During the three months ended March 31,
2013, the Company issued 436,293 shares of its common stock valued at $26,177 for accrued services.
During the three months ended March 31, 2013, the Company recorded
$11,864 of beneficial conversion feature that is related to convertible notes and attached warrants.
During the three months ended March 31, 2013, the Company issued
warrants fair valued at $70,730 for accrued services.
NOTES TO UNAUDITED CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS
ENDED MARCH 31, 2013 AND 2012
Note 1: Organization and Nature of Business and Basis of
Presentation
Organization and Nature of Business
Innolog Holdings Corporation
(“Holdings” or “Innolog”) was formed as a holding company on March 23, 2009 for the purpose of acquiring
companies that provide services primarily to federal government entities. Its wholly owned subsidiaries are Innolog Group Corporation
and Innovative Logistics Techniques, Inc. (“Innovative”). Holdings was previously a wholly owned subsidiary of Galen
Capital Corporation (“Galen”). In June 2010, Holdings was spun out and the stockholders of Galen became the stockholders
of Holdings.
Innovative Logistics Techniques,
Inc., a Virginia corporation, formed in March 1989, is a solutions oriented organization providing supply chain logistics and information
technology solutions to clients in the public and private sector. Innovative's services and solutions are provided to a wide variety
of clients, including the Department of Defense, Department of Homeland Security and civilian agencies in the federal government
and state and local municipalities, as well as selected commercial organizations.
On January 25, 2013 the Board
of Directors of Innolog Holdings approved the following resolution; "The Company is authorized to form a new subsidiary in
Nevada call Innomed. This subsidiary will develop the Company’s health care business. Bill Danielczyk, Michael Kane, and
Ian Reynolds will be the directors of this subsidiary". As of March 31, 2013, the subsidiary was not yet incorporated.
Innolog Holdings Corporation
and its wholly owned subsidiary are referred to herein as the “Company.”
Basis of Presentation
The accompanying unaudited condensed
consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United
States of America for interim financial information and with the instructions to Form 10-Q. Accordingly, they do not include all
of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the
opinion of management, all adjustments consisting of normal recurring accruals considered necessary for a fair presentation have
been included. Accordingly, the results from operations for the three months period ended March 31, 2013, are not necessarily indicative
of the results that may be expected for the year ending December 31, 2013. The unaudited condensed consolidated financial statements
should be read in conjunction with the December 31, 2012 consolidated financial statements and footnotes thereto included in the
Company's SEC Form 10-K.
The unaudited condensed consolidated
financial statements include the accounts of the Company and its wholly owned subsidiaries. All significant inter-company transactions
and balances have been eliminated in consolidation.
Note 2: Going Concern
The accompanying unaudited condensed consolidated
financial statements have been prepared in conformity with generally accepted accounting principles, which contemplate continuation
of the Company as a going concern. However, the Company has sustained substantial operating losses since inception, the Company
has reported a net loss of $905,938 for the three months ended March 31, 2013 and $935,033 for the three months ended March 31,
2012. As of March 31, 2013 the Company has reported an accumulated deficit of $18,060,007, had a stockholders’ deficiency
(defined as total assets minus total liabilities) of $14,154,214 and a working capital deficit (current liabilities minus current
assets) of $12,051,700. There are delinquent claims and obligations, such as payroll taxes, employee income tax withholdings, employee
benefit plan contributions, delinquent loans payable and accounts payable that could ultimately cause the Company to cease operations.
The Company anticipates it may
not have sufficient cash flows to fund its operations over the next twelve months without the completion of additional financing.
The unaudited condensed consolidated financial statements do not include any adjustments relating to the recoverability and classification
of asset carrying amounts or the amounts and classification of liabilities that might result should the Company be unable to continue
as a going concern.
The report of the Company’s
independent registered public accounting firm relating to the December 31, 2012 consolidated financial statements states that there
is substantial doubt about the Company’s ability to continue as a going concern.
Management believes that actions presently being
taken such as continued expense reduction, the implementation of a renewed sales effort and the capital financing efforts of the
Company will help to enhance the Company’s operating and financial weaknesses.
Note 3: Summary of Significant Accounting Policies
Principles of Consolidation:
The unaudited condensed consolidated financial statements
include the assets, liabilities and operating results of Holdings and it’s wholly owned subsidiary since the date of the
acquisition. All significant intercompany accounts and transactions have been eliminated in consolidation.
Use of Estimates:
Management uses estimates and
assumptions in preparing these financial statements in accordance with accounting principles generally accepted in the United States
of America. Those estimates and assumptions affect the reported amounts of assets and liabilities, the disclosure of contingent
assets and liabilities, and the reported revenues and expenses. Actual results could vary from the estimates.
Cash and cash equivalents:
For the purpose of the statements
of cash flows, Company has considered all highly liquid investments purchased with original maturities of three months or less
to be cash equivalents.
Reclassifications:
Certain items in prior consolidated
financial statements are reclassified to conform to the current presentation. These reclassifications had no effect on reported
net loss.
Contract Revenue Recognition:
Revenue on cost-plus-fee contracts
is recognized to the extent of costs incurred plus provisional rates for fringe, overhead and applied G&A, plus a percentage
of fees earned. On fixed price service contracts, revenue is recognized using straight line over the life of the project. Revenue
on time-and-materials contracts is recognized at contractual rates as hours and out of pocket expenses are incurred. Anticipated
losses on contracts are recognized in the period they are first determined.
In accordance with industry
practice, amounts relating to long-term contracts, including retainages, are classified as current assets although an undeterminable
portion of these amounts is not expected to be realized within one year. Because of inherent uncertainties in estimating costs,
it is at least reasonably possible that the estimates used will change within the near term.
Concentration of Credit Risk:
The Company maintains its cash, which, at times may exceed federally
insured limits, in bank deposit accounts with a high credit quality financial institution. The Company believes it is not exposed
to any significant credit risk with regards to those accounts. Accounts receivable principally consist of amounts due from the
federal government and large prime federal government contractors. Management believes associated credit risk is not significant.
Allowance for Doubtful Accounts:
The Company provides an allowance
for doubtful accounts equal to the estimated collection losses that will be incurred in collection of all receivables. Estimated
losses are based on historical collection experience coupled with review of the current status of existing receivables. The allowance
for doubtful accounts amounted to $46,566 at March 31, 2013 and December 31, 2012.
Property and Equipment:
Property and equipment are stated
at cost and depreciated by the straight-line method over estimated useful lives which are as follows:
Office furniture and equipment
|
3 to 7 years
|
Computer hardware and software
|
2 to 5 years
|
Leasehold improvements and lease acquisition costs are amortized
over the shorter of the life of the applicable lease or the life of the asset. Maintenance and repairs are charged to operations
when incurred. Betterments and renewals are capitalized. When property and equipment are sold or otherwise disposed of, the asset
account and related accumulated depreciation account are relieved, and any gain or loss is included in operations.
Long-Lived Assets:
The Company follows Accounting
Standards Codification subtopic 360-10, Property, Plant and Equipment (“ASC 360-10”). ASC 360-10 requires those long-lived
assets and certain identifiable intangibles held and used by the Company be reviewed for impairment whenever events or changes
in circumstances indicate that the carrying amount of any asset may not be recoverable. Events relating to recoverability may include
significant unfavorable changes in business conditions, recurring losses, or a forecasted inability to achieve break-even operating
results over an extended period. An impairment loss would be recognized when the estimated undiscounted future cash flows expected
to result from the use of the asset and its eventual disposition is less than the carrying amount. If impairment is indicated,
the amount of the loss to be recorded is based on an estimate of the difference between the carrying amount and the fair value
of the asset. Fair value is based upon discounted estimated cash flows expected to result from the use of the asset and its eventual
disposition and other valuation methods.
Income Taxes:
Effective January 1, 2009, the
Company has adopted the provisions of FASB ASC 740, “Income Tax” which clarifies the accounting for uncertainty in
tax positions. FASB ASC 740 requires the recognition of the impact of a tax position in the financial statements if that position
is more likely than not to be sustained on a tax return upon examination by the relevant taxing authority, based on the technical
merits of the position. The adoption of FASB ASC 740 had no effect on the Company’s financial position or results of operations.
At March 31, 2013, the Company has no unrecognized tax benefits.
The Company files a consolidated
federal income tax return. Income taxes are accounted for using the asset and liability method under FASB ASC 740 “Income
Tax”, whereby deferred tax assets and liabilities are recognized for future tax consequences attributable to differences
between the financial statement carrying amounts of assets and liabilities, and their respective tax basis, and operating loss
and tax credit carry forwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets
and liabilities due to a change in tax rates is recognized as income in the period that includes the enactment date. Estimates
of the realization of deferred tax assets are based-on the scheduled reversal of deferred tax liabilities, projected future taxable
income, and tax planning strategies.
The Company applies the provisions
of FASB ASC 740, which clarifies the accounting for uncertainty in tax positions. FASB ASC 740 requires the recognition of the
impact of a tax position in the financial statements if that position is more likely than not to be sustained on a tax return upon
examination by the relevant taxing authority, based on the technical merits of the position. At March 31, 2013, the Company has
no unrecognized tax benefits.
Stock Based Compensation:
The Company follows Accounting Standards Codification
subtopic 718-10, Compensation (ASC 718-10”) which requires that all share-based payments to both employees and non employees
be recognized in the income statement based on their fair values at the grant date and recognizes expense over the requisite service
period.
Debt Issuance Costs:
Debt issuance costs are capitalized
and amortized over the term of the related loan.
Fair Value Measurements:
FASB ASC 820, “Fair Value
Measurements and Disclosures”, establishes a framework for measuring fair value. That framework provides a fair value hierarchy
that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted
quoted prices in active markets for identical assets or liabilities (level 1 measurements) and the lowest priority to unobservable
inputs (level 3 measurements). The three levels of the fair value hierarchy under FASB ASC 820 are described as follows:
Level 1: Inputs
to the valuation methodology are unadjusted quoted prices for identical assets or liabilities in active markets that the plan has
the ability to access.
|
|
Level 2: Inputs to the valuation methodology include:
|
|
·
|
quoted prices for similar assets or liabilities in active markets;
|
|
·
|
quoted prices for identical or similar assets or liabilities in inactive markets;
|
|
·
|
inputs other than quoted prices that are observable for the assets or liability;
|
|
·
|
inputs
that are
derived principally
from or corroborated
by observable market
data by correlation
or other means.
|
If the asset or liability has a
specified (contractual) term, the level 2 input must be observable for substantially the full term of the asset or liability.
|
|
Level 3: Inputs to the valuation methodology are unobservable and significant to the fair value
measurement.
|
The asset or liability’s
fair value measurement level within the fair value hierarchy is based on the lowest level of any input that is significant to the
fair value measurement. Valuation techniques used need to maximize the use of observable inputs and minimize the use of unobservable
inputs.
The following is a description
of the valuation methodologies used for assets and liabilities measured at fair value:
The carrying values of accounts
receivable, accounts payable, accrued expenses, notes payable, and the line of credit payable approximate fair value due to the
short term maturities of these instruments.
The preceding methods described
may produce a fair value calculation that may not be indicative of net realizable value or reflective of future fair values. Furthermore,
although the Company believes its valuation methods are appropriate and consistent with other market participants, the use of different
methodologies or assumptions to determine the fair value of certain financial instruments could result in a different fair value
measurement at the reporting date.
Earnings (loss) per Share:
The Company follows Accounting
Standards Codification subtopic 260-10, Earnings Per Share (“ASC 260-10”) specifying the computation, presentation
and disclosure requirements of earnings per share information. Basic earnings (loss) per share (“EPS”) is computed
by dividing net income (loss) available to common stockholders by the weighted average number of common shares outstanding during
the period, excluding the effects of any potentially dilutive securities. Diluted EPS gives effect to the dilutive potential of
shares of common stock outstanding during the period including stock options or warrants, using the treasury stock method (by using
the average stock price for the period to determine the number of shares assumed to be purchased from the exercise of stock options
or warrants), and convertible debt or convertible preferred stock, using the if-converted method. Diluted EPS excludes the dilutive
potential of shares of common stock if their effect is anti-dilutive.
The computation of basic and diluted loss
per share for the three months ended March 31, 2013 and 2012 is equivalent since the Company reported a net loss and the effect
of any common stock equivalents would be anti-dilutive.
Recent Accounting Pronouncements:
Management does not believe that any recently issued, but not
yet effective accounting standards, if adopted, will have a material effect on the Company's unaudited condensed consolidated financial
statements.
Note 4: Major Customers
Revenues from prime contracts
and subcontracts with U.S. Government agency customers in aggregate accounted for 100% of total revenues for the three months ended
March 31, 2013 and 2012.
Note 5: Accounts Receivable
Accounts receivable consisted
of the following as of March 31, 2013 and December 31, 2012:
|
|
March 31, 2013
|
|
|
December 31, 2012
|
|
Billed receivables
|
|
$
|
508,178
|
|
|
$
|
374,038
|
|
Reserve for bad debts
|
|
|
(46,566
|
)
|
|
|
(46,566
|
)
|
Total
|
|
$
|
461,612
|
|
|
$
|
327,472
|
|
Contract receivables from prime
contracts and subcontracts with U.S. Government agency customers in aggregate accounted for 100% of total contract receivables
at March 31, 2013 and December 31, 2012.
Note 6: Accounts Payable and Accrued Liability
Accounts payable and accrued expenses at
March 31, 2013 and December 31, 2012 consisted of the following:
|
|
March 31,
2013
|
|
|
December 31,
2012*
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
3,022,273
|
|
|
$
|
2,956,289
|
|
Accrued liabilities
|
|
|
2,140,080
|
|
|
|
2,150,765
|
|
Accrued interest- other
|
|
|
358,190
|
|
|
|
303,477
|
|
Accrued interest-affiliates
|
|
|
1,224,597
|
|
|
|
1,000,735
|
|
Accrued salaries and benefits
|
|
|
3,850,535
|
|
|
|
3,612,039
|
|
|
|
$
|
10,595,675
|
|
|
$
|
10,023,305
|
|
* The December 31, 2012 interest accrued has been adjusted to
reflect 3 loans transferred to notes payable –affiliates.
Note 7: Line of Credit
On June 14, 2011, Holdings renewed a credit agreement with Eagle
Bank under which it may borrow up to $500,000. Borrowings under the agreement are guaranteed by seven individuals, who are directly
or indirectly related to Holdings. The borrowings were due on August 26, 2012, if not demanded earlier. Interest is payable monthly
at the bank’s prime rate (as defined) plus 1%. The outstanding balance as of December 31, 2012 and 2011 is $0 and $497,570,
respectively. This line of credit was paid in full and cancelled on September 28, 2012.
Note 8: Notes Payable, Other
At March 31, 2013 and
December 31, 2012, notes payable, others consisted of the following:
|
|
March 31, 2013
|
|
|
December 31,
2012 *
|
|
On August 11, 2010 an individual loaned the Company $75,000 with a maturity date of October 11, 2010. The loan is unsecured and carries a flat interest rate of $22,500. In addition, on December 12, 2011 the individual loaned the Company $200,000 with a maturity date of January 12, 2012. The loan was secured by accounts receivable, guaranteed by Ian Reynolds, a director, and carried a flat interest rate of $25,000. As of March 31, 2013 and December 31, 2012 the total outstanding balance is $0 and $13,500 with accrued interest of $72,624 and $73,866 , respectively. The loan is in default and carries a default interest rate of 15% per annum.
|
|
$
|
-
|
|
|
$
|
13,500
|
|
|
|
|
|
|
|
|
|
|
On August 30, 2010 an individual loaned the Company $25,000 with a maturity date of December 6, 2010. The loan is unsecured and carried a flat interest rate of $5,000. As of March 31, 2013 and December 31, 2012 the outstanding balance is $25,000 with accrued interest of $78,266 and $70,766, respectively. The loan is in default and carries a default interest rate of 10% per month.
|
|
|
25,000
|
|
|
|
25,000
|
|
|
|
|
|
|
|
|
|
|
On July 13, 2010 an individual loaned the Company $100,000 with a maturity date of January 13, 2011. The loan is unsecured and carried a flat interest rate of $30,000. As of March 31, 2013 and December 31, 2012 the outstanding balance is $100,000 with accrued interest of $63,535 and $59,836, respectively. The loan is in default and carries a default interest rate of 15% per annum.
|
|
|
100,000
|
|
|
|
100,000
|
|
|
|
|
|
|
|
|
|
|
On July 21, 2010 an individual loaned the Company $25,000 with a maturity date of January 21, 2011. The loan is unsecured and carried a flat interest rate of $7,500. As of March 31, 2013 and December 31, 2012 the outstanding balance is $20,000 with accrued interest of $27,554 and $26,814, respectively. The loan is in default and carries a default interest rate of 15% per annum.
|
|
|
20,000
|
|
|
|
20,000
|
|
|
|
|
|
|
|
|
|
|
On July 20, 2010 an individual loaned the Company $65,500 with a maturity date of January 20, 2011. The loan is unsecured and carried a flat interest rate of $19,650. As of March 31, 2013 and December 31, 2012 the outstanding balance is $65,500 with accrued interest of $41,616 and $39,193, respectively. The loan is in default and carries a default interest rate of 15% per annum.
|
|
|
65,500
|
|
|
|
65,500
|
|
|
|
|
|
|
|
|
|
|
On July 20, 2010 an individual loaned the Company $34,500 with a maturity date of January 20, 2011. The loan is unsecured and carried a flat interest rate of $10,350. As of March 31, 2013 and December 31, 2012 the outstanding balance is $6,000 and $13,000 with accrued interest of $12,602 and $12,602, respectively. The loan is in verbal settlement agreement and is not accruing default interest.
|
|
|
6,000
|
|
|
|
13,000
|
|
|
|
|
|
|
|
|
|
|
On January 2, 2013, the Company borrowed $50,000 from an individual. The loan carried an interest rate of $4,000 and a maturity date of February 2, 2013. In addition, warrants of 50,000 were granted for the purchase of common stock with a strike price of $0.05 and an expiration date of 5 years.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The loan is in default and carries a default interest rate of 18% per annum and a late fee of 8% each 10 days. As of March 31, 2013 there was $19,718 of accrued interest.
|
|
|
50,000
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
On January 28, 2013, the Company borrowed $10,000 from an individual. The loan carried an interest rate of $700 and a maturity date of February 12, 2013. In addition, warrants of 10,000 were granted for the purchase of common stock with a strike price of $0.01 and an expiration date of 5 years. A director and a officer also guaranteed this loan.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The loan has been paid. As of March 31, 2013 there was $1,245 of accrued interest.
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
On January 30, 2013, the Company borrowed $25,000 from an individual. The loan carried an interest rate of $2,000 and a maturity date of March 10, 2013. In addition, warrants of 25,000 were granted for the purchase of common stock with a strike price of $0.05 and an expiration date of 5 years. A director and a officer also guaranteed this loan. This loan has been paid.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
On January 31, 2013, the Company borrowed $25,000 from an individual. The loan carried an interest rate of $2,000 and a maturity date of March 11, 2013. In addition, warrants of 25,000 were granted for the purchase of common stock with a strike price of $0.05 and an expiration date of 5 years. A director and a officer also guaranteed this loan.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The loan is in default and carries a default interest rate of 18% per annum and a late fee of 8% each 10 days. As of March 31, 2013 there was $10,483 of accrued interest.
|
|
|
25,000
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
On February 12, 2013, the Company borrowed $50,000 from an individual under a note dated January 8, 2013. The loan carried an interest rate of $5,000 and a maturity date of March 25, 2013. In addition, warrants of 50,000 were granted for the purchase of common stock with a strike price of $0.05 and an expiration date of 5 years. A director also guaranteed this loan.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The loan is in default and carries a default interest rate of 18% per annum and a late fee of 10%. As of March 31, 2013 there was $10,148 of accrued interest.
|
|
|
50,000
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Total Notes Payable- others-Current
|
|
$
|
341,500
|
|
|
$
|
237,000
|
|
* The December 31, 2012 information has
been redone to reflect the movement of three loans to notes payable-affiliates.
As of March 31, 2013 and December 31, 2012,
there were $341,500 and $237,000 of the notes outstanding, respectively, issued to individuals, trusts, and corporations not related
to the Company.
During the three months ended March 31,
2013 the lenders were granted warrants to purchase 360,000 shares of Innolog common stock at a strike price $0.01 to $0.05 per
share. The value of these warrants and common stock was $19,568. The entire amount was charged to expense during the three months
ended March 31, 2013.
During the year ended December 31, 2012 the lenders were granted
warrants to purchase 500,000 shares of Innolog common stock at a strike price $0.01 per share and 300,000 shares of Series A Convertible
Preferred Stock. The value of these warrants was $25,340. The entire amount was charged to expense during the twelve months ended
December 31, 2012.
Of these loans,
$341,500 and $237,000 have matured as of March 31, 2013 and December 31, 2012, respectively and are in default. Additional interest
and late fees are due upon default as defined in each note.
Total interest and fees incurred on these notes amounted to
$76,213 and $69,649 for the three months ended March 31, 2013 and 2012, respectively. Total interest and fees accrued on these
notes amounted to $358,190 and $303,477 as of March 31, 2013 and December 31, 2012, respectively.
Note 9: Related Party Transactions
Notes Payable, affiliates:
At March 31, 2013 and December
31, 2012, notes payable, affiliates consisted of the following:
|
|
March 31,
2013
|
|
|
December 31,
2012*
|
|
On August 4, 2011, a director entered into a $200,000 unsecured line of credit with the Company. Each advance under the line of credit had a due date of 30 days. Interest was a 10% flat rate of the principal of each advance. The line of credit matured as of December 31, 2011. As of March 31, 2013 and December 31, 2012 the outstanding principal was $0. In October 2012, the $52,600 principal balance was settled into 751,429 warrants of the Company with a strike price of $.07 per share and expiration period of 5 years, which was fair valued at $14,415. Accordingly, the Company recorded a gain on settlement of $38,185 during the year ended December 31, 2012.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
On December 19, 2012, a director entered into a $200,000 revolving line of credit with the Company. The loan carried an interest rate of 10% of the principal outstanding and a maturity of December 31, 2013. As of March 31, 2013 and December 31, 2012, the outstanding balance was $77,500 and $45,000, respectively.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued interest and fees totaled $16,054 and $10,304 at March 31, 2013 and December 31, 2012, respectively.
|
|
$
|
77,500
|
|
|
$
|
45,000
|
|
|
|
|
|
|
|
|
|
|
On February 10, 2011, a holder of more than 5% of common stock, loaned the Company a total of $150,000. At least 50% of the loan must be repaid by October 31, 2011 with a final maturity of October 31, 2012. As of March 31, 2013 and December 31, 2012, $150,000 remained outstanding. The unsecured note carried a flat interest rate of $15,000. As of March 31, 2013 and December 31, 2012 the accrued interest is $15,000. The loan has matured and is in default but per the note no late fees or default interest is due.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
On March 21, 2011, a holder of more than 5% of common stock, renewed a loan to the Company totaling $50,000. The unsecured note carried a flat interest rate of $10,000 and was to be paid back in monthly installments of $10,000 beginning April 21, 2011 with final payment due on September 21, 2011. The outstanding balance of the loan as of March 31, 2013 and December 31, 2012 was $40,000. As of March 31, 2013 and December 31, 2012 the accrued interest is $14,623. The loan has matured and is in default but per the note no late fees or default interest is due.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
On February 27, 2013, a holder of more than 5% of common stock, loaned the company $75,000. The loan has been repaid in full.
|
|
|
190,000
|
|
|
|
190,000
|
|
|
|
|
|
|
|
|
|
|
On March 21, 2011, the Company assumed an unsecured loan from a director, in the amount of $325,000. The interest rate on the loan was a flat fee of $32,500 and the loan matured on March 21, 2012. As of March 31, 2013 and December 31, 2012 the outstanding balance was $325,000. The loan has matured and is in default and carries default rate of interest of 18% per annum.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
On December 21, 2011 the director, loaned the Company additional funds totaling $25,000. As of March 31, 2013 and December 31, 2012, $25,000 in principal amount is outstanding.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
On February 13, 2012 and February 22, 2012, the director, loaned the Company additional funds totaling $50,000. As of March 31, 2013 and December 31, 2012, the outstanding balance is $31,250. In addition, warrants of 50,000 were granted for the purchase of common stock with a strike price of $0.06 and an expiration date of 5 years. These loans matured on April 29, 2012 and May 7, 2012, respectively and are now in default and carry a default interest rate of 18% per annum.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
On October 25, 2012, the director loaned the Company additional funds totaling $25,000 with an interest rate of 10% p.a. and a maturity date of November 25, 2012. In addition, warrants of 25,000 were granted for the purchase of common stock with a strike price of $0.07 and an expiration date of 5 years. As of March 31, 2013 and December 31, 2012, the outstanding balance is $24,000 and $25,000, respectively. The loan has matured and is in default and carries one time late fees of 10% of the principal amount outstanding and default rate of interest of 18% per annum.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
On November 2, 2012, the director loaned the Company additional funds totaling $12,500 with an interest rate of 10% p.a. and a maturity date of December 2, 2012. In addition, warrants of 12,500 were granted for the purchase of common stock with a strike price of $0.07 and an expiration date of 5 years. As of March 31, 2013 and December 31, 2012, the outstanding balance is $0 and $12,500, respectively.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued interest and fees totaled $97,234 and $79,974 at March 31, 2013 and December 31, 2012, respectively.
|
|
|
405,250
|
|
|
|
418,750
|
|
|
|
|
|
|
|
|
|
|
On June 21, 2011, a holder of more than 5% of common stock, loaned the Company a total of $70,000. As consideration for these loans, a fee of $7,000 was expensed. As of March 31, 2013 and December 31, 2012 this unsecured loan has an outstanding balance of $70,000 and has matured and the Company is in default. The loan is accruing interest at 28% per annum and a late fee of 10% of the outstanding balance each month. Total accrued interest and fees amount to $180,186 and $154,353 at March 31, 2013 and December 31, 2012, respectively.
|
|
|
70,000
|
|
|
|
70,000
|
|
|
|
|
|
|
|
|
|
|
On September 28, 2012, a director loaned the Company $25,000 with a interest rate of $2,500. As of March 31, 2013 and December 31, 2012, $20,000 and $25,000, respectively, in principal amount is outstanding. The principal is due on October 28, 2012 and November 28, 2012 in two installments of $12,500 each. The loan has matured and is in default and carries a default interest rate of 8% pa. Total accrued interest and fees amount to $6,413 and $5,814 at March 31, 2013 and December 31, 2012, respectively.
|
|
|
20,000
|
|
|
|
25,000
|
|
|
|
|
|
|
|
|
|
|
Since early 2009 a former director and former officer, loaned the Company funds at various dates. As of March 31, 2013 and December 31, 2012, the outstanding balance was $229,409. Interest in the amount of $84,244 and $75,948 has accrued as of March 31, 2013 and December 31, 2012, respectively. The loans have matured and are in default. The default rate of interest is 15% per annum.
|
|
|
229,409
|
|
|
|
229,409
|
|
|
|
|
|
|
|
|
|
|
On September 28, 2012, a director and officer of the Company, loaned the Company $65,000. As of March 31, 2013 and December 31, 2012, $49,000 in principal amount is outstanding. Interest was in the form of 132,000 warrants. The principal payments of $15,000 on or before October 8, 2012, $25,000 by November 8, 2012 and $25,000 by December 8, 2012 are due. The loan has matured and is in default and carries a default interest rate of 8% pa. Total accrued interest and fees amount to $999 and $0 at March 31, 2013 and December 31, 2012, respectively.
|
|
|
49,000
|
|
|
|
49,000
|
|
|
|
|
|
|
|
|
|
|
Holdings and Innovative (the “Borrowers”) have entered into an agreement (the “Loan Agreement”) with seven individuals (the “Lenders”) who are directly or indirectly related to Holdings, under which the Borrowers may borrow up to $2,000,000. The total borrowings as of March 31, 2013 and December 31, 2012 amounted to $2,000,000, collateralized by substantially all assets of the Borrowers and guaranteed by Galen. Repayment of the loan is due on May 31, 2017. In order to make the loan to the Borrowers, the Lenders borrowed $1,000,000 from Eagle Bank and $1,000,000 from Reliant Bank. The promissory note to Eagle Bank has a maturity date of August 26, 2013 and interest is payable monthly at the bank’s prime rate (as defined) plus 1% with a minimum rate of 7.5%. The promissory note to Reliant Bank has a maturity date of March 28, 2014 and interest is payable monthly at fixed rate of 7.0%. In addition, the Reliant Bank loan is secured by a $250,000 deposit, of which $165,000 was deposited by the Company. Interest is directly paid by the Company to the banks on a monthly basis.
|
|
|
2,000,000
|
|
|
|
2,000,000
|
|
|
|
|
|
|
|
|
|
|
On February 28, 2012 a LLC, a greater than 5% shareholder of the company, loaned the Company $50,000 with a maturity date of April 3, 2012. The loan is secured by accounts receivable, guaranteed by a director, and carried a flat interest rate of $5,000. In addition, at the option of the holder an additional fee of $5,000 or warrants for 50,000 shares of common stock at $0.07 per share shall be paid and 125,000 shares of common stock.
The loan is in default and the Company is paying $6,000 per month in late fees.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
On March 2, 2012 a LLC, a greater than 5% shareholder of the company, loaned the Company $50,000 with a maturity date of April 3, 2012. The loan is secured by accounts receivable, guaranteed by a director, and carried a flat interest rate of $5,000. In addition, the Company shall issue 500,000 shares of common stock. The loan is in default and the Company is paying $6,000 per month in late fees.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
On October 22, 2012 a LLC, a greater than 5% shareholder of the company, loaned the Company $100,000 with a maturity date of November 6, 2012. The loan is secured by accounts receivable, guaranteed by a director, and carried a flat interest rate of $10,000. . In addition, warrants for 200,000 shares of common stock at $0.01 per share have been issued. The loan was repaid on November 15, 2012 along with default interest which was accrued at 18% pa.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
On November 16, 2012 a LLC, a greater than 5% shareholder of the company, loaned the Company $100,000 with a maturity date of December 1, 2012. The loan is secured by accounts receivable, guaranteed by a director, and carried a flat interest rate of $10,000. In addition, warrants for 200,000 shares of common stock at $0.01 per share have been issued. The loan is in default and the Company issued 200,000 more warrants under the same terms and paying $10,000 in late fees as well as accruing default interest at 18% pa.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
On December 4, 2012 a LLC, a greater than 5% shareholder of the company, loaned the Company $50,000 with a maturity date of December 19, 2012. In addition, warrants for 500,000 shares of common stock at $0.01 per
share have been issued.
The loan is secured by accounts receivable, guaranteed by a director, and carried a flat interest rate of $5,000.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
On March 29, 2013 the Company entered into a settlement agreement with the LLC. The agreement calls for a total settlement amount of $290,000 and a forbearance until August 30, 2013 and the following payments: $10,000 by March 31, 2013; $50,000 by April 30, 2013; $40,000 by May 30, 2013; $60,000 by June 30, 2013; $65,000 by July 30, 2013; and $65,000 by August 30, 2013. In addition, warrants for the purchase of 400,000 shares are to be issued at a strike price of $0.01 and expiration of 5 years.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total accrued interest and fees was $57,285 and $30,189 as of March 31, 2013 and December 31, 2012, respectively.
|
|
|
250,000
|
|
|
|
250,000
|
|
|
|
|
|
|
|
|
|
|
On August 1, 2010 an LLC, a greater than 5% shareholder of the company, loaned the Company $200,000 with a maturity date of September 14, 2011. The loan is secured by accounts receivable and carried a flat interest rate of $20,000. The loan was extended on September 19, 2011 and on November 7, 2011 with a maturity of December 31, 2011.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
On August 8, 2011 the LLC, a greater than 5% shareholder of the company, and several individuals loaned the Company $225,000 with a maturity date of November 8, 2011. On November 7, 2011 the loans were extended to December 31, 2011. The loans are secured and carried a flat interest rate of $50,000. The loans are guaranteed by a director. The Company issued 1,000,000 warrants which was valued at $60,022 and charged to operations as interest expense during the year ended December 31, 2012.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
On February 5, 2013 the Company entered into a settlement agreement with the LLC. The agreement calls for a total settlement amount of $450,439 and a forbearance until July 30, 2013 and the following payments: $43,750 on the 15
th
of each month, beginning February 15 and until May 15, 2013, inclusive (total of $175,000, the Total Principal Amount); $30,000 on June 15, 2013 and July 15, 2013; and the remaining balance on or before July 30, 2013.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total accrued interest and fees was $548,270 as of March 31, 2013 and December 31, 2012.
|
|
|
103,000
|
|
|
|
175,000
|
|
|
|
|
|
|
|
|
|
|
On December 29, 2012, the Company borrowed $50,000 from a trust, a greater than 5% shareholder of the company,. The loan carried an interest rate of 2.5% pa and a maturity date of January 17, 2013. In addition, warrants of 100,000 were granted for the purchase of common stock with a strike price of $0.01 and an expiration date of 5 years. A director also guaranteed this loan.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
On January 15, 2013, the Company borrowed $50,000 from a trust, a greater than 5% shareholder of the company,. The loan carried an interest rate of 2.5% per annum and a maturity date of February 7, 2013. In addition, warrants of 100,000 were granted for the purchase of common stock with a strike price of $0.01 and an expiration date of 5 years. A director also guaranteed this loan.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
On January 23, 2013, the Company borrowed $50,000 from a trust, a greater than 5% shareholder of the company. The loan carried an interest rate of $5,000 and a maturity date of February 17, 2013. In addition, warrants of 100,000 were granted for the purchase of common stock with a strike price of $0.01 and an expiration date of 5 years. A director also guaranteed this loan.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
On February 6, 2013, the Company borrowed $25,000 from a trust, a greater than 5% shareholder of the company. The loan carried an interest rate of 2.5% per annum and a maturity date of February 14, 2013. In addition, warrants of 50,000 were granted for the purchase of common stock with a strike price of $0.01 and an expiration date of 5 years. A director also guaranteed this loan.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The loans are in default and carries a default interest rate of 18% per annum and a late fee of 10% each 10 days. As of March 31, 2013 and December 31, 2012 there was $152,973 and $253 of accrued interest, respectively.
|
|
|
175,000
|
|
|
|
150,000
|
|
|
|
|
|
|
|
|
|
|
Total notes payable- Affiliates
|
|
$
|
3,569,159
|
|
|
$
|
3,602,159
|
|
Less: Short term portion
|
|
|
(1,569,159
|
)
|
|
|
(1,602,159
|
)
|
Total notes payable- Affiliates – long term
|
|
$
|
2,000,000
|
|
|
$
|
2,000,000
|
|
* The December 31, 2012 information has
been redone to reflect the movement of three loans to notes payable-affiliated from notes payable- other.
As of March 31, 2013 and December 31, 2012,
$3,569,159 and $3,602,159 were outstanding, respectively, on the notes payable to related parties
In
2012, these parties were granted warrants to purchase 11,621,500 shares of Innolog common stock. The strike price to purchase the
common stock ranges from $0.01 to $0.07 per share with a 5-year expiration date. In addition, 625,000 of common stock was also
issued.
The fair value of these warrants and common stock amounted to $695,836 and was amortized to
interest expense during the twelve months ended December 31, 2012. During the three months ended March 31, 2013 warrants to purchase
common stock of 2,350,000 were granted with a strike price of $.01 and expiration of 5 years. Of which fair value of 2,100,000
warrants amounted to $59,559 was charged to operations during the year ended December 31, 2012 as the warrants were issued in 2013
for loan extension in year 2012 and fair value of 250,000 warrants amounted to $13,805 related to issuance of notes during 2013
was amortized to interest expense during the three months ended March 31, 2013.
Of these notes, $1,491,659 and $1,452,159
were in default as of March 31, 2013 and December 31, 2012, respectively. Total interest and fees incurred on these notes amounted
to $314,691 and $232,696 during the three months ended March 31, 2013 and 2012. Total interest and fees accrued on these notes
amounted $1,133,241 and $945,356 as of March 31, 2013 and December 31, 2012, respectively.
Convertible Notes Payable Long Term, affiliates:
At March 31, 2013 and December 31, 2012,
notes payable long term, affiliates consisted of the following:
|
|
March 31, 2013
|
|
|
December 31, 2012
|
|
A LLC which is an affiliate of a holder of more than 5% of our common stock
|
|
$
|
1,800,000
|
|
|
$
|
1,750,000
|
|
Less: Unamortized debt discount
|
|
|
(1,424,979
|
)
|
|
|
(1,499,141
|
)
|
Total Convertible notes payable long term-affiliates, net of debt discount
|
|
$
|
375,021
|
|
|
$
|
250,859
|
|
On March 31, 2012, March 21, 2012, March
29, 2012, April 2, 2012, April 10, 2012, April 12, 2012, and April 16, 2012 a LLC, an affiliate of a holder of more than 5% of
our common stock, loaned the Company $300,000, $200,000, $300,000, $300,000, $100,000, $100,000, and $400,000 respectively. The
unsecured loans had a maturity date of May 31, 2012 and carry a 6% per annum interest rate.
On May 21, 2012 the Company entered into
a Convertible Notes Purchase Agreement for up to $6,000,000 collateralized by substantially all assets of the Borrowers (“Holdings
and Innovative”) with a maturity date of May 31, 2017 and a 6% per annum rate of interest. The interest accrues and is payable
at maturity. The convertible promissory notes plus accrued interest under the Note Purchase Agreement are convertible
into a Series B Convertible Preferred Stock on a dollar for dollar basis. The Series B has a liquidation preference and is convertible
into common shares at a conversion price of $0.076 per share. The investors have a first lien position on the assets of the Company
on a pari passu basis with the holders of other affiliated debt. The LLC rolled its short-term loans above into this agreement.
In addition, the LLC note is secured by a substantial portion of the directors of the Company stock holdings. The LLC received
8,750,000 warrants for the purchase of the Company common stock at an exercise price of $.069 per share with an expiration date
of May 31, 2017. On January 4, 2013, the Company entered into a convertible promissory note agreement with the LLC for $50,000.
The loan carried an interest rate of 6% p.a. and a maturity date of May 30, 2017. The note is convertible into whole or part into
Series B convertible preferred stock of the Company at an effective conversion rate of one share of Series B convertible preferred
stock for each $1 outstanding principal and accrued but unpaid interest. The Series B has a liquidation preference and is convertible
into common shares at a conversion price of $0.085 per share. In addition, warrants of 250,000 were granted for the purchase of
common stock with a strike price of $0.0709 and an expiration date of 5 years.
As of March 31, 2013 and December 31, 2012 the accrued interest
on this loan was $91,356 and $64,726, respectively.
In
accordance with Accounting Standards Codification 470-20-65, “Accounting for Convertible Securities with Beneficial Conversion
Features or Contingently Adjustable Conversion Ratios (“ASC 470-20-65”), the Company recognized an imbedded beneficial
conversion feature present in the notes. For the three months ended March 31, 2013 and for the year ended December 31, 2012, the
Company recognized a debt discount of $11,863 and $1,360,869, which was equal to the intrinsic value of the imbedded beneficial
conversion feature
. The Company also recorded a net of a deferred debt discount of $11,195
and $347,711 based on the relative fair value of the warrants under the Black-Scholes pricing model
based on the following
assumptions: (1) risk free interest rate of 0.82% and 0.72%; (2) dividend yield of 0%; (3) volatility factor of the expected market
price of the Company common stock of 187.5% and 74.85%; and (4) an expected life of the warrants of 5 years. Total debt discount
of $11,863 and $1,708,581 is attributed to the beneficial conversion feature were recognized to additional paid in capital and
a discount against the Note. The debt discount is being amortized over the Notes maturity period (five years) as interest expense.
During
the three months ended March 31, 2013, the Company recorded amortization of the debt discount relating to these notes of $86,026.
Legal Fees:
During the three months ended
March 31, 2013 and 2012, the Company incurred and reimbursed legal fees in the amount of $74,990 and $45,640 respectively on behalf
of its executive officer in defense of an investigation by a governmental agency.
Note 10: Commitments and Contingencies
Leases:
The Company leases office space in Washington, D.C.
and Fairfax, Virginia under operating leases expiring at various dates through 2016. The premises leases contain scheduled rent
increases and require payment of property taxes, insurance and certain maintenance costs. The minimum future commitments under
lease agreements existing as of March 31, 2013 are approximately as follows:
Year ending December 31,
|
|
|
|
2013
|
|
$
|
190,000
|
|
2014
|
|
|
269,000
|
|
2015
|
|
|
276,000
|
|
2016
|
|
|
222,000
|
|
|
|
$
|
958,000
|
|
Total rent expense amounted to $82,015
and $75,165 for the three months ended March 31, 2013 and 2012, respectively.
In 2010, Innovative vacated
its office space prior to expiration of the lease. The landlord subsequently filed a lawsuit against the Company under which it
pursued total damages of approximately $1,000,000, which approximates the rent charges for the remaining term of the lease. On
February 14, 2011, Innovative entered into a settlement agreement in which it agreed to a payment of $350,000 on May 31, 2011.
In the event Innovative did not make the payment timely, it agreed to a confessed judgment in the amount of $936,510 and this amount
was included in other accrued liabilities as of December 31, 2010. In July 2011, the settlement agreement was amended to extend
the $350,000 payment till August 8, 2011. The entire $350,000 was paid in full by August 8, 2011. As such, $586,510 was recognized
as a gain from legal settlement during the twelve months ended December 31, 2011.
Late Deposit of Payroll Taxes and Employee Income Tax Withholdings:
At March 31, 2013, the Company
is delinquent with filing and remitting payroll taxes of $5,046,009 including estimated penalties and interest related to payroll
taxes withheld since December 31, 2009. The Company has recorded the delinquent payroll taxes, which are included in accrued
expenses on the balance sheet. Although the Company has not entered into any formal repayment agreements with the applicable tax
authorities, management plans to make payment as funds become available. Penalties and interest amounts are subject to increase
based on a number of factors that can cause the estimated liability to increase further. Interest and penalties were accrued in
an amount estimated to cover the ultimate liability. As of March 31, 2013 and December 31, 2012, the total of payroll tax accrued
and income tax withheld balances including penalties and interest, amounted to $5,046,009 and $4,632,104, respectively. The Company
is currently in discussions with the taxing authorities to develop a payment plan. On March 17, 2011 the taxing authorities filed
a notice of federal tax lien in the amount of $614,990 in Fairfax, VA.
Employment Agreement:
On April 1, 2009, Innovative
entered into an employment agreement with its President and Chief Executive Officer through March 31, 2014, which provides for
a minimum annual salary of $198,000. At January 31, 2012 this agreement was cancelled and replaced by a consulting agreement as
the President and Chief Executive Officer of Innovative retired. As of March 31, 2013 the consulting agreement has been cancelled.
Contracts:
Substantially all of the Company’s
revenues have been derived from prime or subcontracts with the U.S. government. These contract revenues are subject to adjustment
upon audit by the Defense Contract Audit Agency. Audits have been finalized through 2005. Management does not expect the results
of future audits to have a material effect on the Company’s financial position or results of operations.
Delinquent payables
The Company has been delinquent
in numerous payables to different parties of which some filed lawsuits against the Company. All necessary accruals have been made
as of March 31, 2013 and 2012 and are included in accounts payable and other accrued liabilities.
Legal Proceedings
Other than the proceedings described below,
the Company is not currently involved in any material legal proceedings, nor have been involved in any such proceedings that have
had or may have a significant effect on it. The Company is not aware of any other credible material legal proceedings pending
or threatened against it.
Lau Massachusetts Business Trust et.
al. vs. Innovative Logistics Techniques, Inc
. This complaint was filed in June 2010 in the Circuit Court of Fairfax
County Virginia (Case No. 2010-8002). The complaint alleges, among other things, breach of various contracts, trover and
conversion of funds based on the Company’s receipt of moneys that allegedly should have been paid over to the complainant
or its affiliates in or about 2008 and non-payment of various alleged settlement arrangements. The Company has entered into a
settlement agreement, as amended (under which, the Company was in default), and a forbearance agreement requiring the payment
of approximately $375,000. An initial payment of $75,000 is due about March 31, 2012 and the remainder is to be paid with interest
over the next 12 months. The Company is in default of the settlement and forbearance agreements. A confession of Judgment for
$271,521 was entered on April 24, 2013.
U.S. Department of Labor vs. Innovative
Logistics Techniques, Inc. and ILT 401K Plan.
This complaint was filed in November 2012, in the US District Court for
the Eastern District of Virginia (Civil Action No. 12-1321). The complaint, covering a period from January 1, 2007 through April
1, 2011, alleges, among other things, failure by the Company to remit certain employee assets to the Plan and wrongful treatment
and use of Plan assets. The Complaint seeks restoration of Plan assets (including lost profits) of approximately $200,000, an
injunction against the Company regarding ERISA activities and other legal and equitable relief. The Company filed a response and
the matter is proceeding.
Investigation by the US Internal Revenue
Service
. The US Internal Revenue Service has alleged that various past due taxes since 2008 are due and owing by the
Company. The IRS has filed various liens amounting to approximately $350,000. There are various matters and issues pending
before the IRS. The Company has sought an installment payment plan with the service. The Company has not heard from the IRS regarding
the proposed payment plan.
801 Potomac Avenue SE Holdings vs.
Innovative Logistics Techniques, Inc
. A summons was filed on April 12, 2013, seeking a Notice to Quit the Premises and approximately
$350,000 in damages. The Company left the premises in early May, 2013. The matter was scheduled for hearing on May 15, 2013 but
was postponed to June 11, 2013.
CACI, Inc. - Federal vs. Innovative Logistics Techniques,
Inc
. This complaint was filed on February 12, 2013, in the Circuit Court of Fairfax County (Civil Action No. 2013-03033).
The complaint alleges breach of contract and seeks damages of approximately $80,000 plus interest and attorney’s fees. The
Company filed an answer and trial is set for November 12, 2013.
Quasar Systems, Inc. vs. Innovative Logistics Techniques,
Inc
. This complaint was filed on February 25, 2013, in the Circuit Court of Fairfax County (Civil Action No. 2013-03940).
The complaint alleges breach of contract and seeks damages of approximately $75,000 plus interest and attorney’s fees. A
Consent Judgment was entered on April 26, 2013 and execution has been stayed until June 17, 2013.
Note 11: Income Taxes
The Company’s effective
income tax rate is lower than what would be expected if the federal statutory rate were applied to income from continuing operations
primarily because of the deferred tax asset being fully reserved.
Temporary differences giving
rise to the deferred tax assets consist primarily of the excess of the goodwill and other intangible assets for tax reporting
purposes over the amount for financial reporting purposes, and net operating loss carry forwards. The Company’s ability
to utilize the federal and state tax assets is uncertain; therefore the deferred tax asset is fully reserved.
At March 31, 2013, the Company
had net operating loss carry forwards of approximately $12 million for federal and Virginia state tax purposes expiring through
2031.
The Company has filed its 2011
federal and state income tax returns.
The Company recognizes interest
and penalties related to income tax matters in interest expense and operating expenses, respectively. As of March 31, 2013, the
Company has no accrued interest and penalties related to uncertain tax positions.
Note 12: Employee Benefit Plan
Innovative has a defined contribution
employee benefit plan covering all full time employees who elect to participate. The plan provides for elective salary deferrals
by employees and annual elective matching contributions. There were no employer contributions for the three months ended March
31, 2013 and 2012.
Innovative has been late in
making deposits of employee deferrals. The Department of Labor has reviewed Innovative’s employee benefit plan document
as well as other records to determine the status of compliance. The Department of Labor and the Company have determined that a
remaining total of $183,304 is to be deposited in the plan, which includes all principal and any penalties.
The Company is working with the Department of Labor on a payment plan. In addition, the Department of Labor has required that
the plan be terminated.
Note 13: Capital Stock
Common Stock:
The Company has authorized
200,000,000 shares of common stock, with a par value of $0.001 per share.
As of March 31, 2013 and December
31, 2012, 18,410,831 and 17,974,538 shares, respectively, of the Company common stock were issued and outstanding.
During the three months ended
March 31, 2013, the Company issued 436,293 shares of its common stock valued at $26,178 for accrued services.
During the year ended December
31, 2012, the Company issued 869,565 shares of its common stock valued at $60,000 for accrued services.
During the year ended December
31, 2012, the Company issued 625,000 shares of its common stock valued at $37,500 for interest expense.
During the year ended December
31, 2012, the Company issued 300,000 shares of its common stock valued at par for conversion of 300,000 Series A convertible preferred
stock.
During the year ended December
31, 2012, the Company issued 1,050,000 shares of its common stock valued at par upon exercise of warrants.
Preferred Stock:
The Company has authorized
50,000,000 shares of preferred stock, with a par value of $0.001 per share (“Preferred Stock”). The Preferred Stock
may be issued from time to time in series having such designated preferences and rights, qualifications and to such limitations
as the Board of Directors may determine.
The Company has designated
38,000,000 shares of the preferred stock as Series A Convertible Preferred Stock (“Series A Stock”). The holders of
Series A Stock have voting rights with a $2.00 liquidation preference per share, and may convert each share of Series A Stock
into one share of common stock at any time. Series A Stock converts automatically upon the occurrence of an offering meeting certain
criteria and the sale of the Company. Holders of the Series A Stock are entitled to accrue dividends based on the prior fiscal
year’s net income equal to 10% of such net income.
As of March 31, 2013 and December
31, 2012, there were 36,894,758 shares of Series A Convertible Preferred Stock outstanding and no dividends have been accrued.
During the year ended December
31, 2012, the Company issued 300,000 shares of its Series A convertible preferred stock for accrued services valued at $3,000,
which was converted into 300,000 common stock valued at par.
The Company has designated
7,800,000 shares of the preferred stock as Series B Convertible Preferred Stock (“Series B Stock”). The holders of
Series B Stock have voting rights with a two times the original issue price plus any declared or accrued but unpaid dividends
liquidation preference to the Company’s Series A Convertible Preferred and Common Stock. Each share of Series B Stock may
convert to common stock at any time at the conversion rate. The conversion rate is defined 120% of the average market closing
price of the Common Stock as determined for the 30-day period ending two business days prior to the applicable closing under the
May 21, 2012 Note Purchase Agreement.
Series B Stock converts automatically upon the occurrence of a listing of the common
stock on the NASDAQ or American Stock Exchange. Holders of the Series B Stock are entitled to accrue dividends based at a 6% rate
per annum.
As of March 31, 2013 and December
31, 2012, there were no shares of Series B Convertible Preferred Stock issued and outstanding and no dividends have been accrued.
Warrants:
For the three months ended March
31, 2013, the Company granted 5,705,000 warrants to various individuals in conjunction with the individuals lending the Company
funds for working capital, renewals of loans in 2012, services rendered in 2012 and 2013 and settlement of debt due. The warrants
have an exercise price of $0.01 to $0.05 per share and a life of five years. All warrants were fully vested on the date of the
grant. The Company has determined through a Black Scholes analysis that the fair value of the 2,455,000 warrants was $120,037
at the time of issue. F
air value of 3,000,000 warrants amounted to $70,730 was charged to operations
during the year ended December 31, 2012 as the warrants were issued in 2013 for board services rendered in 2012 and for renewal
of loans in 2012. Remaining 250,000 warrants were issued along with the convertible note payable (refer Note – 9).
The following assumptions were used in arriving at
the fair value of the above noted warrants:
Expected dividend yield
|
|
|
0
|
%
|
Expected volatility
|
|
|
187.15
|
%
|
Average risk free interest rate
|
|
|
0.84
|
%
|
Expected life (in years)
|
|
|
5.0
|
|
A summary of the Company’s warrant activity
and related information is as follows:
Warrant Summary
|
|
Warrants
|
|
|
Weighted Average
Exercise Price
|
|
Outstanding, January 1, 2011
|
|
|
63,111,564
|
|
|
$
|
0.347
|
|
|
|
|
|
|
|
|
|
|
Issued
|
|
|
22,965,082
|
|
|
|
0.04
|
|
Exercised
|
|
|
(1,050,000
|
)
|
|
|
(0.01
|
)
|
Forfeited/Expired
|
|
|
(11,706
|
)
|
|
|
(3.21
|
)
|
Outstanding, December 31, 2012
|
|
|
85,012,259
|
|
|
|
0.27
|
|
|
|
|
|
|
|
|
|
|
Issued
|
|
|
5,705,000
|
|
|
|
0.03
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
Forfeited/Expired
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Outstanding, March 31, 2013
|
|
|
90,717,259
|
|
|
$
|
0.25
|
|
At March 31, 2013, there were
90,717,259 warrants outstanding and exercisable. These warrants had a weighted average exercise price of $0.25 and a weighted
average remaining life of 37.5 months. The intrinsic value is not greater than the grant price.
Stock Option Plan:
The Deferred Stock and Restricted
Stock Plan (the “Plan”), under which employees, officers, directors, consultants and other service providers may be
granted non-qualified and/or incentive stock options. Generally, all options granted expire five years from the date of grant. All
options have an exercise price equal to or higher than the fair value of the Company’s stock on the date the options are
granted. Options generally vest over three years with the exception of the initial grants of 2010, which vested immediately.
A summary of the status of
stock options issued by the Company as of March 31, 2013 is presented in the following table.
|
|
Number of Options
|
|
|
Weighted Average
Exercise Price
|
|
|
|
|
|
|
|
|
|
|
Outstanding at January 1, 2012
|
|
|
13,429,500
|
|
|
$
|
0.50
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
Exercised/Expired/Cancelled
|
|
|
(2,647,500
|
)
|
|
|
(0.50
|
)
|
Outstanding at December 31, 2012
|
|
|
10,782,000
|
|
|
|
0.50
|
|
Granted
|
|
|
60,000
|
|
|
|
0.10
|
|
Exercised/Expired/Cancelled
|
|
|
(6,000
|
)
|
|
|
(0.50
|
)
|
Outstanding at March 31, 2013
|
|
|
10,836,000
|
|
|
$
|
0.0498
|
|
|
|
|
|
|
|
|
|
|
Exercisable at March 31, 2013
|
|
|
10,759,000
|
|
|
$
|
0.50
|
|
These stock options have a weighted average remaining
life of 28.9 months.
The intrinsic value is not greater than the grant price.
2012 Consultant Stock Plan
The 2012 Consultant Stock Plan (the “Plan”),
under which consultants and other service providers may be granted shares of the Company’s Common Stock. The Company has
reserved up to 5,000,000 shares under this plan. The plan will expire in 10 years. The stock under this plan has been registered
under a S-8. During the three months ended March 31, 2013, the Company has granted 436,293 shares valued at $26,178 for services
rendered in prior period.
Equity Credit Line
On July 25, 2012, the Company entered
into an equity credit line with Dutchess Opportunity Fund II, LP for up to $5,000,000 over a three-year term. Under this arrangement
the Company may obtain working capital from Dutchess in exchange for common stock. The amount of the put is determined by 200%
of the average daily volume for the 3 days prior to the put date and the purchase price is determined 95% of the volume weighted
average price during the 5 trading days after the put date. As of the three months ended March 31, 2013, this line has not been
used.
Note 14: Subsequent Events
On April 22, 2013 the company borrowed
$75,000 from an individual with a maturity date of May 15, 2013 at an interest rate of 10%. In addition, the individual was granted
75,000 warrants for the purchase of common stock at a strike price of $0.01with a 5 year expiration. The proceeds were used for
working capital. The loan was repaid on May 15, 2013.
On April 22, 2013 and April 29, 2013 the
company borrowed a total of $15,000 under its revolving line with a director. The proceeds were used for working capital.
On May 9, 2013 the company borrowed $30,000
from a greater than 5% shareholder of the company with a maturity date of November 30, 2014 and an interest fee of $3,000. The
proceeds were used to pay down debt.
On May 9, 2013 the company borrowed $30,000
from a greater than 5% shareholder of the company with a maturity date of November 30, 2013 and an interest fee of $3,000. The
proceeds were used to pay down debt.