Providing efficient, effective supply chain logistics solutions

Awarded Subcontract for URS Federal Services In Support Of NAVY Q30 Program

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Message: Form 10-Q for INNOLOG HOLDINGS CORP.

14-Aug-2012

Quarterly Report


Item 2: Management's discussion and analysis of financial condition and results of operations

The following discussion and analysis of the results of operations and financial condition of Innolog Holdings Corporation and its wholly owned subsidiary, for the six months ended June 30, 2012 and 2011 should be read in conjunction with the consolidated financial statements and the notes to those financial statements that are included in the Current Report on Form 10-K that we filed with the Securities and Exchange Commission on April 16, 2012. References to "the Company," "we," "our," or "us" in this discussion refer to Innolog Holdings Corporation and its subsidiary.

Our discussion includes forward-looking statements. When used in this report, the words "anticipate," "believe," "estimate," "expect," "future," "intend," "may," "plan," or the negative of these terms and similar expressions identify forward-looking statements. Such statements reflect our current view with respect to future events and are subject to risks, uncertainties, assumptions and other factors relating to our industry, our operations and results of operations and any businesses that we may acquire. Should one or more of these risks or uncertainties materialize, or should the underlying assumptions prove incorrect, actual results may differ significantly from those anticipated, believed, estimated, expected, intended or planned. Some, but not all, of these risks include, among other things:

� whether we will continue to receive the services of certain officers and directors;

� whether we can implement our business plan by acquiring other businesses compatible with ours;

� whether budgetary pressures in the federal and state governments will result in a reduction in spending which will be disadvantageous to us;

� whether we can obtain funding when and as we need it; and

� other uncertainties, all of which are difficult to predict and many of which are beyond our control.

Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. Except as required by applicable law, including the securities laws of the United States, we do not intend to update any of the forward-looking statements to conform these statements to actual results.

Overview

We are a holding company designed to make acquisitions of companies in the government services industry. Our first acquisition, Innovative Logistics Techniques, Inc. is a solutions oriented provider of logistics services primarily to agencies of the U.S. government, but also to state and local agencies and to private businesses. We provide tools to our customers, which allow them to manage the flow of goods, information or other resources through the integration of information, transportation, inventory, warehousing, material handling and security. Our goal is to expand our business, not only through the acquisition of new contracts but also through the acquisition of companies in the government services industry. Our home office is located in Fairfax, Virginia, although we have one additional office located in Washington D.C.

The federal government is the largest consumer of services and solutions in the United States. We believe that the federal government's spending will continue to increase in the next several years, driven by the expansion of national security and homeland security programs, the continued need for sophisticated intelligence gathering and information sharing, increased reliance on technology service providers due to shrinking ranks of government technical professionals and the continuing impact of federal procurement reforms. For example, federal government spending on information technology has consistently increased in each year since 1980. INPUT, an independent federal government market research firm, expects this trend to continue. Federal government spending on information technology increased from approximately $76 billion in federal fiscal year 2009 to $84 billion in federal fiscal year 2011 and is projected to increase to $91 billion in federal fiscal year 2016. Moreover, this data may not fully reflect government spending on classified intelligence programs, operational support services to our armed forces and complementary technical services, which include sophisticated systems engineering.

Across the national security community, we see the following trends that we believe will continue to drive increased spending and dependence on technology support contractors:

� Increased Spending on Defense and Intelligence to Combat Terrorist Threats

� Increased Spending on Cyber Security

� Continuing Focus on Information Sharing, Data Interoperability and Collaboration

� Reliance on Technology Service Providers

� Inherent Weaknesses of Federal Personnel Systems

Critical Accounting Policies and Estimates

Management's discussion and analysis of our financial condition and results of operations is based on our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements as well as the reported net sales and expenses during the reporting periods. On an ongoing basis, we evaluate our estimates and assumptions. We base our estimates on historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

While our significant accounting policies are more fully described in Note 4 to our consolidated financial statements, we believe that the following accounting policies are the most critical to aid you in fully understanding and evaluating this discussion and analysis:

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.

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 $35,590 at June 30, 2012 and December 31, 2011, respectively.

Long-Lived Assets:

The Company follows Accounting Standards Codification subtopic 360-10, Property, Plant and Equipment ("ASC 360-10"). ASC 360-10 requires those long-lived assets and certain identifiable intangibles held and used by the Company be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of any asset may not be recoverable. Events relating to recoverability may include significant unfavorable changes in business conditions, recurring losses, or a forecasted inability to achieve break-even operating results over an extended period. An impairment loss would be recognized when the estimated undiscounted future cash flows expected to result from the use of the asset and its eventual disposition is less than the carrying amount. If impairment is indicated, the amount of the loss to be recorded is based on an estimate of the difference between the carrying amount and the fair value of the asset. Fair value is based upon discounted estimated cash flows expected to result from the use of the asset and its eventual disposition and other valuation methods.

Goodwill:

In accordance with FASB ASC 350, "Intangibles - Goodwill and Other", goodwill is tested for impairment at least annually. There was no impairment loss recorded for the period ended June 30, 2012.

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 June 30, 2012, the Company has no unrecognized tax benefits.

The Company files a consolidated federal income tax return. Income taxes are accounted for using the asset and liability method under FASB ASC 740 "Income Tax", whereby deferred tax assets and liabilities are recognized for future tax consequences attributable to differences between the financial statement carrying amounts of assets and liabilities, and their respective tax basis, and operating loss and tax credit carry forwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities due to a change in tax rates is recognized as income in the period that includes the enactment date. Estimates of the realization of deferred tax assets are based-on the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies.

The Company applies the provisions of FASB ASC 740, which clarifies the accounting for uncertainty in tax positions. FASB ASC 740 requires the recognition of the impact of a tax position in the financial statements if that position is more likely than not to be sustained on a tax return upon examination by the relevant taxing authority, based on the technical merits of the position. At June 30, 2012, the Company has no unrecognized tax benefits.

Stock Based Compensation:

The Company follows Accounting Standards Codification subtopic 718-10, Compensation (ASC 718-10") which requires that all share-based payments to both employees and non employees be recognized in the income statement based on their fair values at the grant date and recognizes expense over the requisite service period.

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.

Recent Accounting Pronouncements:

Management does not believe that any recently issued, but not yet effective accounting standards, if adopted, will have a material effect on our unaudited condensed consolidated financial statements.

Results of Operations



Comparison of the Three and Six Months Ended June 30, 2012 and 2011



The following table sets forth the results of our operations for the periods
indicated:



                                  Three Months                    Three Months                     Six Months                     Six Months
                                  Ended                           Ended                            Ended                          Ended
                                  June 30,                        June 30,                         June 30,                       June 30,
                                  2012              % of          2011               % of          2012             % of          2011             % of
                                  (unaudited)       Sales         (unaudited)        Sales         (unaudited)      Sales         (unaudited)      Sales
Contract Revenue                  $   1,326,599        100.0 %         1,288,794        100.0 %       2,514,402        100.0 %       2,592,500        100.0 %

Direct Costs                            804,410         60.6             574,047         44.5         1,472,972         58.6         1,207,698         46.6

Other Operating Expenses                940,396         70.9           1,434,919        111.4         2,000,247         79.5         2,376,434         91.7

Bad debt expense, affiliate                   -            -                   -            -                 -            -            27,000            -

Operating Loss                         (418,207 )      (31.5 )          (720,172 )      (55.9 )        (958,817 )      (38.1 )      (1,018,632 )      (39.3 )

Other income                                  -                          586,510         45.5            42,460         1.70           586,510         22.6

Amortization of debt discount           (38,581 )       (2.9 )                 -            -           (38,581 )       (1.5 )

Interest Expense                       (774,640 )      (58.4 )          (298,138 )      (23.1 )      (1,211,523 )      (48.2 )        (654,252 )      (25.2 )

Income (Loss) Before Income Tax      (1,231,428 )      (92.8 )          (431,800 )      (33.5 )      (2,166,461 )      (86.2 )      (1,086,374 )      (41.9 )

Income Tax Expense                            -            -                   -            -                 -            -                 -            -

Net Income (Loss)                 $  (1,231,428 )      (92.8 )%         (431,800 )      (33.5 )%     (2,166,461 )      (86.2 )%     (1,086,374 )      (41.9 )%

Contract Revenues.Revenues for the three months period ended June 30, 2012 increased over the previous year as the Company has started to generate additional revenue from new contracts. Revenue for the six months ended June 30, 2012 was down only slightly from the previous year. The Company's two major contracts with the Army and Navy remain solid and are growing and the Company has been awarded a contract with the Air Force. It is anticipated this new contract will add additional revenue in 2012.

Direct Costs. Direct costs increased as a percentage of revenue for the three and six months ended June 30, 2012. This was primarily due to the tightening of accounting controls by the Company, resulting in a more accurate allocation of expenses to the appropriate direct cost pools.

Other Operating Expenses. Operating expenses include indirect contract costs and costs not allocable to contracts. For the three and six months ended June 30, 2012 these expenses decreased year over year, due to more efficient allocation of expenses to our contracts, despite opening our Dayton office earlier in 2012.

Operating Loss. The Company decreased its operating loss by 42% in the three months ended June 30, 2012 from the previous year. The operating loss for the six months ended June 30, 2012 decreased by 5.9% over the previous year. This was due to a decrease in indirect contract costs as discussed above.

Other Income. The other income for the six months ended June 30, 2012 is a gain on legal settlement relating to a settlement agreement with an unrelated note payable whereby the company and lender settled for an amount less than what had been accrued. The other income for the six months ended June 30, 2011 relates to a legal settlement involving the settlement of an office lease obligation.

Net Loss. Our net loss for the period increased. For the six months ended June 30, 2012 and 2011, our net loss was $2,166,461 and $1,086,374, respectively. This was due to an increase in interest expense and a decrease in other income.

Liquidity and Capital Resources

Cash Flows

Net cash used in operating activities was $1,402,091 for the six months ended June 30, 2012. Cash was used primarily to support operating losses. Net cash flow used in operating activities was $322,644 for the six months ended June 30, 2011.

Net cash used in investing activities was $6,087 for the six months ended June 30, 2012 and $2,373 for the six months ended June 30, 2011. In both periods, cash was used in investing activities for equipment purchases.

Net cash provided by financing activities was $1,408,178 for the six months ended June 30, 2012 and $325,017 for the six months ended June 30, 2011. Receipts of cash flow from financing activities during the six months ended June 30, 2012 and 2011 primarily consisted of borrowings from and payments to related and non related party lenders.

Material Impact of Known Events on Liquidity

Other than as discussed herein, there are no known events that are expected to have a material impact on our short-term or long-term liquidity.

Capital Resources

We have financed our operations primarily through cash flows from operations and borrowings. Since the Company is currently still operating at a negative cash flow, continued significant short term borrowings are necessary to cover working capital needs. Typically, these loans are provided by our affiliates or other individuals although they are under no obligation to provide funding to us.

Aside from needing cash for our operations, we may require additional cash due to changes in business conditions or other future developments, including any investments or acquisitions we may decide to pursue. To the extent it becomes necessary to raise additional cash in the future, we may seek to raise it through the sale of debt or equity securities, funding from joint-venture or strategic partners, debt financing or loans, issuance of common stock or a combination of the foregoing. We currently do not have any binding commitments for, or readily available sources of, additional financing. However, we are in discussions with several sources for financing commitments. We cannot provide any assurances that we will be able to secure the additional cash or working capital we may require to continue our operations.

At June 30, 2012 we had cash on hand of zero. We will need significant additional financing to fund our operations over the next 12 months. The Company has sustained substantial operating losses since inception, and had a stockholders' deficit (defined as total assets minus total liabilities) of $11,331,364 and $11,165,636 at June 30, 2012 and December 31, 2011, respectively. There are many delinquent claims and obligations, such as payroll taxes, employee income tax withholdings, employee benefit plan contributions, delinquent loans payable and accounts payable, that could ultimately cause the Company to cease operations.

We may not have sufficient cash flows to fund our operations over the next twelve months without the completion of additional financing. The consolidated financial statements do not include any adjustments relating to the recoverability and classification of asset carrying amounts or the amounts and classification of liabilities that might result should the Company be unable to continue as a going concern.

Because of our historic net losses and negative working capital position, our independent auditors, in their report on our financial statements for the year ended December 31, 2011, expressed substantial doubt about our ability to continue as a going concern.

Contractual Obligations and Off-Balance Sheet Arrangements

Loan and Line of Credit

Innolog Holdings Corporation and Innovative Logistics Techniques, Inc. entered into an agreement with seven individuals, some of which are directors of the Company, to borrow up to $2,000,000 under a loan due on demand. The loan is secured by the assets of both borrowers. Repayment of the loan is at the lenders' demand. In order to make the loan, the lenders borrowed $1,499,384 from Eagle Bank. The promissory note to Eagle Bank matures on July 15, 2012. Innolog Holdings Corporation entered into a $500,000 line of credit with Eagle Bank due on July 15, 2012. The line of credit is guaranteed by seven individuals, some of which are directors of the Company. The line of credit bears interest at the prime rate plus 1%. At June 30, 2012, the interest rate was 5.25%. At June 30, 2012, both the loan and the line of credit were outstanding in the amounts of $1,499,384 and $497,570, respectively. The Company is currently under negotiations to refinance the loans with another bank under more favorable terms.

Loans From Related Parties

During the six months ended June 30, 2012, we received loans totaling $1,800,000 from related parties and paid back loans totaling$129,750. As of the six months ended June 30, 2012 the outstanding balance was $4,171,080. Of these loans $771,699 were in default as of June 30, 2012.

Loans From Unrelated Parties

During the six months ended June 30, 2012, we received loans totaling $200,000 from unrelated parties and paid back loans totaling $478,500. As of the six months ended June 30, 2012 the outstanding balance was $618,500. All of these loans were in default as of June 30, 2012.

Contractual Obligations

We have certain fixed contractual obligations and commitments that include future estimated payments. Changes in our business needs, cancellation provisions, changing interest rates, and other factors may result in actual payments differing from the estimates. We cannot provide certainty regarding the timing and amounts of payments. We have presented below a summary of the most significant assumptions used in our determination of amounts presented in the tables, in order to assist in the review of this information within the context of our consolidated financial position, results of operations, and cash flows.

The following table summarizes our contractual obligations as of June 30, 2012, and the effect these obligations are expected to have on our liquidity and cash flows in future periods.

                                              Less than 1
                                 Total            year          1-3 Years       3-5 Years        5 Years +
Contractual Obligations:
Bank Indebtedness             $   497,570          497,570               -     $         -     $            -
Other Indebtedness              4,789,580        3,039,580               -       1,750,000                  -
Operating Leases                  827,000          151,000         555,000         121,000
Totals:                       $ 6,114,150        3,688,150         555,000     $ 1,871,000     $            -

Off-Balance Sheet Arrangements

We have not entered into any other financial guarantees or other commitments to guarantee the payment obligations of any third parties. We have not entered into any derivative contracts that are indexed to our shares and classified as stockholders' equity or that are not reflected in our financial statements. Furthermore, we do not have any retained or contingent interest in assets transferred to an unconsolidated entity that serves as credit, liquidity or market risk support to such entity. We do not have any variable interest in any unconsolidated entity that provides financing, liquidity, market risk or credit support to us or engages in leasing, hedging or research and development services with us.

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