Quarterly Report (10-q)

Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

(Mark One)

x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2013

 

¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number 001-15941

 

 

INNOVARO, INC.

(Exact name of registrant as specified in its charter)

 

 

 

Delaware		59-3603677
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

2109 Palm Avenue

Tampa, FL 33605

(Address of principal executive offices)

[phone]

(Registrant’s telephone number)

(Former name, former address and former fiscal year, if changed since last report)

None

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes   x     No   ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes   x     No   ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer		¨		Accelerated filer		¨
Non-accelerated filer		¨   (Do not check if a smaller reporting company)		Smaller reporting company		x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes   ¨     No   x

On May 1, 2013, there were 16,150,952 shares outstanding of registrant’s common stock, $0.01 par value.

 

 

 

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Table of Contents

INNOVARO, INC.

FORM 10-Q TABLE OF CONTENTS

 

PART I. FINANCIAL INFORMATION
ITEM 1.		Financial Statements			3
Consolidated Balance Sheets as of March 31, 2013 (unaudited) and December 31, 2012					3
Consolidated Statements of Comprehensive Loss for the Three Months Ended March 31, 2013 and 2012 (unaudited)					4
Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2013 and 2012 (unaudited)					5
Notes to Consolidated Financial Statements (unaudited)					6
ITEM 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations			12
ITEM 3.		Quantitative and Qualitative Disclosures about Market Risks			17
ITEM 4.		Controls and Procedures			17
PART II. OTHER INFORMATION					18
ITEM 1.		Legal Proceedings			18
ITEM 1A.		Risk Factors			18
ITEM 2.		Unregistered Sales of Equity Securities and Use of Proceeds			18
ITEM 3.		Defaults Upon Senior Securities			18
ITEM 4.		Mine Safety Disclosures			18
ITEM 5.		Other Information			18
ITEM 6.		Exhibits			18
Signatures					19
Exhibits

 

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PART I.

FINANCIAL INFORMATION

 

ITEM 1.

Financial Statements

Innovaro, Inc.

Consolidated Balance Sheets

 

		March 31, 2013				December 31, 2012
		(Unaudited)
ASSETS
Current assets:
Cash		$	67,621			$	75,910
Accounts receivable, net			95,574				250,426
Trading securities			259,464				—
Available-for-sale securities			2,383				4,765
Prepaid expenses and other assets			109,498				188,567
Current portion of note receivable and accrued interest			1,480,000				1,199,611
Total current assets			2,014,540				1,719,279
Cost method investments			17,216				86,784
Equity method investments			22,000				92,148
Note receivable and accrued interest			—				829,670
Fixed assets, net			5,376,086				5,420,138
Intangible assets, net			296,087				321,323
Total assets		$	7,725,929			$	8,469,342
LIABILITIES
Current liabilities:
Accounts payable		$	789,053			$	723,211
Accrued expenses			488,359				450,271
Deferred revenue			205,399				250,936
Current maturities of long-term debt			3,271,830				3,294,896
Total current liabilities			4,754,641				4,719,314
Long-term debt, less current maturities			1,945,919				1,938,520
Derivative liability			6,000				29,000
Deferred tax liability			38,002				38,002
Total liabilities			6,744,562				6,724,836
Commitments and contingencies			—				—
EQUITY
Innovaro stockholders’ equity:
Preferred stock, $.01 par value, 1,000,000 shares authorized; none issued and outstanding			—				—
Common stock, $.01 par value, 29,000,000 shares authorized; 16,165,952 shares issued; 16,150,952 shares outstanding			161,510				161,510
Additional paid-in capital			87,837,692				87,796,900
Accumulated deficit			(87,244,871	)			(86,445,142	)
Accumulated other comprehensive income			757				3,139
Total Innovaro stockholders’ equity			755,088				1,516,407
Noncontrolling interest			226,279				228,099
Total equity			981,367				1,744,506
Total liabilities and equity		$	7,725,929			$	8,469,342

See accompanying notes

 

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Innovaro, Inc.

Consolidated Statements of Comprehensive Loss

(Unaudited)

 

		Three Months Ended March 31,
		2013				2012
Revenue		$	151,308			$	78,166
Expenses:
Direct costs of revenue			116,882				180,768
Salaries and wages			184,257				210,582
Professional fees			49,282				65,618
Research and development			74,625				100,263
Sales and marketing			19,312				20,399
General and administrative			184,423				313,814
Depreciation and amortization			69,084				261,395
			697,865				1,152,839
Other (income) and expense:
Other (income) expense			132,528				(120,920	)
Interest expense, net			122,463				106,670
			254,991				(14,250	)
Loss from continuing operations before income taxes			(801,548	)			(1,060,423	)
Provision for income tax expense (benefit)			—				—
Loss from continuing operations			(801,548	)			(1,060,423	)
Loss from discontinued operations, net of tax			—				(247,151	)
Net loss		$	(801,548	)		$	(1,307,574	)
Net loss attributable to noncontrolling interest			(1,820	)			(1,886	)
Net loss attributable to Innovaro stockholders		$	(799,728	)		$	(1,305,688	)
Net loss		$	(801,548	)		$	(1,307,574	)
Other comprehensive income (loss):
Unrealized (loss) gain from available-for-sale securities			(2,382	)			5,588
Comprehensive loss		$	(803,930	)		$	(1,301,986	)
Basic and diluted income (loss) per share:
Loss from continuing operations		$	(0.05	)		$	(0.07	)
Income (loss) from discontinued operations			—				(0.02	)
Net loss		$	(0.05	)		$	(0.09	)
Weighted average shares outstanding: Basic and diluted			16,150,952				15,064,544

See accompanying notes

 

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Innovaro, Inc.

Consolidated Statements of Cash Flows

(Unaudited)

 

		Three Months Ended March 31,
		2013				2012
Operating Activities:
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	)
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

 

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INNOVARO, INC.

Notes to Consolidated Financial Statements

(Unaudited)

 

1.	Basis of Presentation

Interim Financial Information

The financial information for Innovaro, Inc. (the “Company”, “we”, “us” or “Innovaro”) as of 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.

 

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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.

 

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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.

 

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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.

 

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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.

 

5.	Accrued Expenses

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	)

 

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7.	Segment Reporting

FASB ASC Topic 280 Segment Reporting establishes standards for reporting information about operating segments. Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker, or decision making group, in deciding how to allocate resources and in assessing performance. The Company is organized geographically and by line of business. The line of business management structure is the primary basis for which the allocation of resources and financial results are assessed.

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	)

 

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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.

 

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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:

 

•

$802,000 net operating loss;

 

•

$46,000 decrease in deferred revenue;

 

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•

$232,000 gain on sale and impairment of investment securities; and

 

•

$23,000 gain on derivative liabilities.

Partially offset by:

 

•

$107,000 in non-cash depreciation and amortization;

 

•

$489,000 in loss on write down of note receivable;

 

•

$41,000 in non-cash stock-based compensation expense related to vesting options;

 

•

$155,000 decrease in accounts receivable;

 

•

$64,000 decrease in prepaid expense and other assets; and

 

•

$104,000 increase in accounts payable and accrued expenses.

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.

 

ITEM 3.

Quantitative and Qualitative Disclosures about Market Risks

Not applicable.

 

ITEM 4.

Controls and Procedures

Disclosure Controls and Procedures

Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of our disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e) under the Securities and Exchange Act of 1934, as amended (the “Exchange Act”)) as of the end of the period covered by this Quarterly Report on Form 10-Q to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission’s rules and forms, and is accumulated and communicated to our management as appropriate to allow timely decisions regarding required disclosure.

Based on this evaluation and taking into account that certain material weaknesses existed as of December 31, 2012, our Chief Executive Officer and Chief Financial Officer have each concluded that our disclosure controls and procedures were not effective. As a result of this conclusion, the financial statements for the period covered by this Quarterly Report on Form 10-Q were prepared with particular attention to the material weaknesses previously disclosed. Notwithstanding the material weaknesses in internal controls that continue to exist as of March 31, 2013, we have concluded that the financial statements included in this Quarterly Report on Form 10-Q present fairly, the financial position, results of operations and cash flows of the Company as required for interim financial statements.

 

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Internal Control over Financial Reporting

During the fiscal quarter ended March 31, 2013, there was no change in our internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. Management has concluded that the material weaknesses in internal control as described in Item 9A of the Company’s Form 10-K for the year ended December 31, 2012 have not been remediated. Due to the small number of employees dealing with general administrative and financial matters and the expenses associated with increasing the number of employees to remediate the disclosure control and procedure material weaknesses that have been identified, the Company continued to operate without changes to its internal controls over financial reporting for the period covered by this Quarterly Report on Form 10-Q while continuing to seek the expertise its needs to remediate the material weaknesses.

PART II. OTHER INFORMATION

 

ITEM 1.

Legal Proceedings

Although we may from time to time be involved in litigation and claims arising out of our operations in the normal course of our business, as of March 31, 2013, we were not a party to any material pending legal proceedings.

 

ITEM 1A.

Risk Factors

Not applicable.

 

ITEM 2.

Unregistered Sales of Equity Securities and Use of Proceeds

None.

 

ITEM 3.

Defaults upon Senior Securities

None.

 

ITEM 4.

Mine Safety Disclosures

Not applicable.

 

ITEM 5.

Other Information

None.

 

ITEM 6.

Exhibits

The following exhibits are filed with this report on Form 10-Q:

 

31.1		—		Certification of the Chief Executive Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934.
31.2		—		Certification of the Chief Financial Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934.
32.1		—		Certification of the Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350.
32.2		—		Certification of the Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350.
101.INS*		—		XBRL Instance Document
101.SCH*		—		XBRL Taxonomy Extension Schema
101.CAL*		—		XBRL Taxonomy Extension Calculation Linkbase
101.DEF*		—		XBRL Taxonomy Extension Definition Linkbase
101.LAB*		—		XBRL Taxonomy Extension Label Linkbase
101.PRE*		—		XBRL Taxonomy Extension Presentation Linkbase

 

*

Pursuant to Rule 406T of Regulation S-T, these interactive data files are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933 or Section 18 of the Securities Exchange Act of 1934 and otherwise are not subject to liability.

 

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

				INNOVARO, INC.
						(Registrant)
Date: May 15, 2013				/s/ Asa Lanum
				Asa Lanum
				Chief Executive Officer
Date: May 15, 2013				/s/ Carole R. Wright
				Carole R. Wright, CPA
				Chief Financial Officer

 

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