
|
|
|
|
|
|
Cash paid during the period for:
|
|
|
|
|
|
|
|
|
Interest
|
|
$
|
858,600
|
|
|
$
|
907,904
|
|
Income taxes
|
|
$
|
-
|
|
|
$
|
-
|
|
The accompanying notes are an integral
part of the consolidated financial statements.
INNOLOG HOLDINGS CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 2012 AND 2011
SUPPLEMENTAL
DISCLOSURES OF NONCASH INVESTING AND FINANCING ACTIVITIES:
During the year ended December 31, 2012, the Company recorded $1,708,581 of beneficial conversion feature that is related to convertible notes.
During the year ended December 31, 2012, the Company issued 869,565 shares of common stock for accrual valued at $60,000.
During the year ended December 31, 2012, the Company issued 300,000 Series A convertible preferred stock for accrual valued at $3,000.
During the year ended December 31, 2012, the Company issued 300,000 shares of common stock upon conversion of 300,000 Series A convertible preferred stock of the Company valued at $300.
During the year ended December 31, 2012, the Company issued 1,050,000 shares of common stock upon exercise of 1,050,000 warrants of the Company valued at $1,050.
During the year ended December 31, 2012, the Company issued warrants in settlement of notes payable and accrued liabilities of $35,705.
During the year ended December 31, 2011, the Company issued 500,000 shares of common stock upon conversion of 500,000 Series A convertible preferred stock of the Company valued at $500.
During the year ended December 31, 2011, the Company issued 1,000,000 shares of common stock with a fair value of $64,700 to Galen Capital in conjunction with loans from unrelated individuals in exchange for preferred stock transferred from Galen Capital.
The accompanying notes are an integral
part of the consolidated financial statements.
INNOLOG HOLDINGS CORPORATION AND
SUBSIDIARY
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
FOR THE YEARS ENDED
DECEMBER 31, 2012 AND 2011
Note 1: Organization and Nature of Business and Basis of
Presentation
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.
Innolog Holdings Corporation
and its wholly owned subsidiary are referred to herein as the “Company.”
Basis of Presentation
The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for annual financial information and with the instructions to Form 10-K. Accordingly, they do include all of the information and footnotes required by generally accepted accounting principles for complete financial statements.
In the opinion of management,
all adjustments consisting of normal recurring accruals considered necessary for a fair presentation have been included.
The consolidated financial statements
include the accounts of the Company and its wholly owned subsidiaries. All significant inter-company transactions and balances
have been eliminated in consolidation.
Note 2: Going Concern
The accompanying consolidated
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, the Company
has reported a net loss of $4,885,690 for the year ended December 31, 2012 and $3,027,789 for the year ended December 31, 2011.
As of December 31, 2012 the Company has reported an accumulated deficit of $17,154,065, had a stockholders’ deficiency (defined
as total assets minus total liabilities) of $13,477,080 and a working capital deficit (current liabilities minus current assets)
of $11,522,763. 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 of the Company’s
independent registered public accounting firm relating to the December 31, 2012 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 enhance the Company’s operating and financial weaknesses.
Note 3: 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.
Cash and cash equivalents:
For the purpose of the statements
of cash flows, Company has considered all highly liquid investments purchased with original maturities of three months or less
to be cash equivalents.
Reclassifications:
Certain items in prior consolidated
financial statements are reclassified to conform to the current presentation. These reclassifications had no effect on reported
net loss.
Contract Revenue Recognition:
Revenue on cost-plus-fee contracts
is recognized to the extent of costs incurred plus provisional rates for fringe, overhead and applied G&A, plus a percentage
of fees earned. On fixed price service contracts, revenue is recognized using straight line over the life of the project. 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. The allowance
for doubtful accounts amounted to $46,566 and $35,590 at December 31, 2012 and December 31, 2011, respectively.
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 7 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 follows Accounting
Standards Codification subtopic 360-10, Property, Plant and Equipment (“ASC 360-10”). ASC 360-10 requires those long-lived
assets and certain identifiable intangibles held and used by the Company be reviewed for impairment whenever events or changes
in circumstances indicate that the carrying amount of any asset may not be recoverable. Events relating to recoverability may include
significant unfavorable changes in business conditions, recurring losses, or a forecasted inability to achieve break-even operating
results over an extended period. 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.
Income Taxes:
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 to be 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 December 31, 2012, the Company has no unrecognized tax benefits.
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 December 31, 2012, the Company
has no unrecognized tax benefits.
Stock Based Compensation:
The Company follows Accounting Standards Codification
subtopic 718-10, Compensation (ASC 718-10”) which requires that all share-based payments to both employees and non employees
be recognized in the income statement based on their fair values at the grant date and recognizes expense over the requisite service
period.
Debt Issuance Costs:
Debt issuance 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.
Earnings (loss) per Share:
The Company follows Accounting
Standards Codification subtopic 260-10, Earnings Per Share (“ASC 260-10”) specifying the computation, presentation
and disclosure requirements of earnings per share information. 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 twelve months ended December 31, 2012 and 2011 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
consolidated financial statements.
Note 4: Major Customers
Revenues from prime
contracts and subcontracts with U.S. Government agency customers in aggregate accounted for 100% of total revenues for the
twelve months ended December 31, 2012 and 2011. The single largest customer through December 31, 2012 was U.S. Navy Research
Laboratory which generated approximately 58% of total sales.
Note 5: Accounts Receivable
Accounts receivable consisted
of the following as of December 31, 2012 and 2011:
|
|
December 31, 2012
|
|
|
December 31, 2011
|
|
Billed receivables
|
|
$
|
374,038
|
|
|
$
|
454,207
|
|
Reserve for bad debts
|
|
|
(46,566
|
)
|
|
|
(35,590
|
)
|
Total
|
|
$
|
327,472
|
|
|
$
|
418,617
|
|
Contract receivables from prime
contracts and subcontracts with U.S. Government agency customers in aggregate accounted for 100% of total contract receivables
at December 31, 2012 and December 31, 2011.
Note 6: Accounts Payable and Accrued Liability
Accounts payable and accrued expenses at
December 31, 2012 and 2011 consisted of the following:
|
|
December 31,
2012
|
|
|
December 31,
2011
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
2,956,289
|
|
|
$
|
2,525,149
|
|
Accrued liabilities
|
|
|
2,150,765
|
|
|
|
1,240,398
|
|
Accrued interest- other
|
|
|
882,189
|
|
|
|
532,211
|
|
Accrued interest-related party
|
|
|
422,023
|
|
|
|
236,952
|
|
Accrued salaries and benefits
|
|
|
3,612,038
|
|
|
|
3,128,947
|
|
|
|
$
|
10,023,304
|
|
|
$
|
7,663,657
|
|
Note 7: 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 were due on August 26, 2012, if not demanded earlier.
Interest is payable monthly at the bank’s prime rate (as defined) plus 1%. The outstanding balance as of December 31, 2012
and 2011 is $0 and $497,570, respectively. This line of credit was paid in full and cancelled on September 28, 2012.
Note 8: Notes Payable, Other
At December 31, 2012
and 2011, notes payable, others consisted of the following:
|
|
2012
|
|
|
2011
|
|
On August 11, 2010 an individual loaned the Company $75,000 with a maturity date of October 11, 2010. The loan is unsecured and carries a flat interest rate of $22,500. In addition, on December 12, 2011 the individual loaned the Company $200,000 with a maturity date of January 12, 2012. The loan was secured by accounts receivable, guaranteed by Ian Reynolds, a director, and carried a flat interest rate of $25,000. As of December 31, 2012 and 2011 the total outstanding balance is $13,500 and $237,500 with accrued interest of $73,866 and $57,295, respectively. The loan is in default and carries a default interest rate of 15% per annum.
|
|
$
|
13,500
|
|
|
$
|
237,500
|
|
On August 30, 2010 an individual loaned the Company $25,000 with a maturity date of December 6, 2010. The loan is unsecured and carried a flat interest rate of $5,000. As of December 31, 2012 and 2011 the outstanding balance is $25,000 with accrued interest of $70,766 and $40,766, respectively. The loan is in default and carries a default interest rate of 10% per month.
|
|
|
25,000
|
|
|
|
25,000
|
|
On July 13, 2010 an individual loaned the Company $100,000 with a maturity date of January 13, 2011. The loan is unsecured and carried a flat interest rate of $30,000. As of December 31, 2012 and 2011 the outstanding balance is $100,000 with accrued interest of $59,836 and $44,795, respectively. The loan is in default and carries a default interest rate of 15% per annum.
|
|
|
100,000
|
|
|
|
100,000
|
|
On July 21, 2010 an individual loaned the Company $25,000 with a maturity date of January 21, 2011. The loan is unsecured and carried a flat interest rate of $7,500. As of December 31, 2012 and 2011 the outstanding balance is $20,000 with accrued interest of $26,814 and $23,806, respectively. The loan is in default and carries a default interest rate of 15% per annum.
|
|
|
20,000
|
|
|
|
20,000
|
|
On July 20, 2010 an individual loaned the Company $65,500 with a maturity date of January 20, 2011. The loan is unsecured and carried a flat interest rate of $19,650. As of December 31, 2012 and 2011 the outstanding balance is $65,500 with accrued interest of $39,193 and $29,341, respectively. The loan is in default and carries a default interest rate of 15% per annum.
|
|
|
65,500
|
|
|
|
65,500
|
|
On July 20, 2010 an individual loaned the Company $34,500 with a maturity date of January 20, 2011. The loan is unsecured and carried a flat interest rate of $10,350. As of December 31, 2012 and 2011 the outstanding balance is $13,000 and $19,500 with accrued interest of $12,602 and $14,560, respectively. The loan is in verbal settlement agreement and is not accruing default interest.
|
|
|
13,000
|
|
|
|
19,500
|
|
On February 28, 2012 a LLC loaned the Company $50,000 with a maturity date of April 3, 2012. The loan is secured by accounts receivable, guaranteed by a director, and carried a flat interest rate of $5,000. In addition, at the option of the holder an additional fee of $5,000 or warrants for 50,000 shares of common stock at $0.07 per share shall be paid and 125,000 shares of common stock. The loan is in default and the Company is paying $6,000 per month in late fees.
On March 2, 2012 a LLC loaned the Company $50,000 with a maturity date of April 3, 2012. The loan is secured by accounts receivable, guaranteed by a director, and carried a flat interest rate of $5,000. In addition, the Company shall issue 500,000 shares of common stock. The loan is in default and the Company is paying $6,000 per month in late fees.
On October 22, 2012 a LLC loaned the Company $100,000 with a maturity date of November 6, 2012. The loan is secured by accounts receivable, guaranteed by a director, and carried a flat interest rate of $10,000. In addition, warrants for 200,000 shares of common stock at $0.01 per share have been issued. The loan was repaid on November 15, 2012 along with default interest which was accrued at 18% pa.
On November 16, 2012 a LLC loaned the Company $100,000 with a maturity date of December 1, 2012. The loan is secured by accounts receivable, guaranteed by a director, and carried a flat interest rate of $10,000. In addition, warrants for 200,000 shares of common stock at $0.01 per share have been issued. The loan is in default and the Company issued 200,000 more warrants under the same terms and paying $10,000 in late fees as well as accruing default interest at 18% pa.
On December 4, 2012 a LLC loaned the Company $50,000 with a maturity date of December 19, 2012. The loan is secured by accounts receivable, guaranteed by a director, and carried a flat interest rate of $5,000. In addition, warrants for 500,000 shares of common stock at $0.01 per share have been issued.
The loan is in default and the Company issued 200,000 more warrants under the same terms and paying $5,000 in late fees. As well as accruing default interest at 18% pa.
Total accrued interest and fees was $30,189 and $120,000 as of December 31, 2012 and 2011, respectively.
|
|
|
250,000
|
|
|
|
-
|
|
On August 1, 2010 an LLC loaned the Company $200,000 with a maturity date of September 14, 2011. The loan is secured by accounts receivable and carried a flat interest rate of $20,000. The loan was extended on September 19, 2011 and on November 7, 2011 with a maturity of December 31, 2011.
On August 8, 2011 the LLC and several individuals loaned the Company $225,000 with a maturity date of November 8, 2011. On November 7, 2011 the loans were extended to December 31, 2011. The loans are secured and carried a flat interest rate of $50,000. The loans are guaranteed by a director. The Company issued 1,000,000 warrants which was valued at $60,022 and charged to operations as interest expense during the year ended December 31, 2012.
The Company and the lenders are in dispute over how the payments that were made are being applied. The Company records show that as of December 31, 2012 and 2011 the amount outstanding was $175,000 and $425,000, respectively with accrued interest of $548,270 and $55,446. In February 2013 the parties reached a settlement agreement. See subsequent events note 14.
|
|
|
175,000
|
|
|
|
425,000
|
|
On July 29, 2010 a partnership loaned the Company $20,000 with a maturity date of August 27, 2011. The loan is secured with accounts receivable and carried a flat interest rate of $2,000. As of December 31, 2012 and 2011 the outstanding balance is $0 and $4,500 with accrued interest of $0 and $10,802, respectively. The loan is paid in full.
|
|
|
-
|
|
|
|
4,500
|
|
On December 17, 2012, the Company borrowed $100,000 from a trust. The loan carried an interest rate of 2.5% pa and a maturity date of January 8, 2013. In addition, warrants of 200,000 were granted for the purchase of common stock with a strike price of $0.01 and an expiration date of 5 years. A director also guaranteed this loan.
On December 29, 2012, the Company borrowed $50,000 from a trust. The loan carried an interest rate of 2.5% pa and a maturity date of January 17, 2013. In addition, warrants of 100,000 were granted for the purchase of common stock with a strike price of $0.01 and an expiration date of 5 years. A director also guaranteed this loan. As of December 31, 2012, accrued interest on this note was $253.
|
|
|
150,000
|
|
|
|
-
|
|
Total Notes Payable- others-Current
|
|
$
|
812,000
|
|
|
$
|
897,000
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2012 and 2011, there
were $812,000 and $897,000 of the notes outstanding, respectively, issued to individuals, trusts, and corporations not related
to the Company.
For new notes during 2011, the lenders
were granted warrants to purchase 4,077,500 shares of Innolog common stock at a strike price ranging from $0.01 per share to $0.50
per share and to be issued 300,000 shares of Series A convertible preferred stock. The value of these warrants and preferred stock
was $40,994. The entire amount was charged to expense during the twelve months ended December 31, 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 registered shares of common stock from the former sole stockholder of the Company,
Galen. In exchange, the Company issued 1,000,000 unregistered 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 twelve months ended December 31, 2011.
During the year ended December 31, 2012
the lenders were granted warrants to purchase 11,207,000 shares of Innolog common stock at a strike price $0.01 per share and issued
625,000 shares of common stock and 300,000 shares of Series A Convertible Preferred Stock. The value of these warrants and common
stock was $682,493. The entire amount was charged to expense during the twelve months ended December 31, 2012.
Of these loans,
$662,000 and $272,000 have matured as of December 31, 2012 and 2011, respectively and are in default. Additional interest and late
fees are due upon default as defined in each note.
Total interest and fees incurred on these notes amounted to $1,035,383
and $972,402 for the twelve months ended December 31, 2012 and 2011, respectively. Total interest and fees accrued on these notes
amounted to $882,189 and $532,211 as of December 31, 2012 and 2011, respectively.
On March 22, 2011 Atlas Advisors LLC entered
into a line of credit in the amount of up to $200,000 with the Company with a maturity date of October 21, 2011. The loan was secured
by accounts receivable and carried a flat interest rate of 10% on each draw. As of December 31, 2012 and 2011 the outstanding principal
balance was $0. On March 9, 2012 the Company entered into a settlement agreement with Atlas, which reduced the remaining accrued
interest and fees of $120,000 to $56,250 payable in 3 installments of $18,750 on March 15, 2012, April 15, 2012, and May 15, 2012
plus 500,000 warrants at an exercise price of $0.01 and expires on March 15, 2017. The Company has determined through a Black Scholes
analysis that the fair value of the warrants was $21,290 at the time of issue (note 13); the balance of $42,460 was accounted for
as gain on legal settlement for the year ended December 31, 2012. As of December 31, 2012 all obligations had been paid in full.
Also, during the year ended December 31,
2012, the Company received and repaid the following notes:
On February 7, 2012 a trust loaned the
Company $100,000 with a maturity date of February 22, 2012. The loan was secured by accounts receivable and carried a flat interest
rate of $8,000. As of December 31, 2012 the principal and accrued interest is paid in full.
On July 6, 2012, the Company borrowed $50,000
from a trust. The loan carried a flat fee of $4,000 and a maturity date of July 31, 2012. In addition, warrants of 100,000 were
granted for the purchase of common stock with a strike price of $0.01 and an expiration date of 5 years. A director also guaranteed
this loan. This loan has been paid in full.
On July 9, 2012, the Company borrowed $100,000
from a LLC. The loan carried a flat fee of $10,000 and a maturity date of July 24, 2012. A director also guaranteed this loan.
This loan is paid in full.
On July 23, 2012, the Company borrowed
$55,000 from a trust. The loan carried a flat fee of $4,500 and a maturity date of August 22, 2012. In addition, warrants of 110,000
were granted for the purchase of common stock with a strike price of $0.01 and an expiration date of 5 years. A director also guaranteed
this loan. This loan has been paid in full.
On August 6, 2012, the Company borrowed
$75,000 from a trust. The loan carried a flat fee of $6,500 and a maturity date of August 31, 2012. In addition, warrants of 150,000
were granted for the purchase of common stock with a strike price of $0.01 and an expiration date of 5 years. A director also guaranteed
this loan. This loan has been paid in full.
On August 7, 2012, the Company borrowed
$100,000 from a LLC. The loan carried a flat fee of $10,000 and a maturity date of August 22, 2012. In addition, warrants of 100,000
were granted for the purchase of common stock with a strike price of $0.01 and an expiration date of 5 years. A director also guaranteed
this loan. This loan is paid in full.
On August 21, 2012, the Company borrowed
$75,000 a trust. The loan carried a flat fee of $4,500 and a maturity date of September 14, 2012. In addition, warrants of 150,000
were granted for the purchase of common stock with a strike price of $0.01 and an expiration date of 5 years. A director also guaranteed
this loan. This loan has been paid in full.
On August 23, 2012, the Company borrowed
$100,000 from a LLC. The loan carried a flat fee of $15,000 and a maturity date of September 14, 2012. In addition, warrants of
200,000 were granted for the purchase of common stock with a strike price of $0.01 and an expiration date of 5 years. A director
also guaranteed this loan. The loan is paid in full.
On September 5, 2012, the Company borrowed
$75,000 from a trust. The loan carried a flat fee of $4,500 and a maturity date of September 28, 2012. In addition, warrants of
150,000 were granted for the purchase of common stock with a strike price of $0.01 and an expiration date of 5 years. A director
also guaranteed this loan. This loan has been paid in full.
On September 21, 2012, the Company borrowed
$75,000 from a trust. The loan carried a flat fee of $4,500 and a maturity date of October 12, 2012. In addition, warrants of 150,000
were granted for the purchase of common stock with a strike price of $0.01 and an expiration date of 5 years. A director also guaranteed
this loan. This loan has been paid in full.
On September 21, 2012, the Company borrowed
$100,000 from a LLC. The loan carried a flat fee of $10,000 and a maturity date of October 14, 2012. In addition, warrants of 100,000
were granted for the purchase of common stock with a strike price of $0.01 and an expiration date of 5 years. A director also guaranteed
this loan. The loan is paid in full.
On October 4, 2012, the Company borrowed
$75,000 from a trust. The loan carried a flat fee of $4,500 and a maturity date of October 26, 2012. In addition, warrants of 150,000
were granted for the purchase of common stock with a strike price of $0.01 and an expiration date of 5 years. A director also guaranteed
this loan. This loan has been paid in full.
On October 19, 2012, the Company borrowed
$100,000 from a trust. The loan carried interest at 2.5% p.a. and a maturity date of October 31, 2012. In addition, warrants of
200,000 were granted for the purchase of common stock with a strike price of $0.01 and an expiration date of 5 years. A director
also guaranteed this loan. This loan has been paid in full.
On October 22, 2012, the Company borrowed
$100,000 from a LLC. The loan carried a flat fee of $10,000 and a maturity date of November 6, 2012. In addition, warrants of 200,000
were granted for the purchase of common stock with a strike price of $0.01 and an expiration date of 5 years. A director also guaranteed
this loan. The loan is paid in full.
On November 6, 2012, the Company borrowed
$50,000 from a trust. The loan carried interest at 2.5% p.a. and a maturity date of November 19, 2012. A director also guaranteed
this loan. This loan has been paid in full.
On November 21, 2012, the Company entered
into a promissory note agreement with a trust for amount of up to $100,000, which was amended on November 27, 2012 to increase
the amount up to $150,000. The Company borrowed $150,000 from a trust. The loan carried interest at 2.5% p.a. and a maturity date
of December 11, 2012. A director also guaranteed this loan. This loan has been paid in full.
Note 9: Related Party Transactions
Notes Payable, affiliates:
At December 31, 2012 and 2011, notes payable,
affiliates consisted of the following:
|
|
2012
|
|
|
2011
|
|
On August 4, 2011, a director entered into a $200,000 unsecured line of credit with the Company. Each advance under the line of credit had a due date of 30 days. Interest was a 10% flat rate of the principal of each advance. The line of credit matured as of December 31, 2011. As of December 31, 2012 and 2011 the outstanding principal was $0 and $87,100. In October 2012, the $52,600 principal balance was settled into 751,429 warrants of the Company with a strike price of $.07 per share and expiration period of 5 years, which was fair valued at $14,415. Accordingly, the Company recorded a gain on settlement of $38,185 during the year ended December 31, 2012.
On December 19, 2012, a director entered into a $200,000 revolving line of credit with the Company, and loaned the Company funds totaling $90,000. The loan carried an interest rate of 10% of the principal outstanding and a maturity of December 31, 2013. As of December 31, 2012, the outstanding balance is $45,000.
Accrued interest and fees totaled $10,304 and $54,996 at December 31, 2012 and at 2011, respectively.
|
|
$
|
45,000
|
|
|
$
|
87,100
|
|
On February 10, 2011, a holder of more than 5% of common stock, loaned the Company a total of $150,000. At least 50% of the loan must be repaid by October 31, 2011 with a final maturity of October 31, 2012. As of December 31, 2012 and 2011, $150,000 remained outstanding. The unsecured note carried a flat interest rate of $15,000. As of December 31, 2012 and 2011 the accrued interest is $15,000. The loan has matured and is in default but per the note no late fees or default interest is due.
On March 21, 2011, a holder of more than 5% of common stock, renewed a loan to the Company totaling $50,000. The unsecured note carried a flat interest rate of $10,000 and was to be paid back in monthly installments of $10,000 beginning April 21, 2011 with final payment due on September 21, 2011. The outstanding balance of the loan as of December 31, 2012 and 2011 was $40,000. As of December 31, 2012 and 2011 the accrued interest is $14,623. The loan has matured and is in default but per the note no late fees or default interest is due.
|
|
|
190,000
|
|
|
|
190,000
|
|
On March 21, 2011, the Company assumed an unsecured loan from a director, in the amount of $325,000. The interest rate on the loan was a flat fee of $32,500 and the loan matured on March 21, 2012. As of December 31, 2012 and 2011 the outstanding balance was $325,000. The loan has matured and is in default and carries default rate of interest of 18% per annum.
On October 19, 2011, December 7, 2011 and December 21, 2011 the director, loaned the Company additional funds totaling $75,000. As of December 31, 2011, $25,000 in principal amount of these notes has been repaid. As of December 31, 2012 and 2011, $25,000 and $50,000 in principal amount is outstanding, respectively.
On February 13, 2012 and February 22, 2012, the director, loaned the Company additional funds totaling $50,000. As of December 31, 2012, the outstanding balance is $31,250. In addition, warrants of 50,000 were granted for the purchase of common stock with a strike price of $0.06 and an expiration date of 5 years. These loans matured on April 29, 2012 and May 7, 2012, respectively and are now in default and carry a default interest rate of 18% per annum.
On October 25, 2012, the director loaned the Company additional funds totaling $25,000 with an interest rate of 10% p.a. and a maturity date of November 25, 2012. In addition, warrants of 25,000 were granted for the purchase of common stock with a strike price of $0.07 and an expiration date of 5 years. As of December 31, 2012, the outstanding balance is $25,000. The loan has matured and is in default and carries one time late fees of 10% of the principal amount outstanding and default rate of interest of 18% per annum.
On November 2, 2012, the director loaned the Company additional funds totaling $12,500 with an interest rate of 10% p.a. and a maturity date of December 2, 2012. In addition, warrants of 12,500 were granted for the purchase of common stock with a strike price of $0.07 and an expiration date of 5 years. As of December 31, 2012, the outstanding balance is $12,500. The loan has matured and is in default and carries one time late fees of 10% of the principal amount outstanding and default rate of interest of 18% per annum.
Accrued interest and fees totaled $79,974 and $37,500 at December 31, 2012 and 2011, respectively.
|
|
|
418,750
|
|
|
|
375,000
|
|
On June 21, 2011, a holder of more than 5% of common stock, loaned the Company a total of $70,000. As consideration for these loans, a fee of $7,000 was expensed. As of December 31, 2012 this unsecured loan has an outstanding balance of $70,000 and has matured and the Company is in default. The loan is accruing interest at 28% per annum and a late fee of 10% of the outstanding balance each month. Total accrued interest and fees amount to $154,353 and $50,699 at December 31, 2012 and 2011, respectively.
|
|
|
70,000
|
|
|
|
70,000
|
|
On August 9, 2011 and September 23, 2011, an employee of the Company, loaned the Company a total of $50,000. As of December 31, 2012, all principal and interest has been paid in full.
|
|
|
-
|
|
|
|
25,000
|
|
On October 18, 2011 and December 21, 2011, a director, loaned the Company a total of $50,000. As of December 31, 2012 and 2011, $0 and $25,000 in principal amount of these notes is outstanding. Interest in the amount of $5,814 and $5,000 has accrued at December 31, 2012 and 2011, respectively. The principal amount of the loan has been paid in full.
On September 28, 2012, a director loaned the Company $25,000 with a interest rate of $2,500. As of December 31, 2012, $25,000 in principal amount is outstanding. The principal is due on October 28, 2012 and November 28, 2012 in two installments of $12,500 each. The loan has matured and is in default and carries a default interest rate of 8% pa.
|
|
|
25,000
|
|
|
|
25,000
|
|
Since early 2009 a former director and former officer, loaned the Company funds at various dates. As of December 31, 2012 and 2011, the outstanding balance was $229,409 and $229,317, respectively. Interest in the amount of $75,948 and $41,835 has accrued as of December 31, 2012 and 2011, respectively. The loans have matured and are in default. The default rate of interest is 15% per annum.
|
|
|
229,409
|
|
|
|
229,317
|
|
On September 28, 2012, a director and officer of the Company, loaned the Company $65,000. As of December 31, 2012, $49,000 in principal amount is outstanding. Interest was in the form of 132,000 warrants. The principal payments of $15,000 on or before October 8, 2012, $25,000 by November 8, 2012 and $25,000 by December 8, 2012 are due. The loan has matured and is in default and carries a default interest rate of 8% pa.
|
|
|
49,000
|
|
|
|
-
|
|
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 December 31, 2012 and 2011 amounted to $2,000,000 and $1,499,384, respectively, collateralized by substantially all assets of the Borrowers and guaranteed by Galen. Repayment of the loan is due on May 31, 2017. In order to make the loan to the Borrowers, the Lenders borrowed $1,000,000 from Eagle Bank and $1,000,000 from Reliant Bank. The promissory note to Eagle Bank has a maturity date of August 26, 2013 and interest is payable monthly at the bank’s prime rate (as defined) plus 1% with a minimum rate of 7.5%. The promissory note to Reliant Bank has a maturity date of March 28, 2014 and interest is payable monthly at fixed rate of 7.0%. In addition, the Reliant Bank loan is secured by a $250,000 deposit, of which $165,000 was deposited by the Company. Interest is directly paid by the Company to the banks on a monthly basis.
|
|
|
2,000,000
|
|
|
|
1,499,384
|
|
Total notes payable- Affiliates
|
|
$
|
3,027,159
|
|
|
$
|
2,500,801
|
|
Less: Short term portion
|
|
|
(1,027,159
|
)
|
|
|
(2,500,801
|
)
|
Total notes payable- Affiliates – long term
|
|
$
|
2,000,000
|
|
|
$
|
-
|
|
As of December 31, 2012 and $3,027,159
and $2,500,801 were outstanding, respectively, on the notes payable to related parties. In 2011, these parties were granted warrants
to purchase 5,655,000 shares of Innolog common stock. The strike price to purchase the common stock ranges from $0.01 to $0.50
per share with a 5-year expiration date.
The fair value of these warrants amounted to $46,180 and was
amortized to interest expense during the twelve months ended December 31, 2011.
In 2012, these parties were granted warrants
to purchase 914,500 shares of Innolog common stock. The strike price to purchase the common stock ranges from $0.01 to $0.07 per
share with a 5-year expiration date.
The fair value of these warrants amounted to $38,683 and was amortized
to interest expense during the twelve months ended December 31, 2012.
Of these notes, $982,159 and $451,417 were
in default as of December 31, 2012 and December 31, 2011, respectively. Total interest and fees incurred on these notes amounted
to $345,737 and $259,721 during the twelve months ended December 31, 2012 and 2011. Total interest and fees accrued on these notes
amounted $357,297 and $236,952 as of December 31, 2012 and December 31, 2011, respectively.
Also, during the year ended December 31,
2012, the Company received and repaid the following notes:
On October 2, 2012, the director loaned
the Company additional funds totaling $20,000 with an interest rate of $2,000 and a maturity date of October 17, 2012. In addition,
warrants of 20,000 were granted for the purchase of common stock with a strike price of $0.07 and an expiration date of 5 years.
As of December 31, 2012, the loan was repaid in full.
Convertible Notes Payable Long Term, affiliates:
At December 31, 2012 and 2011, notes payable
long term, affiliates consisted of the following:
|
|
December 31, 2012
|
|
|
December 31, 2011
|
|
A LLC which is an affiliate of a holder of more than 5% of our common stock
|
|
$
|
1,750,000
|
|
|
$
|
-
|
|
Less: Unamortized debt discount
|
|
|
(1,499,141
|
)
|
|
|
|
|
Total Convertible notes payable long term- affiliates, net of debt discount
|
|
$
|
250,859
|
|
|
$
|
-
|
|
On March 31, 2012, March 21, 2012, March
29, 2012, April 2, 2012, April 10, 2012, April 12, 2012, and April 16, 2012 a LLC, an affiliate of a holder of more than 5% of
our common stock, loaned the Company $300,000, $200,000, $300,000, $300,000, $100,000, $100,000, and $400,000 respectively. The
unsecured loans had a maturity date of May 31, 2012 and carry a 6% per annum interest rate.
On May 21, 2012 the Company entered into
a Convertible Notes Purchase Agreement for up to $6,000,000 collateralized by substantially all assets of the Borrowers (“Holdings
and Innovative”) with a maturity date of May 31, 2017 and a 6% per annum rate of interest. The interest accrues and is payable
at maturity. The convertible promissory notes plus accrued interest under the Note Purchase Agreement are convertible
into a Series B Convertible Preferred Stock on a dollar for dollar basis. The Series B has a liquidation preference and is convertible
into common shares at a conversion price of $0.076 per share. The investors have a first lien position on the assets of the Company
on a pari passu basis with the holders of other affiliated debt. The LLC rolled its short-term loans above into this agreement.
In addition, the LLC note is secured by a substantial portion of the directors of the Company stock holdings. The LLC received
8,750,000 warrants for the purchase of the Company common stock at an exercise price of $.069 per share with an expiration date
of May 31, 2017. As of December 31, 2012 the accrued interest on this loan was $64,726.
In
accordance with Accounting Standards Codification 470-20-65, “Accounting for Convertible Securities with Beneficial Conversion
Features or Contingently Adjustable Conversion Ratios (“ASC 470-20-65”), the Company recognized an imbedded beneficial
conversion feature present in the notes. The Company recognized a debt discount of $1,360,869, which was equal to the intrinsic
value of the imbedded beneficial conversion feature
. The Company also recorded a net of a
deferred debt discount of $347,711 based on the relative fair value of the warrants under the Black-Scholes pricing model
based
on the following assumptions: (1) risk free interest rate of 0.72%; (2) dividend yield of 0%; (3) volatility factor of the expected
market price of the Company common stock of 74.85%; and (4) an expected life of the warrants of 5 years. Total debt discount of
$1,708,581 is attributed to the beneficial conversion feature were recognized to additional paid in capital and a discount against
the Note. The debt discount is being amortized over the Notes maturity period (five years) as interest expense.
During
the twelve months ended December 31, 2012, the Company recorded amortization of the debt discount relating to these notes of $209,439.
Consulting Agreement:
In 2011, the Company entered
into a verbal agreement with a greater than 5% shareholder for advisory services. On July 11, 2011 the shareholder was granted
warrants for 10,000,000 common shares at a strike price of $0.06 per share with an expiration date of five years. The fair value
of $18,700 on this warrants were charged to expenses during the year 2011.
Legal Fees:
During the twelve months ended
December 31, 2012 and 2011, the Company incurred and reimbursed legal fees in the amount of $290,573 and $199,000 respectively
on behalf of its executive officer in defense of an investigation by a governmental agency.
Note 10: Commitments and Contingencies
Leases:
The Company leases office space in Washington, D.C.
and Fairfax, Virginia under operating leases expiring at various dates through 2016. 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 December 31, 2012 are approximately as follows:
Year ending December 31,
|
|
|
|
2013
|
|
$
|
236,000
|
|
2014
|
|
|
174,000
|
|
2015
|
|
|
178,000
|
|
2016
|
|
|
121,000
|
|
|
|
$
|
709,000
|
|
Total rent expense amounted to $316,944 and $320,925
for the twelve months ended December 31, 2012 and 2011, 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 as of December 31, 2010. In July 2011, the settlement agreement was amended to extend
the $350,000 payment till 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 twelve months ended December 31, 2011.
Late Deposit of Payroll Taxes and Employee Income Tax Withholdings:
At December 31, 2012, the Company
is delinquent with filing and remitting payroll taxes of $4,071,610
including
estimated penalties and interest related to payroll taxes withheld since December
31, 2009. The Company has recorded the delinquent payroll taxes, which are included in accrued expenses on the balance sheet. Although
the Company has not entered into any formal repayment agreements with the applicable tax authorities, management plans to make
payment as funds become available. Penalties and interest amounts are subject to increase based on a number of factors that can
cause the estimated liability to increase further. Interest and penalties were accrued in an amount estimated to cover the ultimate
liability As of December 31, 2012 and 2011, the total of payroll tax accrued and income tax withheld balances including penalties
and interest, amounted to $4,071,610 and $3,694,635, 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 $614,990
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 January 31, 2012 this agreement was cancelled and replaced by a consulting agreement as
the President and Chief Executive Officer of Innovative retired.
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 December 31, 2012 and 2011 and are included in accounts payable and other accrued liabilities.
Legal Proceedings
Other than the proceedings described below,
the Company is not currently involved in any material legal proceedings, nor have been involved in any such proceedings that have
had or may have a significant effect on it. The Company is not aware of any other credible material legal proceedings pending or
threatened against it.
Lau Massachusetts Business Trust et.
al. vs. Innovative Logistics Techniques, Inc
. This complaint was filed in June 2010 in the Circuit Court of Fairfax County
Virginia (Case No. 2010-8002). The complaint alleges, among other things, breach of various contracts, trover and conversion
of funds based on the Company’s receipt of moneys that allegedly should have been paid over to the complainant or its affiliates
in or about 2008 and non-payment of various alleged settlement arrangements. The Company has entered into a settlement agreement,
as amended (under which, the Company was in default), and a forbearance agreement requiring the payment of approximately $375,000.
An initial payment of $75,000 was due about March 31, 2012 and the remainder was to be paid with interest over the next 12 months.
The Company is in default of the settlement and forbearance agreements.
U.S. Department of Labor vs. Innovative
Logistics Techniques, Inc. and ILT 401K Plan.
This complaint was filed in November 2012, in the US District Court for
the Eastern District of Virginia (Civil Action No. 12-1321). The complaint, covering a period from January 1, 2007 through April
1, 2011, alleges, among other things, failure by the Company to remit certain employee assets to the Plan and wrongful treatment
and use of Plan assets. The Complaint seeks restoration of Plan assets (including lost profits) of approximately $200,000, an injunction
against the Company regarding ERISA activities and other legal and equitable relief. The company has filed a response dated February
25, 2013 and is awaiting a decision from the court.
Investigation by the US Internal Revenue
Service
. The US Internal Revenue Service has alleged that various past due taxes since 2008 are due and owing by the
Company. The IRS has filed various liens amounting to approximately $321,494. There are various matters and issues pending
before the IRS. The Company has sought an installment payment plan with the service. The Company has not heard from the IRS regarding
the proposed payment plan.
Note 11: 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 December 31, 2012, the Company
had net operating loss carry forwards of approximately $11 million for federal and Virginia state tax purposes expiring through
2031.
The Company has filed its 2011
federal and state income tax returns.
The Company recognizes interest
and penalties related to income tax matters in interest expense and operating expenses, respectively. As of December 31, 2012,
the Company has no accrued interest and penalties related to uncertain tax positions.
Note 12: 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 twelve months ended December
31, 2012 and 2011.
Innovative has been late in
making deposits of employee deferrals. The Department of Labor has reviewed Innovative’s employee benefit plan document as
well as other records to determine the status of compliance. The Department of Labor and the Company have determined that a remaining
total of $183,304 is to be deposited in the plan, which includes all principal and any penalties.
The
Company is working with the Department of Labor on a payment plan. In addition, the Department of Labor has required that the plan
be terminated.
Note 13: Capital Stock
Common Stock:
The Company has authorized
200,000,000 shares of common stock, with a par value of $0.001 per share.
As of December 31, 2012 and 2011,
17,974,538 and 15,129,973 shares, respectively, of the Company common stock were issued and outstanding.
During the year ended December
31, 2012, the Company issued 869,565 shares of its common stock valued at $60,000 for accrued services.
During the year ended December
31, 2012, the Company issued 625,000 shares of its common stock valued at $37,500 for interest expense.
During the year ended December
31, 2012, the Company issued 300,000 shares of its common stock valued at par for conversion of 300,000 Series A convertible preferred
stock.
During the year ended December
31, 2012, the Company issued 1,050,000 shares of its common stock valued at par upon exercise of warrants.
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.
As of December 31, 2012 and
2011, there were 36,894,758 shares of Series A Convertible Preferred Stock outstanding and no dividends have been accrued.
During the year ended December
31, 2012, the Company issued 300,000 shares of its Series A convertible preferred stock for accrued services valued at $3,000,
which was converted into 300,000 common stock valued at par.
The Company has designated 7,800,000
shares of the preferred stock as Series B Convertible Preferred Stock (“Series B Stock”). The holders of Series B Stock
have voting rights with a two times the original issue price plus any declared or accrued but unpaid dividends liquidation preference
to the Company’s Series A Convertible Preferred and Common Stock. Each share of Series B Stock may convert to common stock
at any time at the conversion rate. The conversion rate is defined 120% of the average market closing price of the Common Stock
as determined for the 30-day period ending two business days prior to the applicable closing under the May 21, 2012 Note Purchase
Agreement.
Series B Stock converts automatically upon the occurrence of a listing of the common stock on the NASDAQ or American
Stock Exchange. Holders of the Series B Stock are entitled to accrue dividends based at a 6% rate per annum.
As of December 31, 2012 and
2011, there were no shares of Series B Convertible Preferred Stock issued and outstanding and no dividends have been accrued.
Warrants:
For the three months ended March
31, 2012, the Company granted 2,047,000 warrants to various individuals in conjunction with the individuals lending the Company
funds for working capital, renewals of loans and settlement of debt due. The warrants have an exercise price of $0.01 per share
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 $87,156 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
|
|
|
73.93
|
%
|
Average risk free interest rate
|
|
|
1.07
|
%
|
Expected life (in years)
|
|
|
5.0
|
|
For the three months ended June
30, 2012, the Company granted 12,296,667 warrants to various individuals in conjunction with the individuals lending the Company
funds for working capital, renewals of loans, services, and settlement of debt due. The warrants have an exercise price of $0.01
to $0.069 per share and a life of five years. All warrants were fully vested on the date of the grant. Out of total warrant issued,
2,700,000 warrants that were issued are related to Note holders, the fair value of $178,470 was determined through Black Scholes
analysis which was charged as an expense, 846,667 warrants that were issued are related to service providers, the fair value of
$26,525 was determined through Black Scholes analysis and was charged as an expense and 8,750,000 warrants were issued in conjunction
with Convertible Note Payable (Note 9).
The following assumptions were used in arriving at
the fair value of the above noted warrants:
Expected dividend yield
|
|
|
0
|
%
|
Expected volatility
|
|
|
74.85
|
%
|
Average risk free interest rate
|
|
|
0.72
|
%
|
Expected life (in years)
|
|
|
5.0
|
|
For the three months ended September
30, 2012, the Company granted 2,692,000 warrants to various individuals in conjunction with the individuals lending the Company
funds for working capital, renewals of loans, and settlement of debt due. The warrants have an exercise price of $0.01 per share
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 $160,828 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
|
|
|
76.63
|
%
|
Average risk free interest rate
|
|
|
0.62
|
%
|
Expected life (in years)
|
|
|
5.0
|
|
For the three months ended December
31, 2012, the Company granted 5,933,929 warrants to various individuals in conjunction with the individuals lending the Company
funds for working capital, renewals of loans, and settlement of debt due. The warrants have an exercise price of $0.01 to $0.07
per share 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 $312,188 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
|
|
|
79.84
|
%
|
Average risk free interest rate
|
|
|
0.69
|
%
|
Expected life (in years)
|
|
|
5.0
|
|
A summary of the Company’s warrant activity and
related information is as follows:
Warrant Summary
|
|
Warrants
|
|
|
Weighted Average Exercise Price
|
|
|
|
|
|
|
|
|
Outstanding, January 1, 2011
|
|
|
43,077,129
|
|
|
$
|
0.513
|
|
Issued
|
|
|
20,165,000
|
|
|
|
0.064
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
Forfeited/Expired
|
|
|
(130,565
|
)
|
|
|
(11.12
|
)
|
Outstanding, December 31, 2011
|
|
|
63,111,564
|
|
|
|
0.347
|
|
|
|
|
|
|
|
|
|
|
Issued
|
|
|
22,965,082
|
|
|
|
0.04
|
|
Exercised
|
|
|
(1,050,000
|
)
|
|
|
(0.01
|
)
|
Forfeited/Expired
|
|
|
(11,706
|
)
|
|
|
(3.21
|
)
|
Outstanding, December 31, 2012
|
|
|
85,012,259
|
|
|
$
|
0.27
|
|
At December 31, 2012, there
were 85,012,259 warrants outstanding and exercisable. These warrants had a weighted average exercise price of $0.27 and a weighted
average remaining life of 39.6 months. The intrinsic value is not greater than the grant price.
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 December 31, 2012 is presented in the following table.
|
|
Number of Options
|
|
|
Weighted Average Exercise Price
|
|
Outstanding at January 1, 2011
|
|
|
13,451,980
|
|
|
$
|
0.503
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
Exercised/Expired/Cancelled
|
|
|
(22,480
|
)
|
|
|
(2.22
|
)
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2011
|
|
|
13,429,500
|
|
|
|
0.50
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
Exercised/Expired/Cancelled
|
|
|
(2,647,500
|
)
|
|
|
(0.50
|
)
|
Outstanding at December 31, 2012
|
|
|
10,782,000
|
|
|
$
|
0.50
|
|
|
|
|
|
|
|
|
|
|
Exercisable at December 31, 2012
|
|
|
10,763,000
|
|
|
$
|
0.50
|
|
These stock options have a weighted average remaining
life of 32.2 months.
The intrinsic value is not greater than the grant price.
2012 Consultant Stock Plan
The 2012 Consultant Stock Plan (the “Plan”),
under which consultants and other service providers may be granted shares of the Company’s Common Stock. The Company has
reserved up to 5,000,000 shares under this plan. The plan will expire in 10 years. The stock under this plan has been registered
under a S-8. During the twelve months ended December 31, 2012, the Company has granted 869,565 shares valued at $60,000 for services
rendered in prior period.
Equity Credit Line
On July 25, 2012, the Company entered into
an equity credit line with Dutchess Opportunity Fund II, LP for up to $5,000,000 over a three-year term. Under this arrangement
the Company may obtain working capital from Dutchess in exchange for common stock. The amount of the put is determined by 200%
of the average daily volume for the 3 days prior to the put date and the purchase price is determined 95% of the volume weighted
average price during the 5 trading days after the put date. As of the twelve months ended December 31, 2012, this line has not
been used.
Note 14: Subsequent Events
Borrowings:
On January 2, 2013, the Company borrowed
$50,000 from an individual. The loan carried an interest rate of $4,000 and a maturity date of February 2, 2013. In addition, warrants
of 50,000 were granted for the purchase of common stock with a strike price of $0.05 and an expiration date of 5 years.
On January 4, 2013, the Company entered
into a convertible promissory note agreement with a LLC for $50,000. The loan carried an interest rate of 6% p.a. and a maturity
date of May 30, 2017. The note is convertible into whole or part into Series B convertible preferred stock of the Company at an
effective conversion rate of one share of Series B convertible preferred stock for each $1 outstanding principal and accrued but
unpaid interest. In addition, warrants of 250,000 were granted for the purchase of common stock with a strike price of $0.0709
and an expiration date of 5 years.
On January 8, 2013, the Company borrowed
$50,000 from an individual. The loan carried an interest rate of $5,000 and a maturity date of March 25, 2013. In addition, warrants
of 50,000 were granted for the purchase of common stock with a strike price of $0.05 and an expiration date of 5 years.
On January 15, 2013, the Company borrowed
$50,000 from a trust. The loan carried an interest rate of 2.5% per annum and a maturity date of February 7, 2013. In addition,
warrants of 100,000 were granted for the purchase of common stock with a strike price of $0.01 and an expiration date of 5 years.
A director also guaranteed this loan.
On January 23, 2013, the Company borrowed
$50,000 from a trust. The loan carried an interest rate of $5,000 and a maturity date of February 17, 2013. In addition, warrants
of 100,000 were granted for the purchase of common stock with a strike price of $0.01 and an expiration date of 5 years. A director
also guaranteed this loan.
On January 28, 2013, the Company borrowed
$10,000 from an individual. The loan carried an interest rate of $700 and a maturity date of February 12, 2013. In addition, warrants
of 10,000 were granted for the purchase of common stock with a strike price of $0.01 and an expiration date of 5 years. A director
and a officer also guaranteed this loan.
On January 30, 2013, the Company borrowed
$25,000 from an individual. The loan carried an interest rate of $2,000 and a maturity date of March 10, 2013. In addition, warrants
of 25,000 were granted for the purchase of common stock with a strike price of $0.05 and an expiration date of 5 years. A director
and a officer also guaranteed this loan.
On January 31, 2013, the Company borrowed
$25,000 from an individual. The loan carried an interest rate of $2,000 and a maturity date of March 11, 2013. In addition, warrants
of 25,000 were granted for the purchase of common stock with a strike price of $0.05 and an expiration date of 5 years. A director
and a officer also guaranteed this loan.
On February 12, 2013, the Company borrowed
$50,000 from an individual under a note dated January 8, 2013. The loan carried an interest rate of $5,000 and a maturity date
of March 25, 2013. In addition, warrants of 50,000 were granted for the purchase of common stock with a strike price of $0.05 and
an expiration date of 5 years. A director also guaranteed this loan.
On February 18, 2013, the Company entered
into a up to $200,000 revolving line of credit with a Director. The advances must be approved by the lender and carry a flat interest
fee of 10% and a maturity of up to 90 days on each advance. The revolving line of credit has a maturity date of December 31, 2013.
There have been seven advances under this facility: 12/19/12 $45,000; 1/2/13 $10,000; 1/16/13 $45,000 1/28/13 $25,000.; 2/5/13
$7,500; 2/19/13 $5,000; and 2/25/13 $10,000.
On February 8, 2013, the Company borrowed
$25,000 from a trust. The loan carried an interest rate of 2.5% per annum and a maturity date of February 14, 2013. In addition,
warrants of 50,000 were granted for the purchase of common stock with a strike price of $0.01 and an expiration date of 5 years.
A director also guaranteed this loan.
On February 27, 2013, the Company borrowed
$75,000 from a related party. The loan was repaid on March 4, 2013 and no interest was charged.
Warrants and Options:
On January 25, 2013 the Company approved the issuance of 436,293
shares of common stock to Erick Richardson under 2012 consultant plan valued at $26,178 for legal services.
On January 25, 2013 the Company granted
a stock option award of 60,000 shares of common stock to vest over 3 years at a strike price of $0.10 per share to an employee.
On January 25, 2013 the Company approved
that the Board be awarded warrants for their service to the company in 2012 and for the coming year 2013. For 2012 they are awarded
150,000 warrants at today’s closing price of $0.045 with 5 year expiration and for 2013 service 250,000 warrants at today’s
closing price of $0.045 with 5 year expiration. The Company charged to operations fair value of 900,000 warrants issued for 2012
services of $11,171 during the year ended December 31, 2012.
On January 25, 2013 the Company approved
that the guarantor/signors of the renewals for the bank loans at Reliant and Eagle Banks be granted warrants as follows: Mel Booth
and Harry Jacobson 600,000 warrants at exercise price of $0.01 per share with 5 years expiration; Bill Danielczyk, Michael Kane,
Ian Reynolds, Bruce Riddle, and Steve Moses 300,000 warrants at exercise price of $0.01 per share with a 5 year expiration. The
Company charged to operations fair value of 2,100,000 warrants issued for renewal of bank loans of $59,559 during the year ended
December 31, 2012.
Other:
On January 25, 2013 the Company accepted
the resignation of Verle Hammond as a director of Innovative Logistics Techniques, Inc.
On January 25, 2013 the Company approved
the nomination of Eric Wagner to the Board of Innovative and noted that he and Richard Steward would serve as directors of Innovative
so long as they were still employed by the company unless the Board replaces them before that time.
The Company is authorized to form a new
subsidiary in Nevada call Innomed. This subsidiary will develop the Company’s health care business. Bill Danielczyk, Michael
Kane, and Ian Reynolds will be the directors of this subsidiary.
On February 5, 2013 the Company entered
into a settlement agreement with YG Funding, Gary Bondi, and Briarwood Capital. The agreement calls for a total settlement amount
of $450,439 and a forbearance until July 31, 2013 and the following payments: $43,750 on the 15
th
of each month, beginning
February 15 and until May 15, 2013, inclusive (total of $175,000, the Total Principal Amount); $30,000 on June 15, 2013 and July
15, 2013; and the remaining balance on or before July 31, 2013.