| 1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES | 1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Nature of Business Innocap, Inc. (the Company) was incorporated under the laws of the State of Nevada on January 23, 2004. The Company had a business plan for finding and assisting in the salvaging of sunken ships. On January 11, 2021, the Company amended and restated its articles of incorporation with the office of the Secretary of State of Nevada to change the Companys name to Unique Logistics International, Inc. On October 8, 2020, the Company, Inno Acquisition Corp., a Delaware corporation and wholly-owned subsidiary of the Company (Merger Sub), and Unique Logistics Holdings, Inc., a privately-held Delaware corporation incorporated on October 28, 2019 headquartered in New York (Unique or ULHI), entered into an Acquisition Agreement and Plan of Merger (the Agreement) pursuant to which the Merger Sub was merged with and into Unique, with Unique surviving as a wholly-owned subsidiary of Innocap (the Merger). The transaction took place on October 8,2020 (the Closing). See Acquisitions in Note 2 below. ULHI operates as a third-party logistics company providing sea and air freight forwarding, servicing customers throughout the United States. The Company has one operating and reportable segment. From inception, October 28, 2019 to May 29, 2020, ULHI was inactive. On May 29, 2020, Unique entered into a Securities Purchase Agreement with Unique Logistics Holdings Ltd, (UL HK), a Hong Kong company, (the UL HK Transaction). See Acquisitions in Note 2 below. COVID-19 In January 2020, the World Health Organization has declared the outbreak of a novel coronavirus (COVID-19) as a Public Health Emergency of International Concern, which continues to have an impact throughout the world and has adversely impacted global commercial activity and contributed to significant declines and volatility in financial markets. The coronavirus outbreak and government responses are creating disruption in global supply chains and adversely impacting many industries. The outbreak could have a continued material adverse impact on economic and market conditions and trigger a period of global economic slowdown. The extent of the impact of COVID-19 on our operational and financial performance will depend on the effect on our shippers and carriers, all of which are uncertain and cannot be predicted. The rapid development and fluidity of this situation precludes any prediction as to the ultimate material adverse impact of the coronavirus outbreak. Nevertheless, the outbreak presents uncertainty and risk with respect to the Company, its performance, and its financial results. The Company has experienced increased air and ocean freight rates due to overall cargo restraints imposed by shippers and carriers. To date, the Company has not experienced any significant negative impact from COVID-19. Basis of Presentation The unaudited interim condensed consolidated financial statements and related notes have been prepared in accordance with accounting principles generally accepted in the United States of America (GAAP) and include the accounts of the Company and its wholly-owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation. The unaudited condensed consolidated financial information furnished herein reflects all adjustments, consisting solely of normal recurring items, which in the opinion of management are necessary to fairly state the financial position of the Company and the results of its operations for the periods presented. This report should be read in conjunction with the Companys consolidated financial statements and notes thereto included in the Companys Form 8-K for the period from inception through May 31, 2020 filed with the Securities and Exchange Commission (the SEC) on January 25, 2021. The Company assumes that the users of the interim financial information herein have read or have access to the audited consolidated financial statements for the preceding fiscal year and that the adequacy of additional disclosure needed for a fair presentation may be determined in that context. Accordingly, footnote disclosure, which would substantially duplicate the disclosure contained in the Companys Form 8-K for the period from inception through May 31, 2020 has been omitted. The results of operations for the interim periods presented are not necessarily indicative of results for the entire year ending May 31, 2021 or any other period. Principles of Consolidation The condensed consolidated financial statements of the Company include the accounts of the Company and its wholly owned subsidiaries stated in U.S. dollars, the Companys functional currency. See Note 2. Business Combination The Company accounts for business acquisitions using the acquisition method as required by Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) Topic 805, Business Combinations. The fair values of intangible assets are generally estimated using a discounted cash flow approach with Level 3 inputs. The estimate of fair value of an intangible asset is equal to the present value of the incremental after-tax cash flows (excess earnings) attributable solely to the intangible asset over its remaining useful life. To estimate fair value, the Company generally uses risk-adjusted cash flows discounted at rates considered appropriate given the inherent risks associated with each type of asset. The Company believes the level and timing of cash flows appropriately reflects market participant assumptions. For acquisitions that involve contingent consideration, the Company records a liability equal to the fair value of the contingent consideration obligation as of the acquisition date. The Company determines the acquisition date fair value of the contingent consideration based on the likelihood of paying the additional consideration. The fair value is generally estimated using projected future operating results and the corresponding future earn-out payments that can be earned upon the achievement of specified operating objectives and financial results by acquired companies using Level 3 inputs and the amounts are then discounted to present value. These liabilities are measured quarterly at fair value, and any change in the fair value of the contingent consideration liability is recognized in the condensed consolidated statements of operations. During the measurement period, which may be up to one year from the acquisition date, the Company records adjustments to the assets acquired and liabilities assumed with the corresponding adjustment to goodwill. Upon the conclusion of the measurement period or final determination of the values of assets acquired or liabilities assumed, whichever comes first, any subsequent adjustments are recognized in the condensed consolidated statements of operations. Use of Estimates The preparation of condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenue and expenses during the reported period. Actual results could differ from those estimates. Significant estimates inherent in the preparation of the condensed consolidated financial statements include determinations of the useful lives and expected future cash flows of long-lived assets, including intangibles, valuation of assets and liabilities acquired in business combinations, estimates of valuation assumptions for long-lived assets impairment, estimates and assumptions in valuation of debt and equity instruments and the calculation of share-based compensation. In addition, the Company makes significant judgments to recognize revenue see policy note Revenue Recognition below. Fair Value Measurement The Company follows the authoritative guidance that establishes a formal framework for measuring fair values of assets and liabilities in the condensed consolidated financial statements that are already required by generally accepted accounting principles to be measured at fair value. The guidance defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (exit price). The transaction is based on a hypothetical transaction in the principal or most advantageous market considered from the perspective of the market participant that holds the asset or owes the liability. The Company utilizes market data or assumptions that market participants who are independent, knowledgeable and willing and able to transact would use in pricing the asset or liability, including assumptions about risk and the risks inherent in the inputs to the valuation technique. These inputs can be readily observable, market corroborate or generally unobservable. The Company attempts to utilize valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs. The Company is able to classify fair value balances based on the observability of those inputs. The guidance establishes a formal fair value hierarchy based on the inputs used to measure fair value. The hierarchy gives the highest priority to level 1 measurements and the lowest priority to level 3 measurements, and accordingly, level 1 measurement should be used whenever possible. The hierarchy is broken down into three levels based on the reliability of inputs as follows: Level 1 Quoted prices in active markets for identical assets or liabilities or published net asset value for alternative investments with characteristics similar to a mutual fund. Level 2 Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly. Level 3 Unobservable inputs for the asset or liability. The methods used may produce a fair value calculation that may not be indicative of net realizable value or reflective of future fair values. Furthermore, while management believes its valuation methods are appropriate, the fair value of certain financial instruments could result in a difference fair value measurement at the reporting date. There were no changes in the Companys valuation methodologies from the prior year. For purpose of this disclosure, the fair value of a financial instrument is the amount at which the instrument could be exchanged in a current transaction between willing parties, other than in a forced sale or liquidation. The carrying amounts for financial assets and liabilities such as cash and cash equivalents, accounts receivable - trade, contract assets, factoring reserve, other prepaid expenses and current assets, accounts payable - trade, accrued expenses and other current liabilities, contract liabilities, current portion of long-term debt due to related party payables, convertible notes, net and current portion of promissory loans approximate fair value due to their short-term nature as of November 30, 2020 and May 31, 2020. The carrying amount of the debt approximates fair value because the interest rates on these instruments approximate the interest rate on debt with similar terms available to the Company. Lease liabilities approximate fair value based on the incremental borrowing rate used to discount future cash flows. Cash and Cash Equivalents The Company considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents. The Company maintains its cash in bank deposit accounts, which at times may exceed federally insured limits. No loss had been experienced, and management believes it is not exposed to any significant risk on credit. Accounts Receivable Trade Accounts receivable - trade from revenue transactions are based on invoiced prices which the Company expects to collect. In the normal course of business, the Company extends credit to customers that satisfy pre-defined credit criteria. The Company generally does not require collateral to support customer receivables. Accounts receivable - trade, as shown on the condensed consolidated balance sheets, is net of allowances when applicable. An allowance for doubtful accounts is determined through analysis of the aging of accounts receivable at the date of the condensed consolidated financial statements, assessments of collectability based on an evaluation of historic and anticipated trends, the financial condition of the Companys customers, and an evaluation of the impact of economic conditions. The maximum accounting loss from the credit risk associated with accounts receivable is the amount of the receivable recorded, net of allowance for doubtful accounts. As of November 30, 2020 and May 31, 2020 the Company recorded an allowance for doubtful accounts of $60,000 and $0, respectively. Concentrations One customer represented greater than 10% of accounts receivable as of November 30, 2020. No customer represented greater than 10% of accounts receivable as of May 31, 2020. Two customers accounted for 16% and 38% of revenue, respectively, for the three months ended November 30, 2020. Two customers accounted for 19% and 33% of revenue, respectively, for the six months ended November 30, 2020. Off Balance Sheet Arrangements The Company has an agreement with an unrelated third party (the Factor) for factoring of specific accounts receivable. The factoring is treated as a sale in accordance with FASB ASC 860, Transfers and Servicing The Company acts as the agent on behalf of the Factor for the arrangements and has no significant retained interests or servicing liabilities related to the accounts receivable sold. The agreement provides the Factor with security interests in purchased accounts until the accounts have been repurchased by the Company or paid by the customer. In order to mitigate credit risk related to the Companys factoring of accounts receivable, the Company may purchase credit insurance, from time to time, for certain factored accounts receivable, resulting in risk of loss being limited to the factored accounts receivable not covered by credit insurance, which the Company does not believe to be significant. During the three and six months ended November 30, 2020 the Company factored accounts receivable invoices totaling approximately $73,827,000 and $111,692,000, respectively, pursuant to the Companys factoring agreement, representing the face value of the invoices. The Company recognizes factoring costs upon disbursement of funds. The Company incurred expenses totaling approximately $1,410,000 and $1,884,000 pursuant to the agreements for the three and six months ended November 30, 2020, respectively, which is presented in costs and operating expenses on the condensed consolidated statement of operations. The Company did not incur factor related expenses for the period from October 28, 2019 (inception), through November 30, 2019. See Note 11. Factoring Reserve When an invoice is sold to Factor, the amount received from the Factor is credited to accounts receivable trade and a reserve is retained, less a fee, by Factor which is debited to factoring reserve on the condensed consolidated balance sheets. Factor Recovery In certain instances, the Company receives payment for a factored reserve directly from the customer. In these cases, until the funds are paid to the factor, the Company records the payment as factor recovery which is in accrued expenses and other current liabilities on the condensed consolidated balance sheets. Recourse Liability Company policy is to do a collectability review of uncollected factored receivables in conjunction with the factor at each reporting date and assess the need to provide for risk of potential non-collection and resulting recourse. Property and Equipment Property and equipment are stated at cost less accumulated depreciation and impairment losses. Depreciation is provided for by the straight-line method over the estimated useful lives of the related assets. Estimated useful lives of property and equipment are as follows: Software 3 years Computer equipment 3 5 years Furniture and fixtures 5 7 years Leasehold improvements Shorter of estimated useful life or remaining term of the lease Both the useful life of an asset and its residual value, if any, are reviewed annually. Expenditures for repairs and maintenance are charged to expense as incurred. For assets sold or otherwise disposed of, the cost and related accumulated depreciation are removed from the accounts, and any related gain or loss is reflected in income for the period. The Company did not record any impairment for the three and six months ended November 30, 2020 and for the period from October 28, 2019 (inception), through November 30, 2019. Goodwill and Other Intangibles The Company accounts for business acquisitions in accordance with GAAP. Goodwill in such acquisitions is determined as the excess of fair value over amounts attributable to specific tangible and intangible assets. GAAP specifies criteria to be used in determining whether intangible assets acquired in a business combination must be recognized and reported separately from goodwill. Amounts assigned to goodwill and other identifiable intangible assets are based on independent appraisals or internal estimates. In accordance with GAAP, the Company does not amortize goodwill or indefinite-lived intangible assets. Management evaluates the remaining useful life of an intangible asset that is not being amortized each reporting period to determine whether events and circumstances continue to support an indefinite useful life. If an intangible asset that is not being amortized is subsequently determined to have a finite useful life, it is amortized prospectively over its estimated remaining useful life. Amortizable intangible assets, including tradenames and non-compete agreements, are amortized on a straight-line basis over 3 to 10 years. Customer relationships are amortized on a straight-line basis over 12 to 15 years. The Company tests goodwill for impairment annually as of May 31 or if an event occurs or circumstances change that indicate that the fair value of the entity, or the reporting unit, may be below its carrying amount (a triggering event). Whenever events or circumstances change, entities have the option to first make a qualitative evaluation about the likelihood of goodwill impairment. If impairment is deemed more likely than not, management would perform the two-step goodwill impairment test. Otherwise, the two-step impairment test is not required. In assessing the qualitative factors, the Company assessed relevant events and circumstances that may impact the fair value and the carrying amount of the reporting unit. The identification of the relevant events and circumstances and how these may impact a reporting units fair value or carrying amount involve significant judgements and assumptions. The judgement and assumptions include the identification of macroeconomic conditions, industry and market considerations, overall financial performance, Company specific events and share price trends, an assessment of whether each relevant factor will impact the impairment test positively or negatively, and the magnitude of an such impact. If a quantitative assessment is performed, a reporting units fair value is compared to its carrying value. A reporting units fair value is determined based upon consideration of various valuation methodologies, including the income approach, which utilizes projected future cash flows discounted at rates commensurate with the risks involved and multiples of current and future earnings. If the fair value of a reporting unit is less than its carrying amount, an impairment charge is recognized for the amount by which the carrying amount exceeds the reporting units fair value; however, the loss recognized cannot exceed the total amount of goodwill allocated to that reporting unit. For the three and six months ended November 30, 2020 and the period from October 28, 2019 (inception) through November 30, 2019, no impairment of goodwill was identified. Impairment of Long-Lived Assets Long-lived assets are comprised of intangible assets and property and equipment. Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. An estimate of undiscounted future cash flows produced by the asset, or the appropriate grouping of assets, is compared to the carrying value to determine whether an impairment exists, pursuant to the provisions of FASB ASC 360-10 Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of. Income Taxes The Company files a consolidated income tax return for federal and most state purposes. Management has determined that there are no uncertain tax positions that would require recognition in the condensed consolidated financial statements. If the Company were to incur an income tax liability in the future, interest and penalties on any income tax liability would be reported as interest expense. Managements conclusions regarding uncertain tax positions may be subject to review and adjustment at a later date based on ongoing analysis of tax laws, regulations, and interpretations thereof as well as other factors. Generally, federal, state, and local authorities may examine the Companys tax returns for three to four years from the filing date and the current and prior three to four years remain subject to examination as of December 31, 2020 for the UL US Entities, January 31, 2020 for the Company and May 31, 2020 for UL HI. The Company uses the assets and liability method of accounting for deferred taxes. Deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the balance sheet carrying amounts of existing assets and liabilities and their respective tax basis. As of November 30, 2020 and May 31, 2020, the Company recognized a deferred tax asset of $221,000 and $0, respectively, which is included in security deposits and other assets on the condensed consolidated balance sheets. The Company regularly evaluates the need for a valuation allowance related to the deferred tax asset. No valuation allowance was recorded at November 30, 2020. In response to the COVID-19 pandemic, the Coronavirus Aid, Relief and Economic Security Act ( CARES Act 2017 Tax Act NOLs In addition, the CARES Act raises the corporate charitable deduction limit to 25% of taxable income and makes qualified improvement property generally eligible for 15-year cost-recovery and 100% bonus depreciation. The enactment of the CARES Act did not result in any material adjustments to the income tax provision. Income Tax Provision The income tax provision of $290,505 and $307,199 included in the Companys results of operations for the three and six months ended November 30, 2020, respectively, reflects the Companys estimated effective tax rate for the years ending May 31, 2021 and 2020, respectively. These rates resulted in a provision of 25.64% for the three and six months ended November 30, 2020. The Company did not record a tax provision for the period from October 28, 2019 (inception) through November 30, 2019. Revenue Recognition The Company adopted ASC 606, Revenue from Contracts with Customers To determine revenue recognition, the Company applies the following five steps: 1. 2. 3. 4. 5. Revenue is recognized as follows: i. Freight income from the provision of air, ocean, and land freight forwarding services are recognized over time based on a relative transit time basis thru the sail or departure from origin port. The Company is the principal in these transactions and recognizes revenue on a gross basis. ii. Freight income from the provision of air, ocean, and land freight forwarding services are recognized over time based on a relative transit time basis thru the delivery to the customers designated location. The Company is the principal in these transactions and recognizes revenue on a gross basis. iii. Customs brokerage and other service income from the provision of other services are recognized at the point in time the performance obligation is met. The Companys business practices require, for accurate and meaningful disclosure, that it recognizes revenue over time. The over time policy is the period from point of origin to arrival of the shipment at US Port of entry (or in the case when the customer requires delivery to a designated point, the arrival at that delivery point). This over time policy requires the Company to make significant judgements to recognize revenue over the estimated duration of time from port of origin to arrival at port of entry. The point in the process when the Company meets its obligation in the port of entry and the subsequent transfer of the goods to the customer is when the customer has the obligation to pay, has taken physical possession, has legal title, risk and awards (ownership) and has accepted the goods. The Company has elected to not disclose the aggregate amount of the transaction price allocated to performance obligations that are unsatisfied as of the end of the period as the Companys contracts with its customers have an expected duration of one year or less. The Company uses independent contractors and third-party carriers in the performance of its transportation services. The Company evaluates who controls the transportation services to determine whether its performance obligation is to transfer services to the customer or to arrange for services to be provided by another party. As discussed under ASC 606-10-55, the Company determined it acts as the principal for its transportation services performance obligation since it is in control of establishing the prices for the specified services, managing all aspects of the shipments process and assuming the risk of loss for delivery and collection. Revenue billed prior to realization is recorded as contract liabilities on the condensed consolidated balance sheets and contract costs incurred prior to revenue recognition are recorded as contract assets on the condensed consolidated balance sheets. Contract Assets Contract assets represent amounts for which the Company has the right to consideration for the services provided while a shipment is still in-transit but for which it has not yet completed the performance obligation and has not yet invoiced the customer. Upon completion of the performance obligations, which can vary in duration based upon the method of transport and billing the customer, these amounts become classified within accounts receivable - trade. Contract Liabilities Contract liabilities represent the amount of obligation to transfer goods or services to a customer for which consideration has been received. There were no contract liabilities outstanding as of November 30, 2020 and May 31, 2020. Disaggregation of Revenue from Contracts with Customers The following table disaggregates gross revenue by significant geographic area for the three and six months ended November 30, 2020 based on origin of shipment (imports) or destination of shipment (exports): For the Three Months ended November 30, 2020 For the Six Months ended November 30, 2020 United States $ 14,946,011 $ 20,223,652 South East Asia 40,546,168 49,678,000 India Sub-continent 6,370,739 10,386,329 China, Hong Kong & Taiwan 58,742,573 95,051,241 Other 4,033,929 6,715,465 Total revenue $ 124,639,420 $ 182,054,687 Segment Reporting Based on the guidance provided by ASC Topic 280, Segment Reporting Earnings per Share Earnings per share (EPS) is the amount of earnings attributable to each share of common stock. For convenience, the term is used to refer to either earnings or loss per share. EPS is computed pursuant to Section 260-10-45 of the FASB ASC. Pursuant to ASC Paragraphs 260-10-45-10 through 260-10-45-16, basic EPS shall be computed by dividing income available to common stockholders (the numerator) by the weighted-average number of common shares outstanding (the denominator) during the period. Income available to common stockholders shall be computed by deducting both the dividends declared in the period on preferred stock (whether or not paid) and the dividends accumulated for the period on cumulative preferred stock (whether or not earned) from income from continuing operations (if that amount appears in the condensed consolidated statements of operations) and also from net income. The computation of diluted EPS is similar to the computation of basic EPS except that the denominator is increased to include the number of additional common shares that would have been outstanding if the dilutive potential common shares had been issued during the period to reflect the potential dilution that could occur from common shares issuable through contingent shares issuance arrangement, stock options or warrants. The following table provides a reconciliation of the numerator and denominator used in computing basic and diluted net income attributable to common stockholders per common share. For the Three Months Ended November 30, 2020 For the Six Months Ended November 30, 2020 Numerator: Net income $ 1,397,183 823,046 Effect of dilutive securities 175,356 175,356 Diluted net income $ 1,572,539 $ 998,402 Denominator: Weighted average common shares outstanding - basic 252,603,584 167,748,635 Dilutive securities (a): Series A Preferred 1,177,041,100 1,177,041,100 Series B Preferred 5,499,034,800 5,499,034,800 Convertible notes 1,236,932,052 1,236,932,052 Warrants 1,099,378,215 1,099,378,215 Weighted average common shares outstanding and assumed conversion diluted 9,264,989,751 9,180,134,802 Basic net income per common share $ 0.01 $ 0.00 Diluted net income per common share $ 0.00 $ 0.00 (a) - Anti-dilutive securities excluded: - - The Company did not have dilutive securities for the period October 28, 2019 (inception) through November 30, 2019. Leases In February 2016, the FASB issued Accounting Standards Update (ASU) 2016-02 Leases The Company adopted ASC 842 upon inception and recognized a right of use (ROU) asset and liability in the consolidated balance sheet in the amount of $4,770,280 related to the operating lease for office and warehouse space. For leases in which the acquiree is a lessee, the Company shall measure the lease liability at the present value of the remaining lease payments, as if the acquired lease were a new lease of the Company at the acquisition date. The Company shall measure the right-of-use asset at the same amount as the lease liability as adjusted to reflect favorable and unfavorable terms of the lease when compared with market terms. The values of the leases acquired in the business acquisition discussed in Note 2 were representative of fair value at the acquisition date and no favorable or unfavorable terms were noted. The Company adopted the package of practical expedients that allows it to (i) not reassess whether an arrangement contains a lease, (ii) carry forward its lease classification as operating or capital leases, (iii) not to apply the recognition requirements in ASC 842 to short-term leases, (iv) not record a right of use asset or right of use liability for leases with an asset or liability balance that would be considered immaterial. and (v) not reassess its previously recorded initial direct costs. In addition, the Company elected the practical expedient to not separate lease and non-lease components, and therefore both components are accounted for and recognized as lease components. The Company determines if an arrangement is a lease at inception. Right-of-use assets represent the Company's right to use an underlying asset for the lease term, and lease liabilities represent the Company's obligation to make lease payments arising from the lease. All ROU assets and lease liabilities are recognized at the commencement date at the present value of lease payments over the lease term. ROU assets are adjusted for lease incentives and initial direct costs. The lease term includes renewal options exercisable at the Company's sole discretion when the Company is reasonably certain to exercise that option. As the Company's leases generally do not have an implicit rate, the Company uses an estimated incremental borrowing rate based on borrowing rates available to them at the commencement date to determin |
