Item 5. Market for Registrant’s Common Equity
Item 5. Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of
Equity Securities
Through March 15, 2010, our shares of common stock traded on the NYSE Amex under the symbol
UTK. As of March 16, 2010, we began doing business as Innovaro and changed our ticker symbol on the NYSE Amex to INV. Computershare Trust Company, Inc., 350 Indiana Street, Suite 800, Golden, CO 80401; 303-262-0600,
serves as transfer agent for our common stock. We had approximately 3,000 stockholders of record at March 1, 2012.
Price Range of
Common Stock and Dividends
The following table reflects the high and low closing prices for our common stock as reported on the NYSE Amex
and the cash dividends declared per common share for the periods indicated:
High
Low
Dividends
Fiscal year 2011
First quarter
$
3.16
$
1.15
Second quarter
$
3.01
$
1.67
Third quarter
$
2.18
$
1.28
Fourth quarter
$
1.61
$
0.80
Fiscal year 2010
First quarter
$
5.11
$
4.10
Second quarter
$
4.06
$
3.10
Third quarter
$
3.53
$
0.86
Fourth quarter
$
1.43
$
0.70
Our Board of Directors has sole discretion in determining whether to declare and pay cash dividends in the future. The
declaration of cash dividends will depend on our profitability, financial condition, cash requirements, future prospects and other factors deemed relevant by our Board of Directors. Our ability to pay cash dividends in the future could be limited or
prohibited by the terms of financing agreements that we may enter into or by the terms of any preferred stock that we have or may authorize and issue.
Item 6. Selected Financial Data
Not
applicable.
Item 7. Managements Discussion and Analysis of Financial Condition and Results
of Operations
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 to clients located in countries throughout the world.
Innovation Engine Innovaro Solutions
Innovaro offers a comprehensive set of services and software to assure the success of any innovation project, regardless of the size or intent. All
services and software leverage our Leading Edge Innovation Practices as a proven methodology for innovation success.
We currently have two
reportable business segments: Strategic Services and Intelligence and Insights Services.
Strategic Services
Our Strategic Services segment leverages our Leading Edge Innovation Practices, or LEIPs methodology to enhance creativity, expand business thinking and
accelerate time-to-profitability for new products, new business models and market expansion. We combine the business acumen of seasoned executives, the learning focus of a leadership development expert and the creativity of an innovation specialist
to get our clients on the path to sustainable and profitable growth.
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We work closely with our clients to identify, develop and act on profitable growth opportunities and
game-changing business strategies. We help our clients to systematically manage their innovation process, optimizing results while reducing the risks associated with new products, services and business ventures.
Intelligence and Insights Services
Innovaro delivers the information clients need to accelerate innovation, including real-time market and buyer trends, IP landscapes, industry reports and
trends, automated intelligence updates and custom research initiatives.
Our focus is to deliver highly relevant, out-of-the-box intelligence
and insights to clients that stimulate the entire innovation process. We help our clients expand their perspectives to fuel new ideas, enhance business concepts with new insights and accelerate innovation time-to-market as a result of shared
knowledge, IP and partnerships.
Intelligence and Insights Services are designed to stimulate new thinking and approaches. As a result of
providing continuous updates and analysis to our clients, they are able to identify and act on real world trends and behaviors that portend next generation opportunities for business growth. Intelligence and Insights are delivered in a variety of
formats to meet each client need.
Innovaro LaunchPad Software
In addition to our two business segments, we are currently developing our innovation management software platform. We are uniquely positioned through the LaunchPad software offering to service our
clients requirements to develop new and innovative products and services for their prospects and customers. With the use of advanced technology in conjunction with a proven innovation methodology we are able to offer a truly unique, next
generation innovation software to our clients. LaunchPad is the only fully integrated innovation environment available, and it rapidly accelerates the innovation process.
Strategies to Drive Our Growth into the Future
We remain focused on growing our
business with the objectives of improving our financial results and generating returns for our shareholders. We continue to focus on our goal of delivering strong financial performance in both the near term and the long term. We have identified the
following four key strategic business imperatives that we believe will enable us to drive growth into the future.
Continue to develop our
innovation management software platform
Our first imperative is to continue to develop our innovation management software platform. We
announced the release of a working model of Version 1.0 of Innovaro LaunchPad in June 2011. We announced that Version 2.0 of Innovaro LaunchPad was in alpha testing in Feb 2012. We anticipate the controlled release of Version 3.0 of the software
product during 2012, thereby expanding the product capability further into the innovation cycle. The full-scale release of the complete product is dependent on the results of our testing procedures and the use of third-party consultants.
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, our i nnovation 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.
Continue to expand our current Strategic and Intelligence and Insights Services businesses
Our second imperative is to sustainably and profitably grow our current Strategic and Intelligence and Insights Services businesses worldwide. We have a
deep commitment to continuously improving our business. This includes our efforts to develop innovation solutions that offer a flexible range of innovation guidance and support, capable of meeting a wide range of innovation needs for our clients. As
we further transform the way we go to market we continue to seek out ways to be more efficient.
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Cherish our Innovaro associates
Our third imperative is to cherish our Innovaro associates. Our continued growth requires us to hire, retain and develop our leadership bench. We are fortunate to employ, worldwide, a truly remarkable set
of associates. The market becomes more competitive every day and innovation is the key to success. It is people who hold that key and to be a good employer is one of the most important strategic decisions a company has to make.
Achieve operational excellence
Our
fourth and final imperative is the total of the other three. Our continued success requires that we do everything we can to position ourselves to achieve operational excellence in each of the areas mentioned above. By focusing on the three key
challenges and related strategic business imperatives discussed above, we believe we can achieve this goal.
Financial Condition
Our total assets were $20.8 million at December 31, 2011 compared to $24.7 million at December 31, 2010. At
December 31, 2011, we had $268,000 in cash, $1.3 million in accounts receivable and contracts in process, $2.5 million in accounts payable and accrued expenses and $5.6 million in term debt outstanding. At December 31, 2010, we had
$263,000 in cash, $2.0 million in accounts receivable and contracts in process, $1.5 million in accounts payable and accrued expenses and $5.8 million in term debt outstanding.
The cash balance decreased significantly in the fourth quarter of 2011 as a result of our having paid bonuses to employees of our strategic services business segment under a discretionary bonus plan. $1.4
million remains payable to certain employees in connection with this bonus plan as of December 31, 2011.
Our consolidated financial
statements as of December 31, 2011 have been prepared under the assumption that we will continue as a going concern. Our independent registered public accounting firm has issued a report on our financial statements that included an explanatory
paragraph referring to our recurring losses from operations and expressing substantial doubt in our ability to continue as a going concern without additional capital becoming available. Our ability to continue as a going concern is dependent upon
our ability to obtain additional equity or debt financing, attain further operating efficiencies and, ultimately, to generate revenue. The consolidated financial statements do not include any adjustments that might result from the outcome of this
uncertainty.
Results of Operations for the Years Ended December 31, 2011 and 2010
Revenue
(in thousands, except percentages)
2011
2010
Percent Change
2011 versus
2010
Strategic services
$
12,374
$
9,783
26
%
Intelligence and Insights services
2,486
3,313
(25
)%
Total revenue
$
14,860
$
13,096
13
%
Strategic Services
Our strategic services revenue increased by $2.6 million for the year ended December 31, 2011 in comparison to the year ended December 31, 2010. The increase is the result of this business
segment having a significant number of new contracts with a higher average value during the year ended December 31, 2011 in comparison to the year ended December 31, 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 current year contracts have specifically requested 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 $800,000 for year ended December 31, 2011 compared to the same period of 2010. An increase in billable client expenses related to overseas travel
and lodging contributed to an increase in revenue of approximately $885,000 for the year ended December 31, 2011 compared to the same period of 2010.
Our strategic services revenue in recent years has largely been dependent on the efforts of certain key consulting professionals whose employment contracts with us 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.
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We expect that our strategic services revenue will decrease in 2012 from that of the year ended
December 31, 2011 as one of our major customers has reduced its budget for innovation in 2012.
Intelligence and Insights Services
Our intelligence and insights services revenue decreased by $827,000 for the year ended December 31, 2011 in comparison to the year
ended December 31, 2010. The decreased revenue is primarily a result of a reduction of $27,000 for our global technology licensing services, a reduction of $137,000 in online marketplace fees, a reduction of $602,000 in foresight and trend
research revenue, and a reduction of $42,000 in intellectual property consulting revenue. The decreased revenue throughout this business segment for the year ended December 31, 2011 in comparison to the same period of 2010 resulted from a
reduction in the number of personnel selling and fulfilling projects, as well as budget cuts for a large group of our customers. This has had a significant, direct impact on new sales and renewals for this business line.
We expect that our intelligence and insights services revenue will remain consistent in 2012 with that of the year ended December 31, 2011.
Expenses
Direct Costs of Revenue
(in thousands, except percentages)
2011
Gross
Margin
2010
Gross
Margin
Direct costs of revenue strategic services
$
10,639
14
%
$
8,454
14
%
Direct costs of revenue Intelligence and Insights Services
1,317
47
%
1,492
55
%
Total direct costs of revenue
$
11,956
$
9,946
Direct Costs of Revenue Strategic Services
Direct costs of revenue 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 strategic services is comprised of consulting personnel compensation, which includes bonuses. Direct costs of revenue strategic services included a bonus expense of $2.5
million for the year ended December 31, 2011. In comparison, direct costs of revenue strategic services included a bonus expense of $3.3 million for year ended December 31, 2010.
In connection with the expiration of the employment contracts for the management team of the strategic services business segment in the second quarter of
2011, we have retained certain of these former professionals 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 2011 as a result of the high number of contracts in
process and a reduction in the number of employees.
Direct costs of revenue strategic services increased by $2.2 million for the year
ended December 31, 2011 in comparison to the year ended December 31, 2010. The increase is primarily related to a $3.3 million increase in outside consultant expenditures and in overseas travel and lodging, partially offset by a $1.1
million decrease in salaries and bonus.
The gross margin for the strategic services business remained consistent at 14% for each of the years
ended December 31, 2011 and 2010.
We expect 2012 costs of strategic services to decrease from that of the year ended December 31,
2011 due to the expected decrease in engagements for this business segment.
Direct Costs of Revenue Intelligence and Insights
Services
Direct costs of revenue intelligence and insights services are comprised of certain salaries and related taxes,
commissions, certain outside services and other direct costs related to this business segment. Our direct costs of revenue intelligence and insights services decreased by $175,000 for the year ended December 31, 2011 in comparison to the
year ended December 31, 2010. The majority of the decrease is related to a decrease in salaries and commissions due to staff cuts and a reduction in sales.
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The intelligence and insights services gross profit margin decreased to 47% for the year ended
December 31, 2011 as compared to 55% for the year ended December 31, 2010. This decrease is the result of a decrease in sales with fixed costs remaining unchanged.
We expect 2012 costs of intelligence and insights services to remain consistent with that of the year ended December 31, 2011.
Salaries and Wages
(in thousands, except percentages)
2011
2010
Percent Change
2011 versus
2010
Salaries and wages
$
1,742
$
2,636
(34
)%
As a percent of revenue
12
%
20
%
(8
)ppt*
*
The abbreviation ppt throughout this section denotes percentage points.
Salaries and wages include non-sales employee and officer salaries that are not otherwise allocated to direct costs of revenue, employee related benefits including certain bonuses, and stock-based
compensation. Salaries and wages decreased by $894,000 for the year ended December 31, 2011 in comparison to the year ended December 31, 2010. The decrease relates to a $286,000 reduction in officers salaries as a result of
severance expense incurred in 2010 related to our former CEO and an $829,000 reduction in administrative staff salaries in 2011, partially offset by a $221,000 increase in stock compensation expense as a result of options issued to our new CEO
during 2011.
We expect salaries and wages to continue to decrease in 2012 due to the reduced number of employees.
Professional Fees
(in thousands, except percentages)
2011
2010
Percent Change
2011 versus
2010
Professional fees
$
343
$
609
(44
)%
As a percent of revenue
2
%
5
%
(3
)ppt
Professional fees include accounting fees, legal fees and valuation expenses for our investments. Professional fees
decreased by $266,000 for the year ended December 31, 2011 in comparison to the year ended December 31, 2010. Valuation expenses were reduced by $46,000 because our investments no longer require outside valuations on a quarterly basis.
Accounting fees were reduced by $154,000 as a result of our having become a smaller reporting company during 2010. Legal fees were reduced by $65,000 because of costs incurred during the year ended December 31, 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 year ended December 31, 2011.
We expect our professional fees for 2012 to remain relatively consistent with 2011.
Research
and Development
in thousands, except percentages)
2011
2010
Percent Change
2011 versus
2010
Research and development
$
752
$
1,231
(39
)%
As a percent of revenue
5
%
9
%
(4
)ppt
Research and development costs include certain salaries, outside services, travel and other costs related to the
development of our LaunchPad software platform, which is designed to enhance and complement our innovation services offerings to clients. Research and development costs decreased by $479,000 for the year ended December 31, 2011 in comparison to
the year ended December 31, 2010. The decrease is primarily related to the capitalization of $225,000 in software costs in 2011 related to Version 1.0 rather than the allocation of such costs to research and development expense. In addition, we
scaled back the amount of resources allocated to the development of LaunchPad to approximately $200,000 in the second half of 2011, due to the completion of our working model of Version 1.0 and certain cash restrictions during the year.
In accordance with applicable accounting guidance, we expense all costs incurred to establish the technological feasibility of our LaunchPad software
platform as research and development expenses. Having established a working model of LaunchPad Version 1.0, all costs related to the refinement of this product will be capitalized until general release of the product to customers. We will continue
to incur costs related to the refinement of Version 1.0 while proceeding with the development of
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the next components of LaunchPad with Version 2.0. The costs related to the development of Version 2.0 will be expensed as research and development until we have completed a working model. We
expect to incur an additional $300,000 in costs related to the product development of Version 2.0 and Version 3.0 of the software, as well as continued refinement of Version 1.0, during 2012.
We expect that research and development expense will decrease from that of the year ended December 31, 2011, due to a decrease in total expenditures related to the software platform and the fact that
a significant portion of the costs will be capitalized.
Sales and Marketing
in thousands, except percentages)
2011
2010
Percent Change
2011 versus
2010
Sales and marketing
$
289
$
544
(47
)%
As a percent of revenue
2
%
4
%
(2
)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 $255,000 for the year ended December 31, 2011 in comparison to the year ended December 31, 2010. The decrease relates primarily to certain marketing
costs incurred during the year ended December 31, 2010, including $91,000 in rebranding costs and $105,000 for partnering with external search partners, which were not repeated during the year ended December 31, 2011. There were additional
decreases of $94,000 in telephone expenses and travel and entertainment expenses related to the closing of certain offices and reduced sales personnel. This decrease in costs was partially offset by an increase of $44,000 in marketing costs incurred
during the year ended December 31, 2011 in connection with an increase in marketing efforts related to our new software platform.
We
expect sales and marketing expenses to increase for the year ending December 31, 2012 due to sales and marketing efforts related to the software platform.
General and Administrative
(in thousands, except percentages)
2011
2010
Percent Change
2011 versus
2010
General and administrative
$
1,892
$
2,254
(16
)%
As a percent of revenue
13
%
17
%
(4
)ppt
General and administrative expenses decreased by $362,000 for the year ended December 31, 2011 in comparison to the
year ended December 31, 2010. The decrease relates to a $211,000 reduction in insurance and other employee related costs due to having fewer employees; a $49,000 reduction in investor relations costs; an $160,000 decrease in outside services
which partially relates to having hired our CEO in the second quarter of 2011 as opposed to paying him as a consultant; as well as a continued overall company plan to reduce all aspects of overhead; partially offset by a $29,000 increase in state
and local taxes and a $28,000 increase related to moving and relocation expenses for our new CEO and Senior VP of Sales.
We expect 2012
general and administrative expenses to remain consistent with 2011 levels.
Amortization and Depreciation
(in thousands, except percentages)
2011
2010
Percent Change
2011 versus
2010
Amortization and depreciation
$
1,272
$
1,527
(17
)%
As a percent of revenue
9
%
12
%
(3
)ppt
Depreciation and amortization expense decreased by $255,000 for the year ended December 31, 2011 in comparison to
the year ended December 31, 2010. Amortization expense decreased $207,000 as a result of the impairment of certain definite-lived intangible assets in 2010. Depreciation expense decreased by $48,000 as a result of impairment charges related to
our fixed assets that were incurred in 2010.
We expect amortization and depreciation for the year ending December 31, 2012 to remain
consistent with 2011 levels.
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Impairment Loss
(in thousands, except percentages)
2011
2010
Percent Change
2011 versus
2010
Impairment loss
$
1,444
$
11,771
(88
)%
Management performed its regular annual impairment testing of goodwill and other long-lived assets as of
December 31, 2011, in accordance with applicable accounting guidance. We recognized impairment of approximately $275,000 to our goodwill and impairment of approximately $269,000 to our intangible assets for the year ended December 31, 2011
as a result of a reduction in the fair value of certain of our reporting units. Third party valuations were obtained to assist in the determination of fair value of our reporting units.
The significant decline in our stock price during 2010 caused a reduction in our market capitalization and third party valuations were obtained to assist in the determination of fair value of our
reporting units. As a result of a reduction in fair value of our reporting units, management determined that the implied fair value of our goodwill and intangible assets was less than their respective carrying values by approximately $10.3 million.
We recognized impairment of approximately $9.4 million to our goodwill and impairment of approximately $971,000 to our intangible assets for the year ended December 31, 2010.
We also recorded impairment of approximately $900,000 and $1.4 million to our fixed assets during the years ended December 31, 2011 and 2010, respectively, as a result of the commercial real estate
market for certain of our properties having taken a significant downturn that is not expected to reverse in the near future. Management determined that the decreases in fair value of the property were other-than-temporary. These impairment losses
were determined based on third party valuations of the respective property.
Other (Income) Expense
(in thousands, except percentages)
2011
2010
Percent Change
2011 versus
2010
Other (income) expense
$
(113
)
$
1,150
(110
)%
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. Other (income) expense changed by $1.2 million for the year ended December 31, 2011 in comparison to the year ended December 31, 2010. The variance is
attributable to a $1.4 million decrease in net capital loss and related impairment and a $139,000 increase in rental income, partially offset by a $337,000 decrease in net gain on adjustment of our derivative liabilities.
Interest Expense, Net
(in thousands, except percentages)
2011
2010
Percent Change
2011 versus
2010
Interest expense, net
$
434
$
621
(30
)%
Interest expense, net decreased by $187,000 for the year ended December 31, 2011 in comparison to the year ended
December 31, 2010. The decrease is primarily attributable to lower interest expense from the amortization of our debt discount.
Income Tax Matters
Deferred taxes are
provided on the asset and liability method whereby deferred tax assets are recognized for deductible temporary differences and operating loss and tax credit carry forwards and deferred tax liabilities are recognized for taxable temporary
differences. Temporary differences are the differences between the reported amounts of assets and liabilities and their tax bases. Future tax benefits for net operating loss carryforwards are recognized to the extent that realization of these
benefits is considered more likely than not. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized.
For federal and state income tax purposes, we are taxed at regular corporate rates on ordinary income and recognize gains on distributions of
appreciated property.
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We do not have any income tax benefit related to the net loss from operations in 2011 or 2010, nor do we
have a deferred tax asset related to our net operating loss carryforward, because of a 100% valuation allowance. We do have an income tax benefit from the reversal of a deferred tax liability related to the impairment and amortization of an
indefinite-lived intangible asset of approximately $230,000 and $56,000 for the years ended December 31, 2011 and 2010, respectively.
Liquidity and Capital Resources
Cash Flows
Cash flows from
operating activities of $651,000 for the year ended December 31, 2011 increased approximately $5.5 million from cash used in operating activities of $(4.9) million for the year ended December 31, 2010. Total cash flows from operations of
$651,000 in the current period are primarily attributable to:
$1.6 million in non-cash impairment charges;
$1.4 million in non-cash depreciation and amortization;
$509,000 in non-cash stock-based compensation expense related to vesting options;
$1.2 million decrease in accounts receivable and other assets; and
$977,000 increase in accounts payable, accrued expenses and accrued bonus.
Partially offset by:
$4.6 million net loss attributable to stockholders; and
$297,000 net loss attributable to noncontrolling interest.
Cash flows from investing activities of $(222,000) for the year ended December 31, 2011 decreased $976,000 from $754,000 for the year ended December 31, 2010. Total cash flows from investing
activities of $(222,000) in the current period are primarily attributable to $225,000 in capitalization of software development costs.
Cash
flows from financing activities of $(421,000) for the year ended December 31, 2011 decreased $2.7 million from $2.3 million for the year ended December 31, 2010. Total cash flows from financing activities of $(421,000) in the current
period are primarily attributable to $621,000 in cash payments on long-term debt partially offset by $200,000 in debt proceeds.
Financing
On July 12, 2010,
we completed a registered offering of 1,481,481 shares of our common stock priced at $2.565 per share along with Series A warrants to purchase up to 1,481,481 shares of common stock with an exercise price of $3.43 per share (subsequently amended to
$3.49 per share) of common stock and Series B warrants to purchase up to 893,519 shares of common stock with an exercise price of $0.01 per share of common stock. We raised gross proceeds of approximately $3.8 million before advisory fees and
offering expenses in connection with the offering.
Software Development Costs
We are continuing the development of our LaunchPad software, which is designed to enhance and complement our innovation service offerings to
clients. We will continue to incur costs related to the refinement of Version 1.0 while proceeding with the development of the next components of LaunchPad with Version 2.0. As of December 31, 2011, we had invested $2.2 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 2012.
Borrowings
We have a $3 million bank note payable due in monthly installments of
$20,436 including principal and interest at 6.50% through April 1, 2013 with a balloon payment due on May 1, 2013. As of December 31, 2011, the amount outstanding on this note was approximately $2.8 million. In addition, we have a
$1.5 million note payable due in monthly installments of interest at 7.00% with principal due in full on October 1, 2015. As of December 31, 2011, the amount outstanding on this note was approximately $1.25 million. These loans were
entered into in connection with the purchases of land and building that serves as our company headquarters and certain other undeveloped land located in Hillsborough County, Florida. These loans are collateralized by the property related to the
purchases.
We have a Promissory Note (the Note) with Gators Lender, LLC (the Lender), pursuant to which we borrowed
$1,750,000 from the Lender. Interest is payable at an annual rate of 8% on a quarterly basis, in arrears. The entire principal amount outstanding and all accrued interest is payable in full no later than October 22, 2012. UTEK Real Estate is a
co-borrower under
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the Note and the loan is guaranteed by all subsidiaries. In addition, the Lender has a security interest in 68% of the outstanding membership interests of Cortez 114, LLC
(Cortez), a subsidiary of UTEK Real Estate that owns vacant real property located in Hernando County, Florida. $500,000 of the indebtedness was repaid in July 2010 in connection with an amendment to the Note. As of December 31,
2011, the face amount outstanding on the Note was $1.25 million.
We borrowed $200,000 for operations from one of our directors under a
promissory note in December 2010. The note was subsequently repaid in full on February 21, 2011 including interest at 3.5% and 3.0 points. This transaction is not necessarily indicative of amounts, terms and conditions that the Company may have
received with unrelated third parties.
During December 2011, we borrowed $200,000 for operations from IIM Holding II, LLC under a promissory
note including interest at 6% and $26,000 in other fees.
Liquidity
We have incurred recurring losses and negative cash flows from operations. We incurred a net loss of $4.9 million for the year ended December 31, 2011. We had a working capital deficit of
$1.2 million and an accumulated deficit of $76.5 million as of December 31, 2011. These factors raise substantial doubt about our ability to continue as a going concern.
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.
We currently intend to fund our liquidity needs, including our software development costs, 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 insufficient to fund our scheduled debt service
payments of $1.6 million and our operating requirements for the next twelve months. We are exploring opportunities for obtaining a credit facility, as well as selling equity securities and certain other assets. In addition, we have the capability to
delay all cash intensive activities, including our software development costs, 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.
The Companys future success depends on its ability to raise capital and ultimately generate revenue and attain profitability. The
Company cannot be certain that additional capital, whether through selling additional debt or equity securities or obtaining a line of credit or other loan, will be available to it or, if available, will be on terms acceptable to the Company. If the
Company issues additional securities to raise funds, these securities may have rights, preferences, or privileges senior to those of its common stock, and the Companys current shareholders may experience dilution. If the Company is unable to
obtain funds when needed or on acceptable terms, the Company may be required to curtail their current development programs, cut operating costs and forego future development and other opportunities. Without sufficient capital to fund their
operations, the Company will be unable to continue as a going concern. The accompanying financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements that have or are materially likely to have a current or future material effect on our financial condition,
revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.
Critical Accounting Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America
(GAAP) requires management to make assessments, estimates and assumptions that affect the amounts reported in the financial statements. 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. We consider the following accounting policies and related estimates to be critical as they require the most subjective judgment or involve
uncertainty that could have a material impact on our financial statements.
Revenue Recognition
The Company has revenues from fixed fee contracts for the sale of strategic consulting services. These revenues are recognized on a pro rata basis based
upon costs incurred to date compared to total estimated contract costs. The determination of estimated
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contract costs is critical to the determination of revenue recognition in any given period. If costs incurred to date are compared to total estimated contract costs that have not been updated for
the most recent information, material variances in revenue recognition can occur. As a result, management evaluates the accuracy of estimated contract costs for each in-process job in light of available information regarding job status at the end of
each reporting period. In addition, management prepares an analysis to determine the accuracy of our estimated total contract costs on closed jobs. We have historically been able to estimate total contract costs with the required accuracy to produce
materially correct revenue results.
Valuation and Impairment of Investments
Our investments include cost method investments, available-for-sale securities, and equity method investments. The assessment of the fair value of certain
of our cost method and equity method investments can be difficult and subjective due in part to our having only limited information on these investments. In addition, determination of permanent impairment for available-for-sale securities can be
difficult and subjective due in part to limited trading activity of certain of these equity instruments.
We conduct periodic reviews to
identify and evaluate each investment that is in an unrealized loss position, in accordance with the meaning of other-than-temporary impairment and its application to certain investments, as required under current accounting standards. An unrealized
loss exists when the current fair value of an individual security is less than its amortized cost basis. Unrealized losses on available-for-sale securities that are determined to be temporary are recorded in accumulated other comprehensive loss.
For available-for-sale equity securities with unrealized losses, management performs an analysis to assess whether the securitys
decline in fair value would be deemed to be other-than-temporary. This can be difficult as many of our holdings have limited trading activity and prices can fluctuate significantly. Fluctuations in price are generally determined to be temporary
unless the price level is maintained for an extended period of time. Significant declines in a securitys fair value are determined to be other-than-temporary when the decline is maintained over several reporting periods. When a decline in
stock price is deemed to be other-than-temporary, the unrealized loss included in accumulated other comprehensive loss is reversed and recorded as a capital loss in the statement of operations.
Our cost method investments and equity method investments are in small, privately held companies. These investments are not publicly traded, and,
therefore, because no established market for these securities exists, the estimate of the fair value of our investments requires significant judgment. Investments that are accounted for using the cost method are valued at cost unless an
other-than-temporary impairment in their value occurs or the investment is liquidated. For investments that are accounted for using the equity method, we record our share of the investees operating results each period. We review the fair value
of our investments on a regular basis to evaluate whether an other-than-temporary impairment in the investment has occurred. We record impairment charges when we believe that an investment has experienced a decline in value that is
other-than-temporary. Future adverse changes in market conditions or poor operating results of underlying investments could result in losses or an inability to recover the carrying value of the investments that may not be reflected in an
investments current carrying value, thereby possibly requiring an impairment charge in the future.
Stock-Based Compensation
Stock-based compensation cost for share-based payments are based on their relative grant date fair values estimated in accordance with
current accounting standards. The Company recognizes compensation expense on a straight-line basis over the requisite service period. The determination of the fair value of stock-based compensation requires significant judgment and the use of
estimates, particularly surrounding assumptions such as stock price volatility, expected option lives and forfeiture rates. These estimates involve inherent uncertainties and the application of management judgment. As a result, if circumstances
change and we use different assumptions, our stock-based compensation expense could be materially different in the future.
The expected term
of options granted represents the period of time that the options are expected to be outstanding and is based on historical experience of similar grants, giving consideration to the contractual terms of the grants, vesting schedules and expectations
of future employee behavior. The expected volatility is based upon our historical market price at consistent points in a period equal to the expected life of the options. Expected forfeitures are based on historical experience and expectations of
future employee behavior. We are required to estimate future forfeitures of stock-based awards for recognition of compensation expense. We will record additional expense if the actual forfeitures are lower than estimated and will record a recovery
of prior recognized expense if the actual forfeitures are higher than estimated. The actual expense recognized over the vesting period will only be for those awards that vest. If our actual forfeiture rate or performance outcomes are materially
different from our estimate, the actual stock-based compensation expense could be significantly different from what we have recorded in the current period.
Valuation and Impairment of Goodwill and Intangible Assets
Goodwill represents the
excess of the aggregate consideration paid for an acquisition over the fair value of the net tangible and intangible assets acquired. Intangible assets represent the cost of trademarks, trade names, websites, customer lists,
non-
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compete agreements, and proprietary processes and software obtained in connection with certain of these acquisitions. Intangible assets with finite lives are amortized on a straight-line basis
over their estimated useful lives, which range from 3 to 10 years. In accordance with current accounting standards, goodwill and intangible assets determined to have indefinite lives are not subject to amortization but are tested for impairment
annually, or more frequently if events or changes in circumstances indicate a potential impairment may have occurred. Circumstances that may indicate impairment include qualitative factors such as an adverse change in the business climate, loss of
key personnel, and unanticipated competition. Additionally, management considers quantitative factors such as current estimates of the future profitability of the Companys reporting units, the current stock price, and the Companys market
capitalization compared to its book value. The consideration of qualitative and quantitative factors when considering circumstances that may indicate impairment requires the application of management judgment. As a result, managements
determinations with regard to current circumstances affecting the Company could have a significant affect the recognition of impairment charges.
If management determines that an impairment test is necessary, it must determine the fair value of the respective reporting units. The determination of the fair value of reporting units requires
significant judgment. Management typically enlists the assistance of a third-party valuation firm in determining fair value of reporting units for use in its impairment analysis. In conducting its impairment test, the Company compares the fair value
of each of its reporting units to the related book value. If the fair value of a reporting unit exceeds its net book value, long-lived assets are considered not to be impaired. If the net book value of a reporting unit exceeds its fair value, an
impairment loss is measured and recognized. The Company conducts its impairment test using balances as of December 31.
The Company
accounts for long-lived assets, including intangibles that are amortized, in accordance with GAAP, which requires that all long-lived assets be reviewed for impairment whenever events or circumstances indicate that the carrying amount of an asset
may not be recoverable. Management considers both qualitative and quantitative factors when considering circumstances that may indicate impairment. This consideration requires significant management judgment and could have a significant effect of
the recognition of impairment charges. If indicators of impairment are present, reviews are performed to determine whether the carrying value of an asset to be held and used is impaired. Such reviews involve a comparison of the carrying amount of an
asset to future net undiscounted cash flows expected to be generated by the asset over its remaining useful life. The determination of future cash flows involves inherent uncertainties and the application of management judgment regarding the future
operations of the Company. If the comparison indicates that there is impairment, the impaired asset is written down to its fair value. The impairment to be recognized as a non-cash charge to earnings is measured by the amount by which the carrying
amount of the asset exceeds the fair value of the asset. Assets to be disposed are reported at the lower of the carrying amount or fair value, less cost to dispose.
Valuation of Derivative Liabilities
ASC Topic 815 Derivatives and Hedging
requires bifurcation of embedded derivative instruments and measure of their fair value for accounting purposes. In addition, freestanding derivative instruments such as certain warrants are also derivative liabilities. Derivative liabilities
are recorded at fair value at inception and then are adjusted to reflect fair value at the end of each quarter, with any increase or decrease in the fair value being recorded in results of operations as a component of other (income) expense. We
estimate the fair value of these instruments using the Black-Scholes option pricing model, which takes into account a variety of factors that require judgment, including estimating the expected term of the warrants and the expected volatility of the
Companys stock price. The expected term of the warrants represents the period of time that they are expected to be outstanding and is based on the contractual term of the warrants and expectations of the warrants holders behavior. The
expected volatility is based upon our historical market price at consistent points in a period equal to the expected life of the warrants. These estimates involve inherent uncertainties and the application of management judgment. As a result, if
circumstances change and we use different assumptions, our derivative liability and the related gain or loss could be materially different in the future. As of December 31, 2011, the Companys derivative liabilities have been extinguished.
Recently Issued Accounting Pronouncements
Information concerning recently issued accounting pronouncements is set forth in Note 2 of our Notes to Consolidated Financial Statements under Item 8. Financial Statements and Supplementary
Data and is incorporated herein by reference.
Item 7A. Quantitative and Qualitative
Disclosures about Market Risk
Not applicable.
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Text extracted from the filing as submitted to EDGAR. Formatting, tables and exhibits are simplified for reading; the original document is authoritative for anything you rely on.