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 June 30, 2010
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number 001-15941
INNOVARO, INC.
(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)
UTEK CORPORATION
(Former name, former address and former fiscal year, if changed since last report)
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
¨ (Do not check if a smaller reporting company)
Smaller reporting company
x
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 August 10, 2010, there were 13,522,554 shares outstanding of registrants common stock, $0.01 par value.
Table of Contents
INNOVARO, INC.
FORM 10-Q TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
3
Consolidated Balance Sheets as of June 30, 2010 (unaudited) and December 31,
2009
3
Consolidated Statements of Operations for the three and six months ended June
30, 2010 and 2009 (unaudited)
4
Consolidated Statement of Changes in Equity for the six months ended June 30, 2010
(unaudited)
5
Consolidated Statements of Cash Flows for the six months ended June 30, 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
18
ITEM 3. Quantitative and Qualitative Disclosures about Market Risks
27
ITEM 4. Controls and Procedures
27
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings
27
ITEM 1A. Risk Factors
28
ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds
28
ITEM 3. Defaults Upon Senior Securities
28
ITEM 4. Reserved
28
ITEM 5. Other Information
28
ITEM 6. Exhibits
29
Signatures
30
Exhibits
Page 2 of 34
Table of Contents
PART I. FINANCIAL INFORMATION
ITEM 1.
Financial Statements
INNOVARO, INC.
Consolidated Balance Sheets
June 30,
2010
(Unaudited)
December 31,
2009
ASSETS
Current assets:
Cash and cash equivalents
$
559,348
$
2,118,970
Accounts receivable, net
1,735,747
1,481,548
Certificates of deposit
495,988
492,246
Available-for-sale securities
151,200
729,800
Investments under cost method
588,085
588,085
Prepaid expenses and other assets
604,142
569,829
Total current assets
4,134,510
5,980,478
Investments under cost method
1,000,125
Note receivable and accrued interest
1,648,000
1,596,000
Fixed assets, net
8,269,342
8,388,263
Goodwill
15,621,342
15,874,139
Intangible assets, net
7,660,021
8,492,301
Total assets
$
38,333,340
$
40,331,181
LIABILITIES
Current liabilities:
Accounts payable
$
791,069
$
454,509
Accrued expenses
909,179
462,802
Accrued severance payable
876,400
Deferred revenue
1,447,256
1,634,096
Current maturities of long-term debt
1,027,205
975,360
Derivative liability
623,022
664,972
Total current liabilities
4,797,731
5,068,139
Long-term debt, less current maturities
5,400,006
5,353,892
Deferred tax liability
1,162,792
1,303,031
Total liabilities
11,360,529
11,725,062
EQUITY
Innovaro 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; 12,530,701 and 12,286,768 shares issued; 12,041,073 and 11,797,140
shares outstanding at June 30, 2010 and December 31, 2009, respectively
120,410
117,971
Additional paid-in capital
82,325,387
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
(3,429,745
)
(624,006
)
Accumulated other comprehensive income (loss)
(499,097
)
175,609
Total Innovaro stockholders equity
26,443,040
28,606,119
Noncontrolling interest
529,771
Total equity
26,972,811
28,606,119
Total liabilities and equity
$
38,333,340
$
40,331,181
See accompanying notes
Page 3 of 34
Table of Contents
INNOVARO, INC.
Consolidated Statements of Operations
(Unaudited)
Operating
Company
Accounting
Investment
Company
Accounting
Operating
Company
Accounting
Investment
Company
Accounting
Three Months
Ended
June 30, 2010
Three Months
Ended
June 30, 2009
Six Months
Ended
June 30, 2010
Six Months
Ended
June 30, 2009
Revenue / Income from operations:
Strategic services
$
1,916,588
$
1,529,010
$
3,346,630
$
3,254,288
Technology marketplaces
245,262
414,229
562,248
816,652
Insights and research
638,925
689,683
1,162,328
1,295,039
Investment income, net
12,546
43,210
2,800,775
2,645,468
$
5,071,206
5,409,189
Expenses:
Direct costs of revenue
1,601,031
1,778,654
3,049,403
4,106,012
Salaries and wages
789,629
3,250,359
1,469,155
4,234,448
Professional fees
165,808
197,103
367,097
420,023
Research and development
351,495
550,654
Sales and marketing
191,581
170,816
437,877
289,316
General and administrative
582,422
855,737
1,177,672
1,651,178
Depreciation and amortization
395,913
415,413
796,408
822,091
Impairment loss
2,368,458
2,368,458
4,077,879
9,036,540
7,848,266
13,891,526
Other (income) and expense:
Other (income) expense
(154,315
)
(156,389
)
Interest expense, net
142,084
277,238
(12,231
)
120,849
Loss before income taxes
(1,264,873
)
(6,391,072
)
(2,897,909
)
(8,482,337
)
Provision for income tax benefit
(34,098
)
(156,140
)
(89,809
)
(172,585
)
Net loss from operations
(1,230,775
)
(6,234,932
)
(2,808,100
)
(8,309,752
)
Net realized and unrealized gains (losses) from investment company activity:
Net realized gains (losses) on investments
(416,995
)
(37,435,130
)
Net change in unrealized appreciation (depreciation) of investments
(571,307
)
33,523,913
Net loss / Net decrease in net assets from operations
$
(1,230,775
)
$
(7,223,234
)
$
(2,808,100
)
$
(12,220,969
)
Net loss attributable to noncontrolling interest
(1,434
)
(2,361
)
Net loss attributable to Innovaro stockholders
$
(1,229,341
)
$
(2,805,739
)
Net loss attributable to Innovaro stockholders per share / Net decrease in net assets from operations per share: Basic and
diluted
$
(0.10
)
$
(0.64
)
$
(0.24
)
$
(1.10
)
Weighted average shares outstanding: Basic and diluted
11,872,196
11,214,181
11,834,875
11,103,434
See accompanying notes
Page 4 of 34
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INNOVARO, INC.
Consolidated Statement of Changes in Equity
(Unaudited)
Innovaro Stockholders Equity
Common Stock
Additional
Paid-In
Capital
Total
Accumulated
Loss
under
Investment
Company
Accounting
Comprehensive
Income (loss)
Accumulated
Deficit
Accumulated
Other
Comprehensive
Income (Loss)
Noncontrolling
Interest
Total
Equity
Shares
Issued
Shares
Outstanding
Par Value
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
$
(2,805,739
)
(2,805,739
)
(2,361
)
(2,808,100
)
Other comprehensive income (loss):
Unrealized gain (loss) from available-for-sale securities
(294,653
)
Foreign currency translation adjustments
(380,053
)
Other comprehensive loss
(674,706
)
(674,706
)
(674,706
)
Comprehensive loss
$
(3,480,445
)
Investment in Verdant Ventures Advisors, LLC
243,933
243,933
2,439
997,686
1,000,125
Stock-based compensation expense
299,373
299,373
Balances at June 30, 2010
12,530,701
12,041,073
$
120,410
$
82,325,387
$
(52,073,915
)
$
(3,429,745
)
$
(499,097
)
$
529,771
$
26,972,811
See accompanying notes
Page 5 of 34
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INNOVARO, INC.
Consolidated Statements of Cash Flows
(Unaudited)
Operating
Company
Accounting
Investment
Company
Accounting
Six Months
Ended
June 30, 2010
Six Months
Ended
June 30, 2009
Operating Activities:
Net loss attributable to Innovaro stockholders / Net decrease in net assets from operations
$
(2,805,739
)
$
(12,220,969
)
Adjustments to reconcile net loss attributable to Innovaro 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
(33,523,913
)
Loss on sale of investments from investment company activity
37,435,130
Net proceeds from sale (purchase) of short-term investments
(297,076
)
Proceeds from sale of equity investments from investment company activity
549,524
Goodwill and intangible asset impairment
2,368,458
Net loss attributable to noncontrolling interest
(2,361
)
Depreciation and amortization
796,408
822,091
Amortization of debt discount from investor warrants
91,735
Loss on sale and impairment of available-for-sale securities
34,801
Gain on derivative liability
(41,950
)
Stock-based compensation
299,373
323,639
Severance compensation paid for in escrowed shares
2,544,580
Deferred income taxes
(89,809
)
(172,585
)
Other
(32,095
)
106,191
Changes in operating assets and liabilities:
Accounts receivable
(239,783
)
1,020,913
Prepaid expenses and other assets
(91,127
)
264,051
Deferred revenue
(164,209
)
(836,326
)
Accounts payable and accrued expenses
465,980
(436,721
)
Net cash flows from operating activities
(1,778,776
)
(2,053,013
)
Investing Activities:
Capital expenditures
(29,729
)
(4,559
)
Cash paid in connection with Strategos acquisition
(292,468
)
Proceeds from sale of available-for-sale securities
249,145
Net cash flows from investing activities
219,416
(297,027
)
Financing Activities:
Proceeds from borrowings on bank line of credit
200,000
Payments on long-term debt
(193,775
)
(144,426
)
Net cash flows from financing activities
6,225
(144,426
)
Effect of foreign exchange rates
(6,487
)
36,293
Decrease in cash and cash equivalents
(1,559,622
)
(2,458,173
)
Cash and cash equivalents at beginning of period
2,118,970
3,922,297
Cash and cash equivalents at end of period
559,348
$
1,464,124
See accompanying notes
Page 6 of 34
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INNOVARO, INC.
Consolidated Statements of Cash Flows (continued)
(Unaudited)
Six Months Ended June 30,
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 Innovaro common stock
$
1,500,000
240,964 shares of NeoStem, Inc. common stock
200,000
$
1,700,000
The Company issued 18,380 shares of common stock in connection with certain acquisition earnout contingencies during the six
months ended June 30, 2009
$
189,823
Unrealized gain (loss) from available-for-sale securities
$
(294,653
)
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
The Company issued 243,933 shares of common stock in connection with its investment in Verdant Ventures Advisors,
LLC
$
1,000,125
Supplemental Disclosures of Cash Flow Information
Cash paid for taxes
$
$
Cash paid for interest
$
327,960
$
35,784
See accompanying notes
Page 7 of 34
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INNOVARO, INC.
Notes to Consolidated Financial Statements
(Unaudited)
1. Basis
of Presentation and Significant Accounting Policies
Interim Financial Information
The financial information for Innovaro, Inc. (the Company, we, us or Innovaro) as of June 30, 2010
and 2009 and for the three and six 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 six months ended June 30, 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 ServicesInvestment 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 and six months ended June 30, 2010 are presented in operating company format and operations for the three and six months ended June 30,
2009 are presented in investment company format.
The statements of operations for the three and six months ended June 30, 2010 are presented in operating company format. Certain operating company
balances are not applicable to an investment company and are not included for the three and six months ended June 30, 2009. These include other (income) expense and interest expense, net.
UTEK Real Estate Holdings, Inc.s results of operations are consolidated with those of Innovaro for the three and six months ended June 30,
2010 and intercompany transactions, including intercompany borrowings and rent, are eliminated in consolidation. At June 30, 2009, UTEK Real Estate Holdings, Inc. was included as one of the Companys portfolio companies and its results of
operations are not consolidated into those of Innovaro for the three and six months ended June 30, 2009.
Certain balances reported under Investment Company Accounting are not applicable to an operating company and are not included for the three and six
months ended June 30, 2010. These include investment income, net realized gains (losses) on investments and net change in unrealized appreciation (depreciation) of investments. During the three and six months ended June 30, 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.
Page 8 of 34
Table of Contents
Other changes include the following:
Other comprehensive income (loss) is not applicable to investments companies, and therefore, any related disclosures are applicable only for the three
and six months ended June 30, 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 internationally from
our offices in 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. On July 8, 2010, the Companys shareholders voted to amend the Companys certificate of incorporation to change the Companys name to Innovaro, Inc. The name change became effective on
July 12, 2010.
Principles of Consolidation
The consolidated financial statements include the accounts of Innovaro 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 and six months ended June 30, 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 and six months ended June 30, 2009.
The Company is reporting as an operating company for the three and six
months ended June 30, 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 and six months ended June 30, 2010. In addition, the assets and liabilities of UTEK Real Estate have
been included in the Companys financial position as of June 30, 2010 and December 31, 2009. As of June 30, 2010, none of the Companys other equity investments qualify for consolidation in accordance with GAAP.
Accounts Receivable
The allowance for
doubtful accounts was approximately $9,000 and $83,000 as of June 30, 2010 and December 31, 2009, respectively.
Goodwill
Impairment
In accordance with ASC Topic 350 Intangibles Goodwill and Other , management performs interim assessments of
goodwill if impairment indicators are present. One such indicator is an adverse change in the business climate. Subsequent to June 30, 2010, the Companys stock price declined significantly. A decline in stock price may be an indicator of
an adverse change in business climate. In addition, a decline in stock price affects the Companys market capitalization and may affect fair value measurements for the Companys reporting units.
Subsequent to June 30, 2010, management considered the incremental decline in our stock price from $3.80 at June 30, 2010 to $1.67 at
July 28, 2010. At this time, the evaluation period for the decline in stock price is limited. As such, management cannot conclude that this decline, although severe, will be other than short-term in nature. Absent a sustained decline in stock
price, the severity of the decline did not trigger a review for impairment outside of the Companys next scheduled annual impairment evaluation date of December 31, 2010.
However, if the decline in the Companys stock price does not reverse or the decline is significantly further extended, material write-downs or
impairment charges may be required in the future. It is reasonably possible that management may be required to conduct an interim goodwill impairment evaluation during the remainder of 2010, which could result in a material impairment of goodwill.
The magnitude and timing of those charges would be dependent on the severity and duration of the decline and cannot be determined at this time. Any material non-cash impairment charges related to goodwill or other intangible assets would have a
material adverse effect on the Companys operating results.
Page 9 of 34
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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.
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.
Page 10 of 34
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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. Research and development costs incurred to date have been expensed in the accompanying statement of operations as the Companys innovation management platform has not reached technological feasibility.
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. Reclassifications were also made to expenses to move direct costs associated with these business lines into direct costs of revenue. In addition, reclassifications were made to 2010 balances to segregate research and
development costs on the statement of operations.
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 June 30
Six Months Ended June 30
2010
2009
2010
2009
Weighted-average outstanding shares of common stock
11,872,196
11,214,181
11,834,875
11,103,434
Dilutive effect of stock options
Common stock and common stock equivalents
11,872,196
11,214,181
11,834,875
11,103,434
Shares excluded from calculation of diluted EPS (1)
1,603,900
968,400
1,603,900
968,400
(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 in Note 2 and fair value measurements discussed in Note 4, the carrying amounts 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 June 30,
2010 and December 31, 2009. The Company has not experienced any losses on such accounts.
The Company had one major customer during the
three and six months ended June 30, 2009, three major customers during the three months ended June 30, 2010 and one major customer during the six months ended June 30, 2010, 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 38% and 10% of the Companys revenue during the three months ended June 30, 2010 and 2009,
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respectively. Major customers accounted for approximately 13% and 11% of the Companys revenue during the six months ended June 30, 2010 and 2009, respectively. In addition, two
customers accounted for approximately 28% of accounts receivable at June 30, 2010.
2. 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 325-20 Cost Method Investments . Investments under cost method comprising $588,085 have been classified as current assets in accordance with the Companys intent and ability regarding
liquidity of the investments. The Company estimated that the fair value of these investments exceeded their respective carrying amounts as of June 30, 2010.
Investment in Verdant Ventures Advisors, LLC
On April 14, 2010, the Company entered into a limited liability company agreement to form Verdant Ventures Advisors, LLC (Verdant
Ventures). Under this agreement, the Company made an investment of 243,933 shares of the Companys common stock worth $1,000,125 in exchange for a 15% ownership in Verdant Ventures. Verdant Ventures will operate as an independently
managed technology transfer venture fund. John Micek, one of the Companys directors, is managing partner of Verdant Ventures, as well as a member of two limited liability companies that are also parties to the limited liability company
agreement of Verdant Ventures. Pursuant to the agreement, the Company is not required to make any additional capital contributions or loans to Verdant Ventures and is not involved in its management. Verdant Ventures may sell up to one-third of the
Companys contributed shares each year during a three-year period from the date the Company first contributed the shares.
The Company
evaluated its investment in Verdant Ventures under ASC Topic 810 Consolidation and concluded that this investment does not meet the requirements for consolidation. As such, it has been recorded as an investment under cost method in the
accompanying balance sheet as of June 30, 2010. This investment has been classified as a non-current asset in accordance with the Companys intent and ability regarding liquidity of the investment.
3. 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 June 30, 2010.
Unrealized (1)
Realized
Cost
Gains
Losses
Losses
Fair Value
Equity securities (available-for-sale)
$
516,800
$
46,200
$
(411,800
)
$
$
151,200
(1)
The net unrealized losses of $(365,600) is included in operating company equity as a component of accumulated other comprehensive income (loss) in the consolidated
balance sheet.
As of June 30, 2010, four of our six 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 $105,000. 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 $214,000 and $249,000 for the three and six months ended June 30, 2010, respectively. Gross realized gains were approximately $100,000 and $111,000 as a result of the sale of available-for-sale securities for the
three and six months ended June 30, 2010, respectively. In addition, the Company recognized a $146,000 loss on certain warrants classified as available-for-sale securities during the six months ended June 30, 2010 because the Company
determined that the warrants were permanently impaired. These warrants subsequently expired unexercised.
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Unrealized gains (losses) on available-for-sale securities for the six months ended June 30, 2010 are
shown in the accompanying statement of equity net of the reclassification adjustment. Disclosure of the gross amounts of the current period gain (loss) and amounts that were reclassified out of accumulated other comprehensive income (loss) into
earnings are as follows:
Six
Months
Ended
June 30, 2010
Unrealized holding gain (loss) arising during the period
$
(82,500
)
Add back: reclassification adjustment for net gains included in net income
(212,153
)
Unrealized gain (loss) from available-for-sale securities, net
$
(294,653
)
4. 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.
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 June 30, 2010 and December 31, 2009 are as
follows:
Fair Value Measurements at
June 30, 2010 Using
Fair Value Measurements at
December 31, 2009 Using
Level 2
Total
Level 2
Total
Assets:
Certificates of deposit
$
495,988
$
495,988
$
492,246
$
492,246
Available-for-sale securities
151,200
151,200
729,800
729,800
Total assets
$
647,188
$
647,188
$
1,222,046
$
1,222,046
Liabilities:
Derivative liability
$
(623,022
)
$
(623,022
)
$
(664,972
)
$
(664,972
)
Total liabilities
$
(623,022
)
$
(623,022
)
$
(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. The 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 are 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
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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 determining of the fair value
of these derivatives. See Note 6 for further discussion of the derivative liability.
5. 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.
6. 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.
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 Innovaro
and UTEK Real Estate must pay down $500,000 of the indebtedness to the Lender within 60 days. At Innovaros request, the Lender subsequently extended the repayment date for the $500,000 payment, which was made in accordance with this extension
on July 12, 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 June 30, 2010, resulting in a gain (loss) on derivative liability of approximately $(12,000) and $42,000
for the three and six months ended June 30, 2010, respectively.
7. Accumulated Other Comprehensive Income (Loss)
Components comprising the balance in accumulated other comprehensive income (loss) for the six months ended June 30, 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
(294,653
)
(380,053
)
(674,706
)
Balance at June 30, 2010
$
(365,599
)
$
(133,498
)
$
(499,097
)
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8. 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 June 30, 2010
5,241,127
26,309,578
31,550,705
Total assets June 30, 2010
5,437,340
32,896,000
38,333,340
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
For the Three Months Ended June 30, 2010
United
Kingdom
United States
Total
Revenue
151,003
2,649,772
2,800,775
Loss before income taxes
(155,691
)
(1,109,182
)
(1,264,873
)
Depreciation and amortization
102,927
292,986
395,913
For the Three Months Ended June 30, 2009
United
Kingdom
United States
Total
Revenue
630,808
2,014,660
2,645,468
Loss before income taxes
(87,265
)
(6,303,807
)
(6,391,072
)
Depreciation and amortization
109,671
305,742
415,413
For the Six Months Ended June 30, 2010
United
Kingdom
United States
Total
Revenue
390,877
4,680,329
5,071,206
Loss before income taxes
(387,995
)
(2,509,914
)
(2,897,909
)
Depreciation and amortization
210,517
585,891
796,408
For the Six Months Ended June 30, 2009
United
Kingdom
United States
Total
Revenue
1,076,024
4,333,165
5,409,189
Loss before income taxes
(179,329
)
(8,303,008
)
(8,482,337
)
Depreciation and amortization
208,083
614,008
822,091
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A summary of revenue and other financial information by reportable line of business segment is shown below:
For the Three Months Ended June 30, 2010
Strategic
Services
Technology
Marketplaces
Insights &
Research
Administrative
and Other
Total
Revenue
1,916,588
245,262
638,925
2,800,775
Income (loss) before income taxes
567,533
(100,644
)
53,583
(1,785,345
)
(1,264,873
)
For the Three Months Ended June 30, 2009
Strategic
Services
Technology
Marketplaces
Insights &
Research
Administrative
and Other
Total
Revenue
1,529,010
414,229
689,683
12,546
2,645,468
Income (loss) before income taxes
(3,918,946
)
(75,732
)
(1,086,972
)
(1,309,422
)
(6,391,072
)
For the Six Months Ended June 30, 2010
Strategic
Services
Technology
Marketplaces
Insights &
Research
Administrative
and Other
Total
Revenue
3,346,630
562,248
1,162,328
5,071,206
Income (loss) before income taxes
862,528
(260,669
)
149,796
(3,649,564
)
(2,897,909
)
For the Six Months Ended June 30, 2009
Strategic
Services
Technology
Marketplaces
Insights &
Research
Administrative
and Other
Total
Revenue
3,254,288
816,652
1,295,039
43,210
5,409,189
Income (loss) before income taxes
(4,346,037
)
(123,854
)
(951,859
)
(3,060,587
)
(8,482,337
)
9. Subsequent Events
Securities Offering
On
July 8, 2010, the Company entered into a definitive securities purchase agreement (the Securities Purchase Agreement) with three institutional investors, pursuant to which the Company agreed to issue to the investors in a registered
offering 1,481,481 shares (the Shares) of the Companys common stock priced at $2.565 per share along with Series A warrants to purchase up to 1,481,481 shares of common stock with an exercise price of $3.43 per share of common
stock and Series B warrants to purchase up to 893,519 shares of common stock with an exercise price of $0.01 per share of common stock. These securities were offered pursuant to our effective shelf registration statement on Form S3 (File
No. 333165859).
On July 9, 2010, the Company entered into an amendment to the Securities Purchase Agreement with each of the
investors to increase the exercise price of the Series A warrants to be issued in connection therewith from $3.43 per share to $3.49 per share.
On July 12, 2010, the Company completed the offering contemplated by the Securities Purchase Agreement and raised gross proceeds in connection
therewith of approximately $3.8 million before advisory fees and offering expenses.
The Series A warrants are exercisable for a five-year
period commencing six months after the date of their issuance. The Series B warrants will become initially exercisable on the 60 day anniversary of the date of their issuance if the market price (calculated in the manner described below) of our
common stock on such anniversary date is less than the $2.565 per share purchase price of our common stock issued to the investors in the offering. In addition, the number of Series B warrants that will become exercisable will increase on the 120
day anniversary of the date of their issuance if the market price (calculated in the manner
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described below) of our common stock on such anniversary date is less than both the $2.565 per share purchase price of our common stock issued to the investors in the offering and the market
price (calculated in the manner described below) on the 60-day anniversary of the date of the issuance of the Series B warrants. In each such event, the Series B warrants will be exercisable for a number of shares such that the average price per
share of the (i) shares of common stock to be sold to the investors in the offering and (ii) the shares of common stock issuable upon exercise of the Series B warrants equals the greater of (i) the market price (calculated in the
manner described below) of the common stock on the date of calculation and (ii) $1.60. For purposes of the Series B warrants, the term market price is 90% of the average of the weighted average price of our common stock during the
10 trading days preceding the date of calculation.
In addition, the Company granted each investor in the offering the right of first refusal
to purchase 100% of the shares of the Companys common stock or securities convertible into or exercisable for shares of the Companys common stock to be issued by the Company in certain offerings until the one (1) year anniversary of
the date of the issuance of the Shares. Thereafter, each investor will have the right of first refusal to purchase 50% of the shares of the Companys common stock or securities convertible into or exercisable for shares of the Companys
common stock to be issued by the Company in certain offerings until the two (2) year anniversary of the date of the issuance of the Shares.
Management is currently evaluating the Securities Purchase Agreement for potential derivatives and possible effects on the Companys financial
statements.
Employee Stock Option Plan
On July 8, 2010, the Companys shareholders voted in favor of a proposal to amend the Companys Amended and Restated Employee Stock Option
Plan (the Option Plan) to increase the number of shares authorized for issuance by 600,000 shares. The maximum number of shares that may be issued through the exercise of options granted under the Option Plan as amended is 2,811,274.
Restricted Stock Plan
On
July 8, 2010, the Companys shareholders voted in favor of a proposal to adopt the Companys Restricted Stock Plan (the Restricted Stock Plan). The purpose of the Restricted Stock Plan is to provide selected members of the
Board of Directors, executive officers, key employees, consultants and advisors of the Company with awards consisting of shares of the Companys common stock contingent on their long-term continued employment and/or their relationship with the
Company. The maximum number of shares of common stock that may be issued to participants under the Restricted Stock Plan is 1,500,000.
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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.
Recent Developments
On July 8,
2010, we held an annual meeting of stockholders to: (i) elect nine directors who will serve for one year, or until their successors are elected and qualified; (ii) ratify the selection of Pender Newkirk & Company LLP to serve
as our registered independent public accounting firm for the year ending December 31, 2010; (iii) approve an amendment to our amended and restated employee stock option plan to increase the number of shares authorized for issuance;
(iv) approve the adoption of our restricted stock plan; and (v) approve an amendment to our certificate of incorporation to change our name to Innovaro, Inc.
All matters submitted to a vote of our stockholders at the annual meeting were approved and all director nominees were elected. However, because Holly
Callen Hamilton, Keith A. Witter and Kwabena Gyimah-Brempong received a greater number of votes withheld for election as a director than votes for such election, they tendered their respective conditional resignations to our
board of directors on July 8, 2010. Pursuant to our Corporate Governance Guidelines and Majority Withheld Vote Policy contained therein, directors are expected to tender a conditional offer of resignation to our board of directors following
certification of the stockholder vote at which he or she receives a greater number of votes withheld for his or her election as a director than votes for such election. The conditional resignation offers were first considered
by the nominating and corporate governance committee of our board of directors (with Messrs. Witter and Gyimah-Brempong and Ms. Callen Hamilton abstaining) and then by our full board of directors (also with Messrs. Witter and Gyimah-Brempong
and Ms. Callen Hamilton abstaining). In light of the results at the annual meeting, our board of directors, following the deliberation process outlined in our Corporate Governance Guidelines, determined unanimously to accept the resignations of
Messrs. Witter and Gyimah-Brempong and Ms. Callen Hamilton as members of our board of directors.
With the addition of three new Board
members in February 2010, we currently have an appropriate number of independent board members in accordance with NYSE guidelines for a smaller reporting company. In addition, we believe the current Board members have the business knowledge and
breadth of experience required.
On July 12, 2010, we completed the registered offering of 1,481,481 shares of our common stock priced at
$2.565 per share along with Series A warrants to purchase up to 1,481,481 shares of common stock with an exercise price of $3.43 per share (subsequently amended to $3.49 per share) of common stock and Series B warrants to purchase up to 893,519
shares of common stock with an exercise price of $0.01 per share of common stock. We raised gross proceeds of approximately $3.8 million before advisory fees and offering expenses in connection with the offering.
The Series A warrants are exercisable for a five-year period commencing six months after the date of their issuance. The Series B warrants will become
initially exercisable on the 60 day anniversary of the date of their issuance if the market price (calculated in the manner described below) of our common stock on such anniversary date is less than the $2.565 per share purchase price of our common
stock issued to the investors in the offering. In addition, the number of Series B warrants that will become exercisable will increase on the 120 day anniversary of the date of their issuance if the market price (calculated in the manner described
below) of our common stock on such anniversary date is less than both the $2.565 per share purchase price of our common stock issued to the investors in the offering and the market price (calculated in the manner described below) on the 60-day
anniversary of the date of the issuance of the Series B warrants. In each such event, the Series B warrants will be exercisable for a number of shares such that the average price per share of the (i) shares of common stock to be sold to the
investors in the offering and (ii) the shares of common stock issuable upon exercise of the Series B warrants equals the greater of (i) the market price (calculated in the manner described below) of the common stock on the date of
calculation and (ii) $1.60. For purposes of the Series B warrants, the term market price is 90% of the average of the weighted average price of our common stock during the 10 trading days preceding the date of calculation.
In addition, we granted each investor the right of first refusal to purchase 100% of the shares of our common stock or securities convertible
into or exercisable for shares of our common stock to be issued by us in certain offerings until July 12, 2011.
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Thereafter, each investor will have the right of first refusal to purchase 50% of the shares of the
Companys common stock or securities convertible into or exercisable for shares of the Companys common stock to be issued by the Company in certain offerings until the July 12, 2012.
Business Overview
General
We provide 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 an innovation management platform designed to
enhance and compliment our innovation services deliverable to clients. The purpose of the innovation management platform is to enable our clients to access, apply and extract value from a proven innovation approach through an on-demand service.
Management is continuing to evaluate the software platform and its internal resource allocation in conjunction with our overall corporate strategy.
On March 16, 2010, we began doing business as Innovaro and changed our ticker symbol to NYSE Amex: INV. On July 12, 2010, we
formally changed our name to Innovaro, Inc. In connection with our rebranding as Innovaro 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 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.
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.
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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.
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.
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Current Market Conditions
We believe that our financial results for the first six months of 2010 continued to be negatively impacted by weakened economic conditions, although to a
lesser extent than during the first six months of 2009. 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
June
30,
Percentage
Change
Six
Months
Ended
June 30,
Percentage
Change
(in thousands, except percentages)
2010
2009
2010
2009
Strategic services
$
1,917
$
1,529
25
%
$
3,347
$
3,254
3
%
Technology marketplaces
245
414
(41
)%
562
817
(31
)%
Insights and research
639
690
(7
)%
1,162
1,295
(10
)%
Investment income, net
12
NM
(1)
43
NM
(1)
Total revenue / income from operations
$
2,801
$
2,645
6
%
$
5,071
$
5,409
(6
)%
(1)
This percentage change is not meaningful given that it relates to the manner in which we reported our operating results during the two reporting periods. For more
information, see Note 1 to our consolidated financial statements included elsewhere in this Form 10-Q.
Strategic Services
Our strategic services revenue is derived from consulting services we provide to our clients. Our strategic services revenue increased by
$388,000 for the three months ended June 30, 2010 in comparison to the three months ended June 30, 2009. Our strategic services revenue increased by $92,000 for the six months ended June 30, 2010 in comparison to the six months ended
June 30, 2009. Strategic services revenue declined in 2009 as a result of adverse economic conditions. We attribute the increased revenue in 2010 to a renewed interest in innovation efficiency and new product development, particularly during
the second quarter, in the US and abroad. Based on current activity, we expect these revenues to increase for the remainder of 2010.
Our
strategic services revenue in recent years has largely been dependent on the efforts of certain key consulting professionals whose employment contracts with us expire in April 2011. If we are not successful in retaining these consulting
professionals or hiring similarly qualified and skilled consulting professionals to replacement them, then we may not be able to maintain the level of strategic services revenue we have generated in recent years. For more information relating to
this risk, see Item 1A. Risk Factors in our Annual Report on Form 10-K for the year ended December 31, 2009.
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 $169,000 for the three months ended June 30, 2010 in comparison to same period of 2009. Our technology marketplaces revenue decreased $254,000 for the six months
ended June 30, 2010 in comparison to same period of 2009. The decreased revenue in 2010 is due to a reduced number of both retainer based and online marketplace customers for our global technology licensing services. Based on current activity,
we expect these revenues to remain flat 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 $51,000 for the three months ended June 30, 2010 in comparison to same period of 2009. Our insights and research revenue decreased $133,000 for the six months ended June 30, 2010 in comparison to same period of 2009. The
decreased revenue in 2010 is primarily a result of a decrease in renewals of our information services subscriptions. Based on current activity, we expect these revenues to continue to decrease for the remainder of 2010 as compared to 2009.
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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 and six
months ended June 30, 2010.
Direct Costs of Revenue
(in thousands, except percentages)
Three
Months
Ended
June 30,
2010
Gross
Profit
Three
Months
Ended
June 30,
2009
Gross
Profit
Six
Months
Ended
June 30,
2010
Gross
Profit
Six
Months
Ended
June 30,
2009
Gross
Profit
Direct costs of strategic services
$
1,171
39
%
$
1,284
16
%
$
2,176
35
%
$
3,138
4
%
Direct costs of technology marketplaces
60
76
%
142
66
%
234
58
%
336
59
%
Direct costs of insights and research
370
42
%
353
49
%
639
45
%
632
51
%
Total direct costs of revenue
$
1,601
$
1,779
$
3,049
$
4,106
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. Our direct costs of strategic services revenue decreased by $112,000 for the three months ended June 30, 2010 in comparison to the three months ended June 30,
2009. Our direct costs of strategic services revenue decreased by $963,000 for the six months ended June 30, 2010 in comparison to the six months ended June 30, 2009. The majority of the decrease in direct costs for both the three and six
month periods related to a decrease in salaries and related payroll taxes partially offset by an increase in outside contract services. 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. As a result of increases in projects during 2010, we have recently begun to increase head count. We expect these costs to increase for the remainder of 2010 in connection with an increase
in the related revenue.
The increase in strategic services gross profit for both the three and six months ended June 30, 2010 in
comparison to the three and six months ended June 30, 2009 is primarily related to head count. Although we reduced the number of employees when we lost revenues in 2009, this reduction was completed over a longer period of time than the
decrease in revenues. This resulted in a significant decrease in the gross profit for the first and second quarters of 2009. These margins have started to return to normal levels during 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. Our direct costs of technology marketplaces revenue decreased by $82,000 for the three months ended June 30, 2010 in comparison to the three months ended June 30, 2009. Our direct costs of
technology marketplaces revenue decreased by $101,000 for the six months ended June 30, 2010 in comparison to the six months ended June 30, 2009. The majority of the decrease in direct costs during 2010 is due to a decrease in salaries as
well as a slight decline in outside services costs. We expect these costs to remain flat 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. There were no significant changes in direct costs of insights and
research revenue for the three and six months ended June 30, 2010 compared to the three and six months ended June 30, 2009. We expect these costs to remain flat for the remainder of 2010.
Salaries and Wages
Three Months
Ended
June 30,
Percentage
Change
Six Months
Ended
June 30,
Percentage
Change
(In thousands, except percentages)
2010
2009
2010
2009
Salaries and wages
$
790
$
3,250
(76
)%
$
1,469
$
4,234
(65
)%
As a percent of revenue
28
%
123
%
(95
)ppt
29
%
78
%
(49
)ppt
*
The abbreviation ppt denotes percentage points.
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Salaries and wages include non-sales employee and officer salaries that are not otherwise allocated to
direct costs, employee related benefits including bonuses, and stock-based compensation. Salaries and wages decreased $2,461,000 for the three months ended June 30, 2010 compared to the three months ended June 30, 2009. Salaries and
wages decreased $2,765,000 for the six months ended June 30, 2010 compared to the six months ended June 30, 2009. Approximately $2.5 million of the decrease in salaries and wages for the three and six months ended June 30, 2010
compared to the three and six months ended June 30, 2009 related to a charge to salaries and wages related to the modification of the acquisition and employment agreements with the division manager of our Social Technologies division. The
remaining difference in the six months ended June 30, 2010 compared to the six months ended June 30, 2009 related to the retirement of our former CEO in the first quarter of 2009.
We expect salaries and wages to remain flat for the remainder of 2010.
Professional Fees
Three Months
Ended
June 30,
Percentage
Change
Six Months
Ended
June 30,
Percentage
Change
(In thousands, except percentages)
2010
2009
2010
2009
Professional fees
$
166
$
197
(16
)%
$
367
$
420
(13
)%
As a percent of revenue
6
%
7
%
(1
)ppt
7
%
8
%
(1
)ppt
Professional fees include
accounting fees, legal fees and valuation expenses for our investments. Professional fees decreased $31,000 for the three months ended June 30, 2010 compared to the three months ended June 30, 2009. Professional fees decreased $53,000 for
the six months ended June 30, 2010 compared to the six months ended June 30, 2009. The decrease in professional fees for the three and six month periods relates primarily to a decrease in valuation expenses due to the reduced number of
investment holdings requiring valuations in 2010.
We expect to continue 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.
Research and Development
Three Months
Ended
June 30,
Percentage
Change
Six Months
Ended
June 30,
Percentage
Change
(In thousands, except percentages)
2010
2009
2010
2009
Research and development
$
351
$
0
%
$
551
$
0
%
As a percent of revenue
13
%
%
13
ppt
11
%
%
11
ppt
Research and development
costs include salaries, outside services, travel and other related costs related to the development of our innovation management platform designed to enhance and compliment our innovation services deliverable to clients. This project commenced in
the first quarter of 2010 and management is continuing to evaluate the software platform and its internal resource allocation in conjunction with our overall corporate strategy.
Sales and Marketing
Three Months
Ended
June 30,
Percentage
Change
Six Months
Ended
June 30,
Percentage
Change
(In thousands, except percentages)
2010
2009
2010
2009
Sales and marketing
$
192
$
171
12
%
$
438
$
289
51
%
As a percent of revenue
7
%
6
%
1
ppt
9
%
5
%
4
ppt
Sales and marketing expenses
include advertising, marketing, commissions paid to outside service providers, certain travel and other business development expenses. Sales and marketing expenses increased $21,000 for the three months ended June 30, 2010 compared to the three
months ended June 30, 2009. The increase in sales and marketing expenses relates to an increase in marketing costs of $117,000, which included $43,000 in rebranding costs and $75,000 for partnering with external search partners to market our
products on their websites, partially offset by a decrease of $76,000 in sales related travel.
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Sales and marketing expenses increased $149,000 for the six months ended June 30, 2010 compared to the
six months ended June 30, 2009. The increase in sales and marketing expenses relates to an increase in marketing costs of $254,000, which included $89,000 in rebranding costs and $150,000 for partnering with external search partners to market
our products on their websites, partially offset by a $78,000 decrease in sales related travel.
We expect sales and marketing expenses to
decrease from current levels for the remainder of 2010.
General and Administrative
Three Months
Ended
June 30,
Percentage
Change
Six Months
Ended
June 30,
Percentage
Change
(In thousands, except percentages)
2010
2009
2010
2009
General and administrative
$
582
$
856
(32
)%
$
1,178
$
1,651
(29
)%
As a percent of revenue
21
%
32
%
(11
)ppt
23
%
31
%
(8
)ppt
General and administrative
expenses decreased $273,000 for the three months ended June 30, 2010 compared to the three months ended June 30, 2009. The decrease relates to a $59,000 reduction in insurance due to having fewer employees; a $109,000 reduction in rent
related to consolidating UTEK Real Estate operations, 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 $121,000 reduction in bad debt expense
due to implementation of a strict collection policy; and a continued overall company plan to reduce all aspects of overhead.
General and
administrative expenses decreased $474,000 for the six months ended June 30, 2010 compared to the six months ended June 30, 2009. The decrease relates to a $84,000 reduction in insurance due to having fewer employees; a $208,000 reduction
in rent related to UTEK Real Estate operations, 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 $36,000 reduction in investment banking
related to our having de-listed from the London Stock Exchange AIM; a $123,000 reduction in bad debt expense due to implementation of a strict collection policy; and a continued overall company plan to reduce all aspects of overhead.
We expect general and administrative expenses to remain flat for the remainder of 2010.
Depreciation and Amortization
Three Months
Ended
June 30,
Percentage
Change
Six Months
Ended
June 30,
Percentage
Change
(In thousands, except percentages)
2010
2009
2010
2009
Depreciation and amortization
$
396
$
415
(5
)%
$
796
$
822
(3
)%
As a percent of revenue
14
%
16
%
(2
)ppt
16
%
15
%
1
ppt
Depreciation and
amortization expense decreased $19,000 and $26,000, respectively, for the three and six months ended June 30, 2010 compared to the three and six months ended June 30, 2009. Amortization expense decreased by $44,000 and $73,000 for the
three and six months ended June 30, 2010, respectively, compared to the three and six months ended June 30, 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 $25,000 and $47,000 for the three and six months ended June 30, 2010, respectively, compared to the three and six months ended June 30, 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 the remainder of 2010 to remain flat in comparison to 2009.
Impairment Loss
In 2009, the Social Technologies division of Innovaro had significant declines in revenues related to their futures and foresight projects. The state of
the economy during 2009 contributed to potential Social Technologies clients focusing on short-term survival rather than long-term foresight planning. As a result, management terminated the majority of the divisions employees in
Page 24 of 34
Table of Contents
favor of an independent, network based approach in an effort to reduce overhead. Management concluded that this division had suffered a significant adverse change in the business, which included
a projection of continuing operating and cash flow losses. We determined that there was impairment of the divisions purchased intangible assets of approximately $1.0 million and impairment of the divisions goodwill of approximately $1.3
million as of June 30, 2009.
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 other income of $154,000
for the three months ended June 30, 2010 is comprised of rental income of $22,000, miscellaneous income of $41,000 and net capital gains of $100,000, partially offset by a loss of $12,000 related to adjusting our derivative liability to fair
value.
The net other income of $156,000 for the six months ended June 30, 2010 is comprised of a gain of $42,000 related to adjusting
our derivative liability to fair value, rental income of $84,000 and miscellaneous income of $62,000, partially offset by capital losses of $35,000.
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 $142,000 for the three months ended June 30, 2010 is primarily comprised of interest expense on long-term
debt of $124,000 and amortization of our debt discount of $46,000, partially offset by interest income on our note receivable of $28,000.
The
net interest expense of $277,000 for the six months ended June 30, 2010 is primarily comprised of interest expense on long-term debt of $243,000 and amortization of our debt discount of $92,000, partially offset by interest income on our note
receivable of $57,000.
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 and second quarters of 2009. We sold some or all of our shares in a significant number of our portfolio companies for $2.25 million in cash and other assets, which resulted in net realized losses of $37.4 million for the six months ended
June 30, 2009.
Net Change in Unrealized Appreciation (Depreciation) on Investments from Investment Company Accounting
The net unrealized appreciation of $33.5 million for the six months ended June 30, 2009 was primarily due to the reversal of unrealized
depreciation on various investments upon their sale during the period of approximately $35.0 million; partially offset by a reduction in value of the investment in MiMedx Group, Inc. of $1.5 million.
Liquidity and Capital Resources
Cash Flows
Cash used in operating
activities of $1.78 million for the six months ended June 30, 2010 decreased approximately $270,000 from $2.05 million for the six months ended June 30, 2009. Total cash used in operations of $1.78 million in the current period is
primarily attributable to:
$2.8 million net operating loss;
$42,000 gain on derivative liability;
$240,000 increase in accounts receivable related to significant billings in the second quarter of 2010;
$164,000 decrease in deferred revenue;
$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:
$796,000 in non-cash depreciation and amortization;
$299,000 in non-cash stock-based compensation expense related to vesting options; and
$913,000 increase in accounts payable and accrued expenses.
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Cash provided by (used in) investing activities of $219,000 for the six months ended June 30, 2010
increased $516,000 from $(297,000) for the six months ended June 30, 2009. Total cash provided by operations of $219,000 in the current period is primarily attributable to:
$249,000 in proceeds from available-for-sale securities.
Cash provided by (used in) financing activities of $6,000 for the six months ended June 30, 2010 increased $150,000 from $(144,000) for the six
months ended June 30, 2009. Total cash provided by financing of $6,000 is primarily attributable to:
$200,000 in proceeds from borrowings on our line of credit.
Partially offset by:
$194,000 in cash paid for long-term debt.
Changes to Contractual Obligations
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.
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
Innovaro 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 payment, which was made in
accordance with this extension on July 12, 2010. As of August 10, 2010, the balance on the note was $1,250,000.
During the second
quarter of 2010, the Company borrowed an additional $200,000 on its revolving line of credit.
Financing
On July 12, 2010, we completed a registered offering of 1,481,481 shares of our common stock priced at $2.565 per share along with Series A warrants
to purchase up to 1,481,481 shares of common stock with an exercise price of $3.43 per share (subsequently amended to $3.49 per share) of common stock and Series B warrants to purchase up to 893,519 shares of common stock with an exercise price of
$0.01 per share of common stock. We raised gross proceeds of approximately $3.8 million before advisory fees and offering expenses in connection with the offering.
Capital Expenditures
In the
first quarter of 2010, we began development of an innovation management platform designed to enhance and compliment our innovation services deliverable to clients. Management is continuing to evaluate the software platform and its internal resource
allocation in conjunction with our 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 June 30, 2010, we had cash and cash equivalents of
$559,000 and investments in certificates of deposit of $496,000. The certificates of deposit are pledged to financial institutions as collateral to support the issuance of our line of credit.
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 proceeds from the sale of our common stock and warrants to purchase shares of our common stock. We believe that these sources will be sufficient to fund our scheduled debt service and provide required
resources for working capital for the next twelve months.
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Table of Contents
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. Except as described below, there have been no material changes to the critical accounting estimates previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2009.
Impairment of Goodwill
As
disclosed in our Annual Report of Form 10-K for the year ended December 31, 2009, we assess goodwill for impairment annually as of the end of the year. We perform interim assessments of goodwill if impairment indicators are present. One such
indicator is an adverse change in the business climate. Subsequent to June 30, 2010, our stock price declined significantly. A decline in stock price may be an indicator of an adverse change in business climate. In addition, a decline in stock
price may affect fair value measurements for our reporting units. We have evaluated the impact of this decline on our reporting units for future periods. Considering this and certain other factors, we determined that the impact was not significant
enough to warrant a full impairment review at this time. It is reasonably possible that we may be required to conduct an interim goodwill impairment evaluation during the remainder of 2010, which could result in a material impairment of goodwill.
However, if the decline in our stock price does not reverse or the decline is significantly further extended, material write-downs or
impairment charges may be required in the future. If the decline in our stock price were to persist or worsen, material impairment charges may be necessary. The magnitude and timing of those charges would be dependent on the severity and duration of
the decline and cannot be determined at this time. Any material non-cash impairment charges related to goodwill or other intangible assets would have a material adverse effect on our results of operations and financial condition.
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 our 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 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 June 30, 2010, we were not a party to any material legal proceedings.
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Table of Contents
ITEM 1A.
Risk Factors
Except as described below,
there have been no material changes to the risk factors previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2009.
We may incur impairments to goodwill and intangible assets.
We are required to test goodwill and intangible assets for impairment annually or if a triggering event occurs in accordance with the provisions of ASC
Topic 350 Intangibles Goodwill and Other . Such impairment could be caused by internal factors as well as external factors beyond our control.
Significant negative industry or economic trends, including the lack of recovery in the market price of our common stock, reduced estimates of future
cash flows, disruptions to our business, slower growth rates or lack of growth in the areas in which we generate revenues could lead to an impairment charge for any of our intangible assets or goodwill. If, in any period, our stock price decreases
to the point where the fair value of the Company, as determined by our market capitalization, is less than our book value, this too could indicate a potential impairment and we may be required to record an impairment charge in our statement of
operations in that period which would cause an increase in our net loss.
Our valuation methodology for assessing impairment requires
management to make judgments and assumptions based on historical experience and to rely heavily on projections of future operating performance. We operate in highly competitive environments and projections of future operating results and cash flows
may vary significantly from actual results. Additionally, if a significant decline in our stock price and/or market capitalization result in impairment to our goodwill, we may be required to record a charge to earnings in our financial statements
during a period in which such impairment is determined to exist, which may negatively impact our results of operations.
ITEM 2.
Unregistered Sales of Equity Securities and Use of Proceeds
On April 14, 2010, the Company agreed to make an equity investment in Verdant Ventures Advisors, LLC, a Delaware limited liability company,
(Verdant Ventures), through the contribution of 243,933 shares of the Companys common stock in connection with Verdant Ventures formation. Verdant Ventures will operate as an independently managed technology transfer venture
fund. The Companys capital contribution represents a 15% ownership interest in Verdant Ventures.
ITEM 3.
Defaults upon Senior Securities
None.
ITEM 4.
Reserved
ITEM 5.
Other Information
None.
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ITEM 6.
Exhibits
Exhibit Index
4.1
Form of Series A Warrants, incorporated by reference to Exhibit 4.1 to Form 8-K filed on July 8, 2010.
4.2
Form of Series B Warrants, incorporated by reference to Exhibit 4.2 to Form 8-K filed on July 8, 2010.
10.1*
Limited Liability Company Agreement for Verdant Ventures Advisors, LLC dated April 14, 2010 by among Verdant Ventures Managers, LLC, Silicon Prairie Partners, LLC and UTEK
Corporation.
10.2
Securities Purchase Agreement dated July 8, 2010 by and among UTEK Corporation and three institutional investors, incorporated by reference to Exhibit 10.1 to the
Companys Form 8-K filed on July 8, 2010.
10.3
Form of Amendment to Securities Purchase Agreement, incorporated by reference to Exhibit 10.2 to the Companys Form 8-K/A filed on July 9, 2010.
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.
*
Filed Herewith.
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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.
INNOVARO, INC.
(Registrant)
Date: August 10, 2010
/s/ Douglas Schaedler
Douglas Schaedler
Chief Executive Officer
Date: August 10, 2010
/s/ Carole R. Wright
Carole R. Wright, CPA
Chief Financial Officer
Page 30 of 34
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.