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| UTK > SEC Filings for UTK > Form 10-K on 5-Mar-2008 | All Recent SEC Filings |
5-Mar-2008
Annual Report
Special Note Regarding Forward-Looking Statements
The following discussion should be read in conjunction with our consolidated financial statements and the notes thereto included elsewhere in this annual report on Form 10-K. This annual report on Form 10-K 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.
Overview
Executive Summary
Our financial condition is dependent on a number of factors including our ability to effectuate technology transfers and the performance of the equity investments that we receive in connection with these transfers. Substantially all of our investments are in development stage and start-up companies and thinly traded public companies. These businesses are thinly capitalized, unproven, small companies that lack management depth, are dependent on new, commercially unproven technologies and have no or a limited history of operations.
Our total assets were $45.2 million and our net assets were $43.7 million at December 31, 2007, compared to $53.0 million and $51.0 million at December 31, 2006, respectively. Net asset value per share was $4.85 at December 31, 2007 and $5.71 at December 31, 2006. At the end of fiscal year 2007, we had no long-term debt outstanding and $5.3 million in cash and cash equivalents.
Income from operations for fiscal year 2007 totaled approximately $20.3 million, as compared to $57.0 million in 2006. Net income from operations for fiscal year 2007 totaled approximately $3.8 million as compared to $19.9 million in 2006. Net realized losses on investments, net of deferred tax effect, totaled approximately $1.4 million in 2007 as compared to net realized gains of $900,000 in 2006. In this regard, we received gross proceeds of $1.9 million in 2007 and $9.7 million in 2006 in connection with the sale of the securities we received in connection with our technology acquisition alliance agreements and technology transfers. Net change in unrealized depreciation of investments, net of deferred tax benefit, was $10.8 million in 2007 as compared to $25.8 million in 2006.
On June 15, 2007, the Company's stockholders voted to approve an amendment to the Company's Certificate of Incorporation to increase the number of authorized shares of common stock from 19,000,000 to 29,000,000. The additional 10,000,000 shares are part of the existing class of common stock and will have the same rights and privileges as the shares of common stock currently issued and outstanding. The Board of Directors deemed it desirable to increase the number of shares of common stock the Company is authorized to issue in order to provide adequate flexibility in the future. The holders of common stock are not entitled to preemptive rights or cumulative voting, and accordingly, the issuance of additional common shares will dilute the ownership and voting rights of shareholders.
Recently, we have taken steps to improve the efficiency of our technology transfer business model and refocused it on Open Innovation. Some of the improvements we have made include:
Expanded our scientific review team for technology due diligence;
Hired an experienced head of business development formerly employed by IBM to oversee our sales efforts;
Hired an experienced professional in technology licensing who was formerly president of Lucent's technology licensing business;
Hired an experienced manager to run our on-line Open Innovation technology sourcing service;
Engaged Professor Henry Chesbrough, the world's thought leader on Open Innovation as a strategic advisor to the Company;
Improved our technology search capabilities through our expanded proprietary technology database and internally developed search engine;
Enhanced client acceptance procedures including the hiring of a manager of due diligence to conduct background checks on principal officers of prospective client companies, and the approval by a Review Committee made up of the executive officers and the director of operations prior to accepting a new client; and
Acquired Pharmalicensing.com, one of the world's leading Open Innovation exchanges in the life sciences.
As a result of these efforts, we have experienced an increase in the number of active engagements and the average market capitalization of our clients. Our goal is to increase the diversity of our clients, and thus, our portfolio companies. Transactions with larger clients require additional time to close. This has resulted in a decrease in the number of executed technology transfers as well as a decrease in gross revenues in 2007 compared to 2006.
UTEK is refining its corporate strategy for 2008 to expand our business. Changes in our strategy include the following:
Seeking to be the first full-service provider of Open Innovation services;
Increasing our pricing for technology acquisition alliances;
Diversify our technology transfer business to include cash transactions;
Identifying and, when appropriate, acquiring companies that complement our Open Innovation strategy; and
Launch of the TekScout Open Innovation Network
Technology Transfers and Technology acquisition alliances
In 2007, we increased the number and diversity of active technology acquisition alliance clients and decreased the number of completed technology transfers:
During 2007, we signed 80 new technology acquisition alliance agreements as compared to 44 new technology acquisition alliances in 2006; and
During 2007, we completed 16 technology transfers valued at approximately $16.4 million as compared to 29 technology transfers valued at approximately $51.2 million in 2006.
Portfolio Activity
The following is a list of significant changes in our portfolio during the year ended December 31, 2007:
The sale of some or all of our shares in Shumate Industries, Inc., Health Sciences Group, Inc., Broadcast International, Inc., Xethanol Corporation, NetFabric Holdings, Inc. and various other portfolio companies for approximately $1.9 million, which resulted in realized losses of $1.4 million (net of income tax effect);
The completion of 16 technology transfers valued at approximately $16.2 million (one technology transfer was completed for $200,000 in cash); and
A net unrealized loss of $10.8 million (net of income tax effect) in the fair value of our investments.
Our most significant portfolio investments at December 31, 2007 were in Material Technologies, Inc., UTEK Real Estate Holdings, Inc., Advanced Medical Isotope Corporation, World Energy Solutions, Inc. and Cyberlux Corporation. These five investments total $15.1 million in fair value and represent 50% of our investments and 35% of net assets at December 31, 2007.
Our capital investments made in our newly formed companies during the year ended December 31, 2007 totaled $3.8 million. Of the total capital invested in our newly formed companies during the year ended December 31, 2007, $762,000 was expended on license and consulting fees and $3.1 million was spent to assist our clients in commercializing their new technology. All of these items are reflected in the accompanying consolidated statement of operations as acquisition of technology rights.
The net unrealized depreciation for the year ended December 31, 2007 was primarily due to a reduction in value of the following nine investments in our portfolio: Advanced Refractive Technologies, Inc., American Soil Technologies, Inc., CytoDyn, Inc., vidShadow.com, Inc., Emission & Power Supply, Inc., Manakoa Services Corporation, Klegg Electronics, Inc., World Energy Solutions, Inc. and Industrial Biotechnology Corporation; partially offset by the appreciation of Broadcast International, Inc. and Health Sciences Group, Inc.
While these unrealized losses were significant, failures among small cap companies are not unexpected and may occur in the future. The current portfolio is comprised of approximately 60 holdings. Many of these positions are with small capitalization companies, which over time may have high failure rates due to a variety of factors. For clients that fail, UTEK may lose the entire amount of its capital spent acquiring and transferring the technology to them.
The value of our investments can fluctuate due to factors that are specific to each investment (e.g., inability to obtain additional capital, inability to execute business model, termination of technology licenses, etc.) or to general marketplace factors.
Results of Operations
Summary of Results for Years Ended December 31, 2007, 2006 and 2005
Income from Operations (Revenue)
Percent Percent
Change 2007 Change 2006
(in thousands, except percentages) 2007 2006 2005 versus 2006 versus 2005
Sale of Technology Rights $ 16,373 $ 51,191 $ 18,132 (68 )% 182 %
Consulting and Other Services 3,343 4,950 4,179 (32 )% 18 %
Investment Income, net 585 812 433 (28 )% 87 %
Income from Operations $ 20,301 $ 56,953 $ 22,744 (64 )% 150 %
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Sale of Technology Rights
Sale of technology rights income strictly relates to the revenue generated from completed technology transfers. We completed sixteen technology transfers during the year ended December 31, 2007 compared to the twenty-nine technology transfers completed during the year ended December 31, 2006. We have experienced an increase in the average market capitalization of our clients. Transactions with these larger clients are requiring additional time to close. This has resulted in a decrease in the number of executed technology transfers. The technology transfers had an average value of $1.0 million and $1.8 million for the years ended December 31, 2007 and 2006, respectively. The lower average value of the technology transfer is a function of a decrease in the cost to acquire the technology rights partially offset by an increase in the average technology transfer multiple. In addition, there were 4 technology transfers with income per transfer of less than $500,000 in 2007 and none in 2006. The average cost of the acquisition of technology rights for the year ended December 31, 2007 was $238,000 compared to $446,000 for 2006. The technology transfer multiple is the revenue markup on the acquisition of technology rights costs. The average technology transfer multiple for the year ended December 31, 2007 was 4.29 as compared to 3.95 for the year ended December 31, 2006. With the exception of $200,000 received in the first quarter of 2007, all income from the sale of technology rights for the years ended December 31, 2007 and December 31, 2006 was received in the form of equity securities.
The increase in sale of technology rights resulted from completing twenty-nine technology transfers during the year ended December 31, 2006 compared to the fourteen technology transfers completed during the year ended December 31, 2005. All of the income from the sale of technology rights was received in the form of equity securities for both the year ended December 31, 2006 and 2005. In addition, the average value of technology transfers increased 36%. The average technology transfer multiple remained consistent from year to year.
In 2008, our revenues from the sale of technology rights are expected to increase modestly over that of 2007.
Consulting and Other Services
Income from technology acquisition alliance services was approximately $1.5 million and $3.0 million for the years ended December 31, 2007 and 2006, respectively. The decrease in income from technology acquisition alliances in 2007 resulted primarily from a change in our pricing of the technology acquisition alliances, partially offset by the increase in the number of technology acquisition alliance agreements. In January 2007, we reduced the price of our technology acquisition alliance services and changed the payment terms to primarily cash. This was done to enhance client diversification and reduce the cost of handling small equity stakes. We increased the number of new technology acquisition alliances from forty-four in 2006 to eighty in 2007. Of the eighty alliances formed in 2007, three agreements called for payment in stock and the remaining agreements called for monthly fees to be paid in cash.
Other consulting income for the year ended December 31, 2007 included income of $583,000 from our Intellectual Capital Consulting division, as compared to $644,000 for the year ended December 31, 2006. Our UTEK Information Services division comprised the balance of consulting fee and other services income of $1.3 million for 2007 and 2006. Of the total consulting and other services income received during the year ended December 31, 2007, 27% was paid in the form of equity securities in companies and the balance was paid in cash. Of such income received during the year ended December 31, 2006, 44% was paid in the form of equity securities and the balance was paid in cash.
Income from technology acquisition alliance services was approximately $3.0 million and $2.15 million for the years ended December 31, 2006 and 2005, respectively. The increase in income from technology acquisition alliances in 2006 resulted primarily from providing services under forty-four new technology acquisition alliance agreements, as compared to thirty-six new technology acquisition alliance agreements during 2005. Other consulting income for the year ended December 31, 2006 included income of $644,000 from our Intellectual
Capital Consulting division, as compared to $1.16 million for the year ended December 31, 2005. UTEK Information Services comprised the balance of consulting fee and other services income of $1.3 million for 2006 and $869,000 for 2005. Of the total consulting and other income received during the years ended December 31, 2006 and 2005, 51% and 34%, respectively, was paid in the form of equity securities and the balances were paid in cash.
The increase in the number of our technology acquisition alliances in 2006 and 2007 is primarily a result of a focus on Open Innovation, an increase in the overall demand for our services, as well as an increase in our business development team including a vice president of business development. We believe that we are growing our customer base as a result of increased sales and marketing efforts and better recognition in the business community regarding the value and availability of our services. Our new technology acquisition alliances have increased the diversity of our customer makeup. Our current customer base has a larger average market capitalization than in previous years. Although this is beneficial to our business, having customers with a larger market capitalization has resulted in a significant increase in the time needed to complete technology transfers. Therefore, although we have increased the number of technology acquisition alliance customers, the number of technology transfers completed for the year ended December 31, 2007 has decreased.
Revenues from consulting and other services are expected to increase as a result of the addition of Pharmalicensing, the expansion of our consulting services client base and an increase in our pricing structure for technology acquisition alliances scheduled to go into effect in 2008.
Investment Income, net
Investment income decreased in 2007 compared to 2006, due to lowered cash and cash equivalent balances. Interest income is expected to continue this decline as a result of lower cash balances and lower interest rates.
Expenses
Acquisition of Technology Rights
Percent Percent
Change 2007 Change 2006
(in thousands, except percentages) 2007 2006 2005 versus 2006 versus 2005
Acquisition of technology rights $ 3,816 $ 12,945 $ 4,600 (71 )% 181 %
As a percent of sale of technology rights 23 % 25 % 25 % (2 )ppt* -0- ppt
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* The abbreviation "ppt" throughout this section denotes percentage points.
Acquisition of technology rights costs consist of the direct costs associated with our technology transfers, which include cash to further accelerate commercialization efforts, license fees to acquire new technologies, consulting fees with the inventor of the technologies, and sponsored research fees with the university or research facility transferring the technologies. The overall decrease in acquisition of technology rights from 2007 to 2006 was due to the reduced number of technology transfers completed and reduced costs per transaction for the year ended December 31, 2007 as compared to 2006. We completed thirteen less technology transfers during 2007 than in 2006. The average cost per technology transfer decreased approximately $207,000 or 46% during the year ended December 31, 2007.
The overall increase in acquisition of technology rights from 2005 to 2006 was due to completing fifteen additional technology transfers in the year ended December 31, 2006 than in 2005. In addition, the average cost per technology transfer increased approximately $118,000 or 36% during the year ended December 31, 2006.
Acquisition of technology rights costs are directly related to sale of technology rights revenue. We expect that the acquisition of technology rights costs in 2008 will remain at approximately 25% of sale of technology rights.
The following table provides certain information relating to the costs of the acquisition of technology rights we incurred in connection with our technology transfers during the year ended December 31, 2007:
Dollar
Amount of
Date Client Acquiring Newly Formed Company Newly Formed Company Expenses
January 4 Manakoa Services Corporation Infinite Identification $ 400,000
Technologies, Inc.
January 11 Cyberlux Corporation Hybrid Lighting Technologies, Inc. 192,455
January 30 CytoDyn, Inc. Advanced Genetic Technologies, 167,500
Inc.
January 31 Material Technologies, Inc. Stress Analysis Technologies, Inc. 130,000
February 12 Liberty Diversified Holdings, Inc. Sero Tonin Solutions, Inc. 70,052
March 12 Metamorphix Global, Inc. Flex Crete Technologies, Inc. 52,884
March 12 Klegg Electronics, Inc. Tempo Control Technologies, Inc. 135,388
March 28 Avalon Oil & Gas, Inc. Leak Location Technologies, Inc. 155,000
April 30 Material Technologies, Inc. Damage Assessment Technologies, 300,000
Inc.
May 30 Klegg Electronics, Inc. Klegg Network Storage 450,000
Technologies, Inc.
June 28 Material Technologies, Inc. Non-Destructive Assessment 280,000
Technologies, Inc.
July 12 Pathway One Plc WebMed Technologies, Inc. 305,215
July 20 MachineTalker, Inc. Wideband Detection Technologies, 40,000
Inc.
Sept 28 World Energy Solutions, Inc. Hydrogen Safe Technologies, Inc. 492,350
November 12 NeoStem, Inc. Stem Cell Technologies, Inc. 300,000
December 28 MachineTalker, Inc. Micro Wireless Technologies, Inc. 345,000
$ 3,815,844
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The following table provides certain information relating to costs of the acquisition of technology rights we incurred in connection with our technology transfers during the year ended December 31, 2006:
Dollar
Amount of
Date Client Acquiring Newly Formed Company Newly Formed Company Expenses
January 20 Fuel FX International, Inc. Emissions Detection $ 300,000
Technologies, Inc.
January 27 Broadcast International, Inc. Video Processing Technologies, 625,000
Inc.
January 30 WebSky, Inc. Strategic Wireless Solutions, 265,000
Inc
March 6 Trio Industries Group, Inc. Ultra Fine Coating Systems, 534,000
Inc.
March 15 American Soil Technologies, Inc. Advanced Fertilizer 500,000
Technologies, Inc.
March 16 Advanced Refractive Technologies, Inc. Ocular Therapeutics, Inc. 400,000
April 3 Trio Industries Group, Inc. Natural Adhesive Technologies, 555,000
Inc.
April 4 Advanced Refractive Technologies, Inc. Advanced Glaucoma Technologies, 399,999
Inc.
April 5 UBA Technology, Inc. Intellitouch Technologies, Inc. 502,000
May 1 Industrial Biotechnology Corporation Bio-Repellant Technologies, 400,000
Inc.
May 12 Kwikpower International Plc Hydrocarbon Synthesis 407,500
Technologies, Inc.
May 12 Kwikpower International Plc Advanced BioEnergy 380,000
Technologies, Inc.
June 1 Trio Industries Group, Inc. Advanced Powder Coating 550,000
Technologies, Inc.
June 12 Kwikpower International Plc Advanced Biofuel Technologies, 375,000
Inc.
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Dollar
Amount of
Date Client Acquiring Newly Formed Company Newly Formed Company Expenses
June 13 Xethanol Corporation Advanced Biomass Gasification 450,000
Technologies, Inc.
June 20 Klegg Electronics, Inc. Smart Speaker Technologies, 528,628
Inc.
July 12 Avalon Oil & Gas, Inc. Ultrasonic Mitigation 410,000
Technologies, Inc.
July 14 DME Interactive Holdings, Inc. Multimedia Control 512,650
Technologies, Inc.
July 18 CytoDyn, Inc. Advanced Influenza 934,399
Technologies, Inc.
August 11 NetFabric Holdings, Inc Intrusion Detection 523,600
Technologies, Inc.
August18 Material Technologies, Inc. Materials Monitoring 589,000
Technologies, Inc.
August 29 Industrial Biotechnology Corporation Advanced Pheromone 325,000
Technologies, Inc.
September12 Liberty Diversified Holdings, Inc. Innovative Packaging 435,000
Technologies, Inc.
September 22 Advanced Medical Isotope Corp. Neu-Hope Technologies, Inc. 335,000
October 9 World Energy Solutions, Inc. Pure Air Technologies, Inc. 593,369
November 1 Klegg Electronics, Inc. Universal Wireless 265,000
Technologies, Inc.
November 8 Avalon Oil & Gas, Inc. IntelliWell Technologies, 250,000
Inc.
November 10 Cyberlux Corporation SPE Technologies, Inc. 375,000
December 6 Cargo Connection Logistics Holding, Inc. Nuclear Material Detection 225,000
Technologies, Inc.
$ 12,945,145
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The following table provides certain information relating to the costs of the acquisition of technology rights we incurred in connection with our technology . . .
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