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SECURITIES AND EXCHANGE
COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K/A
(Amendment No. 1)
CURRENT REPORT
Pursuant to Section 13 or 15(d) of
the
Securities Exchange Act of
1934
Date of report (Date of earliest event
reported): August 13,
2010
UKARMA
CORPORATION
(Exact name of registrant as specified
in Charter)
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Nevada
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333-140633
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68-048-2472
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(State or other jurisdiction of
incorporation)
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(Commission File
No.)
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(IRS Employer Identification
No.)
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4000 Legato
Road, Suite 830 Fairfax,
VA 22033
(Address of Principal Executive
Offices)
(703)
766-1412
(Registrant’s telephone number,
including area code)
499 North
Canon Drive, Suite 308 Beverly
Hills,
CA 90210
(Former name or former address, if
changed since last report)
Check the appropriate box below if the
Form 8-K filing is intended to simultaneously satisfy the filing obligation of
the registrant under any of the following provisions (see General Instruction
A.2. below):
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o
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Written communications pursuant to
Rule 425 under the Securities Act (17 CFR
230.425)
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o
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Soliciting material pursuant to
Rule 14a-12 under the Exchange Act (17 CFR
240.14a-12)
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o
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Pre-commencement communications
pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR
240.14d-2(b))
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Pre-commencement communications
pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR
240.13e-4(c))
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Forward-Looking
Statements
This Current Report on Form 8-K (“Form
8-K”) and other reports filed by us from time to time with the Securities and
Exchange Commission (collectively, the “Filings”) contain or may contain
forward-looking statements and information that are based upon management’s
beliefs of, and information currently available to management, as well as
estimates and assumptions made by management. When used in the filings, the
words “anticipate,” “believe,” “estimate,” “expect,” “future,” “intend,” “may,”
“plan,” or the negative of these terms and similar expressions as they relate to
us or our forward-looking statements. Such
statements reflect our current view with respect to future events and are
subject to risks, uncertainties, assumptions and other factors (including the
risks contained in the section of this report entitled “Risk 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.
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. The following
discussion should be read in conjunction with our pro forma financial statements
and the related notes filed with this Form 8-K.
In this Form 8-K, references to “we,”
“our,” “us,” “Innolog,” “Innovative,” the “Company,” or the “Registrant” refer
to uKarma Corporation
(which the parties intend to be known as Innolog Holdings
Corporation after this transaction has closed after
the subsidiary changes its name from Innolog Holdings Corporation to Innolog
Group Corporation), a
Nevada corporation and Innovative Logistics Techniques
Inc., a Virginia
corporation, a wholly-owned subsidiary of
Innolog.
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Item 1.01
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Modification of a Material Definitive
Agreement
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On August 11, 2010, we, GCC Merger Sub
Corp., our wholly-owned Nevada subsidiary (“Merger Sub”), Galen
Capital Corporation, a Nevada corporation (“Galen”), and Innolog
Holdings Corporation, a Nevada corporation (“Innolog”) entered into an
Amended and Restated Merger Agreement (“New Agreement”). The New
Agreement provided that Innolog would be merged with Merger Sub such that
Innolog would be our wholly-owned subsidiary
(“Acquisition”). Pursuant to the Acquisition, Innolog common
shareholders received one share of our common stock for every share of Innolog
common stock they held (“Common Stock Ratio”). Likewise, holders of
Innolog Series A Preferred Stock
received one share of our Series A Preferred
Stock for every share of Innolog Series A Preferred Stock they
held. Holders of options and warrants to purchase Innolog common
stock received comparable options and warrants to purchase uKarma common stock
with the exercise price and number of underlying uKarma shares proportional to
the Common Stock Ratio. Innolog would also pay uKarma $525,000 in
cash (which included past advances from Galen) in connection with the intended
acquisition.
The New Agreement amended and restated
the Merger Agreement dated as of October 15, 2009, by and among us, Merger Sub and
Galen. This agreement was amended by Amendment No. 1 on December 5, 2009 and Amendment No. 2 on May 15, 2010 (as amended, the “Prior
Agreement”). The Prior Agreement provided that Galen would merge into
GCC Merger Sub Corp. and that Galen would become our wholly-owned
subsidiary. Galen would also pay uKarma $525,000 in connection with
the intended acquisition. The New Agreement modifies the Prior
Agreement such that, among other things, uKarma would acquire Innolog, instead
of Galen.
Innolog is a solutions oriented organization
providing supply chain logistics and information technology solutions to clients
in the public and private sectors. The 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.
As a result of the Acquisition, the Innolog shareholders became our controlling shareholders, and Innolog Holdings Corporation
became our wholly owned subsidiary. In connection with acquiring Innolog Holdings Corporation
we indirectly acquired the business and operations of
Innolog Holdings Corporation’s wholly owned subsidiary, Innovative Logistics
Techniques, Inc., a Virginia corporation (“Innovative”).
Concurrently with the Merger Agreement,
uKarma’s current existing operations were assigned to a wholly-owned
subsidiary called Awesome Living, Inc.
(“AL”). Our Board of Directors and shareholders holding a majority of
the then outstanding common stock approved a spin-off of AL equity securities to our common
shareholders of record as of August 12, 2010. This securities under
this spin-off is intended to be distributed after AL files a Form 10 with the Securities and
Exchange Commission and we distribute an Information Statement to the spin-off
recipients. If for any reason the spin-off cannot be accomplished,
the parties will have
either, (a) discontinued all of its business operations of AL without any material adverse effect upon
uKarma, or (b) assigned its business operations to a
wholly-owned subsidiary whose equity securities will be spun-off by uKarma to an
affiliate of uKarma management in exchange for a promissory note equal to the
dollar amount of such business operations offset by assumed
liabilities.
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Merger
Under the Merger Agreement, the Company
completed the acquisition of all of the equity interests of Innolog Holdings
Corporation held by all
equity holders of Innolog
(“Innolog Owners”) through the issuance of 8,882,455 shares of common stock of the Company
and 36,964,758 restricted shares of convertible
Series A Preferred Stock to the Innolog Owners. Immediately
prior to the Merger Agreement transaction, the Company had 4,747,319 shares of common stock issued and
outstanding. Immediately after the issuance of the shares to the Innolog Owners,
the Company had 13,629,774 shares of common stock issued and
outstanding and 36,964,758 shares of convertible Series A preferred stock issued and
outstanding.
Also in connection with the Closing, all
of the Company’s directors and officers resigned, and designees of Innolog Holdings
Corporation were appointed as new directors and officers of the Company following the
Closing.
The foregoing description of the Merger
Agreement is qualified in its entirety by the contents of such Merger Agreement,
which is attached as Exhibit 2.1 to this Form 8-K.
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Item 2.01
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Completion of Acquisition or
Disposition of Assets
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On August 13, 2010, we acquired a government
services business that specializes in logistical management pursuant to the Acquisition. Reference is made
to Item 1.01, which is incorporated herein, which summarizes the terms of the
purchase under the Merger Agreement.
From and after the Closing Date of the
Merger Agreement, our primary operations consist of the business and operations
of Innovative Logistics Techniques, Inc., which are conducted in the
United States. The assets and operations of our
business prior to the Closing Date have been assigned to a wholly-owned
subsidiary, Awesome Living, Inc. (“AL”). AL capital stock shall be
spun-off to all shareholders of the Company immediately prior to Closing,
Therefore, we disclose
information about the business, financial condition, and management of Innolog
Holdings Corporation in this Form 8-K.
BUSINESS
Overview
Innolog
Holdings Corporation was formed in March, 2009 for the purpose of operating
companies that provide services primarily to federal government
entities. Innolog plans to grow its business organically as well as
through acquisition. Our primary subsidiary, Innovative Logistics
Techniques, Inc.(“Innovative”) brings leading edge, process oriented thinking to
government customers by providing practical logistics solutions to the U.S.
military and civilian agencies as well as state and local
governments. We currently operate 5 offices and employ 51
employees.
Corporate
History
The
Company was originally incorporated as “OM Capital Corporation.” in Nevada on
June 26, 2001. Our corporate name changed to “uKarma Corporation” on
April 30, 2004. In connection with the Acquisition, we intend to
change our name from uKarma Corporation to Innolog Holdings Corporation as
diligently as possible after the closing of the Acquisition. Refer to
the discussion under Item 1.01 for further information
Innolog
Holdings & Innovative Logistics Techniques History and
Organization
Innolog
Holdings Corporation was formed in March, 2009 for the purpose of operating
companies that provide services primarily to federal government entities and
plan to grow organically as well as via acquisition. We acquired
Innovative effective as of March 31, 2009. Innovative brings leading
edge, process oriented thinking to government customers by providing logistics
solutions to the U.S. military agencies, such as the Army Corp of Engineers and
civilian agencies such as the Department of Interior as well as state and local
governments.
Innovative
was founded in 1989 by retired Army Colonel, Verle Hammond. Since its
founding, Innovative has grown to become one of the nation’s leading providers
of logistics, systems engineering, information services and supply chain
management providers in the federal, state and local government
markets.
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Offices and Website
Innolog
Holdings Corporation maintains five offices. Three are in the
Washington D.C. area along with offices in Nashville, Tennessee and Orlando,
Florida. Our headquarters is located at 4000 Legato Road Fairfax,
Virginia 22033, We also operate informational websites located at
www.innologholdings.com and www.innolog.com. The information on these websites
is not incorporated herein by reference.
Industry Overview &
Background
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 each
year since 1980. INPUT, an independent federal government market research firm,
expects this trend to continue, with federal government spending on information
technology forecasted to increase from approximately $76 billion in federal
fiscal year 2009 to $90 billion in federal fiscal year 2014. 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 will continue
to drive increased spending and dependence on technology support
contractors.
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Increased
Spending on Defense and Intelligence to Combat Terrorist
Threats
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The
Department of Defense is the largest purchaser of services and solutions in the
federal government. For federal fiscal year 2010, President Obama signed a
bill that authorizes $636 billion in defense spending, including Overseas
Contingency Operations (OCO) funding of $128 billion and submitted a request for
an additional $33 billion in OCO funding. For federal fiscal year 2011, the
Obama administration has submitted a defense budget of $708 billion, including
$159 billion for OCO. The Intelligence Community is another significant source
of our revenue base. The intelligence budget for federal fiscal year 2009
totaled approximately $50 billion (not including another $25 billion funded
within the defense budget as the Military Intelligence Program (MIP)), a 5%
increase from federal fiscal year 2008 and a compound annual growth rate of 6%
over the last eleven years when it totaled $27 billion in federal fiscal year
1998. The vast majority of the growth has taken place after the 2001 terrorist
attacks, which created an urgent need to confront Al Qaeda and its allies with
enhanced intelligence efforts. The global threat of terrorism has not diminished
and we believe that the Intelligence Community will continue to see growth in
its budget.
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Increased
Spending on Cyber Security
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The
Comprehensive National Cyber Initiative (CNCI), which is mostly classified, is
focused on securing the government’s cyber networks and involves all agencies of
the federal government over the next five to ten years. INPUT forecasts that
federal spending on Cyber & Information Security will increase from
approximately $8 billion in federal fiscal year 2009 to approximately $12
billion in federal fiscal year 2014, an 8% compound annual growth rate over the
next five years. Recent reports of cyber attacks on Google and others from China
underscore the urgency of this problem.
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Continuing
Focus on Information Sharing, Data Interoperability and
Collaboration
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We
believe intelligence agencies will increase their demand for data and text
mining solutions to enable them to extract, analyze and present data gathered
from the massive volumes of information available through open sources such as
the Internet. This increased focus on national security, homeland security and
intelligence has also reinforced the need for interoperability among the many
disparate information technology systems throughout the federal government. We
believe the Department of Homeland Security and the intelligence agencies will
continue to be interested in enterprise systems that enable better coordination
and communication within and among agencies and departments. The
December 25, 2009 attempted terrorist attack on a Northwest Airlines flight
demonstrates the vulnerabilities when agencies fail to properly access,
synthesize and process all of the information known to other various components
of government.
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Reliance
on Technology Service Providers
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The
demand for technology service providers is expected to increase due to the need
for federal agencies to maintain core operational functions while maintaining
and updating technology across their enterprises. Given the difficulty the
federal government has experienced in hiring and retaining skilled technology
personnel in recent years, we believe the federal government will need to rely
heavily on technology service providers that have experience with government
legacy systems, can sustain mission-critical operations and have the required
government security clearances to deploy qualified personnel in classified
environments. In addition, with active engagements in Iraq and Afghanistan,
our Defense customers need to focus their internal resources on combat
operations and are turning to contractors for many support operations such as
logistics.
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Inherent
Weaknesses of Federal Personnel
Systems
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The
fundamental design of U.S. military and federal civil service personnel systems
creates the need for industry support as well as provides a key source of
talent. The government biases its compensation system towards retirement
benefits and offers relatively early opportunities to retire. Retiring
government employees are often at the prime of their career and offer an
attractive labor pool to industry. Moreover, the military service and to a
certain extent the civil service aim to create well-rounded generalists, which
requires their best talent to change jobs every 18 months to three years. This
practice effectively trains senior officers and executives, but it creates a
void of deep domain and technical expertise that is often filled by industry.
Retired military and government workers are attracted to these positions because
they offer long-term stability and a compensation strategy based on take-home
pay. The federal government faces a growing number of retirement-eligible
employees over the next ten years as the baby-boom generation ages, and industry
will benefit from this growing talent pool.
Finally,
we see two opposing trends that both enhance our ability to recruit and retain.
Many civil servants are frustrated with the constant churn of their immediate
leadership as well as the perceived pressure to work only a 40-hour work week
during a time of war. Conversely, in the current environment many military
personnel are stressed by multiple deployments with too little time in between.
Both of these pools are attracted by a reasonable balance between commitment to
mission and family. We believe these trends will continue and likely
increase.
Innolog Holdings
Corporation was formed for the purpose of operating, acquiring and enhancing
complementary companies that provide services primarily to federal government
entities. Our primary subsidiary, Innovative Logistics Techniques,
Inc. (“Innovative”) brings leading edge, process oriented thinking to government
customers by providing logistics, supply chain management and engineering
solutions to the U.S. military, civilian agencies as well as state and local
governments. The vision of Innolog Holdings Corporation is
to:
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1)
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Grow
the best in breed logistics, engineering, supply chain and asset
management businesses.
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a)
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Innolog
Holdings and Innovative are focused on organically growing the existing
service offering by continuing to offer world class, highly effective
services to its current customer base. Our experience shows
that by providing highly effective contracting programs, the result is
additional work and deeper penetration among the current customer base.
Additionally, strong historic results and existing technical expertise
(known as “Qualifications” or “Quals” for short) are highly effective
tools in soliciting new business with new customers across the Department
of Defense and civilian government
agencies.
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2)
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Introduce
Government healthcare services and other complementary capabilities to the
Department of Defense, other government agencies and the civilian
market.
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a)
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We
are currently utilizing this strategy to expand our core logistics
business into the government healthcare services space, initially
targeting the logistical and tracking needs of the U.S. Department of
Veterans Affairs. We began this process through a joint
marketing relationship with JONA, Inc. JONA is a healthcare
focused firm providing multiple healthcare management solutions to both
government healthcare customers and civilian healthcare
systems. Our core expertise in logistics and asset management
can also be applied to other agencies outside of the Department of
Defense. Over time, Innolog may offer further strategic services across
multiple industry sectors, directly or through additional joint
ventures.
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3)
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Make
strategic acquisitions of other small and midsized defense
contractors.
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a)
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Innolog
Holdings Corporation is actively seeking acquisitions of defense
contractors that offer complementary or supplementary services in the
federal marketplace. Acquisitions will be focused on government
contractors providing Logistics, Supply Chain Management, Asset
Management, Engineering Services, and Government Healthcare
services. We will focus our efforts on companies that are
headquartered in the Washington, D.C. metropolitan area and are cash flow
breakeven or cash flow positive. Further, we are initially
looking for companies with $5 to $15 million in revenue, although that
criteria will change as the Company grows. Finally, we are
looking for companies that can bring top quality management to augment our
existing management team.
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Customers
We
provide logistics, systems engineering, information services and supply chain
management services to government customers including multiple
customers in the defense sector as well as the civil & commercial
sectors. Within the defense sector, present and past customers
include the Army Material Command, Office of Naval Research & Naval Research
Laboratory, Department of State, Department of Homeland Security, Defense
Logistics Agency, U.S. Coast Guard, U.S. Army TACOM Life Cycle Command, Army
Sustainment Command, Naval Air Warfare Center, SPAWAR System Center and
TRANSCOM, among others. Civil & Commercial customers have
included the FDIC, U.S. Census Bureau, Smithsonian Institute, Department of
Treasury and the General Services Administration among others. The
company also provides services to other government industry customers, providing
services primarily under subcontracting and teaming agreements with such
companies as Lockheed Martin, CACI, Computer Sciences Corporation, Northrop
Grumman, Boeing, Battelle Memorial Institute, Mantech International and
others. In 2009, no single customer represented more than 21% of
total sales. The single largest customer in 2009 was TACOM which generated
approximately 20% of total sales. Through March 2010, no single
customer represented more than 31% of 2010 sales. The single largest customer
through March 2010 was Navy Research Laboratory which generated approximately
30% of total sales.
Quality Control
Innovative
Logistics Techniques is committed to providing customers quality logistics
solutions enhanced by the targeted application of advanced technology through
the development and continual improvement of our quality management system.
Innolog is certified to ISO-9000, the International Standard for a Quality
Management System. The ISO-9000 certification is based on a business
common sense, documented system focused on consistency, reliability and
improving the way a business operates. Maintaining this certification
demonstrates to customers the Company’s commitment to quality.
Competition
Our key
competitors currently include divisions of large defense contractors as well as
mid-size and small defense contractors with specialized
capabilities. Such competitors include Computer Sciences Corporation,
Lockheed Martin Corporation, Northrop Grumman Corporation, Science Applications
International Corporation, Unisys Corporation, Camber Corporation, Metters
Industries, Binary Consulting, and Calibre Systems. Because of the
diverse requirements of U.S. government customers and the highly competitive
nature of large procurements, corporations frequently form teams to pursue
contract opportunities. The same companies listed as competitors will, at times,
team with us, subcontract to us or ask that we subcontract to them in the
pursuit of new business. We believe that the major competitive factors in our
market are distinctive technical competencies, successful past contract
performance, intelligence and military work experience, price of services,
reputation for quality and key management with domain expertise.
Marketing, Advertising and Promotional
Activities
We plan
to use future capital-raising activities and cash generated from operations for
acquisitions, marketing and promotions in an effort to build brand awareness,
improve marketing efficiencies and reduce customer acquisition
costs. We also plan to participate in the industry’s leading trade
shows, use radio and print advertising and other marketing tools, to raise
awareness of Innolog Holdings Corporation. We also use web-based
promotion tools on our websites and ‘leave behind’ brochures and capability
briefings to educate potential customers on the value and service we
provide.
Intellectual Property
Rights
While
employing proprietary workplace methodologies and implementation procedures,
Innolog Holdings Corporation and its subsidiaries do not own or maintain any
patents, trademarks or copyrights. All employees are required to sign
inventions assignment and proprietary information agreements.
Employees
Innolog
Holdings Corporation along with its primary operating subsidiary, Innovative
Logistics Techniques, Inc., has approximately 51 full-time
employees. In addition, the company employs a number of
part-time employees, contractors and consultants. Of our overall
employee base, approximately 37% hold ‘Secret’ security clearances and an
additional 31% hold Top Secret level clearances. The company is not
affiliated with any union or collective bargaining agreement. Management
believes that its relationship with our employees is good.
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Corporate
Information
Our
principal executive offices are located at 4000 Legato Road, Suite 830, Fairfax,
VA 22033. Our main telephone number is (703) 766-1412, and our fax number is
(703) 766-1425.
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RISK FACTORS
You should carefully consider the risks
described below together with all of the other information included in this
report. The statements contained in or incorporated into this report that are
not historic facts are forward-looking statements that are subject to risks and
uncertainties that could cause actual results to differ materially from those
set forth in or implied by forward-looking statements. If any of the following
risks actually occurs, our business, financial condition or results of
operations could be harmed. In that case, the trading price of our common stock
could decline, and you may lose all or part of your
investment.
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A)
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RISKS
RELATED TO CHANGES IN ECONOMIC AND POLITICAL
CLIMATE
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Current
or worsening economic conditions could adversely affect our
business.
The
United States and global economies are currently experiencing a period of
substantial economic uncertainty with wide-ranging effects, including the
disruption of global financial markets. Some, but not all, of the possible
effects of these economic events are outlined in the risk factors described
below, including those relating to levels and priorities of federal and state
spending, access to capital and credit markets, effects on commercial and other
clients, and potential impairment of our goodwill and other long-lived assets.
Although governments worldwide, including the federal government, have initiated
actions in response to the current situation, we are unable to predict the
impact, severity, and duration of these economic conditions. The economic
environment or related factors may adversely impact our business, financial
condition, results of operations, cash flows, and/or stock price.
The
combination of the adverse economic climate and challenges faced by federal and
state governments could result in changes in spending priorities and adversely
affect our ability to grow or maintain our revenues and
profitability.
The
combination of the challenging economic climate, related budgetary pressures at
the federal and state levels, the wide range of issues facing the current
presidential administration in the United States (that may have, or be forced to
have, spending priorities that are disadvantageous to us, including a focus on
economic stimulus and regulatory reform), and changes in the composition of the
U.S. Congress may affect agencies, departments, projects, or programs we
currently support, or that we may seek to support in the future. The programs
and projects we support must compete with other programs and projects for
consideration during budget formulation and appropriation processes, and may be
affected by the general economic conditions. Budget decisions made in this
environment are difficult to predict and may have long-term consequences for
certain programs and projects. We believe that many of the programs and projects
we support are a high priority, and that changing priorities may present
opportunities for us, but there remains the possibility that one or more of the
programs and projects we support will be reduced, delayed, or terminated. We
engage in a number of programs and projects that may be perceived as being
favored by the presidential administration and may receive funding under the
American Recovery and Reinvestment Act. On the other hand, the President has
recently proposed a freeze on the federal government’s non-security
discretionary funding for three years. This freeze may affect some programs and
projects more than others and may adversely affect programs and projects we
support. Reductions in, or delays or terminations of, any of the existing
programs or projects we support, or of anticipated programs and projects, unless
offset by other programs, projects, or opportunities, could adversely affect our
ability to grow or maintain our revenues and profitability. We are focused on
meeting these challenges and taking advantage of related opportunities. If we
are not successful in this effort, we may not be able to grow or maintain our
revenues and profitability.
Recent
levels of market volatility are unprecedented and adverse capital and credit
market conditions may affect our ability to access cost-effective sources of
funding.
The
capital and credit markets recently have been experiencing extreme volatility
and disruption. Liquidity has contracted significantly, borrowing rates have
varied significantly, and borrowing terms have become more restrictive.
Historically, we have believed that we could access these markets to support our
business activities, including operations, acquisitions, and refinancing debt.
In the future, we may not be able to obtain credit or capital market financing
(such as through equity offerings) on acceptable terms, or at all, which could
have an adverse effect on our financial position, results of operations, and
cash flows. In addition, the state of the capital and credit markets could also
affect other entities with which we do business, including our commercial and
other clients and our suppliers, subcontractors, and team members, which could
also have an adverse effect on our financial position, results of operations,
and cash flows.
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B)
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RISKS
RELATED TO OUR INDUSTRY
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We
rely substantially on government clients for our revenue, and government
spending priorities may change in a manner adverse to our business.
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We derive
100% of our revenue directly or indirectly (through subcontracts with
U.S. Government prime contractors) from contracts with federal & state
government agencies and departments. Virtually all of our major
government clients have experienced reductions in budgets at some time, often
for a protracted period, and we expect similar reductions in the future.
Expenditures by our federal clients may be restricted or reduced by presidential
or congressional action or by action of the Office of Management and Budget or
otherwise limited. In addition, many states are not permitted to operate with
budget deficits, and nearly all states face considerable challenges in balancing
budgets that anticipate reduced revenues. In such a situation, a state which has
recently been dealing with a multi-billion-dollar budget deficit
may delay some payments due to us, may eventually fail to pay what
they owe us, and may delay some programs and projects. For some clients, we may
face an unwelcome choice: turn down (or stop) work with the risk of damaging a
valuable client relationship, or perform work with the risk of not getting paid
in a timely fashion or perhaps at all. For a discussion of the risks associated
with incurring costs before a contract is executed or appropriately modified,
see “Risks Related to Our Business—We sometimes incur costs before a contract is
executed or appropriately modified. To the extent a suitable contract or
modification is not subsequently signed or we are not paid for our work, our
revenue and profit will be reduced.”
Federal,
state, and local elections could also affect spending priorities and budgets at
all levels of government, and the current national and worldwide economic
downturn may result in changes in government priorities in ways that could be
disadvantageous to us. For example, addressing the financial crisis and economic
downturn has required the use of substantial government resources, which may
lower the amounts available for agencies, departments, projects, or programs we
support. In addition, some governments may not have sufficient resources to
continue spending at previous levels. A decline in expenditures, or a shift in
expenditures away from agencies, departments, projects, or programs that we
support, whether to pay for other programs or projects within the same or other
agencies or departments, to reduce budget deficits, to fund tax reductions, or
for other reasons, could materially adversely affect our business, prospects,
financial condition, or operating results. Moreover, the perception that a cut
in appropriations or spending may occur, such as the recent proposal by the
President to limit certain spending, could adversely affect investor sentiment
about our stock and cause our stock price to fall.
The
failure of Congress to approve budgets in a timely manner for the federal
agencies and departments we support could delay and reduce spending and cause us
to lose revenue and profit.
On an
annual basis, Congress must approve budgets that govern spending by each of the
federal agencies and departments we support. When Congress is unable to agree on
budget priorities, and thus is unable to pass the annual budget on a timely
basis, it typically enacts a continuing resolution. Continuing resolutions
generally allow federal agencies and departments to operate at spending levels
based on the previous budget cycle. When agencies and departments must operate
on the basis of a continuing resolution, funding we expect to receive from clients for work we are already performing and new initiatives
may be delayed or cancelled. Thus, the failure by Congress to approve budgets in
a timely manner can result in the loss of revenue and profit in the event
federal agencies and departments are required to cancel or change existing or
new initiatives, or the deferral of revenue and profit to later periods due to
delays in implementing existing or new initiatives. The budgets of many of our
state and local government clients are also subject to similar budget processes,
and thus subject us to similar risks and uncertainties.
Our
failure to comply with complex laws, rules, and regulations relating to
government contracts could cause us to lose business and subject us to a variety
of penalties.
We must
comply with laws, rules, and regulations relating to the formation,
administration, and performance of government contracts, which affect how we do
business with our government clients and impose added costs on our business.
Each government client has its own laws, rules, and regulations affecting its
contracts. Among the more significant strictures affecting federal government
contracts are:
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the
Federal Acquisition Regulation, and agency regulations analogous or
supplemental to it, which comprehensively regulate the formation,
administration, and performance of federal government
contracts;
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the
Truth in Negotiations Act, which requires certification and disclosure of
cost and pricing data in connection with some contract
negotiations;
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the
Procurement Integrity Act, which, among other things, defines standards of
conduct for those attempting to secure federal contracts, prohibits
certain activities relating to federal procurements, and limits the
employment activities of certain former federal
employees;
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the
Cost Accounting Standards, which impose accounting requirements that
govern our right to payment under federal contracts;
and
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laws,
rules and regulations restricting (i) the use and dissemination of
information classified for national security purposes, (ii) the
exportation of specified products, technologies, and technical data, and
(iii) the use and dissemination of sensitive but unclassified
data.
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9
The
federal government and other governments with which we do business may in the
future change their procurement practices or adopt new contracting laws, rules,
or regulations, including cost accounting standards, that could be costly to
satisfy or that could impair our ability to obtain new contracts. Any failure to
comply with applicable federal, state, or local strictures could subject us to
civil and criminal penalties and administrative sanctions, including termination
of contracts, repayment of amounts already received under contracts, forfeiture
of profits, suspension of payments, fines, and suspension or debarment from
doing business with federal and even state and local government agencies and
departments, any of which could adversely affect our reputation, our revenue,
our operating results, and the value of our stock. Failure to abide by laws
applicable to our work for governments outside the United States could have
similar effects. Unless the content requires otherwise, we use the term
“contracts” to refer to contracts and any task orders or delivery orders issued
under a contract.
Unfavorable
government audit results could force us to adjust previously reported operating
results, could affect future operating results, and could subject us to a
variety of penalties and sanctions.
The
federal government and many states audit and review our contract performance,
pricing practices, cost structure, financial responsibility, and compliance with
applicable laws, regulations, and standards. Like most major government
contractors, we have our business processes, financial information, and
government contracts audited and reviewed on a continual basis by federal
agencies, including the Defense Contract Audit Agency. Audits, including audits
relating to companies we have acquired or may acquire or subcontractors we have
hired or may hire, could raise issues that have significant adverse effects on
our operating results. For example, audits could result in substantial
adjustments to our previously reported operating results if costs that were
originally reimbursed, or that we believed would be reimbursed, are subsequently
disallowed, or if invoices that have been paid, or that we
expected to be paid, are subsequently rejected, or otherwise not paid in full.
In addition, cash we have already collected may need to be refunded, past and
future operating margins may be reduced, and we may need to adjust our
practices, which could reduce profit on other past, current, and future
contracts. Moreover, a government agency could withhold payments due to us under
a contract pending the outcome of any investigation with respect to a contract
or our performance under it.
If a
government audit, review, or investigation uncovers improper or illegal
activities, we may be subject to civil and criminal penalties and administrative
sanctions, including termination of contracts, repayment of amounts already
received under contracts, forfeiture of profits, suspension of payments, fines,
and suspension or debarment from doing business with federal and even state and
local government agencies and departments. We may also lose business if we are
found not to be sufficiently financially responsible. In addition, we could
suffer serious harm to our reputation and our stock price could decline if
allegations of impropriety are made against us, whether or not true. Federal
DCAA audits have been completed on our incurred contract costs through 2005;
audits for costs incurred on work performed since then have not yet been
completed. In addition, non-audit reviews by the government may still be
conducted on all our government contracts.
If
significant civil or criminal penalties or administrative sanctions are imposed
on us or if the federal or state governments otherwise cease doing business with
us or significantly decrease the amount of business they do with us, our revenue
and operating results would be materially harmed.
Our
government contracts contain provisions that are unfavorable to us and permit
our government clients to terminate our contracts partially or completely at any
time prior to completion.
Our
government contracts contain provisions not typically found in commercial
contracts, including provisions that allow our clients to terminate or modify
these contracts at the government’s convenience upon short notice. If a
government client terminates one of our contracts for convenience, we may only
bill the client for work completed prior to the termination, plus any project
commitments and settlement expenses the client agrees to pay, but not for any
work not yet performed. In addition, many of our government contracts and task
and delivery orders are incrementally funded as appropriated funds become
available. The reduction or elimination of such funding can result in options
not being exercised and further work on existing contracts and orders being
curtailed. In any such event, we would have no right to seek lost fees or other
damages. If a government client were to terminate, decline to exercise an option
under, or curtail further performance under one or more of our significant
contracts, our revenue and operating results would be materially
harmed.
Adoption
of new procurement practices or contracting laws, rules, and regulations and
changes in existing procurement practices or contracting laws, rules, and
regulations could impair our ability to obtain new contracts and cause us to
lose revenue and profit.
In the
future, the federal government may change its procurement practices or adopt new
contracting laws, rules, or regulations that could cause its agencies and
departments to curtail the use of services firms or increase the use of
companies with a “preferred status,” such as small businesses. For example,
legislation restricting the procedure by which services are outsourced to
federal contractors has been proposed in the past, and if such legislation were
to be enacted, it would likely reduce the amount of services that could be
outsourced by the federal government. Any such changes in procurement practices
or new contracting laws, rules, or regulations could impair our ability to
obtain new contracts and materially reduce our revenue and profit. Other
government clients could enact changes to their procurement laws and regulations
that could have similar adverse effects on us.
10
In
addition, our business activities may be or may become subject to international,
foreign, U.S., state, or local laws or regulatory requirements that may limit
our strategic options and growth and may increase our expenses
and reduce our revenue and profit, negatively affecting the value of our stock.
We generally have no control over the effect of such laws or requirements on us
and they could affect us more than they affect other companies.
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C)
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RISKS
RELATED TO OUR BUSINESS
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We
depend on contracts with federal agencies and departments for a substantial
portion of our revenue and profit, and our business, revenue, and profit levels
could be materially and adversely affected if our relationships with these
agencies and departments deteriorate.
We derive
100% of our revenue directly or indirectly (through subcontracts with
U.S. Government prime contractors) from contracts with federal & state
government agencies and departments. We believe that federal
contracts will continue to be a significant source of our revenue and profit for
the foreseeable future.
Because
we have a large number of contracts with our clients, we continually bid for and
execute new contracts, and our existing contracts continually become subject to
recompetition and expiration. Upon the expiration of a contract, we typically
seek a new contract or subcontractor role relating to that client to replace the
revenue generated by the expired contract. There can be no assurance that the
requirements those expiring contracts were satisfying will continue after their
expiration, that the client will re-procure those requirements, that any such
re-procurement will not be restricted in a way that would eliminate us from the
competition (e.g., set aside for small business), or that we will be successful
in any such re-procurements. If we are not able to replace the revenue from
these contracts, either through follow-on contracts or new contracts for those
requirements or for other requirements, our revenue and operating results will
be materially harmed.
Among the
key factors in maintaining our relationships with government agencies and
departments (and other clients) are our performance on individual contracts, the
strength of our professional reputation, and the relationships of our managers
with client personnel. Because we have many contracts, we expect disagreements
and performance issues with clients to arise from time to time. To the extent
that such disagreements arise, our performance does not meet client
expectations, our reputation or relationships with one or more key clients are
impaired, or one or more important client personnel leave their employment, are
transferred to other positions, or otherwise become less involved with our
contracts, our revenue and operating results could be materially harmed. Our
reputation could also be harmed if we work on or are otherwise associated with a
project that receives significant negative attention in the news media or
otherwise for any reason.
Our
dependence on GSA Schedule and other IDIQ contracts creates the risk of
increasing volatility in our revenue and profit levels.
We
believe that one of the key elements of our success is our position as a prime
contractor under GSA Schedule contracts and other IDIQ contracts. As these types
of contracts have increased in importance over the last several years, we
believe our position as a prime contractor has become increasingly important to
our ability to sell our services to federal clients. However, these contracts
require us to compete for each delivery order and task order, rather than having
a more predictable stream of activity and, therefore, revenue and profit, during
the term of a contract. There can be no assurance that we will continue to
obtain revenue from such contracts at these levels, or in any amount, in the
future. To the extent that federal agencies and departments choose to employ GSA
Schedule and other contracts encompassing activities for which we are not able
to compete or provide services, we could lose business, which would negatively
affect our revenue and profitability.
We
may not receive revenue corresponding to the full amount of our backlog, or may
receive it later than we expect, which could materially and adversely affect our
revenue and operating results.
The
calculation of backlog is highly subjective and is subject to numerous
uncertainties and estimates, and there can be no assurance that we will in fact
receive the amounts we have included in our backlog. Our assessment of a
contract’s potential value is based on factors such as the amount of revenue we
have recently recognized on that contract, our experience in utilizing contract
capacity on similar types of contracts, and our professional judgment. In the
case of contracts that may be renewed at the option of the client, we generally
calculate backlog by assuming that the client will exercise all of its renewal
options; however, the client may elect not to exercise its renewal options. In
addition, federal contracts rely on congressional appropriation of funding,
which is typically provided only partially at any point during the term of
federal contracts, and all or some of the work to be performed under a contract
may require future appropriations by Congress and the subsequent allocation of
funding by the procuring agency to the contract. Our estimate of the portion of
backlog that we expect to recognize as revenue in any future period is likely to
be inaccurate because the receipt and timing of this revenue often depends on
subsequent appropriation and allocation of funding and is subject to various
contingencies, such as timing of task orders and delivery orders, many of which
are beyond our control. In addition, we may never receive revenue from some of
the engagements that are included in our backlog, and this risk is greater with
respect to unfunded backlog and backlog related to IDIQ contracts. Further, the
actual receipt of revenue on engagements included in backlog may never occur or
the amount or timing of such revenue may change because client priorities could
change, a program or project schedule could change, the program or project could
be canceled, the government agency or other client could elect not to exercise
renewal options under a contract or could select other contractors to perform
services, or a contract could be reduced, modified, or terminated. Although we
adjust our backlog periodically to reflect modifications to or renewals of
existing contracts, awards of new contracts, or approvals of expenditures, if we
fail to realize revenue corresponding to our backlog, our revenue and operating
results could be materially adversely affected.
11
Because
much of our work is performed under task orders, delivery orders, and short-term
assignments, we are exposed to the risk of not having sufficient work for our
staff, which can affect revenue and profit.
We
perform some of our work under short-term contracts. Even under many of our
longer-term contracts, we perform much of our work under individual task orders
and delivery orders, many of which are awarded on a competitive basis. If we
cannot obtain new work in a timely fashion, whether through new contracts, task
orders, or delivery orders, modifications to existing contracts, task orders, or
delivery orders, or otherwise, we may not be able to keep our staff profitably
utilized. It is difficult to predict when such new work or modifications will be
obtained. Moreover, we need to manage our staff utilization carefully to ensure
that those with appropriate qualifications are available when needed and that
staff do not have excessive down-time when working on multiple projects, or as
projects are beginning or nearing completion. There can be no assurance that we
can profitably manage the utilization of our staff. In the short run, our costs
are relatively fixed, so sub-optimal staff utilization hurts revenue, profit,
and operating results.
Loss
of key members of our senior operating leadership team could impair our
relationships with clients and disrupt the management of our
business.
Although
the depth of our organization has grown in recent years, we believe that our
success depends on the continued contributions of the members of our senior
operating leadership. We rely on our senior leadership to generate business and
manage and execute projects and programs successfully. In addition, the
relationships and reputation that many members of our operating leadership team
have established and maintain with client personnel contribute to our ability to
maintain good client relations and identify new business opportunities. Apart
from our most senior executive officers, we do not generally have agreements
with members of our operating leadership providing for a specific term of
employment. The loss or rumored loss of any member of our senior operating
leadership could adversely affect our stock price.
If
we fail to attract and retain skilled employees, we will not be able to continue
to win new work, staff engagements, and sustain our profit margins and revenue
growth.
We must
continue to hire significant numbers of highly qualified individuals who have
technical skills and who work well with our clients. These employees are in
great demand and are likely to remain a limited resource for the foreseeable
future. If we are unable to recruit and retain a sufficient number of these
employees, our ability to staff engagements and to maintain and grow our
business could be limited. In such a case, we may be unable to win or perform
contracts, and we could be required to engage larger numbers of subcontractor
personnel, any of which could adversely affect our revenue, profit, operating
results, and reputation. We could even default under one or more contracts for
failure to perform properly in a timely fashion, which could expose us to
additional liability and further harm our reputation and ability to compete for
future contracts. In addition, some of our contracts contain provisions
requiring us to commit to staff an engagement with personnel the client
considers key to our successful performance under the contract. In the event we
are unable to provide these key personnel or acceptable substitutes, or
otherwise staff our work, the client may reduce the size and scope of our
engagement under a contract or terminate it, and our revenue and operating
results may suffer.
Growing
through acquisitions is a key element of our business strategy, and we are
constantly reviewing acquisition opportunities. These activities may involve
significant costs, be disruptive, or not be successful. These activities may
divert the attention of management from existing operations and
initiatives.
One of
our principal growth strategies is to make selective acquisitions. We believe
pursuing acquisitions actively is necessary for a public company of our size in
our business. As a result, at any given time, we may be evaluating several
acquisition opportunities. We may also have outstanding, at any time, one or
more expressions of interest, agreements in principle, letters of intent, or
similar agreements regarding potential acquisitions, which are subject to
completion of due diligence and other significant conditions, as well as
confidentiality agreements with potential acquisition targets. Our experience
has been that potential acquisition targets demand confidentiality as a matter
of course and allow relatively little due diligence before entering into a
preliminary agreement in principle. We insist on including due diligence and
other conditions in such preliminary agreements and engage in due diligence
prior to executing definitive agreements regarding potential acquisitions. We
find that potential acquisitions subject to preliminary agreements in principle
often are not consummated, or are consummated on terms materially different than
those to which the parties initially agreed. Accordingly, our normal practice is
not to disclose potential acquisitions until definitive agreements are executed
and, in some cases, material conditions & precedent are
satisfied.
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When we
are able to identify an appropriate acquisition candidate, we may not be able to
negotiate the price and other terms of the acquisition successfully or finance
the acquisition on terms satisfactory to us. Our out-of-pocket expenses in
identifying, researching, and negotiating potential acquisitions has been and
will likely continue to be significant, even if we do not ultimately acquire
identified businesses. In addition, negotiations of potential acquisitions and
the integration of acquired business operations may divert management attention
away from day-to-day operations and may reduce staff utilization and adversely
affect our revenue and operating results.
When
we undertake acquisitions, they may present integration challenges, fail to
perform as expected, increase our liabilities, and/or reduce our
earnings.
When we
complete acquisitions, it may be difficult and costly to integrate the acquired
businesses due to differences in the locations of personnel and facilities,
differences in corporate cultures, disparate business models, or other reasons.
If we are unable to integrate companies we acquire successfully, our revenue and
operating results could suffer. In addition, we may not be successful in
achieving the anticipated cost efficiencies and synergies from these
acquisitions, which could include offering our services to existing clients of
acquired companies or offering the services of acquired companies to our
existing clients to increase our revenue and profit. In fact, our costs for
managerial, operational, financial, and administrative systems may increase and
be higher than anticipated. We may also experience attrition, including key
employees of acquired and existing businesses, during and following integration
of an acquired business into our Company. We could also lose business during any transition, whether related to this attrition
or caused by other factors. Any attrition or loss of business could adversely
affect our future revenue and operating results and prevent us from achieving
the anticipated benefits of the acquisition. In addition, acquisitions of
businesses or other material operations may require additional debt or equity
financing or both, resulting in additional leverage or dilution of ownership, or
both.
Businesses
we acquire may have liabilities or adverse operating issues, or both, that we
fail to discover through due diligence or the extent of which we underestimate
prior to the acquisition. These liabilities and/or issues may include failure to
comply with, or other violations of, applicable laws, rules, or regulations or
contractual or other obligations or liabilities. We, as the successor owner, may
be financially responsible for, and may suffer harm to our reputation and
otherwise be adversely affected by, such liabilities and/or issues. An acquired
business also may have problems with internal controls over financial reporting,
which could in turn lead us to have significant deficiencies or material
weaknesses in our own internal controls over financial reporting. These and any
other costs, liabilities, issues, and/or disruptions associated with any of our
past acquisitions or any future acquisitions could harm our operating
results.
As
a result of future acquisitions, we may accumulate substantial amounts of
goodwill and intangible assets. Any changes in business conditions
could cause these assets to become impaired, requiring substantial write-downs
that would adversely affect our operating results.
All of
our acquisitions have been accounted for as purchases and involved purchase
prices well in excess of tangible asset values, resulting in the creation of a
significant amount of goodwill and other intangible assets. We plan to continue
acquiring businesses if and when opportunities arise, further increasing these
amounts. Under generally accepted accounting principles, we do not amortize
goodwill and intangible assets acquired in a purchase business combination that
are determined to have indefinite useful lives, but instead review them annually
(or more frequently if impairment indicators arise) for impairment. To the
extent that we determine that such an asset has been impaired, we will write
down its carrying value on our balance sheet and book an impairment charge in
our statement of earnings.
We
face intense competition from many firms that have greater resources than we do,
as well as from smaller firms that have narrower service offerings and serve
niche markets. This competition could result in price reductions, reduced
profitability, and loss of market share.
We
operate in highly competitive markets and generally encounter intense
competition to win contracts, task orders, and delivery orders. If we are unable
to compete successfully for new business, our revenue and operating margins may
decline. Many of our competitors are larger and have greater financial,
technical, marketing, and public relations resources, larger client bases, and
greater brand or name recognition than we do. We also have numerous smaller
competitors, many of which have narrower service offerings and serve niche
markets. Our competitors may be able to compete more effectively for contracts
and offer lower prices to clients, causing us to lose contracts, as well as
lowering our profit or even causing us to suffer losses on contracts that we do
win. Some of our subcontractors are also competitors, and some of them may in
the future secure positions as prime contractors, which could deprive us of work
we might otherwise have won under such contracts. On contracts where we are a
subcontractor, the prime contractors or our teaming partners may also deprive us
of work we might otherwise have performed. Our competitors may be able to
provide clients with different and greater capabilities and benefits than we can
provide in areas such as technical qualifications, past performance on relevant contracts, geographic presence, ability to keep pace
with the changing demands of clients, and the availability of key personnel. Our
competitors also have established or may establish relationships among
themselves or with others, or may, through mergers and acquisitions, increase
their ability to address client needs. Accordingly, it is possible that new
competitors or alliances among competitors may emerge. In addition, our
competitors may also be able to offer higher prices for acquisition candidates,
which could harm our strategy of growing through selected
acquisitions.
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We
derive significant revenue and profit from contracts awarded through a
competitive bidding process, which can impose substantial costs on us, and we
will lose revenue and profit if we fail to compete effectively.
We derive
significant revenue and profit from contracts that are awarded through a
competitive bidding process. We expect that most of the government business we
seek in the foreseeable future will be awarded through competitive bidding.
Competitive bidding imposes substantial costs and presents a number of risks,
including:
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the
substantial cost and managerial time and effort that we spend to prepare
bids and proposals for contracts that may or may not be awarded to
us;
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the
need to estimate accurately the resources and costs that will be required
to service any contracts we are awarded, sometimes in advance of the final
determination of their full scope;
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the
expense and delay that may arise if our competitors protest or challenge
awards made to us pursuant to competitive bidding, and the risk that such
protests or challenges could result in the requirement to resubmit bids,
and in the termination, reduction, or modification of the awarded
contracts; and
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the
opportunity cost of not bidding on and winning other contracts we might
otherwise pursue.
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To the
extent we engage in competitive bidding and are unable to win particular
contracts, we not only incur substantial costs in the bidding process that
negatively affect our operating results, but we may lose the opportunity to
operate in the market for the services provided under those contracts for a
number of years. Even if we win a particular contract through competitive
bidding, our profit margins may be depressed or we may even suffer losses as a
result of the costs incurred through the bidding process and the need to lower
our prices to overcome competition.
We
may lose money on some contracts if we underestimate the resources we need to
perform under them.
We
provide services to clients primarily under three types of contracts:
time-and-materials contracts; cost-based contracts; and fixed-price contracts.
Each of these types of contracts, to differing degrees, involves the risk that
we could underestimate our cost of fulfilling the contract, which may reduce the
profit we earn or lead to a financial loss on the contract, which would
adversely affect our operating results.
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Under
time-and-materials contracts, we are paid for labor at negotiated hourly
billing rates and for certain expenses, and we assume the risk that our
costs of performance may exceed the negotiated hourly
rates.
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Under
our cost-based contracts, which frequently cap many of the various types
of costs we can charge and which impose overall and individual task order
or delivery order ceilings, we are reimbursed for certain costs incurred,
which must be allowable and at or below the caps under the terms of the
contract and applicable regulations. If we incur unallowable costs in the
performance of a contract, the client will not reimburse those costs, and
if our allowable costs exceed any of the applicable caps or
ceilings,
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we
will not be able to recover those costs. Under some cost-based contracts,
we receive no fees.
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Under
fixed-price contracts, we perform specific tasks for a set price. Compared
to cost-plus-fee contracts and time-and-materials contracts, fixed-price
contracts involve greater financial risk because we bear the full impact
of cost overruns.
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In order
to determine the appropriate revenue to recognize on our contracts in each
accounting period, we must use judgment relative to assessing risks, estimating
contract revenue and costs, and making assumptions for schedule and technical
issues. From time to time, facts develop that require us to revise our estimated
total costs and revenue on a contract. To the extent that a revised estimate
affects contract profit or revenue previously recognized, we record the
cumulative effect of the revision in the period in which the facts requiring the
revision become known. Provision for the full amount of an anticipated loss on
any type of contract is recognized in the period in which it becomes probable
and can be reasonably estimated. As a result, our operating results could be
affected by revisions to prior accounting estimates.
14
Systems
or service failures could interrupt our operations, leading to reduced revenue
and profit.
Any
interruption in our operations or any systems failures, including, but not
limited to: (i) inability of our staff to perform their work in a timely
fashion, whether caused by limited access to, or closure of, our or our clients’
offices or otherwise; (ii) failure of network, software, or hardware
systems; and (iii) other interruptions and failures, whether caused by us,
subcontractors, team members, third-party service providers, unauthorized
intruders or hackers, computer viruses, natural disasters, power shortages,
terrorist attacks, or otherwise, could cause loss of data and interruptions or
delays in our business or that of our clients, or both. In addition, failure or
disruption of mail, communications, or utilities could cause an interruption or
suspension of our operations or otherwise harm our business.
If
we fail to meet client expectations or otherwise fail to perform our contracts
properly, the value of our stock could decrease.
We could
lose revenue, profit, and clients, and be exposed to liability if we have
disagreements with our clients or fail to meet their expectations. We create,
implement, and maintain solutions that are often critical to our clients’
operations, and the needs of our clients are rapidly changing. Our ability to
secure new work and hire and retain qualified staff depends heavily on our
overall reputation, as well as the individual reputations of our staff members.
Perceived poor performance on even a single contract could seriously impair our
ability to secure new work and hire and retain qualified staff. In addition, we
have experienced, and may experience in the future, some systems and service
failures, schedule or delivery delays, and other problems in connection with our
work.
Moreover,
a failure by one or more of our subcontractors to perform satisfactorily the
agreed-upon services on a timely basis may compromise our ability to perform our
obligations as a prime contractor. In some cases, we have limited involvement in
the work performed by subcontractors and may have exposure as a result of
problems caused by subcontractors. In addition, we may have disputes with our
subcontractors that could impair our ability to execute our contracts as
required and could otherwise increase our costs. Such disputes and problems with
subcontractors could, among other things, cause us to lose future contracts,
suffer negative publicity, or otherwise incur liability for performance
deficiencies we did not create. In turn, these negative outcomes could have a
material adverse effect upon our operations, our financial performance, and the
value of our stock.
Our
failure to obtain and maintain necessary security clearances may limit our
ability to perform classified work for federal clients, which could cause us to
lose business.
Some
federal contracts require us to maintain facility security clearances and
require some of our employees to maintain individual security clearances. The
federal government has the right to grant and terminate such clearances. If our
employees lose or are unable to obtain needed security clearances in a timely
manner, or we lose or are unable to obtain a needed facility clearance in a
timely manner, federal clients can limit our work under or terminate some
contracts. To the extent we cannot obtain the required facility clearances or
security clearances for our employees or we fail to obtain them on a timely
basis, we may not derive our anticipated revenue and profit, which could harm
our operating results. In addition, a security breach relating to any classified
or sensitive but unclassified information entrusted to us could cause serious
harm to our business, damage our reputation, and result in a loss of our
facility or individual employee security clearances.
Our
relations with other contractors are important to our business and, if
disrupted, could cause us damage.
We derive
a portion of our revenue from contracts under which we act as a subcontractor or
from “teaming” arrangements in which we and other contractors jointly bid on
particular contracts, projects, or programs.. As a subcontractor or team member,
we often lack control over fulfillment of a contract, and poor performance on
the contract could tarnish our reputation, result in a reduction of the amount
of our work under or termination of that contract or other contracts, and cause
us not to obtain future work, even when we perform as required. We expect to
continue to depend on relationships with other contractors for a portion of our
revenue and profit in the foreseeable future. Moreover, our revenue and
operating results could be materially and adversely affected if any prime
contractor or teammate does not pay our invoices in a timely fashion, chooses to
offer products or services of the type that we provide, teams with other
companies to provide such products or services, or otherwise reduces its
reliance upon us for such products or services.
We
sometimes incur costs before a contract is executed or appropriately modified.
To the extent a suitable contract or modification is not subsequently signed or
we are not paid for our work, our revenue and profit will be
reduced.
When
circumstances warrant, we sometimes incur expenses and perform work without a
signed contract or appropriate modification to an existing contract to cover
such expenses or work. When we do so, we are working “at-risk,” and there is a
chance that the subsequent contract or modification will not ensue, or if it
does, that it will not allow us to be paid for expenses already incurred, work
already performed, or both. In such cases, we have generally been successful in
obtaining the required contract or modification, but any failure to do so in the
future could affect our operating results.
15
As
we develop new services, new clients, new practices, and enter new lines of
business, our risk of making costly mistakes increases.
We
currently assist our clients both in advisory capacities and by helping them
implement and improve solutions to their problems. As part of our corporate
strategy, we are attempting to sell more services, and searching for ways to
provide new services to clients. In addition, we plan to extend our services to
new clients, into new practice areas, into new lines of business, and into new
geographic locations. As we change our focus toward implementation and
improvement; attempt to develop new services, new clients, new practice areas,
and new lines of business; open new offices; and do business in new geographic
locations, those efforts could harm our results of operations and could be
unsuccessful.
Efforts
involving a different focus, new services, new clients, new practice areas, new
lines of business, new offices, or new geographic locations entail inherent
risks associated with inexperience and competition from other participants in
those areas. Our inexperience may result in costly decisions that could harm our
profit and operating results. In particular, implementation services often
relate to development and implementation of critical infrastructure or operating
systems that our clients view as “mission critical,” and if we fail to satisfy
the needs of our clients in providing these services, our clients could incur
significant costs and losses for which they could seek compensation from
us.
Claims
in excess of our insurance coverage could harm our business and financial
results.
When
entering into contracts with clients, we attempt, where feasible and
appropriate, to negotiate indemnification protection from our clients, as well
as monetary limitation of liability for professional acts, errors, and
omissions, but it is not always possible to do so. In addition, we cannot be
sure that these contractual provisions will protect us from liability for
damages if action is taken against us. Claims against us, both under our client
contracts and otherwise, have arisen in the past, exist currently, and will
arise in the future. These claims include actions by employees, clients, and
others. Some of the work we do, for example, in the environmental area, is
potentially hazardous to our employees, our clients, and others and they may
suffer damage because of our actions or inaction. We have various policies and
programs in the environmental, health, and safety area, but they may not prevent
harm to employees, clients, and others. Our insurance coverage may not be
sufficient to cover all the claims against us, insurance may not continue to be
available on commercially reasonable terms in sufficient amounts to cover such
claims, or at all, and our insurers may disclaim coverage as to any or all such
claims and otherwise may be unwilling or unable to cover such claims. The
successful assertion of any claim or combination of claims against us could
seriously harm our business. Even if not successful, such claims could result in
significant legal and other costs, harm our reputation, and be a distraction to
management.
Our
business will be negatively affected if we are not able to anticipate and keep
pace with rapid changes in technology or if growth in technology use by our
clients is not as rapid as in the past.
Our
success depends, partly, on our ability to develop and implement technology
services and solutions that anticipate and keep pace with rapid and continuing
changes in technology, industry standards, and client preferences. We may not be
successful in anticipating or responding to these developments on a timely
basis, and our offerings may not be successful in the marketplace. In addition,
the costs we incur in anticipation or response may be substantial and may be
greater than we expect, and we may never recover these costs. Also, our clients
and potential clients may slow the growth in their use of technology, or
technologies developed by our competitors may make our service or solution
offerings uncompetitive or obsolete. Any one of these circumstances could have a
material adverse effect on our revenue or profits or ability to obtain and
complete client engagements successfully.
Moreover,
we use technology-enabled tools to differentiate us from our competitors and
facilitate our service offerings that do not require the delivery of technology
services or solutions. If we fail to keep these tools current and useful, our
ability to sell and deliver our services could suffer, and so could our
operating results.
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D)
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RISKS
RELATED TO OUR CAPITAL STRUCTURE
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Our
stock price is volatile and could decline.
The stock
market in general has been highly volatile. The market price of
our common stock is likely to be volatile, and investors in our common stock may
experience a decrease in the value of their stock, including decreases unrelated
to our operating performance or prospects. The price of our common stock could
be subject to wide fluctuations in response to a number of factors, including
those listed elsewhere in this “Risk Factors” section and others, such
as:
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statements
or actions by clients, government officials (even if they are not our
clients), securities analysts, or
others;
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changes
in analysts’ recommendations or
projections;
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differences
between our actual financial or operating results and those expected by
investors or analysts;
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failure
by Congress or other governmental authorities to approve budgets in a
timely fashion;
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federal
or state government or other clients’ priorities or spending, both
generally or by our particular
clients;
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16
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changes
in general economic or market
conditions;
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military
or other actions related to international conflicts, wars, or
otherwise;
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changes
or perceived changes in the professional services industry in general or
the government services industry in
particular;
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strategic
decisions by us or our competitors, such as acquisitions, consolidations,
divestments, spin-offs, joint ventures, strategic investments, or changes
in business strategy;
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the
operating results of other companies in our
industry;
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the
liquidity of our stock;
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commencement,
completion, or termination of contracts, any of which can cause us to
incur significant expenses without corresponding payments or revenue,
during any particular quarter;
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changes
in our staff utilization rates, which can be caused by various factors
outside our control, including inclement weather that prevents our staff
from traveling to work sites;
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timing
of significant costs or investments, such as bid and proposal costs or the
costs involved in planning, making, or integrating
acquisitions;
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variations
in purchasing patterns under our contracts;
and/or
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our
contract mix or the extent we use subcontractors, or changes in
either.
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In the
past, securities class action litigation has often been instituted against
companies following periods of volatility in their stock price. This type of
litigation could result in substantial costs and divert our management’s
attention and resources.
Additional
shares of our common stock could be offered or distributed in the future, which
could cause our common stock price to decline significantly.
Our
common stock price might decline as a result of sales of shares pursuant to
subsequent offerings of shares. We also may issue common or preferred equity in
the future, in addition to shares of common stock sold in connection with the
acquisition of businesses or assets, to further reduce outstanding debt, or for
general corporate purposes, and we expect to continue to offer shares of our
common stock to our employees and directors. If we issue new equity securities
our stock price might decline as a result, and holders of any new preferred
equity securities may have rights, preferences, and privileges senior to those
of holders of our common stock.
No cash dividends will be paid in the
foreseeable future.
We do not
anticipate paying cash dividends on our common stock in the foreseeable future,
and we may not have sufficient funds legally available to pay dividends. Even if
funds are legally available for distribution, we may nevertheless decide not to
or may be unable to pay any dividends. We intend to retain all earnings for our
company’s operations. Accordingly, you may have to sell some or all of your
common stock in order to generate cash flow from your investment. You may not
receive a gain on your investment when you sell our common stock and may lose
some or all of the amount of your investment. Any determination to pay dividends
in the future on our common stock will be made at the discretion of our board of
directors and will depend on our results of operations, financial conditions,
contractual restrictions, restrictions imposed by applicable law, capital
requirements and other factors that our board of directors deems
relevant. The preferred stock of Innolog Holdings is not subject to
this provision who are entitled to distributions of 10% of our net income, if
any, annually.
Nevada
law may inhibit potential acquisition bids and other actions that you and other
shareholders may consider favorable, and the market price of our common stock
may be lower as a result.
We are
subject to the anti-takeover provisions of Sections 78.378
-78.3793 of the Nevada Revised Statutes, which regulates corporate
acquisitions. These provisions could discourage potential acquisition proposals;
delay or prevent a change-in-control transaction; discourage others from making
tender offers for our common stock; and/or prevent changes in our
management.
We
indemnify our officers and members of the board of directors under certain
circumstances. Such provisions may discourage shareholders from bringing a
lawsuit against officers and directors for breaches of fiduciary duty and may
also reduce the likelihood of derivative litigation against officers and
directors even though such action, if successful, might otherwise have benefited
you and other shareholders. In addition, your investment in our stock may be
adversely affected to the extent that we pay the costs of settlement and damage
awards against our officers or directors pursuant to such
provisions.
17
If
you invest in our common stock, you could experience substantial
dilution.
We have
offered, and we expect to continue to offer, stock to our employees and
directors. Additional options may be granted to employees and directors in the
future.
In
addition, we may be required, or could elect, to seek additional equity
financing in the future or to issue preferred or common stock to pay all or part
of the purchase price for any businesses, products, technologies, intellectual
property, or other assets or rights we may acquire, to pay for a reduction,
change, or elimination of liabilities in the future, for general corporate
purposes, or any other reason. If we issue new equity securities under these
circumstances, our shareholders may experience additional dilution and the
holders of any new equity securities may have rights, preferences, and
privileges senior to those of the holders of our common stock.
The
application of the “penny stock” rules could adversely affect the market price
of our common stock and increase your transaction costs to sell those
shares.
Our
common stock may be subject to the “penny stock” rules adopted under Section
15(g) of the Securities Exchange Act of 1934. The penny stock rules apply to
companies that are not traded on a national securities exchange whose common
stock trades at less than $5.00 per share or that have tangible net worth of
less than $5,000,000 ($2,000,000 if the company has been operating for three or
more years). The “penny stock” rules impose additional sales practice
requirements on broker-dealers who sell securities to persons other than
established customers and accredited investors (generally those with assets in
excess of $1,000,000 or annual income exceeding $200,000 or $300,000 together
with their spouse). For transactions covered by these rules, the broker-dealer
must make a special suitability determination for the purchase of securities and
have received the purchaser’s written consent to the transaction before the
purchase. Additionally, for any transaction involving a penny stock, unless
exempt, the broker-dealer must deliver, before the transaction, a disclosure
schedule prescribed by the SEC relating to the penny stock market. The
broker-dealer also must disclose the commissions payable to both the
broker-dealer and the registered representative and current quotations for the
securities. Finally, monthly statements must be sent disclosing recent price
information on the limited market in penny stocks. These additional burdens
imposed on broker-dealers may restrict the ability or decrease the willingness
of broker-dealers to sell our common stock, and may result in decreased
liquidity for our common stock and increased transaction costs for sales and
purchases of our common stock as compared to other securities.
Our
common stock is thinly traded, and you may be unable to sell at or near “ask”
prices or at all if you need to sell your shares to raise money or otherwise
desire to liquidate your shares.
Although
our common stock is quoted on the Over-the-Counter Bulletin Board (“OTC”), we
cannot predict the extent to which an active public market for our common stock
will develop or be sustained. However, we do not rule out the possibility of
applying for listing on a national exchange. Our common stock has historically
been sporadically or “thinly traded” on the OTC, meaning that the number of
persons interested in purchasing our common stock at or near bid prices at any
give time may be relatively small or nonexistent. This situation is attributable
to a number of factors, including the fact that we are a small company that is
relatively unknown to stock analysts, stock brokers, institutional investors and
others in the investment community that generate or influence sales volume, and
that even if we came to the attention of such persons, they tend to be
risk-adverse and would be reluctant to follow an unproven company such as ours
or purchase or recommend the purchase of our shares until such time as we become
more seasoned and viable. As a consequence, there may be periods of several days
or more when trading activity in our shares is minimal or non-existent, as
compared to a seasoned issuer that has a large and steady volume of trading
activity that will generally support continuous sales without an adverse effect
on share price. We cannot give you any assurance that a broader or more active
public trading market for our common stock will develop or be sustained, or that
current trading levels will be sustained.
The
market price of our common stock is particularly volatile given our status as a
relatively small company with a small and thinly traded “float” that could lead
to wide fluctuations in our share price. The price at which you purchase our
common stock may not be indicative of the price that will prevail in the trading
market. You may be unable to sell your common stock at or above your purchase
price if at all, which may result in substantial losses to you.
The
market for our common stock is characterized by significant price volatility
when compared to seasoned issuers, and we expect that our share price will
continue to be more volatile than a seasoned issuer for the indefinite future.
The volatility in our share price is attributable to a number of factors. As
noted above, our common stock is sporadically and/or thinly traded. As a
consequence of this lack of liquidity, the trading of relatively small
quantities of shares by our shareholders may disproportionately influence the
price of those shares in either direction. The price for our shares could, for
example, decline precipitously in the event a large number of our shares are
sold on the market without commensurate demand, as compared to a seasoned issuer
which could better absorb those sales without adverse impact on its share price.
The following factors also may add to the volatility in the price of our common
stock: actual or anticipated variations in our quarterly or annual operating
results; adverse outcomes; additions to or departures of our key personnel, as
well as other items discussed under this “Risk Factors” section, as well as
elsewhere in this report. Many of these factors are beyond our control and may
decrease the market price of our common stock, regardless of our operating
performance. We cannot make any predictions or projections as to what the
prevailing market price for our common stock will be at any time, including as
to whether our common stock will sustain its current market prices, or as to
what effect the sale of shares or the availability of shares for sale at any
time will have on the prevailing market price.
18
Shareholders should be aware that, according to SEC Release No. 34-29093, the market for penny stocks has suffered in recent years from patterns of fraud and abuse. Such patterns include (1) control of the market for the security by one or a few broker-dealers that are often related to the promoter or issuer; (2) manipulation of prices through pre-arranged matching of purchases and sales and false and misleading press releases; (3) boiler room practices involving high-pressure sales tactics and unrealistic price projections by inexperienced sales persons; (4) excessive and undisclosed bid-ask differential and markups by selling broker-dealers; and (5) the wholesale dumping of the same securities by promoters and broker-dealers after prices have been manipulated to a desired level, along with the resulting inevitable collapse of those prices and with consequent investor losses. Our management is aware of the abuses that have occurred historically in the penny stock market. Although we do not expect to be in a position to dictate the behavior of the market or of broker-dealers who participate in the market, management will strive within the confines of practical limitations to prevent the described patterns from being established with respect to our securities. The occurrence of these patterns or practices could increase the volatility of our share price.
Volatility
in our common stock price may subject us to securities litigation.
The
market for our common stock may be characterized by significant price volatility
when compared to seasoned issuers, and we expect our share price will be more
volatile than a seasoned issuer for the indefinite future. In the past,
plaintiffs have often initiated securities class action litigation against a
company following periods of volatility in the market price of its securities.
We may, in the future, be the target of similar litigation. Securities
litigation could result in substantial costs and liabilities and could divert
management’s attention and resources.
Past
activities of our company and affiliates may lead to future liability for our
company.
Prior to
our acquisition of Innolog Holdings Corporation, we were engaged in a business
unrelated to our current operations. Any liabilities relating to such prior
business against which we are not completely indemnified will be borne by us and
may have a material adverse effect on the Company.
Our
corporate actions are substantially controlled by our Board of Directors and our
5% shareholders.
Our Board
of Directors and our greater than 5% shareholders own or control over 73% of the
fully diluted common and preferred shares of the company. These
shareholders, acting individually or as a group, could exert substantial
influence over matters such as electing directors, amending our certificate of
incorporation or bylaws, and approving mergers or other business combinations or
transactions. In addition, because of the percentage of ownership and voting
concentration in these principal shareholders and their affiliated entities,
elections of our board of directors will generally be within the control of
these shareholders and their affiliated entities. While all of our shareholders
are entitled to vote on matters submitted to our shareholders for approval, the
concentration of shares and voting control presently lies with these principal
shareholders and their affiliated entities. As such, it would be difficult for
shareholders to propose and have approved proposals not supported by these
principal shareholders and their affiliated entities. There can be no assurance
that matters voted upon by our officers and directors in their capacity as
shareholders will be viewed favorably by all shareholders of our company. The
stock ownership of our principal shareholders and their affiliated entities may
discourage a potential acquirer from seeking to acquire shares of our common
stock or otherwise attempting to obtain control of our company, which in turn
could reduce our stock price or prevent our shareholders from realizing a
premium over our stock price.
We
are responsible for the indemnification of our officers and directors, which
could result in substantial expenditures.
Our
bylaws provide for the indemnification of our directors, officers, employees,
and agents, and, under certain circumstances, against attorneys’ fees and other
expenses incurred by them in litigation to which they become a party arising
from their association with or activities on behalf of the Company. This
indemnification policy could result in substantial expenditures, which we may be
unable to recoup.
19
We
may incur additional debt, which could substantially reduce our profitability,
limit our ability to pursue certain business opportunities, and reduce the value
of our stock.
As a
result of our business activities and acquisitions, we may incur additional debt
in the future. Such debt could increase the risks described herein and lead to
other risks. The amount of our debt could have important consequences for our
shareholders, such as:
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our
future ability to obtain additional financing for working capital, capital
expenditures, product and service development, acquisitions, general
corporate purposes, and other purposes may be
impaired;
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a
substantial portion of our cash flow from operations could be dedicated to
the payment of the principal and interest on our
debt;
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our
vulnerability to economic downturns and rises in interest rates will be
increased;
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we
may be unable to comply with the terms of our financing
agreements;
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our
flexibility in planning for and reacting to changes in our business and
the marketplace may be limited;
and/or
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we
may be at a competitive disadvantage relative to other
firms.
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Servicing
our debt in the future may require a significant amount of cash. Our ability to
repay or refinance our debt depends, among other things, on our successful
financial and operating performance and the interest rates on our debt. Our
financial and operating performance and the interest rates we pay in turn depend
on a number of factors, many of which are beyond our control.
If our
financial performance declines and we are unable to pay our debts, we will be
required to pursue one or more alternative strategies, such as selling assets,
refinancing or restructuring indebtedness, and/or selling additional stock,
perhaps under unfavorable conditions. Any of these circumstances could adversely
affect the value of our stock.
Our
continued success depends on our ability to raise capital on commercially
reasonable terms when, and in the amounts, needed. If additional financing is
required, including refinancing existing debt, there can be no assurances that
we will be able to obtain such additional financing on terms acceptable to us
and at the times required, if at all. In that case, we may be
required to raise additional equity by issuing additional stock, alter our
business plan materially, curtail all or part of our business expansion plans,
sell part or all of our business or other assets, or be subject to actions such
as bankruptcy or other financial restructuring in the event of default. Any of
these results could have a significant adverse effect on the value of our
stock.
Our
future debt may include covenants that restrict our activities and create the
risk of defaults, which could impair the value of our stock.
Our
financing arrangements will continue to contain a number of significant
covenants that, among other things, restrict our ability to dispose of assets;
incur additional indebtedness; make capital expenditures; pay dividends; create
liens on assets; enter into leases, investments, and acquisitions; engage in
mergers and consolidations; and engage in certain transactions with affiliates;
and otherwise restrict corporate activities (including change of control and
asset sale transactions).
In
addition, our financing arrangements may require us to maintain specified
financial ratios and comply with financial tests Concern over satisfying debt
restrictions and covenants might cause us to forego contract bidding or
acquisition opportunities or otherwise cause us to focus on short-term rather
than long-term results. There is no assurance that we will be able to fulfill
our debt covenants, maintain these ratios, or comply with these financial tests
in the future.
Failure
to comply with restrictive covenants imposed by our financing arrangements, if
not cured through performance or an amendment of our financing arrangements,
could result in a default. An amendment of our financing arrangements could
substantially adversely affect our revenue, profits, cash flows, and operating
results. In the event of a default, our lenders could, among other things:
(i) declare all amounts borrowed to be due and payable, together with
accrued and unpaid interest; (ii) terminate their commitments to make
further loans; and/or (iii) proceed against the collateral securing
obligations owed to them. In turn, such action by our lenders could lead to the
bankruptcy, insolvency, financial restructuring, and/or liquidation of our
Company, any of which would have a significant adverse effect on the value of
our stock.
Risks Relating to Our
Business
Our
limited operating history makes it difficult to evaluate our future prospects
and results of operations.
Our
limited operating history makes it difficult to evaluate our business. In
addition, the limited performance history of our management and sales team and
the uncertainty of our future performance and ability to maintain or improve our
financial, sales and operating systems, procedures and controls increase the
risk that we may be unable to continue to successfully operate our business. In
the event that we are not able to manage our growth and operate as a public
company due to our limited experience, our business may suffer uncertainty and
failures, which makes it difficult to evaluate our business.
20
Various
GSA Schedules and Contract vehicles are required to win contracts and task
orders from the federal government. The loss of or failure to renew
any or all of these schedules and vehicles could materially adversely affect our
business.
We hold
GSA Schedules and IDIQ contracts with the federal government. The
government can elect to suspend our eligibility to win task orders under the
vehicles and schedules. The loss of or suspension of any such
contracts or GSA Schedule, would materially adversely affect our
business.
Geographical business expansion
efforts we make could result in difficulties in successfully managing
our business and consequently harm our financial
condition.
As part
of our business strategy, we may seek to expand by acquiring competing
businesses or customer contracts outside of our current geographic markets, or
we may open offices in the geographical markets we desire to operate within. We
may face challenges in managing expanding product and service offerings and in
integrating acquired businesses with our own. We cannot accurately predict the
timing, size and success of our expansion efforts and the associated capital
commitments that might be required. We expect to face competition for expansion
candidates, which may limit the number of expansion opportunities available to
us and may lead to higher expansion costs. There can be no assurance that we
will be able to identify, acquire or profitably manage additional businesses and
contracts or successfully integrate acquired businesses and contracts , if any,
into our company , without substantial costs, delays or other operational or
financial difficulties. In addition, expansion efforts involve a number of other
risks, including:
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failure
of the expansion efforts to achieve expected
results;
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diversion
of management’s attention and resources to expansion
efforts;
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failure
to retain key customers or personnel of the acquired businesses;
and
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risks
associated with unanticipated events, liabilities or
contingencies.
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Client dissatisfaction or performance problems at a
single acquired business could negatively affect our reputation. The inability
to acquire businesses on reasonable terms or successfully integrate and manage
acquired companies, or the occurrence of performance problems at acquired
companies, could result in dilution to our shareholders, unfavorable accounting
charges and difficulties in successfully managing our
business.
Our inability to obtain capital, use
internally generated cash, or use shares of our common stock or debt to
finance future expansion efforts could impair the growth and expansion of
our business.
Reliance
on internally generated cash or debt to finance our operations or complete
business expansion efforts could substantially limit our operational and
financial flexibility. The extent to which we will be able or willing to use
shares of common stock to consummate expansions will depend on our market value
from time to time and the willingness of potential sellers to accept it as full
or partial payment. Using shares of common stock for this purpose also may
result in significant dilution to our then existing shareholders. To the extent
that we are unable to use common stock to make future expansions, our ability to
grow through expansions may be limited by the extent to which we are able to
raise capital for this purpose through debt or equity financings. No assurance
can be given that we will be able to obtain the necessary capital to finance a
successful expansion program or our other cash needs. If we are unable to obtain
additional capital on acceptable terms, we may be required to reduce the scope
of any expansion. In addition to requiring funding for expansions, we may need
additional funds to implement our internal growth and operating strategies or to
finance other aspects of our operations. Our failure to (i) obtain additional
capital on acceptable terms, (ii) use internally generated cash or debt to
complete expansions because it significantly limits our operational or financial
flexibility, or (iii) use shares of common stock to make future expansions may
hinder our ability to actively pursue any expansion program we may decide to
implement and negatively impact our stock price.
Our obligations under our credit
facility are secured by our assets. Thus, if the lending group
forecloses on its security interest, we may have to liquidate some or all of our assets,
which may cause us to curtail or cease operations.
Our
obligations under our current loan and security agreement are secured by all of
our assets. If we default under the credit facility, we could be required to
repay all of our borrowings thereunder. As of August 13, 2010,
we owe approximately $2,000,000 under the agreement. In addition, the lenders
could foreclose its security interest and liquidate some or all of our assets,
which could cause us to curtail or cease operations.
21
At March
31, 2010, our working capital was approximately ($4.4)
million. Included in working capital is approximately
$1.6 million of contract costs accounts receivables. This amount
represents work performed and services rendered pursuant to government
contracts. For almost all of our government contracts, we do not receive interim
progress payments. As a result, we must finance the cost of the work
over the length of the contract, which can continue, in some cases, for more
than a year. If we are not able to obtain necessary financing, we may be unable
both to meet our obligations under our existing contracts and to obtain
additional contracts, which could impair our business and could
result in a cessation of business.
Our
operations are cash intensive, and our business could be adversely affected if
we fail to maintain sufficient levels of working capital.
We expend
a significant amount of cash in our operations. We generally fund most of our
working capital requirements out of cash flow generated from operations and our
line of credit. If we fail to generate sufficient revenues from our sales, or if
we experience difficulties collecting our accounts receivables, we may not have
sufficient cash flow to fund our operating costs, and our business could be
adversely affected.
Our
operating results may fluctuate from period to period, and if we fail to meet
market expectations for a particular period, our share price may
decline.
Our
operating results have fluctuated from period to period and are likely to
continue to fluctuate as a result of a wide range of factors, including sales
demands, electricity rate changes, changes in incentives and technological
improvements. Our production and sales are generally lower in the winter due to
weather conditions and holiday activities. Interim reports may not be indicative
of our performance for the year or our future performance, and period-to-period
comparisons may not be meaningful due to a number of reasons beyond our control.
We cannot assure you that our operating results will meet the expectations of
market analysts or our investors. If we fail to meet their expectations, there
may be a decline in our share price.
We
sometimes recognize revenue on a “Milestones” basis and payments are due upon
the achievement of contractual milestones, and any delay or cancellation of a
project could adversely affect our business.
Revenue
on cost plus fee contracts is recognized to the extent of costs incurred plus a
proportionate amount of fee earned. Revenue on fixed price contracts is
recognized on a percentage of completion method based on costs incurred in
relation to total estimated costs. Revenue on time and materials contracts is
recognized at labor rate times hours delivered plus material expense
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
possible that the estimates used will change within the near term.
Our failure to meet a client’s
expectations in the performance of our services, and the risks and
liabilities associated with placing our employees in our customers’ businesses, could
give rise to claims against
us.
Our
engagements involve projects that are critical to our customers’ business. Our
failure or inability to meet a customer’s expectations in the provision of our
products and services could damage or result in a material adverse change to
their premises or property, and therefore could give rise to claims against us
or damage our reputation. In addition, we are exposed to various risks and
liabilities associated with placing our employees in the workplaces of others,
including possible claims of errors and omissions, harassment, theft of client
property, criminal activity and other claims.
22
If
we fail to develop and maintain an effective system of internal controls, we may
not be able to accurately report our financial results or prevent fraud. As a
result, current and potential shareholders could lose confidence in our
financial reports, which could harm our business and the trading price of our
common stock.
Effective
internal controls are necessary for us to provide reliable financial reports and
effectively prevent fraud. We are currently required to provide an assessment of
our internal controls over financial reporting. In the future, under Section 404
of the Sarbanes-Oxley Act of 2002, we may be required to evaluate and report on
these same controls and have our independent registered public accounting firm
annually attest to our evaluation, as well as issue their own opinion on our
internal controls over financial reporting. We plan to prepare for compliance
with Section 404 by strengthening, assessing and testing our system of internal
controls to provide the basis for our report. The process of strengthening our
internal controls and complying with Section 404 is expensive and
time-consuming, and requires significant management attention, especially given
that we have not yet undertaken any efforts to comply with the requirements of
Section 404. We cannot be certain that the measures we will undertake will
ensure that we will maintain adequate controls over our financial processes and
reporting in the future. Furthermore, if we are able to rapidly grow our
business, the internal controls that we will need will become more complex, and
significantly more resources will be required to ensure our internal controls
remain effective. Failure to implement required controls, or difficulties
encountered in their implementation, could harm our operating results or cause
us to fail to meet our reporting obligations. If our auditors identify a
material weakness in our internal controls, then the disclosure of that fact,
even if the weakness is quickly remedied, could diminish investors’ confidence
in our financial statements and harm our stock price. In addition,
non-compliance with Section 404 could subject us to a variety of administrative
sanctions, including the suspension of trading, ineligibility for listing on a
national securities exchange, and the inability of registered broker-dealers to
make a market in our common stock, which would further reduce our stock price.
In conjunction with their audit of our financial statements for the years ended
December 31, 2009 and 2008, our independent public accountants identified
certain deficiencies in our system of internal controls which they considered to
be material weaknesses and significant deficiencies. We are currently evaluating
such deficiencies and are in the process of implementing corrective changes to
our internal control processes and procedures.
Costs
incurred because we are a public company may affect our
profitability.
As a
public company, we incur significant legal, accounting and other expenses, and
we are subject to the SEC’s rules and regulations relating to public disclosure
that generally involve a substantial expenditure of financial resources. In
addition, the Sarbanes-Oxley Act of 2002, as well as new rules subsequently
implemented by the SEC, require changes in corporate governance practices of
public companies. We expect that full compliance with these new rules and
regulations will significantly increase our legal and financial compliance costs
and make some activities more time-consuming and costly. For example, we will be
required to create board committees and adopt policies regarding internal
controls and disclosure controls and procedures. Such additional reporting and
compliance costs may negatively impact our financial results. To the extent our
earnings suffer as a result of the financial impact of our SEC reporting or
compliance costs, our ability to develop an active trading market for our
securities could be harmed.
As a
public company, we also expect that these new rules and regulations may make it
more difficult and expensive for us to obtain director and officer liability
insurance in the future, and we may be required to accept reduced policy limits
and coverage or incur substantially higher costs to obtain the same coverage. As
a result, it may be more difficult for us to attract and retain qualified
persons to serve on our board of directors or as executive
officers.
It may be
time-consuming, difficult and costly for us to develop and implement the
internal controls and reporting procedures required by the Sarbanes-Oxley Act,
when applicable to us. Some members of our management team have limited or no
experience operating a company with securities traded or listed on an exchange,
or subject to SEC rules and requirements, including SEC reporting practices and
requirements that are applicable to a publicly traded company. We may need to
recruit, hire, train and retain additional financial reporting, internal
controls and other personnel in order to develop and implement appropriate
internal controls and reporting procedures. If we are unable to comply with the
internal controls requirements of the Sarbanes-Oxley Act, when applicable, we
may not be able to obtain the independent accountant certifications required by
the Sarbanes-Oxley Act.
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 the Innolog
Holdings Corporation and its wholly owned subsidiary Innovative Logistics
Techniques, Inc. for the fiscal years ended December 31, 2009 and 2008 and the
three months ended March 31, 2010 and 2009 should be read in conjunction with the
Consolidated Financial Statements, and the notes to
those financial statements that are included elsewhere in this Form 8-K.
References to “we,” “our,” or “us” in this section refers to Innolog Holdings
Corporation. Our discussion includes forward-looking statements based upon
current expectations that involve risks and uncertainties, such as our plans,
objectives, expectations and intentions. Actual results and the timing of events
could differ materially from those anticipated in these forward-looking
statements as a result of a number of factors, including those set forth under
the Risk Factors, Forward-Looking Statements and Business sections in this Form
8-K. We use words such as “anticipate,” “estimate,” “plan,” “project,”
“continuing,” “ongoing,” “expect,” “believe,” “intend,” “may,” “will,” “should,”
“could,” and similar expressions to identify forward-looking
statements.
23
Overview
We are a service provider designed to make acquisitions of
companies in the government services industry. Innovative Logistics
Techniques Inc., our first acquisition, is solutions
oriented organization providing preeminent supply chain logistics and
information technology solutions to clients in the public and private sectors.
The 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 August 13, 2010 ,uKarma Corporation, a Nevada
corporation (the “Company”), pursuant to an amended and restated merger agreement, agreed to acquired a
solutions oriented organization providing supply chain logistics and information
technology solutions to clients in the public and private sectors. The 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.
As a result of the Merger Agreement, the
Innolog Owners became our controlling shareholders, and Innolog Holdings Corporation
became our wholly owned subsidiary. In connection with Innolog Holdings
Corporation becoming our wholly owned subsidiary, we acquired the business and
operations of Innolog Holdings Corporation’s wholly owned subsidiary, Innovative
Logistics Techniques, Inc., a Virginia corporation(“Innovative”), referred to
herein as “Innovative”), became our indirect wholly owned subsidiary. On a fully
diluted basis Innolog Owners control 95% of the Company.
Critical Accounting Policies and
Estimates
Our management’s discussion and analysis
of our financial condition and results of operations are based on our
consolidated financial statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States. 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 1 to our consolidated financial statements attached hereto as
Exhibit 99.1, we believe that the following accounting policies are the most
critical to aid you in fully understanding and evaluating this discussion and
analysis:
Use of
Estimates:
Management
uses estimates and assumptions in preparing these financial statements in
accordance with accounting principles generally accepted in the United States of
America. Those estimates and assumptions affect the reported amounts of assets
and liabilities, the disclosure of contingent assets and liabilities, and the
reported revenues and expenses. Actual results could vary from the
estimates.
Contract
Revenue Recognition:
Revenue
on cost-plus-fee contracts is recognized to the extent of costs incurred plus a
proportionate amount of fees earned. Revenue on fixed-price contracts is
recognized on the percentage-of-completion method based on costs incurred in
relation to total estimated costs. Revenue on time-and-materials contracts is
recognized at contractual rates as hours and out of pocket expenses are
incurred. Anticipated losses on contracts are recognized in the period they are
first determined. In accordance with industry practice, amounts relating to
long-term contracts, including retainages, are classified as current assets
although an undeterminable portion of these amounts is not expected to be
realized within one year. Because of inherent uncertainties in estimating costs,
it is at least reasonably possible that the estimates used will change within
the near term.
24
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 couple with
review of the currect status of existing receivables.
Long-Lived
Assets:
The
Company reviews for the impairment of long-lived assets and certain identifiable
intangibles whenever events or changes in circumstances indicate that the
carrying amount of any asset may not be recoverable. An impairment loss would be
recognized when the estimated undiscounted future cash flows expected to result
from the use of the asset and its eventual disposition is less than the carrying
amount. If impairment is indicated, the amount of the loss to be recorded is
based on an estimate of the difference between the carrying amount and the fair
value of the asset. Fair value is based upon discounted estimated cash flows
expected to result from the use of the asset and its eventual disposition and
other valuation methods.
Goodwill:
In
accordance with FASB ASC 350, “Intangibles – Goodwill and Other”, goodwill is
tested for impairment at least annually. An impairment loss of $1,000,000 was
recognized for the period ended December 31, 2009.
Income
Taxes:
Income
taxes are accounted for using the asset and liability method under FASB ASC 740,
“Accounting for Income Taxes”, whereby deferred tax assets and liabilities are
recognized for future tax consequences attributable to differences between the
financial statement carrying amounts of assets and liabilities, and their
respective tax basis, and operating loss and tax credit carry forwards. Deferred
tax assets and liabilities are measured using enacted tax rates expected to
apply to taxable income in the years in which those temporary differences are
expected to be recovered or settled. The effect on deferred tax assets and
liabilities due to a change in tax rates is recognized as income in the period
that includes the enactment date. Estimates of the realization of deferred tax
assets are based on the scheduled reversal of deferred tax liabilities,
projected future taxable income, and tax planning strategies.
Stock
Based Compensation:
The
Company accounts for stock based compensation in accordance with FASB ASC
505-50, “Equity Based Payments to Non-Employees”. Under the fair value
recognition provisions of FASB ASC 505-50, the Company measures stock based
compensation cost at the grant date based on the fair value of the award and
recognizes expense over the requisite service period.
Fair
Value Measurements:
FASB ASC
820, Fair Value Measurements and Disclosures (“FASB ASC 820”), 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:
|
25
|
·
|
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 to former shareholders, and the line of credit
payable approximate fair value due to the short term maturities of these
instruments.
|
|
|
Contingent
consideration payable is based on the revenues and earnings projections of
Innovative discounted by the rate of the seller
note.
|
The
preceding methods described may produce a fair value calculation that may not be
indicative of net realizable value or reflective of future fair values.
Furthermore, although the Company believes its valuation methods are appropriate
and consistent with other market participants, the use of different
methodologies or assumptions to determine the fair value of certain financial
instruments could result in a different fair value measurement at the reporting
date.
The
Company has determined that the contingent consideration liability falls within
level three of the hierarchy.
Recent
Accounting Pronouncements:
Management
does not believe that any recently issued, but not yet effective accounting
standards, if adopted, will have a material effect on our financial
statements.
Results of
Operations
Comparison of Years Ended December 31,
2009 and December 31, 2008
of Innovative Logistics Techniques, Inc.
The following table sets forth the
results of our operations for the periods indicated as a percentage of net
sales:
|
Year Ended
|
Year Ended
|
|||||||||||||||
|
December
31,
|
% of
|
December
31,
|
% of
|
|||||||||||||
|
2009
|
Sales
|
2008
|
Sales
|
|||||||||||||
|
Contract
Revenue
|
$ | 7,847,465 | 100.0 | % | $ | 6,184,531 | 100.0 | % | ||||||||
|
Direct
Costs
|
4,529,380 | 57.7 | % | 3,310,302 | 53.5 | % | ||||||||||
|
Costs of
Operations
|
5,803,041 | 73.9 | % | 5,275,569 | 85.3 | % | ||||||||||
|
Operating Loss
|
(2,484,956 | ) | (31 | ) % | (2,401,340 | ) | (38.8 | ) % | ||||||||
|
Other
Income
|
487,558 | 6.2 | % | 46,570 | 0.8 | % | ||||||||||
|
Other
Expenses
|
(11,960 | ) | (0.2 | ) % | (29,879 | ) | (0.5 | ) % | ||||||||
|
Loss Before Income
Tax
|
(2,009,358 | ) | (25.6 | ) % | (2,384,649 | ) | (38 | ) % | ||||||||
|
Income Tax
Expense
|
% | % | ||||||||||||||
|
Net Loss
|
$ | (2,009,358 | ) | (25.6 | ) % | $ | (2,384,649 | ) | (38 | ) % | ||||||
26
For the years ended December 31, 2009 and 2008 the amounts above are for Innovative Logistics Techniques, Inc. For purposes of comparison, the full 12 months of 2009 are included even though the acquisition of Innovative by Innolog did not occur until April 1, 2009.
Contract Revenues. Revenues
for the year ended 2009 increased 26.9% over the previous year. The majority
of this increase is attributed to short term
contracts where the company had sub-contractors supplying most of the
work; hereby generating a very small margin
to the company. It is anticipated that this revenue will and has been eliminated
going forward and is being replaced by more profitable
contracts.
Direct Costs. Direct costs increased as
a percentage of revenue for the reasons stated
above. It is anticipated that these costs will return to more historical levels
as these contracts are replaced by more profitable ones.
Costs of Operations. The cost of
operations include indirect
contract costs, which are
allowable for reimbursement under the contracts, management fees paid to
affiliate, costs not allocable to contracts, and an impairment
expense. Overall in 2009
these expenses, when the
$1,000,000 goodwill impairment expense is excluded, were reduced by 8.9% from the previous year. The largest
decrease came in indirect
contract costs which was
reduced by almost $1.7 million. The company expects these costs to reduce further in the
future.
Operating Income. If the company eliminates the impairment of goodwill
charge of $1,000,000 it has reduced its operating loss by
38.2% in 2009. This is a result of
controlling and reducing operating expenses and finishing the low margin
contracts relating the large usage of sub contractors.
Other Income. The other income for 2009
increased due to a one time forgiveness of an accounts payable and a unrealized gain on the fair value
of the consideration payable to the former shareholders of Innovative
.
Other Expenses. Other expenses for 2009
decreased by about 60% from
the previous year.
Net Income. Our net loss for the year ended
December 31, 2009 was $2,009,358 as compared to $2,384,649 for the year
ended December 31, 2008. The decrease in net loss was mainly attributable to
cost efficiencies and reductions.
Comparison of Three Month Periods Ended
March 31, 2010 and March 31, 2009 of Innovative Logistics Techniques,
Inc.
The following table sets forth the
results of our operations for the periods indicated:
|
Three Months
Ended
|
Three Months
Ended
|
|||||||||||||||
|
March 31,
|
March 31,
|
|||||||||||||||
|
2010
(unaudited)
|
%
of Sales |
2009
(unaudited)
|
%
of Sales |
|||||||||||||
|
Contract
Revenue
|
$ | 1,712,730 | 100.0 | % | $ | 1,909,395 | 100.0 | % | ||||||||
|
Direct
Costs
|
764,064 | 44.6 | % | 1,158,531 | 60.7 | % | ||||||||||
|
Cost of
Operations
|
1,014,945 | 59.3 | % | 1,118,856 | 58.6 | % | ||||||||||
|
Operating Loss
|
(66,279 | ) | (3.9 | ) % | (367,992 | ) | (19.3 | ) % | ||||||||
|
Other
income
|
170 | 0.0 | % | 281,059 | 14.7 | % | ||||||||||
|
Other
Expense
|
(24,000 | ) | (1.4 | ) % | 0 | 0.0 | % | |||||||||
|
Loss Before Income
Tax
|
(90,109 | ) | (5.3 | ) % | (86,933 | ) | (4.6 | ) % | ||||||||
|
Income Tax
Expense
|
% | % | ||||||||||||||
|
Net Loss
|
$ | (90,109 | ) | (5.3 | ) % | $ | (86,933 | ) | (4.6 | ) % | ||||||
27
For the three months ended March 31, 2010 and March 31, 2009 the amounts above are for Innovative Logistics Techniques, Inc. This is done for purposes of comparison even though the acquisition of Innovative by Innolog did not occur until March 31, 2009.
Contract Revenues. Revenues for the 3 months ended
March 31, 2010 decreased by 10% over the previous year’s three month period. The majority
of this decrease is
attributed to short term contracts where the company had sub contractors
supplying most of the work; hereby generating a very small margin
to the company. It is anticipated that this revenue will be replaced by more profitable
contracts.
Direct Costs. Direct costs decreased as a percentage of revenue for the reasons stated
above.
Costs of Operations. The cost of
operations include indirect
contract costs, which are
allowable for reimbursement under the contracts, and management fees paid to affiliate
and costs not allocable to contracts. Overall for the 3 months ended March 31, 2010
these expenses were reduced
by 9% from the previous year. The largest
decrease came in indirect
contract costs which was reduced by almost $226,000. The company expects these costs to reduce further in the
future.
Operating Income. The company reduced
its operating loss by 82%
in the 3 months ended March
31, 2010 . This is a result
of controlling and reducing operating expenses and finishing the low margin
contracts relating the large usage of sub contractors.
Other Income. The other income for the 3 months ended March 31, 2010
decreased due to a one time forgiveness of a
accounts payable in
2009.
Other Expenses. Other expenses for the 3 months ended March 31, 2010
are interest
expense.
Net Income. Our net loss for the three months ended March 31,
2010 was $90,109 as compared to $86,933 for
2009.
Liquidity and Capital
Resources
Cash Flows
Twelve
Months ended December 31, 2009 and 2008
Net cash flow used in operating activities was $946,359 in fiscal year 2009, while net cash flow
used in operating activities was $1,237,991 in fiscal year 2008. The decrease in the negative net cash flow
used in operating activities from 2008 to 2009
was mainly due to the decrease in net loss and a smaller increase in
accounts payable.
Net cash flow used in investing
activities was $2,975 for fiscal year 2009 and a source of $1,785,787 in fiscal year 2008. Uses of cash flow
for investing activities primarily consist of equipment purchases in 2009 and the source of cash flow in
2008 was the payment received from a note receivable.
Net cash flow generated from financing activities was $790,356 in fiscal year 2009 as compared to
($483,608) in fiscal year 2008. The source of net cash flow generated in financing
activities was mainly due to funding from the parent, Innolog
Holdings Corporation and
other related parties.
During 2009, amounts due from
affiliates, net of payables, in the amount of $218,811, were reclassified to
stockholders’ deficiency.
Three Months
ended March 31, 2010
Net cash flow provided by operating activities was $239,095 for
the 3 months ended March 31, 2010, while net cash flow provided
by operating activities was
$20,125 in 2009. The
increase in the
net cash flow provided
by operating activities
from 2009 to 2010 was
mainly due to the decrease in accounts receivable and increase in
accounts payable.
Net cash flow used in financing activities was $15,693 for
the 3 months ended March 31, 2010 and $214,466 in 2009. Uses of cash flow for
financing activities
primarily consisted of debt
repayments.
28
During 2010, amounts due from
affiliates, net of payables, in the amount of $202,451, were reclassified to
stockholders’ deficiency.
Material Impact of Known Events on
Liquidity
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 short term borrowings are necessary
to cover working capital needs. We believe we can operate
for at least the next foreseeable 12 months based on our cash position and
current projected cash flows from operating activities.
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.
Because of our historic net losses and
low working capital position, our independent auditors, in their report on our
financial statements for the year ended December 31, 2009 expressed substantial
doubt about our ability to continue as a going concern.
Contractual Obligations and Off-Balance
Sheet Arrangements
Loan and Line of
Credit
In March 2009, Innolog Holdings
Corporation and Innovative Logistics Techniques, Inc. entered into an agreement with seven
individuals, some of which are Directors of the Company,
for up to
$2,000,000 loan, due on demand. The loan was secured by the assets of
both borrowers. In March 2009, Innolog Holdings Corporation entered into a
$500,000 line of credit agreement with Eagle Bank due on demand. 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 August 13, 2010, the interest rate was 5%. At August 13, 2010, both the loan and the line of credit
were fully outstanding.
Seller Note Payable and Earn Out Note
Payable
In April 2009, when the Company
purchased Innovative Logistics Techniques, Inc. part of the purchase price was a
Seller Note Payable of $1,285,000 payable over three years. In May 2010, this
note was converted into 1,000,000 shares of Convertible Series A Preferred Stock. Also in April 2009, the Company issued
a $900,000 earn out note payable to the former owners of Innovative. This earn
out is based on certain revenue and net income targets over the next 3
years. The value of this
earn out has been reduced to $515,000 as of March 31, 2010.
Loans From Former Shareholder
As of March 31, 2010 loans from one
former shareholder totaled $259,631. Since that time an additional $80,000 has
been loaned.
Loans From Related Parties and Individuals
Since March 31, 2010, the company
has borrowed funds from a related party totaling
$375,000, in three separate notes. These loans are secured by
certain accounts receivable of Innovative. In addition, another related party
loaned the Company $20,000. Also, in June and July the company
received loans totaling $245,000 from several individuals.
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.
29
The following table summarizes our contractual obligations as of March 31, 2010, and the effect these obligations are expected to have on our liquidity and cash flows in future periods.
|
Payments Due by
Period
|
||||||||||||||||||||
|
Total
|
Less than 1
year
|
1-3 Years
|
3-5 Years
|
5 Years +
|
||||||||||||||||
|
Contractual
Obligations:
|
||||||||||||||||||||
|
Bank
Indebtedness
|
$ | 497,570 | $ | 497,570 | $ | 0 | $ | $ | ||||||||||||
|
Obligation under Employment
Agreement
|
792,000 | 148,500 | 594,000 | 49,500 | ||||||||||||||||
|
Other
Indebtedness
|
$ | 1,759,015 | $ | 1,759,015 | $ | 0 | ||||||||||||||
|
Operating
Leases
|
1,317,000 | 541,000 | 776,000 | |||||||||||||||||
|
Totals:
|
$ | 4,365,585 | $ | 2,946,085 | $ | 1,370,000 | $ | 49,500 | $ | |||||||||||
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 shareholders’ 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.
Quantitative and
Qualitative Disclosures about Market Risk
We do not use derivative financial
instruments and had no foreign exchange contracts as of August 13, 2010. Our financial instruments consist of
cash and cash equivalents, trade accounts receivable, accounts payable, and
certain debt obligations. We consider investments in highly liquid instruments
purchased with a remaining maturity of 90 days or less at the date of purchase
to be cash equivalents.
Interest
Rates. Our exposure to
market risk for changes in interest rates relates primarily to our short-term
investments and short-term debt obligations; thus, fluctuations in interest
rates would not have a material impact on the fair value of these securities. A
hypothetical 5% increase or decrease in interest rates would not have a material
impact on our earnings or loss, or the fair market value or cash flows of these
instruments.
PROPERTIES
Offices and
Facilities
Our principal executive offices are
located at 4000 Legato Road, Suite 830, Fairfax, Virginia. The table below
provides a general description of our offices and facilities, including those
for our international operations:
|
Location
|
Principal
Activities
|
Area (sq.
ft.)
|
Lease Expiration
Date
|
||||
|
810 Potomac Avenue,
SE
Washington,
DC 20003
|
Operating
Office
|
3813
|
August 31,
2011
|
||||
|
4000 Legato Road, Suite 830
Fairfax, Virginia 22033
|
Corporate
Office
|
4106
|
June 2013
|
||||
|
205 Powell Place, Suite
121
Brentwood, Tennessee 37027
|
Operating
Office
|
350
|
February 28,
2011
|
||||
|
8300 Greensboro Dr, Suite
225
McLean, Virginia 22102
|
Operating
Office
|
4404
|
December 31,
2011
|
||||
|
3452 Lake Lynda
Drive
Orlando , Florida 32817
|
Operating
Office
|
879
|
April 2011 Pending
Renewal
|
30
Innovative Logistics Techniques Inc. is
party to a non-cancelable operating lease, which expires in December 2011, for
its administrative and operating facility, which lease provides for annual rent
increases. The minimum future commitments under lease agreements payable as of
March 31, 2010 are approximately as follows:
|
Amount
|
||||
|
2010
|
$
|
541,000
|
||
|
2011
|
$
|
680,000
|
||
|
2012
|
$
|
96,000
|
||
SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Security
Ownership Prior to Change of Control
The
following table sets forth information regarding the beneficial ownership of the
Registrant’s common stock as of August 13, 2010, for each of the following
persons, immediately prior to the closing of the Acquisition:
|
·
|
each
person who was a director or executive officer of the Registrant
immediately prior to the Closing the
Acquisition;
|
|
·
|
all
such directors and executive officers as a group;
and
|
|
·
|
each
person (including any group) who is known by the Registrant as to own
beneficially five percent or more of the Registrant’s common stock
immediately prior the Closing of the
Exchange.
|
Beneficial
ownership is determined in accordance with the rules of the Securities and
Exchange Commission. Unless otherwise indicated in the table, the persons and
entities named in the table have sole voting and sole investment power with
respect to the shares set forth opposite the shareholder’s name. The percentage
of class beneficially owned set forth below is based on 4,747,319 shares of
common stock issued and outstanding as of August 12, 2010, immediately prior to
the Closing of the Acquisition and assumes a 1-for-11.120904 reverse stock split
which took place on August 12, 2010.
|
Named
executive officers and directors (1):
|
Number
of
Shares
beneficially
owned
(2)
|
Percentage of
common
stock beneficially
owned
(2)(3)
|
|||||
|
Bill Glaser, CEO and
Director
|
2,678,018
|
(4)
|
56.4
|
%
|
|||
|
Fred
Tannous, Director
|
154,146
|
3.2
|
|||||
|
All
directors and executive officers as a group (two persons)
|
2,832,164
|
59.6
|
%
|
||||
|
(1)
|
Unless
otherwise indicated, the address of each beneficial owner listed below is
499 North Canon Drive, Suite 308, Beverly Hills, CA
90210.
|
|
(2)
|
Under
Rule 13d-3, a beneficial owner of a security includes any person who,
directly or indirectly, through any contract, arrangement, understanding,
relationship, or otherwise has or shares: (i) voting power, which includes
the power to vote, or to direct the voting of shares; and (ii) investment
power, which includes the power to dispose or direct the disposition of
shares. Certain shares may be deemed to be beneficially owned
by more than one person (if, for example, persons share the power to vote
or the power to dispose of the shares). In addition, shares are
deemed to be beneficially owned by a person if the person has the right to
acquire the shares (for example, upon exercise of an option) within 60
days of the date as of which the information is provided. In
computing the percentage ownership of any person, the amount of shares
outstanding is deemed to include the amount of shares beneficially owned
by such person (and only such person) by reason of these acquisition
rights. As a result, the percentage of outstanding shares of
any person as shown in this table does not necessarily reflect the
person's actual ownership or voting power with respect to the number of
shares of common stock actually
outstanding.
|
|
(3)
|
The
percentage of class beneficially owned is based on 4,747,319 shares of
common stock outstanding on August 12,
2010.
|
|
(4)
|
4,000,000
of these shares represent the number of shares of common stock that Mr.
Glaser has the right to purchase upon exercise of options, and 575,000 of
these shares represent the number of shares of common stock issuable upon
exercise of warrants held by Mr.
Glaser.
|
31
Security
Ownership After Change of Control
The
following table sets forth information regarding the beneficial ownership of the
Registrant’s common stock as of August 13, 2010, for each of the following
persons, after the Closing of the Acquisition:
|
·
|
each
person named to be a director and/or executive officer of the Registrant
in connection with the Transaction;
|
|
·
|
all
such directors and executive officers as a group;
and
|
|
·
|
each
person (including any group) who is known by the Registrant as to own
beneficially five percent or more of the Registrant’s common stock after
the Closing of the Exchange.
|
Beneficial
ownership is determined in accordance with the rules of the Securities and
Exchange Commission. Unless otherwise indicated in the table, the persons and
entities named in the table have sole voting and sole investment power with
respect to the shares set forth opposite the shareholder’s name. Unless
otherwise indicated, the address of each beneficial owner listed below is 4000
Legato Road, Suite 830 Fairfax, VA 22033. The percentage of class beneficially
owned set forth below is based on 13,629,774 and 36,964,758 shares of common
stock and Series A Preferred Stock, respectively issued and outstanding as of
August 13, 2010, immediately following the Closing.
|
Named
executive officers and directors: (1)
|
Number
of Common Shares beneficially owned (2)
|
Percentage
of class beneficially owned
|
Number
of Preferred Shares beneficially owned (2)
|
Percentage
of Series A Preferred Shares beneficially owned
|
|
William
P. Danielcyzk
|
7,150,041
|
12.54%
|
2,233,391
|
6.04%
|
|
Michael
J. Kane
|
4,904,809
|
9.51%
|
1,802,769
|
4.88%
|
|
Verle
B. Hammond
|
1,370,491
|
2.67%
|
1,000,000
|
2.71%
|
|
Joe
Kelley
|
3,514,137
|
6.98%
|
1,275,850
|
3.45%
|
|
Bruce
D. Riddle
|
1,005,527
|
2.03%
|
300,000
|
0.81%
|
|
Stephen
D. Moses
|
3,254,073
|
6.54%
|
1,260,000
|
3.41%
|
|
Ian
J. Reynolds
|
3,507,545
|
6.96%
|
1,332,500
|
3.60%
|
|
Erich
Winkler
|
894,111
|
1.77%
|
300,000
|
0.81%
|
|
Ram
Agarwal
|
%
|
%
|
||
|
%
|
||||
|
All
directors and executive officers as a group (9 persons)
|
25,600,734
|
41.09%
|
9,504,510
|
25.71%
|
|
5%
Shareholders: (1)
|
||||
|
Melvin
D. Booth
|
5,214,113
|
10.34%
|
2,185,000
|
5.91%
|
|
Dr.
Harry R. Jacobson, MD
|
6,199,942
|
12.20%
|
2,498,863
|
6.76%
|
|
Galen
Capital Corporation (3)
|
8,000,000
|
15.54%
|
4,000,000
|
11.09%
|
|
GOFSIX,
LLC (2)
|
33,620,000
|
52.30%
|
16,810,000
|
45.48%
|
* Less than 1%.
|
(1)
|
Unless
otherwise noted, the address for each of the named beneficial owners is:
4000 Legato Road, Suite 830 Fairfax, VA 22033.
|
|
|
(2)
|
Under
Rule 13d-3, a beneficial owner of a security includes any person who,
directly or indirectly, through any contract, arrangement, understanding,
relationship, or otherwise has or shares: (i) voting power, which includes
the power to vote, or to direct the voting of shares; and (ii) investment
power, which includes the power to dispose or direct the disposition of
shares. Certain shares may be deemed to be beneficially owned by more than
one person (if, for example, persons share the power to vote or the power
to dispose of the shares). In addition, shares are deemed to be
beneficially owned by a person if the person has the right to acquire the
shares (for example, upon exercise of an option) within 60 days of the
date as of which the information is provided. In computing the percentage
ownership of any person, the amount of shares outstanding is deemed to
include the amount of shares beneficially owned by such person (and only
such person) by reason of these acquisition rights. As a result, the
percentage of outstanding shares of any person as shown in this table does
not necessarily reflect the person's actual ownership or voting power with
respect to the number of shares of common stock actually
outstanding.
|
|
|
(3)
|
Mr.
Danielczyk is the executive chairman of Galen Capital
Corporation.
|
32
DIRECTORS
AND EXECUTIVE OFFICERS
Directors
and Executive Officers Prior to Change of Control
The
Registrant’s officers and directors prior to the Closing of the Acquisition and
information concerning them are as follows:
|
Name
|
Age
|
Position
|
||
|
Bill
Glaser
|
44
|
Chairman,
CEO and Interim CFO
|
||
|
Fred
Tannous
|
44
|
Director
|
Biographical
Information
Set forth
below is a summary of our executive officers’ and directors’ business experience
for the past 5 years. The experience and background of each of the
directors, as summarized below, were significant factors in their previously
being nominated as directors of the Company.
Bill
Glaser. Mr. Glaser was our Chairman, Chief Executive Officer
and Interim Chief Financial Officer until he recently resigned prior to the
Acquisition. Mr. Glaser began to devote his full time to the Company
beginning in July 2005. From December 2000 to July 2005 Bill served
as President of Health Sciences Group, Inc., a manufacturer, marketer, and
distributor of pharmaceuticals and nutrition based products. He was
also a director of Health Sciences from December 2000 to May 2007, during which
time the company was publicly traded. He worked closely with the CEO
of Health Sciences to provide oversight in all aspects of operations ranging
from crafting and executing Health Sciences’ overall growth strategy to
structuring debt and equity financings and seeking and evaluating qualified
acquisition candidates. Prior to that, Mr. Glaser was founder and
Chief Executive Officer of Zenterprise, Inc., a corporate consulting firm, which
provided strategy, finance, and marketing services for both public and private
companies. Prior, Mr. Glaser was a registered principal of a regional
stock brokerage firm where he gained diverse experience in finance, management,
marketing, sales, and public company relations. Previously, he was a
registered representative at Drexel Burnham Lambert and Smith
Barney. Mr. Glaser holds a Bachelor’s degree in finance and economics
from the Ithaca College - School of Business.
Fred
Tannous. Mr. Tannous was our director. He had been
the co-Chairman, Chief Executive Officer, and Treasurer of Health Sciences Group
from October 2000 to May 2007. He was also a director of Health Sciences
from December 2000 to May 2007 during which time the company was publicly
traded. Previously, Mr. Tannous was employed at DIRECTV, Inc. where
he was involved in various capacities including valuing, structuring, and
executing strategic investments. Prior to joining DIRECTV, a wholly
owned subsidiary of Hughes Electronics Corporation, Mr. Tannous was with the
corporate treasury organization of Hughes where he assisted in conducting
valuations and effectuating financing transactions for the company’s satellite
and network communication units. From February 1996 to May 1999, Mr.
Tannous served as Treasurer and Chief Financial Officer of Colorado Casino
Resorts, Inc., a gaming and lodging concern with operations in
Colorado. In addition to overseeing the company’s finance and
accounting operations, he was accountable for all corporate finance and treasury
activities. Previously, as principal of his own consulting firm, Mr.
Tannous consulted to several start-up ventures in various industries where he
was instrumental in developing business plans, advising on business strategy and
capital structure, and arranging venture financings. Mr. Tannous
received an MBA in finance and accounting from the University of Chicago,
Graduate School of Business. He also holds a Masters and Bachelors
degree in Electrical Engineering from the University of Southern
California.
33
Furthermore, concurrent with the closing of the acquisition transaction, Bill Glaser resigned as our Chairman, Chief Executive Officer, and Interim Chief Financial Officer. Immediately following the resignations of Messrs. Glaser and Tannous, we appointed 3 new executive officers.
Family
Relationships
There are
no family relationships among our directors and executive officers.
Involvement
in Certain Legal Proceedings
None of
our directors or executive officers has, during the past ten years:
|
·
|
Had
any petition under the federal bankruptcy laws or any state insolvency law
filed by or against, or had a receiver, fiscal agent, or similar officer
appointed by a court for the business or property of such person, or any
partnership in which he was a general partner at or within two years
before the time of such filing, or any corporation or business association
of which he was an executive officer at or within two years before the
time of such filing;
|
|
·
|
Been
convicted in a criminal proceeding or a named subject of a pending
criminal proceeding (excluding traffic violations and other minor
offenses);
|
|
·
|
Been
the subject of any order, judgment, or decree, not subsequently reversed,
suspended, or vacated, of any court of competent jurisdiction, permanently
or temporarily enjoining him from, or otherwise limiting, the following
activities:
|
|
(i)
|
Acting
as a futures commission merchant, introducing broker, commodity trading
advisor, commodity pool operator, floor broker, leverage transaction
merchant, any other person regulated by the Commodity Futures Trading
Commission, or an associated person of any of the foregoing, or as an
investment adviser, underwriter, broker or dealer in securities, or as an
affiliated person, director or employee of any investment company, bank,
savings and loan association or insurance company, or engaging in or
continuing any conduct or practice in connection with such
activity;
|
|
(ii)
|
Engaging
in any type of business practice;
or
|
|
(iii)
|
Engaging
in any activity in connection with the purchase or sale of any security or
commodity or in connection with any violation of federal or state
securities laws or federal commodities
laws;
|
|
·
|
Been
the subject of any order, judgment, or decree, not subsequently reversed,
suspended, or vacated, of any federal or state authority barring,
suspending, or otherwise limiting for more than 60 days the right of such
person to engage in any activity described in (i) above, or to be
associated with persons engaged in any such
activity;
|
|
·
|
Been
found by a court of competent jurisdiction in a civil action or by the SEC
to have violated any federal or state securities law, where the judgment
in such civil action or finding by the SEC has not been subsequently
reversed, suspended, or vacated; or
|
|
·
|
Been
found by a court of competent jurisdiction in a civil action or by the
Commodity Futures Trading Commission to have violated any federal
commodities law, where the judgment in such civil action or finding by the
Commodity Futures Trading Commission has not been subsequently reversed,
suspended, or vacated.
|
|
·
|
Been
the subject of, or a party to, any federal or state judicial or
administrative order, judgment, decree, or finding, not subsequently
reversed, suspended or vacated, relating to an alleged violation
of:
|
||
|
(i)
|
Any
federal or state securities or commodities law or regulation;
or
|
||
|
(ii)
|
Any
law or regulation respecting financial institutions or insurance companies
including, but not limited to, a temporary or permanent injunction, order
of disgorgement or restitution, civil money penalty or temporary or
permanent cease-and-desist order, or removal or prohibition order;
or
|
||
|
(iii)
|
Any
law or regulation prohibiting mail or wire fraud or fraud in connection
with any business entity; or
|
||
34
|
·
|
Been
the subject of, or a party to, any sanction or order, not subsequently
reversed, suspended or vacated, of any self-regulatory organization (as
defined in Section 3(a)(26) of the Securities Exchange Act of 1934), any
registered entity (as defined in Section 1(a)(29) of the Commodity
Exchange Act), or any equivalent exchange, association, entity or
organization that has disciplinary authority over its members or persons
associated with a member.
|
Descriptions of our newly appointed
directors and officers can be found below.
Directors
and Executive Officers After the Change of Control
The following table sets forth the names
and ages of our directors, executive officers, and key employees after the change of control:
|
Name
|
Age
|
Position
|
||
|
William P.
Danielczyk
|
48
|
Executive Chairman of the
Board
|
||
|
Michael J.
Kane
|
57
|
Corporate Secretary/Treasurer, and
Director
|
||
|
Verle B.
Hammond
|
76
|
Director, President & CEO of
Innovative Logistics Techniques, Inc.
|
||
|
Joe Kelley
|
62
|
Director and Chairperson of the
Compensation Committee
|
||
|
Bruce D.
Riddle
|
54
|
Director and Chairperson of the
Audit Committee
|
||
|
Stephen D.
Moses
|
75
|
Director
|
||
|
Ian J. Reynolds,
M.D.
|
61
|
Director
|
||
|
Erich
Winkler
|
55
|
Director
|
||
|
Ram Agarwal
|
54
|
Corporate
Controller
|
William P. Danielczyk
Executive Chairman - Mr.
Danielczyk has extensive experience in the healthcare and banking sectors.
Currently, he serves as Chairman and founding member of Emerging Companies, LLC
, a merchant banking firm serving middle-market companies. From July 2002
through May 2010, Mr. Danielczyk served as Chairman of Galen Capital Corporation
(‘GCC’), a diversified middle- market investment banking firm with a focus on
the healthcare and defense sectors. During his tenure, he grew GCC
from 1 to 5 offices and acquired and/or completed over $2 billion of
transactions. Mr. Danielczyk’s previous positions include being a
member of the Board of Directors of AcuNetx, Inc. a publicly-traded
company. Mr. Danielczyk was also Chairman and CEO of Millenium Health
Communications, Inc., (‘MHC’) a B2B healthcare technology
company. Mr. Danielczyk led MHC through a merger with, and became
Chairman of, Surgical Safety Products, a publicly traded company. Mr.
Danielczyk also previously served as Chairman of the Board of IJM Holdings
Corporation, TEDA Travel, Incorporated and Reli Communications, a
telecommunications service provider. Mr. Danielczyk was the founder
and CEO of Ambulatory Healthcare Corporation of America (AHCA), a comprehensive
network of integrated and innovative outpatient healthcare services. An advisor
on healthcare issues to government and industry leaders, Mr. Danielczyk was a
member of the National Health Museum Board of Trustees from 1999 to 2002, has
served on numerous other not-for-profit boards and held advisory positions with
a host of charitable organization.
Michael J. Kane
Secretary, Treasurer & Director – Currently a partner in Emerging
Companies, LLC, a merchant banking firm serving middle-market companies,
Mr. Kane brings a wealth of
corporate finance experience to the Innolog Holdings management team. Mr. Kane
was previously Vice Chairman and Chief Financial Officer of Galen Capital
Corporation, a diversified middle market investment banking firm with a focus on
the healthcare and defense sectors. Mr. Kane was instrumental in
growing GCC from 1 to 5 offices and completing over $2 billion in capital
markets transactions. Mr. Kane previously served as Secretary and
Treasurer for IJM Holdings Corporation. Mr. Kane brings twenty-eight (28) years
in commercial banking experience, having spent more than twenty (20) years with
SunTrust Bank serving in senior management positions such
as Executive Vice President and Senior Credit Officer. While at
SunTrust Mr. Kane served as the head of the bank’s national healthcare lending
area. This area focused on the for profit healthcare services segment. Mr. Kane
formerly served as Chairman of the Finance Board of the Diocese of Nashville and
was formerly the Chairman of the State of Tennessee Bank Collateral Pool Board.
He has a B.S. in Finance from Indiana University, a MBA from the University of
Notre Dame and is a graduate of the Stonier Graduate School of
Banking.
Verle B. Hammond,
Director, President & CEO
of Innovative Logistics Techniques, Inc. -
Mr. Hammond is President
and CEO of Innovative Logistics Techniques, Inc. (INNOLOG). Since founding
INNOLOG in 1989, he has grown the company to its current status as one of the
nation's leading providers of supply chain logistics solutions. At one
time since its inception, INNOLOG grew from a staff of 8 with a $250,000
contract to over 300 employees and annual revenues of around $65 million.
Deloitte and Touché recognized INNOLOG as part of its 1998 Virginia Fast
50 ranking of the fastest growing technology companies in the state. Black
Enterprise Magazine has recognized INNOLOG since 1996 in its annual "Top 100"
listing of America's largest and most successful black-owned companies. As
the Founder and CEO of INNOLOG, he has been at the forefront of out-of-the-box
logistics thinking in areas such as asset visibility and supply chain
technology. With 44
years of experience in logistics, Mr. Hammond continues to guide the direction
of INNOLOG. INNOLOG has been a mentor company for several years in the
U.S. Defense Department’s Mentor Protégé program. INNOLOG has been a protege
company for several years in the Small Business Associations' Mentor Protege
Program. He recently received the Parren J. Mitchell Foundation’s Lifetime
Achievement Award for his achievements as a minority business owner. Mr. Hammond
is the Treasurer of the Board of Trustees for the University of the District of
Columbia. During his 28 years in the U.S. Army,
Mr. Hammond earned the rank of Colonel and held key command and management
assignments in all aspects of logistics and weapons systems acquisitions, with
overseas assignments in Iran, Korea and Vietnam. He served five years at
the U.S. Army Materiel Command in ADP Systems Development, Systems Integration,
ADP Networking, Weapon Systems Management, and Integrated Logistics Support.
While serving in Vietnam he was awarded 4 Bronze Stars, 3 Air Medals, and
the South Vietnamese Honor Medal as a Combat Logistician. After retiring from the US Army in 1984
as, Mr. Hammond joined Innovative Technology, Inc. (ITI) as the company’s Army
Program Manager. In less than a year he was promoted to Senior Vice
President and Director of Operations with responsibility for all technical and
administrative operations. During his five years at ITI, revenue from Army
sources increased an average of 338% per year. In December 2002, Mr. Hammond co-founded
The Verle and Eleanor Hammond Foundation as a non-profit public charity.
The current geographic focus is Loudoun County, Virginia and St. Johns
County, Florida. The foundation focuses on working with families, schools, and
communities to enable and inspire youth who are not given the opportunity to
realize their full potential, through programs that increase their visibility
and self awareness.
35
Stephen D. Moses
Director Mr. Moses, brings
over thirty (30) years of finance, mergers & acquisitions, as well as
business and real estate development experience to the firm. Throughout his
career he has served his government, his community and leading corporations in
significant and successful projects. Mr. Moses was Vice Chairman of MP
Biomedicals, Inc., a company dedicated to promoting research in the life science
and biotech industries, and has been Chairman of the Board of Stephen Moses
Interests since 1981. He was founder and chairman of National Investment
Development Corp. and of Brentwood Bank. Mr. Moses has been involved in the
privatization and capitalization of businesses in the emerging economies of the
former Soviet Bloc, as a member of the Board of ICN Pharmaceuticals (NYSE) and
Chairman of its Audit Committee. He was a member of the Board of The Central
Asian-American Enterprise Fund, appointed by the President of the United States
and was Chair of its Investment Committee. Mr. Moses has been active in the
field of government housing programs and real estate syndication and development
for nearly twenty (20) years. He has held senior level positions at Boise
Cascade Corporation, City Construction Corporation (an amalgamation of the
resources of Kidder, Peabody & Co., Inc. and Prudential Insurance Company of
America) and Transcontinental Realty Corporation. Mr. Moses serves or served on
various boards of not-for- profit and for-profit organizations, has been active
on several Presidential Commissions and served on a range of national political
campaigns. He received a BS in Economics from Franklin & Marshall College
and is a Cum Laude graduate of Harvard Law School.
Joe Kelley, CLU, ChFC
Director and Chairman of Compensation Committee As a Special Advisor, Mr. Kelley,
retired President, Chairman and CEO of American General Life and Accident
Insurance Company, brings over thirty years of executive management and
corporate strategy expertise to the role. Mr. Kelley joined American General in
1994 as senior vice president and chief marketing officer and rapidly assumed
increasingly senior roles within the company, culminating with the position of
Chairman and Chief Executive Officer of the company in 1999. He retired in
September 2001. Prior to joining American General, Mr. Kelley served for
twenty-four (24) years at Prudential, rising through the ranks to Chief
Marketing Officer and Senior Vice President. Mr. Kelley is a member of the Board
of Trustees of The American College, and serves on numerous business and civic
organizations including: regional chapters of the United Way, the Boy Scouts of
America and the YMCA. He is a member of the Board of Directors of the Tennessee
Sports Hall of Fame and the recipient of the Paul W. Bryant Alumni-Athlete
Award. Mr. Kelley is also a former member of the Nashville Chamber of Commerce
Board of Governors. He received a BS in Commerce and Business
Administration from the University of Alabama and is a graduate of the Wharton
School of Business Advanced Management Program. He is a Chartered Life
Underwriter (CLU) and a Chartered Financial Consultant
(ChFC).
Bruce D. Riddle, CPA,
CFP Director and Chairman of Audit Committee Mr. Riddle is Managing Member and
Founder of BDR Associates, LLC, a firm specializing in tax, financial,
investment and business planning. Business owners and executives rely on Mr.
Riddle’s expertise for a variety of business and financial issues including tax
return preparation, the financial viability and appropriate structure for
business ventures, income tax planning, compensation planning, retirement
planning, estate and gift tax planning, business succession planning, wealth
transfer planning and overall investment review regarding asset allocation and
investment performance issues. On the business side, Mr. Riddle works with
clients on assembling their management team, negotiating contracts, and assists
them in identifying sources of capital and obtaining loans. Mr. Riddle also
helps evaluate the financial viability and financial structure of projects. Mr.
Riddle is a graduate of the University of North Carolina at Chapel Hill and
began his career with Ernst & Whitney (now Ernst & Young) in the audit
practice and was promoted to Manager in his third year. He spent time in Ernst's
National Tax Department. In the mid-1980's, Mr. Riddle was the CFO of a private
investment counseling firm and a real estate development firm. In the later
1980's, Mr. Riddle was a Senior Manager with KPMG. Prior to forming BDR
Associates, Mr. Riddle served as a Partner in Charge of Tax at one of the larger
and more established Washington D.C. based CPA firms.
36
Ian J. Reynolds, M.D. Director Dr. Reynolds is a recognized and accomplished leader in the specialty of Orthopedics. Dr. Reynolds attended Indiana School of Medicine. He performed his residency at the Ochsner Foundation Hospital in New Orleans, LA between 1976 and 1980 in Orthopedics. He is a staff physician at Danforth Memorial Hospital in Texas City, TX. In addition, he served as its Chief of Staff from 1986-1987. Dr. Reynolds is on staff at several other Houston area hospitals and is certified by the American Board of Orthopedic Surgeons and is a Fellow of the American Academy of Orthopedic Surgeons. Dr. Reynolds is a founder of the first freestanding outpatient surgical center in Texas. Dr. Reynolds donates his time and service for local junior and high school soccer teams.
Erich Winkler
Director, Mr. Winkler
brings over 25 years of experience in leading and successfully executing
business and information technology transformation programs to the firm. He is
founder and senior partner of BizTek-Global, an advisory and consulting firm
specializing in aligning business and information technology strategies,
managing acquisition, integration, outsourcing and divestiture programs, and in
planning and deploying integrated enterprise resource planning solutions. Prior
to starting his own company in 2008, Mr. Winkler held various senior information
technology management positions with the Altria Group of companies, a Fortune 20
global consumer goods industry leader. He led the information technology
functions at several of the companies' business divisions in North America,
Europe, and in Asia/Pacific. Throughout his career, Mr. Winkler significantly
contributed to improving business performance through the effective deployment
of information technology solutions in the areas of sales, marketing, supply
chain, research and development, finance and human resources
systems. Since 2004, Mr. Winkler also serves on the Board of the
Society for Information Management (SIM) New York, a non-for-profit professional
organization for senior information technology executives committed to
leadership development and innovation. He is also an advisory board member of
privately held software companies. Mr. Winkler holds a degree in Business
Administration from the Zurich School of Business
Administration.
Ram Agarwal, Corporate
Controller, Mr. Agarwal has over fifteen years of experience in managing
Federal Government contract accounting systems for business units with revenue
of over $200 million. He has held various senior level finance
positions including Controller, Senior Management Consultant and Comptroller for
companies such as Goodman & Company-Government Consulting Group, L-3
Communication Government Services, Inc., Systems Engineering and Security, Inc.,
Sonex Enterprise, Inc. and PAI Inc. Mr. Agarwal is knowledgeable in
preparing quarterly and annual financial statements, budget estimates, status
reports and resolved contractual issues. He is proficient in Federal
Financial Systems, accounting policies and procedures, Generally Accepted
Accounting Standards (GAAS), FAR, DCAA and Federal Travel Regulations
(FTR). Mr. Agarwal is a Certified Public Accountant in the
Commonwealth of Virginia and a member of the American Institute of Certified
Public Accountants, The Virginia Society of CPAs and the Association of
Government Accountants (AGA). He received his Bachelor of Science degree
in Mathematics from St. Johns College in Agra, India.
Current Management of Innovative
Logistics Techniques, Inc.
The following table sets forth the names
and ages of our executive officers, and key employees as of the date of this
Form 8-K:
|
Name
|
Age
|
Position
|
||
|
Verle B.
Hammond
|
76
|
President and Chief Executive
Officer
|
||
|
Thomas W.
Burden
|
62
|
Executive Vice President of
Operations
|
||
|
Pamela R.
Holmes
|
51
|
Senior Vice President of
Contracts
|
||
|
William A.
Joseph
|
67
|
Senior Vice President of
Sales
|
||
Verle B. Hammond, President
and Chief Executive Officer. Mr. Hammond’s biography is described
above.
Thomas W. Burden,
Executive Vice President of Operations A thoroughly seasoned Defense & Healthcare industry executive, Mr. Burden brings over 35
years of experience in the development, management, and operation of complex
health care delivery and
defense deployment systems,
including 23 years in Navy Medicine, eight years with PHP Healthcare
Corporation, and ten years with CRAssociates, Inc. A former Navy Medical Service Corps
Officer, his military health care experience includes medical center, hospital,
and clinic management, operational medicine, program management, healthcare
recruiting, quality assurance, resource management, strategic planning, and
managed health care. Immediately prior to his military retirement, Mr. Burden
served on the staff of the Navy Surgeon General, where he directed the Navy’s
health care contracting operations. Since that time, Mr. Burden has
developed extensive knowledge and capabilities in
health services privatization and outsourcing for both publicly- and
privately-owned companies and for federal, state, and local government
agencies. In his role as Senior Vice President and Managing Director,
Managed Care at PHP Healthcare (NYSE), he managed numerous health services
delivery contracts, providing comprehensive and continuing care under a wide
variety of contracting models. As such, he was directly responsible for business
development, client relations, program implementation and start-up, healthcare
recruiting, quality management, contract administration, and ongoing program
operations. His service lines included total managed care programs
under capitation, occupational medicine, primary care facility management, and
behavioral health services. As Executive Vice President at
CRAssociates, Mr. Burden contributed directly to this company’s rapid growth by
leading business development, program implementation, and operations of
government and private sector outsourced health care services for this privately
owned health services firm with annual revenues in excess of $100 million,
enabling the company to double in revenue for each of its first five years and
be named by Inc Magazine in its 2004 Inc 500 list as one of the fastest growing
privately held companies (#54). With P&L responsibility for services
operating nationwide with over 750 FTEs, he was also responsible for operation
of multiple primary care centers, nationwide occupational healthcare for
an auto manufacturer, and a national
managed care support
program. Mr.
Burden holds a Master of Health Administration degree from Baylor University and
a Bachelor of Arts degree, summa cum laude, in Health Care Management and
Business Administration/Economics from the University of LaVerne. He is a Fellow
of the American College of Healthcare Executives and has served as a preceptor
for graduate students fulfilling their administrative residency under the
Army-Baylor University Graduate Program in Health Care Administration. He also
has held a faculty appointment at Wayland Baptist University as an instructor in
Healthcare Administration and Management.
37
Pamela R. Holmes,
Senior Vice President of Contracts. Pamela Holmes is the Senior Vice President of
Contracts at Innovative Logistics Techniques, Inc. . She has been with INNOLOG since 1990
and is responsible for the company's marketing, strategic business development,
contracts and proposal development activities. She oversees the creation of all
corporate marketing materials and actively participates in the planning and
execution of INNOLOG's corporate growth objectives. Before joining INNOLOG, she
was employed with Innovative Technology Incorporated. At this product-oriented
firm, she planned and managed channel sales organization and customer service
teams and was responsible for marketing materials, promotional development, and
GSA Schedule development.
William A. Joseph,
Senior Vice President of Sales. Mr. Joseph has overall corporate
responsibility for the INNOLOG sales function as well as serving as
President/CEO, JONA, Inc. Mr. Joseph has more than 40 years of
experience in the management of complex healthcare operations; both professional
military and within the private sector. As a retired Navy Medical
Service Corps Officer Mr. Joseph has a full appreciation of the Military Health
Care System (MHCS) and the complexities associated with providing high quality
health care services.
Mr. Joseph entered the private sector
after 28 years of Navy service as a Hospital Corpsman and Medical Service Corps
Officer. He held progressively more responsible health care
administration and operations positions culminating with a tour of duty as
Commanding Officer, Naval Medical Clinics Command, Washington, DC, a network of
ambulatory care clinics providing more than 200,000 outpatient visits per
year.
Prior to forming JONA, Inc. and forming
a partnership with INNOLOG, he served as the Executive Vice President/Director
of Veterans Services for a large privately held health care
contractor. In this role he established the organization’s program
for Community Based Outpatient Clinics (CBOC’s) and grew the program to more
than 25 CBOC’s providing care for more than 45,000 veterans in 12
states. Mr. Joseph also held the position of Deputy Chief Operating
Officer, Managed Care Division for a large publically traded Healthcare
Corporation. In that position, he was responsible for operation of a
large integrated health system, comprised of 27 primary care facilities and
multiple provider networks, as well as four freestanding, independent Family
Health Centers and two Occupational Health Clinics located in major industrial
complexes. Earlier he served the same corporation as Vice President,
Long Term Care Division where he held direct responsibility for establishment
and operation of seven Veterans Administration nursing homes and one specialty
geriatric care facility. In addition, Mr. Joseph served as Chief
Operating Officer for a 14-physician radiology practice where he developed and
implemented the Quality Assurance and Utilization Management Review
Program.
Mr. Joseph received his Bachelor of
Science from Southern Illinois University, Carbondale, IL in 1975 and his Master
of Science in Health Care Administration from The George Washington University,
Washington, DC in 1985. Mr. Joseph currently serves as the Prince William County
representative to the Health Systems Agency of Northern Virginia established
under Virginia law to plan for the balanced and orderly development of health
care facilities and services in Northern Virginia.
Family Relationships
Senior Vice President of Contracts, Pam
Holmes is the daughter of CEO, Verle Hammond. Additionally, Anthony Hammond, the
son of Verle Hammond is an employee of Innovative Logistics Techniques in a
non-executive position. There are no family relationships among
officers and directors at Innolog Holdings Corporation.
Other
than as described above, there are no family relationships among our directors
and executive officers.
Involvement
in Certain Legal Proceedings
None of
our directors or executive officers has, during the past ten years:
38
|
·
|
Had
any petition under the federal bankruptcy laws or any state insolvency law
filed by or against, or had a receiver, fiscal agent, or similar officer
appointed by a court for the business or property of such person, or any
partnership in which he was a general partner at or within two years
before the time of such filing, or any corporation or business association
of which he was an executive officer at or within two years before the
time of such filing;
|
|
·
|
Been
convicted in a criminal proceeding or a named subject of a pending
criminal proceeding (excluding traffic violations and other minor
offenses);
|
|
·
|
Been
the subject of any order, judgment, or decree, not subsequently reversed,
suspended, or vacated, of any court of competent jurisdiction, permanently
or temporarily enjoining him from, or otherwise limiting, the following
activities:
|
|
(i)
|
Acting
as a futures commission merchant, introducing broker, commodity trading
advisor, commodity pool operator, floor broker, leverage transaction
merchant, any other person regulated by the Commodity Futures Trading
Commission, or an associated person of any of the foregoing, or as an
investment adviser, underwriter, broker or dealer in securities, or as an
affiliated person, director or employee of any investment company, bank,
savings and loan association or insurance company, or engaging in or
continuing any conduct or practice in connection with such
activity;
|
|
(ii)
|
Engaging
in any type of business practice;
or
|
|
(iii)
|
Engaging
in any activity in connection with the purchase or sale of any security or
commodity or in connection with any violation of federal or state
securities laws or federal commodities
laws;
|
|
·
|
Been
the subject of any order, judgment, or decree, not subsequently reversed,
suspended, or vacated, of any federal or state authority barring,
suspending, or otherwise limiting for more than 60 days the right of such
person to engage in any activity described in (i) above, or to be
associated with persons engaged in any such
activity;
|
|
·
|
Been
found by a court of competent jurisdiction in a civil action or by the SEC
to have violated any federal or state securities law, where the judgment
in such civil action or finding by the SEC has not been subsequently
reversed, suspended, or vacated; or
|
|
·
|
Been
found by a court of competent jurisdiction in a civil action or by the
Commodity Futures Trading Commission to have violated any federal
commodities law, where the judgment in such civil action or finding by the
Commodity Futures Trading Commission has not been subsequently reversed,
suspended, or vacated.
|
|
·
|
Been
the subject of, or a party to, any federal or state judicial or
administrative order, judgment, decree, or finding, not subsequently
reversed, suspended or vacated, relating to an alleged violation
of:
|
||
|
(i)
|
Any
federal or state securities or commodities law or regulation;
or
|
||
|
(ii)
|
Any
law or regulation respecting financial institutions or insurance companies
including, but not limited to, a temporary or permanent injunction, order
of disgorgement or restitution, civil money penalty or temporary or
permanent cease-and-desist order, or removal or prohibition order;
or
|
||
|
(iii)
|
Any
law or regulation prohibiting mail or wire fraud or fraud in connection
with any business entity; or
|
||
|
·
|
Been
the subject of, or a party to, any sanction or order, not subsequently
reversed, suspended or vacated, of any self-regulatory organization (as
defined in Section 3(a)(26) of the Securities Exchange Act of 1934), any
registered entity (as defined in Section 1(a)(29) of the Commodity
Exchange Act), or any equivalent exchange, association, entity or
organization that has disciplinary authority over its members or persons
associated with a member.
|
In 2007,
William P. Danielczyk, the Chairman of Galen Capital Corporation, was named a
subject of a government investigation concerning alleged company campaign
contributions to a candidate for federal elections. When questions arose, Galen
Capital Corporation and Mr. Danielczyk engaged outside counsel to conduct its
own investigation and voluntarily reported the key facts to government agencies
in a written submission. Mr. Danielczyk and counsel have expressed to
us that they remain confident that this matter will conclude without formal
charges being filed.
39
Board of Directors
Our board of directors is currently
composed of eight members. All members of our board of directors serve in this
capacity until their terms expire or until their successors are duly elected and
qualified. Our bylaws provide that the authorized number of directors will be
not less than one.
Board Committees; Director
Independence
Promptly following the date of this Form 8-K, our board of
directors intends to
establish an audit committee, compensation
committee and executive committee. The members of the Audit Committee
shall be Bruce Riddle and Ian Reynolds and Steve
Moses; the members of the Compensation Committee shall be Joe Kelley and Ian Reynolds and Erich
Winkler; and the executive committee shall be William Danielczyk, Michael Kane, and
Joe Kelley.
Three of the members of our board of
directors are independent in accordance with the definitions and criteria
applicable under NASDAQ rules. They are Erich Winkler, Ian Reynolds, and Bruce
Riddle. Our
board of directors has determined, based on information furnished by such
directors and other available information, that they meet the requirements of an
“audit committee financial expert” as such term is defined in the rules
promulgated under the Securities Act of 1933 and the Exchange Act of 1934, as
amended.
Compensation Committee Interlocks and
Insider Participation
No interlocking relationship exists
between our board of directors and the board of directors or compensation
committee of any other company, nor has any interlocking relationship existed in
the past.
EXECUTIVE
COMPENSATION
Director
Compensation
Currently, we pay $1,000 per meeting as
compensation to members of our board of directors for their service on the board
and we reimburse them for expenses incurred in attending board
meetings.
Executive
Compensation
The following summary compensation table
reflects all compensation for fiscal years 2007, 2008, and 2009 received by our
predecessor’s principal executive officer, principal financial officer, and
three most highly compensated executive officers whose salary exceeded
$100,000.
Summary Compensation Table -
Predecessor
|
Name and
Principal Position
|
Year
|
Salary
($)
|
Bonus
($)
|
Stock
Awards
($)
|
Option
Awards
($)(1)
|
Non-
Equity
Incentive
Plan
Compen-
sation
($)
|
Non-
qualified
Deferred
Compen-
sation
Earnings
($)
|
All
Other
Comp-
ensation
($)
|
Total
($)
|
|||||||||
|
Bill
Glaser,
|
2009
|
$
|
144,231
|
(2)
|
—
|
—
|
$
|
190,108
|
—
|
—
|
$
|
9,000
|
(3)
|
$
|
343,339
|
|||
|
CEO
and Interim CFO
|
2008
|
$
|
211,538
|
—
|
—
|
$
|
190,110
|
—
|
—
|
$
|
9,000
|
(3)
|
$
|
410,648
|
||||
|
2007
|
$
|
250,000
|
—
|
—
|
$
|
178,171
|
—
|
—
|
$
|
9,000
|
(3)
|
$
|
437,171
|
|||||
|
(1)
|
The
assumptions made in the valuation of these options can be found in Note 2
to our financial statements for the period ended December 31,
2009.
|
|
(2)
|
This
amount was paid in the form of 7,211,535 shares of our common
stock.
|
|
(3)
|
This
compensation consists of a car allowance of $750 per month pursuant to Mr.
Glaser’s employment agreement.
|
40
The following summary compensation table
reflects all compensation for fiscal year 2009 (company was formed in March
2009) received by Innolog Holdings Corporation principal executive officer,
principal financial officer, and three most highly compensated executive
officers whose salary exceeded $100,000.
Summary Compensation Table – Innolog
Holdings Corporation
|
Name and Principal
Position
|
Year
|
Salary
($)
|
Bonus
($)
|
Stock
Awards
( $)
|
Option
Awards
($)
|
Non-Equity
Incentive Plan
Comp-ensation
($)
|
Non-qualified
Deferred
Comp-ensation
Earnings
($)
|
All Other
Compensation
( $)
|
Total
($)
|
||||||||||||||||||
|
William P.
Danielczyk,
|
2009
|
$
|
0
|
—
|
—
|
—
|
—
|
$
|
0
|
||||||||||||||||||
|
Executive
Chairman
|
—
|
—
|
—
|
—
|
|||||||||||||||||||||||
|
Michael J.
Kane,
|
2009
|
0
|
—
|
—
|
—
|
—
|
0
|
||||||||||||||||||||
|
Secretary/Treasurer
|
—
|
—
|
—
|
—
|
|||||||||||||||||||||||
|
Verle Hammond, President
&
|
2009
|
$196,200
|
|||||||||||||||||||||||||
|
CEO of Innovative Logistics
Techniques, Inc.
|
2008
|
$197,000
|
|||||||||||||||||||||||||
|
Ram Agarwal
Corporate ControllerSecretary/Treasurer(1)
|
0
|
—
|
—
|
—
|
—
|
0
|
|||||||||||||||||||||
|
(1)
|
Mr. Hammond’s salary in 2008 &
2009 was paid by Innovative Logistics Techniques, Inc. (the operating
company). The company anticipates annualized salary
compensation of $ 240,000 to Mr. Danielczyk, $198,000 to Mr. Hammond, and
$90,000 to Mr. Kane and $135,000 to Mr. Agarwal in
2010.
|
|
(2)
|
Mr. Agarwal did not receive more
than $100,000 in the Company’s fiscal year; however his annualized salary
exceeds $100,000.
|
Outstanding Equity
Awards
There are no unexercised options, stock
that has not vested, or equity incentive plan awards for any of our named
executive officers outstanding as of the end of our last completed fiscal year.
As of December 31,
2009 there are warrants
issued in connection with the loan and line of credit (referenced above)
guaranteed by seven individuals, including some of which are directors .
Additionally, there are warrants associated with the acquisition agreement that
are for the Directors and Executive Officers of the
Corporation.
41
Director
Compensation Table
|
Name
|
Year
|
Fees
Earned
or
Paid
in
Cash
($)
|
Stock
Awards
($)
|
Option
Awards
($)
|
Non-Equity
Incentive
Plan
Compensation
($)
|
Nonqualified
Deferred
Compensation
Earnings
($)
|
All
Other
Compensation
($)
|
Total
($)
|
||||||||||||
|
William
P. Danielcyzk
|
2009
|
-0-
|
-0-
|
-0-
|
-0-
|
-0-
|
-0-
|
-0-
|
||||||||||||
|
Michael
J. Kane
|
2009
|
-0-
|
-0-
|
-0-
|
-0-
|
-0-
|
-0-
|
-0-
|
||||||||||||
|
Verle
B. Hammond
|
2009
|
-0-
|
-0-
|
-0-
|
-0-
|
-0-
|
-0-
|
-0-
|
||||||||||||
|
Joe
Kelley
|
2009
|
-0-
|
-0-
|
-0-
|
-0-
|
-0-
|
-0-
|
-0-
|
||||||||||||
|
Bruce
D. Riddle
|
2009
|
-0-
|
-0-
|
-0-
|
-0-
|
-0-
|
-0-
|
-0-
|
||||||||||||
|
Stephen
D. Moses
|
2009
|
-0-
|
-0-
|
-0-
|
-0-
|
-0-
|
-0-
|
-0-
|
||||||||||||
|
Ian
J. Reynolds
|
2009
|
-0-
|
-0-
|
-0-
|
-0-
|
-0-
|
-0-
|
-0-
|
||||||||||||
|
Erich
Winkler
|
2009
|
-0-
|
-0-
|
-0-
|
-0-
|
-0-
|
-0-
|
-0-
|
||||||||||||
|
Ram
Agarwal
|
2009
|
-0-
|
-0-
|
-0-
|
-0-
|
-0-
|
-0-
|
-0-
|
||||||||||||
There
were no option awards issued to any directors and outstanding as of December 31,
2009.
Retirement Plans
Except as described below, we currently
have no plans that provide for the payment of retirement benefits, or benefits
that will be paid primarily following retirement, including but not limited to
tax-qualified defined benefit plans, supplemental executive retirement plans,
tax-qualified defined contribution plans and nonqualified defined contribution
plans.
Innovative Logistics Techniques, Inc.
maintains a 401(k) plan that is tax-qualified for its employees, including its
executive officers. The plan does not offer employer matching with the 401(k)
plan. The 401(k) plan does, however, offer a discretionary employer contribution
at year end.
Potential Payments upon Termination or
Change-in-Control
Except as described below under
“Employment Agreements,” we currently have no contract, agreement, plan or
arrangement, whether written or unwritten, that provides for payments to a named
executive officer at, following, or in connection with any termination,
including without limitation resignation, severance, retirement or a
constructive termination of a named executive officer, or a change in control of
the registrant or a change in the named executive officer’s responsibilities,
with respect to each named executive officer.
Employment
Agreements
The following are summaries of
Innovative Logistics techniques, Inc. employment agreements with the Company’s
incoming executive officers and other employees. The employment agreement with
Bill Glaser has
been terminated.
On April 1, 2009 Innovative Logistics
Techniques, Inc. entered into a 4 year agreement with Verle Hammond. During that
time he willl serve as President & CEO of Innovative. He has the option of
retiring as President & CEO after 2 years and then becoming the Chairman of
Innovative.
CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS,
AND DIRECTOR
INDEPENDENCE
Transactions with Related
Persons
GOFSIX,LLC, one of the Corporation’s
largest shareholders and controlled by Messrs. Danielczyk, Kane, Kelley, Moses,
Reynolds, and Jacobson, has entered into a letter of intent with Harry Jacobson
to assume obligations of the individual members of the LLC. As collateral for
thoses obligations, the LLC will pledge its preferred shares and common stock
warrants.
On May 26, 2010, Emerging Companies, LLC
entered into an engagement with Innolog Holdings to become an Advisor to the
Company relating to certain financial transactions including potential Mergers
& Acquisitions, interfacing with the public markets and other core business
advisory services. William Danielczyk and Michael Kane are members of the
Emerging Companies, LLC. See exhibit 10.14 for a copy of the Engagement
Letter. As part of the Engagement, Mr. Danielczyk and Mr. Kane will serve as
members of the Board and as officers of the Corporation.
42
Director
Independence
For a description of director
independence, see “Board Committees; Director Independence” under the section
entitled “Directors and Executive Officers” above.
LEGAL PROCEEDINGS
Other
than the proceeding described below, we are not currently involved in any
material legal proceedings, nor have we been involved in any such proceedings
that have had or may have a significant effect on us. We are not aware of any
other material legal proceedings pending or threatened against us.
Lau
Massachusettes Business Trust et. al. vs Innovative Logistics Techniques, Inc.
The complaint was filed in June 2010. No answer is due as of the
date hereof. Management believes that there are various defenses to the
allegation and that the lawsuit could be readily resolved. Litigation
counsel has not yet analyzed the lawsuit. The maximum exposure should be
the amount sought - $286,189, plus costs, fees, punitive damages, and
post-judgment interest.
Kettler,
Inc. et. al vs. Innovative Logistics Techniques, Inc. This matter
relates to a Sublease for the Company’s prior headquarters at Pinnacle Drive,
Mclean, Virginia. The plaintiff received a judgment for approximately
$140,000. The Company paid approximately $110,000, plus the plaintiff
has retained a security deposit of $80,000. The plaintiff filed a
further complaint in March 2010 seeking approximately $1 million in damages,
costs, attorney’s fees and interest. Litigation counsel for the
Company has filed an Answer and has asserted various defenses on behalf of the
Company. Management believes that the maximum exposure in a
settlement under the lawsuit should be less than half of the amount
sought.
MARKET PRICE OF AND DIVIDENDS ON THE
REGISTRANT’S COMMON EQUITY
AND RELATED SHAREHOLDER MATTERS
Market Information
On August 12, 2010, our shares of common stock commenced
trading on the Over-The-Counter Bulletin Board (the “OTCBB”) under the symbol
“UKMA.” It is anticipated that in connection
with our name change an application will be made to change our
symbol.
Holders
As of August 13, 2010, we had approximately 300 shareholders of record of our common stock based
upon the shareholder list provided by our transfer agent.
Our transfer agent is Computershare Trust Company, Inc located at 250 Royall
Street, Canton, MA 02021, and their telephone number is (781)
575-2000.
Dividends
We have never paid cash dividends on our
common stock. We intend to keep future earnings, if any, to finance the
expansion of our business, and we do not anticipate that any cash dividends will
be paid in the foreseeable future. Our future payment of dividends will depend
on our earnings, capital requirements, expansion plans, financial condition and
other relevant factors that our board of directors may deem relevant. The
preferred stock of Innolog Holdings is not subject to this
provision.
RECENT SALES OF UNREGISTERED
SECURITIES
Reference is made to Item 3.02 of this
Form 8-K for a description of recent sales of unregistered securities, which is
hereby incorporated by reference.
DESCRIPTION OF
SECURITIES
The following information describes our
capital stock and provisions of our certificate of incorporation and our bylaws,
all as in effect upon the closing of the exchange transaction. This description
is only a summary. You should also refer to our certificate of incorporation and
bylaws that have been incorporated by reference or filed with the SEC as
exhibits to this Form 8-K.
43
General
Our authorized capital stock consists of
100,000,000 shares of common stock, par value $0.001 per share,
and 50,000,000 shares of Preferred Stock, par value $0.001 per share,
(“Preferred”). When the Articles of
Incorporation are amended, our authorized shares of stock will consist of
200,000,000 common shares and 50,000,000 shares of
Preferred.
Common Stock
Holders of our common stock are entitled
to one vote per share on all matters submitted to a vote of the shareholders, including the election of directors.
Generally, all matters to be voted on by shareholders must be approved by a majority of the
votes entitled to be cast by all shares of our common stock that are present in
person or represented by proxy. Holders of our common stock representing fifty
percent (50%) of our capital stock issued, outstanding, and entitled to vote,
represented in person or by proxy, are necessary to constitute a quorum at any
meeting of our shareholders. A vote by the holders of a majority
of our outstanding shares is required to effectuate certain fundamental
corporate changes such as liquidation, merger or an amendment to our certificate
of incorporation. Our certificate of incorporation does not provide for
cumulative voting in the election of directors.
The holders of shares of our common
stock will be entitled to such cash dividends as may be declared from time to
time by our board of directors from funds available
therefore.
Upon liquidation, dissolution, or
winding up, the holders of shares of our common stock will be entitled to
receive pro rata all assets available for distribution to such holders after
distribution of assets to the holders of Series A Preferred.
In the event of any merger or
consolidation with or into another company in connection with which shares of
our common stock are converted into or exchangeable for shares of stock, other
securities, or property (including cash), all holders of our common stock will
be entitled to receive the same kind and amount of shares of stock and other
securities and property (including cash).
Holders of our common stock have no
pre-emptive rights and no conversion rights, and there are no redemption
provisions applicable to our common stock.
Series A Convertible Preferred
Stock
The following is a summary of the
preferences and rights contained in the Certificate of Designation of
Preferences, Rights and Limitations (the “Series A Certificate”) of the Series A
Convertible Preferred Stock (“Series A Preferred”).
Voting Rights
Except as otherwise provided in the
Series A Certificate or by law, each holder of shares of Series A Preferred
shall have the same voting rights as common.
Conversion Rights
Conversion
Each share of Series A Preferred is
convertible at any time and from time to time after the issue date at the
holder’s option into one share of the our common stock. Series A Preferred is
automatically converted into Common Stock upon : (i) the sale by the Company of all or
substantially all of its assets; (ii) the consummation of a merger or a
consolidation in which the Company is not the survivor; (iii) the sale or
exchange of all or substantially all of the outstanding shares of the Company’s
common stock (including by way of merger, consolidation, or other similar
action) except in the case of (ii) or (iii), a transaction in which the current
Company shareholders hold more than 50% of the outstanding voting securities in
the successor company; or (iv) with and only with the written consent of the Board of Directors’ of the Company, any
underwritten public offering by the Company of at least $10,000,000 in gross
proceeds.
Liquidation Preference
Each
share of Series A Preferred Stock issued will have a preference of $2.00 per
share over our Common Stock (“Common”) as to distributions in the
event of a full or partial liquidation or sale of the Corporation or any of its
subsidiaries.
44
Dividends
Holders
of Series A Preferred Stock will be entitled to accrue a portion
of 10% of Company’s net income for such fiscal year as
a dividend proportionally to the number of Series A Preferred Stock
shares they hold.
Other
Each
share of Series A Preferred Stock will, in all other respects have the same
rights and privileges as each share of Common Stock.
Loan/Guarantee and Warrants
At the
purchase of Innovative Logistics Techniques, Inc. the Company entered into a
loan agreement with seven individuals, some of which are directors of
Innolog, to lend up to $2,000,000 to the Company and to guarantee a
$500,000 line of credit to the Company from a Bank. In order to obtain this, the
Company issued Loan/Guarantee Warrants for 4,000,000 common shares with a strike
price of $.01 per share and an expiration of 3/31/14.
As part
of the Merger Agreement, the company assumed certain existing warrants of
Innolog. The Warrants assumed total 40,351,857 with a strike price of $.50 per
share and a expiration date of 6/1/15 to 7/21/15. Total warrants
outstanding of Innolog are 44,351,857.
Additionally,
the Company has existing uKarma warrants totaling 40,465.
INDEMNIFICATION OF DIRECTORS AND
OFFICERS
Nevada Law
The
registrant’s articles of incorporation include a provision that eliminates the
personal liability of its directors for monetary damages for breach of their
fiduciary duty as directors.
In
addition, the registrant’s bylaws provide for the indemnification of officers,
directors and third parties acting on our behalf, to the fullest extent
permitted by Nevada General Corporation Law, if our board of directors
authorizes the proceeding for which such person is seeking indemnification
(other than proceedings that are brought to enforce the indemnification
provisions pursuant to the bylaws). The registrant maintains director and
officer liability insurance.
These
indemnification provisions may be sufficiently broad to permit indemnification
of the registrant’s executive officers and directors for liabilities (including
reimbursement of expenses incurred) arising under the Securities Act of
1933.
Charter Provisions and Other
Arrangements of the Registrant
Our predecessor has adopted the
following indemnification provisions in its certificate of incorporation for its
officers and directors:
The
Corporation shall indemnify, in the manner and to the fullest extent permitted
by the Nevada Law (but in the case of any such amendment, only to the extent
that such amendment permits the Corporation to provide broader indemnification
rights than permitted prior thereto), any person (or the estate of any person)
who is or was a party to, or is threatened to be made a party to, any
threatened, pending or completed action, suit or proceeding, whether or not by
or in the right of the Corporation, and whether civil, criminal, administrative,
investigative or otherwise, by reason of the fact that such person is or was a
director or officer of the Corporation, or is or was serving at the request of
the Corporation as a director or officer of another corporation, partnership,
joint venture, trust or other enterprise. The Corporation to the fullest
extent permitted by the Nevada Law, purchase and maintain insurance on behalf of
any such person against any liability which may be asserted against such person.
The Corporation may create a trust fund, grant a security interest or use
other means (including without limitation a letter of credit) to ensure the
payment of such sums as may become necessary or desirable to effect the
indemnification as provided herein. To the fullest extent permitted by the
Nevada Law, the indemnification provided herein shall include expenses as
incurred (including attorneys’ fees), judgments, finds and amounts paid in
settlement and any such expenses shall be paid by the Corporation in advance of
the final disposition of such action, suit or proceeding upon receipt of an
undertaking by or on behalf of the person seeking indemnification to repay such
amounts if it is ultimately determined that he or she is not entitled to be
indemnified. Notwithstanding the foregoing or any other provision of this
Article, no advance shall be made by the Corporation if a determination is
reasonably and promptly made by the Board by a majority vote of a quorum of
disinterested Directors, or (if such a quorum is not obtainable or, even if
obtainable, a quorum of disinterested Directors so directs) by independent legal
counsel to the Corporation, that, based upon the facts known to the Board or
such counsel at the time such determination is made, (a) the party seeking an
advance acted in bad faith or deliberately breached his or her duty to the
Corporation or its shareholders, and (b) as a result of such actions by the
party seeking an advance, it is more likely than not that it will ultimately be
determined that such party is not entitled to indemnification pursuant to the
provisions of this Article. The indemnification provided herein shall not
be deemed to limit the right of the Corporation to indemnify any other person
for any such expenses to the fullest extent permitted by the Nevada Law, nor
shall it be deemed exclusive of any other rights to which any person seeking
indemnification from the Corporation may be entitled under any agreement, the
Corporation’s Bylaws, vote of shareholders or disinterested directors, or
otherwise, both as to action in such person’s official capacity and as to action
in another capacity while holding such office. The Corporation may, but
only to the extent that the Board of Directors may (but shall not be obligated
to) authorize from time to time, grant rights to indemnification and to the
advancement of expenses to any employee or agent of the Corporation to the
fullest extent of the provisions of this Article as it applies to the
indemnification and advancement of expenses of directors and officers of the
Corporation.
45
In
addition, our bylaws provide for the indemnification of officers, directors and
third parties acting on our behalf, to the fullest extent permitted by Nevada
General Corporation Law, if our board of directors authorizes the proceeding for
which such person is seeking indemnification (other than proceedings that are
brought to enforce the indemnification provisions pursuant to the bylaws). We
maintain directors’ and officers’ liability insurance.
These
indemnification provisions may be sufficiently broad to permit indemnification
of the registrant’s executive officers and directors for liabilities (including
reimbursement of expenses incurred) arising under the Securities Act of
1933.
Insofar
as indemnification for liabilities arising under the Securities Act of 1933
may be permitted to our directors, officers and controlling persons pursuant to
the foregoing provisions, or otherwise, we have been advised that in the opinion
of the SEC such indemnification is against public policy as expressed in the
Securities Act of 1933 and is, therefore, unenforceable. No pending
material litigation or proceeding involving our directors, executive officers,
employees or other agents as to which indemnification is being sought exists,
and we are not aware of any pending or threatened material litigation that may
result in claims for indemnification by any of our directors or executive
officers.
The Company also is in the process of applying
for a $2,000,000
directors and officers liability insurance policy.
CHANGES IN AND DISAGREEMENTS WITH
ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL
DISCLOSURE
There
were no changes in or disagreements with our accountants on accounting and
financial disclosures during our last two fiscal years..
|
Item 2.03
|
Creation of a Direct Financial
Obligation or an Obligation under an Off-Balance Sheet Arrangement of a
Registrant
|
Loan and Line of
Credit
In March 2009, Innolog Holdings
Corporation and Innovative Logistics Techniques, Inc. entered into an agreement
with seven individuals, some of which are Directors of the Company, for a
up to $2,000,000 loan from such individuals, payable on demand. The loan was secured by the assets of
both borrowers. In March 2009, Innolog Holdings Corporation entered into a
$500,000 line of credit with Eagle Bank due on demand. 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 August 13, 2010, the interest rate was 5%. At August 13, 2010, both the loan and the line of credit
were fully outstanding. It is anticipated that the line of credit
will be renewed.
Seller Note Payable and Earn Out Note
Payable
In April 2009, when the Company
purchased Innovative Logistics Techniques, Inc. part of the purchase price was a
Seller Note Payable of $1,285,000 payable over three years. In May 2010, this
note was converted into 1,000,000 shares of Convertible Series A Preferred Stock. Also in April 2009, the Company issued
a $900,000 earn out note payable to the former owners of Innovative. This earn
out is based on certain revenue and net income targets over the next 3
years. The value of this
earn out has been reduced to $515,000 as of March 31, 2010.
46
Loans From Former Shareholder
As of March 31, 2010 loans from former
shareholder totaled $259,631. Since that time an additional $80,000 has been
loaned.
Loans From Related Parties and Individuals
Since March 31, 2010, the company has
received funds from a related party totaling $375,000, in three separate notes. These loans are secured by
certain accounts receivable of Innovative. In addition, another related party
loaned the Company $20,000. Also in June and July the company
received loans from individuals totaling $245,000.
|
Item 3.02
|
Unregistered Sales of Equity
Securities
|
On August
13, 2010, and also as more fully described in Items 1.01 and 2.01 above, in
connection with the Merger Agreement, we issued 8,882,455 shares of our
common stock and 36,964,758 shares of our Series A Preferred Stock to the
Innolog shareholders in exchange for 100% of the capital stock of Innolog
Holdings Corporation. We also issued 44,351,857 warrants to
purchase common stock in exchange for 44,351,857 warrants to purchase Innolog
common stock. Reference is made to the disclosures set forth in Items
1.01 and 2.01 of this Form 8-K, which disclosures are incorporated herein by
reference. The issuance of the common stock to the Innolog shareholders pursuant
to the Merger Agreement was exempt from registration under the Securities Act
pursuant to Section 4(2) and Regulation D thereof. We made this determination
based on the representations of the Innolog shareholders which included, in
pertinent part, that most shareholders were "accredited investors" within the
meaning of Rule 501 of Regulation D promulgated under the Securities
Act. Of the nine shareholders indicating they were not “accredited
investors”, they represented that they were sophisticated investors or were
represented by purchaser representatives that were sophisticated
investors. All persons were provided disclosure statements in
compliance with Rule 506 and Regulation D. All Innolog shareholders
represented that they were acquiring our securities for investment purposes for
their own respective accounts and not as nominees or agents and not with a view
to the resale or distribution thereof, and that each owner understood that the
securities may not be sold or otherwise disposed of without registration under
the Securities Act or an applicable exemption therefrom.
|
Item 5.01
|
Changes in Control of
Registrant.
|
On August 13, 2010, uKarma Corporation, a Nevada corporation
(the “Company”), pursuant
to a merger
agreement described under
Item 1.01, acquired a
solutions oriented organization providing preeminent supply chain logistics and
information technology solutions to clients in the public and private sectors.
The 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, by executing a Merger Agreement (“Merger
Agreement”) by and among the Company, Innolog Merger Sub Corporation, and
Innolog Holdings Corporation Hereinafter, this acquisition transaction is
described as the “Merger Agreement.”
As a result of the Merger Agreement, the
Innolog Owners became our controlling shareholders, and Innolog Holdings Corporation
became our wholly owned subsidiary. In connection with Innolog Holdings
Corporation becoming our wholly owned subsidiary, we acquired the business and
operations of Innolog Holdings Corporation’s wholly owned subsidiary, Innovative
Logistics Techniques, Inc., a Virginia corporation(“Innovative”) , referred to
herein as the “Innovative”), became our indirect wholly owned
subsidiary.
In connection with this change in
control, and as explained in Item 5.02 below, effective August 13, 2010, Bill Glaser resigned
as our Chairman and Chief Executive Officer, and Interim Chief
Financial Officer. Further, effective, August 13, 2010, we appointed the following new
executive officers:
|
Name
|
Age
|
Positions
held:
|
||
|
William P.
Danielczyk
|
48
|
Executive Chairman of the
Board
|
||
|
Michael J.
Kane
|
57
|
Corporate Secretary/Treasurer, and
Director
|
47
In addition, and as explained in Item
5.02 below, Bill Glaser and Fred Tannous agreed to resign as members of our
board of directors, and the following new directors were appointed to our board
of directors:
|
Name
|
Age
|
Positions
Held:
|
||
|
William P.
Danielczyk
|
48
|
Executive Chairman of the
Board
|
||
|
Michael J.
Kane
|
57
|
Corporate Secretary/Treasurer, and
Director
|
||
|
Verle B.
Hammond
|
76
|
President & CEO of Innovative
Logistics Techniques, Inc. and Director
|
||
|
Joe Kelley
|
62
|
Director and Chairperson of the
Compensation Committee
|
||
|
Bruce D.
Riddle
|
54
|
Director and Chairperson of the
Audit Committee
|
||
|
Steven D.
Moses
|
75
|
Director
|
||
|
Ian J. Reynolds,
M.D.
|
61
|
Director
|
||
|
Erich
Winkler
|
55
|
Director
|
|
Item 5.02
|
Departure of Directors or Certain
Officers; Election of Directors; Appointment of Certain Officers;
Compensatory Arrangements of Certain
Officers.
|
As more fully described in Items 1.01,
2.01 and 5.01 above, on August 13, 2010, in a merger agreement transaction, the
company acquired Innolog Holdings Corporation, a solutions oriented organization
providing preeminent supply chain logistics and information technology solutions
to clients in the public and private sectors, by executing the Merger Agreement
by and among the Company, uKarma Corporation , and the uKarma Owners. The
closing of this transaction occurred on August 13, 2010. Reference is made to the disclosures
set forth under Items 1.01, 2.01 and 5.01 of this Form 8-K, which disclosures
are incorporated herein by reference.
|
(a)
|
Resignation of
Directors
|
In connection with the exchange
transaction, on August 13,
2010, Bill Glaser, and Fred
Tannous (the “Resigning Directors”) resigned as members of our board of
directors. There were no disagreements between the Resigning Directors and any
of our officers.
|
(b)
|
Resignation of
Officers
|
Effective August 13, 2010, Bill Glaser resigned as our Chairman
and Chief Executive Officer; and Fred Tannous resigned as our
Director.
|
(c)
|
Appointment of
Officers
|
Effective August 13, 2010, the following persons were appointed
as our newly appointed executive officers (individually, a “New Officer” and
collectively, the “New Officers”):
|
Name
|
Age
|
Positions
held:
|
||
|
William P.
Danielczyk
|
48
|
Executive Chairman of the Board,
and Director
|
||
|
Michael J.
Kane
|
57
|
Corporate Secretary/Treasurer, and
Director
|
There are no family relationships among
any of our officers or directors. The New Officers currently do
not have employment agreements with the Company, which are described
under “Executive Compensation - Employment Agreements” above. Other than the
acquisition transaction under Item 2.01 above, there are no transactions, since
the beginning of our last fiscal year, or any currently proposed transaction, in
which the Company was or is to be a participant and the amount involved exceeds
the lesser of $120,000 or one percent of the average of the Company’s total
assets at year-end for the last three completed fiscal years, and in which any
of the New Officers had or will have a direct or indirect material interest.
Other than the acquisition transaction with uKarma Corporation, there is no
material plan, contract or arrangement (whether or not written) to which any of
the New Officers is a party or in which any New Officer participates that is
entered into or material amendment in connection with our appointment of the New
Officers, or any grant or award to any New Officer or modification thereto,
under any such plan, contract or arrangement in connection with our appointment
of the New Officers.
Descriptions of our newly appointed
officers can be found in Item 2.01 above, in the section titled “Directors and
Executive Officers - Current Management.”
48
|
(d)
|
Appointment of
Directors
|
In connection with the acquisition
transaction and effective as of August 13, 2010, the following persons were appointed
as new members of our board of directors (individually, a “New Director” and
collectively, the “New Directors”):
|
William P.
Danielczyk
|
48
|
Executive Chairman of the
Board
|
||
|
Michael J.
Kane
|
57
|
Corporate Secretary/Treasurer, and
Director
|
||
|
Verle B.
Hammond
|
76
|
President & CEO of Innovative
Logistics Techniques and Director
|
||
|
Joe Kelley
|
62
|
Director and Chairperson of the
Compensation Committee
|
||
|
Bruce D.
Riddle
|
54
|
Director and Chairperson of the
Audit Committee
|
||
|
Steve D.
Moses
|
75
|
Director
|
||
|
Ian J. Reynolds,
M.D.
|
61
|
Director
|
||
|
Erich
Winkler
|
55
|
Director
|
There are no family relationships among
any of our officers or directors at the company level. . There are
family relationships among our directors and executive officers at Innovative
Logistics Techniques, Inc. Senior Vice President of Contracts, Pam
Holmes is the daughter of CEO, Verle Hammond. Additionally, Anthony Hammond, the
son of Verle Hammond is an employee of Innovative Logistics Techniques in a
non-executive position. Other than the acquisition transaction, there
are no transactions, since the beginning of our last fiscal year, or any
currently proposed transaction, in which the Company was or is to be a
participant and the amount involved exceeds the lesser of $120,000 or one
percent of the average of the Company’s total assets at year-end for the last
three completed fiscal years, and in which any of the New Directors had or will
have a direct or indirect material interest. Other than the acquisition
transaction, there is no material plan, contract or arrangement (whether or not
written) to which any of the New Directors is a party or in which any New
Director participates that is entered into or material amendment in connection
with our appointment of the New Directors, or any grant or award to any New
Director or modification thereto, under any such plan, contract or arrangement
in connection with our appointment of the New Directors.
Descriptions of our newly appointed
directors can be found in Item 2.01 above, in the section titled “Directors and
Executive Officers - Current Management.”
|
Item 5.03
|
Amendments to Articles of
Incorporation or Bylaws
|
|
(a)
|
Name
Change
|
Effective August __, 2010, we expect to change our name to
“Innolog Holdings Corporation” by filing a Certificate of Amendment to our
certificate of incorporation with the Secretary of State of the State of Nevada.
In connection with this name change, the Corporation will be filing an
application for a new CUSIP number and trading symbol.
|
(b)
|
Reverse Stock
Split
|
Effective August __, 2010, we expect to change our name to
“Innolog Holdings Corporation” by filing a Certificate of Amendment to our
certificate of incorporation with the Secretary of State of the State of Nevada.
In connection with this name change, the Corporation will be filing an
application for a new CUSIP number and trading symbol.
|
(c)
|
Increase in Authorized
Shares
|
Effective August 12, 2010, we filed an amendment to our articles of
incorporation to increase our authorized number of shares of capital stock from
120,000,000 to 250,000,000, consisting of 200,000,000 shares of authorized
common stock and 50,000,000 shares of authorized preferred
stock.
|
(d)
|
Certificate of Designation for
Series A Convertible Preferred
Stock
|
On August 13, 2010, and as more fully described in Item
2.01 above, we filed a Series A Certificate to fix the preferences, limitations,
and relative rights of our Series A Convertible Preferred Stock. A copy of such
certificate is attached hereto as Exhibit 3.5 and is incorporated herein by
reference.
49
|
(e)
|
Amendment to
Bylaws
|
On August 12, 2010, we filed an amendment
to restate the Bylaws. A
copy of the Bylaws
is attached hereto as Exhibit
3.2 and is incorporated
herein by reference.
|
Item 9.01
|
Financial Statement and
Exhibits.
|
Reference is made to the Merger
Agreement, as described in Item 1.01, which is incorporated herein by reference.
As a result of the closing of the Merger Agreement, our primary operations
consist of the business and operations of the Innovative Logistics Techniques,
Inc., which are conducted in the United States. In the Merger Agreement, the
Company is the accounting acquiree, and Innolog Holdings Corporation is the
accounting acquirer. Accordingly, we are presenting the financial statements of
Innolog Holdings Corporation and its wholly owned subsidiary Innovative
Logistics Techniques, Inc.
|
(a)
|
Financial Statements of the
Business Acquired
|
The audited combined financial
statements of the Innolog Holdings Corporation for the year ended December 31,
2009 and the audited financial statements for Innovative Logistics Techniques,
Inc. for the year ended December 31, 2008, and the unaudited combined financial
statements for the three months ended March 31, 2010 and 2009, including the notes to such
financial statements, are incorporated herein by reference to Exhibit 99.1 to
this Form 8-K.
|
(c)
|
Exhibits
|
INDEX TO
EXHIBITS
|
2.1
|
Amended and Restated Merger Agreement by and among the
Company and Innolog Holdings Corporation as amended dated
August 11,
2010(2)
|
|
|
3.1
|
Articles of Incorporation
(1)
|
|
|
3.2
|
Amended and Restated
Bylaws*
|
|
|
3.3
|
Certificate of Amendment of the
Articles of Incorporation
*
|
|
|
3.4
|
Certificate of Designation of
Preferences, Rights and Limitations of Series A Convertible Preferred
Stock *
|
|
|
10.1
|
Loan Agreement, Promissory Note,
and Security Agreement between Innolog Holdings Corporation
/Innovative Logistics techniques, Inc.and Mel Booth, William Danielczyk,
Joe Kelley, Bruce Riddle, Michael Kane, Steve Moses, Ian Reynolds, and
Harry Jacobson, dated March 31, 2009
*
|
|
10.2
|
Promissory Note issued to Eagle
Bank by Innolog Holdings Corporation dated April 23,
2009*
|
|
|
10.3
|
Commercial Guaranty between
Innolog Holdings Corporation, Mel Booth, and Eagle Bank, dated April 23,
2009 *
|
|
|
10.4
|
Commercial Guaranty between
Innolog Holdings Corporation, William Danielczyk, and Eagle Bank, dated
April 23, 2009 *
|
|
|
10.5
|
Commercial Guaranty between
Innolog Holdings Corporation, Joe Kelley, and Eagle Bank, dated April 23,
2009 *
|
|
|
10.6
|
Commercial Guaranty between
Innolog Holdings Corporation, Bruce Riddle, and Eagle Bank, dated April
23, 2009 *
|
|
|
10.7
|
Commercial Guaranty between
Innolog Holdings Corporation, Michael Kane, and Eagle Bank, dated April
23, 2009 *
|
|
|
10.8
|
Commercial Guaranty between
Innolog Holdings Corporation, Steve Moses, and Eagle Bank, dated April 23,
2009 *
|
|
|
10.9
|
Commercial Guaranty between
Innolog Holdings Corporation, Ian Reynolds, and Eagle Bank, dated April
23, 2009 *
|
|
|
10.10
|
Commercial Guaranty between
Innolog Holdings Corporation, Harry Jacobson, and Eagle Bank, dated April
23, 2009 *
|
50
|
10.11
|
Earn Out Promissory Note between
Innovative Logistics Techniques Inc. and certain Former Shareholders
dated March 31,
2009*
|
|
|
10.12
|
Amendment to Purchase Agreement
dated March 31, 2009 between Innolog Holdings Corporation and Innovative
Logistics Techniques, Inc. dated May 31, 2010*
|
|
|
10.13
|
401(k) Plan of Innovative
Logistics Techniques, Inc.*
|
|
|
10.14
|
Engagement Agreement between
Emerging Companies, LLC and Innolog Holdings Corporation dated May 27,
2010*
|
|
|
10.15
|
Form of Common Stock Purchase
Warrant *
|
|
|
10.17
|
Employment Agreement between
Innovative Logistics Techniques, Inc. and Verle Hammond dated April 1,
2009*
|
|
|
10.18
|
Promissory Note with Verle Hammond
as amended dated March 1, 2010*
|
|
|
10.19
|
Promissory Notes with Verle
Hammond dated June 9, 2010 and June 17, 2010*
|
|
|
10.20
|
Promissory Note with Ram Agarwal
dated July 9, 2010*
|
|
10.21
|
Promissory Notes with Related
Party dated June 21, 2010 and July 8, 2010*
|
|
|
10.22
|
Amendment to Engagement Letter
between Emerging Companies LLC and the Registrant dated July 29,
2010.
|
|
|
17.1
|
Letter of Resignation from Bill
Glaser to the Board of Directors *
|
|
|
17.2
|
Letter of Resignation from Fred
Tannous to the Board of Directors *
|
|
|
99.1
|
Audited consolidated financial
statements for Innolog Holdings Corporation for the year ended December
31, 2009 and unaudited combined financial statements for the three months
ended March 31, 2010 and 2009, and accompanying notes to combined
financial statements. Audited financial statements of
Innovative Logistics Techniques, Inc for the years ended December 31, 2009
and 2008.*
|
|
|
Exhibit
Number
|
Description
|
|
|
*
|
Filed
herewith.
|
|
(1)
|
Filed on February 12, 2007 as an
exhibit to the Company’s Registration Statement on Form SB-2, and
incorporated herein by reference.
|
|
(2)
|
Filed on August 12, 2010 as an exhibit to the Company’s
Form 8-K, and incorporated herein by
reference.
|
SIGNATURES
Pursuant to the requirements of the
Securities Exchange Act of 1934, as amended, the Registrant has duly caused this
report to be signed on its behalf by the undersigned hereunto duly
authorized.
|
uKarma Corporation
|
|||
|
Date: August 13
2010
|
By:
|
/s/ William P.
Danielczyk
|
|
|
William P.
Danielczyk
|
|||
|
Executive
Chairman
|
|||
51