Item 8. Financial Statements and Supplementary Data
Item 8. Financial Statements and Supplementary Data
INNOVARO, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULES
Documents
Page
Report of Independent Registered Public Accounting Firm
19
Consolidated Balance Sheets as of December 31, 2011 and 2010
20
Consolidated Statements of Operations for the Years Ended December 31, 2011 and
2010
21
Consolidated Statements of Changes in Equity for the Years Ended December 31, 2011 and
2010
22
Consolidated Statements of Cash Flows for the Years Ended December 31, 2011 and
2010
23
Notes to Consolidated Financial Statements
25
18
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors
Innovaro,
Inc. and Subsidiaries
Tampa, Florida
We have audited the accompanying consolidated balance sheets of Innovaro, Inc. and subsidiaries (the Company) as of December 31, 2011
and 2010 and the related consolidated statements of operations, changes in equity and cash flows for the years ended December 31, 2011, and 2010. These consolidated financial statements are the responsibility of the Companys management.
Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in
accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free
of material misstatement. For the years ended December 31, 2011, and 2010 the Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits for the years ended
December 31, 2011 and 2010 included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the
effectiveness of the Companys internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material
respects, the financial position of the Company as of December 31, 2011 and 2010 and the results of its operations and cash flows for the years ended December 31, 2011, and 2010 in conformity with accounting principles generally accepted
in the United States of America.
The accompanying financial statements have been prepared assuming that the Company will continue as a going
concern. As discussed in Note 1, the Company incurred a net loss of $4,920,723 during the year ended December 31, 2011 and has an accumulated deficit of $76,453,214 and has a working capital deficit of $1,236,512 as of December 31, 2011.
These factors, among others, raise substantial doubt about the Companys ability to continue as a going concern. Managements plans in regard to these matters are also described in Note 1. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
/s/ PENDER NEWKIRK & COMPANY
Pender Newkirk & Company LLP
Certified Public Accountants
Tampa, Florida
April 11, 2012
19
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INNOVARO, INC.
Consolidated Balance Sheets
December 31,
2011
December 31,
2010
ASSETS
Current assets:
Cash
$
268,170
$
262,619
Accounts receivable, net
799,235
1,796,454
Contracts in process
513,040
214,734
Available-for-sale securities
55,038
171,139
Prepaid expenses and other assets
294,625
791,432
Note receivable and accrued interest
1,804,000
Total current assets
3,734,108
3,236,378
Cost method investments
86,784
95,589
Equity method investments
92,148
303,454
Note receivable and accrued interest
1,700,000
Fixed assets, net
5,632,757
6,736,567
Goodwill
6,130,152
6,407,640
Intangible assets, net
5,090,316
6,174,792
Total assets
$
20,766,265
$
24,654,420
LIABILITIES
Current liabilities:
Accounts payable
$
549,431
$
1,078,088
Accrued expenses
475,348
420,707
Accrued bonus pool
1,444,955
Deferred revenue
856,222
987,624
Current maturities of long-term debt
1,644,664
433,964
Total current liabilities
4,970,620
2,920,383
Long-term debt, less current maturities
3,997,775
5,358,173
Derivative liabilities
1,140,005
Deferred tax liability
990,542
1,220,687
Total liabilities
9,958,937
10,639,248
Commitments and contingencies
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; 15,159,544 and 14,631,950 shares issued; 15,039,544 and 14,585,261
shares outstanding at December 31, 2011 and 2010, respectively
150,396
145,853
Additional paid-in capital
86,820,437
85,024,704
Accumulated deficit
(76,453,214
)
(71,829,344
)
Accumulated other comprehensive income
53,939
147,922
Total Innovaro stockholders equity
10,571,558
13,489,135
Noncontrolling interest
235,770
526,037
Total equity
10,807,328
14,015,172
Total liabilities and equity
$
20,766,265
$
24,654,420
See accompanying notes
20
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INNOVARO, INC.
Consolidated Statements of Operations
Year Ended December 31
2011
2010
Revenue:
Strategic services
$
12,373,822
$
9,783,318
Intelligence and Insights services
2,485,565
3,312,808
14,859,387
13,096,126
Expenses:
Direct costs of revenue Strategic services
10,638,652
8,453,549
Direct costs of revenue Intelligence and Insights services
1,317,306
1,492,396
Salaries and wages
1,742,132
2,636,166
Professional fees
343,245
608,591
Research and development
751,775
1,230,671
Sales and marketing
289,098
544,307
General and administrative
1,892,087
2,254,324
Depreciation and amortization
1,271,966
1,527,344
Impairment loss
1,443,622
11,770,708
19,689,883
30,518,056
Other (income) and expense:
Other (income) expense
(113,132
)
1,149,798
Interest expense, net
433,502
621,371
320,370
1,771,169
Loss before income taxes
(5,150,866
)
(19,193,099
)
Provision for income tax benefit
(230,143
)
(55,581
)
Net loss
(4,920,723
)
(19,137,518
)
Net loss attributable to noncontrolling interest
(296,853
)
(6,095
)
Net loss attributable to Innovaro stockholders
$
(4,623,870
)
$
(19,131,423
)
Net loss attributable to Innovaro stockholders per share: Basic and diluted
$
(0.31
)
$
(1.44
)
Weighted average shares outstanding: Basic and diluted
15,013,299
13,288,179
See accompanying notes
21
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INNOVARO, INC.
Consolidated Statements of Changes in Equity
For the Years Ended December 31, 2011 and 2010
Common Stock
Comprehensive
Income (Loss)
Accumulated
Deficit
Accumulated
Other
Comprehensive
Income (Loss)
Total
Innovaro
Stockholders
Equity
Shares Issued
Shares
Outstanding
Par
Value
Paid-In
Capital
Noncontrolling
Interest
Total
Equity
Balances at December 31, 2009
12,286,768
11,797,140
$
117,971
$
81,010,460
$
(52,697,921
)
$
175,609
$
28,606,119
$
$
28,606,119
Settlement of severance liability for 32% interest in Cortez 114, LLC
17,868
17,868
532,132
550,000
Comprehensive loss:
Net loss
$
(19,131,423
)
(19,131,423
)
(19,131,423
)
(6,095
)
(19,137,518
)
Other comprehensive income (loss):
Unrealized gain (loss) from available-for-sale securities
199,986
Foreign currency translation adjustments
(227,673
)
Other comprehensive loss
(27,687
)
(27,687
)
(27,687
)
(27,687
)
Comprehensive loss
$
(19,159,110
)
Investment in Verdant Ventures Advisors, LLC
243,933
243,933
2,439
997,686
1,000,125
1,000,125
Private offering of equity securities, net of offering costs of $593,440
1,481,481
1,481,481
14,815
3,191,744
3,206,559
3,206,559
Warrants issued as direct offering costs in connection with private equity securities offering
(661,236
)
(661,236
)
(661,236
)
Issuance of shares upon exercise of warrants
884,347
884,347
8,844
(8,844
)
Earnout accruals and escrow adjustments
(264,579
)
178,360
1,784
188,721
190,505
190,505
Stock-based compensation expense
288,305
288,305
288,305
Balances at December 31, 2010
14,631,950
14,585,261
$
145,853
$
85,024,704
$
(71,829,344
)
$
147,922
$
13,489,135
$
526,037
$
14,015,172
Comprehensive loss:
Net loss
$
(4,623,870
)
(4,623,870
)
(4,623,870
)
(296,853
)
(4,920,723
)
Other comprehensive income (loss):
Unrealized gain (loss) from available-for-sale securities
(91,901
)
Foreign currency translation adjustments
(2,082
)
Other comprehensive income (loss):
(93,983
)
(93,983
)
(93,983
)
(93,983
)
Comprehensive loss
$
(4,717,853
)
Contribution from noncontrolling interest
6,586
6,586
Issuance of common shares upon cashless exercise of warrants
436,013
436,013
4,360
(4,360
)
Derivative liability extinguished in connection with exercise of warrants
1,290,830
1,290,830
1,290,830
Issuance and vesting of restricted stock, net of forfeitures
140,000
20,000
200
(200
)
Escrow adjustment related to earnout
(48,419
)
(1,730
)
(17
)
(17
)
(17
)
Stock-based compensation expense
509,463
509,463
509,463
Balances at December 31, 2011
15,159,544
15,039,544
$
150,396
$
86,820,437
$
(76,453,214
)
$
53,939
$
10,571,558
$
235,770
$
10,807,328
See accompanying notes
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INNOVARO, INC.
Consolidated Statements of Cash Flows
Year Ended December 31
2011
2010
Operating Activities:
Net loss attributable to Innovaro stockholders
$
(4,623,870
)
$
(19,131,423
)
Adjustments to reconcile net loss attributable to Innovaro stockholders to net cash flows from operating
activities:
Net loss attributable to noncontrolling interest
(296,853
)
(6,095
)
Depreciation and amortization
1,271,966
1,527,344
Amortization of debt discount from investor warrants
132,138
280,558
Goodwill and intangible asset impairment
543,622
10,332,628
Fixed asset impairment
900,000
1,438,080
Loss on sale and impairment of investments
201,441
1,605,817
Loss (gain) on derivative liability
150,825
(186,203
)
Stock-based compensation
509,463
288,305
Compensation paid out in escrowed shares
146,825
Deferred income taxes
(230,143
)
(55,581
)
Other
15,865
(19,156
)
Changes in operating assets and liabilities:
Accounts receivable and contracts in process
697,846
(495,260
)
Prepaid expenses and other assets
532,438
(248,010
)
Deferred revenue
(131,402
)
(646,472
)
Accounts payable, accrued expenses and accrued bonus
977,525
255,084
Net cash flows from operating activities
650,861
(4,913,559
)
Investing Activities:
Capital expenditures
(39,218
)
(80,063
)
Capitalization of software development costs
(225,172
)
Proceeds from sale of available-for-sale securities
42,870
341,997
Proceeds from redemption of certificates of deposit
492,246
Net cash flows from investing activities
(221,520
)
754,180
Financing Activities:
Net repayments on bank line of credit
(250,000
)
Proceeds from related party and other debt
200,000
200,000
Payments on long-term debt
(621,467
)
(845,266
)
Gross proceeds from registered equity securities offering
3,799,999
Offering costs paid from registered equity securities offering
(593,440
)
Net cash flows from financing activities
(421,467
)
2,311,293
Effect of foreign exchange rates on cash
(2,323
)
(8,265
)
Increase (decrease) in cash
5,551
(1,856,351
)
Cash at beginning of year
262,619
2,118,970
Cash at end of year
$
268,170
$
262,619
See accompanying notes
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INNOVARO, INC.
Consolidated Statements of Cash Flows (continued)
Year Ended December 31
2011
2010
Supplemental Disclosures of Non-Cash Investing and Financing Activities
Unrealized gain (loss) from available-for-sale securities
$
(91,901
)
$
199,986
The extinguishment of a derivative liability related to the exercise of 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 in 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
Warrants issued as direct offering costs in connection with registered equity securities offering
$
(661,236
)
Cash paid for taxes
$
$
Cash paid for interest
$
406,585
$
543,893
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INNOVARO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation
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
Innovaro is The Innovation Solutions Company focused on innovation management
consulting and software. Innovaro is all about helping companies innovate and grow. Innovaro offers a comprehensive set of services and software to assure the success of any innovation project, regardless of the size or intent. Our unique
combination of consulting services provide innovation expertise, our new LaunchPad software product provides an integrated innovation environment, and Intelligence and Insights Services provide any business with the innovation support they need to
drive success. These services are provided internationally from our offices in the United States and the United Kingdom.
On March 16,
2010, we began doing business as Innovaro and changed our ticker symbol from NYSE Amex: UTK to NYSE Amex: INV. On July 8, 2010, the Companys shareholders voted to amend the Companys certificate of
incorporation to change the Companys name from UTEK Corporation to Innovaro, Inc. The name change became effective on July 12, 2010.
Going Concern
These consolidated
financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (GAAP) including the assumption of a going concern basis which contemplates the realization of assets and
the settlement of liabilities and commitments in the normal course of business. The Company has incurred recurring losses and negative cash flows from operations. The Company incurred a net loss of approximately $4.9 million, working capital
deficit of approximately $1.2 million and an accumulated deficit of approximately $76.5 million as of December 31, 2011. These factors raise substantial doubt about the Companys ability to continue as a going concern.
The Companys primary cash requirements include working capital, research and development expenditures, principal and interest payments on
indebtedness, and employee bonuses. Its 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.
The Company currently intends to fund its liquidity needs, including its software development costs, with existing cash balances, cash generated from
operations, collection of existing receivables and the potential sales of our investments. The Company expects that its recent reductions in costs, coupled with its expected revenue, will be insufficient to fund its scheduled debt service payments
of $1.6 million and its operating requirements for the next twelve months. The Company is exploring opportunities for obtaining a credit facility, as well as selling equity securities and certain other assets. In addition, the Company has the
capability to delay all cash intensive activities, including its software development costs, and will look to reduce costs further. However, if such measures prove inadequate, the Company 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 it 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 the Company to service its debt obligations or may have an adverse impact on its business. The failure to generate sufficient cash from operations could have a material adverse effect on
the Company.
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 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.
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Table of Contents
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. Reclassifications were made to the equity section of the December 31, 2010 consolidated balance sheet to conform to the
December 31, 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.
2. Significant Accounting Policies
Accounts Receivable
The Company accounts for accounts receivable in accordance with ASC Topic 310 Receivables . In accordance therewith, the allowance for doubtful
accounts is deducted from the accounts receivable balance.
The Company provides 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 general and administrative expense in the consolidated statements of operations. The provision for
doubtful accounts and notes was approximately $29,000 and $15,000 as of December 31, 2011 and 2010, respectively. In addition, bad debt expense was negligible for the years ended December 31, 2011 and 2010.
Contracts in Process
Contracts in
process include accrued profit related to certain contracts. See Note 4 for further detail.
Available-for-Sale Securities
The Company classifies all investments in freely tradable equity securities as available-for-sale in accordance with ASC Topic 320 Investments
Debt and Equity Securities and our intentions regarding these instruments. Investments in equity securities of public companies continue to be accounted for using the fair value method as long as there is a market in the stock that provides
readily determinable fair values for these securities. These investments are adjusted to fair value at the end of each quarter. Unrealized gains and losses are reported in operating company equity as a component of accumulated other comprehensive
income (loss) in the consolidated balance sheets. Realized gains and losses from the sale of available-for-sale securities are determined on the first-in first-out (FIFO) method of accounting and are included as a component of other
(income) expense in the consolidated statements of operations for the year ended December 31, 2011 and 2010.
Should management determine
that an available-for-sale security has an other-than-temporary decline in fair value; the Company recognizes the investment loss in the consolidated statement of operations. Available-for-sale securities were evaluated for other-than-temporary
impairment at December 31, 2011 and 2010. See Note 5 for further discussion.
Cost Method Investments
The Company classifies its investments in equity securities of noncontrolled entities that do not have readily determinable fair values as cost method
investments in accordance with ASC Subtopic 325-20 Cost Method Investments . Cost method investments are classified as non-current assets in accordance with the Companys intent and ability regarding liquidity of the investments.
Individual securities classified as cost method investments remain at cost basis unless there is a permanent impairment. The Company
determines whether a decline in fair value below the cost basis is other than temporary. If the decline in fair value is judged to be other-than-temporary, the cost basis of the individual security will be written down to fair value as a new cost
basis and the amount of the impairment will be included in earnings as a realized loss. The new cost basis cannot be adjusted
26
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upwards for subsequent recoveries in fair value. Realized gains and losses from the sale or impairment of cost method investments are determined on the FIFO method of accounting and are included
as a component of other (income) expense in the consolidated statements of operations for the years ended December 31, 2011 and 2010.
Cost method investments were considered for impairment at December 31, 2011 and 2010. The Company determined that certain of its cost method
investments had suffered a decline in fair value below that of their respective carrying amounts and this decline was determined to be other-than-temporary. The Company recognized a loss on impairment of its cost method investments of approximately
$9,000 and $468,000 for the year ended December 31, 2011 and 2010, respectively.
Equity Method Investments
The Company evaluated its investment in Verdant Ventures Advisors, LLC under ASC Topic 810 Consolidation and concluded that this investment does
not meet the requirements for consolidation. This investment has been recorded as an equity method investment in the consolidated balance sheets. In addition, this investment has been classified as a non-current asset in accordance with the
Companys intent and ability regarding liquidity of the investment. See Note 6 for a more detailed discussion of the Verdant Ventures transaction.
Equity method investments were considered for impairment at December 31, 2011. The Company determined that this equity method investment had suffered a decline in fair value below that of its
respective carrying amounts and this decline was determined to be other-than-temporary. The Company recognized a loss on impairment of its equity method investment of approximately $209,000 and $671,000 for the years ended December 31, 2011 and
2010, respectively.
Note Receivable
The Company holds a $1,500,000 note receivable from a privately held company. The note was received in exchange for the sale of certain of the Companys investments in January 2009. The note bears
interest at 7% per annum and does not require the payment of such interest or the principal amount of the note until maturity of the note on December 31, 2012. The Company recorded $104,000 of accrued interest income on the note for each
of the years ended December 31, 2011 and 2010. The note is collateralized by a security interest in certain property located in Pasco County, Florida and certain marketable equity securities.
Fixed Assets
Fixed assets are stated at
cost less accumulated depreciation. Depreciation is recorded using the straight-line method over the estimated useful lives of the respective assets of between 3 and 39.5 years. Leasehold improvements are amortized over the shorter of the estimated
useful life of the assets or the lease term. The carrying amount of all long-lived assets is evaluated periodically to determine if adjustment to the depreciation and amortization period or the unamortized balance is warranted. See Note 8 for
impairment discussion.
Maintenance and repairs are charged to operations when incurred. Betterments and renewals are capitalized. When fixed
assets are sold or otherwise disposed of, the asset account and related accumulated depreciation account are relieved, and any gain or loss is included as a component of other (income) expense in the consolidated statements of operations.
Goodwill and Intangible Assets with Indefinite Lives
Goodwill consists of the excess of cost over the fair value of net assets acquired in business combinations. Intangible assets with indefinite lives consist principally of trade names and trademarks. The
Company follows the provisions of ASC Topic 350 Intangibles Goodwill and Other , which requires an annual impairment test for goodwill and intangible assets with indefinite lives. If the carrying value of intangibles with indefinite
lives exceeds their fair value, an impairment loss is recognized in an amount equal to that excess. Goodwill is evaluated using a two-step impairment test at the reporting unit level. The first step compares the book value of a reporting unit,
including goodwill, with its fair value. If the book value of a reporting unit exceeds its fair value, we complete the second step in order to determine the amount of goodwill impairment loss that we should record. In the second step, we determine
an implied fair value of the reporting units goodwill by allocating the fair value of the reporting unit to all of the assets and liabilities other than goodwill. The amount of impairment is equal to the excess of the book value of goodwill
over the implied fair value of that goodwill.
The Company performs the annual impairment testing using balances as of December 31,
unless there are triggering events earlier in the year. See Note 9 for impairment discussion.
Identified Intangible Assets
The Company follows the provisions of ASC Topic 360 Property, Plant and Equipment , which establishes accounting standards for the impairment of
long-lived assets such as property, plant and equipment and intangible assets subject to
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amortization. The Company reviews long-lived assets to be held-and-used for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be
recoverable. If the sum of the undiscounted expected future cash flows over the remaining useful life of a long-lived asset group is less than its carrying amount, the asset is considered to be impaired. Impairment losses are measured as the amount
by which the carrying amount of the asset group exceeds the fair value of the asset. See Note 8 and 9 for impairment discussion.
The
Companys intangible assets subject to amortization consist of, customer lists, propriety know-how and non-compete agreements that are amortized on a straight-line basis over the estimated useful lives of the related intangible asset. The
estimated useful lives of the respective intangible assets range from three to ten years.
Capitalized Software Costs
The Company will amortize capitalized software costs by the greater of (a) the ratio that current gross revenues for a product bear to the total of
current and anticipated future gross revenues for that product, or (b) the straight-line method over the remaining estimated economic life of the product including the period being reported on. There has not been a general release of the
LaunchPad software, and accordingly, we have not recorded amortization expense related to the capitalized software for any periods presented.
Derivative Liability
ASC Topic 815
Derivatives and Hedging requires bifurcation of embedded derivative instruments and measurements of their fair value for accounting purposes. In addition, freestanding derivative instruments such as certain warrants are also derivative
liabilities. The Company estimates the fair value of these instruments using the Black-Scholes option pricing model. As discussed in Note 11, the Company has certain derivative warrants with a variable exercise price. The Company considered the use
of a Binomial model, but determined that the probability of the exercise price adjusting downward was remote. 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 in as a component of other (income) expense in the consolidated statements of operations.
Foreign Currency Translation
The functional currency of the Companys United Kingdom
(UK) operations is that countrys local currency. The Company translates the assets and liabilities of its UK subsidiary into U.S. Dollars at the exchange rates in effect at the end of each reporting period. Revenues and expenses of
the Companys UK operations are translated into U.S. Dollars using weighted average exchange rates during the period. The translation adjustments are included in equity as a component of accumulated other comprehensive income (loss) in the
consolidated balance sheets. Foreign currency transaction gains and losses are included in other (income) expense in the consolidated statements of operations for the years ended December 31, 2011 and 2010 and are immaterial for these periods.
Revenue Recognition
The
Company reorganized into two new lines of business, all working under the Innovaro brand: Strategic Services driven by Strategos, an advanced innovation consultancy; and Intelligence and Insights Services online platforms, partnering
services, global licensing, technology transfer services, futures and trends, research, information services and IP consulting.
Strategic
Services
The Company has revenues from fixed fee contracts for the sale of strategic consulting services. These revenues are recognized on
a pro rata basis based upon costs incurred to date compared to total estimated contract costs. Prior to the commencement of a client engagement, the Company and the client agree on fees for services based upon the scope of the project, staffing
requirements and the level of client involvement. Total revenues are comprised of professional fees for services rendered to clients and exclude applicable taxes. The Company bills clients for services and expenses incurred in accordance with the
terms of the client engagement agreement.
Differences between the timing of billings and the recognition of revenue are recognized as either
unbilled services (included as a component of accounts receivable) or deferred revenue in the consolidated balance sheets. Client prepayments and retainers are classified as deferred revenue and recognized in future periods when earned.
Revenues from strategic consulting services are also provided on a time-and-expense basis. Time-and-expense billing arrangements generally require the
client to pay based on the number of hours worked by our consulting professionals at agreed-upon rates. Time-and-expense revenues are billed and recognized as incurred.
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Intelligence and Insights Services
Revenues from the sale of subscriptions to the Companys online marketplaces, information services websites and online futures programs are initially deferred and subsequently recognized ratably over
the term of the subscription, which is typically one year.
Global technology licensing services are performed pursuant to service agreements
in which the Company provides consulting services by identifying and evaluating technology licensing opportunities for clients. These agreements are typically cancelable with thirty days notice.
The Company has certain consulting revenue that is derived from the sale of research services in intellectual property insight, technology foresight,
forecasting, scenario playing, vision, creativity and leadership, as well as the sale of services to provide for the design, development and implementation of custom software applications.
Before the Company recognizes revenue, the following criteria must be met:
Evidence of a financial arrangement or agreement must exist between the Company and its customer. Purchase orders, signed contracts, or electronic
confirmations are three examples of items accepted by the Company to meet this criterion.
Delivery of the products or services must have occurred. The Company treats either physical or electronic delivery as having met this requirement.
The price of the products or services is fixed and measurable.
Collectability of the sale is reasonably assured and receipt is probable. Collectability of a sale is determined on a customer-by-customer basis.
Differences between the timing of billings and the recognition of revenue are recognized as either unbilled services
(included as a component of accounts receivable) or deferred revenue in the consolidated balance sheets. Client prepayments and retainers are classified as deferred revenue and recognized over future periods as earned.
Direct Costs of Revenue
Direct costs of
revenue consist of direct costs related to the Companys strategic services and Intelligence and Insights Services segments. Direct costs of revenue include salaries and related taxes, bonuses and commissions, certain outside services, business
development costs, royalties and other direct project costs.
Software Development Costs
ASC Subtopic 985-20 Costs of Software to Be Sold, Leased or Marketed , requires companies to expense all software development costs incurred until
technological feasibility has been established, at which time those costs are capitalized until the product is available for general release to customers. In addition, costs incurred to enhance existing software products or after the general release
of the product are required to be expensed as incurred as research and development costs.
In accordance with ASC Subtopic 985-20, the Company
has expensed all costs incurred to establish the technological feasibility of Version 1.0 of the Innovaro LaunchPad software (LaunchPad) as research and development costs. As of June 29, 2011, LaunchPad Version 1.0 reached
technological feasibility with the introduction of a working model. The Company is now incurring costs related to the refinement of Version 1.0, which will be capitalized until the product is available for general release to market. The Company
capitalized $225,000 in software development costs for the year ended December 31, 2011.
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 until they too reach technological feasibility.
Stock-Based Compensation
At
December 31, 2011, the Company had one stock-based equity plan, which is described in Note 13. The Company accounts for stock option grants in accordance with ASC Topic 718 Compensation Stock Compensation . Stock-based compensation
cost recognized during the years ended December 31, 2011 and 2010 includes compensation cost for all share-based payments granted subsequent to January 1, 2006, based on their respective grant date fair values estimated in accordance with
Topic 718. The Company recognizes compensation expense on a straight-line basis over the requisite service period. The Company uses the Black-Scholes option pricing model to estimate fair value of stock option grants at the grant date.
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Income Taxes
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, the Company is taxed at regular corporate rates on
ordinary income and recognizes gains on distributions of appreciated property.
Certain guidance located within ASC Topic 740, Income
Taxes , clarifies the accounting for uncertainty in income taxes recognized in an enterprises financial statements. Topic 740 provides guidance on the financial statement recognition and measurement of a tax position taken or expected to be
taken in a tax return. Topic 740 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosures, and transition. The Company had no uncertain tax positions for the years ended
December 31, 2011 and 2010.
The Company does not have any income tax benefit related to its net loss from operations in 2011 and 2010,
nor does it have a deferred tax asset related to its net operating loss carryforward, because of a 100% valuation allowance. The Company does have an income tax benefit from the reversal of a deferred tax liability related to the impairment and
amortization of certain indefinite-lived intangible assets for the years ended December 31, 2011 and 2010.
Earnings per Share (EPS)
Basic earnings per share is computed on the basis of the weighted-average number of shares of common stock outstanding during the period.
Diluted earnings per share is computed on the basis of the weighted-average number of shares of common stock outstanding plus the effect of dilutive potential common shares outstanding during the period using the treasury stock method. The
Companys dilutive potential common shares consist of outstanding stock options, warrants and unvested shares of restricted stock
Components of basic and diluted per share data are as follows:
Year Ended December 31,
2011
2010
Weighted average outstanding shares of common stock
15,013,299
13,288,179
Dilutive effect of stock options, warrants and unvested shares of restricted stock
Common stock and common stock equivalents
15,013,299
13,288,179
Shares excluded from calculation of diluted EPS (1)
2,908,548
2,751,648
(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 having incurred a net loss during the periods presented.
Financial Instruments and Concentrations of Credit Risk
The Companys financial
instruments consist of investments and cash, 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 maturity of such instruments. The estimated fair value of the Companys long-term debt at December 31, 2011 and 2010 is not materially different from its carrying values of $5.6
million and $5.8 million, respectively. The fair value of available-for-sale securities and derivative liabilities are determined as described in Note 7.
Financial instruments with significant credit risk include investments. The Company maintains its cash 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 Federal Deposit Insurance Corporation provides deposit insurance of $250,000 for substantially all depository accounts as of December 31,
2011. All of the Companys non-interest bearing cash balances were fully insured as of December 31, 2011.
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The Company had two major customers during the years ended December 31, 2011 and 2010. Major customers,
those generating greater than 10% of total revenue, accounted for approximately 57% and 28% of the Companys revenue during the years ended December 31, 2011 and 2010, respectively. Major customers relate to the strategic services business
segment for both years ended December 31, 2011 and 2010. In addition, four customers accounted for approximately 51% of accounts receivable at December 31, 2011.
Use of Estimates
The preparation of the Companys consolidated financial statements
in conformity with ASC Topic 275 Risks and Uncertainties 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 derivative liabilities. Actual results could differ from those estimates.
Recently Issued Accounting Pronouncements
In May 2011, the FASB issued Accounting
Standards Update (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 Company adopted this ASU on 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 Company adopted this ASU on January 1, 2012. The adoption of this ASU will change the way the Company presents comprehensive income in its financial statements.
In September 2011, the FASB issued ASU 2011-08 Testing Goodwill for Impairment. Under the revised guidance, entities testing goodwill
for impairment have the option of performing a qualitative assessment before calculating the fair value of a reporting unit in step 1 of the goodwill impairment test. If entities determine, on the basis of qualitative factors, that the fair value of
the reporting unit is more likely than not greater than the carrying amount, a quantitative calculation is not needed. The Company adopted this ASU on January 1, 2012. The adoption of this ASU is not expected to have a significant impact on the
Companys financial statements or disclosures.
3. Accounts Receivable
Accounts receivable consist of the following at December 31, 2011 and 2010:
December 31,
2011
2010
Trade accounts receivable
$
827,994
$
1,408,047
Allowance for doubtful accounts
(28,759
)
(14,926
)
Unbilled client costs
403,333
Total accounts receivable
$
799,235
$
1,796,454
4. Contracts in Process
Contracts in process consist of the following as of December 31, 2011 and 2010:
December 31,
2011
2010
Contract costs and estimated earnings on uncompleted contracts
$
1,648,024
$
3,712,143
Less: billings to date
1,134,984
3,497,409
Total contracts in process
$
513,040
$
214,734
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Components of contracts in process consist of the following as of December 31, 2011 and 2010:
December 31,
2011
2010
Costs and estimated earnings in excess of billings on uncompleted contracts
$
604,856
$
634,541
Billings in excess of costs and estimated earnings on uncompleted contracts
(91,816
)
(419,807
)
Total contracts in process
$
513,040
$
214,734
5. Available-for-Sale Securities
The Company classifies its investments in freely tradable equity securities as available-for-sale in accordance with ASC Topic 320
Investments Debt and Equity Securities and its intentions regarding these instruments. A summary of the estimated fair value of available-for-sale securities is as follows as of December 31, 2011 and 2010.
Unrealized (1)
Realized
Cost
Gain
Loss
Losses
Fair Value
As of December 31, 2011
$
18,100
$
37,138
$
$
(200
)
$
55,038
As of December 31, 2010
$
225,400
$
129,132
$
(93
)
$
(183,300
)
$
171,139
(1)
The net unrealized gain (loss) is included in operating company equity as a component of accumulated other comprehensive income (loss) in the
consolidated balance sheets.
Proceeds from the sale of available-for-sale securities were approximately $43,000 and
$342,000 for the years ended December 31, 2011 and 2010, respectively. As of December 31, 2011, none of our four total available-for-sale securities was in an unrealized loss position. Gross realized gain (loss) as a result of the sale of
available-for-sale securities was approximately $19,000 and $79,000 for the years ended December 31, 2011 and 2010, respectively.
The
Company recognized a loss from the impairment of certain available-for-sale securities of approximately $200 and $520,000 for the years ended December 31, 2011 and 2010. These losses were written off as a result of managements
determination that these losses were other-than-temporary. The realized loss is included as a component of other (income) expense in the consolidated statement of operations for the years ended December 31, 2011 and 2010.
Unrealized gain (loss) on available-for-sale securities for the years ended December 31, 2011 and 2010 are shown in the accompanying statement of
changes in equity net of the reclassification adjustment. Disclosure of the gross amounts of the current period gain (loss) and amounts that were reclassified out of accumulated other comprehensive income (loss) into earnings are as follows:
Year Ended December 31,
2011
2010
Unrealized holding gain (loss) arising during the period
$
(91,993
)
$
(16,961
)
Add back: reclassification adjustment for net gains included in net income
92
216,947
Unrealized gain (loss) from available-for-sale securities, net
$
(91,901
)
$
199,986
6. Equity Method Investments
On April 14, 2010, the Company entered into a limited liability company agreement to form Verdant Ventures Advisors, LLC
(Verdant Ventures). Under this agreement, the Company made an investment of 243,933 shares of the Companys common stock worth $1,000,125 in exchange for a 15% ownership in Verdant Ventures. The Company accounts for Verdant Ventures
under the equity method of accounting due to the capital account structure of the investee. Verdant Ventures operates as an independently managed technology transfer venture fund. John Micek, one of the Companys directors, is managing partner
of Verdant Ventures, as well as a member of two limited liability companies that are also parties to the limited liability company agreement of Verdant Ventures. Pursuant to the agreement, the Company is not required to make any additional capital
contributions or loans to Verdant Ventures and is not involved in its management. Verdant Ventures may sell up to one-third of the Companys contributed shares each year during a three-year period from the date the Company first contributed the
shares.
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The Companys share of Verdant Ventures net loss was $(2,511) and $(25,856) for the years ended
December 31, 2011 and 2010, respectively, which is included as a component of other (income) expense in the consolidated statements of operations. In addition, the Company recorded an impairment loss to its investment in Verdant Ventures of
approximately $209,000 and $671,000 during 2011 and 2010, which is included as a component of other (income) expense in the consolidated statements of operations.
7. Fair Value Measurements
The Company performs fair value measurements in accordance with the guidance provided by ASC Topic 820 Fair Value Measurements and
Disclosures . Topic 820 defines fair value as the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When determining the fair value
measurements for assets and liabilities required to be recorded at fair value, management considers the principal or most advantageous market in which the Company would transact and considers assumptions that market participants would use when
pricing the asset or liability, such as inherent risk, transfer restrictions, and risk of nonperformance.
Topic 820 establishes a fair value
hierarchy that encourages and is based on the use of observable inputs, but allows for unobservable inputs when observable inputs do not exist. When there are multiple inputs for determining the fair value of an investment, the Company classifies
the investment in the fair value hierarchy based on the lowest level input that is significant to the fair value measurement. Inputs are classified into one of three categories:
Level 1 Unadjusted quoted prices in active markets for identical assets or liabilities.
Level 2 Quoted 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 3 Unobservable inputs for the asset or liability.
Assets measured at fair value on a recurring basis by level within the fair value hierarchy as of December 31, 2011 and 2010 are as follows:
Fair Value Measurements
at
December 31, 2011 (1)
Fair Value Measurements
at
December 31, 2010 (1)
Using Level 2
Total
Using Level 2
Total
Assets:
Available-for-sale securities
$
55,038
$
55,038
$
171,139
$
171,139
Total assets
$
55,038
$
55,038
$
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 December 31,
2011 or 2010.
The Companys investments in available-for-sale securities are classified within Level 2 of the fair
value hierarchy. The equity interests in companies for which there is no liquid public market are valued using quoted market prices for identical or similar instruments in markets that are not active. The determined values are generally discounted
to account for the illiquid nature of the investment and minority ownership positions. The value of our equity interests in public companies for which market quotations are readily available are based on quoted market prices for similar instruments
in an active market. These securities are generally thinly traded and/or carry discounts from the public market value for certain restrictions on resale. The Company utilizes the 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
Black-Scholes model employs the market approach in determining fair value.
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8. Fixed Assets
The Company recorded impairment of approximately $900,000 and $1,438,000 to certain of its land, building and building improvements
during the years ended December 31, 2011 and 2010, respectively. The commercial real estate market for certain property has taken a significant downturn that is not expected to reverse in the near future. As a result, management determined that
the decrease in the fair value of the property was other-than-temporary. The amount of the impairment was determined based on third party valuations of the respective property. This impairment expense is included as a component of impairment loss in
the consolidated statements of operations.
Fixed assets consist of the following:
December 31,
2011
2010
Furniture and Fixtures
$
281,640
$
284,630
Computer Equipment
605,507
733,964
Leasehold Improvements
2,000
9,085
Building
1,854,357
1,854,357
Building Improvements
1,554,742
1,554,742
Land
2,635,120
3,535,120
6,933,366
7,971,898
Less: Accumulated Depreciation
(1,300,609
)
(1,235,331
)
$
5,632,757
$
6,736,567
Depreciation expense was approximately $228,000 and $277,000 for the years ended December 31, 2011 and 2010,
respectively.
9. Goodwill and Intangible Assets
In accordance with ASC Topic 350 Intangibles Goodwill and Other , goodwill is not subject to amortization. Goodwill and
indefinite-lived assets are reviewed for impairment by applying a fair value based test on an annual basis or more frequently if circumstances indicate impairment may have occurred. The Company assesses goodwill for impairment by comparing the
carrying values of its reporting units to their respective fair values and reviewing the Companys market value of invested capital. Management engages an independent valuation firm as needed to assist in its impairment assessment reviews. The
Company determines the fair value of its reporting units primarily by comparing the reporting unit to similar business ownership interests that have been sold. The Company also uses comparative price-to-book multiples and other factors to
corroborate the reasonableness of the conclusion.
The Company obtained third party valuations to assist in the determination of fair value of
our reporting units. As a result of a reduction in fair value of certain 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
$544,000. The Company recognized impairment of approximately $275,000 to our goodwill and impairment of approximately $269,000 to our intangible assets in the year ended December 31, 2011. The $544,000 impairment expense is included as a
component of impairment loss in the consolidated statement of operations for the year ended December 31, 2011.
In accordance with Topic
350, management performs interim assessments of goodwill if impairment indicators are present. At the end of the third quarter of 2010, management concluded that the significant decline in the Companys stock price subsequent to June 30,
2010 was other than short-term in nature. This conclusion, coupled with the severity of the decline, triggered a review for impairment outside of our next scheduled annual impairment evaluation date of December 31, 2010. A decline in stock
price may be an indicator of an adverse change in business climate and it affects market capitalization and may affect fair value measurements for reporting units. Due to the reduction in the Companys market capitalization, third party
valuations were obtained to assist in the determination of fair value for 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. The Company recognized impairment of approximately $9.4 million to our goodwill and impairment of approximately $971,000 to our intangible assets in the year ended
December 31, 2010. The $10.3 million impairment expense is included as a component of impairment loss in the consolidated statement of operations for the year ended December 31, 2010.
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The following table presents goodwill and intangible assets as of December 31, 2011 and 2010.
2011
2010
Weighted
Average
Life
Gross
Carrying
Amount
Accumulated
Amortization
Net
Carrying
Amount
Gross
Carrying
Amount
Accumulated
Amortization
Net
Carrying
Amount
Amortizable intangible assets:
Trade names/ trademarks/ websites
5.0 years
$
364,020
$
291,215
$
72,805
$
657,902
$
511,979
$
145,923
Proprietary software/ processes/ know-how
6.2 years
2,635,172
1,425,563
1,209,609
2,410,000
1,021,288
1,388,712
Non-compete agreements
3.4 years
696,934
679,440
17,494
700,574
534,793
165,781
Customer list
7.3 years
2,989,804
1,511,238
1,478,566
3,070,474
1,173,314
1,897,160
Total amortizable intangible assets, net
2,778,474
3,597,576
Infinite-lived intangible assets:
Trade names
2,311,842
2,577,216
Total intangible assets, net
$
5,090,316
$
6,174,792
Goodwill
$
6,130,152
$
6,407,640
The changes to the net carrying value of goodwill by business segment for the years ended December 31, 2011 and 2010
are as follows:
Strategic
Services
Intelligence
and Insights
Services
Total
Balance as of December 31, 2009
$
7,300,096
$
8,574,043
$
15,874,139
Increases due to acquisitions and earnouts
43,680
43,680
Impairment
(3,891,678
)
(5,469,482
)
(9,361,160
)
Translation adjustment
(65,200
)
(83,819
)
(149,019
)
Balance as of December 31, 2010
3,386,898
3,020,742
6,407,640
Impairment
(274,610
)
(274,610
)
Translation adjustment
(2,878
)
(2,878
)
Balance as of December 31, 2011
$
3,386,898
$
2,743,254
$
6,130,152
The changes to the net carrying value of intangible assets by business segment for the years ended December 31, 2011
and 2010 are as follows:
Strategic
Services
Intelligence
and Insights
Services
Total
Balance as of December 31, 2009
$
7,066,788
$
1,425,513
8,492,301
Amortization
(1,016,445
)
(234,013
)
(1,250,458
)
Impairment
(971,469
)
(971,469
)
Translation adjustment
(74,101
)
(21,481
)
(95,582
)
Balance as of December 31, 2010
5,004,773
1,170,019
6,174,792
Additions
225,172
225,172
Amortization
(820,580
)
(222,941
)
(1,043,521
)
Impairment
(269,012
)
(269,012
)
Translation adjustment
2,885
2,885
Balance as of December 31, 2011
$
4,409,365
$
680,951
$
5,090,316
Finite-lived intangible assets are being amortized over the estimated useful lives of the respective assets, which range
between three and ten years. Total amortization expense related to intangible assets was approximately $1,044,000 and $1,250,000 for the years ended December 31, 2011 and 2010, respectively.
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The estimated aggregate future amortization expense related to the Companys intangible assets with
finite lives is as follows:
For the years ending December 31,
2012
$
942,891
2013
852,588
2014
604,810
2015
207,416
2016
65,539
Thereafter
105,230
Total
$
2,778,474
10. Long-term Debt
The Company had the following long-term debt at December 31, 2011 and 2010:
December 31,
2011
2010
$3,000,000 note payable, bank, 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; collateralized by the Companys corporate office building and related land
$
2,809,199
$
2,867,215
$1,750,000 note payable, due in quarterly installments of interest in arrears at 8.00% with principal due in full on
October 22, 2012; less applicable debt discount (discussed below); collateralized by a security interest in 68% of one of the Companys subsidiaries, which owns undeveloped land in Hernando County, Florida
1,143,202
1,011,064
$1,500,000 note payable, due in monthly installments of interest at 7.00% with principal due in full on October 1, 2015;
collateralized by the Companys corporate office building and undeveloped land in Hillsborough County, Florida
1,250,000
1,250,000
$600,000 note payable, bank, due in monthly installments of $14,420 including principal and interest at 7.09% through November
2012
155,965
311,672
$200,000 secured loan agreement and promissory note, due in full by February 15, 2012 including interest at 6.00% and
$26,000 in related fees. This note was extended in February 2012.
200,000
$200,000 short term related party promissory note, due in full by February 27, 2011 including interest at 3.50% plus 3.0
points
200,000
Capital leases on computer equipment, due in monthly installments of up to $1,635 expiring through July 2011, imputed interest
rates of between 9.5% and 16.3%
8,761
Insurance financing, due in monthly installments of up to $13,603 and $11,376 including principal and interest at 5.32% and 5.44%
through September 2012 and July 2011, respectively
84,073
77,593
$50,000 bank credit card financing, due in monthly installments of interest at 7.74%
43,774
$25,000 bank credit card financing, due in monthly installments of interest at 6.5%
22,058
Total long-term debt
5,642,439
5,792,137
Less current maturities
1,644,664
433,964
Non current portion
$
3,997,775
$
5,358,173
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Payments required for the next five years on the long-term debt balance as of December 31, 2011 are as
follows:
For the years ending December 31,
2012
$
1,644,664
2013
2,747,775
2014
2015
1,250,000
Total
$
5,642,439
11. 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 $151,000 and $(186,000) for the years ended
December 31, 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:
Dec 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.
12. Equity
Accumulated Other Comprehensive Income
Components comprising the balance in accumulated other comprehensive income for the years ended December 31, 2011 and 2010 are as follows:
Unrealized gain
(loss)
from
available-for-
sale securities
Foreign
currency
translation
adjustment
Accumulated
other
comprehensive
income
Balance at December 31, 2009
$
(70,946
)
$
246,555
$
175,609
Gain (loss) for the period
199,986
(227,673
)
(27,687
)
Balance at December 31, 2010
129,040
18,882
147,922
Gain (loss) for the period
(91,901
)
(2,082
)
(93,983
)
Balance at December 31, 2011
$
37,139
$
16,800
$
53,939
37
Table of Contents
Securities Offering
On July 8, 2010, the Company entered into a definitive securities purchase agreement (the Securities Purchase Agreement) with three institutional investors, pursuant to which the Company
agreed to issue to the investors in a registered offering 1,481,481 shares (the Shares) of the Companys common stock priced at $2.565 per share along with Series A warrants to purchase up to 1,481,481 shares of common stock with an
exercise price of $3.43 per share of common stock and Series B warrants to purchase up to 893,519 shares of common stock with an exercise price of $0.01 per share of common stock. These securities were offered pursuant to our effective shelf
registration statement on Form S3 (File No. 333165859).
On July 9, 2010, the Company entered into an amendment to the
Securities Purchase Agreement with each of the investors to increase the exercise price of the Series A warrants to be issued in connection therewith from $3.43 per share to $3.49 per share. The Series A warrants are exercisable for a five-year
period commencing nine months after the date of their issuance.
On July 12, 2010, the Company completed the offering contemplated by the
Securities Purchase Agreement and raised gross proceeds in connection therewith of approximately $3.8 million before advisory fees and offering expenses.
The Series B warrants are exercisable for a five-year period commencing on the 120 day anniversary of the date of their issuance. The Company determined that the Series B warrants are a component of
equity and have been included in the cash proceeds of the securities offering as such. All of the 893,519 Series B warrants were exercised as of December 31, 2010.
In addition, the Company granted each investor in the offering the right of first refusal to purchase 100% of the shares of the Companys common stock or securities convertible into or exercisable
for shares of the Companys common stock to be issued by the Company in certain offerings until the one (1) year anniversary of the date of the issuance of the Shares. Thereafter, each investor will have the right of first refusal to
purchase 50% of the shares of the Companys common stock or securities convertible into or exercisable for shares of the Companys common stock to be issued by the Company in certain offerings until the two (2) year anniversary of the
date of the issuance of the Shares.
Stock Warrants
Effective April 6, 2011, 437,500 of the Companys $0.01 fully vested common stock warrants were exercised.
The Company has Series A warrants to purchase 1,481,481 shares of common stock outstanding as of December 31, 2011. These warrants are fully vested and have an exercise price of $3.49 per share. The
warrants expire in Jan 2016.
13. Stock-Based 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 then existing Non-Qualified Option Plan, Employee Option Plan and Restricted Stock Plan. The options and restricted stock previously granted under the three then 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.
The options can be granted as incentive stock options within the meaning of
Section 422 of the Internal Revenue Code (the Code) or as options that do not qualify for incentive treatment under Section 422 of the Code. Options are granted at the fair market value of the stock on the date of grant, except
in the case of a more than 10% shareholder for which grants are exercisable at 110% of fair market value of the stock on the date of grant. Options generally become fully vested three to four years from the date of grant and expire five to seven
years from the date of grant. At December 31, 2011, the Company had 2,549,420 shares available for future stock or option grants under the Equity Compensation Plan.
Stock-based compensation cost recognized during the years ended December 31, 2011 and 2010 includes compensation cost for all share-based payments granted subsequent to January 1, 2006, based on
their respective grant date fair values estimated in accordance with ASC Topic 718 Compensation Stock Compensation . The Company recognizes compensation expense on a straight-line basis over the requisite service period. The Company
estimates forfeitures, both at the grant date as well as throughout the requisite service period, based on the Companys historical experience and future expectations.
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Table of Contents
Topic 718 requires management to estimate, at the grant date, the number of stock options for which the
requisite service is expected to be rendered. The Company applies a forfeiture rate to account for the number of stock options for which the requisite service period is not expected to be rendered. Management revised its estimate of the forfeiture
rate of its options in 2009 and 2010 to account for significant variances between the estimated forfeitures and the actual forfeitures. The revision to the forfeiture rate is accounted for as a change in estimate in accordance with ASC Topic 250
Accounting Changes and Error Corrections and the cumulative effect of approximately $178,000, a reduction in stock-based compensation, was recognized for the year ended December 31, 2010. In addition, the revision to the forfeiture rate
caused an additional reduction in stock-based compensation of approximately $481,000 and $587,000 for the years ended December 31, 2011 and 2010, respectively. The change in estimate resulted in a beneficial effect of $0.03 and $0.06 per share
on the Companys net loss per share for the years ended December 31, 2011 and 2010, respectively. In connection with these revisions, stock-based compensation for prospective periods will be reduced by approximately $348,000 over the next
2 years.
The Company uses the Black-Scholes option pricing model to estimate the fair value of stock-based awards on the date of grant. The
assumptions employed in the calculation of the fair value of share-based compensation expense were calculated as follows for all years presented:
Expected dividend yield based on the Companys historical dividend yield.
Expected volatility based on the Companys historical market price at consistent points in a period equal to the expected life of the
options.
Risk-free interest rate based on the US Treasury yield curve in effect at the time of grant.
Expected life of options based on the Companys historical life of options exercised, giving consideration to the contractual terms of the
grants, vesting schedules and expectations of future employee behavior.
The following table summarizes the assumptions used
to estimate the fair value of stock options granted during the years ended December 31, 2011 and 2010:
2011
2010
Expected dividend yield
0
%
0
%
Expected volatility
53-66
%
42-55
%
Risk-free interest rate
0.74-1.14
%
0.59-1.44
%
Expected life of options
4.0 years
4.0 years
Weighted average grant date fair value
$
1.02
$
0.51
The Company did not have any cash proceeds from the exercise of stock options for the years ended December 31, 2011
and 2010. Total compensation cost related to stock options was approximately $509,000 and $288,000 for the years ended December 31, 2011 and 2010, respectively. At December 31, 2011, there was approximately $649,000 of unrecognized
compensation cost related to stock options, which is expected to be recognized over a weighted average period of 2.4 years.
The following
table represents stock option activity as of and for the two years ended December 31, 2011:
Number
of Shares
Weighted
Average
Exercise
Price
Weighted
Average
Remaining
Contractual Life
Aggregate
Intrinsic
Value
Options Outstanding December 31, 2009
1,301,650
$
7.86
Granted
681,667
$
1.35
Exercised
Forfeited/cancelled/expired
(713,150
)
$
7.71
Options Outstanding December 31, 2010
1,270,167
$
4.45
Granted
677,250
$
2.19
Exercised
Forfeited/cancelled/expired
(640,350
)
$
4.91
Options Outstanding December 31, 2011
1,307,067
$
3.05
5.65 years
$
35,150
Options Exercisable December 31, 2011
442,542
$
4.17
5.15 years
$
8,788
The total grant date fair value of options vested during the years ended December 31, 2011 and 2010 was
approximately $423,000 and $622,000, respectively.
39
Table of Contents
The following table summarizes information about outstanding and exercisable stock options as of
December 31, 2011:
Outstanding Options
Exercisable Options
Range of Exercise Prices
Outstanding
at
12/31/11
Weighted
Average
Exercise Price
Remaining
Contractual
Life in Years
Exercisable
at
12/31/11
Weighted
Average
Exercise Price
$0.77 - $ 1.60
386,667
$
1.08
5.90
99,917
$
1.11
$2.34 - $ 2.40
554,400
2.38
6.37
127,500
2.40
$3.97 - $ 5.05
271,500
4.68
4.64
142,000
4.68
$9.30 - $13.13
94,500
10.39
3.27
73,125
10.48
1,307,067
$
3.05
5.65
442,542
$
4.17
The following table represents restricted stock activity as of and for the two years ended December 31, 2011:
Number of
Shares
Weighted-
average
Grant
Date
Fair Value
Restricted Stock Outstanding December 31, 2010
Granted
145,000
$
1.19
Vested and stock issued
(20,000
)
$
0.77
Forfeited
(5,000
)
$
0.77
Restricted Stock Outstanding December 31, 2011
120,000
$
1.28
14. Other (Income) Expense
Components comprising the balance in other (income) expense for the years ended December 31, 2011 and 2010 are as follows:
Year Ended December 31,
2011
2010
(Gain) loss on sale of investments
$
(18,670
)
$
(79,451
)
Impairment of investments
217,600
1,659,411
Share in loss of equity method investment
2,511
25,856
Derivative (gain) loss
150,825
(186,203
)
Rental income
(317,097
)
(178,404
)
Other
(148,301
)
(91,411
)
Other (income) expense
$
(113,132
)
$
1,149,798
15. Income Taxes
Deferred income tax assets and liabilities are determined based upon differences between financial reporting and the tax basis of
assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse.
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Table of Contents
The components of the income tax provision on operations, excluding income tax expense (benefit) on
realized gains (losses) and unrealized appreciation (depreciation) of investments for 2011 and 2010 are as follows:
Year Ended December 31,
2011
2010
Current:
Federal
$
$
State
Foreign
$
$
Deferred:
Federal
$
(163,017
)
$
33,731
State
(17,404
)
3,601
Foreign
(49,722
)
(92,913
)
(230,143
)
(55,581
)
Provision for income taxes
$
(230,143
)
$
(55,581
)
A reconciliation of the differences between the effective income tax rate and the statutory federal tax rate follows:
Year Ended December 31,
2011
2010
Tax at US statutory rate
$
(1,764,521
)
$
(6,523,582
)
State taxes, net of federal benefit
(188,389
)
(696,488
)
Foreign rate differential
11,456
152,054
Stock options
126,905
99,656
Gain/loss on derivative liabilities
(302,263
)
Impairment and amortization of intangible assets
3,522,604
Other items
55,471
(63,686
)
(2,061,341
)
(3,509,442
)
Change in valuation allowance
1,831,198
3,453,861
Provision for income taxes
$
(230,143
)
$
(55,581
)
The Company has unrealized gains on available-for-sale securities of $199,986 and foreign currency translation
adjustments of $(227,673) for the year ended December 31, 2010. These amounts are included as a component of equity in 2010. Accordingly, these amounts as tax-effected are included in the Companys valuation allowance, but would not be
reflected in the change in the valuation allowance in the accompanying reconciliation of the effective rate to the statutory rate for 2010.
Significant components of the Companys deferred tax assets and liabilities are as follows:
December 31,
2011
2010
Current
Accrued expenses
$
534,451
$
16,228
Revenue recognition
(128,002
)
(40,863
)
Subtotal current deferred tax asset (liability)
406,449
(24,635
)
Non-current
Net operating loss carryforward
11,861,250
11,025,062
Capital loss carryforward
7,085,790
7,056,766
Intangible assets
(1,808,553
)
(2,213,378
)
Investments
2,660,439
2,617,919
Other
976,059
658,357
Subtotal non-current deferred tax asset (liability)
20,774,985
19,144,726
Total deferred tax asset
21,181,434
19,120,091
Less: valuation allowance
(22,171,976
)
(20,340,778
)
Net deferred tax liability
$
(990,542
)
$
(1,220,687
)
41
Table of Contents
The Company is currently subject to examination by federal and state taxing authorities for 2008 and
subsequent years.
ASC Topic 740 Income Taxes requires a valuation allowance to reduce the deferred tax assets reported if, based on
the weight of the evidence, it is more likely than not that some portion or all of the deferred tax assets will not be realized. The Companys management previously determined that it was more likely than not that the Companys net
operating loss and capital loss carryforwards would not be utilized in the future. Accordingly, a valuation allowance of $22.2 million and $20.3 million was recorded for 2011 and 2010, respectively.
At December 31, 2010, the Company had available U.S. net operating loss carryforwards of approximately $30,702,000, which expire as follows:
2021-$753,000; 2022-$371,000; 2023-$1,645,000; 2024-$69,000; 2025-$3,835,000; 2027-$5,076,000; 2028-$5,423,000; 2029-$7,343,000; 2030-$3,706,000; and 2031 - $2,481,000. The Company has available U.S. capital loss carryforwards of approximately
$18,753,000, which expire as follows: 2012-$381,000; 2013-$860,000; 2014-$16,669,000; and 2015-$843,000.
16. Segment Reporting
ASC Topic 280 Segment Reporting establishes standards for reporting information about operating segments. Operating segments are
defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker, or decision making group, in deciding how to allocate resources and in assessing
performance. The Company is organized geographically and by line of business. The line of business management structure is the primary basis for which the allocation of resources and financial results are assessed.
The Company has two reportable geographical operating segments: United Kingdom and the United States. The United Kingdom segment includes the
Companys wholly owned subsidiary Innovaro Europe, Ltd. and the United States segment includes Innovaro, Inc. and UTEK Real Estate.
A
summary of revenue and other financial information by reportable geographical operating segment is shown below:
0000000000
0000000000
0000000000
United Kingdom
United States
Consolidated
Long-lived assets December 31, 2011
$
1,596,832
$
15,256,393
$
16,853,225
Total assets December 31, 2011
1,624,214
19,142,051
20,766,265
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
0000000000
0000000000
0000000000
For the Year Ended December 31, 2011
United Kingdom
United States
Consolidated
Revenue
$
463,902
$
14,395,485
$
14,859,387
Loss before income taxes
(119,709
)
(5,031,157
) ( 1 )
(5,150,866
)
Depreciation and amortization
115,135
1,156,831
1,271,966
0000000000
0000000000
0000000000
For the Year Ended December 31, 2010
United Kingdom
United States
Consolidated
Revenue
$
644,448
$
12,451,678
$
13,096,126
Loss before income taxes
(3,486,700
) ( 2 )
(15,706,399
) ( 3 )
(19,193,099
)
Depreciation and amortization
345,635
1,181,709
1,527,344
(1)
The Company recognized a $1.4 million impairment loss for the United States segment during 2011.
(2)
The Company recognized a $2.9 million impairment loss for the United Kingdom segment during 2010.
(3)
The Company recognized an $8.9 million impairment loss for the United States segment during 2010.
The Company also has business segments for which certain information can be reported. These reportable business segments include Strategic Services and
Intelligence and Insights Services. The administrative and other column represents miscellaneous and other income items and general and administrative type expenses that are not allocated amongst the different businesses. Management does not analyze
assets for decision making purposes as it relates to the segments below. Accordingly, information is not available for long-lived assets or total assets.
42
Table of Contents
A summary of revenue and other financial information by reportable business segment is shown below:
000000000000
000000000000
000000000000
000000000000
For the Year Ended December 31, 2011
Strategic
Services
Intelligence
and
Insights
Services
Administrative
and Other
Total
Revenue
$
12,373,822
$
2,485,565
$
$
14,859,387
Income (loss) before income taxes
1,108,794
121,347
(1)
(6,381,007
) ( 2 )
(5,150,866
)
000000000000
000000000000
000000000000
000000000000
For the Year Ended December 31, 2010
Strategic
Services
Intelligence
and
Insights
Services
Administrative
and Other
Total
Revenue
$
9,783,318
$
3,312,808
$
$
13,096,126
Loss before income taxes
(1,792,324
) ( 3 )
(8,919,398
) ( 4 )
(8,481,377
)
(19,193,099
)
(1)
The Company recognized a $544,000 impairment loss for the intelligence and insights services segment during 2011.
(2)
The Company recognized a $900,000 impairment loss for the administrative and other during 2011.
(3 )
The Company recognized a $4.9 million impairment loss for the strategic services segment during 2010.
( 4 )
The Company recognized a $5.5 million impairment loss for the Intelligence and Insights Services segment during 2010.
17. Employee Benefit Plan
On February 1, 2009, the Company adopted the UTEK Corporation 401k Plan (the 401k Plan). The 401k Plan allows
employees who satisfy the service requirements of the 401k Plan, which include being 21 years of age and having three months of service, to contribute pre-tax wages to the 401k Plan, subject to legal limits. The Company matches 100% of the first 3%,
and 50% of the second 2%, of compensation contributed by employees. The Companys contributions vest immediately and were approximately $108,000 and $161,000 for the years ended December 31, 2011 and 2010, respectively.
18. Commitments and Contingencies
Bonus Plans
The
Company has a discretionary bonus plan for qualifying strategic services segment employees. The Company recognized bonus expense of approximately $2.5 million and $3.3 million in connection with this bonus plan during the years ended
December 31, 2011 and 2010, respectively.
Operating Leases
The Company leases its office facilities and certain equipment for various terms under long-term, non-cancelable operating lease agreements. The leases expire at various dates through 2013 and provide for
various renewal options. In the normal course of business, it is expected that these leases will be renewed or replaced by leases on other properties. The leases provide for increases in future minimum annual rental payments. Lease expense charged
to operations was approximately $176,000 and $159,000 for the years ended December 31, 2011 and 2010, respectively.
The Company leases
the office space for its corporate headquarters from Ybor City Group, Inc., a subsidiary of UTEK Real Estate. In connection with the consolidation of UTEK Real Estate as of October 1, 2009, the rent expense associated with this lease is
eliminated as an intercompany transaction.
The following is a schedule by year of future minimum rental payments required under the operating
lease agreements:
For the years ending December 31,
2012
$
113,082
2013
24,992
$
138,074
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Table of Contents
19. Related Party Transactions
During December 2010, the Company borrowed $200,000 for operations from one of its directors, Mark Berset, under a promissory note.
This 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.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure
Not applicable.
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.