What changed in this filing

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Item 2. Management’s Discussion and Analysis

2013-11-12 compared with 2013-08-14 · 76 added, 79 removed, 93 unchanged (63% of the section changed)

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Our actual results could differ materially from those expressed or implied by the forward-looking statements as a result of various factors.

Innovaro is The Innovation Solutions Company focused on delivering innovation solutions to our clients through a combination of software and associated services as well as information for strategic decision making.

Innovaro is The Innovation Solutions Company focused on delivering innovation solutions to our clients through a combination of innovation management software and social media mining as well as information for strategic decision making.

We offer a comprehensive set of software to ensure the success of any innovation project, regardless of the size or intent.

Our unique combination of our LaunchPad software (an integrated innovation environment) and our trends and foresight services provide any business with the innovation support they need to drive success.

Our unique combination of our innovation management software platform LaunchPad (an integrated innovation environment), and our trends and foresight services provide any business with the innovation support they need to drive success.

Our offices are located in the United States.

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We envision the continued evolution of our business to include a second segment:

Innovation Software and Services which is the ongoing development and sale of software products such as the innovation management software platform to support the innovation services business.

Our innovation management software platform, LaunchPad, is designed to be enhanced and complemented by innovation service offerings to clients.

Innovation Software and Services, which is the ongoing development and sale of software products such as the our LaunchPad software platform to support the innovation services business.

Our LaunchPad software platform is designed to be enhanced and complemented by innovation service offerings to clients.

We have general release to market of LaunchPad Imagine, LaunchPad Design and LaunchPad Listen.

Through LaunchPad we will provide software and associated services to enable our clients to become more efficient by finding new avenues to grow, fighting commoditization, improving return on investment, transforming the organization and removing barriers to innovation.

Business value is delivered to clients through working with a team of seasoned and experienced professionals capable of unlocking an organization’s capacity by:

We deliver business value to our clients via our team of seasoned and experienced professionals capable of unlocking an organization’s capacity by:

Identifying and developing new segments and markets;

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Assessing a company’s 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.

Our Intelligence and Insights Services business provides insights about new market opportunities and gives organizations the long-range perspective required for strategy and planning activities.

From current market research to predictive intelligence, we help our clients find insights at the intersections affecting their business.

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LaunchPad helps innovation teams by making their jobs better, faster and easier.

We introduced LaunchPad Imagine to the market in 2011, and have been working with select companies over 2012 in innovation journeys.

We continued to expand the capabilities of Imagine during 2012 to include a number of new data sources.

We introduced LaunchPad Imagine to the market in 2011.

We have continued to expand the capabilities of Imagine during 2013 to include a number of new data sources.

We introduced LaunchPad Design to provide customers with support in developing and validating business models to continue their innovation journey.

We also introduced LaunchPad Listen in 2012 to allow clients to monitor social media and analyze sentiment as key input to their business and to the innovation process.

We are continuing to incur costs related to the refinement of Imagine, Design and Listen while proceeding with the design of the next components of LaunchPad Accelerate.

We are continuing to incur costs related to the refinement of LaunchPad Imagine, Design and Listen while proceeding with the design of the next components of LaunchPad Accelerate.

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During 2012, we made the strategic decision to divest of our Strategic Services division and a large portion of our Intelligence and Insights services including the Pharmalicensing, Global Licensing, Pharma Transfer and Knowledge Express operating divisions.

The sale allows us to focus our investments on sales and marketing to promote the growth of our software and innovation solutions businesses, which we believe offer significant growth opportunities.

The sale allowed us to focus our investments on sales and marketing to promote the growth of our software and innovation solutions businesses, which we believe offer significant growth opportunities.

Further, we expect the sale will strengthen our balance sheet and help provide us with the financial wherewithal to extend our software capabilities and deliver additional solutions.

Except as explicitly described as discontinued operations, and unless otherwise noted, all discussions and amounts presented herein relate to our continuing operations.

Presentation for the three and six months ended June 30, 2012 has been reclassified to conform to this new presentation.

Significant Developments

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We have consolidated this entity as of January 1, 2013.

The entity has no operations, or any liabilities, and the only asset held by the entity relates to certain marketable securities.

The securities have a readily determinable fair value, and the Company’s intent is to sell the securities in the near term to generate profits.

We classified the securities as trading securities.

As of June 30, 2013, all trading securities were sold.

The Company’s Board of Directors approved a reduction to the balance of the note receivable from IP Tech Ex in return for the acceleration of the payments on the note.

The entity has no operations, or any liabilities, and the only asset held by the entity relates to certain marketable securities, which we classified as trading securities.

We sold all of these securities to generate profits during the nine months ended September 30, 2013.

Our Board of Directors approved a reduction to the balance of our note receivable from IP Tech Ex in return for the acceleration of the payments on the note.

IP Tech Ex agreed to make a $400,000 payment in May 2013 and a $300,000 in December 2014 in full satisfaction of the note.

Accordingly, the Company recorded a loss of approximately $489,000 during the first quarter of 2013 related to the write-down of this note to its net realizable value of approximately $700,000.

As a result, we recorded a loss of approximately $489,000 during the first quarter of 2013 related to the write-down of this note to its net realizable value of approximately $700,000.

The outstanding balance will accrue interest at 5% per annum.

During the quarter ended June 30, 2013, the Company received the first $400,000 payment on the note balance.

On August 15, 2013, we entered into a securities purchase agreement with Asher Enterprises, Inc.

(“Asher”) pursuant to which we sold to Asher an 8% convertible note in the aggregate principal amount of $78,500, convertible into shares of our common stock upon the terms and subject to the limitations and conditions set forth in the convertible note.

I n October 2013, we entered into an additional securities purchase agreement with Asher pursuant to which we sold to Asher an 8% convertible note in the aggregate principal amount of $42,500, convertible into shares of our common stock upon the terms and subject to the limitations and conditions set forth in the convertible note.

On August 21, 2013, we entered into a revolving credit and security agreement with JJJ Family LLLP (“JJJ Family”) pursuant to which we can borrow up to $400,000 from the JJJ Family.

In connection with this transaction, we issued a revolving promissory note to JJJ Family in the principal amount of $400,000.

Borrowings under the credit facility will be used for general corporate purposes.

As additional consideration for this credit facility, we also entered into a warrant agreement with JJJ Family to allow them to purchase up to 400,000 shares of our common stock at an exercise price of $0.14 per share.

These warrants become exercisable beginning six months after the issuance date and ending five years from that date.

The exercise price is subject to certain conditions and adjustments.

As additional consideration for extension of the credit facility, we agreed to amend the exercise price of all previously granted options and warrants to $0.14 per share.

Financial Condition

Our total assets were $6.5 million and $8.5 million as of June 30, 2013 and December 31, 2012, respectively.

As of June 30, 2013, we had $87,000 in cash, $99,000 in accounts receivable, $1.4 million in accounts payable and accrued expenses, and $4.9 million in total debt outstanding.

Our total assets were $6.5 million and $8.5 million as of September 30, 2013 and December 31, 2012, respectively.

As of September 30, 2013, we had $17,000 in cash, $180,000 in accounts receivable, $1.5 million in accounts payable and accrued expenses, and $5.1 million in total debt outstanding.

As of December 31, 2012, we had $76,000 in cash, $250,000 in accounts receivable, $1.2 million in accounts payable and accrued expenses, and $5.2 million in total debt outstanding.

As of June 30, 2013, we had a working capital deficit of $(3.6) million and an accumulated deficit of $(88.4) million.

As of September 30, 2013, we had a working capital deficit of $(3.9) million and an accumulated deficit of $(88.9) million.

Results of Continuing Operations

Intelligence and Insights Services

Our intelligence and insights services revenue is derived from foresight and trend research revenue.

Our intelligence and insights services revenue decreased by $54,000 for the three months ended June 30, 2013 in comparison to the three months ended June 30, 2012.

The decreased revenue results from a decrease in the number of custom projects completed in three months ended June 30, 2013.

Our intelligence and insights services revenue increased by $19,000 for the six months ended June 30, 2013 in comparison to the six months ended June 30, 2012.

The increased revenue results from an increase in the number of customers utilizing our online services and additional custom projects completed in the first quarter of 2013.

We expect that our intelligence and insights services revenue will remain consistent with the first half of 2013 for the remainder of 2013.

Our revenue is derived from foresight and trend research revenue.

Our revenue decreased by $22,000 for the three months ended September 30, 2013 in comparison to the three months ended September 30, 2012.

The decreased revenue results from a decrease in the number of custom projects completed in three months ended September 30, 2013.

Our revenue decreased by $3,000 for the nine months ended September 30, 2013 in comparison to the nine months ended September 30, 2012.

We expect that our revenue will remain consistent with the first nine months of 2013 for the remainder of 2013.

Direct Costs of Revenue

Direct costs of revenue - intelligence and insights services are comprised of certain salaries and related taxes, commissions, certain outside services and other direct costs related to our intelligence and insights services business.

Direct costs of revenue - intelligence and insights services decreased by $88,000 and $152,000 for the three and six months ended June 30, 2013, respectively in comparison to the three and six months ended June 30, 2012, due to a reduction in sales staff and the elimination of the sales manager position.

We expect that our direct costs of revenue - intelligence and insights services will remain consistent with the first half of 2013 for the remainder of 2013.

Direct costs of revenue are comprised of certain salaries and related taxes, commissions, certain outside services and other direct costs related to our intelligence and insights services business.

Direct costs of revenue decreased by $43,000 and $195,000 for the three and nine months ended September 30, 2013 in comparison to the three and nine months ended September 30, 2012, respectively, due to a reduction in sales staff and the elimination of the sales manager position.

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We expect that our direct costs of revenue will remain consistent with the first nine months of 2013 for the remainder of 2013.

Salaries and Wages

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 $8,000 and $35,000 for the three and six months ended June 30, 2013, respectively in comparison to the three and six months ended June 30, 2012 The decrease is primarily related to a decrease in officer salaries and a decrease in stock compensation expense.

We expect that our salaries and wages will decrease over the first half of 2013 due to the resignation of our general counsel.

Salaries and wages decreased by $15,000 and $50,000 for the three and nine months ended September 30, 2013 in comparison to the three and nine months ended September 30, 2012, respectively.

The decrease is primarily related to a decrease in officer salaries and a decrease in stock compensation expense.

We expect that our salaries and wages will continue to decrease over the 2012 totals due to the resignation of our general counsel.

Professional Fees

Professional fees include accounting fees, legal fees and valuation expenses for our investments.

Professional fees decreased by $72,000 and $88,000 for the three and six months ended June 30, 2013, respectively in comparison to the three and six months ended June 30, 2012, primarily as a result of a reduction in audit and legal fees due to our limited operations.

We expect that our professional fees will remain consistent with the first half of 2013 for the remainder of 2013.

Professional fees decreased by $46,000 and $134,000 for the three and nine months ended September 30, 2013 in comparison to the three and nine months ended September 30, 2012, respectively primarily as a result of a reduction in audit and legal fees due to our limited operations.

We expect that our professional fees will remain consistent with the first nine months of 2013 for the remainder of 2013.

Research and Development

Research and development expense includes outside services and other costs related to the continued 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 $104,000 and $130,000 for the three and six months ended June 30, 2013, respectively in comparison to the three and six months ended June 30, 2012.

Research and development costs decreased by $42,000 and $172,000 for the three and nine months ended September 30, 2013 in comparison to the three and nine months ended September 30, 2012, respectively.

The decrease is related to scaling back the amount of resources allocated to the development of LaunchPad.

We expect that our research and development expense will remain consistent with the first half of 2013 for the remainder of 2013.

We expect that our research and development expense will remain consistent with the first nine months of 2013 for the remainder of 2013.

Sales and Marketing

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 $14,000 and $15,000 for the three and six months ended June 30, 2013, respectively in comparison to the three and months ended June 30, 2012 due to our limited ability to attend conferences.

We expect that our sales and marketing expense will remain consistent with the first half of 2013 for the remainder of 2013.

Sales and marketing expense increased by $29,000 and $15,000 for the three and nine months ended September 30, 2013 in comparison to the three and nine months ended September 30, 2012, respectively, due to our recent marketing push related to our LaunchPad Listen application of the innovation management software .

We expect that our sales and marketing expense will continue to increase over the 2012 totals due to continued market efforts.

General and Administrative

General and administrative expense decreased by $194,000 for the three months ended June 30, 2013 in comparison to the three months ended June 30, 2012.

The decrease primarily relates to a $169,000 reduction in outside services, a $13,000 reduction in insurance and other employee related costs due to having fewer employees, and a $10,000 reduction in rent expense.

General and administrative expense decreased by $323,000 for the six months ended June 30, 2013 in comparison to the six months ended June 30, 2012.

The decrease primarily relates to a $240,000 reduction in outside services, and a $23,000 reduction in bad debt expense, a $13,000 reduction in insurance and other employee related costs due to having fewer employees, and a $42,000 reduction in rent and building expenses.

We expect that our general and administrative expense will remain consistent with the first half of 2013 for the remainder of 2013.

General and administrative expense decreased by $70,000 for the three months ended September 30, 2013 in comparison to the three months ended September 30, 2012.

The decrease primarily relates to a $62,000 reduction in outside services and a $7,000 reduction in rent expense.

General and administrative expense decreased by $393,000 for the nine months ended September 30, 2013 in comparison to the nine months ended September 30, 2012.

The decrease primarily relates to a $282,000 reduction in outside services, a $17,000 reduction in bad debt, a $54,000 reduction in insurance and other employee related costs due to having fewer employees, and a $45,000 reduction in rent and building expenses.

We expect that our general and administrative expense will remain consistent with the first nine months of 2013 for the remainder of 2013.

Depreciation and Amortization

Depreciation and amortization expense decreased by $183,000 and $375,000 for the three and six months ended June 30, 2013, respectively.

Amortization expense decreased by $176,000 and $364,000 for the three and six months ended June 30, 2013, respectively as a result of the impairment charges related to our intangible assets that were incurred in 2012.

Depreciation expense decreased by $7,000 and $11,000, respectively for the three and six months ended June 30, 2013.

We expect that our depreciation and amortization will remain consistent with the first half of 2013 for the remainder of 2013.

Depreciation and amortization expense decreased by $183,000 and $559,000 for the three and nine months ended September 30, 2013 in comparison to the three and nine months ended September 30, 2012, respectively.

Amortization expense decreased by $181,000 and $543,000 for the three and nine months ended September 30, 2013, respectively, as a result of the impairment charges related to our intangible assets that were incurred in 2012.

Depreciation expense decreased by $2,000 and $16,000 for the three and nine months ended September 30, 2013, respectively.

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We expect that our depreciation and amortization will remain consistent with the first nine months of 2013 for the remainder of 2013.

Impairment Loss

In the process of refinancing the mortgage on the Corporate Headquarters, the Company had a third party valuation of the property.

As a result of the valuation, management determined that there was a decrease in the fair value of the property.

Management determined that the decrease in the fair value of the property was other-than-temporary.

Therefore, the Company recorded impairment of $450,000 during the second quarter of 2013.

This impairment expense is included as a component of impairment loss in the consolidated statements of operations for the three and six months ended June 30, 2013.

We recorded an impairment loss of $450,000 related to a decrease in the fair value of our corporate headquarters during the nine months ended September 30, 2013.

Other (Income) Expense

Other (income) expense includes rental income, gains and losses related to adjusting our derivative liabilities to fair value, investment gains and losses and other miscellaneous income (losses).

Other (income) expense decreased by $302,000 and $555,000 for the three and six months ended June 30, 2013, respectively.

The net other expense of $67,000 for the three months ended June 30, 2013 is comprised primarily of an investment net loss of $153,000 related to our notes receivable and investments partially offset by rental income of $76,000, and miscellaneous income of $11,000.

The net other expense of $199,000 for the six months ended June 30, 2013 is comprised primarily of a loss on write down of a note receivable of $593,000, partially offset by rental income of $164,000, investment net income of $183,000, a gain of $23,000 related to adjusting our derivative liabilities and miscellaneous income of $24,000.

Other (income) expense includes rental income, gains and losses related to adjusting our derivative liabilities to fair value, investment gains and losses and other miscellaneous income and expenses.

The net other income of $122,000 for the three months ended September 30, 2013 is comprised primarily of a gain on derivative liabilities of $13,000, rental income of $84,000, and miscellaneous income of $25,000.

The net other expense of $78,000 for the nine months ended September 30, 2013 is comprised primarily of a loss on write down of a note receivable of $593,000, partially offset by rental income of $247,000, investment net income of $183,000, a gain of $36,000 related to adjusting our derivative liabilities and miscellaneous income of $49,000.

Interest Expense, Net

Interest expense, net decreased by $7,000 for the three months ended June 30, 2013 in comparison to the three months ended June 30, 2012.

The net interest expense of $100,000 for the three months ended June 30, 2013 is primarily comprised of interest expense on debt of $94,000 and amortization of our debt discount of $6,000.

The net interest expense of $107,000 for the three months ended June 30, 2012 is primarily comprised of interest expense on debt and other payables of $100,000 and amortization of our debt discount of $33,000, partially offset by interest income on our note receivable of $26,000.

Interest expense, net increased by $8,000 for the six months ended June 30, 2013 in comparison to the six months ended June 30, 2012.

The net interest expense of $223,000 for the three months ended June 30, 2013 is primarily comprised of interest expense on debt of $193,000 and amortization of our debt discount of $45,000, partially offset by interest income on our note receivable of $15,000.

The net interest expense of $215,000 for the six months ended June 30, 2012 is primarily comprised of interest expense on debt and other payables of $201,000 and amortization of our debt discount of $66,000, partially offset by interest income on our note receivable of $52,000.

Interest expense, net increased by $14,000 for the three months ended September 30, 2013 in comparison to the three months ended September 30, 2012.

The net interest expense of $115,000 for the three months ended September 30, 2013 is primarily comprised of interest expense on debt of $95,000 and amortization of our debt discount of $25,000, partially offset by interest income on our notes receivable of $5,000.

The net interest expense of $101,000 for the three months ended September 30, 2012 is primarily comprised of interest expense on debt and other payables of $39,000 and amortization of our debt discount of $91,000, partially offset by interest income on our notes receivable of $29,000.

Interest expense, net increased by $22,000 for the nine months ended September 30, 2013 in comparison to the nine months ended September 30, 2012.

The net interest expense of $338,000 for the nine months ended September 30, 2013 is primarily comprised of interest expense on debt of $288,000 and amortization of our debt discount of $70,000, partially offset by interest income on our notes receivable of $20,000.

The net interest expense of $315,000 for the nine months ended September 30, 2012 is primarily comprised of interest expense on debt and other payables of $298,000 and amortization of our debt discount of $99,000, partially offset by interest income on our notes receivable of $81,000.

Liquidity and Capital Resources

Cash flows from operating activities of ($412,000) for the six months ended June 30, 2013 increased $264,000 from ($676,000) for the six months ended June 30, 2012.

Cash flows from operating activities of ($713,000) for the nine months ended September 30, 2013 increased $448,000 from ($1,161,000) for the nine months ended September 30, 2012.

Total cash flows from operations of ($713,000) in the current period are primarily attributable to:

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$270,000 in non-cash depreciation and amortization;

$593,000 in loss on write down of notes receivable;

$593,000 in loss on write down of note receivable;

$70,000 loss on impairment of investment securities

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Cash flows from investing activities of $779,000 for the six months ended June 30, 2013 increased $761,000 from $18,000 for the six months ended June 30, 2012.

Total cash flows from investing activities of $779,000 for the six months ended June 30, 2013 are primarily attributable to $475,000 in collection of notes receivable and $323,000 in proceeds from sale of securities.

Cash flows from financing activities of ($356,000) for the six months ended June 30, 2013 decreased $(302,000) from $(53,000) the six months ended June 30, 2012.

Total cash flows from financing activities of $(356,000) for the six months ended June 30, 2013 are related to principal payments on long-term debt.

Cash flows from investing activities of $738,000 for the nine months ended September 30, 2013 increased $120,000 from $618,000 for the nine months ended September 30, 2012.

Total cash flows from investing activities of $738,000 for the nine months ended September 30, 2013 are primarily attributable to $475,000 in collection of notes receivable and $323,000 in proceeds from sale of securities, partially offset by capital expenditures of $60,000.

Cash flows from financing activities of ($84,000) for the nine months ended September 30, 2013 decreased $(151,000) from $(235,000) the nine months ended September 30, 2012.

Total cash flows from financing activities of $(84,000) for the nine months ended September 30, 2013 are related to principal payments on long-term debt of $399,000, partially offset by proceeds from additional debt of $315,000.

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.

As of June 30, 2013, we had invested $2.7 million in this software platform.

We expect to incur approximately $200,000 expenditures for the development and refinement of the software platform during 2013.

We incurred a net loss of $(1.9) million and $(10.0) million for the six months ended June 30, 2013 and the year ended December 31, 2012, respectively.

In addition, we have a working capital deficit of $(3.6) million and an accumulated deficit of $(88.4) million as of June 30, 2013.

As of September 30, 2013, we had invested $2.8 million in this software platform.

We expect to incur approximately $70,000 in additional expenditures for the development and refinement of the software platform for the remainder of 2013.

We incurred a net loss of $(2.4) million and $(10.0) million for the nine months ended September 30, 2013 and the year ended December 31, 2012, respectively.

In addition, we have a working capital deficit of $(3.9) million and an accumulated deficit of $(88.9) million as of September 30, 2013.

These factors raise doubt about the Company’s 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 and bonuses.

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Our failure to generate sufficient cash from our operations could have a material adverse effect on us.

We have negotiated a one year extension of the debt on the corporate office building of approximately $2.7 million which is included in current maturities of long term debt at June 30, 2013.

Our future success depends on our ability to raise capital and ultimately generate revenue and attain profitability.

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Critical Accounting Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (“GAAP”) requires management to make assessments, estimates and assumptions that affect the amounts reported in the financial statements.

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make assessments, estimates and assumptions that affect the amounts reported in the financial statements.

Critical accounting estimates are those that require management’s most difficult, complex, or subjective judgments and have the most potential to impact our financial position and operating results.

We consider the following accounting policies and related estimates to be critical as they require the most subjective judgment or involve uncertainty that could have a material impact on our financial statements.

For a detailed discussion of our critical accounting estimates, see our Annual Report on Form 10-K for the year ended December 31, 2012.

There have been no material changes to our critical accounting estimates during the six months ended June 30, 2013.

There have been no material changes to our critical accounting estimates during the nine months ended September 30, 2013.

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Quantitative and Qualitative Disclosures about Market Risks

Not applicable.

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis