10-Q 1 v344763_10q.htm 10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

x QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2013 or

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

For the transition period from ______ to ______

Commission File Number 333-140633

INNOLOG HOLDINGS CORPORATION

(Exact name of registrant as specified in its charter)

Nevada	68-0482472
(State or other jurisdiction of	(IRS Employer
incorporation or organization)	Identification Number)

12011 Lee Jackson Memorial Highway, Suite 300, Fairfax, Virginia 22033

(703) 766-1412

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files. x Yes ¨ No The registrant is not yet subject to this requirement.

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer ¨	Accelerated filer ¨
Non-accelerated filer ¨ (Do not check if a smaller reporting company)	Smaller reporting company þ

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

¨ Yes þ No

APPLICABLE ONLY TO CORPORATE ISSUERS

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.

18,410,831 shares of common stock, $0.001 par value, outstanding on May 17, 2013.

INNOLOG HOLDINGS CORPORATION

REPORT ON FORM 10-Q

QUARTER ENDED March 31, 2013

TABLE OF CONTENTS

		Page Number
PART I - FINANCIAL INFORMATION		3

Item 1. Financial Statements (Unaudited)		3

Condensed Consolidated Balance Sheets – March 31, 2013 and December 31, 2012		3

Condensed Consolidated Statements of Operations For the Three Months Ended March 31, 2013 and 2012		4

Condensed Consolidated Statements of Cash Flows For the Three Months Ended March 31, 2013 and 2012		5

Notes to Condensed Consolidated Financial Statements		7

Forward-Looking Statements

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		20

Item 3. Quantitative and Qualitative Disclosures About Market Risk		25

Item 4. Controls and Procedures		25

PART II - OTHER INFORMATION		26

Item 1. Legal Proceedings		26

Item 1A. Risk Factors		26

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		26

Item 3. Defaults Upon Senior Securities		26

Item 4. Mine Safety Disclosures		27

Item 5. Other Information		27

Item 6. Exhibits		28

Signatures		29

PART I – FINANCIAL INFORMATION

Item 1: Financial Statements.

INNOLOG HOLDINGS CORPORATION AND SUBSIDIARY

CONDENSED CONSOLIDATED BALANCE SHEETS

	March 31, 2013			December 31, 2012
	(Unaudited)
ASSETS
Current Assets
Cash	$	4,803		$	35,386
Accounts receivable, net		461,612			327,472
Prepaid expenses and other current assets		12,715			1,338
Total current assets		479,130			364,196

Property and equipment, net		20,495			22,281
Restricted Cash		165,000			165,000
Other assets		87,012			109,261
Total Assets	$	751,637		$	660,738

LIABILITIES AND STOCKHOLDERS' DEFICIENCY

Current Liabilities

Accounts payable	$	3,022,273		$	2,956,288
Accrued salaries and benefits		3,850,535			3,612,039
Accrued interest		1,582,787			1,304,212
Other accrued liabilities		2,140,080			2,150,765
Deferred rent		24,496			24,496
Notes payable, others		341,500			237,000
Notes payable, affiliates		1,569,159			1,602,159
Total current liabilities		12,530,830			11,886,959

Long Term Liabilities
Notes payable, affiliates		2,000,000			2,000,000
Convertible notes payable, affiliates net of debt discount of $1,424,979 and $1,499,141 as of March 31, 2013 and December 31, 2012, respectively		375,021			250,859
Total Long Term Liabilities		2,375,021			2,250,859
COMMITMENTS AND CONTINGENCIES

Stockholders' Deficiency
Common stock, $0.001 par value, 200,000,000 shares authorized; 18,410,831 and 17,974,538 shares issued and outstanding at March 31, 2013 and December 31, 2012, respectively		18,411			17,975
Preferred stock, $0.001 par value; 50,000,000 shares authorized; Series A Convertible: 38,000,000 shares designated; 36,894,758 shares issued and outstanding at March 31, 2013 and December 31, 2012		36,895			36,895
Series B Convertible: 7,800,000 shares designated: 0 shares issued and outstanding at March 31, 2013 and December 31, 2012		-			-

Additional paid in capital		3,850,487			3,622,115
Accumulated deficit		(18,060,007	)		(17,154,065	)
Total Stockholders' Deficiency		(14,154,214	)		(13,477,080	)

Total Liabilities and Stockholders' Deficiency	$	751,637		$	660,738

The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.

INNOLOG HOLDINGS CORPORATION AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)

	For the three months			For the three months
	ended March 31,			ended March 31,
	2013			2012

Revenues	$	1,056,450		$	1,187,803

Operating expenses
Direct costs		558,808			668,562
Operating expenses		626,367			1,059,851
Total operating expenses		1,185,175			1,728,413

Loss from operations		(128,725	)		(540,610	)

Other Income (Expenses)
Amortization of debt discount		(86,026	)		-
Gain on legal settlement		-			42,460
Other income		169			-
Interest expense		(691,356	)		(436,883	)
Total other income (expenses)		(777,213	)		(394,423	)

Loss before income tax provision		(905,938	)		(935,033	)

Income tax provision		-			-

Net Loss	$	(905,938	)	$	(935,033	)

Loss per share - basic and diluted	$	(0.05	)	$	(0.06	)

Weighted average number of shares, basic and diluted		18,289,639			15,129,973

The accompanying notes are an integral part of the unaudited condensed consolidated financial statements

INNOLOG HOLDINGS CORPORATION AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS

(UNAUDITED)

	For the three			For the three
	months ended			months ended
	March 31, 2013			March 31, 2012
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss	$	(905,938	)	$	(935,033	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization		5,091			2,205
Stock based compensation		120,037			87,156
Amortization of debt discount		86,026			-
Gain on legal settlement		-			(42,460	)
Changes in operating assets and liabilities:
Accounts receivable		(134,141	)		(102,964	)
Prepaid expenses and other assets		8,470			(17,989	)
Accounts payable and accrued expenses		669,274			353,100

Net cash used in operating activities		(151,180	)		(655,985	)

CASH FLOWS FROM INVESTING ACTIVITIES:
Property and equipment purchased		(903	)		(6,087	)

Net cash used in investing activities		(903	)		(6,087	)

CASH FLOWS FROM FINANCING ACTIVITIES:
Cash overdraft		-			(11,459	)
Borrowings on note payable, others		160,000			200,000
Repayments on note payable, others		(55,500	)		(301,500	)
Borrowings on note payable, affiliate/related party		352,500			850,031
Repayments on note payable, affiliate/related party		(335,500	)		(75,000	)
Net cash provided by financing activities		121,500			662,072

NET CHANGE IN CASH		(30,583	)		-

CASH - BEGINNING OF PERIOD		35,386			-

CASH - END OF PERIOD	$	4,803		$	-

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest	$	92,638		$	479,466
Income taxes	$	-		$	-

The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.

INNOLOG HOLDINGS CORPORATION AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)

(unaudited)

SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND FINANCING ACTIVITIES:

During the three months ended March 31, 2013, the Company issued 436,293 shares of its common stock valued at $26,177 for accrued services.

During the three months ended March 31, 2013, the Company recorded $11,864 of beneficial conversion feature that is related to convertible notes and attached warrants.

During the three months ended March 31, 2013, the Company issued warrants fair valued at $70,730 for accrued services.

The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.

INNOLOG HOLDINGS CORPORATION AND SUBSIDIARY

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED MARCH 31, 2013 AND 2012

Note 1: Organization and Nature of Business and Basis of Presentation

Organization and Nature of Business

Innolog Holdings Corporation (“Holdings” or “Innolog”) was formed as a holding company on March 23, 2009 for the purpose of acquiring companies that provide services primarily to federal government entities. Its wholly owned subsidiaries are Innolog Group Corporation and Innovative Logistics Techniques, Inc. (“Innovative”). Holdings was previously a wholly owned subsidiary of Galen Capital Corporation (“Galen”). In June 2010, Holdings was spun out and the stockholders of Galen became the stockholders of Holdings.

Innovative Logistics Techniques, Inc., a Virginia corporation, formed in March 1989, is a solutions oriented organization providing supply chain logistics and information technology solutions to clients in the public and private sector. Innovative's services and solutions are provided to a wide variety of clients, including the Department of Defense, Department of Homeland Security and civilian agencies in the federal government and state and local municipalities, as well as selected commercial organizations.

On January 25, 2013 the Board of Directors of Innolog Holdings approved the following resolution; "The Company is authorized to form a new subsidiary in Nevada call Innomed. This subsidiary will develop the Company’s health care business. Bill Danielczyk, Michael Kane, and Ian Reynolds will be the directors of this subsidiary". As of March 31, 2013, the subsidiary was not yet incorporated.

Innolog Holdings Corporation and its wholly owned subsidiary are referred to herein as the “Company.”

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments consisting of normal recurring accruals considered necessary for a fair presentation have been included. Accordingly, the results from operations for the three months period ended March 31, 2013, are not necessarily indicative of the results that may be expected for the year ending December 31, 2013. The unaudited condensed consolidated financial statements should be read in conjunction with the December 31, 2012 consolidated financial statements and footnotes thereto included in the Company's SEC Form 10-K.

The unaudited condensed consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All significant inter-company transactions and balances have been eliminated in consolidation.

Note 2: Going Concern

The accompanying unaudited condensed consolidated financial statements have been prepared in conformity with generally accepted accounting principles, which contemplate continuation of the Company as a going concern. However, the Company has sustained substantial operating losses since inception, the Company has reported a net loss of $905,938 for the three months ended March 31, 2013 and $935,033 for the three months ended March 31, 2012. As of March 31, 2013 the Company has reported an accumulated deficit of $18,060,007, had a stockholders’ deficiency (defined as total assets minus total liabilities) of $14,154,214 and a working capital deficit (current liabilities minus current assets) of $12,051,700. There are delinquent claims and obligations, such as payroll taxes, employee income tax withholdings, employee benefit plan contributions, delinquent loans payable and accounts payable that could ultimately cause the Company to cease operations.

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

The report of the Company’s independent registered public accounting firm relating to the December 31, 2012 consolidated financial statements states that there is substantial doubt about the Company’s ability to continue as a going concern.

Management believes that actions presently being taken such as continued expense reduction, the implementation of a renewed sales effort and the capital financing efforts of the Company will help to enhance the Company’s operating and financial weaknesses.

Note 3: Summary of Significant Accounting Policies

Principles of Consolidation:

The unaudited condensed consolidated financial statements include the assets, liabilities and operating results of Holdings and it’s wholly owned subsidiary since the date of the acquisition. All significant intercompany accounts and transactions have been eliminated in consolidation.

Use of Estimates:

Management uses estimates and assumptions in preparing these financial statements in accordance with accounting principles generally accepted in the United States of America. Those estimates and assumptions affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities, and the reported revenues and expenses. Actual results could vary from the estimates.

Cash and cash equivalents:

For the purpose of the statements of cash flows, Company has considered all highly liquid investments purchased with original maturities of three months or less to be cash equivalents.

Reclassifications:

Certain items in prior consolidated financial statements are reclassified to conform to the current presentation. These reclassifications had no effect on reported net loss.

Contract Revenue Recognition:

Revenue on cost-plus-fee contracts is recognized to the extent of costs incurred plus provisional rates for fringe, overhead and applied G&A, plus a percentage of fees earned. On fixed price service contracts, revenue is recognized using straight line over the life of the project. Revenue on time-and-materials contracts is recognized at contractual rates as hours and out of pocket expenses are incurred. Anticipated losses on contracts are recognized in the period they are first determined. In accordance with industry practice, amounts relating to long-term contracts, including retainages, are classified as current assets although an undeterminable portion of these amounts is not expected to be realized within one year. Because of inherent uncertainties in estimating costs, it is at least reasonably possible that the estimates used will change within the near term.

Concentration of Credit Risk:

The Company maintains its cash, which, at times may exceed federally insured limits, in bank deposit accounts with a high credit quality financial institution. The Company believes it is not exposed to any significant credit risk with regards to those accounts. Accounts receivable principally consist of amounts due from the federal government and large prime federal government contractors. Management believes associated credit risk is not significant.

Allowance for Doubtful Accounts:

The Company provides an allowance for doubtful accounts equal to the estimated collection losses that will be incurred in collection of all receivables. Estimated losses are based on historical collection experience coupled with review of the current status of existing receivables. The allowance for doubtful accounts amounted to $46,566 at March 31, 2013 and December 31, 2012.

Property and Equipment:

Property and equipment are stated at cost and depreciated by the straight-line method over estimated useful lives which are as follows:

Office furniture and equipment	3 to 7 years
Computer hardware and software	2 to 5 years

Leasehold improvements and lease acquisition costs are amortized over the shorter of the life of the applicable lease or the life of the asset. Maintenance and repairs are charged to operations when incurred. Betterments and renewals are capitalized. When property and equipment are sold or otherwise disposed of, the asset account and related accumulated depreciation account are relieved, and any gain or loss is included in operations.

Long-Lived Assets:

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

Income Taxes:

Effective January 1, 2009, the Company has adopted the provisions of FASB ASC 740, “Income Tax” which clarifies the accounting for uncertainty in tax positions. FASB ASC 740 requires the recognition of the impact of a tax position in the financial statements if that position is more likely than not to be sustained on a tax return upon examination by the relevant taxing authority, based on the technical merits of the position. The adoption of FASB ASC 740 had no effect on the Company’s financial position or results of operations. At March 31, 2013, the Company has no unrecognized tax benefits.

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

The Company applies the provisions of FASB ASC 740, which clarifies the accounting for uncertainty in tax positions. FASB ASC 740 requires the recognition of the impact of a tax position in the financial statements if that position is more likely than not to be sustained on a tax return upon examination by the relevant taxing authority, based on the technical merits of the position. At March 31, 2013, the Company has no unrecognized tax benefits.

Stock Based Compensation:

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

Debt Issuance Costs:

Debt issuance costs are capitalized and amortized over the term of the related loan.

Fair Value Measurements:

FASB ASC 820, “Fair Value Measurements and Disclosures”, establishes a framework for measuring fair value. That framework provides a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (level 1 measurements) and the lowest priority to unobservable inputs (level 3 measurements). The three levels of the fair value hierarchy under FASB ASC 820 are described as follows:

Level 1: Inputs to the valuation methodology are unadjusted quoted prices for identical assets or liabilities in active markets that the plan has the ability to access.

Level 2: Inputs to the valuation methodology include:

quoted prices for similar assets or liabilities in active markets;

quoted prices for identical or similar assets or liabilities in inactive markets;

inputs other than quoted prices that are observable for the assets or liability;

inputs that are derived principally from or corroborated by observable market data by correlation or other means.

If the asset or liability has a specified (contractual) term, the level 2 input must be observable for substantially the full term of the asset or liability.

Level 3: Inputs to the valuation methodology are unobservable and significant to the fair value measurement.

The asset or liability’s fair value measurement level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. Valuation techniques used need to maximize the use of observable inputs and minimize the use of unobservable inputs.

The following is a description of the valuation methodologies used for assets and liabilities measured at fair value:

The carrying values of accounts receivable, accounts payable, accrued expenses, notes payable, and the line of credit payable approximate fair value due to the short term maturities of these instruments.

The preceding methods described may produce a fair value calculation that may not be indicative of net realizable value or reflective of future fair values. Furthermore, although the Company believes its valuation methods are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different fair value measurement at the reporting date.

Earnings (loss) per Share:

The Company follows Accounting Standards Codification subtopic 260-10, Earnings Per Share (“ASC 260-10”) specifying the computation, presentation and disclosure requirements of earnings per share information. Basic earnings (loss) per share (“EPS”) is computed by dividing net income (loss) available to common stockholders by the weighted average number of common shares outstanding during the period, excluding the effects of any potentially dilutive securities. Diluted EPS gives effect to the dilutive potential of shares of common stock outstanding during the period including stock options or warrants, using the treasury stock method (by using the average stock price for the period to determine the number of shares assumed to be purchased from the exercise of stock options or warrants), and convertible debt or convertible preferred stock, using the if-converted method. Diluted EPS excludes the dilutive potential of shares of common stock if their effect is anti-dilutive.

The computation of basic and diluted loss per share for the three months ended March 31, 2013 and 2012 is equivalent since the Company reported a net loss and the effect of any common stock equivalents would be anti-dilutive.

Recent Accounting Pronouncements:

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

Note 4: Major Customers

Revenues from prime contracts and subcontracts with U.S. Government agency customers in aggregate accounted for 100% of total revenues for the three months ended March 31, 2013 and 2012.

Note 5: Accounts Receivable

Accounts receivable consisted of the following as of March 31, 2013 and December 31, 2012:

	March 31, 2013			December 31, 2012
Billed receivables	$	508,178		$	374,038
Reserve for bad debts		(46,566	)		(46,566	)
Total	$	461,612		$	327,472

Contract receivables from prime contracts and subcontracts with U.S. Government agency customers in aggregate accounted for 100% of total contract receivables at March 31, 2013 and December 31, 2012.

Note 6: Accounts Payable and Accrued Liability

Accounts payable and accrued expenses at March 31, 2013 and December 31, 2012 consisted of the following:

	March 31, 2013		December 31, 2012*

Accounts payable	$	3,022,273	$	2,956,289
Accrued liabilities		2,140,080		2,150,765
Accrued interest- other		358,190		303,477
Accrued interest-affiliates		1,224,597		1,000,735
Accrued salaries and benefits		3,850,535		3,612,039
	$	10,595,675	$	10,023,305

* The December 31, 2012 interest accrued has been adjusted to reflect 3 loans transferred to notes payable –affiliates.

Note 7: Line of Credit

On June 14, 2011, Holdings renewed a credit agreement with Eagle Bank under which it may borrow up to $500,000. Borrowings under the agreement are guaranteed by seven individuals, who are directly or indirectly related to Holdings. The borrowings were due on August 26, 2012, if not demanded earlier. Interest is payable monthly at the bank’s prime rate (as defined) plus 1%. The outstanding balance as of December 31, 2012 and 2011 is $0 and $497,570, respectively. This line of credit was paid in full and cancelled on September 28, 2012.

Note 8: Notes Payable, Other

At March 31, 2013 and December 31, 2012, notes payable, others consisted of the following:

	March 31, 2013		December 31, 2012 *
On August 11, 2010 an individual loaned the Company $75,000 with a maturity date of October 11, 2010. The loan is unsecured and carries a flat interest rate of $22,500. In addition, on December 12, 2011 the individual loaned the Company $200,000 with a maturity date of January 12, 2012. The loan was secured by accounts receivable, guaranteed by Ian Reynolds, a director, and carried a flat interest rate of $25,000. As of March 31, 2013 and December 31, 2012 the total outstanding balance is $0 and $13,500 with accrued interest of $72,624 and $73,866 , respectively. The loan is in default and carries a default interest rate of 15% per annum.	$	-	$	13,500

On August 30, 2010 an individual loaned the Company $25,000 with a maturity date of December 6, 2010. The loan is unsecured and carried a flat interest rate of $5,000. As of March 31, 2013 and December 31, 2012 the outstanding balance is $25,000 with accrued interest of $78,266 and $70,766, respectively. The loan is in default and carries a default interest rate of 10% per month.		25,000		25,000

On July 13, 2010 an individual loaned the Company $100,000 with a maturity date of January 13, 2011. The loan is unsecured and carried a flat interest rate of $30,000. As of March 31, 2013 and December 31, 2012 the outstanding balance is $100,000 with accrued interest of $63,535 and $59,836, respectively. The loan is in default and carries a default interest rate of 15% per annum.		100,000		100,000

On July 21, 2010 an individual loaned the Company $25,000 with a maturity date of January 21, 2011. The loan is unsecured and carried a flat interest rate of $7,500. As of March 31, 2013 and December 31, 2012 the outstanding balance is $20,000 with accrued interest of $27,554 and $26,814, respectively. The loan is in default and carries a default interest rate of 15% per annum.		20,000		20,000

On July 20, 2010 an individual loaned the Company $65,500 with a maturity date of January 20, 2011. The loan is unsecured and carried a flat interest rate of $19,650. As of March 31, 2013 and December 31, 2012 the outstanding balance is $65,500 with accrued interest of $41,616 and $39,193, respectively. The loan is in default and carries a default interest rate of 15% per annum.		65,500		65,500

On July 20, 2010 an individual loaned the Company $34,500 with a maturity date of January 20, 2011. The loan is unsecured and carried a flat interest rate of $10,350. As of March 31, 2013 and December 31, 2012 the outstanding balance is $6,000 and $13,000 with accrued interest of $12,602 and $12,602, respectively. The loan is in verbal settlement agreement and is not accruing default interest.		6,000		13,000

On January 2, 2013, the Company borrowed $50,000 from an individual. The loan carried an interest rate of $4,000 and a maturity date of February 2, 2013. In addition, warrants of 50,000 were granted for the purchase of common stock with a strike price of $0.05 and an expiration date of 5 years.

The loan is in default and carries a default interest rate of 18% per annum and a late fee of 8% each 10 days. As of March 31, 2013 there was $19,718 of accrued interest.		50,000		-

On January 28, 2013, the Company borrowed $10,000 from an individual. The loan carried an interest rate of $700 and a maturity date of February 12, 2013. In addition, warrants of 10,000 were granted for the purchase of common stock with a strike price of $0.01 and an expiration date of 5 years. A director and a officer also guaranteed this loan.

The loan has been paid. As of March 31, 2013 there was $1,245 of accrued interest.		-		-

On January 30, 2013, the Company borrowed $25,000 from an individual. The loan carried an interest rate of $2,000 and a maturity date of March 10, 2013. In addition, warrants of 25,000 were granted for the purchase of common stock with a strike price of $0.05 and an expiration date of 5 years. A director and a officer also guaranteed this loan. This loan has been paid.

On January 31, 2013, the Company borrowed $25,000 from an individual. The loan carried an interest rate of $2,000 and a maturity date of March 11, 2013. In addition, warrants of 25,000 were granted for the purchase of common stock with a strike price of $0.05 and an expiration date of 5 years. A director and a officer also guaranteed this loan.

The loan is in default and carries a default interest rate of 18% per annum and a late fee of 8% each 10 days. As of March 31, 2013 there was $10,483 of accrued interest.		25,000		-

On February 12, 2013, the Company borrowed $50,000 from an individual under a note dated January 8, 2013. The loan carried an interest rate of $5,000 and a maturity date of March 25, 2013. In addition, warrants of 50,000 were granted for the purchase of common stock with a strike price of $0.05 and an expiration date of 5 years. A director also guaranteed this loan.

The loan is in default and carries a default interest rate of 18% per annum and a late fee of 10%. As of March 31, 2013 there was $10,148 of accrued interest.		50,000		-

Total Notes Payable- others-Current	$	341,500	$	237,000

* The December 31, 2012 information has been redone to reflect the movement of three loans to notes payable-affiliates.

As of March 31, 2013 and December 31, 2012, there were $341,500 and $237,000 of the notes outstanding, respectively, issued to individuals, trusts, and corporations not related to the Company.

During the three months ended March 31, 2013 the lenders were granted warrants to purchase 360,000 shares of Innolog common stock at a strike price $0.01 to $0.05 per share. The value of these warrants and common stock was $19,568. The entire amount was charged to expense during the three months ended March 31, 2013.

During the year ended December 31, 2012 the lenders were granted warrants to purchase 500,000 shares of Innolog common stock at a strike price $0.01 per share and 300,000 shares of Series A Convertible Preferred Stock. The value of these warrants was $25,340. The entire amount was charged to expense during the twelve months ended December 31, 2012.

Of these loans, $341,500 and $237,000 have matured as of March 31, 2013 and December 31, 2012, respectively and are in default. Additional interest and late fees are due upon default as defined in each note. Total interest and fees incurred on these notes amounted to $76,213 and $69,649 for the three months ended March 31, 2013 and 2012, respectively. Total interest and fees accrued on these notes amounted to $358,190 and $303,477 as of March 31, 2013 and December 31, 2012, respectively.

Note 9: Related Party Transactions

Notes Payable, affiliates:

At March 31, 2013 and December 31, 2012, notes payable, affiliates consisted of the following:

	March 31, 2013			December 31, 2012*
On August 4, 2011, a director entered into a $200,000 unsecured line of credit with the Company. Each advance under the line of credit had a due date of 30 days. Interest was a 10% flat rate of the principal of each advance. The line of credit matured as of December 31, 2011. As of March 31, 2013 and December 31, 2012 the outstanding principal was $0. In October 2012, the $52,600 principal balance was settled into 751,429 warrants of the Company with a strike price of $.07 per share and expiration period of 5 years, which was fair valued at $14,415. Accordingly, the Company recorded a gain on settlement of $38,185 during the year ended December 31, 2012.

On December 19, 2012, a director entered into a $200,000 revolving line of credit with the Company. The loan carried an interest rate of 10% of the principal outstanding and a maturity of December 31, 2013. As of March 31, 2013 and December 31, 2012, the outstanding balance was $77,500 and $45,000, respectively.

Accrued interest and fees totaled $16,054 and $10,304 at March 31, 2013 and December 31, 2012, respectively.	$	77,500		$	45,000

On February 10, 2011, a holder of more than 5% of common stock, loaned the Company a total of $150,000. At least 50% of the loan must be repaid by October 31, 2011 with a final maturity of October 31, 2012. As of March 31, 2013 and December 31, 2012, $150,000 remained outstanding. The unsecured note carried a flat interest rate of $15,000. As of March 31, 2013 and December 31, 2012 the accrued interest is $15,000. The loan has matured and is in default but per the note no late fees or default interest is due.

On March 21, 2011, a holder of more than 5% of common stock, renewed a loan to the Company totaling $50,000. The unsecured note carried a flat interest rate of $10,000 and was to be paid back in monthly installments of $10,000 beginning April 21, 2011 with final payment due on September 21, 2011. The outstanding balance of the loan as of March 31, 2013 and December 31, 2012 was $40,000. As of March 31, 2013 and December 31, 2012 the accrued interest is $14,623. The loan has matured and is in default but per the note no late fees or default interest is due.

On February 27, 2013, a holder of more than 5% of common stock, loaned the company $75,000. The loan has been repaid in full.		190,000			190,000

On March 21, 2011, the Company assumed an unsecured loan from a director, in the amount of $325,000. The interest rate on the loan was a flat fee of $32,500 and the loan matured on March 21, 2012. As of March 31, 2013 and December 31, 2012 the outstanding balance was $325,000. The loan has matured and is in default and carries default rate of interest of 18% per annum.

On December 21, 2011 the director, loaned the Company additional funds totaling $25,000. As of March 31, 2013 and December 31, 2012, $25,000 in principal amount is outstanding.

On February 13, 2012 and February 22, 2012, the director, loaned the Company additional funds totaling $50,000. As of March 31, 2013 and December 31, 2012, the outstanding balance is $31,250. In addition, warrants of 50,000 were granted for the purchase of common stock with a strike price of $0.06 and an expiration date of 5 years. These loans matured on April 29, 2012 and May 7, 2012, respectively and are now in default and carry a default interest rate of 18% per annum.

On October 25, 2012, the director loaned the Company additional funds totaling $25,000 with an interest rate of 10% p.a. and a maturity date of November 25, 2012. In addition, warrants of 25,000 were granted for the purchase of common stock with a strike price of $0.07 and an expiration date of 5 years. As of March 31, 2013 and December 31, 2012, the outstanding balance is $24,000 and $25,000, respectively. The loan has matured and is in default and carries one time late fees of 10% of the principal amount outstanding and default rate of interest of 18% per annum.

On November 2, 2012, the director loaned the Company additional funds totaling $12,500 with an interest rate of 10% p.a. and a maturity date of December 2, 2012. In addition, warrants of 12,500 were granted for the purchase of common stock with a strike price of $0.07 and an expiration date of 5 years. As of March 31, 2013 and December 31, 2012, the outstanding balance is $0 and $12,500, respectively.

Accrued interest and fees totaled $97,234 and $79,974 at March 31, 2013 and December 31, 2012, respectively.		405,250			418,750

On June 21, 2011, a holder of more than 5% of common stock, loaned the Company a total of $70,000. As consideration for these loans, a fee of $7,000 was expensed. As of March 31, 2013 and December 31, 2012 this unsecured loan has an outstanding balance of $70,000 and has matured and the Company is in default. The loan is accruing interest at 28% per annum and a late fee of 10% of the outstanding balance each month. Total accrued interest and fees amount to $180,186 and $154,353 at March 31, 2013 and December 31, 2012, respectively.		70,000			70,000

On September 28, 2012, a director loaned the Company $25,000 with a interest rate of $2,500. As of March 31, 2013 and December 31, 2012, $20,000 and $25,000, respectively, in principal amount is outstanding. The principal is due on October 28, 2012 and November 28, 2012 in two installments of $12,500 each. The loan has matured and is in default and carries a default interest rate of 8% pa. Total accrued interest and fees amount to $6,413 and $5,814 at March 31, 2013 and December 31, 2012, respectively.		20,000			25,000

Since early 2009 a former director and former officer, loaned the Company funds at various dates. As of March 31, 2013 and December 31, 2012, the outstanding balance was $229,409. Interest in the amount of $84,244 and $75,948 has accrued as of March 31, 2013 and December 31, 2012, respectively. The loans have matured and are in default. The default rate of interest is 15% per annum.		229,409			229,409

On September 28, 2012, a director and officer of the Company, loaned the Company $65,000. As of March 31, 2013 and December 31, 2012, $49,000 in principal amount is outstanding. Interest was in the form of 132,000 warrants. The principal payments of $15,000 on or before October 8, 2012, $25,000 by November 8, 2012 and $25,000 by December 8, 2012 are due. The loan has matured and is in default and carries a default interest rate of 8% pa. Total accrued interest and fees amount to $999 and $0 at March 31, 2013 and December 31, 2012, respectively.		49,000			49,000

Holdings and Innovative (the “Borrowers”) have entered into an agreement (the “Loan Agreement”) with seven individuals (the “Lenders”) who are directly or indirectly related to Holdings, under which the Borrowers may borrow up to $2,000,000. The total borrowings as of March 31, 2013 and December 31, 2012 amounted to $2,000,000, collateralized by substantially all assets of the Borrowers and guaranteed by Galen. Repayment of the loan is due on May 31, 2017. In order to make the loan to the Borrowers, the Lenders borrowed $1,000,000 from Eagle Bank and $1,000,000 from Reliant Bank. The promissory note to Eagle Bank has a maturity date of August 26, 2013 and interest is payable monthly at the bank’s prime rate (as defined) plus 1% with a minimum rate of 7.5%. The promissory note to Reliant Bank has a maturity date of March 28, 2014 and interest is payable monthly at fixed rate of 7.0%. In addition, the Reliant Bank loan is secured by a $250,000 deposit, of which $165,000 was deposited by the Company. Interest is directly paid by the Company to the banks on a monthly basis.		2,000,000			2,000,000

On February 28, 2012 a LLC, a greater than 5% shareholder of the company, loaned the Company $50,000 with a maturity date of April 3, 2012. The loan is secured by accounts receivable, guaranteed by a director, and carried a flat interest rate of $5,000. In addition, at the option of the holder an additional fee of $5,000 or warrants for 50,000 shares of common stock at $0.07 per share shall be paid and 125,000 shares of common stock. The loan is in default and the Company is paying $6,000 per month in late fees.

On March 2, 2012 a LLC, a greater than 5% shareholder of the company, loaned the Company $50,000 with a maturity date of April 3, 2012. The loan is secured by accounts receivable, guaranteed by a director, and carried a flat interest rate of $5,000. In addition, the Company shall issue 500,000 shares of common stock. The loan is in default and the Company is paying $6,000 per month in late fees.

On October 22, 2012 a LLC, a greater than 5% shareholder of the company, loaned the Company $100,000 with a maturity date of November 6, 2012. The loan is secured by accounts receivable, guaranteed by a director, and carried a flat interest rate of $10,000. . In addition, warrants for 200,000 shares of common stock at $0.01 per share have been issued. The loan was repaid on November 15, 2012 along with default interest which was accrued at 18% pa.

On November 16, 2012 a LLC, a greater than 5% shareholder of the company, loaned the Company $100,000 with a maturity date of December 1, 2012. The loan is secured by accounts receivable, guaranteed by a director, and carried a flat interest rate of $10,000. In addition, warrants for 200,000 shares of common stock at $0.01 per share have been issued. The loan is in default and the Company issued 200,000 more warrants under the same terms and paying $10,000 in late fees as well as accruing default interest at 18% pa.

On December 4, 2012 a LLC, a greater than 5% shareholder of the company, loaned the Company $50,000 with a maturity date of December 19, 2012. In addition, warrants for 500,000 shares of common stock at $0.01 per share have been issued. The loan is secured by accounts receivable, guaranteed by a director, and carried a flat interest rate of $5,000.

On March 29, 2013 the Company entered into a settlement agreement with the LLC. The agreement calls for a total settlement amount of $290,000 and a forbearance until August 30, 2013 and the following payments: $10,000 by March 31, 2013; $50,000 by April 30, 2013; $40,000 by May 30, 2013; $60,000 by June 30, 2013; $65,000 by July 30, 2013; and $65,000 by August 30, 2013. In addition, warrants for the purchase of 400,000 shares are to be issued at a strike price of $0.01 and expiration of 5 years.

Total accrued interest and fees was $57,285 and $30,189 as of March 31, 2013 and December 31, 2012, respectively.		250,000			250,000

On August 1, 2010 an LLC, a greater than 5% shareholder of the company, loaned the Company $200,000 with a maturity date of September 14, 2011. The loan is secured by accounts receivable and carried a flat interest rate of $20,000. The loan was extended on September 19, 2011 and on November 7, 2011 with a maturity of December 31, 2011.

On August 8, 2011 the LLC, a greater than 5% shareholder of the company, and several individuals loaned the Company $225,000 with a maturity date of November 8, 2011. On November 7, 2011 the loans were extended to December 31, 2011. The loans are secured and carried a flat interest rate of $50,000. The loans are guaranteed by a director. The Company issued 1,000,000 warrants which was valued at $60,022 and charged to operations as interest expense during the year ended December 31, 2012.

On February 5, 2013 the Company entered into a settlement agreement with the LLC. The agreement calls for a total settlement amount of $450,439 and a forbearance until July 30, 2013 and the following payments: $43,750 on the 15^th of each month, beginning February 15 and until May 15, 2013, inclusive (total of $175,000, the Total Principal Amount); $30,000 on June 15, 2013 and July 15, 2013; and the remaining balance on or before July 30, 2013.

Total accrued interest and fees was $548,270 as of March 31, 2013 and December 31, 2012.		103,000			175,000

On December 29, 2012, the Company borrowed $50,000 from a trust, a greater than 5% shareholder of the company,. The loan carried an interest rate of 2.5% pa and a maturity date of January 17, 2013. In addition, warrants of 100,000 were granted for the purchase of common stock with a strike price of $0.01 and an expiration date of 5 years. A director also guaranteed this loan.

On January 15, 2013, the Company borrowed $50,000 from a trust, a greater than 5% shareholder of the company,. The loan carried an interest rate of 2.5% per annum and a maturity date of February 7, 2013. In addition, warrants of 100,000 were granted for the purchase of common stock with a strike price of $0.01 and an expiration date of 5 years. A director also guaranteed this loan.

On January 23, 2013, the Company borrowed $50,000 from a trust, a greater than 5% shareholder of the company. The loan carried an interest rate of $5,000 and a maturity date of February 17, 2013. In addition, warrants of 100,000 were granted for the purchase of common stock with a strike price of $0.01 and an expiration date of 5 years. A director also guaranteed this loan.

On February 6, 2013, the Company borrowed $25,000 from a trust, a greater than 5% shareholder of the company. The loan carried an interest rate of 2.5% per annum and a maturity date of February 14, 2013. In addition, warrants of 50,000 were granted for the purchase of common stock with a strike price of $0.01 and an expiration date of 5 years. A director also guaranteed this loan.

The loans are in default and carries a default interest rate of 18% per annum and a late fee of 10% each 10 days. As of March 31, 2013 and December 31, 2012 there was $152,973 and $253 of accrued interest, respectively.		175,000			150,000

Total notes payable- Affiliates	$	3,569,159		$	3,602,159
Less: Short term portion		(1,569,159	)		(1,602,159	)
Total notes payable- Affiliates – long term	$	2,000,000		$	2,000,000

* The December 31, 2012 information has been redone to reflect the movement of three loans to notes payable-affiliated from notes payable- other.

As of March 31, 2013 and December 31, 2012, $3,569,159 and $3,602,159 were outstanding, respectively, on the notes payable to related parties In 2012, these parties were granted warrants to purchase 11,621,500 shares of Innolog common stock. The strike price to purchase the common stock ranges from $0.01 to $0.07 per share with a 5-year expiration date. In addition, 625,000 of common stock was also issued. The fair value of these warrants and common stock amounted to $695,836 and was amortized to interest expense during the twelve months ended December 31, 2012. During the three months ended March 31, 2013 warrants to purchase common stock of 2,350,000 were granted with a strike price of $.01 and expiration of 5 years. Of which fair value of 2,100,000 warrants amounted to $59,559 was charged to operations during the year ended December 31, 2012 as the warrants were issued in 2013 for loan extension in year 2012 and fair value of 250,000 warrants amounted to $13,805 related to issuance of notes during 2013 was amortized to interest expense during the three months ended March 31, 2013.

Of these notes, $1,491,659 and $1,452,159 were in default as of March 31, 2013 and December 31, 2012, respectively. Total interest and fees incurred on these notes amounted to $314,691 and $232,696 during the three months ended March 31, 2013 and 2012. Total interest and fees accrued on these notes amounted $1,133,241 and $945,356 as of March 31, 2013 and December 31, 2012, respectively.

Convertible Notes Payable Long Term, affiliates:

At March 31, 2013 and December 31, 2012, notes payable long term, affiliates consisted of the following:

	March 31, 2013			December 31, 2012
A LLC which is an affiliate of a holder of more than 5% of our common stock	$	1,800,000		$	1,750,000
Less: Unamortized debt discount		(1,424,979	)		(1,499,141	)
Total Convertible notes payable long term-affiliates, net of debt discount	$	375,021		$	250,859

On March 31, 2012, March 21, 2012, March 29, 2012, April 2, 2012, April 10, 2012, April 12, 2012, and April 16, 2012 a LLC, an affiliate of a holder of more than 5% of our common stock, loaned the Company $300,000, $200,000, $300,000, $300,000, $100,000, $100,000, and $400,000 respectively. The unsecured loans had a maturity date of May 31, 2012 and carry a 6% per annum interest rate.

On May 21, 2012 the Company entered into a Convertible Notes Purchase Agreement for up to $6,000,000 collateralized by substantially all assets of the Borrowers (“Holdings and Innovative”) with a maturity date of May 31, 2017 and a 6% per annum rate of interest. The interest accrues and is payable at maturity. The convertible promissory notes plus accrued interest under the Note Purchase Agreement are convertible into a Series B Convertible Preferred Stock on a dollar for dollar basis. The Series B has a liquidation preference and is convertible into common shares at a conversion price of $0.076 per share. The investors have a first lien position on the assets of the Company on a pari passu basis with the holders of other affiliated debt. The LLC rolled its short-term loans above into this agreement. In addition, the LLC note is secured by a substantial portion of the directors of the Company stock holdings. The LLC received 8,750,000 warrants for the purchase of the Company common stock at an exercise price of $.069 per share with an expiration date of May 31, 2017. On January 4, 2013, the Company entered into a convertible promissory note agreement with the LLC for $50,000. The loan carried an interest rate of 6% p.a. and a maturity date of May 30, 2017. The note is convertible into whole or part into Series B convertible preferred stock of the Company at an effective conversion rate of one share of Series B convertible preferred stock for each $1 outstanding principal and accrued but unpaid interest. The Series B has a liquidation preference and is convertible into common shares at a conversion price of $0.085 per share. In addition, warrants of 250,000 were granted for the purchase of common stock with a strike price of $0.0709 and an expiration date of 5 years.

As of March 31, 2013 and December 31, 2012 the accrued interest on this loan was $91,356 and $64,726, respectively.

In accordance with Accounting Standards Codification 470-20-65, “Accounting for Convertible Securities with Beneficial Conversion Features or Contingently Adjustable Conversion Ratios (“ASC 470-20-65”), the Company recognized an imbedded beneficial conversion feature present in the notes. For the three months ended March 31, 2013 and for the year ended December 31, 2012, the Company recognized a debt discount of $11,863 and $1,360,869, which was equal to the intrinsic value of the imbedded beneficial conversion feature. The Company also recorded a net of a deferred debt discount of $11,195 and $347,711 based on the relative fair value of the warrants under the Black-Scholes pricing model based on the following assumptions: (1) risk free interest rate of 0.82% and 0.72%; (2) dividend yield of 0%; (3) volatility factor of the expected market price of the Company common stock of 187.5% and 74.85%; and (4) an expected life of the warrants of 5 years. Total debt discount of $11,863 and $1,708,581 is attributed to the beneficial conversion feature were recognized to additional paid in capital and a discount against the Note. The debt discount is being amortized over the Notes maturity period (five years) as interest expense. During the three months ended March 31, 2013, the Company recorded amortization of the debt discount relating to these notes of $86,026.

Legal Fees:

During the three months ended March 31, 2013 and 2012, the Company incurred and reimbursed legal fees in the amount of $74,990 and $45,640 respectively on behalf of its executive officer in defense of an investigation by a governmental agency.

Note 10: Commitments and Contingencies

Leases:

The Company leases office space in Washington, D.C. and Fairfax, Virginia under operating leases expiring at various dates through 2016. The premises leases contain scheduled rent increases and require payment of property taxes, insurance and certain maintenance costs. The minimum future commitments under lease agreements existing as of March 31, 2013 are approximately as follows:

Year ending December 31,
2013	$	190,000
2014		269,000
2015		276,000
2016		222,000
	$	958,000

Total rent expense amounted to $82,015 and $75,165 for the three months ended March 31, 2013 and 2012, respectively.

In 2010, Innovative vacated its office space prior to expiration of the lease. The landlord subsequently filed a lawsuit against the Company under which it pursued total damages of approximately $1,000,000, which approximates the rent charges for the remaining term of the lease. On February 14, 2011, Innovative entered into a settlement agreement in which it agreed to a payment of $350,000 on May 31, 2011. In the event Innovative did not make the payment timely, it agreed to a confessed judgment in the amount of $936,510 and this amount was included in other accrued liabilities as of December 31, 2010. In July 2011, the settlement agreement was amended to extend the $350,000 payment till August 8, 2011. The entire $350,000 was paid in full by August 8, 2011. As such, $586,510 was recognized as a gain from legal settlement during the twelve months ended December 31, 2011.

Late Deposit of Payroll Taxes and Employee Income Tax Withholdings:

At March 31, 2013, the Company is delinquent with filing and remitting payroll taxes of $5,046,009 including estimated penalties and interest related to payroll taxes withheld since December 31, 2009. The Company has recorded the delinquent payroll taxes, which are included in accrued expenses on the balance sheet. Although the Company has not entered into any formal repayment agreements with the applicable tax authorities, management plans to make payment as funds become available. Penalties and interest amounts are subject to increase based on a number of factors that can cause the estimated liability to increase further. Interest and penalties were accrued in an amount estimated to cover the ultimate liability. As of March 31, 2013 and December 31, 2012, the total of payroll tax accrued and income tax withheld balances including penalties and interest, amounted to $5,046,009 and $4,632,104, respectively. The Company is currently in discussions with the taxing authorities to develop a payment plan. On March 17, 2011 the taxing authorities filed a notice of federal tax lien in the amount of $614,990 in Fairfax, VA.

Employment Agreement:

On April 1, 2009, Innovative entered into an employment agreement with its President and Chief Executive Officer through March 31, 2014, which provides for a minimum annual salary of $198,000. At January 31, 2012 this agreement was cancelled and replaced by a consulting agreement as the President and Chief Executive Officer of Innovative retired. As of March 31, 2013 the consulting agreement has been cancelled.

Contracts:

Substantially all of the Company’s revenues have been derived from prime or subcontracts with the U.S. government. These contract revenues are subject to adjustment upon audit by the Defense Contract Audit Agency. Audits have been finalized through 2005. Management does not expect the results of future audits to have a material effect on the Company’s financial position or results of operations.

Delinquent payables

The Company has been delinquent in numerous payables to different parties of which some filed lawsuits against the Company. All necessary accruals have been made as of March 31, 2013 and 2012 and are included in accounts payable and other accrued liabilities.

Legal Proceedings

Other than the proceedings described below, the Company is not currently involved in any material legal proceedings, nor have been involved in any such proceedings that have had or may have a significant effect on it. The Company is not aware of any other credible material legal proceedings pending or threatened against it.

Lau Massachusetts Business Trust et. al. vs. Innovative Logistics Techniques, Inc. This complaint was filed in June 2010 in the Circuit Court of Fairfax County Virginia (Case No. 2010-8002). The complaint alleges, among other things, breach of various contracts, trover and conversion of funds based on the Company’s receipt of moneys that allegedly should have been paid over to the complainant or its affiliates in or about 2008 and non-payment of various alleged settlement arrangements. The Company has entered into a settlement agreement, as amended (under which, the Company was in default), and a forbearance agreement requiring the payment of approximately $375,000. An initial payment of $75,000 is due about March 31, 2012 and the remainder is to be paid with interest over the next 12 months. The Company is in default of the settlement and forbearance agreements. A confession of Judgment for $271,521 was entered on April 24, 2013.

U.S. Department of Labor vs. Innovative Logistics Techniques, Inc. and ILT 401K Plan. This complaint was filed in November 2012, in the US District Court for the Eastern District of Virginia (Civil Action No. 12-1321). The complaint, covering a period from January 1, 2007 through April 1, 2011, alleges, among other things, failure by the Company to remit certain employee assets to the Plan and wrongful treatment and use of Plan assets. The Complaint seeks restoration of Plan assets (including lost profits) of approximately $200,000, an injunction against the Company regarding ERISA activities and other legal and equitable relief. The Company filed a response and the matter is proceeding.

Investigation by the US Internal Revenue Service. The US Internal Revenue Service has alleged that various past due taxes since 2008 are due and owing by the Company. The IRS has filed various liens amounting to approximately $350,000. There are various matters and issues pending before the IRS. The Company has sought an installment payment plan with the service. The Company has not heard from the IRS regarding the proposed payment plan.

801 Potomac Avenue SE Holdings vs. Innovative Logistics Techniques, Inc. A summons was filed on April 12, 2013, seeking a Notice to Quit the Premises and approximately $350,000 in damages. The Company left the premises in early May, 2013. The matter was scheduled for hearing on May 15, 2013 but was postponed to June 11, 2013.

CACI, Inc. - Federal vs. Innovative Logistics Techniques, Inc. This complaint was filed on February 12, 2013, in the Circuit Court of Fairfax County (Civil Action No. 2013-03033). The complaint alleges breach of contract and seeks damages of approximately $80,000 plus interest and attorney’s fees. The Company filed an answer and trial is set for November 12, 2013.

Quasar Systems, Inc. vs. Innovative Logistics Techniques, Inc. This complaint was filed on February 25, 2013, in the Circuit Court of Fairfax County (Civil Action No. 2013-03940). The complaint alleges breach of contract and seeks damages of approximately $75,000 plus interest and attorney’s fees. A Consent Judgment was entered on April 26, 2013 and execution has been stayed until June 17, 2013.

Note 11: Income Taxes

The Company’s effective income tax rate is lower than what would be expected if the federal statutory rate were applied to income from continuing operations primarily because of the deferred tax asset being fully reserved.

Temporary differences giving rise to the deferred tax assets consist primarily of the excess of the goodwill and other intangible assets for tax reporting purposes over the amount for financial reporting purposes, and net operating loss carry forwards. The Company’s ability to utilize the federal and state tax assets is uncertain; therefore the deferred tax asset is fully reserved.

At March 31, 2013, the Company had net operating loss carry forwards of approximately $12 million for federal and Virginia state tax purposes expiring through 2031.

The Company has filed its 2011 federal and state income tax returns.

The Company recognizes interest and penalties related to income tax matters in interest expense and operating expenses, respectively. As of March 31, 2013, the Company has no accrued interest and penalties related to uncertain tax positions.

Note 12: Employee Benefit Plan

Innovative has a defined contribution employee benefit plan covering all full time employees who elect to participate. The plan provides for elective salary deferrals by employees and annual elective matching contributions. There were no employer contributions for the three months ended March 31, 2013 and 2012.

Innovative has been late in making deposits of employee deferrals. The Department of Labor has reviewed Innovative’s employee benefit plan document as well as other records to determine the status of compliance. The Department of Labor and the Company have determined that a remaining total of $183,304 is to be deposited in the plan, which includes all principal and any penalties. The Company is working with the Department of Labor on a payment plan. In addition, the Department of Labor has required that the plan be terminated.

Note 13: Capital Stock

Common Stock:

The Company has authorized 200,000,000 shares of common stock, with a par value of $0.001 per share.

As of March 31, 2013 and December 31, 2012, 18,410,831 and 17,974,538 shares, respectively, of the Company common stock were issued and outstanding.

During the three months ended March 31, 2013, the Company issued 436,293 shares of its common stock valued at $26,178 for accrued services.

During the year ended December 31, 2012, the Company issued 869,565 shares of its common stock valued at $60,000 for accrued services.

During the year ended December 31, 2012, the Company issued 625,000 shares of its common stock valued at $37,500 for interest expense.

During the year ended December 31, 2012, the Company issued 300,000 shares of its common stock valued at par for conversion of 300,000 Series A convertible preferred stock.

During the year ended December 31, 2012, the Company issued 1,050,000 shares of its common stock valued at par upon exercise of warrants.

Preferred Stock:

The Company has authorized 50,000,000 shares of preferred stock, with a par value of $0.001 per share (“Preferred Stock”). The Preferred Stock may be issued from time to time in series having such designated preferences and rights, qualifications and to such limitations as the Board of Directors may determine.

The Company has designated 38,000,000 shares of the preferred stock as Series A Convertible Preferred Stock (“Series A Stock”). The holders of Series A Stock have voting rights with a $2.00 liquidation preference per share, and may convert each share of Series A Stock into one share of common stock at any time. Series A Stock converts automatically upon the occurrence of an offering meeting certain criteria and the sale of the Company. Holders of the Series A Stock are entitled to accrue dividends based on the prior fiscal year’s net income equal to 10% of such net income.

As of March 31, 2013 and December 31, 2012, there were 36,894,758 shares of Series A Convertible Preferred Stock outstanding and no dividends have been accrued.

During the year ended December 31, 2012, the Company issued 300,000 shares of its Series A convertible preferred stock for accrued services valued at $3,000, which was converted into 300,000 common stock valued at par.

The Company has designated 7,800,000 shares of the preferred stock as Series B Convertible Preferred Stock (“Series B Stock”). The holders of Series B Stock have voting rights with a two times the original issue price plus any declared or accrued but unpaid dividends liquidation preference to the Company’s Series A Convertible Preferred and Common Stock. Each share of Series B Stock may convert to common stock at any time at the conversion rate. The conversion rate is defined 120% of the average market closing price of the Common Stock as determined for the 30-day period ending two business days prior to the applicable closing under the May 21, 2012 Note Purchase Agreement. Series B Stock converts automatically upon the occurrence of a listing of the common stock on the NASDAQ or American Stock Exchange. Holders of the Series B Stock are entitled to accrue dividends based at a 6% rate per annum.

As of March 31, 2013 and December 31, 2012, there were no shares of Series B Convertible Preferred Stock issued and outstanding and no dividends have been accrued.

Warrants:

For the three months ended March 31, 2013, the Company granted 5,705,000 warrants to various individuals in conjunction with the individuals lending the Company funds for working capital, renewals of loans in 2012, services rendered in 2012 and 2013 and settlement of debt due. The warrants have an exercise price of $0.01 to $0.05 per share and a life of five years. All warrants were fully vested on the date of the grant. The Company has determined through a Black Scholes analysis that the fair value of the 2,455,000 warrants was $120,037 at the time of issue. Fair value of 3,000,000 warrants amounted to $70,730 was charged to operations during the year ended December 31, 2012 as the warrants were issued in 2013 for board services rendered in 2012 and for renewal of loans in 2012. Remaining 250,000 warrants were issued along with the convertible note payable (refer Note – 9).

The following assumptions were used in arriving at the fair value of the above noted warrants:

Expected dividend yield	0	%
Expected volatility	187.15	%
Average risk free interest rate	0.84	%
Expected life (in years)	5.0

A summary of the Company’s warrant activity and related information is as follows:

Warrant Summary	Warrants			Weighted Average Exercise Price
Outstanding, January 1, 2011		63,111,564		$	0.347

Issued		22,965,082			0.04
Exercised		(1,050,000	)		(0.01	)
Forfeited/Expired		(11,706	)		(3.21	)
Outstanding, December 31, 2012		85,012,259			0.27

Issued		5,705,000			0.03
Exercised		-			-
Forfeited/Expired		-			-

Outstanding, March 31, 2013		90,717,259		$	0.25

At March 31, 2013, there were 90,717,259 warrants outstanding and exercisable. These warrants had a weighted average exercise price of $0.25 and a weighted average remaining life of 37.5 months. The intrinsic value is not greater than the grant price.

Stock Option Plan:

The Deferred Stock and Restricted Stock Plan (the “Plan”), under which employees, officers, directors, consultants and other service providers may be granted non-qualified and/or incentive stock options. Generally, all options granted expire five years from the date of grant. All options have an exercise price equal to or higher than the fair value of the Company’s stock on the date the options are granted. Options generally vest over three years with the exception of the initial grants of 2010, which vested immediately.

A summary of the status of stock options issued by the Company as of March 31, 2013 is presented in the following table.

	Number of Options			Weighted Average Exercise Price

Outstanding at January 1, 2012		13,429,500		$	0.50
Granted		-			-
Exercised/Expired/Cancelled		(2,647,500	)		(0.50	)
Outstanding at December 31, 2012		10,782,000			0.50
Granted		60,000			0.10
Exercised/Expired/Cancelled		(6,000	)		(0.50	)
Outstanding at March 31, 2013		10,836,000		$	0.0498

Exercisable at March 31, 2013		10,759,000		$	0.50

These stock options have a weighted average remaining life of 28.9 months. The intrinsic value is not greater than the grant price.

2012 Consultant Stock Plan

The 2012 Consultant Stock Plan (the “Plan”), under which consultants and other service providers may be granted shares of the Company’s Common Stock. The Company has reserved up to 5,000,000 shares under this plan. The plan will expire in 10 years. The stock under this plan has been registered under a S-8. During the three months ended March 31, 2013, the Company has granted 436,293 shares valued at $26,178 for services rendered in prior period.

Equity Credit Line

On July 25, 2012, the Company entered into an equity credit line with Dutchess Opportunity Fund II, LP for up to $5,000,000 over a three-year term. Under this arrangement the Company may obtain working capital from Dutchess in exchange for common stock. The amount of the put is determined by 200% of the average daily volume for the 3 days prior to the put date and the purchase price is determined 95% of the volume weighted average price during the 5 trading days after the put date. As of the three months ended March 31, 2013, this line has not been used.

Note 14: Subsequent Events

On April 22, 2013 the company borrowed $75,000 from an individual with a maturity date of May 15, 2013 at an interest rate of 10%. In addition, the individual was granted 75,000 warrants for the purchase of common stock at a strike price of $0.01with a 5 year expiration. The proceeds were used for working capital. The loan was repaid on May 15, 2013.

On April 22, 2013 and April 29, 2013 the company borrowed a total of $15,000 under its revolving line with a director. The proceeds were used for working capital.

On May 9, 2013 the company borrowed $30,000 from a greater than 5% shareholder of the company with a maturity date of November 30, 2014 and an interest fee of $3,000. The proceeds were used to pay down debt.

On May 9, 2013 the company borrowed $30,000 from a greater than 5% shareholder of the company with a maturity date of November 30, 2013 and an interest fee of $3,000. The proceeds were used to pay down debt.

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

The following discussion and analysis of the results of operations and financial condition of Innolog Holdings Corporation and its wholly owned subsidiary, for three months ended March 31, 2013 and 2012 should be read in conjunction with the consolidated financial statements and the notes to those financial statements that are included in the Current Report on Form 10-K that we filed with the Securities and Exchange Commission on April 15, 2013. References to “the Company,” “we,” “our,” or “us” in this discussion refer to Innolog Holdings Corporation and its subsidiary.

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

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

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

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

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

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

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

Overview

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

The federal government is the largest consumer of services and solutions in the United States. Given the current focus on the nation’s increasing debt levels, the rate of growth in federal spending is not expected to grow as rapidly as it has over the last 10 years. However, we believe that the federal government’s spending will continue to increase, albeit at a slower pace, 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, the continuing impact of federal procurement reforms and the need to identify cost reductions and increase agency efficiencies. 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. Federal government spending on information technology increased from approximately $76 billion in federal fiscal year 2009 to $84 billion in federal fiscal year 2011 and is projected to increase to $91 billion in federal fiscal year 2016. Moreover, this data may not fully reflect government spending on classified intelligence programs, operational support services to our armed forces and complementary technical services, which include sophisticated systems engineering.

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

Increased Spending on Defense and Intelligence to Combat Terrorist Threats

Increased Spending on Cyber Security

Continuing Focus on Information Sharing, Data Interoperability and Collaboration

Reliance on Technology Service Providers

Inherent Weaknesses of Federal Personnel Systems

Critical Accounting Policies and Estimates

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

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

Contract Revenue Recognition:

Allowance for Doubtful Accounts:

Long-Lived Assets:

Income Taxes:

Stock Based Compensation:

Fair Value Measurements:

Level 1: Inputs to the valuation methodology are unadjusted quoted prices for identical assets or liabilities in active markets that the plan has the ability to access.

Level 2: Inputs to the valuation methodology include:

quoted prices for similar assets or liabilities in active markets;

quoted prices for identical or similar assets or liabilities in inactive markets;

inputs other than quoted prices that are observable for the assets or liability;

inputs that are derived principally from or corroborated by observable market data by correlation or other means.

If the asset or liability has a specified (contractual) term, the level 2 input must be observable for substantially the full term of the asset or liability.

Level 3: Inputs to the valuation methodology are unobservable and significant to the fair value measurement.

The following is a description of the valuation methodologies used for assets and liabilities measured at fair value:

Recent Accounting Pronouncements:

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

Results of Operations

Comparison of the Three Months Ended March 31, 2013 and 2012

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

	Three Months Ended March 31, 2013 (unaudited)			% of Sales			Three Months Ended March 31, 2012 (unaudited)			% of Sales
Contract Revenue	$	1,056,450			100.0		$	1,187,803			100.0

Direct Costs		558,808			52.9			668,562			56.3

Other Operating Expenses		626,367			59.3			1,059,851			89.2

Operating Loss		(128,725	)		(12.2	)		(540,610	)		(45.5	)

Other income		169			-			42,460			3.6

Other Expense		(777,382	)		(73.6	)		(436,883	)		(36.8	)

Loss Before Income Tax		(905,938	)		(85.8	)		(935,033	)		(78.7	)

Income Tax Expense		-						-

Net Loss	$	(905,938	)		(85.8	)	$	(935,033	)		(78.7	)

Contract Revenues. Revenues for the three months period ended March 31, 2013 decreased by 11% over the previous period as the Company has started to see the effect of loss of the Army contract as reported in the annual filing. In addition, the company has been notified that its Navy contracts will not be renewed.

Direct Costs. Direct costs decreased as a percentage of revenue for the three months ended March 31, 2013. This was primarily due to the tightening of accounting controls by the Company, resulting in a more accurate allocation of expenses to the appropriate direct cost pools.

Other Operating Expenses. Operating expenses include indirect contract costs and costs not allocable to contracts. For the three months ended March 31, 2013 these expenses decreased year over year, due to more efficient allocation of expenses to our contracts, and other cost reductions.

Operating Loss. The Company decreased its operating loss by 76.2% in the three months ended March 31, 2013 from the previous year. This was due to a decrease in indirect contract costs as discussed above.

Other Income. The other income for the three months ended March 31, 2012 is a gain on debt settlement relating to a settlement agreement with an unrelated note payable whereby the company and lender settled for an amount less than what had been accrued. The other income for the three months ended March 31, 2013 is from interest income.

Other Expenses. The other expense for the three months ended March 31, 2013 and March 31, 2012 were $777,382 and $436,883, respectively. These expenses are interest expense and debt discount amortization.

Net Loss. Our net loss for the period decreased slightly. For the three months ended March 31, 2013 and 2012, our net loss was $905,938 and $935,033, respectively. This was due to a decrease in operating expense but was offset by an increase in interest expense, and an increase in debt discount amortization. The company has had to continue to borrow funds from high expense lenders to cover its operating losses.

Liquidity and Capital Resources

Cash Flows

Net cash used in operating activities was $151,180 for the three months ended March 31, 2013. Cash was used primarily to support operating losses. Net cash flow used in operating activities was $655,985 for the three months ended March 31, 2012.

Net cash used in investing activities was $903 for the three months ended March 31, 2013 and $6,087 for the three months ended March 31, 2012. In both periods, cash was used in investing activities for equipment purchases.

Net cash provided by financing activities was $121,500 for the three months ended March 31, 2013 and $662,072 for the three months ended March 31, 2012. Receipts of cash flow from financing activities during the three months ended March 31, 2013 and 2012 primarily consisted of borrowings from and payments to related and non-related party lenders.

Material Impact of Known Events on Liquidity

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

Capital Resources

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

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

At March 31, 2013 we had $4,803 of unrestricted cash on hand. We will need significant additional financing to fund our operations over the next 12 months. The Company has sustained substantial operating losses since inception, and had a stockholders’ deficit (defined as total assets minus total liabilities) of $14,154,214 and $13,477,080 at March 31, 2013 and December 31, 2012, respectively. There are many delinquent claims and obligations, such as payroll taxes, employee income tax withholdings, employee benefit plan contributions, delinquent loans payable and accounts payable that could ultimately cause the Company to cease operations.

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

Because of our historic net losses and negative working capital position, our independent auditors, in their report on our consolidated financial statements for the year ended December 31, 2012, expressed substantial doubt about our ability to continue as a going concern.

Contractual Obligations and Off-Balance Sheet Arrangements

Loans From Related Parties

During the three months ended March 31, 2013, we received loans totaling $352,500 from related parties and paid back loans totaling $335,500. As of the three months ended March 31, 2013 the outstanding balance was $5,369,159. Of these loans $1,491,659 were in default as of March 31, 2013.

Loans From Unrelated Parties

During the three months ended March 31, 2013, we received loans totaling $160,000 from unrelated parties and paid back loans totaling $55,500. As of the three months ended March 31, 2013 the outstanding balance was $341,500. Of these loans $341,500 were in default as of March 31, 2013.

Contractual Obligations

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

The following table summarizes our contractual obligations as of March 31, 2013, and the effect these obligations are expected to have on our liquidity and cash flows in future periods.

Contractual Obligations	Total		Less than 1 year		1-3 years		3-5 years		5 years +
Bank Indebtedness	$	-	$	-	$	-	$	-	$	-
* Other Indebtedness		5,710,659		1,910,659		-		3,800,000		-
Operating Leases		958,000		190,000		545,000		222,000		-
Totals	$	6,668,659	$	2,100,659	$	545,000	$	4,022,000	$	-

* Gross of debt discount of $1,424,979

Off-Balance Sheet Arrangements

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

Item 3: Quantitative and Qualitative Disclosures about Market Risk

As a smaller reporting company we are not required to provide this information.

Item 4: Controls and Procedures.

Evaluation of Disclosure Controls and Procedures

As of March 31, 2013, we carried out an evaluation, under the supervision of and with the participation of our principal executive officer and principal financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”)). Disclosure controls and procedures are designed to ensure that information required to be disclosed in the reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our principal executive officer and chief financial officer, to allow timely decisions regarding required disclosures.

Based on that evaluation, our principal executive officer and chief financial officer has concluded that as of March 31, 2013, our disclosure controls and procedures were not effective due to the following material weaknesses. A material weakness is a control deficiency (within the meaning of the Public Company Accounting Oversight Board (PCAOB) Auditing Standard No. 2) or combination of control deficiencies that result in more than a remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected. Management has identified the following material weaknesses in our disclosure controls and procedures:

1. We do not have sufficient segregation of duties within accounting functions, which is a basic internal control. Due to our size and nature, segregation of all conflicting duties may not always be possible and may not be economically feasible. However, to the extent possible, the initiation of transactions, the custody of assets and the recording of transactions should be performed by separate individuals. Management evaluated the impact of our failure to have segregation of duties on our disclosure controls and procedures and has concluded that the control deficiency that resulted represented a material weakness.

2. We do not have sufficient review and supervision procedures for financial reporting functions. The review and supervision function of internal control relates to the accuracy of financial information reported. The failure to review and supervise could allow the reporting of inaccurate or incomplete financial information. Due to our size and nature, review and supervision may not always be possible or economically possible. Management evaluated the impact of our significant number of audit adjustments and has concluded that the control deficiency that resulted represented a material weakness.

To address these material weaknesses, management performed additional analyses and other procedures to ensure that the financial statements included herein fairly present, in all material respects, our financial position, results of operations and cash flows for the periods presented.

Remediation of Material Weaknesses

Written documentation of the internal controls of financial reporting has been prepared and implemented and our disclosure controls and procedures are effective. In December 2012, the Company hired a staff accountant to bring the accounting process back in-house. We do not have sufficient separation of duties and sufficient internal review of financial reporting functions, given our current staffing level. The Company does not anticipant adding additional accounting staff in the near future.

Changes in Internal Controls

During the quarter covered by this report, there was no change in our internal control over financial reporting (as defined in Rule 13a-15(f) of the Exchange Act) that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting except as noted above.

PART II - OTHER INFORMATION

Item 1: Legal Proceedings.

An update to the legal proceedings discussed in our Annual Report on Form 10-K can be found above in Item 1, Footnote 10 titled “Commitments & Contingencies”.

Item 1A: Risk Factors.

As a smaller reporting company we are not required to provide this information.

Item 2: Unregistered Sales of Equity Securities and Use of Proceeds.

None

Item 3: Defaults Upon Senior Securities.

None

Item 4: Mine Safety Disclosures.

Not applicable.

Item 5: Other Information.

Not applicable.

Item 6: Exhibits.

The Exhibit Table below lists those documents that we are required to file with this report.

Number		Description

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		Amended and Restated Articles of Incorporation (1)

3.2		Bylaws (2)

3.3		Certificate of Amendment of the Articles of Incorporation (2)

3.4		Certificate of Designation of Preferences, Rights and Limitations of Series A Convertible Preferred Stock (2)

3.5		Articles of Merger between GCC Merger Sub Corporation and Innolog Group Corporation filed August 18, 2010 with the Secretary of State of Nevada (3)

3.6		Certificate of Designation of Preferences, Rights and Limitations of Series B Convertible Preferred Stock (5)

10.1		Promissory Note dated January 15, 2013 in the principal amount of $50,000 issued by Innolog Holdings Corporation in favor of Kay M. Gumbinner Trust. *

10.2		Promissory Note dated January 23, 2013 in the principal amount of $50,000 issued by Innolog Holdings Corporation in favor of Kay M. Gumbinner Trust. *

10.3		Promissory Note dated January 2, 2013 in the principal amount of $50,000 issued by Innolog Holdings Corporation in favor of Charlie Fink. *

10.4		Promissory Note dated January 28, 2013 in the principal amount of $10,000 issued by Innolog Holdings Corporation in favor of Andrea Ballentine. *

10.5		Promissory Note dated January 30, 2013 in the principal amount of $25,000 issued by Innolog Holdings Corporation in favor of Sunjay Berdia. *

10.6		Promissory Note dated January 31, 2013 in the principal amount of $25,000 issued by Innolog Holdings Corporation in favor of Sunjay Berdia. *

10.7		Promissory Note dated February 12, 2013 in the principal amount of $50,000 issued by Innolog Holdings Corporation in favor of Tim Fleischer. *

10.8		Promissory Note dated February 8, 2013 in the principal amount of $25,000 issued by Innolog Holdings Corporation in favor of Kay M. Gumbinner Trust. *

10.9		Revolving Credit Note dated February 18, 2013 in the principal amount of up to $200,000 issued by Innolog Holdings Corporation in favor of Ian Reynolds.*

21.0		Subsidiaries of Innolog Holdings Corporation (4)

31.1		Rule 13a-14(a)/15d-14(a) Certification*

31.2		Rule 13a-14(a)/15d-14(a) Certification*

32.1		Section 906 Certification*

* 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 13, 2010 as an exhibit to the Company’s Current Report on Form 8-K, and incorporated herein by reference.

(3)

Filed on October 15, 2010 as an exhibit to the Company’s Amendment No. 3 to Current Report on Form 8-K and incorporated herein by reference.

(4)

Filed on January 12, 2011 as an exhibit to the Company’s Amendment No. 1 to the Registration Statement on Form S-1 and incorporated herein by reference.

(5)

Filed on May 25, 2012 as an exhibit to the Company’s Current Report on Form 8-K, and incorporated herein by reference.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

INNOLOG HOLDINGS CORPORATION

Dated: May 20, 2013	By:	/s/ William P. Danielczyk

		Name:	William P. Danielczyk
		Title:	Executive Chairman of the Board
			Principal Executive Officer

Dated: May 20, 2013	By:	/s/Eric Wagner

		Name:	Eric Wagner
		Title:	Chief Financial Officer