Innovaro, Inc. 10-K

Item 1. Business Unless the context requires otherwise, reference in this Form 10-K to “Innovaro,” the “Company,” “we,” “us” and words of similar import refer to Innovaro, Inc. and its wholly owned subsidiaries, Innovaro Europe, Ltd. (“Europe”) and UTEK Real Estate Holdings, Inc. (“UTEK Real Estate”). We commenced operations in 1997 and were originally incorporated under the laws of the State of Florida, and subsequently under the laws of the State of Delaware in July 1999. Until September 30, 2009, we were 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, we filed a notification on Form N-54C with the Securities and Exchange Commission (“SEC”) withdrawing our election to be regulated as a BDC under the 1940 Act. As such, we are reporting as an operating company as of October 1, 2009 and forward. 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 provided internationally from our offices in the United States and the United Kingdom. 1 Table of Contents In the first quarter of 2010, we began development of an innovation management software platform designed to enhance and complement our innovation service offerings to our clients. The purpose of the innovation management software platform is to enable our clients to access, apply and extract value from a proven innovation approach through an on-demand software application. Management has begun testing and marketing of the software platform in 2011. The release to general availability of phase one of the software is dependent on the results of our testing, but is tentatively scheduled for the end of the second quarter of 2011. During the first quarter of 2011, phase one of the software will have reached technological feasibility and additional costs will be capitalized. 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.” We have reorganized into two new lines of business, all working under the Innovaro brand: Strategic Services—driven by Strategos, an advanced innovation consultancy, and Technology Services—online platforms, partnering services, global licensing, technology transfer services, futures trends, research and information services and IP consulting. Business Strategy Innovaro has evolved from a technology transfer firm, organized as a BDC, into an operating company. We have shifted the focus of the business to become an innovation services business. We provide innovation consulting services, IP licensing, technology acquisition and partnering and trends analysis. During the course of 2010, Innovaro recognized the opportunity to develop a new innovation management software platform with the intent to bring the product to market beginning in 2011. Innovaro envisions the continued evolution of its business to include the development and sale of software products such as the innovation management software platform to support its innovation services business. Over time, we expect the software product component of our business to grow at a greater rate than the growth in our other business segments and we feel it will represent an important component of our overall revenue stream. As the innovation management software capability matures, we expect to evolve into an innovation solutions company which will include all of our current services as well as the software platform to form the basis of an innovation engine . This innovation engine will allow us to more broadly engage clients depending on their requirements, whether people, software or data across their innovation cycle. A key component of our strategy is to embrace both software and information offerings from other firms through an open innovation approach. Open innovation is a paradigm that assumes that firms can and should use external ideas as well as internal ideas, and internal and external paths to market, as the firms look to advance their technology. Using this approach, our clients will be able to incorporate our offerings to suit their requirements to most effectively drive innovation. Operating Segments We currently have strategically aligned our business into two reportable segments: Strategic Services and Technology Services. Strategic Services Segment Overview 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. 2 Table of Contents We provide strategic 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 organization’s 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 company’s innovation capability. Clients Approximately 75% and 63% of our revenue in 2010 and 2009, respectively, was from strategic services. We have a global client base including both private and public sector organizations, representing multiple industries including fast moving consumer goods, consumer packaged goods, retail, medical, telecommunications, chemicals, media, financial services, energy, utilities and government agencies. Strategic services had two significant clients for the year ended December 31, 2010 and one significant client for the year ended December 31, 2009, which accounted for 28% and 10% of the total revenue, respectively. Competition The strategic services business is highly competitive. We currently have significant competitors for many of our service offerings, including, but not limited to, McKinsey & Company, The Boston Consulting Group and Monitor Group, Inc. for strategic services. Technology Services Segment Overview 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 expertise, 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. Our clients require intelligence applied to their markets in order to have confidence in deploying 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. 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. 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 3 Table of Contents 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. Pharma Transfer provides a source of research and peer reviewed business development opportunities for the international pharmaceutical market encompassing all areas of pipeline development including early-stage discovery, pre-clinical and clinical trials and registered products that are all available for co-development or licensing. 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. 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. 4 Table of Contents Clients Approximately 25% and 36% of our revenue in 2010 and 2009, respectively, was from technology services. We have a global client base including private and public sector organizations of varying sizes, representing a wide range of industries. Clients for our subscription services include universities, research centers and primarily large companies across a diversified group of industries. Clients for our other services within the technology services segment include both private and public sector organizations, representing multiple industry sectors including retail, government, telecommunications, chemicals, media, financial services, energy and utilities. Competition We have capable competitors in the global technology licensing business including IP Group plc, British Technology Group plc, Intellectual Ventures, Yet2.com, Competitive Technologies, Inc. and many other firms. Competitors for online marketplace services are significant and include: Reed Elsevier, PharmaVentures, Nerac, Inc., Thomson S.A., BioPharm Insight, EvaluatePharma and many others. Competitors for IP consulting services include: The Patent Board, Ocean Tomo, LLC, PatentCafé, 1790 Analytics and many other private firms and Forrester Research, Inc. and Gartner, Inc. for foresight and trend research. In addition, university technology commercialization offices also provide location specific competition with regard to the licensing of IP technology that they have developed. We believe the primary factors affecting competition in our markets include firm and consultant reputations, client relationships and experiences, a legacy of successes, referrals and referral sources, the ability to attract and retain top talent, the ability to manage client engagements effectively, responsiveness, and the ability to listen and provide high quality services. There is competition on price, as evidenced by the price competition we experienced during the recent severe economic downturn. However, given the critical nature of many of the issues that our services address, we are not typically competing on price alone. Many of our competitors have a greater share of the markets in which we operate, more high profile personnel and greater financial and marketing resources than we do. We believe that our experience, our reputation (collectively and as previously independent businesses), our focus on innovation, and our comprehensive approach to our clients’ innovation challenges enable us to compete favorably and effectively in this marketplace. Research and Development Currently, our research and development activities are related to the continuing development of an innovation management software platform. In fiscal 2010 and fiscal 2009, our research and development expenses were $1.2 million and $0, respectively. Our research and development expenses consist primarily of personnel and related expenses, including payroll and employee benefits, expenses for facilities and payments made to outside software development contractors and, to a lesser degree, depreciation of capital equipment. We estimate that we have spent approximately 17,000 hours on research and development activities during 2010. The software platform has not reached technological feasibility as of December 31, 2010 and accordingly all related costs have been expensed in 2010. Intellectual Property We consider our products as proprietary. We attempt to protect our proprietary technology by relying primarily on a combination of copyright and trademark laws, trade secrets, confidentiality procedures and contractual provisions. Business Development and Marketing Our business development and marketing efforts are aimed at developing relationships and building strong awareness and brand reputation with the key economic buyers, specifically; innovation leaders, business and business unit leaders, research and consumer insights professionals, R&D leaders, product marketers, brand 5 Table of Contents managers, licensing professionals, industry analysts, academic institutions, law firms, and others. We believe strong relationships and a client-driven approach to service are critical to building and maintaining our business and brand reputation. We emphasize high quality client service to all of our employees. We generate new business opportunities through relationships with individuals, through direct sales, cross selling, trade show and conference participation and sponsorship, direct marketing outreach, and our extensive network of contacts. We hold ongoing thought leadership programs to generate awareness and build brand recognition. These activities include a quarterly Innovation Index which ranks businesses in a different industry each quarter in terms of their level of innovation; an Innovation Update, which is a topical monthly opinion piece; bi-annual Innovation Leaders rankings; and book sponsorships. Financial Information about Financial Reporting Segments and Geographic Areas Information concerning revenue and segment income attributable to each of our financial reporting segments and geographic areas is set forth in Note 18 of our Notes to Consolidated Financial Statements under Item 8. “Financial Statements and Supplementary Data” and is incorporated herein by reference. Recent Developments The following developments that occurred during the year ended December 31, 2010 are considered to be significant to our business: • We raised gross proceeds of approximately $3.8 million before advisory fees and offering expenses in connection with a registered offering of our common stock; • We began development of our innovation software management platform, for which we have subsequently begun testing and marketing in 2011; • Our Chief Executive Officer, Douglas Schaedler, resigned from his position as CEO and member of the Board of Directors. The Board of Directors appointed Mr. Asa Lanum as Interim Chief Executive Officer; • We recorded impairment losses of $11.8 million related to goodwill, intangible assets and fixed assets; • We recognized $1.6 million in losses on investments; and • We significantly decreased our operating costs, which we expect will have an impact on 2011 operating results. Costs and Effects of Compliance with Environmental Laws and Regulations We are not in a business that involves the use of materials in a manufacturing stage where such materials are likely to result in the violation of any existing environmental rules and/or regulations. Therefore, we do not anticipate that there will be any substantial costs associated with complying with environmental laws and regulations. Scientific Advisory Council Our Scientific Advisory Council is comprised of more than 40 experts in a broad range of scientific, medical and engineering disciplines. Our Scientific Advisory Council assists our management in the evaluation of new technologies for our clients. Employees As of March 17, 2011, we had 39 full-time employees. We believe our relations with our employees are good. 6 Table of Contents Corporate Offices and Available Information Our executive offices are located at 2109 Palm Avenue, Tampa, Florida 33605 and our telephone number is (813) 754-4330. We also have offices in Illinois, Washington D.C., California and the United Kingdom. Our Internet address is www.innovaro.com . We make available free of charge through our website our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to those reports as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC. Information contained on our website is not incorporated by reference into this Annual Report on Form 10-K, and you should not consider information contained on our website to be part of this Annual Report on Form 10-K.