The accompanying notes are an integral part of these financial statements.
The accompanying notes are an integral part of these consolidated financial statements.
The accompanying notes are an integral part of these consolidated financial statements.
Innolog Holdings Corporation (“Holdings”) was formed in March 2009 as a holding company for the purpose of acquiring companies that provide services primarily to federal government entities. Its wholly owned subsidiary is Innovative Logistics Techniques, Inc. (“Innovative”). As of March 31, 2010, Holdings was a wholly owned subsidiary of Galen Capital Corporation (“Galen”). In June 2010, Holdings was spun out as an independent company.
The accompanying financial statements have been prepared in conformity with generally accepted accounting principles, which contemplate continuation of the Company as a going concern. However, the Company has sustained a substantial operating loss in the current year and has a stockholders’ deficit (defined as total assets minus total liabilities) of $3,128,579 and $2,490,085 at March 31, 2010 and December 31, 2009, respectively. Management believes that actions presently being taken such as continued expense reduction, the implementation of a renewed sales effort and the capital financing efforts of the Company will help to revise the Company’s operating and financial requirements.
The accompanying financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America, which contemplate continuation of the Company as a going concern. As a result of the foregoing, the Company’s independent accounting firm on the Company’s 2009 financial statements, expressed substantial doubt about the Company’s ability to continue as a going concern. The financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that could result from the outcome of this uncertainty.
The Company has adopted changes issued by the Financial Accounting Standards Board (“FASB”) to the authoritative hierarchy of Generally Accepted Accounting Principles (“GAAP”). These changes establish the FASB Accounting Standards Codification (“ASC”) as the source of authoritative accounting principles recognized by the FASB to be applied by nongovernmental entities in the preparation of financial statements in conformity with GAAP. The codification itself does not change GAAP. Other than the manner in which new accounting guidance is referenced, the adoption of these changes had no impact on the financial statements.
The consolidated financial statements includes the assets, liabilities and operating results of Holdings and its wholly-owned subsidiary. All significant intercompany accounts and transactions have been eliminated in consolidation.
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.
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.
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.
The Company provides an allowance for doubtful accounts equal to the estimated collection losses that will be incurred in collection of all receivables. Estimated losses are based on historical collection experience coupled with review of the current status of existing receivables. There was no allowance for doubtful accounts required at March 31, 2010.
Property and equipment are stated at cost and depreciated by the straight-line method over estimated useful lives which are as follows:
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.
The Company reviews for the impairment of long-lived assets and certain identifiable intangibles whenever events or changes in circumstances indicate that the carrying amount of any asset may not be recoverable. An impairment loss would be recognized when the estimated undiscounted future cash flows expected to result from the use of the asset and its eventual disposition is less than the carrying amount. If impairment is indicated, the amount of the loss to be recorded is based on an estimate of the difference between the carrying amount and the fair value of the asset. Fair value is based upon discounted estimated cash flows expected to result from the use of the asset and its eventual disposition and other valuation methods.
In accordance with FASB ASC 350, “Intangibles – Goodwill and Other”, goodwill is tested for impairment at least annually. There was no impairment loss for the period ended March 31, 2010.
The Company and its subsidiary file a consolidated federal income tax return. Income taxes are accounted for using the asset and liability method under FASB ASC 740, "Accounting for Income Taxes", whereby deferred tax assets and liabilities are recognized for future tax consequences attributable to differences between the financial statement carrying amounts of assets and liabilities, and their respective tax basis, and operating loss and tax credit carry forwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities due to a change in tax rates is recognized as income in the period that includes the enactment date. Estimates of the realization of deferred tax assets are based-on the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies.
The Company accounts for stock based compensation in accordance with FASB ASC 505-50, “Equity Based Payments to Non-Employees”. Under the fair value recognition provisions of FASB ASC 505-50, the Company measures stock based compensation cost at the grant date based on the fair value of the award and recognizes expense over the requisite service period.
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.
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.
Contingent consideration payable is based on the revenues and earnings projections of Innovative discounted by the rate of the seller note.
The preceding methods described may produce a fair value calculation that may not be indicative of net realizable value or reflective of future fair values. Furthermore, although the Company believes its valuation methods are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different fair value measurement at the reporting date.
The Company has determined that the contingent consideration liability falls within level three of the hierarchy. The following table sets forth a summary of the changes in the fair value of such liability for the period from January 1, 2010 to March 31, 2010:
Management does not believe that any recently issued, but not yet effective accounting standards, if adopted, will have a material effect on the Company's financial statements.
On March 31, 2009, Holdings acquired Innovative, whereby Holdings acquired all of the outstanding shares of common stock of Innovative. The purpose of the acquisition was to allow the Company to become involved in providing services to federal government entities. The total purchase price for Innovative was $2,835,000 and consisted of the following (at fair value):
Goodwill in the amount of $4,056,238 was recognized in the acquisition and was attributable to the excess of the purchase price paid over the fair value of the net assets acquired, as there were no other intangibles qualifying for separate recognition. Due to the increase in the Company’s net liabilities during 2009 and cash flow shortfalls, an impairment loss of $1,000,000 has been made.
The following table summarizes the approximate fair values of the assets acquired and liabilities assumed at the date of acquisition:
Revenues from prime contracts and subcontracts with U.S. Government agency customers in aggregate accounted for approximately 100% of total revenues for the three months ended March 31, 2010.
In March 2009, Holdings and Innovative entered into an agreement with seven individuals who are directly or indirectly related to Holdings, under which they may borrow up to $2,000.000. The total borrowings as of March 31, 2010 amounted to $1,499,384, collaterized by substantially all assets of both borrowers and guaranteed by Galen. The borrowings are due at the lender’s demand.
The lenders under the loan agreement have borrowed this amount from Eagle Bank under a promissory note and then loaned it to the Holdings and Innovative. The promissory note expires in March 2011 and interest is payable monthly at the bank’s prime rate (as defined) plus 1%. Interest is directly paid by the Company to the bank on a monthly basis. As of March 31, 2010, unpaid and accrued interest amounted to $7,414 which was included in accounts payable.
In addition to the interest due to the bank, the Company granted warrants to these individuals under which they may purchase 4,000,000 common shares of the Company’s common stock, with a strike price of $0.01 per share and an expiration of March 31, 2014. The fair value of these warrants amounted to $520,000 and have been amortized to interest expense during the period ended December 31, 2009.
As of March 31, 2010, amounts due to four of the Company’s affiliates under common control amounted to $203,332. There was no interest charged on these payables and no scheduled due date. On June 15, 2010, the amount due to affiliates was offset against the note receivable from an affiliate under common control and converted to equity. As such, these payables have been reclassified to equity as of March 31, 2010.
Pursuant to an Executive Management Agreement with Galen entered into on April 1, 2009, the Company is being charged a management fee of $100,000 per month limited to15% of the gross revenue of the Company for each twelve month period effective with the consummation of this agreement. Total management fees amounted to $244,690 for the three months ended March 31, 2010. The agreement expires on July 31, 2010.
In April 2009, Holdings entered into an interest-free credit agreement with an affiliate under which the affiliate may borrow up to $1,500,000 through April 15, 2010. As of December 31, 2009, the outstanding balance was $740,000. On June 15, 2010, the amount outstanding under this note was forgiven. As such, this receivable has been reclassified to equity as of March 31, 2010.
Costs not allocable to contracts consisted of the following during March 31, 2010:
The Company leases office space in Washington, D.C.; Orlando, Florida; Springfield, Virginia; and Mclean, Virginia; under operating leases expiring at various dates through 2012. 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 March 31, 2010, are approximately as follows:
Total rent expense for the three months ended March 31, 2010 amounted to $182,453.
In 2010, Innovative vacated its office space prior to expiration of the lease. There has been no agreement reached between Innovative and the former landlord to settle the breach. The landlord subsequently filed a law suit against the Company under which it pursued total damages of approximately $1,000,000, which approximates the rent charges for the remaining term of the lease. The monthly rent amount is being accrued and is included in the future lease commitment schedule. The outcome of the law suit is undetermined as of the date of these financial statements.
During 2009 and 2010, the Company has been late in making deposits of federal and state employer payroll taxes, as well as employee income tax withholdings. As of March 31, 2010 and December 31, 2009, the total of payroll tax accrued and income tax withheld balances including penalties and interest, amounted to $633,187 and $277,762, respectively, which is included in accrued salaries and benefits on the balance sheet.
On April 1, 2009, Innovative entered into an employment agreement contract with its President and Chief Executive Officer through March 31, 2014, which provides for a minimum annual salary of $198,000. At March 31, 2010, the total commitment, excluding incentives, was $792,000.
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. Final 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.
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 carryforwards. The Company’s ability to utilize the federal and state tax assets is uncertain, therefore the deferred tax asset is fully reserved.
At March 31, 2010, the Company had net operating loss carryforwards of approximately $2,100,000 for federal and Virginia state tax purposes expiring through 2028.
Effective January 1, 2009, the Company has adopted the provisions of FASB ASC 740, “Income Tax” which clarifies the accounting for uncertainty in tax positions. FASB ASC 740 requires the recognition of the impact of a tax position in the financial statements if that position is more likely than not of being sustained on a tax return upon examination by the relevant taxing authority, based on the technical merits of the position. The adoption of FASB ASC 740 had no effect on the Company’s financial position or results of operations. At March 31, 2010, the Company has no unrecognized tax benefits.
The Company recognizes interest and penalties related to income tax matters in interest expense and operating expenses, respectively. As of March 31, 2010, the Company has no accrued interest and penalties related to uncertain tax positions.
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 three months ended March 31, 2010.
Innovative has been late in making deposits of employee deferrals. The Department of Labor is reviewing Innovative’s employee benefit plan document as well as other records to determine the status of compliance. The outcome is undetermined as of the date of these financial statements.
As of March 31, 2010, 100,000,000 shares of $.001 par value common stock were authorized and 20,000,000 shares of common stock were issued and outstanding. In May 2010, the Company consummated a .44-for-1 reverse stock split, thereby decreasing the number of issued and outstanding shares to 8,882,455, and increasing the par value of each share to $0.0023. All references in the accompanying consolidated financial statements to the number of common shares and per-share amounts for the period ended March 31, 2010 have been restated to reflect the reverse stock split.
On March 31, 2009, the Company granted 4,000,000 warrants to various affiliated individuals in conjunction with their guarantee of the Company’s line of credit (Note 7) and their loans to the Company (Note 9). The warrants have an exercise price of $0.01 and a life of five years. All warrants were fully vested on the date of grant. The fair value of the warrants was $520,000 and was charged to interest expense for the period from March 23, 2009 (inception) to December 31, 2009.
Innovative’s former stockholder loaned the Company $80,000 during 2010, which is partially collateralized by certain accounts receivable. The former stockholder was granted warrants to purchase 80,000 shares of Innolog stock at a price of $0.50 per share.
Innovative’s controller loaned the Company $20,000 during 2010. The controller was granted warrants to purchase 20,000 shares of Innolog stock at a price of $0.50 per share.
During 2010, the Company received funds from an affiliate totaling $250,000, in two separate notes. These loans are secured by certain accounts receivable of Innovative. The affiliate was granted warrants to purchase 500,000 shares of Innolog stock at a price of $0.50 per share and 500,000 shares of preferred stock of the Company.
On October 15, 2009, uKarma Corporation, a publicly traded Nevada corporation, and Galen entered into an agreement to merge (the "Merger Agreement") in a reverse merger transaction. In June 2010, the rights to merge were assigned directly to Holdings. Once the merger transaction is closed, the Holdings stockholders will become the controlling stockholders of uKarma Corporation and the business of Holdings will continue.
During 2010, the Company granted 38,551,857 warrants which enable the holders to purchase 38,551,857 shares of the Company’s common stock at an exercise price of $0.50 per share. These warrants are exercisable immediately upon issuance and expire on June 1, 2015.
On May 16, 2010, the seller note of $1,285,000 (note 9) was converted into 1,000,000 shares of Preferred Stock Series A of Holdings.
Management has evaluated subsequent events through July 12, 2010, the date which the financial statements were available to be issued. Except as disclosed, there were no other subsequent events noted that would require adjustment to or disclosure in these financial statements.
INNOVATIVE LOGISTICS TECHNIQUES, INC.
(A Wholly Owned Subsidiary of Innolog Holdings Corporation)
FINANCIAL REPORT
FOR THE THREE MONTHS ENDED
MARCH 31, 2010 and 2009
INNOVATIVE LOGISTICS TECHNIQUES, INC
(A Wholly Owned Subsidiary of Innolog Holdings Corporation)
FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2010 AND 2009
TABLE OF CONTENTS
| | | PAGE | |
| Financial Statements | | | |
| | | | |
| Balance Sheets | | | 1 | |
| | | | | |
| Statements of Operations | | | 2 | |
| | | | | |
| Statements of Stockholder's Equity | | | 3 | |
| | | | | |
| Statements of Cash Flows | | | 4 | |
| | | | | |
| Notes to Financial Statements | | | 5-15 | |
INNOVATIVE LOGISTICS TECHNIQUES, INC.
(A Wholly Owned Subsidiary of Innolog Holdings Corporation)
BALANCE SHEETS
AS OF MARCH 31, 2010 and DECEMBER 31, 2009
| | | 3/31/10 | | | 12/31/09 | |
| | | (Unaudited) | | | | |
| ASSETS | | | | | | |
| Current Assets | | | | | | |
| Cash | | $ | 232,657 | | | $ | 9,255 | |
| Accounts receivable, net | | | 1,554,150 | | | | 1,729,594 | |
| Prepaid expenses and other current assets | | | 929 | | | | 929 | |
| Total Current Assets | | | 1,787,736 | | | | 1,739,778 | |
| | | | | | | | | |
| Property and equipment, net | | | - | | | | 11,911 | |
| Goodwill | | | 3,056,238 | | | | 3,056,238 | |
| Other assets | | | 22,365 | | | | 14,552 | |
| Total Assets | | $ | 4,866,339 | | | $ | 4,822,479 | |
| | | | | | | | | |
| LIABILITIES AND STOCKHOLDER'S EQUITY | | | | | | | | |
| | | | | | | | | |
| Current Liabilities | | | | | | | | |
| Accounts payable | | $ | 2,201,230 | | | $ | 2,521,398 | |
| Accrued salaries and benefits | | | 1,182,738 | | | | 726,096 | |
| Billings in excess of related costs and | | | | | | | | |
| estimated earnings on contracts in progress | | | 71,159 | | | | - | |
| Other accrued liabilities | | | 342,284 | | | | - | |
| Due to affiliates | | | 111,995 | | | | 553,504 | |
| Due to former stockholder and officer | | | 259,631 | | | | 183,631 | |
| Due to Innolog Holdings Corporation | | | 74,834 | | | | 124,519 | |
| Deferred rent | | | - | | | | 754 | |
| Total current liabilities | | | 4,243,871 | | | | 4,109,902 | |
| | | | | | | | | |
| Long Term Liabilities | | | | | | | | |
| Due to Innolog Holdings Corporation | | | 2,635,000 | | | | 2,635,000 | |
| | | | | | | | | |
| COMMITMENTS | | | | | | | | |
| | | | | | | | | |
| Stockholder's Deficiency | | | | | | | | |
| Common stock, $1 par value - 1,000 shares authorized, | | | | | | | | |
| 674 shares issued and outstanding | | | 674 | | | | 674 | |
| Additional paid-in capital | | | - | | | | - | |
| Accumulated deficit | | | (2,013,206 | ) | | | (1,923,097 | ) |
| Total Stockholder's Deficiency | | | (2,012,532 | ) | | | (1,922,423 | ) |
| | | | | | | | | |
| Total Liabilities and Stockholder's Deficiency | | $ | 4,866,339 | | | $ | 4,822,479 | |
The accompanying notes are an integral part of these financial statements.
| INNOVATIVE LOGISTICS TECHNIQUES, INC. | |
| STATEMENTS OF OPERATIONS | |
| (A Wholly Owned Subsidiary of Innolog Holdings Corporation) | |
| FOR THE THREE MONTHS ENDED MARCH 31, 2010 AND 2009 | |
| (UNAUDITED) | |
| | | | | | | |
| | | For the three months ended | |
| | | 3/31/10 | | | 3/31/09 | |
| Revenues | | $ | 1,712,730 | | | $ | 1,909,395 | |
| | | | | | | | | |
| Operating expenses | | | | | | | | |
| Direct costs | | | 764,064 | | | | 1,158,531 | |
| Indirect contract costs, of which $85,640 | | | | | | | | |
| was charged by an affiliate | | | 815,502 | | | | 1,041,259 | |
| Management fees, affiliate | | | 159,050 | | | | - | |
| Cost not allocable to contracts | | | 40,393 | | | | 77,597 | |
| Total operating expenses | | | 1,779,009 | | | | 2,277,387 | |
| | | | | | | | | |
| Loss from operations | | | (66,279 | ) | | | (367,992 | ) |
| | | | | | | | | |
| Other Income (Expenses) | | | | | | | | |
| Obligations forgiven upon early termination of lease | | | - | | | | 280,606 | |
| Other income | | | 170 | | | | 453 | |
| Interest expense | | | (24,000 | ) | | | - | |
| Total other income (expenses) | | | (23,830 | ) | | | 281,059 | |
| | | | | | | | | |
| Loss before income tax provision | | | (90,109 | ) | | | (86,933 | ) |
| | | | | | | | | |
| Income tax provision | | | - | | | | - | |
| | | | | | | | | |
| Net Loss | | $ | (90,109 | ) | | $ | (86,933 | ) |
The accompanying notes are an integral part of these financial statements.
| INNOVATIVE LOGISTICS TECHNIQUES, INC. | |
| (A Wholly Owned Subsidiary of Innolog Holdings Corporation) | |
| STATEMENTS OF STOCKHOLDER'S DEFICIENCY | |
| FOR THE THREE MONTHS ENDED MARCH 31, 2010 | |
| (UNAUDITED) | |
| | | | | | | | | | | | | |
| | | | | | | | | RETAINED | | | TOTAL | |
| | | | | | ADDITIONAL | | | EARNINGS | | | STOCKHOLDER'S | |
| | | COMMON | | | PAID IN | | | (ACCUMULATED | | | EQUITY | |
| | | STOCK | | | CAPITAL | | | DEFICIT) | | | (DEFICIENCY) | |
| Balance December 31, 2009 | | $ | 674 | | | $ | - | | | $ | (1,923,097 | ) | | $ | (1,922,423 | ) |
| | | | | | | | | | | | | | | | | |
| Net loss | | | - | | | | - | | | | (90,109 | ) | | | (90,109 | ) |
| | | | | | | | | | | | | | | | | |
| Balance March 31, 2010 | | $ | 674 | | | $ | - | | | $ | (2,013,206 | ) | | $ | (2,012,532 | ) |
| INNOVATIVE LOGISTICS TECHNIQUES, INC. | |
| (A Wholly Owned Subsidiary of Innolog Holdings Corporation) | |
| STATEMENTS OF CASH FLOWS | |
| FOR THE THREE MONTHS ENDED MARCH 31, 2010 AND 2009 | |
| (UNAUDITED) | |
| | | | | | | |
| | | For the three months ended | |
| | | 3/31/10 | | | 3/31/09 | |
| CASH FLOWS FROM OPERATING ACTIVITIES: | | | | | | |
| Net loss | | $ | (90,109 | ) | | $ | (86,933 | ) |
| Adjustments to reconcile net loss to net | | | | | | | | |
| cash provided by operating activities: | | | | | | | | |
| Depreciation and amortization | | | 11,912 | | | | 6,202 | |
| Accrued loss on contracts in progress | | | 0 | | | | (44,463 | ) |
| Changes in assets and liabilities: | | | | | | | | |
| Accounts receivable | | | 175,444 | | | | (158,245 | ) |
| Prepaid expenses and other assets | | | (7,813 | ) | | | (7,056 | ) |
| Deferred rent | | | (754 | ) | | | - | |
| Billings in excess of contract costs and related earnings | | | 71,159 | | | | (9,704 | ) |
| Due to affiliate | | | (399,500 | ) | | | - | |
| Accounts payable and accrued expenses | | | 478,756 | | | | 320,324 | |
| | | | | | | | | |
| Net cash provided by operating activities | | | 239,095 | | | | 20,125 | |
| | | | | | | | | |
| | | | | | | | | |
| CASH FLOWS FROM FINANCING ACTIVITIES: | | | | | | | | |
| Net payments on related party loans | | | (15,693 | ) | | | (214,466 | ) |
| | | | | | | | | |
| Net cash used in financing activities | | | (15,693 | ) | | | (214,466 | ) |
| | | | | | | | | |
| | | | | | | | | |
| NET CHANGE IN CASH | | | 223,402 | | | | (194,341 | ) |
| | | | | | | | | |
| CASH - BEGINNING OF PERIOD | | | 9,255 | | | | 168,233 | |
| | | | | | | | | |
| CASH (CASH OVERDRAFT) - END OF PERIOD | | $ | 232,657 | | | $ | (26,108 | ) |
| | | | | | | | | |
| SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: | | | | | | | | |
| Cash paid during the year for: | | | | | | | | |
| Interest | | $ | 24,000 | | | $ | - | |
INNOVATIVE LOGISITICS TECHNIQUES, INC
(A Wholly Owned Subsidiary of Innolog Holdings Corporation)
NOTES TO FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2010 AND 2009
(Unaudited)
Note 1: Organization and Nature of Business
Innovative Logistics Techniques, Inc. (the "Company"), 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. The Company's services and solutions are provided to a wide variety of clients, including the U.S. Department of Defense, U.S. Department of Homeland Security and civilian agencies in the federal government and state and local municipalities, as well as selected commercial organizations. The Company is a wholly owned subsidiary of Innolog Holdings Corporation (“Holdings”). Holdings was a wholly owned subsidiary of Galen Capital Corporation (“Galen”). In June 2010, Holdings was spun out as an independent company.
Note 2: Going Concern
The accompanying financial statements have been prepared in conformity with generally accepted accounting principles, which contemplate continuation of the Company as a going concern. However, the Company has sustained substantial operating losses in the recent years and a stockholder’s deficit (defined as total assets minus total liabilities) of $1,922,423 and $1,734,303 at December 31, 2009 and 2008, respectively. 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's parent will help to revise the Company’s operating and financial requirements.
The accompanying financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America, which contemplate continuation of the Company as a going concern. The financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that could result from the outcome of this uncertainty.
Note 3: Summary of Significant Accounting Policies
Accounting Standards Codification:
The Company has adopted changes issued by the Financial Accounting Standards Board (“FASB”) to the authoritative hierarchy of Generally Accepted Accounting Principles (“GAAP”). These changes establish the FASB Accounting Standards Codification (“ASC”) as the source of authoritative accounting principles recognized by the FASB to be applied by nongovernmental entities in the preparation of financial statements in conformity with GAAP. The codification itself does not change GAAP. Other than the manner in which new accounting guidance is referenced, the adoption of these changes had no impact on the financial statements.
INNOVATIVE LOGISITICS TECHNIQUES, INC
(A Wholly Owned Subsidiary of Innolog Holdings Corporation)
NOTES TO FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2010 AND 2009 (Unaudited)
Note 3: Summary of Significant Accounting Policies (Continued)
Use of Estimates:
Management uses estimates and assumptions in preparing these financial statements in accordance with accounting principles generally accepted in the United States of America. Those estimates and assumptions affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities, and the reported revenues and expenses. Actual results could vary from the estimates.
Contract Revenue Recognition:
Revenue on cost-plus-fee contracts is recognized to the extent of costs incurred plus a proportionate amount of fees earned. Revenue on fixed-price contracts is recognized on the percentage-of-completion method based on costs incurred in relation to total estimated costs. Revenue on time-and-materials contracts is recognized at contractual rates as hours and out of pocket expenses are incurred. Anticipated losses on contracts are recognized in the period they are first determined. Total accrued losses on contracts in progress amounted to zero and $202,080 as of March 31, 2010 and 2009, respectively. 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. As of March 31, 2010 and 2009, there was no allowance for doubtful accounts required.
Property and Equipment:
Property and equipment are stated at cost and depreciated by the straight-line method over estimated useful lives which are as follows:
| Office furniture and equipment | 3 to 5 years |
| Computer hardware and software | 2 to 5 years |
INNOVATIVE LOGISITICS TECHNIQUES, INC
(A Wholly Owned Subsidiary of Innolog Holdings Corporation)
NOTES TO FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2010 AND 2009 (Unaudited)
Note 3: Summary of Significant Accounting Policies (Continued)
Property and Equipment (Continued):
Leasehold improvements and lease acquisition costs are amortized over the shorter of the life of the applicable lease or the life of the asset. Maintenance and repairs are charged to operations when incurred. Betterments and renewals are capitalized. When property and equipment are sold or otherwise disposed of, the asset account and related accumulated depreciation account are relieved, and any gain or loss is included in operations.
Long-Lived Assets:
The Company reviews for the impairment of long-lived assets and certain identifiable intangibles whenever events or changes in circumstances indicate that the carrying amount of any asset may not be recoverable. An impairment loss would be recognized when the estimated undiscounted future cash flows expected to result from the use of the asset and its eventual disposition is less than the carrying amount. If impairment is indicated, the amount of the loss to be recorded is based on an estimate of the difference between the carrying amount and the fair value of the asset. Fair value is based upon discounted estimated cash flows expected to result from the use of the asset and its eventual disposition and other valuation methods.
Goodwill:
In accordance with FASB ASC 350, “Intangibles – Goodwill and Other”, goodwill is tested for impairment at least annually. No impairment loss was recorded during the period ended March 31, 2010.
Income Taxes:
For the period ended March 31, 2009, the stockholders of the Company elected to treat corporate taxable income as income to its stockholders. Accordingly, taxable income or loss of the Company was passed through to, and reportable by, the stockholders on their personal income tax returns. The Company remained liable for income taxes in jurisdictions that did not recognize S corporation status.
INNOVATIVE LOGISITICS TECHNIQUES, INC
(A Wholly Owned Subsidiary of Innolog Holdings Corporation)
NOTES TO FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2010 AND 2009 (Unaudited)
Note 3: Summary of Significant Accounting Policies (Continued)
Income Taxes (Continued):
Effective April 1, 2009, the Company converted its tax status to a C-corporation. The Company and its parent file a consolidated federal income tax return. Income tax expense incurred by the Company is allocated as if the Company is separately filing. Income taxes are accounted for using the asset and liability method under FASB ASC 740, "Accounting for Income Taxes", whereby deferred tax assets and liabilities are recognized for future tax consequences attributable to differences between the financial statement carrying amounts of assets and liabilities, and their respective tax basis, and operating loss and tax credit carry forwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities due to a change in tax rates is recognized as income in the period that includes the enactment date. Estimates of the realization of deferred tax assets are based-on the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies.
Recent Accounting Pronouncements:
Management does not believe that any recently issued, but not yet effective accounting standards, if adopted, will have a material effect on our financial statements.
Note 4: Acquisition by Innolog Holdings Corporation
On March 31, 2009, Innolog Holdings Corporation (“Holdings”), acquired the Company in a stock purchase transaction whereby Holdings acquired all of the outstanding shares of common stock of the Company. The total purchase price for the Company was $2,835,000 and consisted of the following (at fair value):
| Cash | | $ | 100,000 | |
| Short Term Note | | | 50,000 | |
| Seller Note (1) | | | 1,285,000 | |
| 2,500,000 shares of Galen common stock (2) | | | 85,000 | |
| Capital contribution | | | 600,000 | |
| Contingent note payable (3) | | | 715,000 | |
| | | $ | 2,835,000 | |
| (1) | The purchase agreement was amended in May 2010 and this note was converted into 1,000,000 shares of Preferred Stock Series A of Holdings. |
| (2) | Fair value of Galen’s common shares issued was determined on the basis of the fair value of the Company’s shares. These shares were exchanged for 285,453 shares of Holdings common stock in May 2010. |
INNOVATIVE LOGISITICS TECHNIQUES, INC
(A Wholly Owned Subsidiary of Innolog Holdings Corporation)
NOTES TO FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2010 AND 2009 (Unaudited)
Note 4: Acquisition by Innolog Holdings Corporation (Continued)
| (3) | The fair value of the contingent consideration was based on the revenues and earnings projections of the Company. The contingent note payable requires Holdings to pay the former stockholders up to $900,000 in three years based on the performance of the Company and up to 10% of the net income of years four and five. As of March 31, 2009, based on management’s estimates, Holdings expected that the aggregate undiscounted amount of contingent consideration to be paid was approximate $900,000. This was discounted to present value using an 8% discount rate and amounted to $715,000 at the date of acquisition. As of December 31, 2009, this amount was reduced to $515,000. |
Goodwill in the amount of $4,056,238 was recognized in the acquisition and was attributable to the excess of the purchase price paid over the fair value of the net assets acquired, as there were no other intangibles qualifying for separate recognition. Due to the increase in the Company’s net liabilities during 2009 and cash flow shortfalls, an impairment loss of $1,000,000 has been made.
Goodwill and purchase liabilities resulting from the purchase transaction were pushed down to the Company upon closing of the transaction. Purchase liabilities in the amount of $2,835,000 have been reflected as due to Innolog Holdings Corporation. This amount was reduced to $2,635,000 since the fair value of the consideration payable was reduced by $200,000. It is not the intent of Holdings to demand payment of these amounts in less than one year.
The following table summarizes the approximate fair values of the assets acquired and liabilities assumed at the date of acquisition:
| Current assets | | $ | 1,325,138 | |
| Other assets | | | 100,657 | |
| Fixed assets | | | 49,189 | |
| Goodwill | | | 4,056,238 | |
| Liabilities assumed | | | (2,696,222 | ) |
| | | $ | 2,835,000 | |
Note 5: Major Customers
Revenues from prime contracts or subcontracts with U.S. Government agency customers in aggregate accounted for approximately 100% and 99% of total revenues for the three months ended March 31, 2010 and 2009, respectively.
INNOVATIVE LOGISITICS TECHNIQUES, INC
(A Wholly Owned Subsidiary of Innolog Holdings Corporation)
NOTES TO FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2010 AND 2009 (Unaudited)
Note 6: Accounts Receivable
Accounts receivable consisted of the following:
| | | 3/31/10 | | | 12/31/09 | |
| | | (Unaudited) | | | | |
| Billed receivables | | $ | 1,205,729 | | | $ | 1,543,115 | |
| Unbilled receivables | | | 348,421 | | | | 186,479 | |
| | | $ | 1,554,150 | | | $ | 1,729,594 | |
Contract receivables from prime contracts or subcontracts with U.S. Government agency customers in aggregate accounted for approximately 96% and 97% of total contract receivables at March 31, 2010 and December 31, 2009, respectively.
Note 7: Property and Equipment
Property and equipment consisted of the following as of March 31, 2010 and 2009:
| | | 3/31/10 | | | 12/31/09 | |
| | | (Unaudited) | | | | |
| Office furniture and equipment | | $ | 497,697 | | | $ | 497,696 | |
| Computer hardware and software | | | 257,053 | | | | 257,053 | |
| Leasehold improvements | | | 118,276 | | | | 118,276 | |
| | | | 873,026 | | | | 873,025 | |
Less accumulated depreciation | | | (873,026 | ) | | | (861,114 | ) |
| | | $ | - | | | $ | 11,911 | |
INNOVATIVE LOGISTICS TECHNIQUES, INC
(A Wholly Owned Subsidiary of Innolog Holdings Corporation)
NOTES TO FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2010 AND 2009 (Unaudited)
Note 8: Related party transactions
Loans from former stockholder and officer:
As of March 31, 2010 and December 31, 2009, loans from former stockholder and officer consisted of the following:
| | | March 31, 2010 (Unaudited) | | | December 31, 2009 | |
| Note, interest of 10% per annum and principal due on December 31, 2009. In May 2010, this debt was converted to 30,000 shares of preferred stock of Holdings. | | $ | 57,332 | | | $ | 57,332 | |
| Note, interest of $12,000 and principal due on December 18, 2009 or upon collection of certain accounts receivable. During 2010, the due date on this note was extended to February 10, 2010 with additional interest of $12,000 payable upon maturity. In addition, 120,000 warrants of Galen were granted. (1) | | | 120,000 | | | | 120,000 | |
| Note, interest of $7,600 and principal due on March 15, 2010. In addition, 76,000 warrants of Galen were granted. (1) | | | 76,000 | | | | - | |
| Other | | | 6,299 | | | | 6,299 | |
| | | $ | 259,631 | | | $ | 183,631 | |
| (1) | These loans have not been paid off as of the date of these financial statements. Interest expense incurred on these loans amounted to $24,000 and zero for the three months ended March 31, 2010 and 2009, respectively. |
Due to affiliates:
As of March 31, 2010 and December 31, 2009, amounts due to two of the Company’s affiliates under common control amounted to $111,995 and $553,504, respectively. There was no interest charged on these payables and no scheduled due date.
Office and service agreement:
The Company provided management and office support to a charitable nonprofit organization in which the Company’s former stockholders served as officers. The Company recognized revenue of zero and $7,922 for services provided to this organization for the three months ended March 31, 2010 and 2009, respectively. This agreement was terminated during 2009.
INNOVATIVE LOGISTICS TECHNIQUES, INC
(A Wholly Owned Subsidiary of Innolog Holdings Corporation)
NOTES TO FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2010 AND 2009 (Unaudited)
Note 8: Related party transactions (Continued)
Management fees, affiliate:
Pursuant to an Executive Management Agreement with Galen entered on April 1, 2009, the Company is being charged a management fee of $100,000 per month limited to 15% of the gross revenue of the Company for each twelve month period effective with the consummation of this agreement. Total management fees amounted to $244,690 for the three months ended March 31, 2010. The agreement expires on July 31, 2010. Galen was owed zero and $399,500 under this agreement as of March 31, 2010 and December 31, 2009, respectively.
Note 9: Costs not Allocable to Contracts
Costs not allocable to contracts consisted of the following during the three months ended March 31, 2010 and 2009:
| | | March 31, 2010 (Unaudited) | | | March 31, 2009 (Unaudited) | |
| Entertainment | | $ | 40 | | | $ | 2,358 | |
| Professional fees | | | - | | | | 54,643 | |
| Late fees and penalties | | | 35,505 | | | | 6,577 | |
| Finance charges | | | - | | | | 7,002 | |
| Other | | | 4,848 | | | | 7,017 | |
| | | $ | 40,393 | | | $ | 77,597 | |
Note 10: Commitments
Leases:
The Company leases office space in Washington, D.C.; Orlando, Florida; Springfield, Virginia; and Mclean, Virginia; under operating leases expiring at various dates through 2012. 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 March 31, 2010, are approximately as follows:
| Year ending December 31, | | | |
| 2010 | | $ | 541,000 | |
| 2011 | | | 680,000 | |
| 2012 | | | 96,000 | |
| | | $ | 1,317,000 | |
INNOVATIVE LOGISTICS TECHNIQUES, INC
(A Wholly Owned Subsidiary of Innolog Holdings Corporation)
NOTES TO FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2010 AND 2009 (Unaudited)
Note 10: Commitments (Continued)
Leases (Continued):
Total rent expense for the three months ended March 31, 2010 and 2009 amounted to $182,453 and $163,985, respectively.
In 2010, the Company vacated its office space in Mclean, VA, prior to the expiration of the lease. There has been no agreement reached between the Company and the former landlord to settle the breach by the Company. The landlord subsequently filed a suit against the Company under which it pursued for total damages of approximately $1,000,000, which approximates the rent charges for the remaining term of the lease. The monthly rent amount is accrued on the balance sheets and is included in the future lease commitment schedule. The outcome of the law suit is undetermined as of the date of these financial statements.
Employment Agreement:
On April 1, 2009, the Company 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 March 31, 2010, the total commitment, excluding incentives, was $792,000.
As of March 31, 2010, the Company was delinquent in paying a significant portion of its accounts payable. Some of the Company's vendors have filed claims to collect on the amounts due.
Late deposit of payroll taxes and employee income tax withholdings:
During 2009 and 2010, the Company has been late in making deposits of federal and state employer payroll taxes as well as employee income tax withholdings. As of March 31, 2010 and December 31, 2009, the total of payroll tax accrued and income tax withheld balances amounted to $633,187 and $277,762, respectively, which is included in accrued salaries and benefits on the balance sheets.
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. Final 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.
INNOVATIVE LOGISTICS TECHNIQUES, INC
(A Wholly Owned Subsidiary of Innolog Holdings Corporation)
NOTES TO FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2010 AND 2009 (Unaudited)
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 the 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 the net operating loss carryforwards. The Company’s ability to utilize the federal and state tax assets is uncertain, therefore the deferred tax asset is fully reserved.
At March 31, 2010, the Company had net operating loss carry forwards of approximately $1,350,000 for federal and Virginia tax purposes expiring through 2028.
The deferred tax asset as of March 31, 2010 consisted of the following:
| Tax benefit on net operating loss carry forward | | $ | 555,000 | |
| Goodwill | | | 292,000 | |
| Contingent consideration | | | (80,000 | ) |
| Less: valuation allowance | | | (767,000 | ) |
| | | $ | - | |
Effective January 1, 2009, the Company has adopted the provisions of FASB ASC 740, “Income Tax” which clarifies the accounting for uncertainty in tax positions. FASB ASC 740 requires the recognition of the impact of a tax position in the financial statements if that position is more likely than not of being sustained on a tax return upon examination by the relevant taxing authority, based on the technical merits of the position. The adoption of FASB ASC 740 had no effect on the Company’s financial position or results of operations. At March 31, 2010, the Company has no unrecognized tax benefits.
The Company recognizes interest and penalties related to income tax matters in interest expense and operating expenses, respectively. As of March 31, 2010, the Company has no accrued interest and penalties related to uncertain tax positions.
Note 12: Employee Benefit Plan
The Company 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 three months ended March 31, 2010 and 2009.
The Company has been late in making deposits of employee deferrals. The Department of Labor is reviewing the Company’s employee benefit plan document as well as other records to determine the status of compliance. The outcome is undetermined as of the date of these financial statements.
INNOVATIVE LOGISTICS TECHNIQUES, INC
(A Wholly Owned Subsidiary of Innolog Holdings Corporation)
NOTES TO FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2010 AND 2009 (Unaudited)
Note 13: Subsequent Events
Former Stockholder Loan:
Innovative’s former stockholder loaned the Company $80,000 during 2010, which is partially collateralized by certain accounts receivable. The former stockholder was granted warrants to purchase 80,000 shares of Innolog stock at a price of $0.50 per share.
Loan from controller
Innovative’s controller loaned the Company $20,000 during 2010. The controller was granted warrants to purchase 20,000 shares of Innolog stock at a price of $0.50 per share.
Management has evaluated subsequent events through July 12, 2010, the date which the financial statements were available to be issued. Except as disclosed, there were no other subsequent events noted that would require adjustment to or disclosure in these financial statements.
INNOLOG HOLDINGS CORPORATION
AND SUBSIDIARY
CONSOLIDATED FINANCIAL REPORTS
FOR THE PERIOD MARCH 23, 2009 (INCEPTION) THROUGH DECEMBER 31, 2009
INNOLOG HOLDINGS COPRORATION
AND SUBSIDIARY
CONSOLIDATED FINANCIAL STATEMENTS
FOR THE PERIOD MARCH 23, 2009 (INCEPTION) THROUGH DECEMBER 31, 2009
TABLE OF CONTENTS
| | | PAGE | |
| | | 1 | |
| | | | | |
| Consolidated Financial Statements | | | | |
| | | | | |
| Balance Sheet | | | 2 | |
| | | | | |
| Statement of Operations | | | 3 | |
| | | | | |
| Statement of Stockholders’ Deficiency | | | 4 | |
| | | | | |
| Statement of Cash Flows | | | 5 | |
| | | | | |
| Notes to Financial Statements | | | 7-21 | |
Independent Auditor’s Report
The Board of Directors
Innolog Holdings Corporation
Fairfax, Virginia
We have audited the accompanying consolidated balance sheet of Innolog Holdings Corporation and its wholly owned subsidiary (the “Company”) as of December 31, 2009, and the related consolidated statements of operations, stockholders’ deficiency, and cash flows from March 23, 2009 (inception) through December 31, 2009. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the 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 audit provides 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 its wholly owned subsidiary as of December 31, 2009, and the results of their operations and their cash flows for the period from March 23, 2009 (inception) through December 31, 2009 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 more fully described in Note 2 to the financial statements, the Company incurred a net loss of $2,811,274 for the period from March 23, 2009 (inception) through December 31, 2009, and the Company may not have sufficient working capital or outside financing to meet its planned operating activities over the next 12 months. At December 31, 2009, current liabilities exceeded current assets by $3,774,580. These factors, and the others discussed in Note 2, raise substantial doubt about the Company’s ability to continue as a going concern. These consolidated financial statements do not include any adjustments relating to the recoverability and classification of recorded assets, or the amounts and classification of liabilities that might be necessary in the event the Company cannot continue in existence.
Spector & Associates, LLP
Pasadena, California
July 12, 2010
INNOLOG HOLDINGS CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
AS OF DECEMBER 31, 2009
| ASSETS | | | |
| Current Assets | | | |
| Cash | | $ | 9,278 | |
| Accounts receivable, net | | | 1,729,594 | |
| Prepaid expenses and other current assets | | | 929 | |
| Total Current Assets | | | 1,739,801 | |
| | | | | |
| Property and equipment, net | | | 11,911 | |
| Goodwill | | | 3,056,238 | |
| Other assets | | | 16,346 | |
| Total Assets | | $ | 4,824,296 | |
| | | | | |
| LIABILITIES AND STOCKHOLDERS' DEFICIENCY | | | | |
| | | | | |
| Current Liabilities | | | | |
| Accounts payable | | $ | 2,606,946 | |
| Accrued salaries and benefits | | | 726,096 | |
| Line of credit, bank | | | 497,570 | |
| Due to former stockholder | | | 183,631 | |
| Deferred rent | | | 754 | |
| Note payable, affiliates | | | 1,499,384 | |
| Total current liabilities | | | 5,514,381 | |
| | | | | |
| Long Term Liabilities | | | | |
| Contingent consideration payable, net of discount of $385,000 | | | 515,000 | |
| Note payable, former stockholders | | | 1,285,000 | |
| Total Long Term Liabilities | | | 1,800,000 | |
| | | | | |
| COMMITMENTS AND CONTINGENCIES | | | | |
| | | | | |
| Stockholders' Deficiency | | | | |
| Common stock, $0.0023 par value, 44,012,665 shares authorized; 8,882,455 shares issued and outstanding | | | | |
| | | | 20,000 | |
| Additional paid in capital | | | 520,000 | |
| Due from affiliates, net | | | (218,811 | ) |
| Accumulated deficit | | | (2,811,274 | ) |
| Total Stockholders' Deficiency | | | (2,490,085 | ) |
| | | | | |
| Total Liabilities and Stockholders' Deficiency | | $ | 4,824,296 | |
INNOLOG HOLDINGS CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE PERIOD MARCH 23, 2009 (INCEPTION) THROUGH DECEMBER 31, 2009
| Revenues | | $ | 5,938,070 | |
| | | | | |
| Operating expenses | | | | |
| Direct costs | | | 3,370,849 | |
| Indirect contract costs, of which $134,922 | | | | |
| was charged by an affiliate | | | 2,394,270 | |
| Management fees, affiliate | | | 764,078 | |
| Costs not allocable to contracts | | | 535,452 | |
| Impairment of goodwill | | | 1,000,000 | |
| Total operating expenses | | | 8,064,649 | |
| | | | | |
| Loss from operations | | | (2,126,579 | ) |
| | | | | |
| Other Income (expenses) | | | | |
| Other income | | | 6,503 | |
| Interest expense | | | (680,198 | ) |
| Merger expenses | | | (211,000 | ) |
| Unrealized gain on fair value of consideration payable | | | 200,000 | |
| Total other income (expenses) | | | (684,695 | ) |
| | | | | |
| Loss before income tax provision | | | (2,811,274 | ) |
| | | | | |
| Income tax provision | | | - | |
| | | | | |
| Net Loss | | $ | (2,811,274 | ) |
The accompanying notes are an integral part of these financial statements.
INNOLOG HOLDINGS CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENT OF STOCKHOLDERS’ DEFICIENCY
FOR THE PERIOD MARCH 23, 2009 (INCEPTION) THROUGH DECEMBER 31, 2009
| | | COMMON STOCK | | | ADDITIONAL PAID IN CAPITAL | | | ACCUMULATED DEFICIT | | | DUE FROM AFFILIATES, NET | | | TOTAL STOCKHOLDERS’ EQUITY (DEFICIENCY) | |
| Balance, March 23, 2009 | | $ | - | | | $ | - | | | $ | - | | | $ | - | | | $ | - | |
| | | | | | | | | | | | | | | | | | | | | |
| Common stock | | | 20,000 | | | | | | | | | | | | | | | | 20,000 | |
| | | | | | | | | | | | | | | | | | | | | |
| Issuance of warrants | | | | | | | 520,000 | | | | | | | | | | | | 520,000 | |
| | | | | | | | | | | | | | | | | | | | | |
| Due from affiliates | | | | | | | | | | | | | | $ | (218,811 | ) | | | (218,811 | ) |
| | | | | | | | | | | | | | | | | | | | | |
| Net loss | | | | | | | | | | | (2,811,274 | ) | | | | | | | (2,811,274 | ) |
| | | | | | | | | | | | | | | | | | | | | |
| Balance, December 31, 2009 | | $ | 20,000 | | | $ | 520,000 | | | $ | (2,811,274 | ) | | $ | (218,811 | ) | | $ | (2,490,085 | ) |
The accompanying notes are an integral part of these financial statements.
INNOLOG HOLDINGS CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE PERIOD MARCH 23, 2009 (INCEPTION) THROUGH DECEMBER 31, 2009
| | | | |
| | | | |
| CASH FLOWS FROM OPERATING ACTIVITIES: | | | |
| Net loss | | $ | (2,811,274 | ) |
| Adjustments to reconcile net loss to net | | | | |
| cash used in operating activities: | | | | |
| Depreciation and amortization | | | 40,255 | |
| Accrued loss on contracts in progress | | | (202,080 | ) |
| Amortization of debt issuance costs | | | 520,000 | |
| Impairment of goodwill | | | 1,000,000 | |
| Unrealized gain on fair value of consideration payable | | | (200,000 | ) |
| Changes in assets and liabilities, net of effects from purchase | | | | |
| of Innovative Logistics Techniques, Inc. | | | | |
| Accounts receivable | | | 195,544 | |
| Prepaid expenses and other assets | | | 3,066 | |
| Deposits | | | 80,316 | |
| Deferred rent | | | (67,307 | ) |
| Billings in excess of contract costs and related earnings | | | (29,112 | ) |
| Due to affiliate | | | 399,500 | |
| Accounts payable and accrued expenses | | | 680,188 | |
| | | | | |
| Net cash used in operating activities | | | (390,904 | ) |
| | | | | |
| CASH FLOWS FROM INVESTING ACTIVITIES: | | | | |
| Payment for purchase of Innovative Logistics Techniques, Inc | | | (750,000 | ) |
| Advances on note receivable, affiliate | | | (740,000 | ) |
| Property and equipment purchased | | | (2,975 | ) |
| | | | | |
| Net cash used in investing activities | | | (1,492,975 | ) |
| | | | | |
| | | | | |
| CASH FLOWS FROM FINANCING ACTIVITIES: | | | | |
| Net borrowings from related parties | | | 162,987 | |
| Repayment of borrowings from factor | | | (286,784 | ) |
| Borrowing under line of credit, bank | | | 497,570 | |
| Borrowings under note payable, affiliate | | | 1,499,384 | |
| Issuance of common stock | | | 20,000 | |
| | | | | |
| Net cash provided by financing activities | | | 1,893,157 | |
| | | | | |
| | | | | |
| NET CHANGE IN CASH | | | 9,278 | |
| | | | | |
| CASH - BEGINNING OF YEAR | | | - | |
| | | | | |
| CASH - END OF YEAR | | $ | 9,278 | |
| | | | | |
| SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: | | | | |
| Cash paid during the year for: | | | | |
| Interest | | $ | 74,687 | |
INNOLOG HOLDINGS CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CASH FLOWS (CONTINUED)
FOR THE PERIOD MARCH 23, 2009 (INCEPTION) THROUGH DECEMBER 31, 2009
SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND FINANCING ACTIVITIES:
During the period ended December 31, 2009, the Company granted warrants with a fair value of $520,000 in conjunction with debt.
During 2009, Innolog Holdings Corporation purchased all of the capital stock of Innovative Logistics Techniques, Inc for $2,835,000. In conjunction with the acquisition, liabilities were assumed as follows:
| Fair value of assets acquired | | $ | 5,531,222 | |
| Cash paid | | | (750,000) | |
| Notes payable and liabilities incurred | | | (2,085,000) | |
| Liabilities assumed | | $ | 2,696,222 | |
Amounts due from affiliates, net of payables, in the amount of $218,811, have been reclassified to stockholders' deficiency.
INNOLOG HOLDINGS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE PERIOD MARCH 23, 2009 (INCEPTION) THROUGH DECEMBER 31, 2009
Note 1: Organization and Nature of Business
Innolog Holdings Corporation (“Holdings”) was formed in March 2009 as a holding corporation for the purpose of acquiring companies that provide services primarily to federal government entities. Its wholly owned subsidiary is Innovative Logistics Techniques, Inc. (“Innovative”). As of December 31, 2009, Innolog Holdings Corporation was a wholly owned subsidiary of Galen Capital Corporation (“Galen”). In June 2010, Innolog Holdings Corporation was spun out as an independent company.
Innovative Logistics Techniques, Inc. (”Innovative”), a Virginia corporation, formed in March 1989, is a solutions oriented organization providing supply chain logistics and information technology solutions to clients in the public and private sector. Innovative’s services and solutions are provided to a wide variety of clients, including the Department of Defense, Department of Homeland Security and civilian agencies in the federal government and state and local municipalities, as well as selected commercial organizations. Included in the consolidated financial statements are Innovative’s results of operations since its date of acquisition.
Note 2: Going Concern
The accompanying financial statements have been prepared in conformity with generally accepted accounting principles, which contemplate continuation of the Company as a going concern. However, the Company has sustained a substantial operating loss in the current year and has a stockholders’ deficit (defined as total assets minus total liabilities) of $2,490,085 at December 31, 2009. Management believes that actions presently being taken such as continued expense reduction, the implementation of a renewed sales effort and the capital financing efforts of the Company will help to revise the Company’s operating and financial requirements.
The accompanying financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America, which contemplate continuation of the Company as a going concern. As a result of the foregoing, the Company’s independent accounting firm on the Company’s 2009 financial statements, expressed substantial doubt about the Company’s ability to continue as a going concern. The financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that could result from the outcome of this uncertainty.
Note 3: Summary of Significant Accounting Policies
Accounting Standards Codification:
The Company has adopted changes issued by the Financial Accounting Standards Board (“FASB”) to the authoritative hierarchy of Generally Accepted Accounting Principles (“GAAP”). These changes establish the FASB Accounting Standards Codification (“ASC”) as the source of authoritative accounting principles recognized by the FASB to be applied by nongovernmental entities in the preparation of financial statements in conformity with GAAP. The codification itself does not change GAAP. Other than the manner in which new accounting guidance is referenced, the adoption of these changes had no impact on the financial statements.
INNOLOG HOLDINGS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE PERIOD MARCH 23, 2009 (INCEPTION) THROUGH DECEMBER 31, 2009
Note 3: Summary of Significant Accounting Policies (Continued)
Principles of Consolidation
The consolidated financial statement includes the assets, liabilities and operating results of Holdings and its wholly-owned subsidiary since the date of 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.
Contract Revenue Recognition:
Revenue on cost-plus-fee contracts is recognized to the extent of costs incurred plus a proportionate amount of fees earned. Revenue on fixed-price contracts is recognized on the percentage-of-completion method based on costs incurred in relation to total estimated costs. Revenue on time-and-materials contracts is recognized at contractual rates as hours and out of pocket expenses are incurred. Anticipated losses on contracts are recognized in the period they are first determined. In accordance with industry practice, amounts relating to long-term contracts, including retainages, are classified as current assets although an undeterminable portion of these amounts is not expected to be realized within one year. Because of inherent uncertainties in estimating costs, it is at least reasonably possible that the estimates used will change within the near term.
Concentration of Credit Risk:
The Company maintains its cash, which, at times may exceed federally insured limits, in bank deposit accounts with a high credit quality financial institution. The Company believes it is not exposed to any significant credit risk with regards to those accounts. Accounts receivable principally consist of amounts due from the federal government and large prime federal government contractors. Management believes associated credit risk is not significant.
Allowance for Doubtful Accounts:
The Company provides an allowance for doubtful accounts equal to the estimated collection losses that will be incurred in collection of all receivables. Estimated losses are based on historical collection experience coupled with review of the current status of existing receivables. There was no allowance for doubtful accounts required at December 31, 2009.
INNOLOG HOLDING CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE PERIOD MARCH 23, 2009 (INCEPTION) THROUGH DECEMBER 31, 2009
Note 3: Summary of Significant Accounting Policies (Continued)
Property and Equipment:
Property and equipment are stated at cost and depreciated by the straight-line method over estimated useful lives which are as follows:
| Office furniture and equipment | | 3 to 5 years |
| Computer hardware and software | | 2 to 5 years |
Leasehold improvements and lease acquisition costs are amortized over the shorter of the life of the applicable lease or the life of the asset. Maintenance and repairs are charged to operations when incurred. Betterments and renewals are capitalized. When property and equipment are sold or otherwise disposed of, the asset account and related accumulated depreciation account are relieved, and any gain or loss is included in operations.
Long-Lived Assets:
The Company reviews for the impairment of long-lived assets and certain identifiable intangibles whenever events or changes in circumstances indicate that the carrying amount of any asset may not be recoverable. An impairment loss would be recognized when the estimated undiscounted future cash flows expected to result from the use of the asset and its eventual disposition is less than the carrying amount. If impairment is indicated, the amount of the loss to be recorded is based on an estimate of the difference between the carrying amount and the fair value of the asset. Fair value is based upon discounted estimated cash flows expected to result from the use of the asset and its eventual disposition and other valuation methods.
Goodwill:
In accordance with FASB ASC 350, “Intangibles – Goodwill and Other”, goodwill is tested for impairment at least annually. An impairment loss of $1,000,000 was recognized for the period ended December 31, 2009.
Income Taxes:
Income taxes are accounted for using the asset and liability method under FASB ASC 740, "Accounting for Income Taxes", whereby deferred tax assets and liabilities are recognized for future tax consequences attributable to differences between the financial statement carrying amounts of assets and liabilities, and their respective tax basis, and operating loss and tax credit carry forwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities due to a change in tax rates is recognized as income in the period that includes the enactment date. Estimates of the realization of deferred tax assets are based on the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies.
INNOLOG HOLDINGS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE PERIOD MARCH 23, 2009 (INCEPTION) THROUGH DECEMBER 31, 2009
Note 3: Summary of Significant Accounting Policies (Continued)
Stock Based Compensation:
The Company accounts for stock based compensation in accordance with FASB ASC 505-50, “Equity Based Payments to Non-Employees”. Under the fair value recognition provisions of FASB ASC 505-50, the Company measures stock based compensation cost at the grant date based on the fair value of the award and recognizes expense over the requisite service period.
Debt issuance costs are capitalized and amortized over the term of the related loan.
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.
INNOLOG HOLDINGS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE PERIOD MARCH 23, 2009 (INCEPTION) THROUGH DECEMBER 31, 2009
Note 3: Summary of Significant Accounting Policies (Continued)
Fair Value Measurements: (Continued)
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 shareholders, and the line of credit payable approximate fair value due to the short term maturities of these instruments. |
| | Contingent consideration payable is based on the revenues and earnings projections of Innovative discounted by the rate of the seller note. |
The preceding methods described may produce a fair value calculation that may not be indicative of net realizable value or reflective of future fair values. Furthermore, although the Company believes its valuation methods are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different fair value measurement at the reporting date.
The Company has determined that the contingent consideration liability falls within level three of the hierarchy. The following table sets forth a summary of the changes in the fair value of such liability for the period from March 23, 2009 (inception) to December 31, 2009:
| | | Contingent Consideration | |
| Balance, beginning of period | | $ | 715,000 | |
| Change in fair value | | | (200,000 | ) |
| | | | | |
| Balance, end of period | | $ | 515,000 | |
Recent Accounting Pronouncements:
Management does not believe that any recently issued, but not yet effective accounting standards, if adopted, will have a material effect on our financial statements.
INNOLOG HOLDINGS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE PERIOD MARCH 23, 2009 (INCEPTION) THROUGH DECEMBER 31, 2009
Note 4: Acquisition by Innolog Holdings Corporation
On March 31, 2009, Holdings acquired Innovative, whereby Holdings acquired all of the outstanding shares of common stock of Innovative. The purpose of the acquisition was to allow the Company to become involved in providing services to federal government entities. The total purchase price for the stock of Innovative was $2,835,000 and consisted of the following (at fair value):
| Cash | | $ | 100,000 | |
| Short Term Note | | | 50,000 | |
| Seller Note (1) | | | 1,285,000 | |
| 2,500,000 shares of Galen common stock (2) | | | 85,000 | |
| Capital contribution | | | 600,000 | |
| Contingent note payable (3) | | | 715,000 | |
| | | $ | 2,835,000 | |
| (1) | The purchase agreement was amended in May 2010 and this note was converted into 1,000,000 shares of convertible series A preferred stock of Holdings. |
| | |
| (2) | Fair value of Galen’s common shares issued was determined on the basis of the fair value of Innovative. These shares were exchanged for 285,453 shares of Holdings common stock in May 2010. |
| | |
| (3) | The fair value of the contingent consideration was based on the revenues and earnings projections of Innovative. The contingent note payable requires the Company to pay the former stockholders up to $900,000 in three years based on the performance of Innovative and up to 10% of the net income of Innovative of years four and five. As of March 31, 2009, based on management’s estimates, the Company expected that the aggregate undiscounted amount of contingent consideration to be paid was approximately $900,000. This was discounted to present value using an 8% discount rate and amounted to $715,000 at the date of acquisition. As of December 31, 2009, this amount was reduced to $515,000 and an unrealized gain of $200,000 has been recognized for the period ended December 31, 2009. |
Goodwill in the amount of $4,056,238 was recognized in the acquisition and was attributable to the excess of the purchase price paid over the fair value of the net assets acquired, as there were no other intangibles qualifying for separate recognition. Due to the increase in the Company’s net liabilities during 2009 and cash flow shortfalls, an impairment loss of $1,000,000 has been made. Of the total goodwill recognized, $4,056,238 is expected to be deductible for income tax purposes.
The following table summarizes the approximate fair values of the assets acquired and liabilities assumed at the date of acquisition:
| Current Assets | | $ | 1,325,138 | |
| Other Assets | | | 100,657 | |
| Fixed Assets | | | 49,189 | |
| Goodwill | | | 4,056,238 | |
| Liabilities assumed | | | (2,696,222 | ) |
| | | $ | 2,835,000 | |
INNOLOG HOLDINGS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE PERIOD MARCH 23, 2009 (INCEPTION) THROUGH DECEMBER 31, 2009
Note 4: Acquisition by Innolog Holdings Corporation (Continued)
Costs related to the acquisition, in the amount of $30,000 have been charged directly to operations and are included in the 2009 consolidated statement of operations.
Note 5: Major Customers
Revenues from prime contracts and subcontracts with U.S. Government agency customers in aggregate accounted for approximately 97% of total revenues for the period ended December 31, 2009.
Note 6: Accounts Receivable
Accounts receivable consisted of the following as of December 31, 2009:
| Billed receivables | | $ | 1,543,115 | |
| Unbilled receivables | | | 186,479 | |
| | | $ | 1,729,594 | |
Contract receivables from prime contracts and subcontracts with U.S. Government agency customers in aggregate accounted for approximately 97% of total contract receivables at December 31, 2009.
Note 7: Property and Equipment
Property and equipment consisted of the following as of December 31, 2009:
| Office furniture and equipment | | $ | 497,696 | |
| Computer hardware and software | | | 257,053 | |
| Leasehold improvements | | | 118,276 | |
| | | | 873,025 | |
Less accumulated depreciation | | | 861,114 | |
| | | $ | 11,911 | |
Note 8: Line of Credit
In April 2009, Holdings entered into a credit agreement with Eagle Bank under which it may borrow up to $500,000. Borrowings under the agreement are guaranteed by seven individuals, who are directly or indirectly related to Holdings. The borrowings are payable upon the bank’s demand. Interest is payable monthly at the bank’s prime rate (as defined) plus 1%. At December 31, 2009, the interest rate was 5% and $497,570 was outstanding.
INNOLOG HOLDINGS CORPORATION AND SUBSIDAIRY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE PERIOD MARCH 23, 2009 (INCEPTION) THROUGH DECEMBER 31, 2009
Note 9: Seller Note Payable and Earn Out Note Payable
Seller Note Payable:
In March 2009, when Holdings purchased Innovative, part of the purchase consideration was a note payable of $1,285,000, payable over three years. In May 2010, this note, including accrued interest, was converted into 1,000,000 shares of Innolog Preferred Stock Series A. For the period ended December 31, 2009, interest was charged at 8% per annum. Total unpaid and accrued interest amounted to $77,100 which was included in accounts payable as of December 31, 2009.
Contingent Consideration Payable:
In March 2009, as part of the purchase transaction, Holdings estimated that contingent consideration due to the former stockholders amounted to $900,000. As specified in the agreement, the earn out is based on certain revenue and net income targets over the next five years, and is payable annually. This has been discounted to present value using an 8% discount rate and amounted to $715,000 at the date of acquisition and $515,000 at December 31, 2009.
Note 10: Related Party Transactions
Loans From Affiliates:
In March 2009, Holdings and Innovative entered into an agreement with seven individuals who are directly or indirectly related to Holdings, under which Holdings may borrow up to $2,000,000. The total borrowings as of December 31, 2009 amounted to $1,499,384, collaterized by substantially all assets of both borrowers and guaranteed by Galen. The borrowings are due at the lender’s demand.
The lenders under the loan agreement have borrowed this amount from Eagle Bank under a promissory note and then loaned it to the Company. The bank promissory note expires in March 2011 and interest is payable monthly at the bank’s prime rate (as defined) plus 1%. As of December 31, 2009, the interest rate was 5%. Interest is paid directly by the Company to the bank on a monthly basis. As of December 31, 2009, unpaid and accrued interest amounted to $7,414 which was included in accounts payable.
In addition to the interest due to the bank, the Company granted warrants to these individuals under which they may purchase 4,000,000 shares of the Company’s common stock, with a strike price of $0.01 per share and an expiration of March 31, 2014. The fair value of these warrants amounted to $520,000 and have been fully amortized to interest expense during the period ended December 31, 2009.
INNOLOG HOLDINGS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE PERIOD MARCH 23, 2009 (INCEPTION) THROUGH DECEMBER 31, 2009
Note 10: Related Party Transactions (Continued)
Loans From Former Stockholder:
As of December 31, 2009, loans from former stockholder consisted of the following:
| Note, interest of 10% and principal due on December 31, 2009. In May 2010, this debt was converted into 30,000 shares of preferred stock of Holdings. | | $ | 57,332 | |
| Note, interest of $12,000 and principal due on December 18, 2009 or upon collection of certain accounts receivable. During 2010, the due date on this note was extended to February 10, 2010 with additional interest of $12,000 payable upon maturity. In addition, 120,000 warrants of Galen were granted. (1) | | | 120,000 | |
| Other | | | 6,299 | |
| | | $ | 183,631 | |
| (1) | This loan has not been paid off as of the date of these financial statements. Interest expense incurred on these loans amounted to $12,000 for the period ended December 31, 2009. |
Due to Affiliates:
As of December 31, 2009, amounts due to three of the Company’s affiliates under common control amounted to $521,189. There was no interest charged on these payables and no scheduled due date. On June 15, 2010, the amount due to affiliates was offset against the note receivable from an affiliate under common control and converted to equity. As such, these payables have been reclassified to equity as of March 31, 2010.
Office and Service Agreement:
Innovative provided management and office support to a charitable nonprofit organization in which Innovative’s former stockholders served as officers. Innovative recognized revenue of $11,264 for services provided to this organization for the period ended December 31, 2009. This agreement was terminated during 2009.
Management Fees, Affiliate:
Pursuant to an Executive Management Agreement with Galen entered into on April 1, 2009, the Company is being charged a management fee of $100,000 per month limited to15% of the gross revenue of the Company for each twelve month period effective with the consummation of this agreement. Total management fees amounted to approximately $900,000 for the period ended December 31, 2009, of which $399,500 was accrued and was included in due to affiliates on the balance sheet. The agreement expires on July 31, 2010.
INNOLOG HOLDINGS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE PERIOD MARCH 23, 2009 (INCEPTION) THROUGH DECEMBER 31, 2009
Note 10: Related Party Transactions (Continued)
Note Receivable, Affiliate:
In April 2009, Holdings entered into an interest-free credit agreement with an affiliate under which the affiliate may borrow up to $1,500,000 through April 15, 2010. As of December 31, 2009, the outstanding balance was $740,000. On June 15, 2010, the amount outstanding under this note was forgiven. As such, this receivable has been reclassified to stockholders’ deficiency as of December 31, 2009.
Note 11: Costs not Allocable to Contracts
Costs not allocable to contracts consisted of the following for the period ended December 31, 2009:
| Entertainment | | $ | 221,675 | |
| Professional fees | | | 112,239 | |
| Late fees and penalties | | | 41,738 | |
| Rent | | | 80,316 | |
| Finance charges | | | 21,487 | |
| Other | | | 57,997 | |
| | | $ | 535,452 | |
Note 12: Commitments and Contingencies
Leases:
The Company leases office space in Washington, D.C.; Orlando, Florida; Springfield, Virginia; and Mclean, Virginia; under operating leases expiring at various dates through 2012. 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, 2009, are approximately as follows:
| Year ending December 31, | | | |
| 2010 | | $ | 717,000 | |
| 2011 | | | 680,000 | |
| 2012 | | | 96,000 | |
| | | $ | 1,493,000 | |
INNOLOG HOLDINGS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE PERIOD MARCH 23, 2009 (INCEPTION) THROUGH DECEMBER 31, 2009
Note 12: Commitments and Contingencies (Continued)
Leases (Continued):
Rent expense is charged ratably over the lives of the leases using the straight-line method. Deferred rent payable as of December 31, 2009 was approximately $1,000 . Total rent expense for the period ended December 31, 2009 amounted to $593,239, which includes a straight-line rent adjustment of $67,307.
In 2010, Innovative vacated its office space prior to expiration of the lease. There has been no agreement reached between Innovative and the former landlord to settle the breach. The landlord subsequently filed a law suit against Innovative under which it pursued total damages of approximately $1,000,000, which approximates the rent charges for the remaining term of the lease. The monthly rent amount is being accrued and the commitment is included in the future lease commitment schedule. The outcome of the law suit is undetermined as of the date of these financial statements.
Late Deposit of Payroll Taxes and Employee Income Tax Withholdings:
During 2009, the Company has been late in making deposits of federal and state employer payroll taxes as well as employee income tax withholdings. As of December 31, 2009, the total of accrued and withheld balances amounted to $277,762 which is included in accrued salaries and benefits on the balance sheet.
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 December 31, 2009, the total commitment, excluding incentives, was $841,500.
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. Final audits have been finalized through 2005. Management does not expect the results of future audits to have a material effect on the Company’s financial position or results of operations.
Note 13: 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 carryforwards. 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, 2009, the Company had net operating loss carry forwards of approximately $1,600,000 for federal and Virginia state tax purposes expiring through 2028.
INNOLOG HOLDINGS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE PERIOD MARCH 23, 2009 (INCEPTION) THROUGH DECEMBER 31, 2009
Note 13: Income Taxes (Continued)
The deferred tax asset as of December 31, 2009 consisted of the following:
| Tax benefit on net operating loss carry forward | | $ | 642,000 | |
| Goodwill | | | 320,000 | |
| Contingent consideration | | | (80,000 | ) |
| Less: valuation allowance | | | (882,000 | ) |
| | | $ | - | |
Effective January 1, 2009, the Company has adopted the provisions of FASB ASC 740, “Income Tax” which clarifies the accounting for uncertainty in tax positions. FASB ASC 740 requires the recognition of the impact of a tax position in the financial statements if that position is more likely than not of being sustained on a tax return upon examination by the relevant taxing authority, based on the technical merits of the position. The adoption of FASB ASC 740 had no effect on the Company’s financial position or results of operations. At December 31, 2009, the Company has no unrecognized tax benefits.
The Company recognizes interest and penalties related to income tax matters in interest expense and operating expenses, respectively. As of December 31, 2009, the Company has no accrued interest and penalties related to uncertain tax positions.
Note 14: 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 period ended December 31, 2009.
Innovative has been late in making deposits of employee deferrals. The Department of Labor is reviewing the Innovative’s employee benefit plan document as well as other records to determine the status of compliance. The outcome is undetermined as of the date of these financial statements.
Note 15: Capital Stock
Common Stock:
As of December 31, 2009, 100,000,000 shares of $.001 par value common stock were authorized and 20,000,000 shares of common stock were issued and outstanding. In May 2010, the Company consummated a .44-for-1 reverse stock split, thereby decreasing the number of issued and outstanding shares to 8,882,455, and increasing the par value of each share to $0.0023. All references in the accompanying consolidated financial statements to the number of common shares and per-share amounts for the period ended December 31, 2009 have been restated to reflect the reverse stock split. (See Note 16)
INNOLOG HOLDINGS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE PERIOD MARCH 23, 2009 (INCEPTION) THROUGH DECEMBER 31, 2009
Note 15: Capital Stock (Continued)
Stock Warrant Activity:
On March 31, 2009, the Company granted 4,000,000 warrants to various affiliated individuals in conjunction with their guarantee of the Company’s line of credit (Note 8) and their loans to the Company (Note 10). The warrants have an exercise price of $0.01 and a life of five years. All warrants were fully vested on the date of grant. The fair value of the warrants was $520,000 and was charged to interest expense for the period from March 23, 2009 (inception) to December 31, 2009.
A summary of Holdings’ warrant activity and related information is as follows:
Warrant Summary | | Warrants | | | Weighted Average Exercise Price | |
| Outstanding, beginning of year | | | - | | | $ | - | |
| Granted | | | 4,000,000 | | | | 0.01 | |
| Exercised | | | - | | | | - | |
| Forfeited/Expired | | | - | | | | - | |
| Outstanding, end of year | | | 4,000,000 | | | $ | 0.01 | |
At December 31, 2009, there were 4,000,000 warrants outstanding and exercisable. These warrants had a weighted average exercise price of $0.01 and a weighted average remaining life of 4.25 years. The intrinsic value of these warrants was $580,000.
Note 16: Subsequent Events (Unaudited)
Former Stockholder Loan:
Innovative’s former stockholder loaned the Company an additional $156,000 during 2010, which is partially collateralized by certain accounts receivable. The former stockholder was granted warrants to purchase 156,000 shares of Innolog stock at a price of $0.50 per share.
Loan from controller
Innovative’s controller loaned the Company $20,000 during 2010. The controller was granted warrants to purchase 20,000 shares of Innolog stock at a price of $0.50 per share.
INNOLOG HOLDINGS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE PERIOD MARCH 23, 2009 (INCEPTION) THROUGH DECEMBER 31, 2009
Note 16: Subsequent Events (Continued, Unaudited)
Related party loan
During 2010, the Company received funds from an affiliate totaling $250,000, in two separate notes. These loans are secured by certain accounts receivable of Innovative. The affiliate was granted warrants to purchase 500,000 shares of Innolog stock at a price of $0.50 per share and 500,000 shares of preferred stock of the Company.
Merger with Public Company:
On October 15, 2009, uKarma Corporation, a publicly traded Nevada corporation, and Galen entered into an agreement to merge (the “Merger Agreement”) in a reverse merger transaction. In June 2010, the rights to merge were assigned directly to Holdings. Once the merger transaction is closed, the Holdings stockholders will become the controlling stockholders of uKarma Corporation and the business of Holdings will continue.
Stock Transactions:
In May 2010, Holdings reversed the number of shares of its common stock from 20,000,000 shares outstanding to 8,882,455 shares (.44 to 1) and transferred such to the existing shareholders of Galen. In addition, Holdings issued 36,714,758 shares of convertible preferred stock.
Preferred Stock:
In April 2010, the Company amended its articles of incorporation and authorized 50,000,000 shares
of $.001 par value Preferred Stock Series A. In 2010, Holdings issued 36,714,758 shares of
Preferred Stock Series A.
Consulting Agreement:
In May, 2010, Emerging Companies, LLC entered into an agreement with the Company to provide consulting services to the Company relating to merger and acquisition transactions, interfacing with the public markets and other advisors, and other core business advisory services. Two of the Company’s executive officers and directors are members of Emerging Companies, LLC.
Seller Note from Innovative Acquisition:
On May 16, 2010, the seller note of $1,285,000 (note 9) was converted into 1,000,000 shares of Convertible Preferred Stock Series A of Holdings.
INNOLOG HOLDINGS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE PERIOD MARCH 23, 2009 (INCEPTION) THROUGH DECEMBER 31, 2009
Note 16: Subsequent Events (Continued, Unaudited)
Warrants:
In 2010, the Company granted 38,551,857 warrants which enable the holders to purchase 38,551,857 shares of the Company’s common stock at an exercise price of $0.50 per share. These warrants are exercisable immediately upon issuance and expire on June 1, 2015.
Management has evaluated subsequent events through July 12, 2010 the date which the financial statements were available to be issued. Except as disclosed, there were no other subsequent events noted that would require adjustment to or disclosure in these financial statements.
INNOVATIVE LOGISTICS TECHNIQUES, INC.
(A Wholly Owned Subsidiary of Innolog Holdings Corporation)
FINANCIAL REPORTS
FOR THE YEARS ENDED
DECEMBER 31, 2009 and 2008
INNOVATIVE LOGISTICS TECHNIQUES, INC
(A Wholly Owned Subsidiary of Innolog Holdings Corporation)
FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2009 AND 2008
TABLE OF CONTENTS
| | | PAGE | |
| Independent Auditors’ Report | | | 1 | |
| | | | | |
| Financial Statements | | | | |
| | | | | |
| Balance Sheets | | | 2 | |
| | | | | |
| Statements of Operations | | | 3 | |
| | | | | |
| Statements of Stockholder’s Deficiency | | | 4 | |
| | | | | |
| Statements of Cash Flows | | | 5 | |
| | | | | |
| Notes to Financial Statements | | | 6-16 | |
Independent Auditor’s Report
The Board of Directors
Innovative Logistics Techniques, Inc.
Fairfax, Virginia
We have audited the accompanying balance sheets of Innovative Logistics Techniques, Inc. (the “Company”) as of December 31, 2009 and 2008, and the related statements of operations, stockholder’s deficiency, and cash flows for the years then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the 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 financial statements referred to above present fairly, in all material respects, the financial position of Innovative Logistics Techniques, Inc. as of December 31, 2009 and 2008, and the results of its operations and its cash flows for the years then ended 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 shown in the financial statements, the Company incurred a net loss of $2,009,358 and $2,384,649 for each of the years ended December 31, 2009 and 2008, respectively. At December 31, 2009 and 2008, current liabilities exceeded current assets by $2,370,124 and $1,883,295, respectively. These factors, and the others discussed in Note 2, raise substantial doubt about the Company’s ability to continue as a going concern. These financial statements do not include any adjustments relating to the recoverability and classification of recorded assets, or the amounts and classification of liabilities that might be necessary in the event the Company cannot continue in existence.
Spector & Associates, LLP
Pasadena, California
July 12, 2010
INNOVATIVE LOGISTICS TECHNIQUES, INC.
(A Wholly Owned Subsidiary of Innolog Holdings Corporation)
BALANCE SHEETS
AS OF DECEMBER 31, 2009 and 2008
| | | 2009 | | | 2008 | |
| ASSETS | | | | | | |
| Current Assets | | | | | | |
| Cash | | $ | 9,255 | | | $ | 168,233 | |
| Accounts receivable, net | | | 1,729,594 | | | | 1,189,160 | |
| Prepaid expenses and other current assets | | | 929 | | | | 3,842 | |
| Total Current Assets | | | 1,739,778 | | | | 1,361,235 | |
| | | | | | | | | |
| Property and equipment, net | | | 11,911 | | | | 55,392 | |
| Goodwill | | | 3,056,238 | | | | - | |
| Other assets | | | 14,552 | | | | 93,600 | |
| Total Assets | | $ | 4,822,479 | | | $ | 1,510,227 | |
| | | | | | | | | |
| LIABILITIES AND STOCKHOLDER'S DEFICIENCY | | | | | | | | |
| | | | | | | | | |
| Current Liabilities | | | | | | | | |
| Accounts payable | | $ | 2,521,398 | | | $ | 2,175,337 | |
| Accrued salaries and benefits | | | 726,096 | | | | 443,975 | |
| Billings in excess of related costs and | | | | | | | | |
| estimated earnings on contracts in progress | | | - | | | | 38,816 | |
| Accrued contract loss | | | - | | | | 246,543 | |
| Due to factor | | | - | | | | 214,466 | |
| Due to affiliates | | | 553,504 | | | | - | |
| Due to former stockholder/officer | | | 183,631 | | | | 57,332 | |
| Due to Innolog Holdings Corporation | | | 124,519 | | | | - | |
| Deferred rent | | | 754 | | | | 68,061 | |
| Total Current Liabilities | | | 4,109,902 | | | | 3,244,530 | |
| | | | | | | | | |
| Long Term Liabilities | | | | | | | | |
| Due to Innolog Holdings Corporation | | | 2,635,000 | | | | - | |
| | | | | | | | | |
| COMMITMENTS AND CONTINGENCIES | | | | | | | | |
| | | | | | | | | |
| Stockholder's Deficiency | | | | | | | | |
| Common stock, $1 par value - 1,000 shares authorized, | | | | | | | | |
| 674 shares issued and outstanding | | | 674 | | | | 674 | |
| Additional paid-in capital | | | - | | | | 325,190 | |
| Accumulated deficit | | | (1,923,097 | ) | | | (2,060,167 | ) |
| Total Stockholder's Deficiency | | | (1,922,423 | ) | | | (1,734,303 | ) |
| | | | | | | | | |
| Total Liabilities and Stockholder's Deficiency | | $ | 4,822,479 | | | $ | 1,510,227 | |
| INNOVATIVE LOGISTICS TECHNIQUES, INC. |
| STATEMENTS OF OPERATIONS |
| (A Wholly Owned Subsidiary of Innolog Holdings Corporation) |
| FOR THE YEARS ENDED DECEMBER 31, 2009 AND 2008 |
| | | 2009 | | | 2008 | |
| | | | | | | |
| Revenues | | $ | 7,847,465 | | | $ | 6,184,531 | |
| | | | | | | | | |
| Operating expenses | | | | | | | | |
| Direct costs | | | 4,529,380 | | | | 3,310,302 | |
| Indirect contract costs, of which $134,922 | | | | | | | | |
| was charged by an affiliate | | | 3,430,440 | | | | 5,082,506 | |
| Management fees, affiliate | | | 764,078 | | | | - | |
| Costs not allocable to contracts | | | 608,523 | | | | 193,063 | |
| Impairment of goodwill | | | 1,000,000 | | | | - | |
| Total operating expenses | | | 10,332,421 | | | | 8,585,871 | |
| | | | | | | | | |
| Loss from operations | | | (2,484,956 | ) | | | (2,401,340 | ) |
| | | | | | | | | |
| Other Income (expenses) | | | | | | | | |
| Obligations forgiven upon early termination of lease | | | 280,606 | | | | - | |
| Other income | | | 6,952 | | | | 46,570 | |
| Interest expense | | | (11,960 | ) | | | (29,879 | ) |
| Unrealized gain on fair value of consideration payable | | | 200,000 | | | | - | |
| Total other income (expenses) | | | 475,598 | | | | 16,691 | |
| | | | | | | | | |
| Loss before income tax provision | | | (2,009,358 | ) | | | (2,384,649 | ) |
| | | | | | | | | |
| Income tax provision | | | - | | | | - | |
| | | | | | | | | |
| Net Loss | | $ | (2,009,358 | ) | | $ | (2,384,649 | ) |
| INNOVATIVE LOGISTICS TECHNIQUES, INC. |
| (A Wholly Owned Subsidiary of Innolog Holdings Corporation) |
| STATEMENTS OF STOCKHOLDER'S DEFICIENCY |
| FOR THE YEARS ENDED DECEMBER 31, 2009 AND 2008 |
| | | | | | | | | RETAINED | | | TOTAL | |
| | | | | | ADDITIONAL | | | EARNINGS | | | STOCKHOLDER'S | |
| | | COMMON | | | PAID IN | | | (ACCUMULATED | | | EQUITY | |
| | | STOCK | | | CAPITAL | | | DEFICIT) | | | (DEFICIENCY) | |
| Balance December 31, 2007 | | $ | 674 | | | $ | 325,190 | | | $ | 324,482 | | | $ | 650,346 | |
| | | | | | | | | | | | | | | | | |
| Net loss | | | - | | | | - | | | | (2,384,649 | ) | | | (2,384,649 | ) |
| Balance December 31, 2008 | | | 674 | | | | 325,190 | | | | (2,060,167 | ) | | | (1,734,303 | ) |
| | | | | | | | | | | | | | | | | |
| Net loss | | | - | | | | - | | | | (2,009,358 | ) | | | (2,009,358 | ) |
| | | | | | | | | | | | | | | | | |
| Reclassification of accumulated deficit | | | | | | | | | | | | | | | | |
| upon acquisition | | | - | | | | (2,146,428 | ) | | | 2,146,428 | | | | - | |
| | | | | | | | | | | | | | | | | |
| Intangible assets contributed | | | - | | | | 4,056,238 | | | | - | | | | 4,056,238 | |
| | | | | | | | | | | | | | | | | |
| Capital contribution | | | - | | | | 600,000 | | | | - | | | | 600,000 | |
| | | | | | | | | | | | | | | | | |
| Purchase liabilities contributed | | | - | | | | (2,835,000 | ) | | | - | | | | (2,835,000 | ) |
| | | | | | | | | | | | | | | | | |
| Balance December 31, 2009 | | $ | 674 | | | $ | - | | | $ | (1,923,097 | ) | | $ | (1,922,423 | ) |
| INNOVATIVE LOGISTICS TECHNIQUES, INC. | |
| (A Wholly Owned Subsidiary of Innolog Holdings Corporation) | |
| STATEMENTS OF CASH FLOWS | |
| FOR THE YEAR ENDED DECEMBER 31, 2009 AND 2008 | |
| | | | | | | |
| | | 2009 | | | 2008 | |
| CASH FLOWS FROM OPERATING ACTIVITIES: | | | | | | |
| Net loss | | $ | (2,009,358 | ) | | $ | (2,384,649 | ) |
| Adjustments to reconcile net loss to net | | | | | | | | |
| cash used in operating activities: | | | | | | | | |
| Depreciation and amortization | | | 46,456 | | | | 37,405 | |
| Accrued loss on contracts in progress | | | (246,543 | ) | | | 190,295 | |
| Impairment of goodwill | | | 1,000,000 | | | | - | |
| Unrealized gain on fair value of consideration payable | | | (200,000 | ) | | | - | |
| Changes in assets and liabilities: | | | | | | | | |
| Accounts receivable | | | (540,434 | ) | | | (276,922 | ) |
| Prepaid expenses and other assets | | | 1,646 | | | | 31,977 | |
| Deposits | | | 80,316 | | | | 25,000 | |
| Deferred rent | | | (67,307 | ) | | | (74,075 | ) |
| Billings in excess of contract costs and related earnings | | | (38,816 | ) | | | 38,816 | |
| Due to affiliate | | | 399,500 | | | | - | |
| Accounts payable and accrued expenses | | | 628,181 | | | | 1,174,162 | |
| | | | | | | | | |
| Net cash used in operating activities | | | (946,359 | ) | | | (1,237,991 | ) |
| | | | | | | | | |
| CASH FLOWS FROM INVESTING ACTIVITIES: | | | | | | | | |
| Payments received for notes receivable | | | - | | | | 1,789,125 | |
| Property and equipment purchased | | | (2,975 | ) | | | (3,338 | ) |
| | | | | | | | | |
| Net cash (used in) provided by investing activities | | | (2,975 | ) | | | 1,785,787 | |
| | | | | | | | | |
| CASH FLOWS FROM FINANCING ACTIVITIES: | | | | | | | | |
| Net borrowings from related parties | | | 404,822 | | | | 57,332 | |
| Capital contribution | | | 600,000 | | | | - | |
| Repayment of borrowings from factor | | | (214,466 | ) | | | (40,940 | ) |
| Payments under notes payable bank | | | - | | | | (500,000 | ) |
| | | | | | | | | |
| Net cash (used in) provided by financing activities | | | 790,356 | | | | (483,608 | ) |
| | | | | | | | | |
| NET CHANGE IN CASH | | | (158,978 | ) | | | 64,188 | |
| | | | | | | | | |
| CASH - BEGINNING OF YEAR | | | 168,233 | | | | 104,045 | |
| | | | | | | | | |
| CASH - END OF YEAR | | $ | 9,255 | | | $ | 168,233 | |
| | | | | | | | | |
| SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: | | | | | | | | |
| Cash paid during the year for: | | | | | | | | |
| Interest | | $ | 12,000 | | | $ | 30,047 | |
| SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES: | | | | | | | | |
| | |
| During the year ended December 31,2009, Holdings contributed goodwill of $4,056,238 and purchase liabilities of | |
| $2,835,000 as a result of the acquisition transaction (Note 4) | |
INNOVATIVE LOGISTICS TECHNIQUES, INC
(A Wholly Owned Subsidiary of Innolog Holdings Corporation)
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2009 AND 2008
Note 1: Organization and Nature of Business
Innovative Logistics Techniques, Inc. (the "Company"), 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. The Company's services and solutions are provided to a wide variety of clients, including the U.S. Department of Defense, U. S. Department of Homeland Security and civilian agencies in the federal government and state and local municipalities, as well as selected commercial organizations. The Company is a wholly owned subsidiary of Innolog Holdings Corporation. Innolog Holdings Corporation is a wholly owned subsidiary of Galen Capital Corporation (“Galen”).
Note 2: Going Concern
The accompanying financial statements have been prepared in conformity with generally accepted accounting principles, which contemplate continuation of the Company as a going concern. However, the Company has sustained substantial operating losses in the recent years and a stockholder’s deficit (defined as total assets minus total liabilities) of $1,922,423 and $1,734,303 at December 31, 2009 and 2008, respectively. 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's parent will help to revise the Company’s operating and financial requirements.
The accompanying financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America, which contemplate continuation of the Company as a going concern. The financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that could result from the outcome of this uncertainty.
Note 3: Summary of Significant Accounting Policies
Accounting Standards Codification:
The Company has adopted changes issued by the Financial Accounting Standards Board (“FASB”) to the authoritative hierarchy of Generally Accepted Accounting Principles (“GAAP”). These changes establish the FASB Accounting Standards Codification (“ASC”) as the source of authoritative accounting principles recognized by the FASB to be applied by nongovernmental entities in the preparation of financial statements in conformity with GAAP. The codification itself does not change GAAP. Other than the manner in which new accounting guidance is referenced, the adoption of these changes had no impact on the financial statements.
INNOVATIVE LOGISTICS TECHNIQUES, INC
(A Wholly Owned Subsidiary of Innolog Holdings Corporation)
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2009 AND 2008
Note 3: Summary of Significant Accounting Policies (Continued)
Use of Estimates:
Management uses estimates and assumptions in preparing these financial statements in accordance with accounting principles generally accepted in the United States of America. Those estimates and assumptions affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities, and the reported revenues and expenses. Actual results could vary from the estimates.
Contract Revenue Recognition:
Revenue on cost-plus-fee contracts is recognized to the extent of costs incurred plus a proportionate amount of fees earned. Revenue on fixed-price contracts is recognized on the percentage-of-completion method based on costs incurred in relation to total estimated costs. Revenue on time-and-materials contracts is recognized at contractual rates as hours and out of pocket expenses are incurred. Anticipated losses on contracts are recognized in the period they are first determined. Total accrued losses on contracts in progress amounted to zero and $246,543 as of December 31, 2009 and 2008, respectively. In accordance with industry practice, amounts relating to long-term contracts, including retainages, are classified as current assets although an undeterminable portion of these amounts is not expected to be realized within one year. Because of inherent uncertainties in estimating costs, it is at least reasonably possible that the estimates used will change within the near term.
Concentration of Credit Risk:
The Company maintains its cash, which, at times may exceed federally insured limits, in bank deposit accounts with a high credit quality financial institution. The Company believes it is not exposed to any significant credit risk with regards to those accounts. Accounts receivable principally consist of amounts due from the federal government and large prime federal government contractors. Management believes associated credit risk is not significant.
Allowance for Doubtful Accounts:
The Company provides an allowance for doubtful accounts equal to the estimated collection losses that will be incurred in collection of all receivables. Estimated losses are based on historical collection experience coupled with review of the current status of existing receivables. There was no allowance for doubtful accounts as of December 31, 2009 and 2008.
Property and Equipment:
Property and equipment are stated at cost and depreciated by the straight-line method over estimated useful lives which are as follows:
| Office furniture and equipment | 3 to 5 years |
| Computer hardware and software | 2 to 5 years |
INNOVATIVE LOGISTICS TECHNIQUES, INC
(A Wholly Owned Subsidiary of Innolog Holdings Corporation)
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2009 AND 2008
Note 3: Summary of Significant Accounting Policies (Continued)
Property and Equipment (Continued):
Leasehold improvements and lease acquisition costs are amortized over the shorter of the life of the applicable lease or the life of the asset. Maintenance and repairs are charged to operations when incurred. Betterments and renewals are capitalized. When property and equipment are sold or otherwise disposed of, the asset account and related accumulated depreciation account are relieved, and any gain or loss is included in operations.
Long-Lived Assets:
The Company reviews for the impairment of long-lived assets and certain identifiable intangibles whenever events or changes in circumstances indicate that the carrying amount of any asset may not be recoverable. An impairment loss would be recognized when the estimated undiscounted future cash flows expected to result from the use of the asset and its eventual disposition is less than the carrying amount. If impairment is indicated, the amount of the loss to be recorded is based on an estimate of the difference between the carrying amount and the fair value of the asset. Fair value is based upon discounted estimated cash flows expected to result from the use of the asset and its eventual disposition and other valuation methods.
Goodwill:
In accordance with FASB ASC 350, “Intangibles – Goodwill and Other”, goodwill is tested for impairment at least annually. An impairment loss of $1,000,000 was recorded during the year ended December 31, 2009.
Income Taxes
For the year ended December 31, 2008 and the period ended March 31, 2009, the stockholders of the Company elected to treat corporate taxable income as income to its stockholders. Accordingly, taxable income or loss of the Company was passed through to, and reportable by, the stockholders on their personal income tax returns. The Company remained liable for income taxes in jurisdictions that did not recognize S corporation status.
INNOVATIVE LOGISTICS TECHNIQUES, INC
(A Wholly Owned Subsidiary of Innolog Holdings Corporation)
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2009 AND 2008
Note 3: Summary of Significant Accounting Policies (Continued)
Income Taxes (Continued):
Effective April 1, 2009, the Company converted its tax status to a C-corporation. The Company and its parent file a consolidated federal income tax return. Income tax expense incurred by the Company is allocated as if the Company is separately filing. Income taxes are accounted for using the asset and liability method under FASB ASC 740, "Accounting for Income Taxes", whereby deferred tax assets and liabilities are recognized for future tax consequences attributable to differences between the financial statement carrying amounts of assets and liabilities, and their respective tax basis, and operating loss and tax credit carry forwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities due to a change in tax rates is recognized as income in the period that includes the enactment date. Estimates of the realization of deferred tax assets are based-on the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies.
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 these financial statements.
Note 4: Acquisition by Innolog Holdings Corporation
On March 31, 2009 Innolog Holdings Corporation (“Holdings”), acquired the Company in a stock purchase transaction whereby Holdings acquired all of the outstanding shares of common stock of the Company. The total purchase price for the Company was $2,835,000 and consisted of the following (at fair value):
| Cash | | $ | 100,000 | |
| Short Term Note | | | 50,000 | |
| Seller Note (1) | | | 1,285,000 | |
| 2,500,000 shares of Galen common stock (2) | | | 85,000 | |
| Capital Contribution | | | 600,000 | |
| Contingent note payable (3) | | | 715,000 | |
| | | $ | 2,835,000 | |
| (1) | The purchase agreement was amended in May 2010 and this note was converted into 1,000,000 shares of convertible preferred series A stock of Holdings. |
| | |
| (2) | Fair value of Galen’s common shares issued was determined on the basis of the fair value of the Company’s shares. These shares were exchanged for 285,453 shares of Holdings common stock in May 2010. |
INNOVATIVE LOGISTICS TECHNIQUES, INC
(A Wholly Owned Subsidiary of Innolog Holdings Corporation)
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2009 AND 2008
Note 4: Acquisition by Innolog Holdings Corporation (Continued)
| (3) | The fair value of the contingent consideration was based on the revenues and earnings projections of the Company. The contingent note payable requires Holdings to pay the former stockholders up to $900,000 in three years based on the performance of the Company and up to 10% of the net income of years four and five. As of March 31, 2009, based on management’s estimates, Holdings expected that the aggregate undiscounted amount of contingent consideration to be was approximate $900,000. This was discounted to present value using an 8% discount rate and amounted to $715,000 at the date of acquisition. As of December 31, 2009, this amount was reduced to $515,000 and an unrealized gain of $200,000 has been recognized for the year ended December 31, 2009. |
Goodwill in the amount of $4,056,238 was recognized in the acquisition and was attributable to the excess of the purchase price paid over the fair value of the net assets acquired, as there were no other intangibles qualifying for separate recognition. Due to the increase in the Company’s net liabilities during 2009 and cash flow shortfalls, an impairment loss of $1,000,000 has been made. Of the total goodwill recognized, $4,056,238 is expected to be deductible for income tax purposes.
Goodwill and purchase liabilities resulting from the purchase transaction were pushed down to the Company upon closing of the transaction. Purchase liabilities in the amount of $2,835,000 have been reflected as due to Innolog Holdings Corporation. This amount was reduced to $2,635,000 since the fair value of the consideration payable was reduced by $200,000. It is not the intent of Holdings to demand payment of these amounts in less than one year.
The following table summarizes the approximate fair values of the assets acquired and liabilities assumed at the date of acquisition:
| Current assets | | $ | 1,325,138 | |
| Other assets | | | 100,657 | |
| Fixed assets | | | 49,189 | |
| Goodwill | | | 4,056,238 | |
| Liabilities assumed | | | (2,696,222 | ) |
| | | $ | 2,835,000 | |
Costs related to the acquisition in the amount of approximately $30,000 have been charged to operations during 2009.
Note 5: Major Customers
Revenues from prime contracts and subcontracts with U.S. Government agency customers in aggregate accounted for approximately 97% and 98% of total revenues for the years ended December 31, 3009 and 2008, respectively.
INNOVATIVE LOGISTICS TECHNIQUES, INC
(A Wholly Owned Subsidiary of Innolog Holdings Corporation)
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2009 AND 2008
Note 6: Accounts Receivable
Accounts receivable consisted of the following:
| | | 2009 | | | 2008 | |
| Billed receivables | | $ | 1,543,115 | | | $ | 1,185,560 | |
| Unbilled receivables | | | 186,479 | | | | 3,600 | |
| | | $ | 1,729,594 | | | $ | 1,189,160 | |
Contract receivables from prime contracts and subcontracts with U.S. Government agency customers in aggregate accounted for approximately 97% and 100% of total contract receivables at December 31, 2009 and 2008, respectively.
Note 7: Property and Equipment
Property and equipment consisted of the following as of December 31, 2009 and 2008:
| | | 2009 | | | 2008 | |
| Office furniture and equipment | | $ | 497,696 | | | $ | 494,721 | |
| Computer hardware and software | | | 257,053 | | | | 257,053 | |
| Leasehold improvements | | | 118,276 | | | | 118,276 | |
| | | | 873,025 | | | | 870,050 | |
Less accumulated depreciation | | | 861,114 | | | | 814,658 | |
| | | | | | | | | |
| | | $ | 11,911 | | | $ | 55,392 | |
Note 8: Due to factor
In July 2007, the Company entered into a Receivables Purchase Agreement with Federal National Payables, Inc. Borrowings under the agreement were secured by the Company’s accounts receivable and a personal guarantee from the Company’s major stockholder. Under this agreement, the Company assigned a portion of its trade accounts receivable to the factor and received advances for up to 90% of the factored accounts receivables. Service fees were charged at 0.65% for the first 30 days and 0.0216% per day, thereafter. Interest was charged at the factor’s prime rate, as defined.
As of December 31, 2008, there was $214,466 outstanding under the arrangement plus service and interest charges of $7,428 which was included in account payable. The Company paid off any outstanding balance and terminated this credit facility in November 2009.
INNOVATIVE LOGISTICS TECHNIQUES, INC
(A Wholly Owned Subsidiary of Innolog Holdings Corporation)
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2009 AND 2008
Note 9: Related party transactions
Loans from former stockholder and officer:
As of December 31, 2009 and 2008, loans from former stockholder and officer consisted of the following:
| | | 2009 | | | 2008 | |
| Note, interest of 10% per annum and principal due on December 31, 2009. In May 2010, this debt was converted to 30,000 shares of preferred stock of Holdings. | | $ | 57,332 | | | $ | 57,332 | |
| Note, interest of $12,000 and principal due on December 18, 2009 or upon collection of certain accounts receivable. During 2010, the due date on this note was extended to February 10, 2010 with additional interest of $12,000 payable upon maturity. In addition, 120,000 warrants of Galen were granted. (1) | | | 120,000 | | | | - | |
| Other | | | 6,299 | | | | - | |
| | | $ | 183,631 | | | $ | 57,332 | |
| (1) | This loan has not been paid off as of the date of these financial statements. Interest expense incurred on these loans amounted to $12,000 and zero for the years ended December 31, 2009 and 2008, respectively. |
Due to affiliates:
As of December 31, 2009, amounts due to two of the Company’s affiliates under common control amounted to $553,504. There was no interest charged on these payables and no scheduled due date.
Office and service agreement:
The Company provided management and office support to a charitable nonprofit organization in which the Company’s former stockholders served as officers. The Company recognized revenue of $11,264 and $123,608 for services provided to this organization for the year ended December 31, 2009 and 2008, respectively. As of December 31, 2009 and 2008, receivables from this organization amounted to zero and $4,062, respectively. This agreement was terminated during 2009.
INNOVATIVE LOGISTICS TECHNIQUES, INC
(A Wholly Owned Subsidiary of Innolog Holdings Corporation)
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2009 AND 2008
Note 9: Related party transactions (Continued)
Management fees affiliate:
Pursuant to an Executive Management Agreement with Galen entered into on April 1, 2009, the Company is being charged a management fee of $100,000 per month limited to 15% of the gross revenue of the Company for each twelve month period effective with the consummation of this agreement. Total management fees amounted to approximately $900,000 for the year ended December 31, 2009. The agreement expires on July 31, 2010. Management fees payable to Galen amounted $399,500 as of December 31, 2009 and have been included in due to affiliates.
Due to Innolog Holdings Corporation:
As of December 31, 2009, the Company owed Holdings $124,519. There is no due date or interest charged on this amount. In addition, the Company owed Holdings $2,635,000 for liabilities relating to the purchase transaction. The amount due on acquisition was $2,835,000 and was reduced to $2,635,000 as the fair value of consideration payable was reduced by $200,000. It is not the intent of Holdings to request payment of these amounts in less than one year. No interest was charged by Holdings on these amounts.
Note 10: Costs not Allocable to Contracts
Costs not allocable to contracts consisted of the following during December 31, 2009 and 2008:
| | | 2009 | | | 2008 | |
| Entertainment | | $ | 221,731 | | | $ | - | |
| Professional fees | | | 165,680 | | | | - | |
| Late fees and penalties | | | 48,315 | | | | 28,355 | |
| Rent | | | 80,316 | | | | 25,000 | |
| Finance charges | | | 28,488 | | | | 62,304 | |
| Other | | | 63,993 | | | | 77,404 | |
| | | $ | 608,523 | | | $ | 193,063 | |
INNOVATIVE LOGISTICS TECHNIQUES, INC
(A Wholly Owned Subsidiary of Innolog Holdings Corporation)
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2009 AND 2008
Note 11: Commitments and Contingencies
Leases:
The Company leases office space in Washington, D.C.; Orlando, Florida; Springfield, Virginia; and Mclean, Virginia; under operating leases expiring at various dates through 2012. The 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, 2009, are approximately as follows:
| Year ending December 31, | | | |
| 2010 | | $ | 717,000 | |
| 2011 | | | 680,000 | |
| 2012 | | | 96,000 | |
| | | $ | 1,493,000 | |
Rent expense is charged ratably over the lives of the leases using the straight-line method. Deferred rent payable as of December 31, 2009 and 2008 was approximately $1,000 and $68,000, respectively. Total rent expense for the years ended December 31, 2009 and 2008 amounted to $593,239 and $1,450,865, which includes a straight-line rent adjustment of $67,307 and $51,392, respectively. During 2009, $280,606 that was previously accrued was forgiven upon early termination of a lease.
In 2010, the Company vacated its office space in Mclean, VA, prior to the expiration of the lease. There has been no agreement reached between the Company and the former landlord to settle the breach by the Company. The landlord subsequently filed a law suit against the Company under which it pursued for total damages of approximately $1,000,000, which approximates the rent charges for the remaining term of the lease. The monthly rent amount is included in the future lease commitment schedule. The outcome of the law suit is undetermined as of the date of these financial statements.
Employment Agreement:
On April 1, 2009, the Company 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 December 31, 2009, the total commitment, excluding incentives, was $841,500.
As of December 31, 2009, the Company was delinquent in paying a significant portion of its accounts payable. Some of the Company's vendors have filed claims to collect on the amounts due.
INNOVATIVE LOGISTICS TECHNIQUES, INC
(A Wholly Owned Subsidiary of Innolog Holdings Corporation)
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2009 AND 2008
Note 11: Commitments and Contingencies (Continued)
Late deposit of payroll taxes and employee income tax withholdings:
During year 2009, the Company has been late in making deposits of federal and state employer payroll taxes as well as employee income tax withholdings. As of December 31, 2009, the total of accrued and withheld balances amounted to $277,762 which is included in accrued salaries and benefits on the balance sheets.
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. Final audits have been finalized through 2005. Management does not expect the results of future audits to have a material effect on the Company’s financial position or results of operations.
Note 12: Income Taxes
The Company’s effective income tax rate is lower than what would be expected if the federal statutory rate were applied to income from the 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 the net operating loss carryforwards. 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, 2009, the Company had net operating loss carry forwards of approximately $1,200,000 for federal and Virginia state tax purposes expiring through 2028.
The deferred tax asset as of December 31, 2009 consisted of the following:
| Tax benefit on net operating loss carry forward | | $ | 494,000 | |
| Goodwill | | | 320,000 | |
| Contingent consideration | | | (80,000 | ) |
| Less: valuation allowance | | | (734,000 | ) |
| | | $ | - | |
Effective January 1, 2009, the Company has adopted the provisions of FASB ASC 740, “Income Tax” which clarifies the accounting for uncertainty in tax positions. FASB ASC 740 requires the recognition of the impact of a tax position in the financial statements if that position is more likely than not of being sustained on a tax return upon examination by the relevant taxing authority, based on the technical merits of the position. The adoption of FASB ASC 740 had no effect on the Company’s financial position or results of operations. At December 31, 2009, the Company has no unrecognized tax benefits.
INNOVATIVE LOGISTICS TECHNIQUES, INC
(A Wholly Owned Subsidiary of Innolog Holdings Corporation)
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2009 AND 2008
Note 12: Income Taxes (Continued)
The Company recognizes interest and penalties related to income tax matters in interest expense and operating expenses, respectively. As of December 31, 2009, the Company has no accrued interest and penalties related to uncertain tax positions.
Note 13: Employee Benefit Plan
The Company 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. The employer contribution amounted to $83,591 for the year ended December 31, 2008. There was no employer contribution for the year ended December 31, 2009.
The Company has been late in making deposits of employee deferrals. The Department of Labor is reviewing the Company’s employee benefit plan document as well as other records to determine the status of compliance. The outcome is undetermined as of the date of these financial statements.
Note 14: Subsequent Events (unaudited)
Former Stockholder Loan:
Innovative’s former stockholder loaned the Company an additional $156,000 during 2010, which is partially collateralized by certain accounts receivable. The former stockholder was granted warrants to purchase 156,000 shares of Innolog stock at a price of $0.50 per share.
Loan from controller
Innovative’s controller loaned the Company $20,000 during 2010. The controller was granted warrants to purchase 20,000 shares Innolog stock at a price of $0.50 per share.
Management has evaluated subsequent events through July 12, 2010, the date which the financial statements were available to be issued. Except as disclosed, there were no other subsequent events noted that would require adjustment to or disclosure in these financial statements.
