10-Q/A
1
d326615d10qa.htm
AMENDMENT TO FORM 10-Q
Amendment to Form 10-Q
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q/A
Amendment 1
(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, 2011
¨
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)
(Former name, former address and
former fiscal year, if changed since last report)
None
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90
days. Yes x No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule
405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such
files). Yes x 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 2, 2011, there were 15,021,274 shares outstanding of registrants common stock, $0.01 par value.
Table of Contents
EXPLANATORY NOTE
The Company is filing this Amendment No. 1 on Form 10-Q/A to our Quarterly Report on Form 10-Q for the three and six months ended June 30, 2011 due to the fact that the Company has determined that it
should not have recorded a derivative liability related to certain warrants issued by it during the third quarter of 2010. The derivative liability was first recorded in the Companys financial statements for the quarter ended September 30,
2010 and continued to be recorded through the third quarter of 2011. The Company has determined that this error is not material with respect to its financial statements for the quarter ended September 30, 2010 and the year ended December 31, 2010,
but has determined that the error is material with respect to the first three quarters of 2011. As a result, the Company is amending this Form 10-Q and its Form 10-Qs for the quarters ended March 31, 2011 and September 30, 2011
to reverse the recording of this derivative liability in the financial statements included therein. As required by Rule 12b-15 under the Securities Exchange Act of 1934, as amended, new certifications of our principal executive officer and principal
financial officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 and 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, are filed as exhibits to this Quarterly Report. Except as set forth in this
Amendment No. 1, the other Items in the Original Filing remain unchanged. This Amendment No. 1 continues to reflect circumstances as of the date of the initial filing and the Company has not updated the disclosures contained therein to
reflect events that occurred at a later date.
Table of Contents
INNOVARO, INC.
FORM 10-Q/A TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
ITEM 1.
Financial Statements
Consolidated Balance Sheets as of June 30, 2011 (unaudited) and December 31,
2010
3
Consolidated Statements of Operations for the three and six months ended June
30, 2011 and 2010 (unaudited)
4
Consolidated Statements of Cash Flows for the six months ended June
30, 2011 and 2010 (unaudited)
5
Notes to Consolidated Financial Statements (unaudited)
7
ITEM 2.
Managements Discussion and Analysis of Financial Condition and Results of Operations
16
ITEM 3.
Quantitative and Qualitative Disclosures about Market Risks
25
ITEM 4.
Controls and Procedures
25
PART II. OTHER INFORMATION
ITEM 1.
Legal Proceedings
25
ITEM 1A.
Risk Factors
25
ITEM 2.
Unregistered Sales of Equity Securities and Use of Proceeds
25
ITEM 3.
Defaults Upon Senior Securities
25
ITEM 4.
Reserved
25
ITEM 5.
Other Information
25
ITEM 6.
Exhibits
26
Signatures
27
Exhibits
Page 2 of 31
Table of Contents
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
INNOVARO, INC.
Consolidated Balance Sheets
June 30,
2011
(Unaudited)
December 31,
2010
(Restated)
ASSETS
Current assets:
Cash and cash equivalents
$
632,987
$
262,619
Accounts receivable, net
2,668,868
1,796,454
Contracts in process
187,613
214,734
Available-for-sale securities
122,598
171,139
Prepaid expenses and other assets
538,933
791,432
Total current assets
4,150,999
3,236,378
Cost method investments
95,589
95,589
Equity method investments
303,454
303,454
Note receivable and accrued interest
1,752,000
1,700,000
Fixed assets, net
6,625,869
6,736,567
Goodwill
6,449,722
6,407,640
Intangible assets, net
5,629,524
6,174,792
Total assets
$
25,007,157
$
24,654,420
LIABILITIES
Current liabilities:
Accounts payable
$
1,231,670
$
1,078,088
Accrued expenses
611,248
420,707
Accrued bonus
1,520,848
Deferred revenue
1,014,712
987,624
Current maturities of long-term debt
174,138
433,964
Total current liabilities
4,552,616
2,920,383
Long-term debt, less current maturities
5,311,320
5,358,173
Derivative liabilities
1,140,005
Deferred tax liability
1,201,948
1,220,687
Total liabilities
11,065,884
10,639,248
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; 15,187,963 and 14,631,950 shares issued; 15,021,274 and 14,585,261
shares outstanding at June 30, 2011 and December 31, 2010, respectively
150,213
145,853
Additional paid-in capital
86,579,309
85,024,704
Accumulated deficit
(73,467,158
)
(71,829,344
)
Accumulated other comprehensive income
150,689
147,922
Total Innovaro stockholders equity
13,413,053
13,489,135
Noncontrolling interest
528,220
526,037
Total equity
13,941,273
14,015,172
Total liabilities and equity
$
25,007,157
$
24,654,420
See accompanying notes
Page 3 of 31
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INNOVARO, INC.
Consolidated Statements of Operations
(Unaudited)
Three Months Ended June 30,
Six Months Ended June 30,
2011
2010
2011
2010
(Restated)
(Restated)
Revenue:
Strategic services
$
4,555,245
$
1,916,588
$
7,583,106
$
3,346,630
Technology services
670,237
884,187
1,245,105
1,724,576
5,225,482
2,800,775
8,828,211
5,071,206
Expenses:
Direct costs of revenue Strategic services
4,475,680
1,171,222
6,157,242
2,175,646
Direct costs of revenue Technology services
365,213
429,809
698,455
873,757
Salaries and wages
485,427
789,629
809,935
1,469,155
Professional fees
96,870
165,808
185,149
367,097
Research and development
330,087
351,495
633,664
550,654
Sales and marketing
52,883
191,581
114,118
437,877
General and administrative
523,624
582,422
1,028,310
1,177,672
Depreciation and amortization
339,097
395,913
680,185
796,408
6,668,881
4,077,879
10,307,058
7,848,266
Other (income) and expense:
Other (income) expense
(50,416
)
(154,315
)
(43,713
)
(156,389
)
Interest expense, net
81,623
142,084
223,210
277,238
31,207
(12,231
)
179,497
120,849
Loss before income taxes
(1,474,606
)
(1,264,873
)
(1,658,344
)
(2,897,909
)
Provision for income tax benefit
(8,129
)
(34,098
)
(16,127
)
(89,809
)
Net loss
(1,466,477
)
(1,230,775
)
(1,642,217
)
(2,808,100
)
Net loss attributable to the noncontrolling interest
(1,976
)
(1,434
)
(4,403
)
(2,361
)
Net loss attributable to Innovaro stockholders
$
(1,464,501
)
$
(1,229,341
)
$
(1,637,814
)
$
(2,805,739
)
Net loss attributable to Innovaro stockholders per share: Basic and diluted
$
(0.10
)
$
(0.10
)
$
(0.11
)
$
(0.24
)
Weighted average shares outstanding: Basic and diluted
14,963,859
11,872,196
14,993,148
11,834,875
See accompanying notes
Page 4 of 31
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INNOVARO, INC.
Consolidated Statements of Cash Flows
(Unaudited)
Six Months Ended June 30,
2011
2010
(Restated)
Operating Activities:
Net loss attributable to Innovaro stockholders
$
(1,637,814
)
$
(2,805,739
)
Adjustments to reconcile net loss attributable to Innovaro stockholders to net cash flows from operating
activities:
Net loss attributable to noncontrolling interest
(4,403
)
(2,361
)
Depreciation and amortization
680,185
796,408
Amortization of debt discount from investor warrants
65,526
91,735
Loss on sale and impairment of available-for-sale securities
201
34,801
Loss (gain) on derivative liabilities
150,825
(41,950
)
Stock-based compensation
268,135
299,373
Deferred income taxes
(16,127
)
(89,809
)
Loss (gain) on disposal of fixed assets
11,015
1,406
Bad debt expense
1,067
(33,501
)
Changes in operating assets and liabilities:
Accounts receivable and contracts in process
(846,360
)
(239,783
)
Prepaid expenses and other assets
211,644
(91,127
)
Deferred revenue
27,088
(164,209
)
Accounts payable and accrued expenses
1,871,556
465,980
Net cash flows from operating activities
782,538
(1,778,776
)
Investing Activities:
Capital expenditures
(22,758
)
(29,729
)
Proceeds from sale of available-for-sale securities
249,145
Net cash flows from investing activities
(22,758
)
219,416
Financing Activities:
Proceeds from borrowings on bank line of credit
200,000
Payments on long-term debt
(383,350
)
(193,775
)
Net cash flows from financing activities
(383,350
)
6,225
Effect of foreign exchange rates
(6,062
)
(6,487
)
Increase (decrease) in cash and cash equivalents
370,368
(1,559,622
)
Cash and cash equivalents at beginning of period
262,619
2,118,970
Cash and cash equivalents at end of period
$
632,987
$
559,348
See accompanying notes
Page 5 of 31
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INNOVARO, INC.
Consolidated Statements of Cash Flows (continued)
(Unaudited)
Six Months Ended June 30,
2011
2010
Supplemental Disclosures of Non-Cash Investing and Financing Activities
Unrealized gain (loss) from available-for-sale securities, net
$
(48,341
)
$
(294,653
)
Derivative liability extinguished in connection with exercise of investor warrants
$
1,290,830
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
$
298,303
$
327,960
See accompanying notes
Page 6 of 31
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INNOVARO, INC.
Notes to Consolidated Financial Statements
(Unaudited)
1. Basis of Presentation
Interim Financial Information
The financial information for Innovaro, Inc. (the Company, we, us or Innovaro) as of June 30, 2011 and 2010 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 (GAAP) for interim financial information and, therefore, do not include all
information and notes required by GAAP 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, 2010. Operating results for the six months ended June 30, 2011 are not necessarily indicative of the results that may be expected for the entire year.
Organization
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.
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 provided internationally from our offices in the United States and the United Kingdom.
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. 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). All
intercompany transactions and balances are eliminated in consolidation.
Reclassifications
Certain reclassifications have been made to the 2010 balances to conform to the 2011 financial statement presentation. In particular, reclassifications
were made to the revenue line items in the consolidated statements of operations for the three and six months ended June 30, 2010 to conform to the Companys new business segments. Reclassifications were also made to the expense line items
in the consolidated statements of operations for the three and six months ended June 30, 2010 to move the direct costs associated with these business lines into two separately captioned line items: direct costs of revenue strategic
services and direct costs of revenue technology services.
In addition, reclassifications were made to the equity section of the
December 31, 2010 consolidated balance sheet to conform to the June 30, 2011 presentation. Reclassifications were made to combine the total accumulated loss under investment company accounting of $(52,073,915) with the accumulated deficit
under operating company accounting of $(19,755,429) into one accumulated deficit line item with a balance of $(71,829,344) as of December 31, 2010.
Page 7 of 31
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2. Restatement of Consolidated Financial Statements
The financial statements as of and for the three and six months ended June 30, 2011 have been restated to correct the accounting
treatment previously recorded for certain warrants. The Company has determined that it should not have recorded a derivative liability related to certain warrants as well as unrealized gain and loss for the changes in the value of the warrants. Upon
further review of the warrant agreement, the Company determined that the exercise price associated with the warrants was not subject to adjustment, and accordingly, removal of the variable feature embedded in the warrant exercise price eliminated
the need to record a derivative liability.
The correction of the derivative liability and unrealized gain or loss included in other (income)
and expense as illustrated below, includes an out-of-period adjustment of approximately $518,000 related to the overstatement of the derivative liability and overstatement of other expense during 2010, which was not material to the 2010 consolidated
financial statements. In addition, the Company determined that the out-of-period adjustment related to 2010 was not material to the annual results for 2011.
The following schedule illustrates the effects on the consolidated financial statements of the reversal of the derivative liability resulting from the above restatement:
As Previously
Reported
Adjustments
to Restate
As Restated
Consolidated Balance Sheet As of June 30, 2011:
Derivative liabilities
$
1,273,471
(1,273,471
)
$
Total liabilities
12,339,355
(1,273,471
)
11,065,884
Accumulated deficit
(74,740,629
)
1,273,471
(73,467,158
)
Total Innovaro stockholders equity
12,139,582
1,273,471
13,413,053
Total equity
12,667,802
1,273,471
13,941,273
Consolidated Statement of Operations
For the Three Months Ended June 30, 2011:
Other (income) expense
(498,887
)
448,471
(50,416
)
Total other expenses - net
(417,264
)
448,471
31,207
Net loss before income taxes
(1,026,135
)
(448,471
)
(1,474,606
)
Net loss
(1,018,006
)
(448,471
)
(1,466,477
)
Net loss attributable to Innovaro stockholders
(1,016,030
)
(448,471
)
(1,464,501
)
Net loss attributable to Innovaro stockholders per share:
Basic and diluted
$
(0.07
)
$
(0.03
)
$
(0.10
)
Consolidated Statement of Operations
For the Six Months Ended June 30, 2011:
Other (income) expense
1,229,758
(1,273,471
)
(43,713
)
Total other expenses - net
1,452,968
(1,273,471
)
179,497
Net loss before income taxes
(2,931,815
)
1,273,471
(1,658,344
)
Net loss
(2,915,688
)
1,273,471
(1,642,217
)
Net loss attributable to Innovaro stockholders
(2,911,285
)
1,273,471
(1,637,814
)
Net loss attributable to Innovaro stockholders per share:
Basic and diluted
$
(0.19
)
(0.08
)
$
(0.11
)
3. Significant Accounting Policies
Accounts Receivable
The Company records an allowance for losses on trade receivables based on a review of the current status of existing receivables and managements
evaluation of periodic aging of accounts. The Company charges off accounts receivable against the allowance for losses when an account is deemed to be uncollectible. The Company determines the allowance based on historical bad debt experience,
current receivables aging, expected future write-offs, as well as an assessment of specific identifiable customer accounts considered at risk or uncollectible. It is not the Companys policy to accrue interest on past due receivables. The
expense associated with the allowance for doubtful accounts is recognized as a component of general and administrative expense in the consolidated statements of operations. The allowance for doubtful accounts and notes was approximately $27,000 and
$15,000 as of June 30, 2011 and December 31, 2010, respectively.
Cost Method Investments
Cost method investments were not evaluated for impairment as of June 30, 2011. The Company does not estimate the fair value of a cost method
investment if there are no identified events or changes in circumstances that may have a significant adverse effect on the fair value because it is not practicable to estimate fair value on a quarterly basis.
Research and Development
In accordance
with Accounting Standards Codification (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 through the second quarter of 2011 have been expensed in the accompanying statements of operations. As of June 29, 2011, Version 1.0 of the
Innovaro LaunchPad software (LaunchPad) reached technological feasibility with the introduction of a working model. As such, any further costs that the Company incurs related to the refinement of Version 1.0 will be capitalized as an
intangible asset in the consolidated balance sheet.
The Company has begun development of the next components of LaunchPad with Version 2.0.
Costs related to the development of this and other versions of the software will continue to be expensed in the accompanying statements of operations until they too reach technological feasibility.
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 potential dilutive effect of outstanding stock options, warrants and unvested shares of restricted stock.
Components of basic and diluted
per share data are as follows:
Three Months Ended June 30,
Six Months Ended June 30,
2011
2010
2011
2010
Weighted-average outstanding shares of common stock
14,963,859
11,872,196
14,993,148
11,834,875
Dilutive effect of stock options, warrants and unvested shares of restricted stock
Common stock and common stock equivalents
14,963,859
11,872,196
14,993,148
11,834,875
Shares excluded from calculation of diluted EPS (1)
2,947,398
1,603,900
2,947,398
1,603,900
(1)
These shares attributable to outstanding stock options, warrants and unvested restricted stock were excluded from the calculation of diluted EPS because their inclusion
would have been anti-dilutive, primarily as a result of the net loss during the periods presented.
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Financial Instruments and Concentrations of Credit Risk
The Companys financial instruments consist of investments, cash and cash equivalents, accounts receivable, accounts payable, accrued expenses,
long-term debt and derivative liabilities. The fair value of accounts receivable, accounts payable and certain accrued expenses approximate their carrying amounts in the financial statements due to the short-term nature of such instruments. The
estimated fair value of the Companys long-term debt as of June 30, 2011 and December 31, 2010 is not materially different from its carrying values at such dates. The fair value of available-for-sale securities and derivative
liabilities are determined as described in Note 6.
Financial instruments with significant credit risk include investments and cash and cash
equivalents. The Company maintains its cash and cash equivalents with high credit quality financial institutions in the United States and, at times, balances may exceed federally insured limits. The Company has not experienced any losses related to
these balances.
The Company had two major customers during each of the three and six months ended June 30, 2011, 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 49% and 38% of the Companys revenue during the three months ended June 30, 2011 and 2010, respectively. Major customers accounted for approximately 55% and 13% of the Companys revenue
during the six months ended June 30, 2011 and 2010, respectively. In addition, three customers accounted for approximately 59% of accounts receivable as of June 30, 2011.
Use of Estimates
The preparation of the Companys consolidated financial statements
in conformity with GAAP requires management to make estimates and assumptions that could affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the
reported amounts of revenue and expenses during the reporting period. The Companys most significant estimates relate to revenue recognition, the valuation and impairment of certain investments, stock-based compensation, the valuation and
impairment of goodwill and intangible assets, and the valuation of derivative liabilities. Actual results could differ from these estimates.
Recently Issued Accounting Pronouncements
In April 2011, the Financial Accounting Standards Board (FASB) issued Accounting Standard Update (ASU) 2011-02 A
Creditors Determination of Whether a Restructuring is a Troubled Debt Restructuring for the purpose of measuring the impairment of old receivables and evaluating whether a troubled debt restructuring has occurred. An entity should disclose
the total amount of receivables and the allowances for credit losses as of the end of the period of adoption related to those receivables that are considered newly impaired under ASC Section 310-10-35 for which impairment was previously
measured under ASC Subtopic 450-20, Contingencies Loss Contingencies . The ASU is effective for the Company with the reporting period beginning July 1, 2011. The adoption of this ASU is not expected to have an impact on the
Companys financial statements or disclosures.
In May 2011, the FASB issued ASU 2011-04 Amendments to Achieve Common Fair Value
Measurement and Disclosure Requirements in U.S. GAAP and IFRSs . The ASU expands ASC Topic 820s existing disclosure requirements for fair value measurements and makes other amendments that could change how the fair value measurement
guidance in ASC Topic 820 is applied. The ASU is effective for the Company with the reporting period beginning January 1, 2012. The adoption of this ASU is not expected to have a significant impact on the Companys financial statements or
disclosures.
In June 2011, the FASB issued ASU 2011-05 Presentation of Comprehensive Income , which revises the manner in which
entities present comprehensive income in their financial statements. The new guidance requires entities to report components of comprehensive income in either (1) a continuous statement of comprehensive income or (2) two separate but
consecutive statements. The ASU is effective for the Company with the reporting period beginning January 1, 2012. The adoption of this ASU will change the way the Company presents comprehensive income in its financial statements.
Page 9 of 31
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4. Accounts Receivable
Accounts receivable consist of the following as of June 30, 2011 and December 31, 2010:
June 30,
2011
December 31,
2010
Trade accounts receivable
$
2,560,199
$
1,408,047
Less: allowance for doubtful accounts
(27,260
)
(14,926
)
Unbilled client costs
135,929
403,333
Total accounts receivable
$
2,668,868
$
1,796,454
5. Contracts in Process
Contracts in process consist of the following as of June 30, 2011 and December 31, 2010:
June 30,
2011
December 31,
2010
Contract costs and estimated profits on contracts in process
$
6,090,882
$
3,712,143
Less: advances and progress payments
5,903,269
3,497,409
Total contracts in process
$
187,613
$
214,734
Components of contracts in process consist of the following as of June 30, 2011 and December 31, 2010:
June 30,
2011
December 31,
2010
Billings in excess of costs and estimated earnings on uncompleted contracts
$
426,775
$
634,541
Costs and estimated earnings in excess of billings on uncompleted contracts
(239,162
)
(419,807
)
Total contracts in process
$
187,613
$
214,734
6. Available-for-Sale Securities
The Company classifies its investments in freely tradable equity securities as available-for-sale in accordance with FASB 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, 2011 and December 31, 2010.
Unrealized (1)
Realized
Cost
Gain
Loss
Loss
Fair Value
As of June 30, 2011
$
42,100
$
80,699
$
$
(201
)
$
122,598
As of December 31, 2010
$
225,400
$
129,132
$
(93
)
$
(183,300
)
$
171,139
(1)
The net unrealized gain (loss) is included in equity as a component of accumulated other comprehensive income in the consolidated balance sheets.
As of June 30, 2011, none of our five available-for-sale securities were in an unrealized loss position. The Company had
no sales of available-for-sale securities during the three and six months ended June 30, 2011. 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. The Company recognized an impairment loss of $201 on available-for-sale securities during the six months ended June 30, 2011. Gross realized gain (loss) as a result of the sale of available-for-sale securities was
approximately $100,000 and $111,000 for the three and six months ended June 30, 2010, respectively. In addition, the Company recognized an impairment loss to available-for-sale securities of approximately $146,000 during the six months ended
June 30, 2010. The realized gain (loss) related to available-for-sale securities is included as a component of other (income) expense in the consolidated statements of operations.
Page 10 of 31
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7. Fair Value Measurements
The Company performs fair value measurements in accordance with the guidance provided by FASB 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 and liabilities measured at fair value on a recurring basis by level within the fair value hierarchy as of June 30, 2011 and December 31, 2010 are as follows:
Fair Value
Measurements
at
June 30, 2011 (1)
Fair Value Measurements at
December 31, 2010 (1)
Using
Level 2
Total
Using Level 2
Total
(Restated)
(Restated)
Assets:
Available-for-sale securities
$
122,598
$
122,598
$
171,139
$
171,139
Total assets
$
122,598
$
122,598
$
171,139
$
171,139
Liabilities:
Derivative liabilities
$
$
$
(1,140,005
)
$
(1,140,005
)
Total liabilities
$
$
$
(1,140,005
)
$
(1,140,005
)
(1)
The Company did not have any assets or liabilities measured at fair value using Level 1 or Level 3 of the fair value hierarchy as of June 30, 2011 or
December 31, 2010.
The Companys investments in available-for-sale securities are classified within Level 2 of the
fair value hierarchy. Our equity interests in companies for which there is no liquid public market are valued using quoted market prices for identical or similar instruments in markets that are not active. The determined values are generally
discounted to account for the illiquid nature of the investment and minority ownership positions. The value of our equity interests in public companies for which market quotations are readily available is based on quoted market prices for similar
instruments in an active market. These securities are generally thinly traded and/or carry discounts from the public market value for certain restrictions on resale. The Company utilizes the market approach in determining the fair value of these
securities.
The Companys derivative liabilities are classified within Level 2 of the fair value hierarchy. The Company utilizes the
Black-Scholes Option Pricing Model to value the derivative liabilities utilizing observable inputs such as the Companys common stock price, the exercise price of the warrants, and expected volatility, which is based on historical volatility.
The Company considered the use of a binomial model, but determined that the probability of the exercise price adjusting downward was remote. The Black-Scholes model employs the market approach in determining fair value.
Page 11 of 31
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8. Derivative Liabilities
In accordance with FASB ASC Topic 815 Derivatives and Hedging , the Company has recorded derivative liabilities for certain stock
warrants with variable exercise prices. Derivative liabilities are recorded at fair value at inception and then are adjusted to reflect fair value at the end of each reporting period, with any increase or decrease in the fair value being recorded as
a component of other (income) expense in the consolidated statements of operations. The Company recognized a gain (loss) related to the adjustment of these derivatives to fair value of approximately $79,000 and $(12,000) for the three months ended
June 30, 2011 and 2010, respectively, and $(151,000) and $42,000 for the six months ended June 30, 2011 and 2010, respectively.
The
Company uses the Black-Scholes option pricing model to estimate the fair value of the derivative instrument. The Company employed the following assumptions for the Black-Scholes model at December 31, 2010:
December 31,
2010
Expected dividend yield
0
%
Expected volatility
53-54
%
Risk-free interest rate
2.01
%
Expected life of options
3.8 - 5.0 years
Fair value
$
0.35 - $ 1.42
Warrant Exercise
Effective April 6, 2011, 437,500 of the Companys $0.01 fully vested common stock warrants were exercised. The derivative liability related to the warrants was adjusted to fair value of
approximately $1.3 million on the date of exercise. The derivative liability related to the warrants was effectively extinguished through the adjustment of the $1.3 million from derivative liabilities to additional paid-in capital at the above
exercise date.
9. Accumulated Other Comprehensive Income
Components comprising accumulated other comprehensive income as of and for the six months ended June 30, 2011 are as follows:
Unrealized gain
(loss) from
available-for-
sale securities
Foreign currency
translation
adjustment
Accumulated
other
comprehensive
income
Balances at December 31, 2010
$
129,040
$
18,882
$
147,922
Gain (loss) for the period
(48,341
)
51,108
2,767
Balances at June 30, 2011
$
80,699
$
69,990
$
150,689
10. Other (Income) Expense
Components comprising other (income) expense for the three and six months ended June 30, 2011 and 2010 are as follows:
Three Months Ended June 30,
Six Months Ended June 30,
2011
2010
2011
2010
(Restated)
(Restated)
Loss (gain) on sale and impairment of investments
$
$
(99,756
)
$
201
$
34,801
Loss (gain) on derivative liabilities
78,759
12,359
150,825
(41,950
)
Rental income
(66,983
)
(22,328
)
(137,669
)
(83,680
)
Other
(62,192
)
(44,590
)
(57,070
)
(65,560
)
Other (income) expense
$
(50,416
)
$
(154,315
)
$
(43,713
)
$
(156,389
)
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11. Comprehensive Income (Loss)
Comprehensive income (loss) for the six months ended June 30, 2011 and 2010 is as follows:
Six Months Ended June 30,
2011
2010
(Restated)
Net loss
$
(1,637,814
)
$
(2,805,739
)
Other comprehensive income (loss):
Unrealized gain (loss) from available-for-sale securities
(48,341
)
(294,653
)
Foreign currency translation adjustment
51,108
(380,053
)
Other comprehensive income (loss)
2,767
(674,706
)
Comprehensive loss
$
(1,635,047
)
$
(3,480,445
)
12. Segment Reporting
FASB 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.
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, 2011
$
1,708,184
$
16,996,931
$
18,705,115
Total assets June 30, 2011
1,774,871
23,232,286
25,007,157
Long-lived assets December 31, 2010
1,711,729
17,607,270
19,318,999
Total assets December 31, 2010
1,796,827
22,857,593
24,654,420
For the Three Months Ended June 30, 2011
(Restated)
United
Kingdom
United States
Total
Revenue
$
121,600
$
5,103,882
$
5,225,482
Loss before income taxes
8,638
(1,483,244
)
(1,474,606
)
Depreciation and amortization
29,231
309,866
339,097
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 Six Months Ended June 30, 2011
(Restated)
United
Kingdom
United States
Total
Revenue
$
253,609
$
8,574,602
$
8,828,211
Loss before income taxes
(42,718
)
(1,615,626
)
(1,658,344
)
Depreciation and amortization
58,103
622,082
680,185
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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
From time to time, the Company will reorganize its internal organizational structure to better align its service
offerings. In 2011, we reorganized into two new lines of business: Strategic Services and Technology Services. As a result, business segment information for the six months ended June 30, 2010 has been restated to reflect the new business
segments.
A summary of revenue and other financial information by reportable line of business segment is shown below:
For the Three Months Ended June 30, 2011
(Restated)
Strategic
Services
Technology
Services
Administrative
and Other
Total
Revenue
$
4,555,245
$
670,237
$
$
5,225,482
Income (loss) before income taxes
(73,359
)
225,331
(1,626,578
)
(1,474,606
)
For the Three Months Ended June 30, 2010
Strategic
Services
Technology
Services
Administrative
and Other
Total
Revenue
$
1,916,588
$
884,187
$
$
2,800,775
Income (loss) before income taxes
567,533
(47,061
)
(1,785,345
)
(1,264,873
)
For the Six Months Ended June 30,
2011
(Restated)
Strategic
Services
Technology
Services
Administrative
and Other
Total
Revenue
$
7,583,106
$
1,245,105
$
$
8,828,211
Income (loss) before income taxes
1,129,315
222,309
(3,009,968
)
(1,658,344
)
For the Six Months Ended June 30, 2010
Strategic
Services
Technology
Services
Administrative
and Other
Total
Revenue
$
3,346,630
$
1,724,576
$
$
5,071,206
Income (loss) before income taxes
862,528
(110,873
)
(3,649,564
)
(2,897,909
)
Page 14 of 31
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13. Management Changes
Appointment of Chief Executive Officer
Effective April 17, 2011, the Companys Board of Directors appointed Mr. Asa Lanum as the Companys permanent Chief Executive Officer and a member of the Board of Directors.
Mr. Lanum has served as the Interim Chief Executive Officer since August 2010. The Company agreed to pay Mr. Lanum an annual base salary of $325,000 and awarded him options to purchase 250,000 shares of the Companys common stock.
Departure of Managing Director
Effective April 22, 2011, Peter C. Skarzynski resigned from his position as Managing Director of the strategic services division. In accordance with the terms of his employment agreement,
Mr. Skarzynski remains bound by a covenant regarding the protection of our confidential information and a one-year covenant not to solicit our clients or employees. Mr. Skarzynski continues to act as a consultant to the Company.
On April 22, 2011, the Company appointed Mr. Gary Getz as Managing Director of the strategic services division. Mr. Getz has
held a management position at Innovaro since its acquisition of Strategos in 2008, and held a management position at Strategos since the companys founding.
14. Stock Compensation Plans
In June 2011, the Companys stockholders approved an amendment and restatement of the Companys three existing equity
compensation plans as one plan, the Innovaro, Inc. Equity Compensation Plan (the Equity Compensation Plan). The maximum number of shares available for issuance under the Equity Compensation Plan is 4,626,274, which is the total number of
shares available under the existing Non-Qualified Option Plan, Employee Option Plan and Restricted Stock Plan. The options and restricted stock previously granted under the three existing equity compensation plans are counted in determining the
shares that remain available for issuance under the Equity Compensation Plan. The Compensation Committee of the Companys Board of Directors determines those officers, employees, directors and consultants of the Company who are eligible to
participate in the Equity Compensation Plan.
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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/A. This Form 10-Q/A contains forward-looking statements regarding the plans and objectives of management for future operations. These forward-looking statements may involve known and unknown risks,
uncertainties and other factors which may cause our actual results, performance or achievements to be materially different from future results, performance or achievements expressed or implied by any forward-looking statements. Forward-looking
statements, which involve assumptions and describe our future plans, strategies and expectations, are generally identifiable by use of the words may, will, should, expect, anticipate,
estimate, believe, intend or project or the negative of these words or other variations on these words or comparable terminology. These forward-looking statements are based on assumptions that may be
incorrect, and we cannot assure you that the projections included in these forward-looking statements will come to pass. Our actual results could differ materially from those expressed or implied by the forward-looking statements as a result of
various factors.
Business Overview
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 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.
We have two business segments: Strategic Services and Technology 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; and
create 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 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.
Our technology services segment offers expansive networks, experts in scouting, partner sourcing and licensing expertise, and world leading online marketplaces. We also provide an important foundation to
successful licensingunderstanding the true potential value of our clients intellectual property IP and IP portfolio. We access that value and build a roadmap for our clients use, and uncover opportunities and options to
realize any latent value.
We have an online information service, purpose-built for those who need it mosttechnology transfer, business
development, intellectual property, competitive intelligence, and marketing professionals across the physical and life sciences.
We also
provide the insight and intelligence our clients require, applied to their markets today and into the future. From current market research to predictive intelligence, we help our clients find insights at the intersections affecting their business.
Our research identifies and explains key consumer trendsincluding emerging trends not covered by other sourcesand delivers insights about how these trends will shape the future operating environment.
These services include:
Futures scenario development and planning
Custom and syndicated research
Online information services
IP consulting
IP and market landscape analysis
Technology search
Page 16 of 31
Table of Contents
In- and out-licensing
Online marketplaces
Partner search and profiling
Innovaro LaunchPad
We are continuing the development of our innovation management software
platform, Innovaro LaunchPad (LaunchPad), which is designed to enhance and complement our innovation service offerings to clients. We have completed an external review by users of Version 1.0 of LaunchPad, which continues to evolve based
on their feedback, and have introduced this version to the market. We are continuing the development of the next components of LaunchPad, which are designed to take the outputs from the current product and extend them further into the
organizations product delivery process.
Recent Developments
On April 18, 2011, our Board of the Directors increased its size from four to five directors and, upon the recommendation of the Nominating and Corporate Governance Committee, elected
Asa Lanum as a new director. In addition, our Board of Directors appointed Mr. Lanum, who has served as our interim Chief Executive Officer since August 2010, as our permanent Chief Executive Officer. In connection with such appointment,
we agreed to pay Mr. Lanum an annual base salary of $325,000 and awarded him options to purchase 250,000 shares of the Companys common stock.
Effective April 22, 2011, Peter C. Skarzynski resigned from his position as Managing Director of the strategic services division. In accordance with the terms of his employment agreement,
Mr. Skarzynski remains bound by a covenant regarding the protection of our confidential information and a one-year covenant not to solicit our clients or employees. Mr. Skarzynski continues to act as a consultant for us.
On April 22, 2011, we appointed Mr. Gary Getz as Managing Director of the strategic services division. Mr. Getz has held a management
position at Innovaro since its acquisition of Strategos in 2008, and held a management position at Strategos since the companys founding.
In June 2011, our stockholders approved an amendment and restatement of our three existing equity compensation plans as one plan, the Innovaro, Inc.
Equity Compensation Plan (the Equity Compensation Plan). The maximum number of shares available for issuance under the Equity Compensation Plan is 4,626,274, which is the total number of shares available under the existing Non-Qualified
Option Plan, Employee Option Plan and Restricted Stock Plan. The options and restricted stock previously granted under the three existing equity compensation plans are counted in determining the shares that remain available for issuance under the
Equity Compensation Plan. The Compensation Committee of the Companys Board of Directors determines those officers, employees, directors and consultants who are eligible to participate in the Equity Compensation Plan. The amendment and
restatement of the three existing plans as the Equity Compensation Plan did not increase the number of shares of common stock authorized for issuance as stock-based incentive compensation, but gives the Compensation Committee greater flexibility to
make grants of non-qualified options, incentive stock options or restricted stock as it deems appropriate, since one maximum limit will apply to all three types of stock-based incentive compensation.
Financial Condition
Our total assets
were $25.0 million as of June 30, 2011 and $24.7 million as of December 31, 2010. As of June 30, 2011, we had $633,000 in cash and cash equivalents, $2.9 million in accounts receivable and contracts in process, $3.4 million in
accounts payable, accrued expenses and accrued bonus and $5.5 million in total debt outstanding. As of December 31, 2010, we had $263,000 in cash and cash equivalents, $2.0 million in accounts receivable and contracts in process, $1.5 million
in accounts payable and accrued expenses and $5.8 million in total debt outstanding. As of June 30, 2011, we had a working capital deficit of $402,000 and an accumulated deficit of $73.5 million.
Page 17 of 31
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Results of Operations
Revenue
Three Months
Ended
June 30,
Percentage
Change
Six Months
Ended
June 30,
Percentage
Change
(in thousands, except percentages)
2011
2010
2011
2010
Strategic services
$
4,555
$
1,917
138
%
$
7,583
$
3,347
127
%
Technology services
670
884
(24
)%
1,245
1,724
(28
)%
Total revenue
$
5,225
$
2,801
87
%
$
8,828
$
5,071
74
%
Strategic Services
Our strategic services revenue is derived from consulting services we provide to our clients. Our strategic services revenue increased by $2.6 million for the three months ended June 30, 2011 in
comparison to the three months ended June 30, 2010. In addition, our strategic services revenue increased by $4.2 million for the six months ended June 30, 2011 in comparison to the six months ended June 30, 2010. These increases are
the result of this division having a significant number of new contracts with a higher average value during the three and six months ended June 30, 2011 than we had during the three and six months ended June 30, 2010. We attribute the
increased contract level in 2011 to a renewed interest in innovation efficiency and new product development in the U.S. and abroad. In addition, certain of the contracts have required the work of a specialist consultant who bills out at a
significantly higher rate than that of the other consultants, which contributed to an increase in revenue of approximately $450,000 for both the three and six months ended June 30, 2011. An increase in reimbursable expenses related to overseas
travel and lodging contributed to an increase in revenue of approximately $600,000 for both the three and six months ended June 30, 2011.
Our strategic services revenue in recent years has largely been dependent on the efforts of certain key consulting professionals whose employment
contracts with us expired in April 2011. We were able to retain the majority of these consulting professionals under new employment contracts or consulting contracts in order to maintain the level of strategic services revenue we have generated in
recent years.
We expect that our strategic services revenue will continue to increase over 2010 levels for the remainder of 2011, although we
do not expect the increase to be at the level experienced for the second quarter of 2011.
Technology Services
Our technology services revenue is derived from a combination of global technology partnering search retainer fees, online subscription fees, online
information services revenue, foresight and trend research revenue and IP consulting revenue. Our technology services revenue decreased by $214,000 for the three months ended June 30, 2011 in comparison to the three months ended June 30,
2010. The decreased revenue is primarily a result of a reduction of $10,000 in monthly fees for our global technology partnering services, a reduction of $93,000 in online marketplace fees and a reduction of $142,000 in intellectual property
analytics research revenue, partially offset by an increase in our online report store sales.
Our technology services revenue decreased by
$479,000 for the six months ended June 30, 2011 in comparison to the six months ended June 30, 2010. The decreased revenue is primarily a result of a reduction of $50,000 in monthly fees for our global technology partnering services, a
reduction of $269,000 in online marketplace fees and a reduction of $154,000 in foresight and trend research revenue. The decreased revenue throughout this division for the three and six months ended June 30, 2011 in comparison to the same
periods of 2010 results from a reduction in the number of personnel selling and fulfilling projects, which has had a direct impact on new sales for this business. Consequently, we have not been able to replace prior year contracts with new contracts
as they come up for renewal.
We expect that our technology services revenue will remain consistent with the six months ended June 30,
2011 for the remainder of 2011.
Page 18 of 31
Table of Contents
Direct Costs of Revenue
(in thousands, except percentages)
Three
Months
Ended
June 30,
2011
Gross
Margin
Three
Months
Ended
June 30,
2010
Gross
Margin
Six
Months
Ended
June 30,
2011
Gross
Margin
Six
Months
Ended
June 30,
2010
Gross
Margin
Direct costs of revenue - strategic services
$
4,476
2
%
$
1,171
39
%
$
6,157
19
%
$
2,176
35
%
Direct costs of revenue - technology services
365
46
%
430
51
%
698
44
%
874
49
%
Total direct costs of revenue
$
4,841
$
1,601
$
6,855
$
3,050
Direct Costs of Revenue - Strategic Services
Direct costs of revenue for strategic services are comprised of salaries and related taxes, bonuses, certain outside services and other business development costs related to our strategic services
business. The most significant portion of direct costs of revenue for strategic services is comprised of consulting personnel compensation, which includes bonuses. Direct costs of strategic services revenue included a $1.5 million bonus accrual as a
result of the high level of revenue for the three and six months ended June 30, 2011. In comparison, there was no bonus accrual for the three and six months ended June 30, 2010.
In connection with the expiration of certain of the strategic services managers contracts in the second quarter of 2011, we have retained certain of these former managers as consultants. The pay
rate these consultants receive is higher than the pay rate of most other consultants we use due to their experience and relationship with the customers. In addition, certain of the contracts have required the work of a specialist consultant whose
cost is much higher than that of the other consultants. We also needed to hire more consultants during the second quarter of 2011 as a result of the high number of contracts in process.
Direct costs of revenue for strategic services increased by $3.3 million for the three months ended June 30, 2011 in comparison to the three months ended June 30, 2010. The increase is primarily
related to a $1.5 million increase in the bonus accrual, a $1.1 million increase in outside consultant expenditures and a $600,000 increase in overseas travel and lodging during the three months ended June 30, 2011.
The gross margin for the strategic services business decreased to 2% for the three months ended June 30, 2011 in comparison to 39% for the three
months ended June 30, 2010. The decrease in the gross margin down to 2% in the three months ended June 30, 2011 is a direct result of the bonus accrual. The first quarter that a bonus is recorded in any given year results in a skewed gross
margin because the cost is recorded in one quarter for a bonus that relates to year-to-date revenue.
Direct costs of revenue for strategic
services increased by $4.0 million for the six months ended June 30, 2011 in comparison to the six months ended June 30, 2010. The increase is primarily related to a $1.5 million increase in the bonus accrual, a $1.7 million increase in
outside consultant expenditures and a $600,000 increase in overseas travel and lodging during the six months ended June 30, 2011.
The
gross margin for the strategic services business decreased to 19% for the six months ended June 30, 2011 in comparison to 35% for the six months ended June 30, 2010. The decrease is primarily related to the bonus accrual and utilization of
contractors at higher than normal rates.
We expect that our direct costs of revenue for strategic services will decrease from the six months
ended June 30, 2011 for the remainder of 2011.
Direct Costs of Revenue - Technology Services
Direct costs of revenue for technology services are comprised of certain salaries and related taxes, commissions, certain outside services and other
direct costs related to technology services. Direct costs of technology services revenue decreased by $65,000 for the three months ended June 30, 2011 in comparison to the three months ended June 30, 2010. In addition, direct costs of
revenue for technology services decreased by $176,000 for the six months ended June 30, 2011 in comparison to the six months ended June 30, 2010. The majority of the decrease relates to a reduction in sales and project management
personnel, as well as the reduced utilization of outside contractors related to the reduced amount of revenue.
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The gross margin for the technology services business decreased to 46% for the three months ended
June 30, 2011 in comparison to 51% for the three months ended June 30, 2010. In addition, the gross margin for the technology services business decreased to 44% for the six months ended June 30, 2011 in comparison to 49% for the six
months ended June 30, 2010. The decrease is related to the aforementioned reduction in sales personnel having had a negative impact on new sales for this business.
We expect that our direct costs of revenue for technology services will remain consistent with the six months ended June 30, 2011 for the remainder of 2011.
Salaries and Wages
Three Months
Ended
June 30,
Percentage
Change
Six Months
Ended
June 30,
Percentage
Change
(In thousands, except percentages)
2011
2010
2011
2010
Salaries and wages
$
485
$
790
(39
)%
$
810
$
1,469
(45
)%
As a percent of revenue
9
%
28
%
(19
)ppt
9
%
29
%
(20
)ppt
*
The abbreviation ppt denotes percentage points.
Salaries and wages include non-sales employee and officer salaries and related benefits, including bonuses and stock-based compensation that are not otherwise allocated to direct costs of
revenue. Salaries and wages decreased by $305,000 for the three months ended June 30, 2011 in comparison to the three months ended June 30, 2010. The decrease relates to a $55,000 reduction in officers salaries as a result of a
CEO change and a $282,000 reduction in administrative staff, partially offset by a $34,000 increase in stock compensation expense as a result of certain options issued to our new CEO during the three months ended June 30, 2011.
Salaries and wages decreased by $659,000 for the six months ended June 30, 2011 in comparison to the six months ended June 30, 2010. The
decrease relates to a $133,000 reduction in officers salaries as a result of a CEO change, a $495,000 reduction in administrative staff, and a $31,000 reduction in stock compensation expense as a result of a change in estimate made in
conjunction with the valuation of our stock option issuances.
We expect that our salaries and wages will increase over the six months ended
June 30, 2011 for the remainder of 2011 as a result of the permanent hire of our interim CEO in April 2011.
Professional Fees
Three Months
Ended
June 30,
Percentage
Change
Six Months
Ended
June 30,
Percentage
Change
(In thousands, except percentages)
2011
2010
2011
2010
Professional fees
$
97
$
166
(42
)%
$
185
$
367
(50
)%
As a percent of revenue
2
%
6
%
(4
)ppt
2
%
7
%
(5
)ppt
Professional fees include accounting fees, legal fees and valuation expenses for our investments. Professional fees
decreased by $69,000 for the three months ended June 30, 2011 in comparison to the three months ended June 30, 2010. The majority of this decrease is related to a reduction in accounting fees as a result of our having become a smaller
reporting company (a designation under the federal securities laws that impacts the level of our disclosure requirement thereunder) during 2010. As a smaller reporting company, we are subject to a more streamlined reporting regime than the reporting
regime for larger companies, including the elimination of the requirement to have our auditors audit our internal control over financial reporting.
Professional fees decreased by $182,000 for the six months ended June 30, 2011 in comparison to the six months ended June 30, 2010. Valuation expenses were reduced by $34,000 because our
investments no longer require outside valuations on a quarterly basis. Accounting fees were reduced by $79,000 as a result of our having become a smaller reporting company during 2010. Legal fees were reduced by $69,000 because of costs incurred
during the six months ended June 30, 2010 related to the preparation of our restricted stock plan and the settlement of a severance liability related to our former CEO that were not repeated during the six months ended June 30, 2011.
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We expect that our professional fees will remain consistent with the six months ended June 30, 2011 for
the remainder of 2011.
Research and Development
Three Months
Ended
June 30,
Percentage
Change
Six Months
Ended
June 30,
Percentage
Change
(In thousands, except percentages)
2011
2010
2011
2010
Research and development
$
330
$
351
(6
)%
$
634
$
551
15
%
As a percent of revenue
6
%
13
%
(7
)ppt
7
%
11
%
(4
)ppt
Research and development costs include salaries, outside services, travel and other costs related to the development of
our innovation management software platform, which is designed to enhance and complement our innovation services offerings to clients. Research and development costs decreased by $21,000 for the three months ended June 30, 2011 in comparison to
the three months ended June 30, 2010. The decrease is related to a $66,000 decrease in salaries and related costs and a $16,000 reduction in travel, partially offset by a $53,000 increase in outside service providers and an $8,000 increase in
marketing costs.
Research and development costs increased by $83,000 for the six months ended June 30, 2011 in comparison to the six
months ended June 30, 2010. The increase is related to a $140,000 increase in outside service providers and a $9,000 increase in marketing costs, partially offset by a $34,000 decrease in salaries and related costs and a $29,000 reduction in
travel.
In accordance with accounting guidance, we expense all costs incurred to establish the technological feasibility of our software
platform as research and development expenses. With the established working model of LaunchPad Version 1.0, all costs related to the refinement of this product will be capitalized. We have begun development of the next components of LaunchPad with
Version 2.0 and the costs related to the development of this product will be expensed as research and development. We expect to incur an additional $300,000 on product development of Version 2.0 and refinement of Version 1.0 of LaunchPad during the
third quarter of 2011. Since a portion of these costs will be capitalized, we expect that research and development expense will decrease from current levels for the remainder of 2011.
Sales and Marketing
Three Months
Ended
June 30,
Percentage
Change
Six Months
Ended
June 30,
Percentage
Change
(In thousands, except percentages)
2011
2010
2011
2010
Sales and marketing
$
53
$
192
(72
)%
$
114
$
438
(74
)%
As a percent of revenue
1
%
7
%
(6
)ppt
1
%
9
%
(8
)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 decreased by $139,000 for the three months ended June 30, 2011 in comparison to the three months ended June 30, 2010. The decrease relates primarily to certain
marketing costs incurred in the second quarter of 2010, including $43,000 in rebranding costs and $75,000 for partnering with external search partners, which were not repeated in the second quarter of 2011. We also participated in and sponsored
conferences totaling $6,000 during the second quarter of 2010 that we did not participate in or sponsor during the second quarter of 2011.
Sales and marketing expenses decreased by $324,000 for the six months ended June 30, 2011 in comparison to the six months ended June 30, 2010.
The decrease relates primarily to certain marketing costs incurred during the six months ended June 30, 2010, including $89,000 in rebranding costs and $150,000 for partnering with external search partners, which were not repeated during the
six months ended June 30, 2011. We also participated in and sponsored conferences totaling $61,000 during the six months ended June 30, 2010 that we did not participate in or sponsor during the six months ended June 30, 2011.
We expect that our sales and marketing costs will remain consistent with the six months ended June 30, 2011 for the remainder of 2011.
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Table of Contents
General and Administrative
Three Months
Ended
June 30,
Percentage
Change
Six Months
Ended
June 30,
Percentage
Change
(In thousands, except percentages)
2011
2010
2011
2010
General and administrative
$
524
$
582
(10
)%
$
1,028
$
1,178
(13
)%
As a percent of revenue
10
%
21
%
(11
)ppt
12
%
23
%
(11
)ppt
General and administrative expenses decreased by $58,000 for the three months ended June 30, 2011 in comparison to
the three months ended June 30, 2010. The decrease relates to a $52,000 reduction in insurance and other employee related costs due to having fewer employees; a $34,000 reduction in printing costs related to the proxy and annual report; as well
as a continued overall company plan to reduce all aspects of overhead; partially offset by a $14,000 increase in investment banking costs.
General and administrative expenses decreased by $150,000 for the six months ended June 30, 2011 in comparison to the six months ended June 30,
2010. The decrease relates to a $131,000 reduction in insurance and other employee related costs due to having fewer employees; a $35,000 reduction in printing costs related to the proxy and annual report; as well as a continued overall company plan
to reduce all aspects of overhead; partially offset by a $23,000 increase related to moving and relocation expenses.
We expect that our
general and administrative costs will remain consistent with the six months ended June 30, 2011 for the remainder of 2011.
Depreciation and Amortization
Three Months
Ended
June 30,
Percentage
Change
Six Months
Ended
June 30,
Percentage
Change
(In thousands, except percentages)
2011
2010
2011
2010
Depreciation and amortization
$
339
$
396
(14
)%
$
680
$
796
(15
)%
As a percent of revenue
6
%
14
%
(8
)ppt
8
%
16
%
(8
)ppt
Depreciation and amortization decreased by $57,000 for the three months ended June 30, 2011 in comparison to the
three months ended June 30, 2010. Amortization expense decreased by $45,000 as a result of impairment charges related to our intangible assets that were incurred in 2010. Depreciation expense decreased by $12,000 as a result of impairment
charges related to our fixed assets that were incurred in 2010.
Depreciation and amortization decreased by $116,000 for the six months ended
June 30, 2011 in comparison to the six months ended June 30, 2010. Amortization expense decreased by $95,000 as a result of impairment charges related to our intangible assets that were incurred in 2010. Depreciation expense decreased by
$21,000 as a result of impairment charges related to our fixed assets that were incurred in 2010.
We expect that our depreciation and
amortization will remain consistent with the six months ended June 30, 2011 for the remainder of 2011.
Other (Income) Expense
Three Months
Ended
June 30,
Percentage
Change
Six Months
Ended
June 30,
Percentage
Change
(In thousands, except percentages)
2011
2010
2011
2010
(Restated)
(Restated)
Other (income) expense
$
(50
)
$
(154
)
(68
)%
$
(44
)
$
(156
)
(72
)%
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Table of Contents
Other (income) expense includes rental income, gains and losses related to adjusting our derivative
liabilities to fair value each reporting period, capital gains and losses and other miscellaneous income (losses). Other (income) expense decrease by $104,000 for the three months ended June 30, 2011 in comparison to the three months ended
June 30, 2010. The decrease is attributable to a $100,000 decrease in net capital gain and a $66,000 increase in net loss, partially offset by $45,000 increase in rental income and an $18,000 increase in miscellaneous income.
Other (income) expense decreased by $113,000 for the six months ended June 30, 2011 in comparison to the six months ended June 30, 2010. This
decrease is attributable to a $193,000 decrease in net gain/loss on adjustment of our derivative liabilities, partially offset by a $54,000 increase in rental income and a $35,000 increase in net capital gain/loss.
Interest Expense, Net
Three Months
Ended
June 30,
Percentage
Change
Six Months
Ended
June 30,
Percentage
Change
(In thousands, except percentages)
2011
2010
2011
2010
Interest expense, net
$
82
$
142
(43
)%
$
223
$
277
(19
)%
Interest expense, net decreased by $60,000 for the three months ended June 30, 2011 in comparison to the three
months ended June 30, 2010. The decrease is attributable to lower interest expense on long-term debt of $23,000, lower amortization of our debt discount of $13,000, and higher interest income on our note receivable of $24,000.
Interest expense, net decreased by $54,000 for the six months ended June 30, 2011 in comparison to the six months ended June 30, 2010. The
decrease is attributable to lower interest expense on long-term debt of $33,000 and lower amortization of our debt discount of $26,000, partially offset by lower interest income on our note receivable of $5,000.
Liquidity and Capital Resources
Cash Flows
Cash flows from
operating activities of $783,000 for the six months ended June 30, 2011 increased $2,562,000 from $(1,779,000) for the six months ended June 30, 2010. Total cash flows from operations of $783,000 in the current period are primarily
attributable to:
$151,000 loss on derivative liabilities;
$746,000 in non-cash depreciation and amortization;
$268,000 in non-cash stock-based compensation expense related to vesting options;
$212,000 decrease in prepaid expenses and other assets; and
$1.9 million increase in accounts payable and accrued expenses.
Partially offset by:
$1.6 million net loss; and
$846,000 increase in accounts receivable and contracts in process.
Cash flows from investing activities of $(23,000) for the six months ended June 30, 2011 decreased $242,000 from $219,000 for the six months ended June 30, 2010. There were no significant
investing transactions during the current period.
Cash flows from financing activities of $(383,000) for the six months ended June 30,
2011 decreased $389,000 from $6,000 for the six months ended June 30, 2010. Total cash flows from financing of $(383,000) are related to principal payments on long-term debt.
Research and Development Expenditures
As of June 29, 2011, Version 1.0 of the
Innovaro LaunchPad software (LaunchPad) reached technological feasibility with the introduction of a working model. In addition, we have begun development of the next components of LaunchPad with Version 2.0. As of June 30, 2011, we
have invested $1.8 million in this software platform. We expect to incur approximately $300,000 in additional expenditures for product development of Version 2.0 and refinement of Version 1.0 during the third quarter of 2011.
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Table of Contents
Accounts Receivable Balances
Our accounts receivable balance as of June 30, 2011 was significantly higher than our historical accounts receivable balance. The increase in our accounts receivable balance during the second quarter of
2011 is a result of a significant increase in revenue. Revenue increased because we had a significant number of new contracts in the second quarter of 2011. Revenue for the three and six months ended June 30, 2011 increased 87% and 74%,
respectively, over revenue for the three and six months ended June 30, 2010. It is not unusual for our accounts receivable to sustain an elevated balance during periods of increased revenues.
Of the outstanding receivables balance of $2.7 million at June 30, 2011, only 24%, or $632,000, was past due, but only by 1 to 30 days. As of the date of this filing, we have collected all but
$577,000 of the total accounts receivable balance outstanding at June 30, 2011.
Liquidity
Our primary cash requirements include working capital, research and development expenditures, principal and interest payments on indebtedness, and
employee bonuses. Our primary sources of funds are cash received from customers in connection with operations and, to a lesser extent, proceeds from the sale from time to time of our investments. As of June 30, 2011, we had $633,000 in cash and
cash equivalents, $2.9 million in accounts receivable and contracts in process, $521,000 in investments, and a working capital deficit of $402,000.
We currently intend to fund our liquidity needs, including our research and development expenditures, with existing cash and cash equivalent balances, cash generated from operations, collections of our
existing receivables and the potential sales of our investments. We expect that our recent reductions in costs, coupled with our expected revenue, will be sufficient to fund our scheduled debt service payments of $174,000 and operations for the next
twelve months. Should we face a more restricted cash flow scenario than projected during the next twelve months, we have the capability to delay all cash intensive activities, including our research and development expenditures, and will look to
reduce costs further. However, if such measures prove inadequate, we could face liquidity problems and might be required to reduce or delay planned capital expenditures and other initiatives, sell assets, restructure or refinance our debt or seek
additional equity capital, and we may be unable to take any of these actions on satisfactory terms or in a timely manner. Further, any of these actions may not be sufficient to allow us to service our debt obligations or may have an adverse impact
on our business. Our failure to generate sufficient cash from our operations could have a material adverse effect on us.
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, 2010.
Recently Issued Accounting Pronouncements
In April 2011, the FASB issued new guidance for
the purpose of measuring the impairment of old receivables and evaluating whether a troubled debt restructuring has occurred. An entity should disclose the total amount of receivables and the allowances for credit losses as of the end of the period
of adoption related to those receivables that are considered newly impaired under the new guidance for which impairment was previously measured under previously authoritative guidance. The guidance is effective for us for with the reporting period
beginning in July 1, 2011. The adoption of this guidance is not expected to have an impact on our operations.
In May 2011, the FASB
issued new guidance that expands existing disclosure requirements for fair value measurements and makes other amendments that could change how the fair value measurement guidance is applied. The guidance is effective for us with the reporting period
beginning in January 1, 2012. The adoption of this guidance is not expected to have an impact on our operations.
In June 2011, the FASB
issued new guidance that revises the manner in which entities present comprehensive income in their financial statements. The new guidance requires entities to report components of comprehensive income in either (1) a continuous statement of
comprehensive income or (2) two separate but consecutive statements. The guidance is effective for us with the reporting period beginning in January 1, 2012. The adoption of this guidance will change the way we present comprehensive income
in our financial statements.
Page 24 of 31
Table of Contents
ITEM 3. Quantitative and Qualitative Disclosures about Market Risks
Not applicable.
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/A, our chief executive officer and chief financial officer conducted an
evaluation of the effectiveness of the design and operation of the Companys disclosure controls and procedures, (as is defined in Rules 13a-15(e) under the Securities Exchange Act of 1934). Based on their evaluation, our chief executive
officer and 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, 2011, we were not a party to any material
pending legal proceedings.
ITEM 1A. Risk Factors
There have been no material changes to the risk factors previously disclosed in the Companys Annual Report on Form 10-K for the year ended
December 31, 2010.
ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds
None.
ITEM 3. Defaults upon Senior Securities
None.
ITEM 4. Reserved
ITEM 5. Other Information
None.
Page 25 of 31
Table of Contents
ITEM 6. Exhibits
Exhibit Index
10.1
Innovaro Equity Compensation Plan. (Incorporated by reference to the Companys Proxy Statement filed on April 20, 2011.)
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 U.S.C. Section 1350.
32.2*
Certification of the Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350.
101.INS**
XBRL Instance Document
101.SCH**
XBRL Taxonomy Extension Schema
101.CAL**
XBRL Taxonomy Extension Calculation Linkbase
101.LAB**
XBRL Taxonomy Extension Label Linkbase
101.PRE**
XBRL Taxonomy Extension Presentation Linkbase
*
Filed herewith.
**
Pursuant to Rule 406T of Regulation S-T, these interactive data files are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11
or 12 of the Securities Act of 1933 or Section 18 of the Securities Exchange Act of 1934 and otherwise are not subject to liability.
Page 26 of 31
Table of Contents
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: April 11, 2012
/s/ Asa Lanum
Asa Lanum
Chief Executive Officer
Date: April 11, 2012
/s/ Carole R. Wright
Carole R. Wright, CPA
Chief Financial Officer
Page 27 of 31
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.