Innovaro Inc. Director Mark S Berset bought 217,392 shares on 6-20-2012 at $ 0.92
Innovaro has evolved from a technology transfer firm, organized as a BDC, into an operating company. We have shifted the focus of the business to become an innovation services business. We provide innovation consulting services, IP licensing, technology acquisition and partnering and trends analysis.
During the course of 2010, Innovaro recognized the opportunity to develop a new innovation management software platform with the intent to bring the product to market beginning in 2011. Innovaro envisions the continued evolution of its business to include the development and sale of software products such as the innovation management software platform to support its innovation services business.
Over time, we expect the software product component of our business to grow at a greater rate than the growth in our other business segments and we feel it will represent an important component of our overall revenue stream.
As the innovation management software capability matures, we expect to evolve into an innovation solutions company which will include all of our current services as well as the software platform to form the basis of an innovation engine . This innovation engine will allow us to more broadly engage clients depending on their requirements, whether people, software or data across their innovation cycle.
A key component of our strategy is to embrace both software and information offerings from other firms through an open innovation approach. Open innovation is a paradigm that assumes that firms can and should use external ideas as well as internal ideas, and internal and external paths to market, as the firms look to advance their technology. Using this approach, our clients will be able to incorporate our offerings to suit their requirements to most effectively drive innovation.
We currently have strategically aligned our business into two reportable segments: Strategic Services and Technology Services.
Strategic Services Segment Overview
Our clients require strategies to help them embrace improved innovation capabilities. We apply innovation insights; build those strategies with supporting infrastructure, processes and mechanisms; creating a culture primed for repeatable innovation success. We help organizations create and realize new, breakthrough growth strategies, create and execute non-incremental new growth platforms and opportunities, and develop the capability for ongoing creation and execution of those growth platforms and concepts.
Technology Services Segment Overview
Whether partnering or licensing, our clients need exposure to the broadest and most relevant communities to identify needs, fulfill technology demands, and take technology development forward and into the market. We offer expansive networks, experts in scouting, partner sourcing and licensing expertise, and a world leading online marketplace. An important aspect of licensing is understanding the true potential value of the intellectual property portfolio. We assess that value by building a roadmap for our clients to use to uncover opportunities and options to realize latent value.
Our clients require intelligence applied to their markets in order to have confidence in deploying their development capital. From current market research to predictive intelligence, we help clients determine the factors impacting or that will likely impact their business including social, geopolitical, competitive, economic, environmental and technological factors.
Innovaro Pharmalicensing is a biopharmaceutical innovation resource designed for life science professionals driving partnering, licensing and business development worldwide. Pharmalicensing.com affords clients the ability to in-license and out-license intellectual property and also provides partnering services, business development reports, industry news and a jobs source for candidates and employers. We are tracking at approximately 200,000 unique visitors per month and developing partnerships with external search partners to further drive traffic.
Knowledge Express is an online, information service built for those who need it mostâ€”business development, technology transfer and marketing professionals across technology industries. It is a premier business development resource with expert IP search capabilities and report generation functionality. Our service includes access to key corporate profiles, industry contacts, technology pipelines, investigational technologies, deal information, sales data and patent data.
Pharma Transfer provides a source of research and peer reviewed business development opportunities for the international pharmaceutical market encompassing all areas of pipeline development including early-stage discovery, pre-clinical and clinical trials and registered products that are all available for co-development or licensing.
Global Technology Licensing
Our global technology licensing service enables clients to enhance their new product pipeline through the acquisition of proprietary technologies primarily from universities, medical centers, federal research laboratories, select corporations and university incubator programs. A global network of technology providers, coupled with an in-house staff of scientists and researchers, offers companies low-cost, low-risk access to review and acquire new technologies from research centers around the world. After gaining an understanding of our clientsâ€™ technology and business needs, we find and assess technologies for our clients. With the added benefit of our licensing professionals, we can negotiate agreements on behalf of our clients and offer a variety of flexible terms and transaction models.
Foresight and Trend Research
Foresight is the ability of an organization to understand the ways in which the future might emerge and to apply that understanding in organizationally useful ways. Strategic foresight may also be used to detect adverse conditions, guide policy and help shape strategy. We provide services to clients that build the capacity for foresight, including monitoring trends, researching topics of interest, forecasting alternative scenarios, developing technology roadmaps, creating growth platforms and embedding futures thinking within the organization.
We offer innovative futures programs that provide clients with up-to-the-minute knowledge, expert insight, high-level learning experiences, and opportunities to network with experts and peers, including:
â€˘ Futures Consortiumâ€” a membership service that provides access to research briefs, member meetings and networking events, and onsite workshops.
â€˘ Futures Observatoryâ€” a membership service that provides a steady stream of â€śobservationsâ€ť that illustrate the latest developments in key global trends. The observations are brief, timely discussions of real-life events or circumstances in key markets, which exemplify how trends are playing out in the market.
â€˘ Futures Interactiveâ€” a customizable, web-based knowledge management tool that gathers and organizes information from across a client in one, intuitive platform.
We also offer IP Consulting to deliver value through the identification of intellectual property opportunities and execution of IP optimization and exploitation strategies for clients in a wide range of industries. Our approach is designed to help our clients determine market viability, product viability and buyer viability and determine the best means to maximize the value from commercially available assets.
Our IP analysis, coupled with collaborative planning and execution, delivers focused results. Because our model is science-based, the result has a greater probability of high value realization. Strategies we employ are directly proportional to the return on IP investment and our holistic IP value consists of several phases in order to determine the right IP for our clientsâ€”one that employs strategies designed to deliver the desired business goals.
Approximately 25% and 36% of our revenue in 2010 and 2009, respectively, was from technology services. We have a global client base including private and public sector organizations of varying sizes, representing a wide range of industries. Clients for our subscription services include universities, research centers and primarily large companies across a diversified group of industries. Clients for our other services within the technology services segment include both private and public sector organizations, representing multiple industry sectors including retail, government, telecommunications, chemicals, media, financial services, energy and utilities.
We have capable competitors in the global technology licensing business including IP Group plc, British Technology Group plc, Intellectual Ventures, Yet2.com, Competitive Technologies, Inc. and many other firms. Competitors for online marketplace services are significant and include: Reed Elsevier, PharmaVentures, Nerac, Inc., Thomson S.A., BioPharm Insight, EvaluatePharma and many others. Competitors for IP consulting services include: The Patent Board, Ocean Tomo, LLC, PatentCafĂ©, 1790 Analytics and many other private firms and Forrester Research, Inc. and Gartner, Inc. for foresight and trend research. In addition, university technology commercialization offices also provide location specific competition with regard to the licensing of IP technology that they have developed.
We believe the primary factors affecting competition in our markets include firm and consultant reputations, client relationships and experiences, a legacy of successes, referrals and referral sources, the ability to attract and retain top talent, the ability to manage client engagements effectively, responsiveness, and the ability to listen and provide high quality services. There is competition on price, as evidenced by the price competition we experienced during the recent severe economic downturn. However, given the critical nature of many of the issues that our services address, we are not typically competing on price alone. Many of our competitors have a greater share of the markets in which we operate, more high profile personnel and greater financial and marketing resources than we do. We believe that our experience, our reputation (collectively and as previously independent businesses), our focus on innovation, and our comprehensive approach to our clientsâ€™ innovation challenges enable us to compete favorably and effectively in this marketplace.
Research and Development
Currently, our research and development activities are related to the continuing development of an innovation management software platform. In fiscal 2010 and fiscal 2009, our research and development expenses were $1.2 million and $0, respectively. Our research and development expenses consist primarily of personnel and related expenses, including payroll and employee benefits, expenses for facilities and payments made to outside software development contractors and, to a lesser degree, depreciation of capital equipment. We estimate that we have spent approximately 17,000 hours on research and development activities during 2010. The software platform has not reached technological feasibility as of December 31, 2010 and accordingly all related costs have been expensed in 2010.
We consider our products as proprietary. We attempt to protect our proprietary technology by relying primarily on a combination of copyright and trademark laws, trade secrets, confidentiality procedures and contractual provisions.
Business Development and Marketing
Our business development and marketing efforts are aimed at developing relationships and building strong awareness and brand reputation with the key economic buyers, specifically; innovation leaders, business and business unit leaders, research and consumer insights professionals, R&D leaders, product marketers, brand managers, licensing professionals, industry analysts, academic institutions, law firms, and others. We believe strong relationships and a client-driven approach to service are critical to building and maintaining our business and brand reputation. We emphasize high quality client service to all of our employees.
We generate new business opportunities through relationships with individuals, through direct sales, cross selling, trade show and conference participation and sponsorship, direct marketing outreach, and our extensive network of contacts. We hold ongoing thought leadership programs to generate awareness and build brand recognition. These activities include a quarterly Innovation Index which ranks businesses in a different industry each quarter in terms of their level of innovation; an Innovation Update, which is a topical monthly opinion piece; bi-annual Innovation Leaders rankings; and book sponsorships.
Mark Berset has served as a director of the Company since July 2009. Mr. Berset has served as the Chief Executive Officer of Comegys Insurance, a family owned insurance agency for 20 years. Mr. Berset is also the Chief Executive Officer of the Strategic Agency Network of Florida. He is past board of director member at Northstar Bank Holding Company and the immediate past President of the Bayfront Hospital Foundation in St. Petersburg, Florida where he continues to serve as a member of its Board. Mr. Berset received a Bachelorâ€™s degree in Business Economics from St. Ambrose University and a Masterâ€™s degree in Business Management from Georgia State University. As the founder and CEO of a highly successful enterprise, Mr. Berset brings to the Board of Directors a strong entrepreneurial awareness, a keen insight into financial affairs and practical management skills.
Asa Lanum has served as the Companyâ€™s Interim Chief Executive Officer since August 2010 and Chief Executive Officer and director since April 18, 2011. Mr. Lanum was a Managing Principal and senior technology principal with The CTO Group, a consulting firm. Previously he was President and CEO of FORTEL Inc. (NASD â€“ FRTL), an independent software vendor specializing in service level management. Prior to FORTEL he was Senior Vice President Advanced Systems and Chief Technology Officer for OpenVision Technologies, a premier supplier of integrated systems and network management software. Before joining OpenVision, Mr. Lanum was a co-founder and CEO of Enterprise Technology, Inc., a developer of Intel-based closely-coupled distributed multiprocessor UNIX server clusters. He has held a number of executive positions within the computer industry at Sun Microsystems, ICL Ltd., Pansophic Systems and Amdahl. Mr. Lanum holds a Bachelors degree from The State University of New York. Mr. Lanum has served the IT community for over 35 years and has been responsible for establishing IT Strategy, Enterprise architectures and SDLC processes for global IT organizations. Mr. Lanum has introduced and managed numerous successful hardware and software products in the computer industry. Mr. Lanum brings to the Board of Directors extensive knowledge and experience in the information technology industry as well as strong leadership and managerial skills.
John Micek III, J.D., has served as a director of the Company since June 2001. Since 2011 has served as CFO of Enova Systems, a developer of drive systems and components for the electric vehicle markets. From 2000 through 2010, he was a managing director of Silicon Prairie Partners, LP, a venture fund. Since September 1998, Mr. Micek has also served as a board member of JAL Enterprises (formerly Universal Assurors, Inc.), a member company of Universal Group, Inc., a Midwest group of insurance companies. From July 1997 to July 1998, he served as Chief Operating Officer for Protozoa, Inc., a digital media and animation company. From April 1994 to February 1997, Mr. Micek was General Counsel for Enova Systems, Inc., a developer and manufacturer of digital power management and conversion systems for mobile and stationary applications. He also serves as a director of Armanino Foods of Distinction, Inc., a public company that produces and markets frozen and refrigerated food products. He received a Bachelor of Arts degree in History from the University of Santa Clara in 1974 and a Juris Doctorate from the University of San Francisco, School of Law in 1979. Mr. Micek brings to the Board of Directors public company board experience, knowledge and experience in corporate law, and financial and managerial expertise.
Charles Pope, CPA, has served as a director of the Company since February 2010. Mr. Pope has served as the chief financial officer and chief operating officer of the Palm Bank in Tampa, Florida since June 2009. During his 20 years at PricewaterhouseCoopers LLP, Mr. Pope served as a Partner in the Audit and Financial Advisory Consulting Divisions, and was a Partner in the Accounting and SEC Directorate. Previously, Mr. Pope held CFO positions for public companies including, Aerosonic Corporation, Reptron Manufacturing and SRI/Surgical. He also served as CFO for Innovaro, Inc. from 2001-2002. He holds a B.S. in Economics and Accounting from Auburn University, and is a Certified Public Accountant in the State of Florida. Mr. Pope provides the Board of Directors with financial expertise, knowledge of the public equity markets and public company management experience, as well as a strong understanding of Audit Committee functions.
Mark F. Radcliffe, J.D. , has served as a director of the Company since February 2010. Mr. Radcliffe is currently a Partner at DLA Piper, a law firm, where he specializes in strategic intellectual property advice, software licensing, Internet licensing, copyright and trademark, private financing and corporate partnering for over 30 years. He graduated magna cum laude from the University of Michigan and went on to Harvard University for his law degree. In 1998, Harvard Law School honored Mr. Radcliffe by naming him a â€śDistinguished Alumniâ€ť. Mr. Radcliffe was named in The Best Lawyers in America and also as one of Northern Californiaâ€™s Top 100 intellectual property lawyers. In 2009, 2010, and 2011, Intellectual Asset Magazine named Mr. Radcliffe as one of its IAM250: Leading Global IP Strategists. Mr. Radcliffe is the author of numerous articles as well as several books including the Internet Law and Business Handbook in 2000. Mr. Radcliffe brings experience and understanding in strategic intellectual property advice, software licensing, internet licensing, copyright and trademark, private financing and corporate partnering, as well as a unique perspective on legal matters, to the Board of Directors.
MANAGEMENT DISCUSSION FROM LATEST 10K
We provide services that help clients become stronger innovators, develop compelling strategies to drive and catalyze growth, rapidly source externally developed technologies, create value from their intellectual property and gain foresight into marketplace and technology developments that affect their business. These services are provided to clients located in countries throughout the world.
We have two business segments: Strategic Services and Technology Services.
Our strategic services segment helps clients achieve and sustain industry leadership through innovation, developing game-changing strategies for growth, and implementing these strategies through capability development, opportunity management and organizational excellence. We also help our clients programmatically develop a core competence for innovation. In addition, we assist clients apply innovation tools and techniques to create and act on breakthrough strategies and profitable growth platforms and opportunities. We work closely with our clients to jointly structure and execute a tailored journey that is right for their situation. We combine the business acumen of seasoned executives, the learning focus of a leadership development expert and the creativity of an innovation specialist to get our clients on the path to sustainable and profitable growth.
These services include:
â€˘ Strategic innovation consulting
â€˘ Business model and product development consulting
â€˘ Identify and develop new segments and markets
â€˘ Create and act on game-changing strategies
Our technology services segment offers expansive networks, experts in scouting, partner sourcing and licensing expertise, and world leading online marketplaces. We also provide an important foundation to successful licensingâ€”understanding the true potential value of our clientsâ€™ IP and IP portfolio. We access that value and build a roadmap for our clientsâ€™ use, and uncover opportunities and options to realize any latent value.
We have an online information service, purpose-built for those who need it most-technology transfer, business development, intellectual property, competitive intelligence, and marketing professionals across the physical and life sciences
We also 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 trendsâ€”including emerging trends not covered by other sourcesâ€”and delivers insights about how these trends will shape the future operating environment.
These services include:
â€˘ Futures scenario development and planning
â€˘ Custom and syndicated research
â€˘ Online information services
â€˘ IP consulting
â€˘ IP and market landscape analysis
â€˘ Technology search
â€˘ In- and out-licensing
â€˘ Online marketplaces
â€˘ Partner search and profiling
Strategies to Drive Our Growth into the Future
We remain focused on growing our business with the objectives of improving our financial results and generating returns for our shareholders. We continue to focus on delivering strong financial performance in both the near term and the long term. We have identified the following four key challenges and related strategic business imperatives that we believe will enable us to drive growth into the future.
Continue to develop our innovation management software platform
Our first imperative is to continue to develop our innovation management software platform. We announced the controlled release of the first phase of our software product in December 2010, for which we have subsequently begun testing in 2011. We anticipate the controlled release of two additional phases of the software product during 2011, thereby expanding the product capability further into the innovation cycle process. The full-scale release of the complete product is dependent on the results of our testing procedures, which is dependent on the use of third-party consultants.
Over time, we expect the software product component of our business to grow at a greater rate than the growth in our current business segments until it represents an important component of our overall revenue stream.
A key component of our strategy is to embrace both software and information offerings from other firms through an open innovation approach. Using this approach, our clients that have already begun to utilize other software and information services will be able to incorporate our offerings to suit their requirements to most effectively drive innovation.
Build and expand our current consulting and technology services business
Our second imperative is to sustainably and profitably grow our current consulting and technology services businesses worldwide. We have recently hired a Senior Vice President of Sales who brings with him twenty years of global experience in technology sales at the enterprise and executive sales management level. As the Senior Vice President of Sales at Innovaro, he will establish sales and engagement models while continuing to build upon our core pillars of business. He will also take on identical responsibilities as we move into the future with our software product offering.
Cherish our Innovaro associates
Our third imperative is to cherish our Innovaro associates. Our continued growth requires us to hire, retain and develop our leadership bench. We are fortunate to employ, worldwide, a truly remarkable set of associates. The market becomes more competitive every day and innovation is the key to success. It is people who hold that key and to be a good employer is one of the most important strategic decisions a company has to make.
Achieve operational excellence
Our fourth and final imperative is the sum total of the other three. Our continued success requires that we do everything we can to position ourselves to achieve operational excellence in each of the areas mentioned above. By focusing on the four key challenges and related strategic business imperatives discussed above, we believe we can achieve this goal.
Our total assets were $24.7 million at December 31, 2010 compared to $40.3 million at December 31, 2009. At December 31, 2010, we had $263,000 in cash and cash equivalents, $2.0 million in accounts receivable, $1.5 million in accounts payable and accrued expenses and $5.8 million in long-term debt outstanding. At December 31, 2009, we had $2.1 million in cash and cash equivalents, $492,000 in certificates of deposit, $1.5 million in accounts receivable, $917,000 in accounts payable and accrued expenses and $6.3 million in long-term debt outstanding.
Our cash balance as of December 31, 2010 was significantly lower than our historical cash position. The cash balance decreased significantly in the fourth quarter of 2010 as a result of the Company having to pay bonuses to employees of its strategic services business segment in accordance with the terms of the Strategos Bonus Plan. We have subsequently rebuilt our cash position to approximately $700,000 as of the date of this filing. See the Liquidity section for further discussion.
Current Market Conditions
We believe that our financial results for 2010 continued to be negatively impacted by weakened economic conditions. Since mid-2007, global credit and other financial markets have suffered substantial stress, volatility, illiquidity and disruption. These forces reached unprecedented levels in late 2008, resulting in the bankruptcy or acquisition of, or government assistance to, several major domestic and international financial institutions. These events significantly diminished overall confidence in the financial markets and caused increasing global economic uncertainty. This reduced confidence and uncertainty could further exacerbate the overall market disruptions and risks to businesses in need of capital, including us. Moreover, the deterioration in the equity markets has had a negative impact on the cash proceeds that we have been able to obtain upon the sale of our investments and has resulted in our having to recognize certain impairment losses related to decreases in the fair value of our assets. In addition, the deterioration in consumer confidence and a general reduction in spending by consumers and business have had an adverse effect on certain of our operations as businesses have delayed spending on these types of services. Recent improvements in demand trends globally may not continue, and our future financial results and growth could be further harmed or constrained if the recovery was to stall or conditions were to worsen.
Investment Portfolio Activity
Until September 30, 2009, we were a non-diversified, closed-end management investment company that had elected to be treated as a business development company (â€śBDCâ€ť) under the Investment Company Act of 1940 (â€ś1940 Actâ€ť). On October 1, 2009, because we no longer met the requirements, we filed a notification on Form N-54C with the SEC withdrawing our election to be regulated as a BDC under the 1940 Act. As such, we began reporting as an operating company as of October 1, 2009.
In connection with our plan to de-elect BDC status, we liquidated a significant portion of our investment portfolio during 2009. We sold some or all of our shares in a significant number of our portfolio companies for $3.1 million in cash and other assets, which resulted in realized losses of $49.6 million and unrealized appreciation of $44.3 million, which is primarily related to the reversal of previously recorded unrealized depreciation upon the sale of these investments.
Conversion from Investment Company Presentation to Operating Company Presentation
The withdrawal of our election to be regulated as a BDC under the 1940 Act resulted in a significant change in our method of accounting. Investment company financial statement presentation and accounting utilizes the value method of accounting used by investment companies, which requires investment companies to value their investments at market value as opposed to historical cost, and recognize income related to unrealized gains and losses in the current period. As an operating company, the required financial statement presentation and accounting for investments held is either fair value or historical cost methods of accounting, depending on the classification of the investment and the Companyâ€™s intent with respect to the period of time it intends to hold the investment.
In addition, the financial accounts of majority-owned entities were not consolidated with ours under Investment Company Accounting; rather, investments in those entities were reflected in our balance sheet at fair value. As an operating company, we are required to consolidate the accounts of majority-owned entities in which we have a controlling financial interest with our accounts. In this regard, the accounts of UTEK Real Estate Holdings, Inc., which was previously reflected as an investment at fair value in our balance sheet, have been consolidated with our accounts from October 1, 2009.
For a detailed discussion of the impact of the withdrawal of our election to be regulated as a BDC under the 1940 Act on our method of accounting and a discussion of how we account for investments as an operating company, see Notes 1 and 2 to the Consolidated Financial Statements contained elsewhere in this Annual Report on Form 10-K.
On July 12, 2010, we completed a registered offering of 1,481,481 shares of our common stock priced at $2.565 per share along with Series A warrants to purchase up to 1,481,481 shares of common stock with an exercise price of $3.43 per share (subsequently amended to $3.49 per share) of common stock and Series B warrants to purchase up to 893,519 shares of common stock with an exercise price of $0.01 per share of common stock. We raised gross proceeds of approximately $3.8 million before advisory fees and offering expenses in connection with the offering.
Research and Development Expenditures
In the first quarter of 2010, we began development of an innovation management software platform designed to enhance and complement our innovation services deliverable to clients. As of December 31, 2010, we have invested $1.2 million in this software platform. Management has begun testing and marketing the software platform in 2011. We expect to incur additional software platform costs of approximately $900,000 to commercialize all phases of the platform during 2011.
As of October 1, 2009, the financial results of UTEK Real Estate have been consolidated with those of Innovaro. UTEK Real Estate has a $3 million bank note payable due in monthly installments of $20,436 including principal and interest at 6.50% through April 1, 2013 with a balloon payment due on May 1, 2013. As of December 31, 2010, the amount outstanding on this note was approximately $2.9 million. In addition, UTEK Real Estate has a $1.5 million note payable due in monthly installments of interest at 7.00% with principal due in full on October 1, 2015. As of December 31, 2010, the amount outstanding on this note was approximately $1.25 million. These loans were entered into in connection with the purchases of land and building that serves as our company headquarters and certain other undeveloped land located in Hillsborough County, Florida. These loans are collateralized by the property related to the purchases.
On October 22, 2009, we entered into a Promissory Note (the â€śNoteâ€ť) with Gators Lender, LLC (the â€śLenderâ€ť), pursuant to which we borrowed $1,750,000 from the Lender. Interest is payable at an annual rate of 8% on a quarterly basis, in arrears, beginning April 15, 2010. The entire principal amount outstanding and all accrued interest is payable in full no later than October 22, 2013. UTEK Real Estate is a co-borrower under the Note and the loan is guaranteed by all subsidiaries. In addition, the guaranty was secured pursuant to a security agreement encumbering vacant real property located in Hernando County, Florida (the â€śCollateralâ€ť), which is owned by Cortez 114, LLC (â€śCortezâ€ť), a subsidiary of UTEK Real Estate. On February 26, 2010, we entered into a Substitution of Collateral Agreement and a Membership Interest Pledge Agreement and Release of Mortgage (the â€śModification Agreementsâ€ť), pursuant to which the Lenderâ€™s security interest in the Collateral was released and replaced by a security interest in 68% of the outstanding membership interests of Cortez. The Note was amended and restated to provide that UTEK and UTEK Real Estate must pay down $500,000 of the indebtedness to the Lender within 60 days. At our request, the Lender subsequently extended the repayment date for the $500,000 payment, which was made in accordance with this extension on July 12, 2010. As of December 31, 2010, the face amount outstanding on the Note was approximately $1.25 million.
As additional consideration for the Note, we also entered into a Warrant Agreement with the Lender to allow the Lender to purchase up to 437,500 shares of our common stock at an exercise price of $4.48 until October 22, 2014. The exercise price is subject to certain conditions and adjustments that make the exercise price variable.
During December 2010, the Company borrowed $200,000 for operations from one of its Directors under a promissory note. The note was subsequently repaid in full on February 21, 2011 including interest at 3.5% and 3.0 points. This transaction is not necessarily indicative of amounts, terms and conditions that the Company may have received with unrelated third parties.
Cash and Accounts Receivable Balances
Our cash balance as of December 31, 2010 was significantly lower than our historical cash position. The cash balance decreased significantly in the fourth quarter of 2010 as a result of the Company having to pay bonuses to employees in its strategic services business segment in accordance with the terms of the Strategos Bonus Plan. These bonuses are based on adjusted earnings of the strategic services business segment without taking into account any working capital requirements of the business segment and are required to be paid by December 15 th , but no later than December 31 st , of each year with respect to such year. Accounts receivable related to the strategic services business segment due within 30 days of December 31, 2010 were included in the amounts eligible to be paid as bonuses under the terms of the Strategos Bonus Plan. As a result, we were required to pay bonuses to these employees prior to our collection of the related amounts of accounts receivable, which significantly lowered the Companyâ€™s cash balance as of December 31, 2010.
We have subsequently rebuilt our cash position to approximately $700,000 as of the date of this filing.
Our accounts receivable balance as of December 31, 2010 was significantly higher than our historical accounts receivable balance. The increase in our accounts receivable balance during the third and fourth quarters of 2010 is a result of a significant increase in revenue. Revenue increased because the Company had a significant number of new contracts in the second half of 2010. Revenue for the third and fourth quarters of 2010 increased 58% over revenue for the first and second quarters of 2010. It is not unusual for our accounts receivables balance to sustain an elevated balance during periods of increased revenues.
Of the outstanding receivables balance of $2.0 million at December 31, 2010, only 14%, or $279,000, was overdue. As of the date of this filing, we have collected all but $26,000 of the total accounts receivable balance outstanding at December 31, 2010.
Our primary cash requirements include working capital, research and development expenditures, principal and interest payments on indebtedness, and employee bonuses. Our primary sources of funds are cash received from customers in connection with operations and proceeds from the sale of our investments. At December 31, 2010, we had cash and cash equivalents of $263,000 and accounts receivable of $2.0 million. We had $316,000 in working capital as of December 31, 2010.
We currently intend to fund our research and development expenditures and liquidity needs with existing cash and cash equivalent balances, cash generated from operations, collections of our existing receivables and the potential sales of our investments. We believe that these sources will be sufficient to fund our scheduled debt service and provide required resources for working capital for the next twelve months.
Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements that have or are materially likely to have a current or future material effect on our financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.
Critical Accounting Estimates
The preparation of financial statements in conformity with US Generally Accepted Accounting Principles (â€śGAAPâ€ť) requires management to make assessments, estimates and assumptions that affect the amounts reported in the financial statements. Critical accounting estimates are those that require managementâ€™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.
The Company has revenues from fixed fee contracts for the sale of strategic consulting services. These revenues are recognized on a pro rata basis based upon costs incurred to date compared to total estimated contract costs. The determination of estimated contract costs is critical to the determination of revenue recognition in any given period. If costs incurred to date are compared to total estimated contract costs that have not been updated for the most recent information, material variances in revenue recognition can occur. As a result, management evaluates the accuracy of estimated contract costs for each in-process job in light of available information regarding job status at the end of each reporting period. In addition, management prepares an analysis to determine the accuracy of our estimated total contract costs on closed jobs. We have historically been able to estimate total contract costs with the required accuracy to produce materially correct revenue results.
Valuation and Impairment of Investments
Our investments include cost method investments, available-for-sale securities, and equity method investments. The assessment of the fair value of certain of our cost method and equity method investments can be difficult and subjective due in part to our having only limited information on these investments. In addition, determination of permanent impairment for available-for-sale securities can be difficult and subjective due in part to limited trading activity of certain of these equity instruments.
We conduct periodic reviews to identify and evaluate each investment that has an unrealized loss, in accordance with the meaning of other-than-temporary impairment and its application to certain investments, as required under current accounting standards. An unrealized loss exists when the current fair value of an individual security is less than its amortized cost basis. Unrealized losses on available-for-sale securities that are determined to be temporary are recorded in accumulated other comprehensive loss.
For available-for-sale equity securities with unrealized losses, management performs an analysis to assess whether the securityâ€™s decline in fair value would be deemed to be other-than-temporary. This can be difficult as many of our holdings have limited trading activity and prices can fluctuate significantly. Fluctuations in price are generally determined to be temporary unless the price level is maintained for an extended period of time. Significant declines in a securityâ€™s fair value are determined to be other-than-temporary when the decline is maintained over several reporting periods. When a decline in stock price is deemed to be other-than-temporary, the unrealized loss included in accumulated other comprehensive loss is reversed and recorded as a capital loss in the statement of operations.
Our cost method investments and equity method investments are in small, privately held companies. These investments are not publicly traded, and, therefore, because no established market for these securities exists, the estimate of the fair value of our investments requires significant judgment. Investments that are accounted for using the cost method are valued at cost unless an other-than-temporary impairment in their value occurs or the investment is liquidated. For investments that are accounted for using the equity method, we record our share of the investeeâ€™s operating results each period. We review the fair value of our investments on a regular basis to evaluate whether an other-than-temporary impairment in the investment has occurred. We record impairment charges when we believe that an investment has experienced a decline in value that is other-than-temporary. Future adverse changes in market conditions or poor operating results of underlying investments could result in losses or an inability to recover the carrying value of the investments that may not be reflected in an investmentâ€™s current carrying value, thereby possibly requiring an impairment charge in the future.
Stock-based compensation cost for share-based payments are based on their relative grant date fair values estimated in accordance with current accounting standards. The Company recognizes compensation expense on a straight-line basis over the requisite service period. The determination of the fair value of stock-based compensation requires significant judgment and the use of estimates, particularly surrounding assumptions such as stock price volatility, expected option lives and forfeiture rates. These estimates involve inherent uncertainties and the application of management judgment. As a result, if circumstances change and we use different assumptions, our stock-based compensation expense could be materially different in the future.
The expected term of options granted represents the period of time that the options are expected to be outstanding and is based on historical experience of similar grants, giving consideration to the contractual terms of the grants, vesting schedules and expectations of future employee behavior. The expected volatility is based upon our historical market price at consistent points in a period equal to the expected life of the options. Expected forfeitures are based on historical experience and expectations of future employee behavior. We are required to estimate future forfeitures of stock-based awards for recognition of compensation expense. We will record additional expense if the actual forfeitures are lower than estimated and will record a recovery of prior recognized expense if the actual forfeitures are higher than estimated. The actual expense recognized over the vesting period will only be for those awards that vest. If our actual forfeiture rate or performance outcomes are materially different from our estimate, the actual stock-based compensation expense could be significantly different from what we have recorded in the current period.
Valuation and Impairment of Goodwill and Intangible Assets
Goodwill represents the excess of the aggregate consideration paid for an acquisition over the fair value of the net tangible and intangible assets acquired. Intangible assets represent the cost of trade marks, trade names, websites, customer lists, non-compete agreements, and proprietary processes and software obtained in connection with certain of these acquisitions. Intangible assets with finite lives are amortized on a straight-line basis over their estimated useful lives, which range from 5 to 12 years. In accordance with current accounting standards, goodwill and intangible assets determined to have indefinite lives are not subject to amortization but are tested for impairment annually, or more frequently if events or changes in circumstances indicate a potential impairment may have occurred. Circumstances that may indicate impairment include qualitative factors such as an adverse change in the business climate, loss of key personnel, and unanticipated competition. Additionally, management considers quantitative factors such as current estimates of the future profitability of the Companyâ€™s reporting units, the current stock price, and the Companyâ€™s market capitalization compared to its book value. The consideration of qualitative and quantitative factors when considering circumstances that may indicate impairment requires the application of management judgment. As a result, managementâ€™s determinations with regard to current circumstances affecting the Company could have a significant affect the recognition of impairment charges.
If management determines that an impairment test is necessary, it must determine the fair value of the respective reporting units. The determination of the fair value of reporting units requires significant judgment. Management typically enlists the assistance of a third-party valuation firm in determining fair value of reporting units for use in its impairment analysis. In conducting its impairment test, the Company compares the fair value of each of its reporting units to the related book value. If the fair value of a reporting unit exceeds its net book value, long-lived assets are considered not to be impaired. If the net book value of a reporting unit exceeds it fair value, an impairment loss is measured and recognized. The Company conducts its impairment test using balances as of December 31.
The Company accounts for long-lived assets, including intangibles that are amortized, in accordance with GAAP, which requires that all long-lived assets be reviewed for impairment whenever events or circumstances indicate that the carrying amount of an asset may not be recoverable. Management considers both qualitative and quantitative factors when considering circumstances that may indicate impairment. This consideration requires significant management judgment and could have a significant affect of the recognition of impairment charges. If indicators of impairment are present, reviews are performed to determine whether the carrying value of an asset to be held and used is impaired. Such reviews involve a comparison of the carrying amount of an asset to future net undiscounted cash flows expected to be generated by the asset over its remaining useful life. The determination of future cash flows involves inherent uncertainties and the application of management judgment regarding the future operations of the Company. If the comparison indicates that there is impairment, the impaired asset is written down to its fair value. The impairment to be recognized as a non-cash charge to earnings is measured by the amount by which the carrying amount of the asset exceeds the fair value of the asset. Assets to be disposed are reported at the lower of the carrying amount or fair value, less cost to dispose.
Valuation of Derivative Liabilities
ASC Topic 815 Derivatives and Hedging requires bifurcation of embedded derivative instruments and measure of their fair value for accounting purposes. In addition, freestanding derivative instruments such as certain warrants are also derivative liabilities. Derivative liabilities are recorded at fair value at inception and then are adjusted to reflect fair value at the end of each quarter, with any increase or decrease in the fair value being recorded in results of operations as a component of other (income) expense. We estimate the fair value of these instruments using the Black-Scholes option pricing model, which takes into account a variety of factors that require judgment, including estimating the expected term of the warrants and the expected volatility of the Companyâ€™s stock price. The expected term of the warrants represents the period of time that they are expected to be outstanding and is based on the contractual term of the warrants and expectations of the warrants holdersâ€™ behavior. The expected volatility is based upon our historical market price at consistent points in a period equal to the expected life of the warrants. These estimates involve inherent uncertainties and the application of management judgment. As a result, if circumstances change and we use different assumptions, our derivative liability and the related gain or loss could be materially different in the future.
MANAGEMENT DISCUSSION FOR LATEST QUARTER
We are The Innovation Solutions Company focused on innovation management consulting and software. We are all about helping companies innovate and grow. We offer a comprehensive set of services and software to assure the success of any innovation project, regardless of the size or intent. Our unique combination of strategic consulting services provide innovation expertise, our new LaunchPad software product provides an integrated innovation environment, and our intelligence and insights services provide any business with the innovation support they need to drive success. These services are provided internationally from our offices in the United States and the United Kingdom.
We have two business segments: Strategic Services and Intelligence and Insights Services.
People are the key to providing innovation expertise through our strategic consulting services. Our people have defined and refined our methodology for over 15 years with more than 250 clients in over 750 engagements, which has created a proven effective process to get a company through the innovation cycle. This process has served to develop put Leading Edge Innovation Practices contained within our methodology.
We provide strategic services to enable our clients to become more efficient by finding new avenues to grow, fighting commoditization, improving return on investment, transforming the organization, and removing barriers to innovation. Business value is delivered to clients through working with a team of seasoned and experienced professionals capable of unlocking an organizationâ€™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 companyâ€™s innovation capability.
Our intelligence and insights services business provides information to assist clients in gaining insights and making decisions. We offer expansive networks, experts in scouting, partner sourcing and licensing expertise, and world leading online marketplaces. We also provide an important foundation to successful licensing - understanding the true potential value of our clientsâ€™ intellectual property â€śIPâ€ť and IP portfolio. We access that value and build a roadmap for our clientsâ€™ use, and uncover opportunities and options to realize any latent value.
We have an online information service, purpose-built for those who need it most - technology transfer, business development, intellectual property, competitive intelligence, and marketing professionals across the physical and life sciences.
We also 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.
Software Development Costs
We are continuing the development of our LaunchPad software, which is designed to enhance and complement our innovation service offerings to clients. We will continue to incur costs related to the refinement of Version 1.0 while proceeding with the development of the next components of LaunchPad with Version 2.0. As of March 31, 2012, we had invested $2.2 million in this software platform. We expect to incur approximately $300,000 in additional expenditures for product development of Version 2.0 and refinement of Version 1.0 during 2012.
We have incurred recurring losses and negative cash flows from operations. We incurred a net loss of approximately $1.3 million and $4.9 million for the three months ended March 31, 2012 and the year ended December 31, 2011, respectively. In addition, we have a working capital deficit of approximately $2.2 million and an accumulated deficit of approximately $77.8 million as of March 31, 2012. These factors raise doubt about our ability to continue as a going concern.
Our primary cash requirements include working capital, research and development expenditures, principal and interest payments on indebtedness, and employee salaries 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 potential 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 $1.6 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 satisfactory terms or in a timely manner. Further, any of these actions may not be sufficient to allow us to service our debt obligations or may have an adverse impact on our business. Our failure to generate sufficient cash from our operations could have a material adverse effect on us.
Our future success depends on our ability to raise capital and ultimately generate revenue and attain profitability. We cannot be certain that additional capital, whether through selling additional debt or equity securities or obtaining a line of credit or other loan, will be available to us or, if available, will be on terms acceptable to us. If we issue additional securities to raise funds, these securities may have rights, preferences, or privileges senior to those of our common stock, and our current shareholders may experience dilution. If we are unable to obtain funds when needed or on acceptable terms, we may be required to curtail our current development programs, cut operating costs and forego future development and other opportunities. Without sufficient capital to fund our operations, we will be unable to continue as a going concern.
Critical Accounting Estimates
The preparation of financial statements in conformity with GAAP requires management to make assessments, estimates and assumptions that affect the amounts reported in the financial statements. We evaluate the accounting policies and estimates used to prepare the financial statements on an ongoing basis. Critical accounting estimates are those that require managementâ€™s most difficult, complex, or subjective judgments and have the most potential to impact our financial position and operating results. For a detailed discussion of our critical accounting estimates, see our Annual Report on Form 10-K for the year ended December 31, 2011. There have been no material changes to our critical accounting estimates during the three months ended March 31, 2012.