UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
______________
FORM 10-Q
______________
| ༂ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended June 30, 2008
ྑ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from _____________
Commission File No.
000-52865
INOVACHEM, INC.
(Exact name of small business issuer as specified in its charter)
______________
Delaware | 26-1946130 |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
c/o Polymed Therapeutics, Inc 3040 Post Oak Road, Suite 1110 Houston, TX | 77056 |
| (Address of principal executive offices) | (Zip Code) |
(713) 777-7088 |
| (Issuer’s telephone number) |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes ༂ No ྑ
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
| | | | | | | |
| | | | | | | |
| Large accelerated filer ྑ | | Accelerated filer ྑ | | Non-accelerated filer ྑ | | Smaller reporting company ༂ |
| (Do not check if a smaller reporting company) |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ྑ No ༂
Common stock outstanding ($.001 par value) as of August 14, 2008: 21,515,013 shares.
TABLE OF CONTENTS
| | Page # |
| | |
PART I - FINANCIAL INFORMATION | |
| Item 1. Financial Information | 3 |
| Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations | 15 |
| Item 3. Not applicable | 19 |
| Item 4. Controls and Procedures | 19 |
| | 19 |
PART II -OTHER INFORMATION | |
| Item 1. Legal Proceedings. | 20 |
| Item 1A. Not Required | 20 |
| Item 2. Unregistered Sales of Equity Securities and Use of Proceeds. | 20 |
| Item 3. Defaults Upon Senior Securities. | 20 |
| Item 4. Submission of Matters to a Vote of Security Holders. | 20 |
| Item 5. Other Information. | 20 |
| Item 6. Exhibits | 20 |
| | |
SIGNATURES | 21 |
PART I - FINANCIAL INFORMATION
Item 1.
INOVACHEM, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED FINANCIAL STATEMENTS
As of June 30, 2008
(UNAUDITED)
Table of Contents
| FINANCIAL STATEMENTS | | Page # | |
| | | | |
| Consolidated Balance Sheet | | | 4 | |
| | | | | |
| Consolidated Statements of Operations | | | 5 | |
| | | | | |
| Consolidated Statement of Changes in Stockholders’ Equity | | | 6 | |
| | | | | |
| Consolidated Statements of Cash Flows | | | 7 | |
| | | | | |
| Notes to Consolidated Financial Statements | | | 8 | |
| InovaChem, Inc. and Subsidiary |
| (a development stage company) |
| CONSOLIDATED BALANCE SHEET |
| June 30, 2008 |
| (UNAUDITED) |
| ASSETS | | | | |
| Current assets | | | | |
| Cash and cash equivalents | | $ | 116,516 | |
| Prepaid expenses | | | 4,625 | |
| | | | | |
| Total current assets | | | 121,141 | |
| | | | | |
| | | | 121,141 | |
| | | | | |
| LIABILITIES AND STOCKHOLDERS' EQUITY | | | | |
| Current liabilities | | | | |
| Accounts payable | | | 135,508 | |
| Due to related parties | | | 5,899 | |
| | | | | |
| Total current liabilities | | | 141,407 | |
| | | | | |
| | | | 141,407 | |
| | | | | |
| Stockholders' equity | | | | |
| Preferred stock - authorized 50,000,000 shares | | | | |
| of $0.001 par value; issued and outstanding: None | | | - | |
| | | | | |
| Common stock - authorized 200,000,000 shares | | | | |
| of $0.001 par value; issued and outstanding | | | | |
| 20,091,667 shares | | | 20,092 | |
| Additional paid-in capital | | | 285,894 | |
| Deficit accumulated during development stage | | | (326,252 | ) |
| Total stockholders' equity | | | (20,266 | ) |
| | | | | |
| | | $ | 121,141 | |
The accompanying unaudited notes are an integral part of these statements.
| InovaChem, Inc. and Subsidiary |
| (a development stage company) |
| CONSOLIDATED STATEMENTS OF OPERATIONS |
| | | Three | | For Period from | | For Period from | |
| | �� | months ended | | February 14, 2008 | | February 14, 2008 | |
| | | June 30, | | (inception) to June 30, | | (inception) to June 30, | |
| | | 2008 | | 2008 | | 2008 | |
| | | (UNAUDITED) | | (UNAUDITED) | | (UNAUDITED) | |
| | | | | | | | |
| Revenues | | $ | - | | $ | - | | $ | - | |
| | | | | | | | | | | |
| Expenses | | | | | | | | | | |
| General and administrative expenses | | | | | | | | | | |
| Compensation | | | 279,500 | | | 279,500 | | | 279,500 | |
| Professional fees | | | 46,752 | | | 46,752 | | | 46,752 | |
| Total General and administrative expenses | | | 326,252 | | | 326,252 | | | 326,252 | |
| | | | | | | | | | | |
| Net loss from operations | | | (326,252 | ) | | (326,252 | ) | | (326,252 | ) |
| | | | | | | | | | | |
| Net loss | | $ | (326,252 | ) | $ | (326,252 | ) | $ | (326,252 | ) |
| | | | | | | | | | | |
| Net loss per share | | $ | (0.02 | ) | $ | (0.02 | ) | | | |
| | | | | | | | | | | |
| Weighted average number | | | | | | | | | | |
| of common stock outstanding | | | 16,742,778 | | | 16,716,667 | | | | |
The accompanying unaudited notes are an integral part of these statements.
| InovaChem, Inc. and Subsidiary |
| (a development stage company) |
| CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY |
| FROM February 18, 2008 (INCEPTION) to June 30, 2008 |
| (UNAUDITED) |
| | | Preferred Stock | | Common Stock | | Additional | | | | | |
| | | Number of | | Par | | Number of | | Par | | Paid-in | | Accumulated | | | |
| | | Shares | | Value | | Shares | | Value | | Capital | | Deficit | | Total | |
| | | | | | | | | | | | | | | | |
| Balances at February 18, 2008 | | | - | | $ | - | | | 16,666,667 | | $ | 16,667 | | $ | 43,333 | | $ | - | | $ | 60,000 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Recapitalization | | | | | | | | | 2,500,000 | | $ | 2,500 | | | (34,014 | ) | | | | | (31,514 | ) |
| | | | | | | | | | | | | | | | | | | | | | | |
| Issuance of common stock | | | | | | | | | | | | | | | | | | | | | | |
| to Officers and Directors | | | | | | | | | 925,000 | | | 925 | | | 276,575 | | | - | | | 277,500 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Net loss from February 18, 2008 | | | | | | | | | | | | | | | | | | | | | | |
| (inception) to June 30, 2008 | | | - | | | - | | | - | | | - | | | - | | | (326,252 | ) | | (326,252 | ) |
| | | | | | | | | | | | | | | | | | | | | | | |
| Balances at June 30, 2008 | | | - | | $ | - | | | 20,091,667 | | $ | 20,092 | | $ | 285,894 | | $ | (326,252 | ) | $ | (20,266 | ) |
The accompanying unaudited notes are an integral part of these statements.
| InovaChem, Inc. and Subsidiary |
| (a development stage company) |
| CONSOLIDATED STATEMENTS OF CASH FLOWS |
| | | For Period | | For Period | |
| | | from February 14, 2008 | | from February 14, 2008 | |
| | | (inception) to June 30, | | (inception) to June 30, | |
| | | 2008 | | 2008 | |
| | | (UNAUDITED) | | (UNAUDITED) | |
| Cash flows from operating activities | | | | | | | |
| Net loss | | $ | (326,252 | ) | $ | (326,252 | ) |
| Adjustments to reconcile net earnings to net cash | | | | | | | |
| provided by operating activities | | | | | | | |
| Stock issued as compensation | | | 277,500 | | | 277,500 | |
| | | | | | | | |
| Net cash provided by (used in) operating activities | | | (48,752 | ) | | (48,752 | ) |
| | | | | | | | |
| Cash flows from investing activities | | | | | | | |
| Cash acquired in recapitalization | | $ | 105,268 | | $ | 105,268 | |
| | | | | | | | |
| Net cash provided by (used in) investing activities | | | 105,268 | | | 105,268 | |
| | | | | | | | |
| Cash flows from financing activities | | | | | | | |
| Proceeds from sale of common stock, net | | | 60,000 | | | 60,000 | |
| | | | | | | | |
| Net cash provided by (used in) financing activities | | | 60,000 | | | 60,000 | |
| | | | | | | | |
| Net increase in cash and cash equivalents | | | 116,516 | | | 116,516 | |
| | | | | | | | |
| Cash and cash equivalents at beginning of period | | | - | | | - | |
| | | | | | | | |
| Cash and cash equivalents at end of period | | $ | 116,516 | | $ | 116,516 | |
| | | | | | | | |
| Supplemental disclosure of cash flow information | | | | | | | |
| Cash paid during the period for interest | | $ | - | | $ | - | |
| Cash paid during the period for taxes | | $ | - | | $ | - | |
| | | | | | | | |
| Supplemental disclosure of non- cash investing | | | | | | | |
| and financing activities | | | | | | | |
| Net non-cash assets and (liabilities) assumed | | | | | | | |
| in recapitalization | | $ | (136,782 | ) | $ | (136,782 | ) |
The accompanying unaudited notes are an integral part of these statements.
INOVACHEM, INC. AND SUBSIDIARY
(a development stage company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
June 30, 2008
Note 1. Nature of Operations, Basis of Presentation and Going Concern:
Nature of Operations:
InovaChem, Inc. and its subsidiary (the “Company”) is a development stage research, development and manufacturing company. The Company’s strategic plan is to reduce the cost of manufacture of food, pharmaceutical and other products, including sucralose, through the utilization of new technologies. The Company intends to obtain these technologies through their purchase, acquisition or in-house development.
On June 28, 2008, InovaChem Mergerco, LLC a Texas limited liability company (“Mergerco”) and a wholly owned subsidiary of the Company merged (the “Merger”) with and into Trinterprise LLC, a Texas limited liability company (“Trinterprise”) with Trinterprise surviving the Merger. As a result of the Merger, the Company acquired the rights in and to three patent applications of Trinterprise, and Trinterprise became a wholly owned subsidiary of the Company. As discussed below in Note 5, this transaction was treated as a recapitalization of Trinterprise. The Company is maintaining its fiscal year end of September 30, which was the historical fiscal year end of Inovachem, Inc. and Trinterprise.
Activities during the development stage include obtaining patents pending, developing the business plan, and raising capital.
Basis of Presentation
The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America and the rules and regulations of the United States Securities and Exchange Commission for interim financial information. Accordingly, they do not include all the information and footnotes necessary for a comprehensive presentation of financial position and results of operations.
It is management's opinion, however, that all material adjustments (consisting of normal recurring adjustments and non-recurring adjustments) have been made which are necessary for a fair consolidated financial statement presentation. The results for the interim period are not necessarily indicative of the results to be expected for the year.
Going Concern
As reflected in the accompanying unaudited consolidated financial statements, the Company had a net loss of $326,252 for the three months ended June 30, 2008 and for the period from February 14, 2008 (inception) to June 30, 2008, and had a working capital deficit of $20,266 at June 30, 2008. The Company expects to have to expend cash for operations and technology investments in order to implement its business plan and does not expect immediate revenues to offset such expenditures.
The ability of the Company to continue as a going concern is dependent on the Company's ability to further implement its business plan, raise capital, and generate revenues. The financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern.
In July 2008, the Company sold a total of 1,423,346 shares of Common Stock, pursuant to its private offering, at a price of $.30 per share for aggregate proceeds of $427,004.
Note 2. Summary of Significant Accounting Policies:
Principles of Consolidation
The consolidated financial statements include the accounts of Inovachem, Inc. and Trinterprise LLC, its wholly-owned subsidiary. All significant inter-company balances and transactions have been eliminated in consolidation.
Use of Estimates:
Management has used estimates and assumptions in preparing these financial statements in accordance with generally accepted accounting principles. Those estimates and assumptions affect the reported amounts of assets and liabilities and the Company’s reported expenses. Significant estimates during fiscal 2008 include the valuation of patents contributed by founders in connection with the Trinterprise acquisition and the valuation of stock-based compensation. These estimates are reasonable in the judgment of the Company’s management.
Cash and Cash Equivalents:
The Company considers cash on hand and amounts on deposit with financial institutions which have original maturities of three months or less to be cash and cash equivalents.
Fair Value of Financial Instruments:
The Company's financial instruments may include cash and cash equivalents, short-term investments, accounts receivable, accounts payable and liabilities to banks and shareholders. The carrying amount of long-term debt to banks approximates fair value based on interest rates that are currently available to the Company for issuance of debt with similar terms and remaining maturities. The carrying amounts of other financial instruments approximate their fair value because of short-term maturities.
Accounts Receivable
Accounts receivable and customer deposits do not exist at this time and therefore have no allowances accounted for or disclosures made.
Intangibles and other long-lived assets
In accordance with Statement of Financial Accounting Standards (SFAS) No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets", the Company reviews the carrying value of intangibles and other long-lived assets for impairment at least annually or whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of long-lived assets is measured by comparison of its carrying amount to the undiscounted cash flows that the asset or asset group is expected to generate. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the property, if any, exceeds its fair market value.
Revenue Recognition
The Company follows the guidance of the Securities and Exchange Commission's Staff Accounting Bulletin No. 104 for revenue recognition. In general, the Company records revenue when persuasive evidence of an arrangement exists, services have been rendered or product delivery has occurred, the sales price to the customer is fixed or determinable, and collectability is reasonably assured.
Stock Based Compensation
At inception, the Company implemented Statement of Financial Accounting Standard 123 (revised 2004) (“SFAS 123(R)”), “Share-Based Payment,” which replaced SFAS 123 “Accounting for Stock-Based Compensation” and superseded APB Opinion No. 25, “Accounting for Stock Issued to Employees.” In March 2005, the SEC issued Staff Accounting Bulletin No. 107 (SAB 107) regarding its interpretation of SFAS 123R. SFAS 123(R) and related interpretations requires the fair value of all stock-based employee compensation awarded to employees to be recorded as an expense over the related requisite service period. The statement also requires the recognition of compensation expense for the fair value of any unvested stock option awards outstanding at the date of adoption. The Company values any employee or non-employee stock based compensation at fair value using the Black-Scholes Option Pricing Model.
Research and development
Research and development costs, if any, are expensed as incurred.
Income Taxes:
The Company utilizes the asset and liability method to measure and record deferred income tax assets and liabilities. Deferred tax assets and liabilities reflect the future income tax effects of temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and are measured using enacted tax rates that apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Deferred tax assets are reduced by a valuation allowance when in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. At this time, the Company has set up an allowance for deferred taxes as there is no Company history to indicate the usage of deferred tax assets and liabilities.
Earnings Per Share:
Basic earnings per share ("EPS") is computed by dividing earnings available to common stockholders by the weighted-average number of common shares outstanding for the period as required by the Financial Accounting Standards Board (FASB) under Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings per Shares". Diluted EPS reflects the potential dilution of securities that could share in the earnings. At June 30, 2008, there were options to purchase 1,200,000 common shares that may dilute future EPS.
Recent Pronouncements
In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements”. The objective of SFAS 157 is to increase consistency and comparability in fair value measurements and to expand disclosures about fair value measurements. SFAS 157 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements. SFAS 157 applies under other accounting pronouncements that require or permit fair value measurements and does not require any new fair value measurements. The provisions of SFAS No. 157 are effective for fair value measurements made in fiscal years beginning after November 15, 2007. The adoption of this statement is not expected to have a material effect on the Company's future reported financial position or results of operations.
In February 2007, the Financial Accounting Standards Board (FASB) issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities - Including an Amendment of FASB Statement No. 115”. This statement permits entities to choose to measure many financial instruments and certain other items at fair value. Most of the provisions of SFAS No. 159 apply only to entities that elect the fair value option. However, the amendment to SFAS No. 115 “Accounting for Certain Investments in Debt and Equity Securities” applies to all entities with available-for-sale and trading securities. SFAS No. 159 is effective as of the beginning of an entity’s first fiscal year that begins after November 15, 2007. Early adoption is permitted as of the beginning of a fiscal year that begins on or before November 15, 2007, provided the entity also elects to apply the provision of SFAS No. 157, “Fair Value Measurements”. The adoption of this statement is not expected to have a material effect on the Company's financial statements.
In December 2007, the Financial Accounting Standards Board (FASB) issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements - an amendment of ARB No. 51”. This statement improves the relevance, comparability, and transparency of the financial information that a reporting entity provides in its consolidated financial statements by establishing accounting and reporting standards that require the ownership interests in subsidiaries held by parties other than the parent and the amount of consolidated net income attributable to the parent and to the noncontrolling interest be clearly identified and presented on the face of the consolidated statement of income, changes in a parent’s ownership interest while the parent retains its controlling financial interest in its subsidiary be accounted for consistently, and when a subsidiary is deconsolidated, any retained noncontrolling equity investment in the former subsidiary be initially measured at fair value, entities provide sufficient disclosures that clearly identify and distinguish between the interests of the parent and the interests of the noncontrolling owners. SFAS No. 160 affects those entities that have an outstanding noncontrolling interest in one or more subsidiaries or that deconsolidate a subsidiary. SFAS No. 160 is effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2008. Early adoption is prohibited. The adoption of this statement is not expected to have a material effect on the Company's financial statements.
Note 3. Related parties:
Two of the Company’s executive officers, William Zuo and Xiaojing Li, are also executive officers and shareholders of Polymed Therapeutics, Inc. (“Polymed”). Polymed is an affiliate of the Chongqing Polymed Chemical Co. Ltd. in the city of Chongqing, People’s Republic of China one of the Chinese facilities that will likely be producing the Company’s products pursuant to a proposed manufacturing contract with Polymed. Additionally, the Company leases office space from Polymed and contracts with Polymed for other services, such as receptionist and secretarial assistance, for a fee of $5,000 per month.
“Due to related parties” includes reimbursable travel expenses, miscellaneous fees and expenses, as well as research costs and other amounts paid for by corporate officers or directors on behalf of the Company.
Note 4. Commitments and Contingencies:
Employment Agreements
On June 30, 2008, the Company entered into employment agreements with its Executive Chairman, Executive Vice Chairman, Chief Science Officer, Vice President / Corporate Secretary and Chief Financial Officer / Treasurer. The employment agreements for the Executive Chairman and the Vice President / Corporate Secretary are for an initial term ending on December 31, 2011. The other employment agreements are for an initial term ending on December 31, 2009.
Pursuant to the terms of the employment agreements, each of the Executive Chairman, Executive Vice Chairman, Chief Science Officer, Vice President / Corporate Secretary and Chief Financial Officer / Treasurer will be entitled to receive a base salary of $300,000,$150,000, $100,000, $100,000, and $125,000, respectively, in each case subject to review and increase at the Company's Board of Directors' discretion. Pursuant to the terms of the employment agreements, the Company may defer payment of some or all of the compensation to each of the Executives until such time as the Company’s financial situation permits payment of such compensation. The Board of Directors and Compensation Committee have determined that they will defer a portion of the cash compensation due to each of the Executives such that the total monthly compensation (beginning in July 2008) that is being paid to the Company’s executive officers is approximately $13,000 per month. A total of approximately $51,000 per month of the executive’s compensation will deferred until such time as determined by the Company’s Compensation Committee. The Compensation Committee of the Company reserves the right to reassess these payments and adjust the amount to be paid as the financial condition of the Company changes. Each of the Executives will also be entitled to receive an annual bonus with a targeted amount of 50% of their respective base salary based on performance criteria established by the Board of Directors. Each of the Executives shall be entitled to participate in disability, health, life insurance and other fringe benefit plans or programs offered to all employees of the Company, as well as be entitled to four weeks vacation per year.
The employment agreements of each Executive may be terminated by (a) the Company upon death or disability of the Executive, for "Cause" (as defined in the employment agreement), or for any reason in the Company's sole and absolute discretion or (b) by the Executive for "Good Reason" (as defined in the employment agreement). In the event of a termination upon death or disability, the Executive and/or the Executive's family shall continue to be covered by all of the Company's medical, health and dental plans, at the Company's expense, for a period of 18 months following such Executive's death or disability.
In the event of a termination by the Company for any reason other than death, disability or Cause, or by the Executive for Good Reason, the Executive shall be entitled to receive his/her base salary for the longer of (i) the remaining term of the employment agreement or (ii) 12 months from the date of termination.
The employment agreements provide for a non-compete for the period during which the Executive is employed by the Company and for so long as the Executive is receiving payments under the terms of the employment agreement following termination.
Note 5. Merger and Recapitalization:
On June 28, 2008, Mergerco, which is a wholly owned subsidiary of the Company, merged with and into Trinterprise, with Trinterprise surviving the Merger as a wholly-owned subsidiary of the Company.
Under the terms of the Merger Agreement, the Trinterprise Members received an aggregate of 16,666,667 newly issued shares (the “Merger Shares”) of common stock, par value $.001 per share (the “Common Stock”), of the Company in exchange for all of the outstanding membership interest in Trinterprise. Upon consummation of the Merger, the Trinterprise Members owned approximately 80% of the issued and outstanding Common Stock of InovaChem. All but one of the Trinterprise Members are directors and/or officers of the Company. In addition, the Executive Chairman and Vice President / Corporate Secretary of the Company are the managers of Trinterprise. Each Trinterprise Member received an amount of Merger Shares that is equal in proportion to the interest in Trinterprise held by such Trinterprise Members.
In accordance with the terms of the Merger Agreement, 4,166,667 Merger Shares were placed in escrow to satisfy certain indemnity obligations the Trinterprise Members may have to the Company. The escrowed Merger Shares will be released on the later ( the "Release Date") of (i) the sixth month anniversary of the Merger Agreement, and (ii) the date of delivery to the Company of executed supply agreements between Polymed and two designated manufacturing facilities in China. The Company will be entitled to receive all or a portion of the escrowed Merger Shares prior to the Release Date in the event the Company is entitled to indemnification under the terms of the Merger Agreement.
As the Trinterprise Members obtained voting and management control of the Company as a result of the Merger, the Merger was accounted for as a recapitalization of Trinterprise. Accordingly, the financial statements of the Company subsequent to the Merger consist of the balance sheets of InovaChem, Inc. and Trinterprise, the historical operations of Trinterprise and the operations of both InovaChem, Inc. and Trinterprise from June 28, 2008 (date of Merger) until June 30, 2008. As a result of the Merger, the historical financial statements of InovaChem, Inc. for the period prior to June 28, 2008, are not presented herein.
As a result of the Merger, the 2,500,000 common shares that had previously been issued to the pre-merger stockholders of Inovachem, Inc. were recapitalized and valued as the net of the $141,407 of current liabilities, $105,268 of cash and cash equivalents and $4,625 of prepaid expenses that were assumed by the Company. The net charge of $31,514 is reflected on the Company’s Statement of Changes in Stockholders’ Equity.
All of the effects of the recapitalization are reflected retroactively in the accompanying consolidated financial statements.
In June 2008, certain patent applications were assigned to Trinterprise from certain controlled affiliates of the founders of Trinterprise. Pursuant to Staff Accounting Bulletin Topic 5(G), "Transfers of Nonmonetary Assets by Promoters or Shareholders", the patent applications of Trinterprise were acquired by the Company at their historical cost basis of $0 as determined under generally accepted accounting principles and therefore there was no accounting effect of the assignment.
Note 6. Stockholder's Equity:
Preferred stock includes 50,000,000 shares authorized at a par value of $0.001, of which none are issued or outstanding. Common Stock includes 200,000,000 shares authorized at a par value of $0.001.
In February 2008, the Trinterprise Members paid $60,000 for their membership interest in Trinterprise. As a result of the Merger this membership interest was converted to 16,666,667 common shares of the Company which is reflected retroactively in the accompanying consolidated financial statements. The existing 2,500,000 common shares were deemed to be issued to the pre-merger stockholders of Inovachem, Inc. as a result of the recapitalization. (See Note 5 - Merger and Recapitalization).
In June 2008 the Company granted, pursuant to the Employment Agreements it entered into with its officers and pursuant to its arrangement with its directors, 925,000 shares of Common Stock to its officers and directors valued at the contemporaneous private offering price of $.30 per share (See Note 8 - Subsequent Events). As the shares were fully vested on the grant date, a total of $277,500 was charged to compensation expense in the quarter ended June 30, 2008.
2008 Stock Option Plan
On June 30, 2008, the Company's Board of Directors adopted the 2008 Stock Option Plan (the “Plan”). The Plan was implemented for the purpose of furthering the Company’s long-term stability, continuing growth and financial success by retaining and attracting key employees, officers and directors through the use of stock incentives. The Company will submit the Plan to its stockholders for approval at its next annual meeting of stockholders. Awards may be granted under the Plan in the form of incentive stock options and non-qualified stock options, subject to stockholder approval of the Plan. Pursuant to the Plan, the Company has reserved 2,000,000 shares of its Common Stock for awards.
All of the Company’s officers, directors and executive, managerial, administrative and professional employees are eligible to receive awards under the Plan. The Company’s Compensation Committee has the power and complete discretion, as provided in the Plan, to select which persons will receive awards and to determine for each such person the terms, conditions and nature of the award, and the number of shares to be allocated to each individual as part of each award.
Upon adoption of the Plan, the Company’s Board of Directors approved the issuance of options to purchase 1,200,000 common shares, at an exercise price of $.45 per share, subject to stockholder approval of the Plan. These options expire ten (10) years from the grant date. The shares subject to the stock options vest in 12 quarterly installments on the last day of each fiscal quarter commencing on June 30, 2008. Accordingly there is no expense for these grants as of June 30, 2008 and the amortization of expense will begin on July 1, 2008.
Note 7. Concentrations:
Concentrations of Credit Risk:
Financial instruments which potentially expose the Company to concentrations of credit risk consist principally of operating demand deposit accounts. The Company's policy is to place its operating demand deposit accounts with high credit quality financial institutions. At June 30, 3008, there were $6,268 in bank deposits that exceeded federally insured limits.
Patent Applications Concentration
The Company’s business relies on patent applications assigned to the Company by its founders. Although the Company has received a Freedom to Operate opinion from its patent counsel regarding these applications, there can be no assurance that the U.S. Patent and Trademark Office will grant the Company the patents. Accordingly, there is a risk that if the patents are not granted, there can be a material effect on the Company’s planned operations.
Note 8. Subsequent Events:
In July 2008, the Company sold a total of 1,423,346 shares of Common Stock, pursuant to its private offering, at a price of $.30 per share for aggregate proceeds of $427,004.
| ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
Forward-Looking Statements
We caution readers that this report includes “forward-looking statements” as that term is used in the Private Securities Litigation Reform Act of 1995. Forward-looking statements are based on current expectations rather than historical facts and they are indicated by words or phrases such as “anticipate,” “could,” “may,” “might,” “potential,” “predict,” “should,” “estimate,” “expect,” “project,” “believe,” “intend,” “plan,” “envision,” “continue,” target,” “contemplate,” or “will” and similar words or phrases or corporate terminology. We have based such forward-looking statements on our current expectations, assumptions, estimates and projections. While we believe these expectations, assumptions, estimates and projections are reasonable, such forward-looking statements are only predictions and involve known and unknown risks and uncertainties and other factors that may cause actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements, many of which are beyond our control.
Some of the factors that could affect our financial performance, cause actual results to differ from our estimates or underlie such forward-looking statements are set forth in various places in this report. These factors include, but are not limited to:
| | • | general economic conditions, |
| | • | our ability to evaluate and predict our future operations and expenses, being an early stage development company with limited assets and no current operations, |
| | • | the possibility of future product-related liability claims, |
| | • | our future capital needs and our ability to obtain financing, |
| | • | our ability to protect our intellectual property and trade secrets, both domestically and abroad, |
| | • | expenses involved in protecting our intellectual property and trade secrets, |
| | • | our ability to attract and retain key management, technical, and research and development personnel, |
| | • | our ability to research and develop new technology, products and design and manufacturing techniques, |
| | • | technological advances, the introduction of new and competing products, and new design and manufacturing techniques developed by our competitors, |
| | • | anticipated and unanticipated trends and conditions in our industry, |
| | • | our ability to predict consumer preferences, |
| | • | changes in the costs of operation, |
| | • | our ability to manage growth and carry out growth strategies, including international expansion, |
| | • | possible necessity of obtaining government approvals for both new and continuing operations, |
| | • | risks, expenses and requirements involved in operating in various foreign markets, including China, |
| | • | exposure to foreign currency risk and interest rate risk, |
| | • | possible foreign import controls and United States-imposed embargoes, |
| | • | possible disruption in commercial activities due to terrorist activity, armed conflict and government instability, and |
| | • | other factors set forth in this report and in our other Securities and Exchange Commission (“SEC”) filings. |
You are cautioned not to place undue reliance on these forward-looking statements, which are valid only as of the date they were made. We undertake no obligation to update or revise any forward-looking statements to reflect new information or the occurrence of unanticipated events or otherwise.
General
We are an early stage research, development and manufacturing company. Our strategic plan is to reduce the cost of manufacture of food, pharmaceutical and other products, including sucralose, through the utilization of new technologies. We intend to obtain these technologies through their purchase, acquisition or in-house development. Our business plan currently anticipates that we will also develop and produce chemicals for use in electronic “smart glass” and solvents to be used as new carriers for use in lithium batteries. These developments will not occur in the Company’s current fiscal year.
As a result of our acquisition of Trinterprise on June 28, 2088, we own the rights to certain pending patent applications for the production and manufacture of sucralose, a non-caloric sweetener made from sugar. We anticipate that sucralose will be our first product. Sucralose is a non-caloric, high-intensity sweetener made from sugar, 600 times sweeter than sucrose. This product is used worldwide by food manufacturers, diet soda bottling companies and has many other commercial uses.
Our Merger with Trinterprise was accounted for as a recapitalization rather than as a business combination. As a result, the historical financial statements of Trinterprise are reflected as our historical consolidated financial statements. Accordingly, the consolidated financial statements of the Company subsequent to the Merger consist of the balance sheets of InovaChem, Inc. and Trinterprise, the historical operations of Trinterprise and the operations of both InovaChem, Inc. and Trinterprise from June 28, 2008 (date of Merger) until June 30, 2008. As a result of the Merger, the historical financial statements of InovaChem, Inc. for the period prior to June 28, 2008, are not presented herein.
We are maintaining our fiscal year end of September 30, which was the historical fiscal year end of Inovachem, Inc. and Trinterprise.
Results of Operation
We have not had any operating income since inception, February 14, 2008. We had a net loss of $326,252 for the three months ended June 30, 2008 and for the development stage period from February 14, 2008 (inception) to June 30, 2008, and had a working capital deficit of $20,266 at June 30, 2008. We expect to expend cash for operations and technology investments in order to implement our business plan and we do not expect immediate revenues to offset such expenditures.
The following table identifies the cash and non-cash expenses incurred in the periods presented herein:
| | | Cash | | Non-cash | | | |
| Expense Category | | Expenses | | Expenses | | Total | |
| Compensation | | $ | 2,000 | | $ | 277,500 | | $ | 279,500 | |
| | | | | | | | | | | |
| Professional Fees | | $ | 46,752 | | | - | | $ | 46,752 | |
| | | | | | | | | | | |
| Total General & Administrative Expenses | | $ | 48,752 | | $ | 277,500 | | $ | 326,252 | |
Liquidity and Capital Resources
At June 30, 2008, we had $116,516 of cash on hand. As reflected in the accompanying consolidated financial statements, we are in the development stage with no operations and had a net loss of $326,252 from inception. The net loss consisted of compensation expense and professional fees. We raised approximately $427,000 in our private offering in the first half of July 2008 (see below). We have not yet determined the amount of additional funds we will need to raise to meet our liquidity needs for the coming year. Once we reach that determination, the funds required, if any, will be raised through private and / or public offerings.
On February 11, 2008, Exchequer, Inc. purchased all of the outstanding shares of our common stock from our original sole stockholder. We were then renamed InovaChem, Inc. The original sole stockholder owned a total of 100,000 shares of our common stock. Following the purchase, we declared a stock dividend of 8.7 shares for every share of our common stock issued and outstanding, and issued an additional 870,000 shares of common stock to Exchequer, Inc. for a total of 970,000 outstanding shares of common stock. All share and per share amounts have been retroactively restated to reflect that 970,000 shares were issued and outstanding from our inception. In connection with the stock dividend we then issued 1,530,000 shares of common stock to five additional people for an aggregate of $153,000. The total common shares of 2,500,000 are deemed to have been issued on June 28, 2008 pursuant to a recapitalization (the Trinterprise merger described below) and recapitalization accounting was applied as described in the notes to our consolidated financial statements.
On June 28, 2008, Mergerco, LLC, a wholly owned subsidiary of us, merged with and into Trinterprise, with Trinterprise surviving the merger. As a result of the merger we acquired the rights in and to three patent applications of Trinterpriise, and Trinterprise became a wholly owned subsidiary of us.
Under the terms of the merger agreement, Trinterprise Members received an aggregate of 16,666,667 newly issued shares of our common stock in exchange for all of the outstanding membership interest in Trinterprise. Upon consummation of the merger, the Trinterprise Members owned approximately 80% of our issued and outstanding common stock. All but one of the Trinterprise Members are directors and/or officers of us. In addition, our Executive Chairman and Vice President / Corporate Secretary are the managers of Trinterprise. Each Trinterprise member received an amount of merger shares that is equal in proportion to the interest in Trinterprise held by such Trinterprise member.
In accordance with the terms of the merger agreement, 4,166,667 Merger Shares were placed in escrow to satisfy certain indemnity obligations the Trinterprise Members may have to us. The escrowed merger shares will be released on the later of (i) the sixth month anniversary of the merger agreement, and (ii) the date of delivery to us of executed supply agreements between Polymed and two designated manufacturing facilities in China. We will be entitled to receive all or a portion of the escrowed merger shares prior to the release date in the event we are entitled to indemnification under the terms of the merger agreement.
In July 2008, we sold a total of 1,423,346 shares of Common Stock, pursuant to its private offering, at a price of $.30 per share for aggregate proceeds of $427,004. We did not pay any commission in connection with this offering. We will use such proceeds for working capital.
Our business plan currently anticipates that we will also develop and produce chemicals for use in electronic “smart glass” and solvents to be used as new carriers for use in lithium batteries. Although we are unable at present to estimate the funds we will require to purchase and/or acquire these products and technologies, management expects that we will need to raise additional funds through the sale of common stock if and when we pursue this aspect of our business plan. There can be no assurance that we will be able to raise such funds if and when we wish to do so.
Critical Accounting Policies
We have identified the accounting policies outlined below as critical to our business operations and an understanding of our results of operations. Additionally, we intend to develop and adopt policies, once we commence operations, which are appropriate to our operations. The list is not intended to be a comprehensive list of all of our accounting policies. In many cases, the accounting treatment of a particular transaction is specifically dictated by accounting principles generally accepted in the United States, with no need for management's judgment in their application. In particular, given our early stage of business, our primary critical accounting policy and area in which we use judgment is in the area of the recoverability of deferred tax assets.
We account for income taxes under the Statement of Financial Accounting Standards No. 109, “Accounting for Income Taxes” (“SFAS 109”). Under SFAS 109, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. 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. Under SFAS 109, the effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. The ultimate realization of the deferred tax asset is dependent upon the generation of future taxable income during the periods prior to the expiration of the related net operating losses. If our estimates and assumptions about future taxable income are not appropriate, the value of our deferred tax asset may not be recoverable. At this time, we have set up an allowance for deferred taxes as we have no history to indicate the usage of deferred tax assets and liabilities.
Recent Pronouncements
In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements”. The objective of SFAS 157 is to increase consistency and comparability in fair value measurements and to expand disclosures about fair value measurements. SFAS 157 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements. SFAS 157 applies under other accounting pronouncements that require or permit fair value measurements and does not require any new fair value measurements. The provisions of SFAS No. 157 are effective for fair value measurements made in fiscal years beginning after November 15, 2007. The adoption of this statement is not expected to have a material effect on the Company's future reported financial position or results of operations.
In February 2007, the Financial Accounting Standards Board (FASB) issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities - Including an Amendment of FASB Statement No. 115”. This statement permits entities to choose to measure many financial instruments and certain other items at fair value. Most of the provisions of SFAS No. 159 apply only to entities that elect the fair value option. However, the amendment to SFAS No. 115 “Accounting for Certain Investments in Debt and Equity Securities” applies to all entities with available-for-sale and trading securities. SFAS No. 159 is effective as of the beginning of an entity’s first fiscal year that begins after November 15, 2007. Early adoption is permitted as of the beginning of a fiscal year that begins on or before November 15, 2007, provided the entity also elects to apply the provision of SFAS No. 157, “Fair Value Measurements”. The adoption of this statement is not expected to have a material effect on the Company's financial statements.
In December 2007, the Financial Accounting Standards Board (FASB) issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements - an amendment of ARB No. 51”. This statement improves the relevance, comparability, and transparency of the financial information that a reporting entity provides in its consolidated financial statements by establishing accounting and reporting standards that require the ownership interests in subsidiaries held by parties other than the parent and the amount of consolidated net income attributable to the parent and to the noncontrolling interest be clearly identified and presented on the face of the consolidated statement of income, changes in a parent’s ownership interest while the parent retains its controlling financial interest in its subsidiary be accounted for consistently, and when a subsidiary is deconsolidated, any retained noncontrolling equity investment in the former subsidiary be initially measured at fair value, entities provide sufficient disclosures that clearly identify and distinguish between the interests of the parent and the interests of the noncontrolling owners. SFAS No. 160 affects those entities that have an outstanding noncontrolling interest in one or more subsidiaries or that deconsolidate a subsidiary. SFAS No. 160 is effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2008. Early adoption is prohibited. The adoption of this statement is not expected to have a material effect on the Company's financial statements.
ITEM 3.
ITEM 4.
Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, the Company conducted an evaluation of our disclosure controls and procedures, as such term is defined under Rule 13a-15(e) and Rule 15d-15(e) promulgated under the Securities Exchange Act of 1934, as amended (Exchange Act), as of June 30, 2008. Based on this evaluation, our principal executive officer and principal financial officer have concluded that the Company’s disclosure controls and procedures were effective to ensure that information required to be disclosed by the Company in the reports filed or submitted under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms and that the Company’s disclosure and controls are designed to ensure that information required to be disclosed by the Company in the reports that we file or submit under the Exchange Act is accumulated and communicated to management, including our principal executive officer and principal financial officer, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.
There were no changes (including corrective actions with regard to significant deficiencies or material weaknesses) in the internal controls over financial reporting during the period from February 14, 2008 (inception) to June 30, 2008 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II - OTHER INFORMATION
ITEM | 1. LEGAL PROCEEDINGS. |
We are currently not a party to any pending legal proceedings and no such actions by, or to the best of its knowledge, against us have been threatened.
ITEM | 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS. |
None
ITEM. | 3. DEFAULTS UPON SENIOR SECURITIES. |
None
ITEM | 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. |
No matter was submitted to a vote of our shareholders, through the solicitation of proxies or otherwise during the quarter ended June 30, 2008.
ITEM | 5. OTHER INFORMATION. |
None
Exhibit Number | | Exhibit Title |
| | | |
| 10.1 | | Employment Agreement dated June 30, 2008 between the Company and William Zuo |
| 10.2 | | Employment Agreement dated June 30, 2008 between the Company and Henry Toh |
| 10.3 | | Employment Agreement dated June 30, 2008 between the Company and Xiaojing Li |
| 10.4 | | Employment Agreement dated June 30, 2008 between the Company and Alan Pritzker |
| 10.5 | | Employment Agreement dated June 30, 2008 between the Company and Shao Jun Xu |
| 10.6 | | Supply Agreement dated June 28, 2008 between InovaChem Inc., and Polymed Therapeutics Inc., |
| 10.7 | | 2008 Stock Option Plan |
| 31.1 | | Certification of William Zuo pursuant to Rule 13a - 14(a)/15d-14(a). |
| 31.2 | | Certification of Alan Pritzker pursuant to Rule 13a - 14(a)/15d-14(a). |
| 32.1 | | Certification of William Zuo pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
| 32.2 | | Certification of Alan Pritzker pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
By: /s/ William Zuo
William Zuo
President, Chief Executive Officer
August 14, 2008
By: /s/Alan Pritzker
Alan Pritzker
Chief Financial Officer
August 14, 2008
