10-Q
1
d347066d10q.htm
FORM 10-Q
Form 10-Q
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2012
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number 001-15941
INNOVARO,
INC.
(Exact name of registrant as specified in its charter)
Delaware
59-3603677
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
2109 Palm Avenue
Tampa, FL 33605
(Address of principal executive offices)
(813) 754-4330
(Registrants telephone number)
(Former name, former address and
former fiscal year, if changed since last report)
None
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90
days. Yes x No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every
Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such
files). Yes x No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller
reporting company. See the definitions of large accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.
Large accelerated filer
¨
Accelerated filer
¨
Non-accelerated filer
¨ (Do not check if a smaller reporting company)
Smaller reporting company
x
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act). Yes ¨ No x
On August 1, 2012, there were 15,456,410 shares outstanding of the registrants common stock, $0.01 par value.
Table of Contents
INNOVARO, INC.
FORM 10-Q TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
3
ITEM 1. Financial Statements
3
Consolidated Balance Sheets as of June 30, 2012 (unaudited) and December 31,
2011
3
Consolidated Statements of Comprehensive Income for the Three and Six Months Ended June
30, 2012 and 2011 (unaudited)
4
Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2012 and 2011
(unaudited)
5
Notes to Consolidated Financial Statements (unaudited)
7
ITEM 2. Managements Discussion and Analysis of Financial Condition and Results of
Operations
15
ITEM 3. Quantitative and Qualitative Disclosures about Market Risks
23
ITEM 4. Controls and Procedures
23
PART II. OTHER INFORMATION
23
ITEM 1. Legal Proceedings
23
ITEM 1A. Risk Factors
23
ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds
23
ITEM 3. Defaults Upon Senior Securities
23
ITEM 4. Mine Safety Disclosures
23
ITEM 5. Other Information
24
ITEM 6. Exhibits
24
Signatures
25
Exhibits
Page 2 of 29
Table of Contents
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
INNOVARO, INC.
Consolidated Balance Sheets
June 30,
2012
(Unaudited)
December
31,
2011
ASSETS
Current assets:
Cash
$
570,401
$
268,170
Accounts receivable, net
639,752
507,482
Contracts in process
37,849
513,040
Available-for-sale securities
6,552
55,038
Prepaid expenses and other current assets
171,349
235,285
Note receivable and accrued interest
1,856,000
1,804,000
Current assets held for sale
221,077
351,093
Total current assets
3,502,980
3,734,108
Cost method investments
86,784
86,784
Equity method investments
92,148
92,148
Fixed assets, net
5,521,077
5,619,003
Goodwill
3,386,898
Intangible assets, net
3,085,483
4,831,630
Noncurrent assets held for sale
2,715,956
3,015,694
Total assets
$
15,004,428
$
20,766,265
LIABILITIES
Current liabilities:
Accounts payable
$
821,423
$
512,840
Accrued expenses
739,069
449,432
Accrued bonus pool
1,408,332
1,444,955
Deferred revenue
247,292
123,836
Current maturities of long-term debt
4,183,006
1,644,664
Current liabilities held for sale
742,143
794,893
Total current liabilities
8,141,265
4,970,620
Long-term debt, less current maturities
1,250,000
3,997,775
Deferred tax liability
283,308
798,839
Noncurrent liabilities held for sale
194,890
191,703
Total liabilities
9,869,463
9,958,937
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; 15,551,410 and 15,159,544 shares issued; 15,456,410 and 15,039,544
shares outstanding at June 30, 2012 and December 31, 2011, respectively
154,564
150,396
Additional paid-in capital
87,335,178
86,820,437
Accumulated deficit
(82,623,709
)
(76,453,214
)
Accumulated other comprehensive income
37,325
53,939
Total Innovaro stockholders equity
4,903,358
10,571,558
Noncontrolling interest
231,607
235,770
Total equity
5,134,965
10,807,328
Total liabilities and equity
$
15,004,428
$
20,766,265
See accompanying notes
Page 3 of 29
Table of Contents
INNOVARO, INC.
Consolidated Statements of Comprehensive Income
(Unaudited)
Three Months Ended June 30,
Six Months Ended June 30,
2012
2011
2012
2011
Revenue:
Strategic services
$
1,734,860
$
4,555,245
$
2,478,531
$
7,583,106
Intelligence and Insights services
148,750
112,317
226,916
255,192
1,883,610
4,667,562
2,705,447
7,838,298
Expenses:
Direct costs of revenue Strategic services
1,123,430
4,475,680
1,947,248
6,157,242
Direct costs of revenue Intelligence and Insights services
168,935
150,237
365,140
315,117
Salaries and wages
240,928
352,444
503,687
520,473
Professional fees
91,309
96,136
163,580
178,109
Research and development
139,988
330,087
240,251
633,664
Sales and marketing
30,885
40,105
84,009
78,864
General and administrative
469,632
463,603
903,929
907,853
Depreciation and amortization
258,661
309,867
521,402
622,082
Impairment loss
4,756,898
4,756,898
7,280,666
6,218,159
9,486,144
9,413,404
Other (income) and expense:
Other (income) expense
(230,748
)
8,685
(351,534
)
14,678
Interest expense, net
142,560
81,623
277,336
223,210
(88,188
)
90,308
(74,198
)
237,888
Loss from continuing operations before income taxes
(5,308,868
)
(1,640,905
)
(6,706,499
)
(1,812,994
)
Provision for income tax expense (benefit)
(515,531
)
(9,814
)
(515,531
)
(19,628
)
Loss from continuing operations
(4,793,337
)
(1,631,091
)
(6,190,968
)
(1,793,366
)
Income (loss) from discontinued operations, net of tax
(73,747
)
164,614
16,310
151,149
Net loss
(4,867,084
)
(1,466,477
)
(6,174,658
)
(1,642,217
)
Net loss attributable to the noncontrolling interest
(2,977
)
(1,976
)
(4,163
)
(4,403
)
Net loss attributable to Innovaro stockholders
(4,864,107
)
(1,464,501
)
(6,170,495
)
(1,637,814
)
Other comprehensive income (loss)
(37,801
)
1,155
(32,213
)
(48,341
)
Comprehensive loss
$
(4,901,908
)
$
(1,463,346
)
$
(6,202,708
)
$
(1,686,155
)
Basic and diluted income (loss) per share:
Loss from continuing operations
$
(0.32
)
$
(0.11
)
$
(0.41
)
$
(0.12
)
Income (loss) from discontinued operations
0.00
0.01
0.00
0.01
Net loss
(0.32
)
(0.10
)
(0.41
)
(0.11
)
Weighted average shares outstanding: Basic and diluted
15,174,780
14,963,859
15,119,662
14,993,148
See accompanying notes
Page 4 of 29
Table of Contents
INNOVARO, INC.
Consolidated Statements of Cash Flows
(Unaudited)
Six Months Ended June 30,
2012
2011
Operating Activities:
Net loss
$
(6,174,658
)
$
(1,642,217
)
Less: Income from discontinued operations, net of tax
16,310
151,149
Loss from continuing operations
(6,190,968
)
(1,793,366
)
Adjustments to reconcile net loss from continuing operations to net cash flows from operating activities:
Depreciation and amortization
520,259
620,897
Amortization of debt discount from investor warrants
65,889
65,526
Stock issued for services
97,499
Goodwill impairment
3,386,898
Intangible asset impairment
1,370,000
Loss (gain) on sale and impairment of available-for-sale securities
(47,630
)
201
Loss on derivative liabilities
150,825
Stock-based compensation
189,580
268,135
Deferred income taxes
(515,531
)
(19,628
)
Other
45,596
12,082
Changes in operating assets and liabilities:
Accounts receivable and contracts in process
342,921
(610,388
)
Prepaid expenses and other assets
(23,430
)
(40,855
)
Deferred revenue
123,456
(14,849
)
Accounts payable and other liabilities
561,597
1,857,510
Net cash flows from operating activities of continuing operations
(73,864
)
496,090
Investing Activities:
Capital expenditures
(661
)
(22,758
)
Capitalization of software development costs
(45,525
)
Proceeds from sale of available-for-sale securities
63,903
Net cash flows from investing activities of continuing operations
17,717
(22,758
)
Financing Activities:
Net proceeds from stock offering
231,830
Payments on long-term debt
(285,552
)
(383,350
)
Net cash flows from financing activities of continuing operations
(53,722
)
(383,350
)
Net cash flows from continuing operations
(109,869
)
89,982
Net cash flows from discontinued operations
412,100
280,386
Increase in cash
302,231
370,368
Cash at beginning of period
268,170
262,619
Cash at end of period
$
570,401
$
632,987
See accompanying notes
Page 5 of 29
Table of Contents
INNOVARO, INC.
Consolidated Statements of Cash Flows (continued)
(Unaudited)
Six Months Ended June 30,
2012
2011
Supplemental Disclosures of Non-Cash Investing and Financing Activities
Unrealized gain (loss) from available-for-sale securities, net
$
32,213
$
(48,341
)
Derivative liability extinguished in connection with exercise of investor warrants
$
1,290,830
Supplemental Disclosures of Cash Flow Information
Cash paid for taxes
$
$
Cash paid for interest
$
231,067
$
298,303
See accompanying notes
Page 6 of 29
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INNOVARO, INC.
Notes to Consolidated Financial Statements
(Unaudited)
1.
Basis of Presentation
Interim Financial Information
The financial information for Innovaro, Inc. (the Company, we, us or Innovaro) as of June 30, 2012 and 2011 and for the three and six month periods
then ended is unaudited, but includes all adjustments, which, in the opinion of management are necessary in order to make the consolidated financial statements not misleading at such dates and for those periods. These consolidated financial
statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and, therefore, do not include all information and notes required by accounting principles
generally accepted in the United States of America (GAAP) for complete consolidated financial statements. These consolidated financial statements should be read in conjunction with the consolidated audited financial statements and
related notes included in the Companys Annual Report on Form 10-K for the year ended December 31, 2011. Operating results for the six months ended June 30, 2012 are not necessarily indicative of the results that may be expected for
the entire year.
The Company
Innovaro is The Innovation Solutions Company focused on innovation management consulting and software. Innovaros mission is to help companies
innovate and grow. Innovaro offers a comprehensive set of services and software to ensure the success of any innovation project, regardless of the size or intent. The Companys unique combination of strategic consulting services provide
innovation expertise, the 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 the Companys offices in the United States and the United Kingdom.
Going Concern
These consolidated financial statements have been prepared in accordance with 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 $(6,174,658) and
$(4,920,723) for the six months ended June 30, 2012 and the year ended December 31, 2011, respectively. In addition, the Company has a working capital deficit of $(4,638,285) and an accumulated deficit of $(82,623,709) as of June 30,
2012. These factors raise 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 salaries. 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 its investments and common stock.
The Company currently intends to fund its
liquidity needs, including its software development costs, with existing cash balances, cash generated from operations, collections of its existing receivables, the potential sales of its investments and the potential sale of certain of the
Companys operating divisions and assets. Given the Companys cash position, working capital deficit and expected revenues in the near term, the Company does not expect that it will be able to fund its scheduled debt service payments of
$4,183,006 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 and sell assets, 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.
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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 its 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.
Principles of Consolidation
The consolidated financial statements include the accounts of Innovaro and its wholly owned subsidiaries: Innovaro 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.
2.
Significant Accounting Policies
Accounts Receivable
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 comprehensive income. The allowance for doubtful accounts was approximately $0 and $29,000 as of June 30, 2012 and December 31, 2011,
respectively.
Cost Method Investments
Cost method investments were not evaluated for impairment as of June 30, 2012. The Company does not estimate the fair value of a cost method investment if there are no identified events or changes in
circumstances that may have a significant adverse effect on the fair value because it is not practicable to estimate fair value on a quarterly basis.
Software Development Costs
Financial Accounting Standards Board (FASB) Accounting Standards Codification (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 FASB ASC Subtopic 985-20, the Company has expensed all costs incurred to establish the technological feasibility of Versions 1.0 and
2.0 of the Innovaro LaunchPad software (LaunchPad) as research and development costs. In addition, the Company capitalized approximately $46,000 in software development costs related to Version 1.0 for the six months ended June 30,
2012.
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. During the second quarter of
2012, the Company had a general release of Version 1.0, and accordingly, began amortizing capitalized software costs. The Company recorded amortization expense related to software development costs of approximately $8,000 for the six months ended
June 30, 2012.
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Goodwill and Intangible Assets
In accordance with FASB ASC Topic 350 Intangibles Goodwill and Other , management performs interim assessments of goodwill if impairment indicators are present. At the end of the second
quarter of 2012, management concluded that its revenue projections for its strategic services segment needed to be revised as a result of concerns that the business may not meet its revenue and cash flow projections for the year ending
December 31, 2012 due to a diminished backlog that is not expected to turn around in the near term. This conclusion triggered a review for impairment outside of the Companys next scheduled annual impairment evaluation date of
December 31, 2012. Management determined that the goodwill was impaired and the Company recognized impairment of $3,386,898 to its goodwill for the three and six months ended June 30, 2012. In addition, subsequent to June 30, 2012,
the Company began discussions to sell certain of its intangible assets related to its strategic services segment. Based on the terms of this discussion, management determined that these intangible assets were impaired. The Company recognized
impairment of $1,370,000 to its intangible assets for the three and six months ended June 30, 2012. The impairment expense is classified as impairment loss in the consolidated statements of comprehensive income for the three and six months
ended June 30, 2012.
Accrued Expenses
Accrued expenses include approximately $409,000 and $213,000 of accrued salaries, vacation and related taxes as of June 30, 2012 and December 31, 2011.
Earnings per Share (EPS)
Basic earnings per share is computed on the basis of the weighted-average number of shares of common stock outstanding during the period. Diluted earnings per share is computed on the basis of the
weighted-average number of shares of common stock outstanding plus the potential dilutive effect of outstanding stock options, warrants and unvested shares of restricted stock.
Components of basic and diluted per share data are
as follows:
Three Months Ended June 30,
Six Months Ended June 30,
2012
2011
2012
2011
Weighted-average outstanding shares of common stock
15,174,780
14,963,859
15,119,662
14,993,148
Dilutive effect of stock options, warrants and unvested shares of restricted stock
Common stock and common stock equivalents
15,174,780
14,963,859
15,119,662
14,993,148
Shares excluded from calculation of diluted EPS (1)
2,992,918
2,947,398
2,992,918
2,947,398
(1)
These shares attributable to outstanding stock options, warrants and unvested restricted stock were excluded from the calculation of diluted EPS because their inclusion
would have been anti-dilutive, primarily as a result of the net loss during the periods presented.
Use of Estimates
The preparation of the Companys consolidated financial statements in conformity with FASB 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, and the valuation and impairment of goodwill and intangible assets. Actual results could differ from those
estimates.
Fair Value of Financial Instruments
The Companys financial instruments consist of investments, cash, accounts receivable, accounts payable, accrued expenses and long-term debt. The
fair value of cash, accounts receivable, accounts payable and certain accrued expenses approximate their carrying amounts in the financial statements due to the short-term nature of such instruments. The estimated fair value of the Companys
long-term debt is not materially different from its carrying value of $5,433,006 and $5,642,439 as of June 30, 2012 and December 31, 2011, respectively.
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The Company performs fair value measurements in accordance with the guidance provided by FASB ASC Topic 820
Fair Value Measurements and Disclosures . In accordance with FASB ASC Topic 820, the Company groups financial assets and financial liabilities measured at fair value in three levels based on the principal markets in which the assets and
liabilities are transacted and the observability of the data points used to determine fair value. The Companys investments in available-for-sale securities are classified within Level 2 of the fair value hierarchy. Level 2 includes valuations
for 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.
Available-for-sale securities were $6,552 and $55,038 as of June 30, 2012 and December 31, 2011, respectively.
The Companys
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 value of our equity interests in public companies for which
market quotations are readily available is based on quoted market prices for such equity interests. These securities are generally thinly traded and may 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.
Concentrations of Credit Risk
Financial instruments that the Company holds with significant credit risk include cash and 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 June 30, 2012. All of the Companys non-interest bearing cash balances were fully insured as of June 30, 2012.
Major Customers
The Company had three major customers during each of the three months ended June 30, 2012 and 2011 and two major customers during each of the six months ended June 30, 2012 and 2011, all of
which were customers of the strategic services line of business. Major customers, those generating greater than 10% of total revenue, accounted for approximately 92% and 65% of the Companys revenue during the three months ended June 30,
2012 and 2011, respectively. Major customers accounted for approximately 77% and 62% of the Companys revenue during the six months ended June 30, 2012 and 2011, respectively. In addition, four customers accounted for approximately 70% of
accounts receivable as of June 30, 2012.
New Accounting Pronouncements
In January 2012, the Company adopted the provisions of FASB 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 has presented a continuous statement of comprehensive income for the current period.
3.
Discontinued Operations
During the quarter ended June 30, 2012, as part of the Companys strategy to maximize cash flow as discussed in Note 1, the
Company decided to dispose of certain of its operating divisions that are included in its intelligence and insights segment. On June 4, 2012, the Company entered into a non-binding letter of intent with IPFlow International, LLC to sell its
Pharmalicensing, Pharma Transfer, Global Licensing and Knowledge Express operating divisions and all related assets for $2,000,000. Under the letter of intent, a definitive agreement had to be reached before August 4, 2012. However, the Company
is in continuing discussions with the buyer and believes that it is probable that a definitive agreement will still be reached. The agreement remains subject to customary conditions including negotiation of mutually agreeable terms, satisfactory
completion of due diligence and the buyer securing financing. No assurances can be provided that a definitive agreement will be reached and that the sale will be completed.
The Company has determined that these divisions meet the criteria for classification as discontinued operations as of June 30, 2012. Should the sale be completed, the operations and cash flows of
these divisions will be eliminated from the Companys ongoing operations, and the Company will have no significant continuing involvement in these divisions operations. Based on an estimate of proceeds from the sale of these divisions,
the Company recognized impairment totaling $255,126 in the second quarter of 2012. The Company has reflected the operations of these divisions as discontinued operations in the statements of comprehensive income for all periods presented. In
addition, the Company has classified the assets and liabilities of the discontinued divisions as current and noncurrent assets and liabilities held for sale in the consolidated balance sheets for all periods presented. Substantially all the cash
flows from discontinued operations for all periods presented relate to operating activities, and accordingly, the Company has presented cash flows from discontinued operations as a single line item in the consolidated statements of cash flows.
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The results of
operations of the aforementioned divisions are included in discontinued operations. The summary comparative financial results of discontinued operations are as follows:
Three Months Ended June 30,
Six Months Ended June 30,
2012
2011
2012
2011
Revenue
$
516,756
$
557,920
$
951,233
$
989,913
Long-lived asset impairment charge
(255,126
)
(255,126
)
Operating expense
(332,660
)
(450,722
)
(676,055
)
(893,654
)
Other income
59,101
134
58,391
Income (loss) before income taxes
(71,030
)
166,299
20,186
154,650
Provision for income tax (expense) benefit
(2,717
)
(1,685
)
(3,876
)
(3,501
)
Income (loss) from discontinued operations, net of tax
$
(73,747
)
$
164,614
$
16,310
$
151,149
The assets and liabilities classified as held for sale as of June 30, 2012 and
December 31, 2011 were as follows:
June 30, 2012
December 31, 2011
Receivables, net of allowance for doubtful accounts
$
166,550
$
291,753
Prepaid expenses and other current assets
54,527
59,340
Current assets held for sale
$
221,077
$
351,093
Property, plant and equipment
$
9,649
$
13,754
Goodwill
2,497,982
2,743,254
Intangible assets
208,325
258,686
Noncurrent assets held for sale
$
2,715,956
$
3,015,694
Accounts payable
$
100,294
$
36,591
Accrued expenses
43,892
25,916
Deferred revenue
597,957
732,386
Current liabilities held for sale
$
742,143
$
794,893
Deferred tax liability
$
194,890
$
191,703
Noncurrent liabilities held for sale
$
194,890
$
191,703
4.
Contracts in Process
Contracts in process consist of the following as of June 30, 2012 and December 31,
2011:
June 30,
2012
December 31,
2011
Contract costs and estimated earnings on uncompleted contracts
$
1,127,430
$
1,648,024
Less: billings to date
1,089,581
1,134,984
Total contracts in process
$
37,849
$
513,040
Components of contracts in process consist of the following as of June 30,
2012 and December 31, 2011:
June 30,
2012
December 31,
2011
Costs and estimated earnings in excess of billings on uncompleted contracts
$
37,849
$
604,856
Billings in excess of costs and estimated earnings on uncompleted contracts
(91,816
)
Total contracts in process
$
37,849
$
513,040
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Table of Contents
5.
Equity
Accumulated Other Comprehensive Income
The following table presents the components comprising the accumulated
other comprehensive income balance for the six months ended June 30, 2012.
Unrealized gain
(loss) from
available-for-
sale securities
Foreign currency
translation
adjustment
Accumulated
other
comprehensive
income
Balance at December 31, 2011
$
37,139
$
16,800
$
53,939
Gain (loss) for the period
(32,213
) ( 1 )
15,599
( 2 )
(16,614
)
Balance at June 30, 2012
$
4,926
$
32,399
$
37,325
(1)
Comprehensive loss for the six months ended June 30, 2012 per the consolidated statement of comprehensive income agrees to the gain (loss)
for the period related to the unrealized gain (loss) from available-for-sale securities.
(2)
The gain (loss) for the period related to the foreign currency translation adjustment is included in discontinued operations for the six months ended
June 30, 2012.
Securities Offering
On June 20, 2012, the Company entered into a securities purchase agreement with Messrs. Mark Berset and Bruce Lucas, each a member of the
Companys Board of Directors, pursuant to which the Company agreed to issue them, in a registered offering, 271,740 shares of the Companys common stock priced at $0.92 per share along with Series A warrants to purchase up to 135,870
shares of common stock with an exercise price of $1.16 per share. The Series A warrants are exercisable for a three-year period commencing on the date of their issuance. If the average closing price of the shares is greater than or equal to $1.16
for any 20 consecutive trading day period after the date the Series A warrants are issued, then the Company may force the holders of the Series A warrants to exercise their warrants. On June 20, 2012, the Company completed the offering and
raised gross proceeds of $250,000 before offering expenses. These securities were offered pursuant to a registration statement previously filed and declared effective by the Securities and Exchange Commission.
Other Common Stock Issuances
During the
second quarter of 2012, the Company issued 120,126 shares of common stock with a value of $97,499 to members of its Board of Directors and certain others in lieu of payment for services rendered.
6.
Other (Income) Expense
Components comprising the balance in other (income) expense from continuing
operations for the three and six months ended June 30, 2012 and 2011 are as follows:
Three Months Ended June 30,
Six Months Ended June 30,
2012
2011
2012
2011
Loss (gain) on sale and impairment of investments
$
(34,827
)
$
$
(47,630
)
$
201
Dividend income
(57,500
)
(57,500
)
Loss on derivative liabilities
78,759
150,825
Rental income
(102,417
)
(66,983
)
(203,192
)
(137,669
)
Other
(36,004
)
(3,091
)
(43,212
)
1,321
Other (income) expense
$
(230,748
)
$
8,685
$
(351,534
)
$
14,678
Page 12 of 29
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7.
Segment Reporting
FASB ASC Topic 280 Segment Reporting establishes standards for reporting information about operating segments. Operating
segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker, or decision making group, in deciding how to allocate resources and in
assessing performance. The Company is organized geographically and by line of business. The line of business management structure is the primary basis for which the allocation of resources and financial results are assessed.
On June 4, 2012, the Company entered into a non-binding letter of intent to sell its Pharmalicensing, Pharma Transfer, Global Licensing and
Knowledge Express operating divisions and all related assets for $2,000,000 (see Note 3). These divisions operate out of the United States and the United Kingdom as part of the intelligence and insights services segment. The Company has reflected
the operations of these divisions as discontinued operations for all periods presented. As a result, revenue, income (loss) from continuing operations before income taxes, and depreciation and amortization do not include amounts related to these
divisions. In addition, the Company has classified the assets and liabilities of these divisions as current and noncurrent assets and liabilities held for sale for all periods presented.
A summary of revenue and other
financial information by reportable geographic operating segment is shown below:
United
Kingdom
United States
Discontinued
Operations
Total
Long-lived assets as of June 30, 2012
$
$
8,606,560
$
2,715,956
$
11,322,516
Total assets as of June 30, 2012
12,067,395
2,937,033
15,004,428
Long-lived assets as of Dec 31, 2011
13,837,531
3,015,694
16,853,225
Total assets as of Dec 31, 2011
17,399,478
3,366,787
20,766,265
For the Three Months Ended June 30, 2012
United
Kingdom
United States
Total
Revenue
$
$
1,883,610
$
1,883,610
Loss from continuing operations before income taxes
(5,308,868
) (1)
(5,308,868
)
Depreciation and amortization
258,661
258,661
For the Three Months Ended June 30, 2011
United
Kingdom
United States
Total
Revenue
$
$
4,667,562
$
4,667,562
Loss from continuing operations before income taxes
(1,640,905
)
(1,640,905
)
Depreciation and amortization
309,867
309,867
For the Six Months Ended June 30, 2012
United
Kingdom
United States
Total
Revenue
$
$
2,705,447
$
2,705,447
Loss from continuing operations before income taxes
(6,706,499
) (1)
(6,706,499
)
Depreciation and amortization
521,402
521,402
For the Six Months Ended June 30, 2011
United
Kingdom
United States
Total
Revenue
$
$
7,838,298
$
7,838,298
Loss from continuing operations before income taxes
(1,812,994
)
(1,812,994
)
Depreciation and amortization
622,082
622,082
(1)
The Company recognized a $4,756,898 impairment loss for the United States segment during the three and six months ended June 30, 2012.
Page 13 of 29
Table of Contents
A summary of revenue and other financial information by reportable line of
business segment is shown below:
For the Three Months Ended June 30, 2012
Strategic
Services
Intelligence
&
Insights
Services
Administrative
and Other
Total
Revenue
$
1,734,860
$
148,750
$
$
1,883,610
Income (loss) from continuing operations before income taxes
(4,260,672
) ( 1 )
85,392
(1,133,588
)
(5,308,868
)
Income (loss) from discontinued operations, net of tax
(73,747
)
(73,747
)
For the Three Months Ended June 30, 2011
Strategic
Services
Intelligence
&
Insights
Services
Administrative
and Other
Total
Revenue
$
4,555,245
$
112,317
$
$
4,667,562
Income (loss) from continuing operations before income taxes
(73,359
)
59,032
(1,626,578
)
(1,640,905
)
Income (loss) from discontinued operations, net of tax
164,614
164,614
For the Six Months Ended June 30, 2012
Strategic
Services
Intelligence
&
Insights
Services
Administrative
and Other
Total
Revenue
$
2,478,531
$
226,916
$
$
2,705,447
Income (loss) from continuing operations before income taxes
(4,495,742
) (1 )
77,270
(2,288,027
)
(6,706,499
)
Income (loss) from discontinued operations, net of tax
16,310
16,310
For the Six Months Ended June 30, 2011
Strategic
Services
Intelligence
&
Insights
Services
Administrative
and Other
Total
Revenue
$
7,583,106
$
255,192
$
$
7,838,298
Income (loss) from continuing operations before income taxes
1,129,315
67,659
(3,009,968
)
(1,812,994
)
Income (loss) from discontinued operations, net of tax
151,149
151,149
(1)
The Company recognized a $4,756,898 impairment loss for the strategic services business segment during the three and six months ended June 30,
2012.
Page 14 of 29
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ITEM 2.
Managements Discussion and Analysis of Financial Condition and Results of Operations
The following discussion should be read in conjunction with our consolidated financial statements and the notes thereto included elsewhere in this Form 10-Q. This Form 10-Q contains forward-looking
statements regarding the plans and objectives of management for future operations. These forward-looking statements may involve known and unknown risks, uncertainties and other factors which may cause our actual results, performance or achievements
to be materially different from future results, performance or achievements expressed or implied by any forward-looking statements. Forward-looking statements, which involve assumptions and describe our future plans, strategies and expectations, are
generally identifiable by use of the words may, will, should, expect, anticipate, estimate, believe, intend or project or the negative of
these words or other variations on these words or comparable terminology. These forward-looking statements are based on assumptions that may be incorrect, and we cannot assure you that the projections included in these forward-looking statements
will come to pass. Our actual results could differ materially from those expressed or implied by the forward-looking statements as a result of various factors.
Business Overview
We are The Innovation Solutions Company focused on innovation management
consulting and software. Our mission is to help companies innovate and grow. We offer a comprehensive set of services and software to ensure the success of any innovation project, regardless of the size or intent. Our unique combination of strategic
consulting services provide innovation expertise, our new LaunchPad software product provides an integrated innovation environment, and our 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.
We have two business
segments: Strategic Services and Intelligence and Insights Services.
People are the key to providing innovation expertise through our
strategic consulting services. Our people have defined and refined our methodology for over 15 years with more than 250 clients in over 750 engagements, which has created a proven effective process to get a company through the innovation cycle.
We provide strategic services to enable our clients to become more efficient by finding new avenues to grow, fighting commoditization,
improving return on investment, transforming the organization, and removing barriers to innovation. Business value is delivered to clients through working with a team of seasoned and experienced professionals capable of unlocking an
organizations capacity by:
Identifying and developing new segments and markets;
Creating and acting on game-changing strategies;
Building an enterprise-wide capability for innovation;
Accelerating and improving new product development processes; and
Assessing a companys innovation capability.
Our intelligence and insights services business provides information to assist clients in gaining insights and making decisions. We provide the insight and intelligence our clients require, applied to
their markets today and into the future. From current market research to predictive intelligence, we help our clients find insights at the intersections affecting their business. Our research identifies and explains key consumer trends - including
emerging trends not covered by other sources - and delivers insights about how these trends will shape the future operating environment. In all of our work, our end goal is to focus on what the changing technology landscape will mean to our
clients business.
Innovaro LaunchPad
We are continuing the development of our innovation management software platform, Innovaro LaunchPad, which is designed to enhance and complement our innovation service offerings to clients. We have had a
general release to market of Version 1.0 of the software and are proceeding with the development of the next components of LaunchPad with Version 2.0.
Page 15 of 29
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Recent Developments
On June 4, 2012, we entered into a non-binding letter of intent with IPFlow International, LLC to sell our Pharmalicensing, Pharma Transfer, Global Licensing and Knowledge Express operating divisions
and all related assets for $2,000,000. Under the letter of intent, a definitive agreement had to be reached before August 4, 2012. However, the Company is in continuing discussions with the buyer and believes that it is probable that a
definitive agreement will still be reached. The agreement remains subject to customary conditions including negotiation of mutually agreeable terms, satisfactory completion of due diligence and the buyer securing financing. No assurances can be
provided that a definitive agreement will be reached and that the sale will be completed. Based on an estimate of proceeds from the sale of this business, we recognized impairment totaling $255,126 in the second quarter of 2012. We have reflected
the results of these operations as discontinued operations for all periods presented.
On June 7, 2012, we held our 2012 annual meeting
of stockholders, where our stockholders approved two proposals. Our stockholders elected five directors of our Board of Directors, each of whom will serve for a one-year term expiring in 2013. Our stockholders also ratified the selection of Pender
Newkirk & Company LLP to serve as our independent registered public accounting firm for the year ending December 31, 2012
Effective June 14, 2012, our Board of the Directors appointed Bruce Lucas as a member of the Board of Directors. Mr. Lucas will
receive customary cash fees and equity compensation for his service on our Board of Directors.
On June 20, 2012, we entered into a
securities purchase agreement with Messrs. Mark Berset and Bruce Lucas, each a member of our Board of Directors, pursuant to which we agreed to issue them, in a registered offering, 271,740 shares of our common stock priced at $0.92 per share along
with Series A warrants to purchase up to 135,870 shares of our common stock with an exercise price of $1.16 per share. The Series A warrants are exercisable for a three-year period commencing on the date of their issuance. If the average closing
price of the shares is greater than or equal to $1.16 for any 20 consecutive trading day period after the date the Series A warrants are issued, then we may force the holders of the Series A warrants to exercise their warrants. On June 20,
2012, we completed the offering and raised gross proceeds of $250,000 before offering expenses. These securities were offered pursuant to a registration statement previously filed and declared effective by the Securities and Exchange Commission.
As of June 30, 2012, our management concluded that its revenue projections for our strategic services segment needed to be revised as a
result of concerns that the business may not meet its revenue and cash flow projections for the year ending December 31, 2012 due to a diminished backlog that is not expected to turn around in the near term. This conclusion triggered a review
for impairment outside of our next scheduled annual impairment evaluation date of December 31, 2012. Our management determined that the goodwill was impaired and we recognized an impairment loss of $3,386,898 to our goodwill in the current
period. In addition, subsequent to June 30, 2012, we began discussions to sell certain of our intangible assets related to our strategic services segment. Based on the terms of this discussion, management determined that these intangible assets
were impaired and recognized impairment of $1,370,000 to our intangible assets in the current period.
On June 12, 2012, we received
notice from the NYSE MKT LLC (the Exchange) indicating that we are not in compliance with certain of the Exchanges continued listing standards. Specifically, the Exchange has notified us that we are not in compliance with
Section 1003(a)(iv) of the Exchange Company Guide in that the Exchange believes that we have sustained losses which are so substantial in relation to our overall operations or our existing financial resources, or our financial condition has
become so impaired that it appears questionable, in the opinion of the exchange, as to whether we will be able to continue operations and/or meet our obligations as they mature.
In order to maintain the listing of our common stock on the Exchange, we were required to submit, and have submitted, a plan to the Exchange by July 12, 2012, addressing how we intend to regain
compliance with Section 1003(a)(iv) by November 30, 2012. If the Exchange accepts the plan, then we may be able to continue the listing of our common stock on the Exchange during the plan period, up to November 30, 2012, during which
time we will be subject to periodic reviews to determine whether we are making progress consistent with the plan. If we fail to submit a plan acceptable to the Exchange or if the plan is accepted but the Exchange determines that we are not making
progress consistent with the plan by November 30, 2012 or at any time prior to such date, then the Exchange may initiate delisting proceedings.
On August 8, 2012, Bruce Lucas, a member of our Board of Directors, notified us that he was resigning from our Board of Directors effective immediately. On August 9, 2012, Charlie Pope, the
Chairman of our Board of Directors, notified us that he was resigning from our Board of Directors effective immediately. Each director confirmed that his resignation was not a result of any disagreement with us with respect to our policies,
operations or practices.
Page 16 of 29
Table of Contents
Financial Condition
Our total assets were $15.0 million and $20.8 million as of June 30, 2012 and December 31, 2011, respectively. As of June 30, 2012, we had $570,000 in cash, $640,000 in accounts receivable,
$38,000 in contracts in process, $3.0 million in accounts payable, accrued expenses and accrued bonus, and $5.4 million in total debt outstanding (of which $1.25 million is due in October 2012 and $2.8 million is due in May 2013). As of
December 31, 2011, we had $268,000 in cash, $507,000 in accounts receivable, $513,000 in contracts in process, $2.4 million in accounts payable, accrued expenses and accrued bonus, and $5.6 million in total debt outstanding. As of June 30,
2012, we had a working capital deficit of $4.6 million and an accumulated deficit of $(82.6) million.
Results of Continuing Operations
Revenue
Three
Months
Ended
June 30,
Percentage
Change
Six
Months
Ended
June 30,
Percentage
Change
(in thousands, except percentages)
2012
2011
2012
2011
Strategic services
$
1,735
$
4,555
(62
)%
$
2,479
$
7,583
(67
)%
Intelligence and insights services
149
112
32
%
227
255
(11
)%
Total revenue
$
1,884
$
4,667
(60
)%
$
2,706
$
7,838
(65
)%
Strategic Services
Our strategic services revenue is derived from consulting services we provide to our clients. Our strategic services revenue decreased by $2.8 million for the three months ended June 30, 2012 in
comparison to the three months ended June 30, 2011. In addition, our strategic services revenue decreased by $5.1 million for the six months ended June 30, 2012 in comparison to the six months ended June 30, 2011. This decrease is the
result of the Company having a significantly lower number of contracts in the first half of 2012 than we had in the first half of 2011. We attribute the decreased contract level in 2012 to the departure of certain key consulting professionals and a
reduction in recurring customers. 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.
As discussed under recent developments, we incurred impairment to the goodwill of our strategic services segment in connection with a reduction in
prospective work. As a result, we expect that our strategic services revenue will continue to decrease for the remainder of 2012.
Intelligence and Insights Services
Our
intelligence and insights services revenue is derived from our foresight and trend research revenue. Our intelligence and insights services revenue increased by $37,000 for the three months ended June 30, 2012 in comparison to the three months
ended June 30, 2011, which is primarily related to the closing of one large job in the current period.
Our intelligence and insights
services revenue decreased by $28,000 for the six months ended June 30, 2012 in comparison to the six months ended June 30, 2011. The decreased revenue resulted from a 50% reduction in the number of projects that were completed during the
current period.
We expect that our intelligence and insights services revenue will remain consistent with the second quarter of 2012 for the
remainder of 2012.
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Table of Contents
Direct Costs of Revenue
Three
Months
Ended
June 30,
Percentage
Change
Six
Months
Ended
June 30,
Percentage
Change
(in thousands, except percentages)
2012
2011
2012
2011
Direct costs of revenue - Strategic services
$
1,123
$
4,476
(75
)%
$
1,947
$
6,157
(68
)%
Direct costs of revenue - Intelligence and insights services
169
150
12
%
365
315
16
%
Direct costs of revenue - strategic services include salaries and related taxes, bonuses, certain outside services and
other business development costs directly related to our strategic services business. The most significant portion of direct costs of revenue - strategic services is consulting personnel compensation, which includes bonuses. Direct costs of revenue
- strategic services decreased by $3.4 million for the three months ended June 30, 2012 in comparison to the three months ended June 30, 2011. In addition, direct costs of revenue - strategic services decreased by $4.2 million for the six
months ended June 30, 2012 in comparison to the six months ended June 30, 2011. These decreases are partially related to a reduction in the use of outside consultants due to the lower number of jobs in process during the first half of
2012. In addition, we had a significant reduction in salaries expense during 2012 related to the departure of certain consulting professionals near the end of 2011.
As discussed under recent developments, we incurred impairment to the goodwill of our strategic services segment in connection with a reduction in prospective work. As a result, we expect that our direct
costs of revenue - strategic services will continue to decrease for the remainder of 2012.
Direct costs of revenue - intelligence and
insights services include certain salaries and related taxes, commissions, certain outside services and other direct costs directly related to our intelligence and insights services business. Direct costs of revenue - intelligence and insights
services increased by $19,000 for the three months ended June 30, 2012 in comparison to the three months ended June 30, 2011. In addition, direct costs of revenue - intelligence and insights services increased by $50,000 for the six months
ended June 30, 2012 in comparison to the six months ended June 30, 2011. These increases were related to the hiring of sales personnel for this business.
We expect that our direct costs of revenue - intelligence and insights services will remain consistent with the second quarter of 2012 for the remainder of 2012.
Salaries and Wages
Three Months
Ended
June 30,
Percentage
Change
Six Months
Ended
June 30,
Percentage
Change
(In thousands, except percentages)
2012
2011
2012
2011
Salaries and wages
$
241
$
352
(32
)%
$
504
$
520
(3
)%
As a percent of revenue
13
%
8
%
5
ppt
19
%
7
%
(12
)ppt
*
The abbreviation ppt denotes percentage points.
Salaries and wages include non-sales employee and officer salaries and related benefits, including bonuses and stock-based compensation that are not otherwise allocated to direct costs of
revenue. Salaries and wages decreased by $111,000 for the three months ended June 30, 2012 in comparison to the three months ended June 30, 2011. The decrease is primarily related to a $95,000 decrease in stock compensation expense as
a result of the grant of equity compensation to our CEO upon his hiring in April 2011, and a $16,000 decrease in administrative staff.
Salaries and wages decreased by $16,000 for the six months ended June 30, 2012 in comparison to the six months ended June 30, 2011. The
decrease is primarily related to an $80,000 decrease in stock compensation expense as a result of the grant of equity compensation to our CEO upon his hiring in April 2011, partially offset by a $62,000 increase in salary expense as a result of
having hired our CEO in April 2011.
We expect that our salaries and wages will remain consistent with the second quarter of 2012 for the
remainder of 2012.
Page 18 of 29
Table of Contents
Professional Fees
Three
Months
Ended
June 30,
Percentage
Change
Six
Months
Ended
June 30,
Percentage
Change
(In thousands, except percentages)
2012
2011
2012
2011
Professional fees
$
91
$
96
(5
)%
$
164
$
178
(8
)%
As a percent of revenue
5
%
2
%
3
ppt
6
%
2
%
4
ppt
Professional fees include accounting fees, legal fees and valuation expenses for our investments. Professional fees
decreased by $5,000 for the three months ended June 30, 2012 in comparison to the three months ended June 30, 2011, primarily as a result of a reduction in legal fees of $33,000, partially offset by an increase in accounting and valuation
fees of $28,000.
Professional fees decreased by $14,000 for the six months ended June 30, 2012 in comparison to the six months ended
June 30, 2011, primarily as a result of a reduction in legal fees of $59,000, partially offset by an increase in accounting and valuation fees of $45,000.
We expect that our professional fees will remain consistent with the second quarter of 2012 for the remainder of 2012.
Research and Development
Three
Months
Ended
June 30,
Percentage
Change
Six
Months
Ended
June 30,
Percentage
Change
(In thousands, except percentages)
2012
2011
2012
2011
Research and development
$
140
$
330
(58
)%
$
240
$
634
(62
)%
As a percent of revenue
7
%
7
%
0
ppt
9
%
8
%
(1
)ppt
Research and development expense includes 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 $190,000 for the three months ended June 30, 2012 in comparison to the
three months ended June 30, 2011. The decrease relates primarily to our having scaled back the amount of resources, including personnel and outside services, allocated to the development of LaunchPad. Fewer resources are necessary at this time
because the current projects are less labor intensive than the prior year projects.
Research and development costs decreased by $394,000 for
the six months ended June 30, 2012 in comparison to the six months ended June 30, 2011. The decrease is partially related to the capitalization of $45,000 in software development costs in the first quarter of 2012 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 $349,000 in total for the first half of 2012.
We expect that our research and development expense will remain consistent with the second quarter of 2012 for the remainder of 2012.
Sales and Marketing
Three
Months
Ended
June 30,
Percentage
Change
Six
Months
Ended
June 30,
Percentage
Change
(In thousands, except percentages)
2012
2011
2012
2011
Sales and marketing
$
31
$
40
(23
)%
$
84
$
79
7
%
As a percent of revenue
2
%
1
%
1
ppt
3
%
1
%
2
ppt
Sales and marketing expense includes advertising, marketing, commissions paid to outside service providers, certain
travel and other business development expenses. Sales and marketing expense decreased by $9,000 for the three months ended June 30, 2012 compared to the three months ended June 30, 2011. The decrease relates primarily to decreased
participation in sales conferences in the second quarter of 2012. Sales and marketing expense increased by $5,000 for the six months ended June 30, 2012 compared to the six months ended June 30, 2011. The increase relates primarily to
increased participation in sales conferences in the first quarter of 2012.
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Table of Contents
We expect that our sales and marketing expense will increase over the second quarter of 2012 for the
remainder of 2012 due to an increase in marketing related to LaunchPad.
General and Administrative
Three
Months
Ended
June 30,
Percentage
Change
Six
Months
Ended
June 30,
Percentage
Change
(In thousands, except percentages)
2012
2011
2012
2011
General and administrative
$
470
$
464
1
%
$
904
$
908
0
%
As a percent of revenue
25
%
10
%
15
ppt
33
%
12
%
(21
)ppt
General and administrative expense increased by $6,000 for the three months ended June 30, 2012 compared to the
three months ended June 30, 2011. In addition, general and administrative expense decreased by $4,000 for the six months ended June 30, 2012 compared to the six months ended June 30, 2011.
We expect that our general and administrative expense will remain consistent with the second quarter of 2012 for the remainder of 2012.
Depreciation and Amortization
Three
Months
Ended
June 30,
Percentage
Change
Six
Months
Ended
June 30,
Percentage
Change
(In thousands, except percentages)
2012
2011
2012
2011
Depreciation and amortization
$
259
$
310
(17
)%
$
521
$
622
(16
)%
As a percent of revenue
14
%
7
%
7
ppt
19
%
8
%
(11
)ppt
Depreciation and amortization decreased by $51,000 and $101,000 for the three and six months ended June 30, 2012 in
comparison to the three and six months ended June 30, 2011, respectively. Amortization expense decreased by $42,000 and $81,000 for the three and six months ended June 30, 2012 as compared to the same periods in 2011, as a result of the
impairment charges related to our intangible assets that were incurred in 2011. In addition, depreciation expense decreased by $8,000 and $20,000 for the three and six months ended June 30, 2012 as compared to the same periods in 2011.
We expect that our depreciation and amortization will remain consistent with the second quarter of 2012 for the remainder of 2012.
Impairment Loss
As
of June 30, 2012, our management concluded that its revenue projections for our strategic services segment needed to be revised as a result of concerns that the business may not meet its revenue and cash flow projections for the year ending
December 31, 2012 due to a diminished backlog that is not expected to turn around in the near term. This conclusion triggered a review for impairment outside of our next scheduled annual impairment evaluation date of December 31, 2012. Our
management determined that the goodwill was impaired and we recognized an impairment loss of $3,386,898 to our goodwill in the current period. In addition, subsequent to June 30, 2012, we began discussions to sell certain of our intangible
assets related to our strategic services segment. Based on the terms of this discussion, management determined that these intangible assets were impaired and recognized impairment of $1,370,000 to our intangible assets in the current period.
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Other (Income) Expense
Three
Months
Ended
June 30,
Percentage
Change
Six
Months
Ended
June 30,
Percentage
Change
(In thousands, except percentages)
2012
2011
2012
2011
Other (income) expense
$
(231
)
$
9
(2,757
)%
$
(352
)
$
15
(2,495
)%
Other (income) expense includes rental income, gains and losses related to adjusting our derivative liabilities to fair
value, capital gains and losses and other miscellaneous income (losses). Other (income) expense changed by $(240,000) for the three months ended June 30, 2012 in comparison to the three months ended June 30, 2011. The net other income of
$231,000 for the three months ended June 30, 2012 is comprised primarily of rental income of $102,000, dividend income of $58,000, capital gains of $35,000 and miscellaneous income of $36,000. The net other expense of $9,000 for the three
months ended June 30, 2011 is comprised primarily of a loss of $79,000 related to adjusting our derivative liabilities to fair value, partially offset by rental income of $67,000 and miscellaneous other net income of $3,000.
Other (income) expense changed by $(367,000) for the six months ended June 30, 2012 in comparison to the six months ended June 30, 2011. The
net other income of $352,000 for the six months ended June 30, 2012 is comprised primarily of rental income of $203,000, dividend income of $58,000, capital gains of $48,000 and miscellaneous income of $43,000. The net other expense of $15,000
for the six months ended June 30, 2011 is comprised primarily of a loss of $151,000 related to adjusting our derivative liabilities to fair value, partially offset by rental income of $138,000.
Interest Expense, Net
Three
Months
Ended
June 30,
Percentage
Change
Six
Months
Ended
June 30,
Percentage
Change
(In thousands, except percentages)
2012
2011
2012
2011
Interest expense, net
$
143
$
82
75
%
$
277
$
223
24
%
Interest expense, net increased by $61,000 for the three months ended June 30, 2012 in comparison to the three
months ended June 30, 2011. The net interest expense of $143,000 for the three months ended June 30, 2012 is primarily comprised of interest expense on debt and other payables of $136,000 and amortization of our debt discount of $33,000,
partially offset by interest income on our note receivable of $26,000. The net interest expense of $82,000 for the three months ended June 30, 2011 is primarily comprised of interest expense on long-term debt of $49,000 and amortization of our
debt discount of $33,000.
Interest expense, net increased by $54,000 for the six months ended June 30, 2012 in comparison to the six
months ended June 30, 2011. The net interest expense of $277,000 for the six months ended June 30, 2012 is primarily comprised of interest expense on debt and other payables of $263,000 and amortization of our debt discount of $66,000,
partially offset by interest income on our note receivable of $52,000. The net interest expense of $223,000 for the six months ended June 30, 2011 is primarily comprised of interest expense on long-term debt of $211,000 and amortization of our
debt discount of $66,000, partially offset by interest income on our note receivable of $52,000.
Liquidity and Capital Resources
Cash Flows
Cash
flows from operating activities of continuing operations of $(74,000) for the six months ended June 30, 2012 decreased $570,000 from $496,000 for the six months ended June 30, 2011. Total cash flows from operations of $(74,000) in the
current period are primarily attributable to:
$3.4 million in non-cash goodwill impairment related to our strategic services business segment;
$1.4 million in non-cash intangible asset impairment related to our strategic services business segment;
$586,000 in non-cash depreciation and amortization;
$287,000 in non-cash stock-based compensation expense related to vesting options and stock issued for services;
$343,000 decrease in accounts receivable and contracts in process;
$123,000 increase in deferred revenue; and
$562,000 increase in accounts payable and accrued expenses.
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Partially offset by:
$6.2 million net loss; and
$516,000 in deferred tax benefit.
Cash flows from investing activities of continuing operations of $18,000 for the six months ended June 30, 2012 increased $41,000 from $(23,000) for the six months ended June 30, 2011. Total
cash flows from investing activities of $18,000 are related to $64,000 in proceeds from the sale of our available-for-sale securities, partially offset by $45,000 in the capitalization of software development costs.
Cash flows from financing activities of continuing operations of $(54,000) for the six months ended June 30, 2012 increased $329,000 from $(383,000)
for the six months ended June 30, 2011. Total cash flows from financing of $(54,000) are related to principal payments on long-term debt of $286,000, partially offset by net proceeds from our stock offering of $232,000.
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 have had a general release to market of Version 1.0 and are proceeding with the development of
the next components of LaunchPad with Version 2.0. As of June 30, 2012, we had invested $2.3 million in this software platform. We expect to incur approximately $200,000 in additional expenditures for product development of Version 2.0 and
refinement of Version 1.0 for the remainder of 2012.
Liquidity
We have incurred recurring losses and negative cash flows from operations. We incurred a net loss of $(6,174,658) and $(4,920,723) for the six months ended June 30, 2012 and the year ended
December 31, 2011, respectively. In addition, we have a working capital deficit of $(4,638,285) and an accumulated deficit of $(82,623,709) as of June 30, 2012. These factors raise 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 salaries. 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 and our common stock.
We currently intend to fund our liquidity needs, including our software development costs, with existing cash balances, cash generated from operations,
collections of our existing receivables, the potential sales of our investments and the potential sale of certain of our operating divisions and assets. Given our cash position, working capital deficit and expected revenues in the near term, we do
not expect that we will be able to fund our scheduled debt service payments of $4.2 million (of which $1.25 million is due in October 2012 and $2.8 million is due in May 2013) and our operating requirements for the next twelve months. Our debt is
secured by our office building and land. 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
and sell assets, 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.
Our future
success depends on our ability to raise capital and ultimately generate revenue and attain profitability. We 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 us or, if available, will be on terms acceptable to us. If we issue additional securities to raise funds, these securities may have rights, preferences, or privileges senior to those of our common stock, and our
current shareholders may experience dilution. If we are unable to obtain funds when needed or on acceptable terms, we may be required to curtail our current development programs, cut operating costs and forego future development and other
opportunities. Without sufficient capital to fund our operations, we will be unable to continue as a going concern.
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Table of Contents
Critical Accounting Estimates
The preparation of financial statements in conformity with GAAP requires management to make assessments, estimates and assumptions that affect the amounts reported in the financial statements. We
evaluate the accounting policies and estimates used to prepare the financial statements on an ongoing basis. Critical accounting estimates are those that require managements most difficult, complex, or subjective judgments and have the
most potential to impact our financial position and operating results. For a detailed discussion of our critical accounting estimates, see our Annual Report on Form 10-K for the year ended December 31, 2011. There have been no material changes
to our critical accounting estimates during the six months ended June 30, 2012.
ITEM 3.
Quantitative and Qualitative Disclosures about Market Risks
Not applicable.
ITEM 4.
Controls and Procedures
Disclosure
Controls and Procedures
As of the end of the period covered by this Quarterly Report on Form 10-Q, our chief executive officer and chief
financial officer conducted an evaluation of the effectiveness of the design and operation of the Companys disclosure controls and procedures, (as is defined in Rules 13a-15(e) under the Securities Exchange Act of 1934). Based on their
evaluation, our chief executive officer and chief financial officer concluded that our disclosure controls and procedures were effective such that the information required to be disclosed in our reports filed or submitted under the Securities
Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission rules and forms and such that information required to be disclosed in our reports filed or submitted
under the Securities Exchange Act of 1934 is accumulated and communicated to our management, including our chief executive officer and chief financial officer, as appropriate to allow timely decisions regarding required disclosure.
Internal Control over Financial Reporting
There have been no changes in our internal control over financial reporting (as defined in Rule13a-15(f) of the Securities Exchange Act of 1934) that
occurred during the most recently completed fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
PART II. OTHER INFORMATION
ITEM 1.
Legal Proceedings
Although we may from
time to time be involved in litigation and claims arising out of our operations in the normal course of our business, as of June 30, 2012, we were not a party to any material pending legal proceedings.
ITEM 1A.
Risk Factors
Not applicable.
ITEM 2.
Unregistered Sales of Equity Securities and Use of Proceeds
None.
ITEM 3.
Defaults upon Senior Securities
None.
ITEM 4.
Mine Safety Disclosures
Not applicable.
Page 23 of 29
Table of Contents
ITEM 5.
Other Information
The disclosure set
forth below is provided in lieu of a separate Form 8-K filing.
On August 8, 2012, Bruce Lucas, a member of our Board of Directors,
notified us that he was resigning from our Board of Directors effective immediately. On August 9, 2012, Charlie Pope, the Chairman of our Board of Directors, notified us that he was resigning from our Board of Directors effective immediately.
Each director confirmed that his resignation was not a result of any disagreement with us with respect to our policies, operations or practices.
ITEM 6.
Exhibits
The following exhibits are
filed with this report on Form 10-Q:
4.1
Form of Series A Warrant. (Incorporated by reference to Exhibit 4.1 to Form 8-K filed on June 26, 2012.)
10.1
Securities Purchase Agreement by and among Innovaro, Inc. and Mark Berset and Bruce Lucas dated as of June 20, 2012. (Incorporated by reference to Exhibit 10.1 to Form 8-K filed
on June 26, 2012.)
31.1
Certification of the Chief Executive Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934.
31.2
Certification of the Chief Financial Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934.
32.1
Certification of the Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350.
32.2
Certification of the Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350.
101.INS*
XBRL Instance Document
101.SCH*
XBRL Taxonomy Extension Schema
101.CAL*
XBRL Taxonomy Extension Calculation Linkbase
101.DEF*
XBRL Taxonomy Extension Definition Linkbase
101.LAB*
XBRL Taxonomy Extension Label Linkbase
101.PRE*
XBRL Taxonomy Extension Presentation Linkbase
*
Pursuant to Rule 406T of Regulation S-T, these interactive data files are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11
or 12 of the Securities Act of 1933 or Section 18 of the Securities Exchange Act of 1934 and otherwise are not subject to liability.
Page 24 of 29
Table of Contents
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
INNOVARO, INC.
(Registrant)
Date: August 14, 2012
/s/ Asa Lanum
Asa Lanum
Chief Executive Officer
Date: August 14, 2012
/s/ Carole R. Wright
Carole R. Wright, CPA
Chief Financial Officer
Page 25 of 29
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.