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ITEM 1.
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Financial Statements
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Innovaro, Inc.
Consolidated Balance Sheets
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March 31,
2013
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December 31,
2012
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(Unaudited)
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ASSETS
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Current assets:
|
|
|
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|
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Cash
|
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$
|
67,621
|
|
|
$
|
75,910
|
|
|
Accounts receivable, net
|
|
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95,574
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|
|
|
250,426
|
|
|
Trading securities
|
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|
259,464
|
|
|
|
—
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Available-for-sale securities
|
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2,383
|
|
|
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4,765
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Prepaid expenses and other assets
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109,498
|
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188,567
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Current portion of note receivable and accrued interest
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1,480,000
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1,199,611
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Total current assets
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2,014,540
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|
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1,719,279
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Cost method investments
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17,216
|
|
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86,784
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Equity method investments
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22,000
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92,148
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Note receivable and accrued interest
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—
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|
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829,670
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Fixed assets, net
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5,376,086
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|
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5,420,138
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Intangible assets, net
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296,087
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321,323
|
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|
|
|
|
|
|
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Total assets
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$
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7,725,929
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$
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8,469,342
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LIABILITIES
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Current liabilities:
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Accounts payable
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$
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789,053
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$
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723,211
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Accrued expenses
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488,359
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|
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450,271
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Deferred revenue
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205,399
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250,936
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Current maturities of long-term debt
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3,271,830
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3,294,896
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Total current liabilities
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4,754,641
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4,719,314
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Long-term debt, less current maturities
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1,945,919
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1,938,520
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Derivative liability
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6,000
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29,000
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Deferred tax liability
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38,002
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38,002
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Total liabilities
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6,744,562
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6,724,836
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Commitments and contingencies
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—
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—
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EQUITY
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Innovaro stockholders’ equity:
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Preferred stock, $.01 par value, 1,000,000 shares authorized; none issued and outstanding
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—
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—
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Common stock, $.01 par value, 29,000,000 shares authorized; 16,165,952 shares issued; 16,150,952 shares
outstanding
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161,510
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161,510
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Additional paid-in capital
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87,837,692
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87,796,900
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Accumulated deficit
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(87,244,871
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)
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(86,445,142
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)
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Accumulated other comprehensive income
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|
757
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3,139
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Total Innovaro stockholders’ equity
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755,088
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1,516,407
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Noncontrolling interest
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226,279
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228,099
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Total equity
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981,367
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1,744,506
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Total liabilities and equity
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$
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7,725,929
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$
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8,469,342
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See accompanying notes
3
Innovaro, Inc.
Consolidated Statements of Comprehensive Loss
(Unaudited)
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Three Months
Ended
March 31,
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2013
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2012
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Revenue
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$
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151,308
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$
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78,166
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Expenses:
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Direct costs of revenue
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116,882
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180,768
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Salaries and wages
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184,257
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210,582
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Professional fees
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49,282
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65,618
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Research and development
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74,625
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100,263
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Sales and marketing
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19,312
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20,399
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General and administrative
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184,423
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313,814
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Depreciation and amortization
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69,084
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261,395
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697,865
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1,152,839
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Other (income) and expense:
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Other (income) expense
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132,528
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(120,920
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)
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Interest expense, net
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122,463
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106,670
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254,991
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(14,250
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)
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Loss from continuing operations before income taxes
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(801,548
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)
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(1,060,423
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)
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Provision for income tax expense (benefit)
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|
—
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—
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|
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|
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|
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Loss from continuing operations
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|
(801,548
|
)
|
|
|
(1,060,423
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)
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Loss from discontinued operations, net of tax
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—
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|
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(247,151
|
)
|
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|
|
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Net loss
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|
$
|
(801,548
|
)
|
|
$
|
(1,307,574
|
)
|
|
|
|
|
|
|
|
|
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Net loss attributable to noncontrolling interest
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(1,820
|
)
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|
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(1,886
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)
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Net loss attributable to Innovaro stockholders
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$
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(799,728
|
)
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$
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(1,305,688
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)
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|
|
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Net loss
|
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$
|
(801,548
|
)
|
|
$
|
(1,307,574
|
)
|
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Other comprehensive income (loss):
|
|
|
|
|
|
|
|
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Unrealized (loss) gain from available-for-sale securities
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(2,382
|
)
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5,588
|
|
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|
|
|
|
|
|
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Comprehensive loss
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$
|
(803,930
|
)
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|
$
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(1,301,986
|
)
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Basic and diluted income (loss) per share:
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Loss from continuing operations
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$
|
(0.05
|
)
|
|
$
|
(0.07
|
)
|
|
Income (loss) from discontinued operations
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|
—
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|
|
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(0.02
|
)
|
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|
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|
|
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Net loss
|
|
$
|
(0.05
|
)
|
|
$
|
(0.09
|
)
|
|
|
|
|
|
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|
|
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Weighted average shares outstanding: Basic and diluted
|
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|
16,150,952
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|
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|
15,064,544
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See accompanying notes
4
Innovaro, Inc.
Consolidated Statements of Cash Flows
(Unaudited)
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Three Months Ended
March 31,
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2013
|
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|
2012
|
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Operating Activities:
|
|
|
|
|
|
|
|
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Net loss
|
|
$
|
(801,548
|
)
|
|
$
|
(1,307,574
|
)
|
|
Less: Loss from discontinued operations, net of tax
|
|
|
—
|
|
|
|
(247,151
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations
|
|
|
(801,548
|
)
|
|
|
(1,060,423
|
)
|
|
Adjustments to reconcile net loss to net cash flows from operating activities:
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
69,084
|
|
|
|
261,395
|
|
|
Amortization of debt discount from investor warrants
|
|
|
38,414
|
|
|
|
32,944
|
|
|
Loss on write-down of note receivable to net realizable value
|
|
|
489,437
|
|
|
|
—
|
|
|
Loss (gain) on sale and impairment of investment securities
|
|
|
(232,123
|
)
|
|
|
(12,803
|
)
|
|
Loss (gain) on derivative liabilities
|
|
|
(23,000
|
)
|
|
|
—
|
|
|
Stock-based compensation
|
|
|
40,791
|
|
|
|
46,478
|
|
|
Other
|
|
|
204
|
|
|
|
58,040
|
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
154,852
|
|
|
|
(11,257
|
)
|
|
Prepaid expenses and other assets
|
|
|
63,913
|
|
|
|
(45,275
|
)
|
|
Deferred revenue
|
|
|
(45,537
|
)
|
|
|
295,234
|
|
|
Accounts payable and accrued expenses
|
|
|
103,930
|
|
|
|
344,089
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash flows from operating activities of continuing operations
|
|
|
(141,583
|
)
|
|
|
(91,578
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Investing Activities:
|
|
|
|
|
|
|
|
|
|
Payments on notes receivable
|
|
|
75,000
|
|
|
|
—
|
|
|
Capital expenditures
|
|
|
—
|
|
|
|
(1,189
|
)
|
|
Capitalization of software development costs
|
|
|
—
|
|
|
|
(45,525
|
)
|
|
Proceeds from sale of investment securities
|
|
|
112,375
|
|
|
|
16,236
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash flows from investing activities of continuing operations
|
|
|
187,375
|
|
|
|
(30,478
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing Activities:
|
|
|
|
|
|
|
|
|
|
Payments on long-term debt
|
|
|
(54,081
|
)
|
|
|
(101,032
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Net cash flows from financing activities of continuing operations
|
|
|
(54,081
|
)
|
|
|
(101,032
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash flows from continuing operations
|
|
|
(8,289
|
)
|
|
|
(223,088
|
)
|
|
|
|
|
|
Net cash flows from discontinued operations
|
|
|
—
|
|
|
|
117,167
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Decrease in cash
|
|
|
(8,289
|
)
|
|
|
(105,921
|
)
|
|
Cash at beginning of period
|
|
|
75,910
|
|
|
|
268,170
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash at end of period
|
|
$
|
67,621
|
|
|
$
|
162,249
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental Disclosures of Cash Flow Information
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid for taxes
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid for interest
|
|
$
|
103,767
|
|
|
$
|
115,731
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental Disclosures of Non-Cash Investing and Financing Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized gain (loss) from available-for-sale securities
|
|
$
|
(2,382
|
)
|
|
$
|
5,588
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes
5
INNOVARO, INC.
Notes to Consolidated Financial Statements
(Unaudited)
Interim Financial Information
The financial information for Innovaro, Inc. (the “Company”, “we”, “us” or “Innovaro”) as of March 31, 2013 and for the three months ended March 31, 2013
and 2012 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 Company’s Annual Report on Form 10-K for the year ended December 31, 2012. Operating results for the three months ended March 31, 2013 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 delivering innovation solutions to our clients through a combination of software and associated services as well as information for strategic decision making. Innovaro offers software to ensure the
success of any innovation project, regardless of the size or intent. The Company’s LaunchPad software 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 primarily from the Company’s offices in the United States.
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
$(801,548) and $(9,999,599) for the three months ended March 31, 2013 and the year ended December 31, 2012, respectively. In addition, the Company has a working capital deficit of $(2,740,101) and an accumulated deficit of $(87,244,871) as
of March 31, 2013. These factors raise doubt about the Company’s ability to continue as a going concern.
The Company’s
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 proceeds from sales of its investments and the sale of certain
of the Company’s common stock. Given the Company’s 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 current scheduled debt service payments of $3.3
million and its operating requirements for the next twelve months. The Company is exploring opportunities for obtaining a credit facility, as well as selling equity securities. 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 it may be unable to take any of these actions on satisfactory terms or in a timely manner. Further, any of these actions may not be sufficient to allow the Company to service its debt obligations or may have an adverse
impact on its business. The failure to generate sufficient cash from operations could have a material adverse effect on the Company. The Company is currently negotiating to refinance the debt on the corporate office building of
approximately $2,700,000, which is included in current maturities of long term debt at March 31, 2013.
6
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.
On January 1, 2013, the Company acquired 100% ownership of an entity as a result of an assignment and transfer of certain collateral shares held in the
entity. The Company has 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. The Company has classified the securities as trading securities.
|
2.
|
Significant Accounting Policies
|
Trading Securities
Trading securities include equity securities that the Company intends to sell in the near term to generate profits. Trading securities are carried at fair value in the consolidated balance sheets.
Unrealized gains and losses are recorded as a component of other (income) expense in the consolidated statements of comprehensive income.
The
Company recognized a gain (loss) on trading securities of $302,000 during the three months ended March 31, 2013, of which $(25,000) was related to securities sold during the period and $327,000 was related to securities held at March 31, 2013.
Equity Method Investments
Equity method investments were considered for impairment at March 31, 2013. The Company determined that the equity method investment had suffered a decline in fair value below that of its respective
carrying amounts and this decline was determined to be other-than-temporary. The Company recognized a loss on impairment of its equity method investment of approximately $70,000 for the three months ended March 31, 2013, which is included as a
component of other (income) expense in the consolidated statements of comprehensive loss. There was no impairment for the three months ended March 31, 2012.
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 the Innovaro
LaunchPad software (“LaunchPad”) as research and development costs.
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 March 31
|
|
|
|
|
2013
|
|
|
2012
|
|
|
Weighted average outstanding shares of common stock
|
|
|
16,150,952
|
|
|
|
15,064,544
|
|
|
Dilutive effect of stock options, warrants and unvested shares of restricted stock
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock and common stock equivalents
|
|
|
16,150,952
|
|
|
|
15,064,544
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares excluded from calculation of diluted EPS
(
1
)
|
|
|
3,601,018
|
|
|
|
2,874,048
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
These shares attributable to outstanding stock options, warrants and unvested restricted stock were excluded from the calculation of diluted EPS because their inclusion
would have been anti-dilutive, primarily as a result of having incurred a net loss during the periods presented.
|
Financial Instruments
The Company’s 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 Company’s long-term debt is not materially different from its
carrying value of $5,217,749 and $5,233,416 as of March 31, 2013 and December 31, 2012, respectively.
7
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. All of the Company’s non-interest bearing cash balances were fully insured as of March 31, 2013.
Recent Accounting Pronouncements
In December 2011, the FASB issued an accounting standards update to require disclosure of information about the effect of rights of setoff with certain
financial instruments on an entity’s financial position. In January 2013, the FASB issued an accounting standards update that clarifies the aforementioned offsetting disclosure requirements. The disclosure requirements are only applicable to
rights of setoff of certain derivative instruments, repurchase agreements and reverse purchase agreements, and securities borrowing and securities lending transactions that are either offset in accordance with standards set forth by the FASB
Codification or master netting arrangements or similar agreements. The Company has adopted the amendments in these standards effective in the first quarter of 2013. Adoption of this standard had no impact on the Company’s consolidated financial
statements.
In February 2013, the FASB issued an accounting standards update that requires presentation for reclassification adjustments from
accumulated other comprehensive income into net income in a single note or on the face of the financial statements. The Company has adopted the amendments in this standard effective in the first quarter of 2013. Adoption of this standard did not
have a significant effect on the Company’s consolidated financial statements.
Use of Estimates
The preparation of the Company’s 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 Company’s
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.
|
3.
|
Discontinued Operations
|
Pharmalicensing, Global Licensing, Pharma Transfer and Knowledge Express operating divisions
Pursuant to an asset purchase agreement dated September 12, 2012, the Company sold the Pharmalicensing, Global Licensing, Pharma Transfer and
Knowledge Express operating divisions to IP Technology Exchange, Inc. (“IP Tech Ex”) effective as of August 31, 2012. These divisions operated out of the United States and the United Kingdom as part of the Company’s intelligence
and insights services segment. Under the terms of the original agreement, the Company was receive $2,000,000, consisting of (i) a lump-sum payment of $600,000 upon closing, (ii) the assumption of approximately $70,000 of debt relating to
the divisions, (iii) quarterly payments of $100,000 through August 2014, and (iv) payment of the remaining balance on September 1, 2014. In addition, IP Tech Ex was entitled to a $125,000 reduction in the purchase price if all amounts
were paid to the Company by May 1, 2013.The outstanding balance accrues interest at 5% per annum.
On May 13, 2013, 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. IP Tech Ex agreed to make a $500,000 payment in May 2013 and a $200,000 in
February 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.
8
Strategic Services operating division
On October 2, 2012, the Company entered into an asset purchase agreement to sell certain assets, primarily intellectual property rights and equipment, relating to our strategic services division,
known as Strategos, to one of its officers and employees for $100,000. In connection with the asset purchase agreement, the Company entered into separation and release agreements with all of the officers and employees of our Strategos division
pursuant to which they agreed to forgo approximately $1,489,000 in accrued bonuses owed them in exchange for $150,000. Finally, as part of the transaction, the Company also entered into a technology license agreement with Strategos, Inc., a newly
formed company that will carry on the business formerly conducted by our Strategos division, pursuant to which we agreed to license Strategos, Inc. certain technology and intellectual property rights relating to our Strategos division, including the
use of the name “Strategos,” for royalty payments equal to 12.5% of the professional fee revenue earned by Strategos, Inc. in excess of $10,000,000 during the period from October 2, 2012 to December 31, 2015.
The Company has reflected the operations of these divisions as discontinued operations in the consolidated statements of comprehensive loss for the three
months ended March 31, 2012. 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.
The summary financial results of discontinued operations are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, 2012
|
|
|
|
|
Strategic
Services
|
|
|
Intelligence
&
Insights
|
|
|
Total
|
|
|
Revenue
|
|
$
|
743,671
|
|
|
$
|
434,477
|
|
|
$
|
1,178,148
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-lived asset impairment charge
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Operating expense
|
|
|
1,018,265
|
|
|
|
377,769
|
|
|
|
1,396,034
|
|
|
Other (income) expense
|
|
|
28,106
|
|
|
|
—
|
|
|
|
28,106
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
|
(302,700
|
)
|
|
|
56,708
|
|
|
|
(245,992
|
)
|
|
Provision for income tax (expense) benefit
|
|
|
—
|
|
|
|
(1,159
|
)
|
|
|
(1,159
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from discontinued operations, net of tax
|
|
$
|
(302,700
|
)
|
|
$
|
55,549
|
|
|
$
|
(247,151
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4.
|
Fair Value Measurements
|
The Company performs fair value measurements in accordance with the guidance provided by FASB
ASC Topic 820
Fair Value Measurements and Disclosures
. Topic 820 defines fair value as the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the
measurement date. When determining the fair value measurements for assets and liabilities required to be recorded at fair value, management considers the principal or most advantageous market in which the Company would transact and considers
assumptions that market participants would use when pricing the asset or liability, such as inherent risk, transfer restrictions, and risk of nonperformance.
Topic 820 establishes a fair value hierarchy that encourages and is based on the use of observable inputs, but allows for unobservable inputs when observable inputs do not exist. When there are multiple
inputs for determining the fair value of an investment, the Company classifies the investment in the fair value hierarchy based on the lowest level input that is significant to the fair value measurement. Inputs are classified into one of three
categories:
|
|
•
|
|
Level 1—Unadjusted quoted prices in active markets for identical assets or liabilities.
|
|
|
•
|
|
Level 2—Quoted prices in active markets for similar assets or liabilities, or quoted prices for identical or similar assets or liabilities in
markets that are not active, or inputs other than quoted prices that are observable for the asset or liability.
|
|
|
•
|
|
Level 3—Unobservable inputs for the asset or liability.
|
9
Assets measured at fair value on a recurring basis by level within the fair value hierarchy are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements
at
March 31, 2013
(1)
|
|
|
Fair Value Measurements at
December 31, 2012
(1)
|
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Total
|
|
|
Level 2
|
|
|
Total
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trading securities
|
|
$
|
259,464
|
|
|
$
|
—
|
|
|
$
|
259,464
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Available-for-sale securities
|
|
|
—
|
|
|
|
2,383
|
|
|
|
2,383
|
|
|
|
4,765
|
|
|
|
4,765
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
259,464
|
|
|
$
|
2,383
|
|
|
$
|
261,847
|
|
|
$
|
4,765
|
|
|
$
|
4,765
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative liability
|
|
$
|
—
|
|
|
$
|
6,000
|
|
|
$
|
6,000
|
|
|
$
|
29,000
|
|
|
$
|
29,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
$
|
—
|
|
|
$
|
6,000
|
|
|
$
|
6,000
|
|
|
$
|
29,000
|
|
|
$
|
29,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
The Company did not have any assets or liabilities measured at fair value using Level 3 of the fair value hierarchy as of March 31, 2013. The
Company did not have any assets or liabilities measured at fair value using Level 1 or Level 3 of the fair value hierarchy as of December 31, 2012.
|
The Company’s investments in trading securities are classified within Level 1 of the fair value hierarchy. The value of these
equity interests in public companies are based on quoted market prices for identical instruments in an active market. The Company utilizes the market approach in determining the fair value of these securities.
The Company’s investments in available-for-sale securities are classified within Level 2 of the fair value hierarchy. The equity interests in
companies for which there is no liquid public market are valued using quoted market prices for identical or similar instruments in markets that are not active. The determined values are generally discounted to account for the illiquid nature of the
investment and minority ownership positions. The value of our equity interests in public companies for which market quotations are readily available are based on quoted market prices for similar instruments in an active market. These securities are
generally thinly traded and/or carry discounts from the public market value for certain restrictions on resale. The Company utilizes the market approach in determining the fair value of these securities.
The Company’s derivative liability is classified within Level 2 of the fair value hierarchy. The Company utilizes the Black-Scholes Option Pricing
Model to value the derivative liability utilizing observable inputs such as the Company’s common stock price, the exercise price of the warrants, and expected volatility, which is based on historical volatility. The Black-Scholes model employs
the market approach in determining fair value.
Accrued expenses are comprised of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31,
2013
|
|
|
December 31,
2012
|
|
|
Accrued salaries and related expenses
|
|
$
|
200,332
|
|
|
$
|
178,030
|
|
|
Property taxes payable
|
|
|
182,081
|
|
|
|
163,279
|
|
|
Board of Director fees payable
|
|
|
49,500
|
|
|
|
49,500
|
|
|
Accrued interest
|
|
|
38,610
|
|
|
|
43,265
|
|
|
Other
|
|
|
17,836
|
|
|
|
16,197
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
488,359
|
|
|
$
|
450,271
|
|
|
|
|
|
|
|
|
|
|
|
|
6.
|
Other (Income) Expense
|
Other (income) expense is comprised of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
|
|
2013
|
|
|
2012
|
|
|
Loss (gain) on sale and impairment of investments
|
|
$
|
(232,123
|
)
|
|
$
|
(12,803
|
)
|
|
Loss on write-down of note receivable to net realizable value
|
|
|
489,437
|
|
|
|
—
|
|
|
Loss (gain) on derivative liabilities
|
|
|
(23,000
|
)
|
|
|
—
|
|
|
Rental income
|
|
|
(88,015
|
)
|
|
|
(100,775
|
)
|
|
Other
|
|
|
(13,771
|
)
|
|
|
(7,342
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Other (income) expense
|
|
$
|
132,528
|
|
|
$
|
(120,920
|
)
|
|
|
|
|
|
|
|
|
|
|
10
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.
The Company sold certain of its operating divisions during the year ended December 31, 2012. See Note 3 for further discussion
of the sale of these divisions. Accordingly, the Company has reflected the operations of these divisions as discontinued operations for the three months ended March 31, 2012. As a result, revenue and income (loss) from continuing operations
before income taxes shown below for the three months ended March 31, 2012 do not include amounts related to these divisions.
A summary
of revenue and other financial information by reportable geographic operating segment is shown below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United
Kingdom
|
|
|
United States
|
|
|
Total
|
|
|
Long-lived assets as of March 31, 2013
|
|
$
|
—
|
|
|
$
|
5,672,173
|
|
|
$
|
5,672,173
|
|
|
Total assets as of March 31, 2013
|
|
|
1,350
|
|
|
|
7,724,579
|
|
|
|
7,725,929
|
|
|
Long-lived assets as of December 31, 2012
|
|
|
—
|
|
|
|
5,741,461
|
|
|
|
5,741,461
|
|
|
Total assets as of December 31, 2012
|
|
|
3,064
|
|
|
|
8,466,278
|
|
|
|
8,469,342
|
|
A summary of revenue and other financial information by reportable line of business segment is shown below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended March 31, 2013
|
|
|
|
|
Strategic
Services
|
|
|
Intelligence
&
Insights
Services
|
|
|
Administrative
and Other
|
|
|
Total
|
|
|
Revenue
|
|
$
|
—
|
|
|
$
|
151,308
|
|
|
$
|
—
|
|
|
$
|
151,308
|
|
|
Income (loss) from continuing operations before income taxes
|
|
|
—
|
|
|
|
24,280
|
|
|
|
(825,828
|
)
|
|
|
(801,548
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended March 31, 2012
|
|
|
|
|
Strategic
Services
|
|
|
Intelligence
&
Insights
Services
|
|
|
Administrative
and Other
|
|
|
Total
|
|
|
Revenue
|
|
$
|
—
|
|
|
$
|
78,166
|
|
|
$
|
—
|
|
|
$
|
78,166
|
|
|
Income (loss) from continuing operations before income taxes
|
|
|
—
|
|
|
|
(84,060
|
)
|
|
|
(976,363
|
)
|
|
|
(1,060,423
|
)
|
|
Income (loss) from discontinued operations, net of tax
|
|
|
(302,700
|
)
|
|
|
55,549
|
|
|
|
—
|
|
|
|
(247,151
|
)
|
11
|
ITEM 2.
|
Management’s 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
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. 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 offices are located in the United States.
We currently have one business segment: Intelligence and Insights Services. 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. 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:
|
|
•
|
|
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 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. 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.
12
Innovaro LaunchPad
Our LaunchPad software product provides an integrated innovation environment which embodies our Leading Edge Innovation Practices to offer a process that is repeatable, reliable and scalable. 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 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.
Discontinued Operations
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. 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 months ended March 31, 2012 has been reclassified to conform to
this new presentation.
Significant Developments
On January 1, 2013, we acquired 100% ownership of an entity as a result of an assignment and transfer of certain collateral shares held in the entity. 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 have classified the securities as trading securities.
Subsequent to the end of the current quarter on
May 13, 2013, our 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. IP Tech Ex agreed to make a $500,000 payment in May 2013 and a $200,000 in
February 2014 in full satisfaction of the note. Accordingly, 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.
Financial Condition
Our total assets
were $7.7 million and $8.5 million as of March 31, 2013 and December 31, 2012, respectively. As of March 31, 2013, we had $68,000 in cash, $96,000 in accounts receivable, $1.3 million in accounts payable and accrued expenses, and $5.2 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 March 31, 2013, we had a working
capital deficit of $(2.7) million and an accumulated deficit of $(87.2) million.
Results of Operations
Revenue
Our revenue is derived
from a combination of global technology licensing services, online marketplace fees, foresight and trend research revenue and IP consulting revenue. Our revenue increased by $73,000 for the three
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months ended March 31, 2013 in comparison to the three months ended March 31, 2012. The increased revenue results from an increase in the number of customers utilizing our online services and
additional custom projects completed in 2013.
We expect that our revenue will remain consistent with the first quarter of 2013 for the
remainder of 2013.
Direct Costs of Revenue
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 $64,000 for the three months ended March 31, 2013 in comparison to the three months ended March 31, 2012 due to a reduction in sales staff and the elimination of the sales manager position.
We expect that our direct costs of revenue will remain consistent with the first quarter 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 $26,000 for the three months
ended March 31, 2013 in comparison to the three months ended March 31, 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 quarter of 2013 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 $16,000 for the three months ended March 31, 2013 in comparison to the three months ended March 31, 2012, primarily as a result of a reduction in accounting and valuation fees
offset by a slight increase in legal fees in the first quarter of 2013.
We expect that our professional fees will remain consistent with the
first quarter 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 $26,000 for the three months ended March 31, 2013 in comparison to the three months ended March 31, 2012. 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 decrease over the first quarter 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 remained flat for the three months ended March 31, 2013 compared to the three months ended March 31, 2012.
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We expect that our sales and marketing expense will increase over the first quarter of 2013 for the
remainder of 2013.
General and Administrative
General and administrative expense decreased by $129,000 for the three months ended March 31, 2013 compared to the three months ended March 31, 2012. The decrease primarily relates to a $22,000 reduction
in insurance and other employee related costs due to having fewer employees and a $95,000 decrease in outside services.
We expect that our
general and administrative expense will decrease over the first quarter of 2013 for the remainder of 2013.
Depreciation and
Amortization
Depreciation and amortization decreased by $192,000 for the three months ended March 31, 2013 in comparison to the three
months ended March 31, 2012. Amortization expense decreased by $187,000 as a result of the impairment charges related to our intangible assets that were incurred in 2012.
We expect that our depreciation and amortization will remain consistent with the first quarter of 2013 for the remainder of 2013.
Other (Income) Expense
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 $253,000 for the three months ended March 31, 2013 in comparison to the three
months ended March 31, 2012. The net other expense of $133,000 for the three months ended March 31, 2013 is comprised primarily of a loss on write down of a note receivable to net realizable value of $489,000 partially offset by a capital gain of
$232,000 related to our trading securities, rental income of $88,000, a gain of $23,000 related to adjusting our derivative liabilities and miscellaneous income of $14,000. The net other income of $121,000 for the three months ended March 31, 2012
is comprised primarily of rental income of $101,000, a capital gain of $13,000 and miscellaneous income of $7,000.
Interest Expense,
Net
Interest expense, net increased by $15,000 for the three months ended March 31, 2013 in comparison to the three months ended March
31, 2013. The net interest expense of $122,000 for the three months ended March 31, 2012 is primarily comprised of interest expense on long-term debt of $99,000 and amortization of our debt discount of $38,000, partially offset by interest income on
our note receivable of $15,000. The net interest expense of $107,000 for the three months ended March 31, 2012 is primarily comprised of interest expense on long-term debt of $100,000 and amortization of our debt discount of $33,000, partially
offset by interest income on our note receivable of $26,000.
Liquidity and Capital Resources
Cash Flows
Cash flows from
operating activities of ($142,000) for the three months ended March 31, 2013 decreased $50,000 from ($92,000) for the three months ended March 31, 2012. Total cash flows from operations of $(142,000) in the current period are primarily attributable
to:
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$802,000 net operating loss;
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$46,000 decrease in deferred revenue;
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$232,000 gain on sale and impairment of investment securities; and
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$23,000 gain on derivative liabilities.
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Partially offset by:
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$107,000 in non-cash depreciation and amortization;
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$489,000 in loss on write down of note receivable;
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$41,000 in non-cash stock-based compensation expense related to vesting options;
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$155,000 decrease in accounts receivable;
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$64,000 decrease in prepaid expense and other assets; and
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$104,000 increase in accounts payable and accrued expenses.
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Cash flows from investing activities of $187,000 for the three months ended March 31, 2013 increased $217,000 from $(30,000) for the three months ended March 31, 2012. Total cash flows from investing
activities of $187,000 are attributable to payments received on notes receivable of $75,000 and proceeds of $112,000 received from sale of investment securities.
Cash flows from financing activities of ($54,000) for the three months ended March 31, 2013 increased $47,000 from $(101,000) for the three months ended March 31, 2012. Total cash flows from financing
activities of $(54,000) are related to principal payments on long-term debt.
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 March 31, 2013, we had invested $2.7 million in this software platform. We expect to incur approximately $250,000 expenditures for the development and refinement of the software platform during 2013.
Liquidity
We incurred a net loss
of $(802,000) and $(10.0) million for the three months ended March 31, 2013 and the year ended December 31, 2012, respectively. In addition, we have a working capital deficit of $(2.7) million and an accumulated deficit of $(87.2) million as of
March 31, 2013. 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 and bonuses. Our primary sources of funds are cash received from customers in connection with operations and, to a lesser
extent, proceeds from the sale from time to time of our investments.
We currently intend to fund our liquidity needs, including our software
development costs, with existing cash balances, cash generated from operations, collections of our existing receivables and the proceeds for the sales of our investments. 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 $3.3 million and our operating requirements for the next twelve months. We are exploring opportunities for obtaining a credit facility, as well as
selling equity securities and certain other assets. In addition, we have the capability to delay all cash intensive activities, including our software development costs, and will look to reduce costs further. However, if such measures prove
inadequate, we could face liquidity problems and might be required to reduce or delay planned capital expenditures and other initiatives and sell assets, and we may be unable to take any of these actions on
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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. We are currently negotiating to refinance the debt on the corporate office building of approximately $2.7 million, which is included
in current maturities of long-term debt at March 31, 2013.
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.
Critical Accounting Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (“GAAP”) requires management to make assessments, estimates
and assumptions that affect the amounts reported in the financial statements. Critical accounting estimates are those that require 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 three months ended March 31,
2013.
