10-Q
1
d10q.htm
FORM 10-Q
Form 10-Q
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2010
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number 001-15941
UTEK
CORPORATION
(Exact name of registrant as specified in its charter)
Delaware
59-3603677
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
2109 Palm Avenue
Tampa, FL 33605
(Address of principal executive offices)
(813) 754-4330
(Registrants telephone number)
(Former name, former address and former fiscal year, if changed since last report)
None
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 x 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). Yes ¨ No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting
company. See the definitions of large accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.
Large accelerated filer
¨
Accelerated filer
¨
Non-accelerated filer
x (Do not check if a smaller reporting company)
Smaller reporting company
¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange
Act). Yes ¨ No x
On May 10, 2010, there were 11,797,140 shares outstanding of registrants common stock, $0.01 par value.
Table of Contents
UTEK CORPORATION
FORM 10-Q TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
3
Consolidated Balance Sheets as of March 31, 2010 (unaudited) and December 31,
2009
3
Consolidated Statements of Operations for the three months ended March
31, 2010 and 2009 (unaudited)
4
Consolidated Statement of Changes in Equity for the three months ended March
31, 2010 (unaudited)
5
Consolidated Statements of Cash Flows for the three months ended March
31, 2010 and 2009 (unaudited)
6
Notes to Consolidated Financial Statements (unaudited)
8
ITEM
2. Managements Discussion and Analysis of Financial Condition and Results of Operations
16
ITEM 3. Quantitative and Qualitative Disclosures about Market Risks
22
ITEM 4. Controls and Procedures
22
PART II. OTHER INFORMATION
ITEM 1.
Legal Proceedings
23
ITEM 1A.
Risk Factors
23
ITEM 2.
Unregistered Sales of Equity Securities and Use of Proceeds
23
ITEM 3.
Defaults Upon Senior Securities
23
ITEM 4.
Reserved
23
ITEM 5.
Other Information
23
ITEM 6.
Exhibits
23
Signatures
24
Exhibits
Page 2 of 28
Table of Contents
PART I. FINANCIAL INFORMATION
ITEM 1.
Financial Statements
UTEK Corporation
Consolidated Balance Sheets
March 31,
2010
(Unaudited)
December 31,
2009
ASSETS
Current assets:
Cash and cash equivalents
$
1,179,143
$
2,118,970
Accounts receivable, net
1,323,148
1,481,548
Certificates of deposit
494,452
492,246
Available-for-sale securities
640,000
729,800
Investments under cost method
588,085
588,085
Prepaid expenses and other assets
576,447
569,829
Total current assets
4,801,275
5,980,478
Note receivable and accrued interest
1,622,000
1,596,000
Fixed assets, net
8,341,772
8,388,263
Goodwill
15,649,966
15,874,139
Intangible assets, net
8,004,362
8,492,301
Total assets
$
38,419,375
$
40,331,181
LIABILITIES
Current liabilities:
Accounts payable
$
611,188
$
454,509
Accrued expenses
694,175
462,802
Accrued severance payable
876,400
Deferred revenue
1,564,190
1,634,096
Current maturities of long-term debt
936,806
975,360
Derivative liability
610,663
664,972
Total current liabilities
4,417,022
5,068,139
Long-term debt, less current maturities
5,337,045
5,353,892
Deferred tax liability
1,202,634
1,303,031
Total liabilities
10,956,701
11,725,062
EQUITY
UTEK stockholders equity:
Preferred stock, $.01 par value, 1,000,000 shares authorized; none issued and outstanding
Common stock, $.01 par value, 29,000,000 shares authorized; 12,286,768 shares issued; 11,797,140 shares
outstanding
117,971
117,971
Additional paid-in capital
81,176,073
81,010,460
Total accumulated loss under Investment Company Accounting
(52,073,915
)
(52,073,915
)
Accumulated income (deficit) under Operating Company Accounting:
Accumulated deficit
(2,200,404
)
(624,006
)
Accumulated other comprehensive income (loss)
(88,256
)
175,609
Total UTEK stockholders equity
26,931,469
28,606,119
Noncontrolling interest
531,205
Total equity
27,462,674
28,606,119
Total liabilities and equity
$
38,419,375
$
40,331,181
See accompanying notes
Page 3 of 28
Table of Contents
UTEK Corporation
Consolidated Statements of Operations
(Unaudited)
Operating
Company
Accounting
Investment
Company
Accounting
Three Months
Ended March 31,
2010
Three Months
Ended March 31,
2009
Revenue / Income from operations:
Strategic services
$
1,430,042
$
1,725,278
Technology marketplaces
316,986
402,423
Insights and research
523,403
605,356
Investment income, net
44,958
2,270,431
2,778,015
Expenses:
Direct costs of revenue
1,448,372
2,327,358
Salaries and wages
730,084
984,089
Professional fees
201,289
222,920
Sales and marketing
249,783
118,500
General and administrative
740,364
809,735
Depreciation and amortization
400,495
406,678
3,770,387
4,869,280
Other (income) and expense:
Other (income) expense
(2,074
)
Interest expense, net
135,154
133,080
Loss before income taxes
(1,633,036
)
(2,091,265
)
Provision for income tax benefit
(55,711
)
(16,445
)
Net loss from operations
(1,577,325
)
(2,074,820
)
Net realized and unrealized gains (losses) from investment company activity:
Net realized gains (losses) on investments
(37,018,135
)
Net change in unrealized appreciation (depreciation) of investments
34,095,220
Net loss / Net decrease in net assets from operations
(1,577,325
)
$
(4,997,735
)
Net loss attributable to the noncontrolling interest
(927
)
Net loss attributable to UTEK stockholders
$
(1,576,398
)
Net loss attributable to UTEK stockholders per share / Net decrease in net assets from operations per share: Basic and diluted
$
(0.13
)
$
(0.45
)
Weighted average shares outstanding: Basic and diluted
11,797,140
10,987,743
See accompanying notes
Page 4 of 28
Table of Contents
UTEK Corporation
Consolidated Statement of Changes in Equity
(Unaudited)
UTEK Stockholders Equity
Common Stock
Additional
Total
Accumulated
Loss under
Investment
Comprehensive
Income (loss)
Accumulated
Deficit
Accumulated
Other
Noncontrolling
Interest
Total Equity
Shares
Issued
Shares
Outstanding
Par Value
Paid-In
Capital
Company
Accounting
Comprehensive
Income (Loss)
Balances at December 31, 2009
12,286,768
11,797,140
$
117,971
$
81,010,460
$
(52,073,915
)
$
(624,006
)
$
175,609
$
$
28,606,119
Settlement of severance liability for 32% interest in Cortez 114, LLC
17,868
532,132
550,000
Comprehensive loss:
Net loss
$
(1,576,398
)
(1,576,398
)
(927
)
(1,577,325
)
Other comprehensive income (loss):
Unrealized gain (loss) from available-for-sale securities
79,831
Foreign currency translation adjustments
(343,696
)
Other comprehensive loss
(263,865
)
(263,865
)
(263,865
)
Comprehensive loss
$
(1,840,263
)
Stock-based compensation expense
147,745
147,745
Balances at March 31, 2010
12,286,768
11,797,140
$
117,971
$
81,176,073
$
(52,073,915
)
$
(2,200,404
)
$
(88,256
)
$
531,205
$
27,462,674
See accompanying notes
Page 5 of 28
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UTEK Corporation
Consolidated Statements of Cash Flows
(Unaudited)
Operating
Company
Accounting
Investment
Company
Accounting
Three Months
Ended
March
31, 2010
Three Months
Ended
March 31, 2009
Operating Activities:
Net loss attributable to UTEK stockholders / Net decrease in net assets from operations
$
(1,576,398
)
$
(4,997,735
)
Adjustments to reconcile net loss attributable to UTEK stockholders / net decrease in net assets from operations to net cash
flows from operating activities:
Change in net unrealized (appreciation) depreciation of investments from investment company activity
(34,095,226
)
Loss on sale of investments from investment company activity
37,018,135
Proceeds from sale of equity investments from investment company activity
400,033
Net proceeds from sale (purchases) of short-term investments from investment company activity
(394,966
)
Net loss attributable to noncontrolling interest
(927
)
Depreciation and amortization
400,495
406,678
Amortization of debt discount from investor warrants
45,614
Loss on sale and impairment of available-for-sale securities
134,557
Gain on derivative liability
(54,309
)
Stock-based compensation
147,745
244,849
Deferred income taxes
(55,711
)
(16,445
)
Other
7,511
49,404
Changes in operating assets and liabilities:
Accounts receivable
152,330
924,870
Prepaid expenses and other assets
(34,824
)
71,610
Deferred revenue
(69,906
)
(308,232
)
Accounts payable and accrued expenses
61,652
(263,129
)
Net cash flows from operating activities
(842,171
)
(960,154
)
Investing Activities:
Capital expenditures
(29,729
)
(2,539
)
Proceeds from sale of available-for-sale securities
35,074
Net cash flows from investing activities
5,345
(2,539
)
Financing Activities:
Proceeds from borrowings on bank line of credit
750,000
Payments on long-term debt
(101,015
)
(88,274
)
Net cash flows from financing activities
(101,015
)
661,726
Effect of foreign exchange rates
(1,986
)
(9,587
)
Decrease in cash and cash equivalents
(939,827
)
(310,554
)
Cash and cash equivalents at beginning of period
2,118,970
3,922,297
Cash and cash equivalents at end of period
$
1,179,143
$
3,611,743
See accompanying notes
Page 6 of 28
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UTEK Corporation
Consolidated Statements of Cash Flows (continued)
(Unaudited)
Three Months Ended
March 31,
2010
2009
Supplemental Disclosures of Non-Cash Investing and Financing Activities
The Company received a note in connection with the sale of certain investments
$
1,500,000
The Company issued stock in connection with an investment in UTEK Real Estate Holdings, Inc. as follows:
176,470 shares of UTEK common stock
$
1,500,000
240,964 shares of NeoStem, Inc. common stock
200,000
$
1,700,000
The Company issued 15,262 shares of common stock in connection with certain acquisition earnout contingencies
$
156,371
Unrealized gain (loss) from available-for-sale securities
$
79,831
The Company transferred certain equity interests in a subsidiary to satisfy a severance obligation resulting in the following:
Noncontrolling interest
$
532,132
Increase to additional paid-in capital
17,868
$
550,000
Supplemental Disclosures of Cash Flow Information
Cash paid for taxes
$
$
Cash paid for interest
$
84,690
$
17,500
See accompanying notes
Page 7 of 28
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UTEK Corporation
Notes to Consolidated Financial Statements
(Unaudited)
1. Basis
of Presentation and Significant Accounting Policies
Interim Financial Information
The financial information for UTEK Corporation (the Company, we, us or UTEK) as of March 31, 2010 and
2009 and for the three month periods then ended is unaudited, but includes all adjustments (consisting only of normal recurring accruals), which, in the opinion of management are necessary in order to make the consolidated financial statements not
misleading at such dates and for those periods. These consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and, therefore,
do not include all information and notes required by accounting principles generally accepted in the United States of America for complete consolidated financial statements. These consolidated financial statements should be read in conjunction with
the consolidated audited financial statements and related notes included in the Companys Annual Report on Form 10-K for the year ended December 31, 2009. Operating results for the three months ended March 31, 2010 are not necessarily
indicative of the results that may be expected for the entire year.
Basis of Presentation
Until September 30, 2009, the Company was a non-diversified, closed-end management investment company that had elected to be treated as a business
development company (BDC) under the Investment Company Act of 1940 (1940 Act). On October 1, 2009, the Company filed a notification on Form N-54C with the Securities and Exchange Commission (SEC) withdrawing
its election to be regulated as a BDC under the 1940 Act. As such, the Company began reporting as an operating company as of October 1, 2009.
As a result of our de-election from BDC status, we make reference to both Investment Company Accounting and Operating Company Accounting throughout these
consolidated financial statements. Investment Company Accounting, as we refer to it, is defined as accounting in accordance with generally accepted accounting principles in the United States (GAAP) for investment companies under the 1940
Act and Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) Topic 946 Financial Services - Investment Companies . Operating Company Accounting, as we refer to it, is defined as accounting
in accordance with GAAP other than for investment companies under the 1940 Act and Topic 946.
Presentation of Financial Statements
The Company made the following adjustments in order to present two periods of financial statements together for which the periods
include two different methods of accounting. Changes made to the accompanying consolidated statements of operations include the following:
Operations in the consolidated statements of operations are presented comparatively in two different formats to properly report results of operations
in accordance with the accounting in effect during the respective periods. Operations for the three months ended March 31, 2010 are presented in operating company format and operations for the three months ended March 31, 2009 are
presented in investment company format.
The statement of operations for the three months ended March 31, 2010 is presented in operating company format. Certain operating company balances
are not applicable to an investment company and are not included for the three months ended March 31, 2009. These include other (income) expense and interest expense, net.
UTEK Real Estates results of operations are consolidated with those of UTEK for the three months ended March 31, 2010 and intercompany
transactions, including intercompany borrowings and rent, are eliminated in consolidation. At March 31, 2009, UTEK Real Estate was included as one of the Companys portfolio companies and its results of operations are not consolidated into
those of UTEK for the three months ended March 31, 2009.
Certain balances reported under Investment Company Accounting are not applicable to an operating company and are not included for the three months
ended March 31, 2010. These include investment income, net realized gains (losses) on investments and net change in unrealized appreciation (depreciation) of investments. During the three months ended March 31, 2010, income and losses from
these sources are classified as follows:
Investment income is included in other (income) expense or interest expense, net, depending on its source.
Realized gains (losses) on investments are included in other (income) expense.
Unrealized gain (loss) on available-for-sale securities are reported in operating company equity as a component of accumulated other comprehensive
income (loss) in the consolidated balance sheet.
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Other changes include the following:
Other comprehensive income is not applicable to investments companies, and therefore, any related disclosures are applicable only for the three months
ended March 31, 2010.
The Consolidated Schedule of Investments, Consolidated Statement of Changes in Net Assets and Financial Highlights are not presented as they are
financial statement requirements under Investment Company Accounting.
The Company
The Company provides services that help clients become stronger innovators, develop compelling strategies to drive and catalyze growth, rapidly source
externally developed technologies, create value from their intellectual property (IP) and gain foresight into marketplace and technology developments that affect their business. These services are primarily provided throughout the United
States and the United Kingdom.
On March 16, 2010, the Company began doing business as Innovaro and changed its ticker symbol to NYSE
Amex: INV. The Companys proxy statement for the 2010 Annual Meeting of Shareholders includes a proposal to amend the Companys certificate of incorporation to change the Companys name to Innovaro, Inc.
Principles of Consolidation
The
consolidated financial statements include the accounts of UTEK and its wholly owned subsidiaries: Innovaro Europe, Ltd. (formerly UTEK Europe, Ltd.) and UTEK Real Estate Holdings, Inc. (as of October 1, 2009). All intercompany transactions and
balances are eliminated in consolidation.
The Company is reporting as an investment company for the three months ended March 31, 2009.
As an investment company, portfolio investments are held for the purpose of deriving investment income and future capital gains. The operating results of the Companys portfolio companies, including UTEK Real Estate Holdings, Inc., are not
consolidated with the Companys financial statements for the three months ended March 31, 2009.
The Company is reporting as an
operating company for the three months ended March 31, 2010. As such, the Company is required to consolidate UTEK Real Estate Holdings, Inc. and its subsidiaries: Ybor City Group, Inc., 22nd Street of Ybor City, Inc., ABM of Tampa Bay, Inc.,
and Cortez 114, LLC (collectively UTEK Real Estate). The results of operations of UTEK Real Estate have been included in the Companys operations for the three months ended March 31, 2010. In addition, the assets and
liabilities of UTEK Real Estate have been included in the Companys financial position as of March 31, 2010 and December 31, 2009. As of March 31, 2010, none of the Companys other equity investments qualify for
consolidation in accordance with GAAP.
Accounts Receivable
The allowance for doubtful accounts was approximately $7,000 and $83,000 as of March 31, 2010 and December 31, 2009, respectively.
Revenue Recognition
Beginning in March
2010, the Company reorganized into three new lines of business, all working under the Innovaro brand: Strategic Services driven by Strategos, an advanced innovation consultancy; Technology Marketplaces online platforms, partnering
services, global licensing and technology transfer services; and Insights & Research futures and trends, research, information services and IP consulting.
Strategic Services
The Company has
revenues from fixed fee contracts for the sale of strategic consulting services. These revenues are recognized on a pro rata basis based upon costs incurred to date compared to total estimated contract costs. Prior to the commencement of a client
engagement, the Company and the client agree on fees for services based upon the scope of the project, staffing requirements and the level of client involvement. Total revenues are comprised of professional fees for services rendered to clients plus
reimbursement of out-of-pocket expenses and exclude applicable taxes. The Company bills clients for services and expenses incurred in accordance with the terms of the client engagement agreement.
Revenues from strategic consulting services are also provided on a time-and-expense basis. Time-and-expense billing arrangements generally require the
client to pay based on the number of hours worked by our consulting professionals at agreed-upon rates. Time-and-expense revenues are billed and recognized as incurred.
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Technology Marketplaces
Revenues from the sale of subscriptions to the Companys online marketplaces are initially deferred and subsequently recognized ratably over the term
of the subscription, which is typically one year.
Global technology licensing services are performed pursuant to service agreements in which
the Company provides consulting services by identifying and evaluating technology licensing opportunities for clients. These agreements are typically cancelable with thirty days notice.
Revenues from the sale of technology rights are recognized upon consummation of the agreement and transfer of the technology rights.
Insights and Research
Revenues from the
sale of subscriptions to the Companys information services websites and online futures programs are initially deferred and subsequently recognized ratably over the term of the subscription, which is typically one year.
The Company has certain consulting revenue that is derived from the sale of research services in intellectual property insight, technology foresight,
forecasting, scenario playing, vision, creativity and leadership, as well as the sale of services to provide for the design, development and implementation of custom software applications. Vendor specific objective evidence is not available to
allocate among the respective deliverables in contracts with multiple deliverables. Accordingly, the Company recognizes revenue for these consulting services at the point when all the deliverables associated with the consulting contract have been
provided to the customer.
Before the Company recognizes revenue, the following criteria must be met:
Evidence of a financial arrangement or agreement must exist between the Company and its customer. Purchase orders, signed contracts, or electronic
confirmations are three examples of items accepted by the Company to meet this criterion.
Delivery of the products or services must have occurred. The Company treats either physical or electronic delivery as having met this requirement.
The price of the products or services is fixed and measurable.
Collectability of the sale is reasonably assured and receipt is probable. Collectability of a sale is determined on a customer-by-customer basis.
Differences between the timing of billings and the recognition of revenue are recognized as either unbilled services
(included as a component of prepaid expenses and other assets) or deferred revenue in the consolidated balance sheets. Client prepayments and retainers are classified as deferred revenue and recognized over future periods as earned.
Direct Costs of Revenue
Direct costs of
revenue consist of direct costs related to the Companys strategic services, technology marketplaces and insights & research segments. Direct costs of revenue include salaries and related taxes, bonuses and commissions, certain outside
services, business development costs, royalties and other direct project costs.
Research and Development
In accordance with ASC Subtopic 985-20 Costs of Software to Be Sold, Leased, or Marketed , the Company expenses all costs incurred to establish the
technological feasibility of a computer product to be sold, leased, or otherwise marketed as research and development costs. The Company charged $198,000 in research and development costs to expense for the three months ended March 31, 2010.
Reclassifications
In
connection with the change in the Companys business segments, certain reclassifications have been made to the 2009 balances to conform to the 2010 financial statement presentation. Reclassifications were made to revenue to conform to the
Companys new line of business segments. In addition, reclassifications were made to expenses to move direct costs associated with these business lines into direct costs of revenue.
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Earnings per Share (EPS)
Basic earnings per share is computed on the basis of the weighted-average number of shares of common stock outstanding during the period. Diluted earnings
per share is computed on the basis of the weighted-average number of shares of common stock outstanding plus the effect of dilutive potential common shares outstanding during the period using the treasury stock method. The Companys dilutive
potential common shares consist of outstanding stock options and warrants.
Components of basic and diluted per share data are as follows:
Three Months Ended March 31
2010
2009
Weighted average outstanding shares of common stock
11,797,140
10,987,743
Dilutive effect of stock options and warrants
Common stock and common stock equivalents
11,797,140
10,987,743
Shares excluded from calculation of diluted EPS (1)
1,647,900
885,400
(1)
These shares attributable to outstanding common stock options and warrants were excluded from the calculation of diluted EPS because their inclusion would have been
anti-dilutive, primarily as a result of the net loss/ net decrease in net assets from operations during the period.
Financial Instruments and Concentrations of Credit Risk
The Companys financial instruments consist of cash and cash equivalents, accounts receivable, certificates of deposit, investments, accounts
payable, accrued expenses, long-term debt and the derivative liability. With the exception of investments under cost method discussed below and fair value measurements discussed in Note 3, the carrying amount of the Companys financial
instruments approximate their fair values.
Financial instruments with significant credit risk include cash and cash equivalents, certificates
of deposit and investments. The Company invests its cash and cash equivalents and certificates of deposit with high credit quality financial institutions. Certain cash and cash equivalents were in excess of FDIC insurance limits at March 31,
2010 and December 31, 2009. The Company has not experienced any losses on such accounts.
The Company had two major customers during the
three months ended March 31, 2010 and two major customers during the three months ended March 31, 2009, all of which were customers of the strategic services line of business. Major customers, those generating greater than 10% of total
revenue, accounted for approximately 29% and 27% of the Companys revenue during the three months ended March 31, 2010 and 2009, respectively. In addition, two customers accounted for approximately 33% of accounts receivable at
March 31, 2010.
Investments under Cost Method
The Company classifies its investments in equity securities of noncontrolled entities that do not have readily determinable fair values as investments
under cost method in accordance with ASC Subtopic 320-20 Cost Method Investments . The Company evaluated investments of $394,000 accounted for under the cost method for impairment as of March 31, 2010. The Company determined that the fair
value of these investments exceeded the carrying amount of these investments. It was not practicable to estimate the fair value of the remaining $194,000 of the Companys investments under cost method and such an estimate was not made because
there were no events or changes in circumstances that may have had a significant adverse effect on the fair value of such investments during the current period.
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2. Available-for-Sale Securities
The Company classifies its investments in freely tradable equity securities as available-for-sale in accordance with ASC Topic 320 Investments
Debt and Equity Securities and its intentions regarding these instruments. A summary of the estimated fair value of available-for-sale securities is as follows as of March 31, 2010.
Unrealized (1)
Realized
Losses
Fair Value
Cost
Gains
Losses
Equity securities
$
777,115
$
353,485
$
(344,600
)
$
(146,000
)
$
640,000
Available-for-Sale Securities
$
777,115
$
353,485
$
(344,600
)
$
(146,000
)
$
640,000
(1)
The total of the unrealized gains and losses of $8,885 is included in operating company equity as a component of accumulated other comprehensive income (loss) in the
consolidated balance sheet.
As of March 31, 2010, four of our eight total available-for-sale securities were in an
unrealized loss position, all of which were for a period of less than twelve months. The aggregate fair value of the four available-for-sale securities with unrealized losses was $172,200. These securities are in micro-cap companies in various
industries and the impairment is significant as it relates to three of the four investments. In all cases, the impairment is deemed to have been caused by general market fluctuations. Based on third-party valuations, the Company believes these
impairments are not other-than-temporary. Accordingly, no impairment loss has been recognized on these securities.
Proceeds from the sale of
available-for-sale securities were approximately $35,000 for the three months ended March 31, 2010. Gross realized gains were approximately $11,000 as a result of the sale of available-for-sale securities for the three months ended
March 31, 2010. In addition, the Company recognized a $146,000 loss on certain warrants classified as available-for-sale securities as of March 31, 2010 because the Company determined that the warrants were permanently impaired.
Unrealized gains (losses) on available-for-sale securities for the three months ended March 31, 2010 are shown in the accompanying
statement of equity net of the reclassification adjustment. Disclosure of the gross amounts of the current period gain and amounts that were reclassified out of accumulated other comprehensive income into earnings are as follows:
Three Months
Ended March 31,
2010
Unrealized holding gains (losses) arising during the period
$
55,200
Add back: reclassification adjustment for losses included in net income
24,631
Unrealized gain (loss) from available-for-sale securities, net
$
79,831
3. Fair Value Measurements
The Company performs fair value measurements in accordance with the guidance provided by ASC Topic 820, Fair Value Measurements and Disclosures .
Topic 820 defines fair value as the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When determining the fair value measurements for
assets and liabilities required to be recorded at fair value, management considers the principal or most advantageous market in which the Company would transact and considers assumptions that market participants would use when pricing the asset or
liability, such as inherent risk, transfer restrictions, and risk of nonperformance.
Topic 820 establishes a fair value hierarchy that
encourages and is based on the use of observable inputs, but allows for unobservable inputs when observable inputs do not exist. When there are multiple inputs for determining the fair value of an investment, the Company classifies the investment in
the fair value hierarchy based on the lowest level input that is significant to the fair value measurement. Inputs are classified into one of three categories:
Level 1Unadjusted quoted prices in active markets for identical assets or liabilities.
Level 2Quoted prices in active markets for similar assets or liabilities, or quoted prices for identical or similar assets or liabilities in
markets that are not active, or inputs other than quoted prices that are observable for the asset or liability.
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Level 3Unobservable inputs for the asset or liability.
Assets measured at fair value on a recurring basis by level within the fair value hierarchy as of March 31, 2010 and December 31, 2009 are as
follows:
Fair Value Measurements
at
March 31, 2010 Using
Fair Value Measurements at
December 31, 2009 Using
Level 2
Total
Level 2
Total
Assets:
Certificates of deposit
$
494,452
$
494,452
$
492,246
$
492,246
Available-for-sale securities
640,000
640,000
729,800
729,800
Total assets
$
1,134,452
$
1,134,452
$
1,222,046
$
1,222,046
Liabilities:
Derivative liability
$
(610,663
)
$
(610,663
)
$
(664,972
)
$
(664,972
)
Total liabilities
$
(610,663
)
$
(610,663
)
$
(664,972
)
$
(664,972
)
The Companys investments in certificates of deposit and available-for-sale securities are classified within Level 2 of
the fair value hierarchy. Our equity interests in companies for which there is no liquid public market are valued using quoted market prices for identical or similar instruments in markets that are not active. The determined values are generally
discounted to account for the illiquid nature of the investment and minority ownership positions. The value of our equity interests in public companies for which market quotations are readily available is based on quoted market prices for similar
instruments in an active market. These securities are generally thinly traded and/or carry discounts from the public market value for certain restrictions on resale. The Company utilizes the assistance of an independent valuation firm in determining
these values. The valuation firm utilizes the market approach in determining the fair value of these securities.
The Companys
derivative liability is classified within Level 2 of the fair value hierarchy. The Company utilizes the Black-Scholes Option Pricing Model to value the derivative liability utilizing observable inputs such as the Companys common stock price,
the exercise price of the warrants, and expected volatility, which is based on historical volatility. The Black-Scholes model employs the market approach in the determining of the fair value of these derivatives.
4. Severance Liability
Clifford M.
Gross, Ph.D. retired from his position as the Companys chief executive officer on March 1, 2009 following the conclusion of the term of his employment agreement. The Company entered into a separation agreement with Dr. Gross on
April 8, 2009 that modified the payment terms, but not the monetary obligation amount that Dr. Gross was entitled to receive pursuant to the employment agreement. In connection therewith, the Company issued to Dr. Gross a $550,000
promissory note that did not bear any interest and was due and payable on March 1, 2010. Pursuant to the terms of the promissory note, the Company had the option to elect to transfer certain equity interests in one of its subsidiaries, Cortez
114, LLC (Cortez), which owns real estate located in Hernando County, Florida, to Dr. Gross in lieu of making the $550,000 cash payment upon maturity of the promissory note.
On March 2, 2010, the Company satisfied its remaining severance obligation to Dr. Gross through the conveyance of a 32% ownership interest in
Cortez. In connection with this severance payment, the Company paid approximately $320,000 to satisfy the related payroll taxes, which included an income tax gross-up.
This transaction was accounted for in accordance with ASC Topic 810 Consolidation . The Company recognized a noncontrolling interest in the amount
of $532,132, as determined by the carrying value of Companys investment in Cortez. The Company also recorded $17,868 as additional paid-in capital for the excess of the liability reduction of $550,000 over the adjustment to the carrying amount
of the noncontrolling interest.
5. Long-term Debt
Note and Warrant Purchase Agreement
On
October 22, 2009, the Company entered into a Note and Warrant Purchase Agreement (the Purchase Agreement) with Gators Lender, LLC (the Lender), pursuant to which the Company borrowed $1,750,000 from the Lender. In
connection with this transaction, the Company issued a Promissory Note (the Note) to the Lender in the principal amount of $1,750,000. UTEK Real Estate is a co-borrower under the Note.
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Pursuant to an Absolute Guaranty of Payment and Performance, this loan is guaranteed by all of the
Companys subsidiaries. In addition, this guaranty was secured pursuant to a Mortgage and Security Agreement encumbering vacant real property located in Hernando County, Florida (the Collateral), which is owned by Cortez 114, LLC
(Cortez), a subsidiary of UTEK Real Estate.
Pursuant to a February 26, 2010, Substitution of Collateral Agreement and a
Membership Interest Pledge Agreement and Release of Mortgage, the Lenders security interest in the Collateral was released and replaced by a security interest in 68% of the outstanding membership interests of Cortez. In addition, the Note
was amended and restated to provide that UTEK and UTEK Real Estate must pay down $500,000 of the indebtedness to the Lender within 60 days. At UTEKs request, the Lender subsequently extended the repayment date for the $500,000 pay down to
June 30, 2010.
In accordance with ASC Topic 815 Derivatives and Hedging , the Company recognized a derivative liability for the
value of the warrants granted in conjunction with the Purchase Agreement. The Company adjusted the derivative liability to fair value as of March 31, 2010, resulting in a gain on derivative liability of $54,309 for the three months ended
March 31, 2010.
6. Accumulated Other Comprehensive Income (Loss)
Components comprising the accumulated other comprehensive income (loss) balance for the three months ended March 31, 2010 are as follows:
Unrealized gain
(loss)
from
available-for-
sale securities
Foreign currency
translation
adjustment
Accumulated
other
comprehensive
income (loss)
Balance at December 31, 2009
$
(70,946
)
$
246,555
$
175,609
Gain (loss) for the period
79,831
(343,696
)
(263,865
)
Balance at March 31, 2010
$
8,885
$
(97,141
)
$
(88,256
)
7. Segment Reporting
ASC Topic 280 Segment Reporting establishes standards for reporting information about operating segments. Operating segments are defined as
components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker, or decision making group, in deciding how to allocate resources and in assessing performance. The
Company is organized geographically and by line of business. The line of business management structure is the primary basis for which the allocation of resources and financial results are assessed.
From time to time, the Company will reorganize its internal organizational structure to better align its service offerings. In connection with the
Companys rebranding as Innovaro in March 2010, the Company reorganized into three new lines of business: Strategic Services driven by Strategos, an advanced innovation consultancy; Technology Marketplaces online platforms,
partnering services, global licensing and technology transfer services; and Insights & Research futures and trends, research, information services and IP consulting. Previously reported segment information has been restated to
reflect this change.
A summary of revenue and other financial information by reportable geographic operating segment is shown below:
United
Kingdom
United States
Total
Long-lived assets March 31, 2010
$
5,393,534
$
26,602,566
$
31,996,100
Total assets March 31, 2010
5,668,788
32,750,587
38,419,375
Long-lived assets December 31, 2009
5,887,520
26,867,183
32,754,703
Total assets December 31, 2009
6,411,846
33,919,335
40,331,181
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For the Three Months Ended March 31, 2010
United
Kingdom
United States
Total
Revenue
$
239,874
$
2,030,557
$
2,270,431
Loss before income taxes
(232,304
)
(1,400,732
)
(1,633,036
)
Depreciation and amortization
107,590
292,905
400,495
For the Three Months Ended March 31, 2009
United
Kingdom
United States
Total
Revenue
$
445,216
$
2,332,799
$
2,778,015
Loss before income taxes
(92,064
)
(1,999,201
)
(2,091,265
)
Depreciation and amortization
98,412
308,266
406,678
A summary of revenue and other
financial information by reportable line of business segment is shown below:
For the Three Months Ended March 31, 2010
Strategic
Services
Technology
Marketplaces
Insights &
Research
Administrative
and Other
Total
Revenue
$
1,430,042
$
316,986
$
523,403
$
$
2,270,431
Income (loss) before income taxes
294,995
(160,025
)
96,213
(1,864,219
)
(1,633,036
)
For the Three Months Ended March 31, 2009
Strategic
Services
Technology
Marketplaces
Insights &
Research
Administrative
and Other
Total
Revenue
$
1,725,278
$
402,423
$
605,356
$
44,958
$
2,778,015
Income (loss) before income taxes
(427,091
)
(48,122
)
135,113
(1,751,165
)
(2,091,265
)
8. Subsequent Events
On April 1, 2010, the Company filed a Form S-3 with the SEC to register the offering of its securities. The Company may offer and sell, from time to
time, in one or more offerings, common stock, preferred stock and warrants for which the aggregate offering price will not exceed $20,000,000. The Form S-3 became effective on April 16, 2010.
On April 14, 2010, the Company entered into a limited liability company agreement to form Verdant Ventures Advisors, LLC. Under this agreement, the
Company is obligated to invest $1,000,000 worth of shares of the Companys common stock (equal to 250,627 shares based on the closing market price of the Companys common stock on April 14, 2010). John Micek, one of the Companys
directors, is a member of two limited liability companies that are also parties to the Verdant Ventures Advisors, LLC agreement.
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ITEM 2.
Managements Discussion and Analysis of Financial Condition and Results of Operations
The following discussion should be read in conjunction with our consolidated financial statements and the notes thereto included elsewhere in this Form
10-Q. This Form 10-Q contains forward-looking statements regarding the plans and objectives of management for future operations. These forward-looking statements may involve known and unknown risks, uncertainties and other factors which may cause
our actual results, performance or achievements to be materially different from future results, performance or achievements expressed or implied by any forward-looking statements. Forward-looking statements, which involve assumptions and describe
our future plans, strategies and expectations, are generally identifiable by use of the words may, will, should, expect, anticipate, estimate, believe,
intend or project or the negative of these words or other variations on these words or comparable terminology. These forward-looking statements are based on assumptions that may be incorrect, and we cannot assure you that the
projections included in these forward-looking statements will come to pass. Our actual results could differ materially from those expressed or implied by the forward-looking statements as a result of various factors.
Business Overview
The Company provides
services that help clients become stronger innovators, develop compelling strategies to drive and catalyze growth, rapidly source externally developed technologies, create value from their intellectual property (IP) and gain foresight
into marketplace and technology developments that affect their business. These services are primarily provided throughout the United States and the United Kingdom.
In the first quarter of 2010, we began development of a software platform designed to enhance connections between each of our lines of business and
complement existing services. At this time, management is continuing to evaluate the software platform and its alignment with the overall corporate strategy.
On March 16, 2010, we began doing business as Innovaro and changed our ticker symbol to NYSE Amex: INV. Our proxy statement for the 2010
Annual Meeting of Shareholders includes a proposal to amend our certificate of incorporation to change the Companys name to Innovaro, Inc. Beginning in March 2010, we reorganized into three new lines of business, all working under the Innovaro
brand: Strategic Services driven by Strategos, an advanced innovation consultancy; Technology Marketplaces online platforms, partnering services, global licensing and technology transfer services; and Insights & Research
futures and trends, research, information services and IP consulting. In connection therewith, our business segments have changed beginning with the current reporting period ended March 31, 2010 and this change has required certain
reclassifications to prior period financial information.
Strategic Services
Our clients require strategies to help them embrace improved innovation capabilities. We apply innovation insights, build those strategies with supporting
infrastructure, processes and mechanisms; creating a culture primed for repeatable innovation success. We help organizations create and realize new, breakthrough growth strategies, create and execute non-incremental new growth platforms and
opportunities, and develop the capability for ongoing creation and execution of those growth platforms and concepts.
We provide strategic
innovation consulting services to enable our clients to become more efficient by finding new avenues to grow, fighting commoditization, improving return on investment, transforming the organization, and removing barriers to innovation. Business
value is delivered to clients through working with a team of seasoned and experienced professionals capable of unlocking an organizations capacity by:
Identifying and developing new segments and markets;
Creating and acting on game-changing strategies;
Building an enterprise-wide capability for innovation;
Accelerating and improving new product development processes; and
Assessing a companys innovation capability.
Technology Marketplaces
Whether
partnering or licensing, our clients need exposure to the broadest and most relevant communities to identify needs, fulfill technology demands, and take technology development forward and into the market. We offer expansive networks, experts in
scouting, partner sourcing and licensing experiences, and a world leading online marketplace. An important aspect of licensing is understanding the true potential value of the intellectual property portfolio. We assess that value by building a
roadmap for our clients to use to uncover opportunities and options to realize latent value.
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Online Marketplaces
Innovaro Pharmalicensing is a biopharmaceutical innovation resource designed for life science professionals driving partnering, licensing and business
development worldwide. Pharmalicensing.com affords clients the ability to in-license and out-license intellectual property and also provides partnering services, business development reports, industry news and a jobs source for candidates and
employers. We are tracking at approximately 200,000 unique visitors per month and developing partnerships with external search partners to further drive traffic.
Innovaro Medical Device Licensing is an online global resource for open innovation, partnering, licensing and business development within the medical
device industry. Medical Device Licensing benefits from the Pharmalicensing traffic and strategic partnerships as well as establishing its own with member associations around the globe to further its reach and exposure.
Global Technology Licensing
Our global
technology licensing service enables clients to enhance their new product pipeline through the acquisition of proprietary technologies primarily from universities, medical centers, federal research laboratories, select corporations and university
incubator programs. A global network of technology providers, coupled with an in-house staff of scientists and researchers, offers companies low-cost, low-risk access to review and acquire new technologies from research centers around the world.
After gaining an understanding of our clients technology and business needs, we find and assess technologies for our clients. With the added benefit of our licensing professionals, we can negotiate agreements on behalf of our clients and offer
a variety of flexible terms and transaction models.
Insights and Research
Our clients require intelligence applied to their markets in order to have confidence in where to put their development capital. From current market
research to predictive intelligence, we help clients determine the factors impacting or that will likely impact their business including social, geopolitical, competitive, economic, environmental and technological factors.
Information Services
Knowledge Express
is an online, information service built for those who need it most business development, technology transfer and marketing professionals across technology industries. It is a premier business development resource with expert IP search
capabilities and report generation functionality. Our service includes access to key corporate profiles, industry contacts, technology pipelines, investigational technologies, deal information, sales data and patent data.
Foresight and Trend Research
Foresight
is the ability of an organization to understand the ways in which the future might emerge and to apply that understanding in organizationally useful ways. Strategic foresight may also be used to detect adverse conditions, guide policy and help shape
strategy. We provide services to clients that build the capacity for foresight, including monitoring trends, researching topics of interest, forecasting alternative scenarios, developing technology roadmaps, creating growth platforms and embedding
futures thinking within the organization.
We offer innovative futures programs that provide clients with up-to-the-minute knowledge, expert
insight, high-level learning experiences, and opportunities to network with experts and peers, including:
Futures Consortium - a membership service that provides access to research briefs, member meetings and networking events, and onsite workshops.
Futures Observatory - a membership service that provides a steady stream of observations that illustrate the latest developments in
key global trends. The observations are brief, timely discussions of real-life events or circumstances in key markets, which exemplify how trends are playing out in the market.
Futures Interactive - a customizable, web-based knowledge management tool that gathers and organizes information from across a client in one,
intuitive platform.
IP Consulting
We also offer IP Consulting to deliver value through the identification of intellectual property opportunities and execution of IP optimization and
exploitation strategies for clients in a wide range of industries. Our approach is designed to help our clients determine market viability, product viability and buyer viability and determine the best means to maximize the value from commercially
available assets.
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Our IP analysis coupled with collaborative planning and execution delivers focused results. Because our
model is science-based, the result has a greater probability of high value realization. Strategies we employ are directly proportional to the return on IP investment and our holistic IP value consists of several phases in order to determine the
right IP for our clients one that employs strategies designed to deliver the desired business goals.
Current Market Conditions
We believe that our financial results for the first quarter of 2010 continued to be negatively impacted by weakened economic conditions. The
deterioration in consumer confidence and a general reduction in spending by consumers and businesses have had an adverse effect on our operations as businesses have delayed spending on these types of services. Recent improvements in demand trends
globally may not continue, and our future financial results and growth could be further harmed or constrained if the recovery was to stall or conditions were to worsen.
Results of Operations
Revenue /
Income from Operations
Three months ended March 31,
Percentage
Change
(in thousands, except percentages)
2010
2009
Strategic services
$
1,430
$
1,725
(17
)%
Technology marketplaces
317
403
(21
)%
Insights and research
523
605
(14
)%
Investment income, net
45
(100
)%
Total revenue / income from operations
$
2,270
$
2,778
(18
)%
Strategic Services
Our strategic services revenue is derived from consulting services we provide to our clients. Our strategic services revenue decreased by $295,000 for the
three months ended March 31, 2010 in comparison to the three months ended March 31, 2009. We attribute this decrease to the continued weakened economic conditions, primarily as it relates to the United Kingdom. Based on current activity,
we expect these revenues to increase over the first quarter for the remainder of 2010.
Technology Marketplaces
Our technology marketplaces revenue is a combination of global technology licensing search retainer fees and our online marketplaces subscription fees.
Our technology marketplaces revenue decreased $86,000 for the three months ended March 31, 2010 in comparison to same period of 2009, due to a reduced number of retainer based customers for our global technology licensing services. Based on
current activity, we expect these revenues to increase over first quarter for the remainder of 2010.
Insights and Research
Our insights and research revenue is made up of our online information services, foresight and trend research and IP consulting. Our insights and research
revenue decreased $82,000 for the three months ended March 31, 2010 in comparison to the three months ended March 31, 2009, as a result of a decrease in membership income related to our information services and online futures programs.
Based on current activity, we expect these revenues to remain flat to the first quarter for the remainder of 2010.
Investment Income, net
As an operating company, investment income is recorded as other (income) and expense in the accompanying statement of operations for the
three months ended March 31, 2010.
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Direct Costs of Revenue
(in thousands, except percentages)
Three
Months
Ended 2010
Gross
Profit
Three
Months
Ended 2009
Gross
Profit
Percentage
Change
Direct costs of strategic services
$
1,004
30
%
$
1,845
(7
%)
(46
)%
Direct costs of technology marketplaces
174
45
%
169
58
%
3
%
Direct costs of insights and research
270
48
%
313
48
%
(14
)%
Total direct costs of revenue
$
1,448
$
2,327
Direct costs of strategic services revenue are comprised of salaries and related taxes, bonuses, certain outside
services and other business development costs related to strategic services. The most significant portion of direct costs of strategic services is comprised of consulting personnel compensation including bonuses. The majority of the $841,000
decrease in direct costs of strategic services for the three months ended March 31, 2010 compared to the three months ended March 31, 2009 is related to a decrease in salaries and related payroll taxes. With the reduction in revenue
related to poor global economic conditions, we reduced the head count of our strategic services employees in the second quarter of 2009 and have only recently begun to increase head count. Based on current activity, we expect these costs to increase
over the first quarter for the remainder of 2010.
Direct costs of technology marketplaces revenue are comprised of certain salaries and
related taxes, commissions, certain outside services and other direct costs related to online marketplaces. There were no significant changes in direct costs of technology marketplaces for the three months ended March 31, 2010 compared to the
three months ended March 31, 2009. Based on current activity, we expect these costs to increase over the first quarter for the remainder of 2010.
Direct costs of insights and research revenue are comprised of certain salaries and related taxes, certain outside services, business development costs
and royalty costs related to information services. The majority of the $43,000 decrease in direct costs of insights and research for the three months ended March 31, 2010 compared to the three months ended March 31, 2009 is related to a
decrease in salaries and related payroll taxes. Based on current activity, we expect these costs to remain flat to the first quarter for the remainder of 2010.
Salaries and Wages
Three months ended March 31,
Percentage
Change
(in thousands, except percentages)
2010
2009
Salaries and wages
$
730
$
984
(26
)%
As a percent of revenue
32
%
35
%
(3
)ppt
*
The abbreviation ppt denotes percentage points.
Salaries and wages include non-sales employee and officer salaries that are not otherwise allocated to direct costs and related benefits including
bonuses and stock-based compensation. $246,000 of the decrease in salaries and wages for the three months ended March 31, 2010 compared to the three months ended March 31, 2009 related to the retirement of our former CEO on
March 1, 2009. The remaining decrease related to reduced stock compensation expense of $97,000 for the first quarter of 2010 compared to the first quarter of 2009 as a result of fewer option grants and an increase in the related forfeiture
rate, partially offset by an increase in new administrative hires of $90,000 in 2010.
We expect salaries and wages to increase over the first
quarter for the remainder of 2010 as a result of new hires.
Professional Fees
Three months ended March 31,
Percentage
Change
(in thousands, except percentages)
2010
2009
Professional fees
$
201
$
223
(10
)%
As a percent of revenue
9
%
8
%
1
ppt
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Professional fees include accounting fees, legal fees and valuation expenses for our investments. The
decrease in professional fees for the three months ended March 31, 2010 compared to the three months ended March 31, 2009 relates to a $38,000 decrease in valuation expenses due to the reduced number of investment holdings requiring
valuations in 2010, partially offset by a $13,000 increase in accounting fees.
We expect to have a decrease in professional fees over 2009
for the remainder of 2010 as a result of a reduction in the number of investments requiring quarterly valuations and a reduction in legal and accounting fees related to the change from an investment company to an operating company.
Sales and Marketing
Three months ended March 31,
Percentage
Change
(in thousands, except percentages)
2010
2009
Sales and marketing
$
250
$
119
111
%
As a percent of revenue
11
%
4
%
7
ppt
Sales and marketing expenses
include advertising, marketing, commissions paid to outside service providers, certain travel and other business development expenses. The increase in sales and marketing expenses relates primarily to an increase in marketing costs of $137,000 for
the three months ended March 31, 2010, which included $46,000 in rebranding costs and $75,000 for partnering with external search partners to market our products on their websites. We have also participated in and sponsored conferences in the
first quarter of 2010 that we did not participate in during the first quarter of 2009.
We expect sales and marketing expenses to continue to
increase over 2009 for the remainder of 2010 as a result of the push in our marketing efforts in an effort to take advantage of recent improvements in the economy.
General and Administrative
Three months ended March 31,
Percentage
Change
(in thousands, except percentages)
2010
2009
General and administrative
$
740
$
810
(9
)%
As a percent of revenue
33
%
29
%
4
ppt
The decrease in general and
administrative expenses for the three months ended March 31, 2010 compared to the three months ended March 31, 2009 relates to a $27,000 reduction in insurance due to having fewer employees; a $99,000 reduction in rent related to closing
one of our offices in the United Kingdom, closing our Pennsylvania office, and reducing the amount of space leased for our Washington, DC office; a $30,000 reduction in investment banking related to our having de-listed from the London Stock
Exchange AIM; a $26,000 reduction in printing costs; and a continued overall company plan to reduce all aspects of overhead. These decreases were partially offset by a $143,000 increase in outside services related to the research and development of
new products and services.
We expect general and administrative expenses for 2010 to remain flat in comparison to 2009.
Depreciation and Amortization
Three months ended March 31,
Percentage
Change
(in thousands, except percentages)
2010
2009
Depreciation and amortization
$
400
$
407
(2
)%
As a percent of revenue
18
%
15
%
3
ppt
Amortization expense
decreased by $29,000 for the first quarter of 2010 compared to the first quarter of 2009 resulting primarily from a decrease of $700,000 in definite-lived intangible assets as a result of impairment in the second quarter of 2009. Depreciation
expense increased by $23,000 for the first quarter of 2010 compared to the first quarter of 2009 resulting primarily from the addition of $4 million in depreciable assets from the consolidation of UTEK Real Estate in the fourth quarter of 2009.
We expect depreciation and amortization expenses for 2010 to remain flat in comparison to 2009.
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Other (Income) Expense
Other (income) expense is a new line item in our statement of operations related to reporting as an operating company. The net income of $2,074 for the
three months ended March 31, 2010 is comprised of a gain of $54,000 related to adjusting our derivative liability to fair value; rental income of $61,000; and miscellaneous income of $22,000; partially offset by capital losses of $135,000.
Interest Expense, Net
Interest expense, net is a new line item in our statement of operations related to reporting as an operating company. The net interest expense of $135,154
for the three months ended March 31, 2010 is primarily comprised of interest expense on long-term debt of $119,000 and amortization of our debt discount of $46,000, partially offset by interest income on our note receivable of $29,000.
Net Realized Gains (Losses) on Investments from Investment Company Accounting
In connection with our plan to de-elect business development company status, we liquidated a significant portion of our investment portfolio during the
first quarter of 2009. We sold some or all of our shares in a significant number of our portfolio companies for $2.1 million in cash and other assets, which resulted in net realized losses of $37.0 million for the three months ended March 31,
2009.
Net Change in Unrealized Appreciation (Depreciation) on Investments from Investment Company Accounting
The net unrealized appreciation of $34.1 million for the three months ended March 31, 2009 was primarily due to the reversal of unrealized
depreciation on various investments upon their sale during the period of approximately $35.9 million; partially offset by a reduction in value of the investment in MiMedx Group, Inc. of $1.8 million.
Liquidity and Capital Resources
Cash Flows
Cash used in operating
activities of $842,000 for the three months ended March 31, 2010 decreased $118,000 from $960,000 in 2009. Total cash used in operations of $842,000 in the current period is primarily attributable to:
$1.58 million net operating loss;
$320,000 cash payment for payroll taxes, which included an income tax gross-up, paid in conjunction with the settlement of our severance liability; and
$130,000 cash payment for other severance liabilities.
Partially offset by:
$400,000 in non-cash depreciation and amortization;
$135,000 loss on sale and impairment of available-for-sale securities;
$148,000 in non-cash stock-based compensation expense related to vesting options; and
$158,000 decrease in accounts receivable primarily related to increased collection efforts.
Cash provided by (used in) investing activities of $5,000 for the three months ended March 31, 2010 increased $8,000 from $(2,500) in 2009. There
were no significant investing transactions during the period.
Cash provided by (used in) financing activities of $(101,000) for the three
months ended March 31, 2010 decreased $763,000 from $662,000 in 2009. Total cash used in financing of $(101,000) is primarily attributable to:
$101,000 in cash paid for long-term debt.
Borrowings
On October 22,
2009, we entered into a Promissory Note (the Note) with Gators Lender, LLC (the Lender), pursuant to which we borrowed $1,750,000 from the Lender. Interest is payable at an annual rate of 8% on a quarterly basis, in arrears,
beginning April 15, 2010. The entire principal amount outstanding and all accrued interest is payable in full no later than October 22, 2012. UTEK Real Estate is a co-borrower under the Note and the loan is guaranteed by all of our
subsidiaries. In addition, the guaranty was secured pursuant to a security agreement encumbering vacant real property located in Hernando County, Florida (the Collateral), which is owned by Cortez 114, LLC (Cortez), a
subsidiary of UTEK Real Estate.
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On February 26, 2010, we entered into a Substitution of Collateral Agreement and a Membership Interest
Pledge Agreement and Release of Mortgage, pursuant to which the Lenders security interest in the Collateral was released and replaced by a security interest in 68% of the outstanding membership interests of Cortez. In addition, the Note
was amended and restated to provide that UTEK and UTEK Real Estate must pay down $500,000 of the indebtedness to the Lender within 60 days of February 26, 2010. At our request, the Lender subsequently extended the repayment date for the
$500,000 pay down to June 30, 2010.
Capital Expenditures
In the first quarter of 2010, we began development of a software platform designed to enhance connections between each of our lines of business and
complement existing services. At this time, management is continuing to evaluate the software platform and its alignment with the overall corporate strategy.
Liquidity
Our primary cash
requirements include working capital, capital expenditures and principal and interest payments on indebtedness. Our primary sources of funds are cash received from customers in connection with operations, proceeds from the sale of our investments,
debt financing and availability under our $450,000 revolving line of credit. At March 31, 2010, we had cash and cash equivalents of $1.2 million and investments in certificates of deposit (CDs) of $494,000. The CDs are pledged to
financial institutions as collateral to support the issuance of our line of credit. The Company had $200,000 of unused availability under its revolving line of credit at March 31, 2010.
We currently intend to fund our capital expenditures and liquidity needs with existing cash and cash equivalent balances, cash generated from operations,
the potential sales of our investments and unused availability under our revolving line of credit. As a result of our progress in significantly reducing our overhead expenses, we believe that these sources will be sufficient to fund our scheduled
debt service, including the $500,000 pay down due June 30th, and provide required resources for working capital for the next twelve months. However, in light of liquidity constraints caused by the $500,000 debt pay down, we may not be able to
continue funding our capital expenditures in the near term.
We may seek to raise additional funds through public or private debt or equity
financing for long-term liquidity. Financing terms from our recent debt financing completed in October 2009 as discussed in our Annual Report on Form 10-K for the year ended December 31, 2009 represent what possible additional financing could
look like in the near term.
On April 1, 2010, we filed a Form S-3 with the SEC to register the offering of our securities. We may offer
and sell, from time to time, in one or more offerings, common stock, preferred stock and warrants for which the aggregate offering price will not exceed $20,000,000. The Form S-3 became effective on April 16, 2010.
However, capital markets have been volatile over the last several years, and we cannot assure you that we will be able to raise debt or equity capital on
acceptable terms, if at all, in order to fund our operations.
Critical Accounting Estimates
The preparation of financial statements in conformity with GAAP requires management to make assessments, estimates and assumptions that affect the amounts
reported in the financial statements. We evaluate the accounting policies and estimates used to prepare the financial statements on an ongoing basis. Critical accounting estimates are those that require managements most difficult,
complex, or subjective judgments and have the most potential to impact our financial position and operating results. For a detailed discussion of our critical accounting estimates, see our Annual Report on Form 10-K for the year ended
December 31, 2009. There have been no material changes to our critical accounting estimates during the three months ended March 31, 2010.
ITEM 3.
Quantitative and Qualitative Disclosures about Market Risks
There has been no material change in the quantitative and qualitative disclosures about market risk since December 31, 2009.
ITEM 4.
Controls and Procedures
Disclosure
Controls and Procedures
As of the end of the period covered by this Quarterly Report on Form 10-Q, our chief executive officer and chief
financial officer conducted an evaluation of the effectiveness of the design and operations of the Companys disclosure controls and procedures, (as is defined in Rules 13a-15(e) under the Securities Exchange Act of 1934). Based on their
evaluation, our chief executive officer and
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chief financial officer concluded that our disclosure controls and procedures were effective such that the information required to be disclosed in our reports filed or submitted under the
Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission rules and forms and such that information required to be disclosed in our reports filed or
submitted under the Securities Exchange Act of 1934 is accumulated and communicated to our management, including our chief executive officer and chief financial officer, as appropriate to allow timely decisions regarding required disclosure.
Internal Control over Financial Reporting
There have been no changes in our internal control over financial reporting (as defined in Rule13a-15(f) of the Securities Exchange Act of 1934) that
occurred during the most recently completed fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
PART II. OTHER INFORMATION
ITEM 1.
Legal Proceedings
Although we may from
time to time be involved in litigation and claims arising out of our operations in the normal course of our business, as of March 31, 2010, we were not a party to any material pending legal proceedings.
ITEM 1A.
Risk Factors
Except as described below,
there have been no material changes to the risk factors previously disclosed in the Companys Annual Report on Form 10-K for the year ended December 31, 2009.
The recent disruptions in the global financial markets may continue to negatively impact our ability to raise additional capital.
We expect to continue to experience difficulty and higher cost in securing debt and equity financing to fund our operations or respond to competitive
pressures or strategic opportunities as a result of the current economic climate and tightness in the capital markets. The debt financing we completed in October 2009, and the amendment thereto, has been more expensive than similar transactions
completed in prior periods.
ITEM 2.
Unregistered Sales of Equity Securities and Use of Proceeds
None.
ITEM 3.
Defaults upon Senior Securities
None.
ITEM 4.
Reserved
ITEM 5.
Other Information
None.
ITEM 6.
Exhibits
The following exhibits are
filed with this report on Form 10-Q:
31.1
Certification of the Chief Executive Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934.
31.2
Certification of the Chief Financial Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934.
32.1
Certification of the Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 USC. Section 1350.
32.2
Certification of the Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 USC. Section 1350.
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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.
UTEK CORPORATION
(Registrant)
Date: May 13, 2010
/s/ Douglas Schaedler
Douglas Schaedler
Chief Executive Officer
Date: May 13, 2010
/s/ Carole R. Wright
Carole R. Wright, CPA
Chief Financial Officer
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Text extracted from the filing as submitted to EDGAR. Formatting, tables and exhibits are simplified for reading; the original document is authoritative for anything you rely on.