Innovaro, Inc. - FORM 10-Q - November 14, 2012

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EXCEL - IDEA: XBRL DOCUMENT - Innovaro, Inc.	Financial_Report.xls
EX-32.2 - EX-32.2 - Innovaro, Inc.	d398353dex322.htm
EX-32.1 - EX-32.1 - Innovaro, Inc.	d398353dex321.htm
EX-31.2 - EX-31.2 - Innovaro, Inc.	d398353dex312.htm
EX-31.1 - EX-31.1 - Innovaro, Inc.	d398353dex311.htm

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 September 30, 2012

¨	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)

(813) 754-4330

(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.

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 November 1, 2012, there were 16,003,325 shares outstanding of the registrant’s common stock, $0.01 par value.

INNOVARO, INC.

FORM 10-Q TABLE OF CONTENTS


PART I. FINANCIAL INFORMATION
	ITEM 1.	Financial Statements	3
		Consolidated Balance Sheets as of September 30, 2012 (unaudited) and December 31, 2011	3
		Consolidated Statements of Comprehensive Income for the Three and Nine Months Ended September 30, 2012 and 2011 (unaudited)	4
		Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2012 and 2011 (unaudited)	5
		Notes to Consolidated Financial Statements (unaudited)	7
	ITEM 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	16
	ITEM 3.	Quantitative and Qualitative Disclosures about Market Risks	23
	ITEM 4.	Controls and Procedures	23

PART II. OTHER INFORMATION
	ITEM 1.	Legal Proceedings	24
	ITEM 1A.	Risk Factors	24
	ITEM 2.	Unregistered Sales of Equity Securities and Use of Proceeds	24
	ITEM 3.	Defaults Upon Senior Securities	24
	ITEM 4.	Mine Safety Disclosures	24
	ITEM 5.	Other Information	24
	ITEM 6.	Exhibits	24
	Signatures		25
	Exhibits

Page 2 of 29

PART I. FINANCIAL INFORMATION

ITEM 1.

Financial Statements

INNOVARO, INC.

Consolidated Balance Sheets


	September 30, 2012 (Unaudited)			December 31, 2011
ASSETS
Current assets:
Cash	$	313,787		$	268,170
Accounts receivable, net		117,077			101,785
Stock subscription receivable		250,000			—
Available-for-sale securities		5,242			55,038
Prepaid expenses and other current assets		99,324			225,657
Current portion of notes receivable and accrued interest		2,282,044			1,804,000
Current assets held for sale		—			1,279,458

Total current assets		3,067,474			3,734,108
Cost method investments		86,784			86,784
Equity method investments		92,148			92,148
Note receivable, net of current portion		932,949			—
Fixed assets, net		5,463,508			5,610,956
Intangible assets, net		2,576,043			3,158,505
Noncurrent assets held for sale		307,748			8,083,764

Total assets	$	12,526,654		$	20,766,265

LIABILITIES
Current liabilities:
Accounts payable	$	518,855		$	512,840
Accrued expenses		711,509			364,891
Deferred revenue		159,436			123,836
Current maturities of long-term debt		4,043,591			1,644,664
Current liabilities held for sale		1,541,508			2,324,389

Total current liabilities		6,974,899			4,970,620
Long-term debt, less current maturities		1,250,000			3,997,775
Deferred tax liability		189,233			189,233
Noncurrent liabilities held for sale		94,075			801,309

Total liabilities		8,508,207			9,958,937

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; 15,471,410 and 15,159,544 shares issued; 15,471,410 and 15,039,544 shares outstanding at September 30, 2012 and December 31, 2011, respectively		154,714			150,396
Common stock payable		250,000			—
Additional paid-in capital		87,399,671			86,820,437
Accumulated deficit		(84,019,275	)		(76,453,214	)
Accumulated other comprehensive income		3,616			53,939

Total Innovaro stockholders’ equity		3,788,726			10,571,558
Noncontrolling interest		229,721			235,770

Total equity		4,018,447			10,807,328

Total liabilities and equity	$	12,526,654		$	20,766,265

See accompanying notes

Page 3 of 29

INNOVARO, INC.

Consolidated Statements of Comprehensive Income

(Unaudited)


	Three Months Ended September 30,						Nine Months Ended September 30,
	2012			2011			2012			2011
Revenue:
Intelligence and Insights services	$	190,416		$	61,484		$	417,334		$	316,676

Expenses:
Direct costs of revenue – Intelligence and Insights services		177,273			154,468			542,525			479,344
Salaries and wages		169,959			258,064			574,943			665,486
Professional fees		97,255			97,097			253,955			274,707
Research and development		94,637			27,936			334,888			661,600
Sales and marketing		5,499			88,058			45,857			118,774
General and administrative		250,448			281,536			939,282			940,356
Depreciation and amortization		246,908			261,714			758,157			868,458

		1,041,979			1,168,873			3,449,607			4,008,725

Other (income) and expense:
Other (income) expense		(156,406	)		(87,657	)		(512,110	)		(70,941	)
Interest expense, net		100,662			106,308			315,161			329,257

		(55,744	)		18,651			(196,949	)		258,316

Loss from continuing operations before income taxes		(795,819	)		(1,126,040	)		(2,835,324	)		(3,950,365	)
Provision for income tax expense (benefit)		—			—			—			(19,628	)

Loss from continuing operations		(795,819	)		(1,126,040	)		(2,835,324	)		(3,930,737	)
Income (loss) from discontinued operations, net of tax (including loss on disposal)		(601,634	)		(11,413	)		(4,736,786	)		1,151,067

Net loss		(1,397,453	)		(1,137,453	)		(7,572,110	)		(2,779,670	)

Net loss attributable to the noncontrolling interest		(1,886	)		(2,835	)		(6,049	)		(7,238	)

Net loss attributable to Innovaro stockholders		(1,395,567	)		(1,134,618	)		(7,566,061	)		(2,772,432	)

Other comprehensive income (loss)		(1,310	)		(11,854	)		(33,523	)		(60,195	)

Comprehensive loss	$	(1,396,877	)	$	(1,146,472	)	$	(7,599,584	)	$	(2,832,627	)

Basic and diluted income (loss) per share:
Loss from continuing operations	$	(0.05	)	$	(0.08	)	$	(0.19	)	$	(0.26	)
Income (loss) from discontinued operations	$	(0.04	)	$	0.00		$	(0.31	)	$	0.07
Net loss	$	(0.09	)	$	(0.08	)	$	(0.50	)	$	(0.19	)

Weighted average shares outstanding: Basic and diluted		15,458,040			15,024,970			15,233,278			15,003,871

See accompanying notes

Page 4 of 29

INNOVARO, INC.

Consolidated Statements of Cash Flows

(Unaudited)


	Nine Months Ended September 30,
	2012			2011
Operating Activities:
Net loss	$	(7,572,110	)	$	(2,779,670	)
Less: Income (loss) from discontinued operations, net of tax		(4,736,786	)		1,151,067

Loss from continuing operations		(2,835,324	)		(3,930,737	)
Adjustments to reconcile net loss from continuing operations to net cash flows from operating activities:
Depreciation and amortization		758,157			868,458
Amortization of debt discount from investor warrants		98,831			98,832
Stock issued for services		97,499			—
Loss (gain) on sale and impairment of available-for-sale securities		(47,630	)		201
Loss on derivative liabilities		—			150,825
Stock-based compensation		262,767			240,918
Deferred income taxes		—			(19,628	)
Other		52,036			12,673
Changes in operating assets and liabilities:
Accounts receivable		(15,292	)		41,671
Prepaid expenses and other assets		9,644			113,436
Deferred revenue		35,600			(27,068	)
Accounts payable and other liabilities		422,963			445,711

Net cash flows from operating activities of continuing operations		(1,160,749	)		(2,004,708	)

Investing Activities:
Capital expenditures		(661	)		(26,733	)
Capitalization of software development costs		(45,525	)		(185,272	)
Proceeds from disposal of business		600,000			—
Proceeds from sale of available-for-sale securities		63,903			—

Net cash flows from investing activities of continuing operations		617,717			(212,005	)

Financing Activities:
Net proceeds from stock offering		223,286			—
Payments on long-term debt		(457,909	)		(525,466	)

Net cash flows from financing activities of continuing operations		(234,623	)		(525,466	)

Net cash flows from continuing operations		(777,655	)		(2,742,179	)

Net cash flows from discontinued operations		823,272			4,025,502

Increase in cash		45,617			1,283,323
Cash at beginning of period		268,170			262,619

Cash at end of period	$	313,787		$	1,545,942

Page 5 of 29

INNOVARO, INC.

Consolidated Statements of Cash Flows (continued)

(Unaudited)


	Nine Months Ended September 30,
	2012			2011
Supplemental Disclosures of Non-Cash Investing and Financing Activities

Unrealized gain (loss) from available-for-sale securities, net	$	(33,523	)	$	(60,195	)

Derivative liability extinguished in connection with exercise of investor warrants				$	1,290,830

The Company disposed of its Pharmalicensing, Global Licensing, Pharma Transfer and Knowledge Express operating divisions. In conjunction with the disposal, the Company received the following consideration:
Cash received	$	600,000
Note receivable received		1,329,670
Liabilities assumed by buyer		70,330

Total sale price	$	2,000,000

Supplemental Disclosures of Cash Flow Information

Cash paid for taxes	$	—		$	—

Cash paid for interest	$	398,213		$	324,774

See accompanying notes

Page 6 of 29

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 September 30, 2012 and for the three and nine month periods ended September 30, 2012 and 2011 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, 2011. Operating results for the nine months ended September 30, 2012 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 $(7,572,110) and $(4,920,723) for the nine months ended September 30, 2012 and the year ended December 31, 2011, respectively. In addition, the Company has a working capital deficit of $(3,907,425) and an accumulated deficit of $(84,019,275) as of September 30, 2012. 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. The Company’s 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 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 scheduled debt service payments of $4,043,591 and its operating requirements for the next twelve months. Subsequent to the end of the third quarter, the Company successfully negotiated with the creditors of its $1.25 million debt due in October 2012 to extend the due date of this note. 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.

Page 7 of 29

The Company’s future success depends on its ability to raise capital and ultimately generate revenue and attain profitability. The Company 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 it or, if available, will be on terms acceptable to the Company. If the Company issues additional securities to raise funds, these securities may have rights, preferences, or privileges senior to those of its common stock, and the Company’s current shareholders may experience dilution. If the Company is unable to obtain funds when needed or on acceptable terms, the Company may be required to curtail its current development programs, cut operating costs and forego future development and other opportunities. Without sufficient capital to fund operations, the Company will be unable to continue as a going concern. The accompanying financial statements do not include any adjustments that might result from the outcome of this uncertainty.

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.

2. Significant Accounting Policies

Cost Method Investments

Cost method investments were not evaluated for impairment as of September 30, 2012. The Company does not estimate the fair value of a cost method investment if there are no identified events or changes in circumstances that may have a significant adverse effect on the fair value because it is not practicable to estimate fair value on a quarterly basis.

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 Versions 1.0 and 2.0 of the Innovaro LaunchPad software (“LaunchPad”) as research and development costs. In addition, the Company capitalized approximately $46,000 in software development costs related to Version 1.0 for the nine months ended September 30, 2012.

The Company will amortize capitalized software costs by the greater of (a) the ratio that current gross revenues for a product bear to the total of current and anticipated future gross revenues for that product, or (b) the straight-line method over the remaining estimated economic life of the product including the period being reported on. During the second quarter of 2012, the Company had a general release of Version 1.0, and accordingly, began amortizing capitalized software costs. The Company recorded amortization expense related to software development costs of approximately $8,500 and $17,000 for the three and nine months ended September 30, 2012, respectively.

Goodwill and Intangible Assets

In accordance with FASB ASC Topic 350 Intangibles – Goodwill and Other, management performs interim assessments of goodwill if impairment indicators are present. At the end of the second quarter of 2012, management concluded that its revenue projections for its strategic services segment needed to be revised as a result of concerns that the business may not meet its revenue and cash flow projections for the year ending December 31, 2012 due to a diminished backlog that is not expected to turn around in the near term. This conclusion triggered a review for impairment outside of the Company’s next scheduled annual impairment evaluation date of December 31, 2012. Management determined that the goodwill was impaired and the Company recognized impairment of $3,386,898 to its goodwill for the nine months ended September 30, 2012. In addition, the Company began discussions to sell certain of its intangible assets related to its strategic services segment. Based on the terms of this discussion, management determined that these intangible assets were impaired. The Company recognized impairment of $1,370,000 to its intangible assets for the nine months ended September 30, 2012. The impairment expense is included in loss from discontinued operations in the consolidated statements of comprehensive income for the nine months ended September 30, 2012.

Page 8 of 29

Accrued Expenses

Accrued expenses include approximately $277,492 and $213,000 of accrued salaries, vacation and related taxes as of September 30, 2012 and December 31, 2011.

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 September 30,				Nine Months Ended September 30,
	2012		2011		2012		2011
Weighted-average outstanding shares of common stock		15,458,040		15,024,970		15,233,278		15,003,871
Dilutive effect of stock options, warrants and unvested shares of restricted stock		—		—		—		—

Common stock and common stock equivalents		15,458,040		15,024,970		15,233,278		15,003,871

Shares excluded from calculation of diluted EPS (1)		2,531,018		2,939,898		2,531,018		2,939,898

(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 the net loss during the periods presented.

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.

Fair Value of 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 $5,293,591 and $5,642,439 as of September 30, 2012 and December 31, 2011, respectively.

The Company performs fair value measurements in accordance with the guidance provided by FASB ASC Topic 820 Fair Value Measurements and Disclosures. In accordance with FASB ASC Topic 820, the Company groups financial assets and financial liabilities measured at fair value in three levels based on the principal markets in which the assets and liabilities are transacted and the observability of the data points used to determine fair value. The Company’s investments in available-for-sale securities are classified within Level 2 of the fair value hierarchy. Level 2 includes valuations for 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. Available-for-sale securities were $5,242 and $55,038 as of September 30, 2012 and December 31, 2011, respectively.

The Company’s 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 value of our equity interests in public companies for which market quotations are readily available is based on quoted market prices for such equity interests. These securities are generally thinly traded and may be subject to certain restrictions on resale. The Company utilizes the market approach in determining the fair value of these securities.

Page 9 of 29

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. The Federal Deposit Insurance Corporation provides deposit insurance of $250,000 for substantially all depository accounts as of September 30, 2012. All of the Company’s non-interest bearing cash balances were fully insured as of September 30, 2012.

New Accounting Pronouncements

In January 2012, the Company adopted the provisions of FASB ASU 2011-05 Presentation of Comprehensive Income, which revises the manner in which entities present comprehensive income in their financial statements. The new guidance requires entities to report components of comprehensive income in either (1) a continuous statement of comprehensive income or (2) two separate but consecutive statements. The Company has presented a continuous statement of comprehensive income for the current period.

3. Discontinued Operations and Divestitures

Pharmalicensing, Global Licensing, Pharma Transfer and Knowledge Express Operating Divisions

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, pursuant to an asset purchase agreement dated September 12, 2012. Under the terms of the agreement, the Company will 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. On November 30, 2012, any outstanding balance will begin accruing interest at 5% per annum. IP Tech Ex is entitled to a $125,000 reduction in the purchase price if all amounts are paid to the Company by May 1, 2013. See Note 7 for related party disclosure.

In connection with the sale of these divisions, the Company recognized a loss on disposal of business of $87,539 during the three and nine months ended September 30, 2012. This loss is included as a component of income (loss) from discontinued operations in the consolidated statements of comprehensive income. These divisions operated out of the United States and the United Kingdom as part of the Company’s intelligence and insights services segment.

Strategic Services Operating Division

During the third quarter of 2012, as part of the Company’s strategy to maximize cash flow as discussed in Note 1, the Company’s Board of Directors approved the disposal of the strategic services division. The sale of this division was subsequently completed on October 2, 2012. See Note 8 for further discussion of the terms of this sale.

The Company has determined that each of these divisions meet the criteria for classification as discontinued operations as of September 30, 2012. The Company has reflected the operations of these divisions as discontinued operations in the consolidated statements of comprehensive income for all periods presented. In addition, the Company has classified the assets and liabilities of the discontinued divisions as current and noncurrent assets and liabilities held for sale in the consolidated balance sheets for all periods presented. 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.

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The results of operations of the aforementioned divisions are included in discontinued operations in the statements of comprehensive income. The summary comparative financial results of discontinued operations are as follows:


	Three Months Ended September 30, 2012
	Strategic Services			Intelligence & Insights			Total
Revenue	$	22,004		$	247,866		$	269,870

Long-lived asset impairment charge		—			—			—
Operating expense		405,953			271,469			677,422
Other (income) expense		102,163			(10	)		102,153
Loss on disposal of business		—			87,539			87,539

Income (loss) before income taxes		(486,112	)		(111,132	)		(597,244	)
Provision for income tax (expense) benefit		—			(4,390	)		(4,390	)

Income (loss) from discontinued operations, net of tax	$	(486,112	)	$	(115,522	)	$	(601,634	)


	Three Months Ended September 30, 2011
	Strategic Services			Intelligence & Insights			Total
Revenue	$	2,899,131		$	459,636		$	3,358,767

Long-lived asset impairment charge		—			—			—
Operating expense		3,003,818			371,169			3,374,987
Other (income) expense		2,740			—			2,740

Income (loss) before income taxes		(107,427	)		88,467			(18,960	)
Provision for income tax (expense) benefit		—			7,547			7,547

Income (loss) from discontinued operations, net of tax	$	(107,427	)	$	96,014		$	(11,413	)


	Nine Months Ended September 30, 2012
	Strategic Services			Intelligence & Insights			Total
Revenue	$	2,500,534		$	1,199,098		$	3,699,632

Long-lived asset impairment charge		4,756,898			255,126			5,012,024
Operating expense		2,711,484			963,610			3,675,094
Other (income) expense		169,170			(144	)		169,026
Loss on disposal of business		—			87,539			87,539

Income (loss) before income taxes		(5,137,018	)		(107,033	)		(5,244,051	)
Provision for income tax (expense) benefit		515,531			(8,266	)		507,265

Income (loss) from discontinued operations, net of tax	$	(4,621,487	)	$	(115,299	)	$	(4,736,786	)


	Nine Months Ended September 30, 2011
	Strategic Services			Intelligence & Insights			Total
Revenue	$	10,482,237		$	1,449,549		$	11,931,786

Long-lived asset impairment charge		—			—			—
Operating expense		9,562,705			1,279,488			10,842,193
Other (income) expense		963			(58,391	)		(57,428	)

Income (loss) before income taxes		918,569			228,452			1,147,021
Provision for income tax (expense) benefit		—			4,046			4,046

Income (loss) from discontinued operations, net of tax	$	918,569		$	232,498		$	1,151,067

Page 11 of 29

The assets and liabilities classified as held for sale as of September 30, 2012 and December 31, 2011 were as follows:


	September 30, 2012		December 31, 2011
	Strategic Services		Strategic Services		Intelligence & Insights		Total
Receivables, net of allowance for doubtful accounts	$	—	$	405,697	$	291,753	$	697,450
Contracts in progress		—		513,040		—		513,040
Prepaid expenses and other current assets		—		9,628		59,340		68,968

Current assets held for sale	$	—	$	928,365	$	351,093	$	1,279,458

Property, plant and equipment	$	4,623	$	8,047	$	13,754	$	21,801
Goodwill		—		3,386,898		2,743,254		6,130,152
Intangible assets		303,125		1,673,125		258,686		1,931,811

Noncurrent assets held for sale	$	307,748	$	5,068,070	$	3,015,694	$	8,083,764

Accounts payable	$	—	$	—	$	36,591	$	36,591
Accrued expenses		53,004		84,541		25,916		110,457
Accrued bonus		1,488,504		1,444,955		—		1,444,955
Deferred revenue		—		—		732,386		732,386

Current liabilities held for sale	$	1,541,508	$	1,529,496	$	794,893	$	2,324,389

Deferred tax liability	$	94,075	$	609,606	$	191,703	$	801,309

Noncurrent liabilities held for sale	$	94,075	$	609,606	$	191,703	$	801,309

4. Equity

Accumulated Other Comprehensive Income

The following table presents the components comprising the accumulated other comprehensive income balance for the nine months ended September 30, 2012.


	Unrealized gain (loss) from available-for- sale securities			Foreign currency translation adjustment			Accumulated other comprehensive income
Balance at December 31, 2011	$	37,139		$	16,800		$	53,939
Gain (loss) for the period		(33,523	)⁽¹⁾		74,017	⁽²⁾		40,494
Reclassification into accumulated deficit in connection with disposal of business		—			(90,817	)		(90,817	)

Balance at September 30, 2012	$	3,616		$	—		$	3,616

⁽¹⁾	Comprehensive loss for the nine months ended September 30, 2012 per the consolidated statement of comprehensive income agrees to the gain (loss) for the period related to the unrealized gain (loss) from available-for-sale securities.

⁽²⁾	The gain (loss) for the period related to the foreign currency translation adjustment is included in discontinued operations for the nine months ended September 30, 2012.

Securities Offering

On June 20, 2012, the Company entered into a securities purchase agreement with Messrs. Mark Berset and Bruce Lucas, each a member of the Company’s Board of Directors, pursuant to which the Company agreed to issue them, in a registered offering, 271,740 shares of the Company’s common stock priced at $0.92 per share along with Series A warrants to purchase up to 135,870 shares of common stock with an exercise price of $1.16 per share. The Series A warrants are exercisable for a three-year period commencing on the date of their issuance. If the average closing price of the shares is greater than or equal to $1.16 for any 20 consecutive trading day period after the date the Series A warrants are issued, then the Company may force the holders of the Series A warrants to exercise their warrants. On June 20, 2012, the Company completed the offering and raised gross proceeds of $250,000 before offering expenses. These securities were offered pursuant to a registration statement previously filed and declared effective by the Securities and Exchange Commission.

Page 12 of 29

On September 27, 2012, the Company entered into a securities purchase agreement with JJJ Family LLLP pursuant to which we agreed to issue, in a registered offering, 531,915 shares of its common stock priced at $0.47 per share along with Series B warrants to purchase up to 531,915 shares of common stock with an exercise price of $0.47 per share of common stock. The Series B warrants will be exercisable for a five-year period commencing on the six month anniversary of the date of its issuance. The securities purchase agreement provides the buyer with the right to participate in future offerings of our securities, in an amount up to $250,000 in each offering, for a period of one year after the date of the sale. These securities were offered pursuant to a registration statement previously filed and declared effective by the Securities and Exchange Commission.

On October 2, 2012, the Company completed the offering to JJJ Family LLLP and raised gross proceeds of $250,000 before offering expenses. As a result of the closing date having been subsequent to the end of the quarter, the Company recorded a subscription receivable and common stock payable for this amount in the consolidated balance sheets as of September 30, 2012.

Other Common Stock Issuances

During the nine months ended September 30, 2012, the Company issued 120,126 shares of common stock under the Innovaro, Inc. Equity compensation plan with a value of $97,499 to members of its Board of Directors and certain others in lieu of payment for services rendered.

5. Other (Income) Expense

Components comprising the balance in other (income) expense from continuing operations for the three and nine months ended September 30, 2012 and 2011 are as follows:


	Three Months Ended September 30,						Nine Months Ended September 30,
	2012			2011			2012			2011
Loss (gain) on sale and impairment on investments	$	—		$	—		$	(47,630	)	$	—
Dividend income		(70,000	)		—			(127,500	)		—
Loss on derivative liabilities		—			—			—			150,825
Rental income		(34,643	)		(86,415	)		(289,803	)		(224,084	)
Other		(51,763	)		(1,242	)		(47,177	)		2,318

Other (income) expense	$	(156,406	)	$	(87,657	)	$	(512,110	)	$	(70,941	)

6. 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 the Pharmalicensing, Global Licensing, Pharma Transfer and Knowledge Express operating divisions during the third quarter of 2012. These divisions operated out of the United States and the United Kingdom as part of the intelligence and insights services segment. In addition, the Company’s board of directors approved the disposal of the strategic services division during the third quarter of 2012. See Note 3 and Note 8 for further discussion of the sale of these divisions. The Company has reflected the operations of the operations of these divisions as discontinued operations for all periods presented. As a result, revenue and income (loss) from continuing operations before income taxes shown below do not include amounts related to these divisions.

Page 13 of 29

A summary of revenue and other financial information by reportable geographic operating segment is shown below:


	United Kingdom		United States		Discontinued Operations		Total
Long-lived assets as of September 30, 2012	$	—	$	8,039,551	$	307,748	$	8,347,299
Total assets as of September 30, 2012		14,811		12,204,095		307,748		12,526,654
Long-lived assets as of December 31, 2011		—		8,769,461		8,083,764		16,853,225
Total assets as of December 31, 2011		4,633		11,398,410		9,363,222		20,766,265

A summary of revenue and other financial information by reportable line of business segment is shown below:


	For the Three Months Ended September 30, 2012
	Strategic Services			Intelligence & Insights Services			Administrative and Other			Total
Revenue	$	—		$	190,416		$	—		$	190,416
Income (loss) from continuing operations before income taxes		—			49,759			(845,578	)		(795,819	)
Income (loss) from discontinued operations, net of tax		(486,112	)		(115,522	)		—			(601,634	)

	For the Three Months Ended September 30, 2011
	Strategic Services			Intelligence & Insights Services			Administrative and Other			Total
Revenue	$	—		$	61,484		$	—		$	61,484
Income (loss) from continuing operations before income taxes		—			(42,364	)		(1,083,676	)		(1,126,040	)
Income (loss) from discontinued operations, net of tax		(107,427	)		96,014			—			(11,413	)

	For the Nine Months Ended September 30, 2012
	Strategic Services			Intelligence & Insights Services			Administrative and Other			Total
Revenue	$	—		$	417,334		$	—		$	417,334
Income (loss) from continuing operations before income taxes		—			35,841			(2,871,165	)		(2,835,324	)
Income (loss) from discontinued operations, net of tax		(4,621,487	)		(115,299	)		—			(4,736,786	)

	For the Nine Months Ended September 30, 2011
	Strategic Services			Intelligence & Insights Services			Administrative and Other			Total
Revenue	$	—		$	316,676		$	—		$	316,676
Income (loss) from continuing operations before income taxes		—			(10,677	)		(3,939,688	)		(3,950,365	)
Income (loss) from discontinued operations, net of tax		918,569			232,498			—			1,151,067

Page 14 of 29

7. Related Party Transactions

During the three months ended September 30, 2012, the Company sold three of its operating divisions to IP Tech Ex for $2,000,000. See Note 3 for further discussion of this transaction. Ms. Wright, the Chief Financial Officer of the Company, has a 7% equity interest in IP Tech Ex. Mr. Reiber, the Company’s general counsel, indirectly owns a 7% equity position in IP Tech Ex. Neither party holds a seat on the Board of Directors of IP Tech Ex, nor do they have a role in managing the Company. The price established by the Board for the three divisions was based on a separate letter of intent previously submitted to the Company for the same three divisions. IP Tech Ex has a note payable to the Company for the remaining unpaid balance of $1,329,670 plus interest, which accrues at 5% per annum.

8. Subsequent Events

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 $1.4 million in bonuses owed to them by the Company (and which bonuses had previously been accrued as an expense in the Company’s financial statements) 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 million during the period from October 2, 2012 to December 31, 2015. In connection with the sale of this division, the Company will recognize a gain on disposal of business of approximately $1.3 million during the fourth quarter of 2012.

Subsequent to the end of the third quarter, the Company successfully negotiated with the creditors of its $1.25 million debt due in October 2012 to extend the due date of this note.

Page 15 of 29

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

We are 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 software to ensure the success of any innovation project, regardless of the size or intent. Our LaunchPad software 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 primarily from our offices in the United States.

Our innovation management software platform, Launchpad, is designed 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 our Launchpad software 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.

Discontinued Operations and Divestitures

During the second and third quarters of 2012, we made the strategic decision to divest of our strategic services division and a large portion of the intelligence and insights segment 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 offers 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 held for sale or as discontinued operations, and unless otherwise noted, all discussions and amounts presented herein relate to our continuing operations. Prior years presented have been reclassified to conform to current year presentation.

Page 16 of 29

Recent Developments

On October 19, 2012, the Company received notice that the NYSE MKT LLC (the “Exchange”) approved the Company’s plan for regaining compliance with Section 1003(a)(iii) of the Exchange Company Guide by December 12, 2013. Previously, on August 16, 2012, the Exchange notified the Company that it was not in compliance with Section 1003(a)(iii) of the Exchange Company Guide because the Company reported stockholders’ equity of less than $6,000,000 at June 30, 2012 and losses from continuing operations and/or net losses in its five most recent fiscal years ended December 31, 2011.

On August 24, 2012, the Exchange approved the Company’s plan for regaining compliance with Section 1003(a)(iv) of the Exchange Company Guide by November 30, 2012. The Company had violated Section 1003(a)(iv) of the Exchange Company Guide in that the Exchange believed that the Company had sustained losses which are so substantial in relation to its overall operations or its existing financial resources, or its financial condition had become so impaired that it appeared questionable, in the opinion of the Exchange, as to whether the Company would be able to continue operations and/or meet its obligations as they matured.

The Company may be able to continue the listing of its common stock on the Exchange while under each plan, during which time the Company will be subject to periodic reviews to determine whether it is making progress consistent with each plan. If the Exchange determines that the Company is not making progress consistent with either plan, then the Exchange may initiate delisting proceedings.

On August 8, 2012, Bruce Lucas, a member of our Board of Directors, notified us that he was resigning from our Board of Directors effective immediately. On August 9, 2012, Charlie Pope, the Chairman of our Board of Directors, notified us that he was resigning from our Board of Directors effective immediately. Each director confirmed that his resignation was not a result of any disagreement with us with respect to our policies, operations or practices.

On September 12, 2012, we sold our Pharmalicensing, Global Licensing, Pharma Transfer and Knowledge Express operating divisions to IP Technology Exchange, Inc. effective as of August 31, 2012. Under the Asset Purchase Agreement, IP Technology Exchange, Inc. will pay $2,000,000 consisting of (i) a lump-sum payment of $600,000 on the closing date, (ii) assumption of approximately $70,000 of debt relating to these divisions, (iii) quarterly payments of $100,000 through August 2014, and (iv) the remaining balance of the purchase price on September 1, 2014. On November 30, 2012, any outstanding balance of the purchase price will begin accruing interest at 5% per annum. IP Technology Exchange, Inc. is entitled to a $125,000 reduction in the purchase price if all amounts are paid to us by May 1, 2013. Ms. Wright, our Chief Financial Officer and Mr. Reiber, our general counsel, each own a 7% equity interest in IP Technology Exchange, Inc., although neither party holds a board or management position with the entity.

On October 2, 2012, we 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 our officers and employees for $100,000. In connection with the asset purchase agreement, we 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 $1.4 million in bonuses we owned them (and which bonuses had previously been accrued as an expense in our financial statements) in exchange for $150,000. Finally, as part of the transaction, we 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 million during the period from October 2, 2012 to December 31, 2015.

On October 22, 2012, Gators Lender, LLC agreed to extend the maturity date on the $1.25 million that would otherwise be due on that date until October 22, 2015. As an inducement to extend the maturity date of such indebtedness, we agreed to repay (i) $250,000 of such amount on or before November 21, 2012, (ii) an additional $250,000 of such amount on or before October 22, 2013 and (iii) the final $750,000 of such amount on or before October 22, 2015. We also agreed to issue Gators Lender, LLC (i) warrants to purchase up to 150,000 shares of our common stock as soon as practicable subsequent to October 22, 2012; (ii) warrants to purchase up to 75,000 shares of our common stock if our indebtedness to Gators Lender, LLC has not been repaid in full by October 22, 2013 and (iii) warrants to purchase up to an additional 75,000 shares of our common stock if our indebtedness to Gators Lender, LLC has not been repaid in full by October 22, 2014. The interest rate payable on such indebtedness will remain unchanged at 8.0% per year and there is no penalty if we pre-pay the indebtedness prior to the scheduled repayments dates set forth above. We and Gators Lender, LLC are in the process of documenting the above-described agreement.

Financial Condition

Our total assets were $12.5 million and $20.8 million as of September 30, 2012 and December 31, 2011, respectively. As of September 30, 2012, we had $314,000 in cash, $117,000 in accounts receivable, $1.2 million in accounts payable and accrued expenses and $5.3 million in total debt outstanding (of which $1.25 million was due in October 2012 and $2.8 million is due in May 2013). On October 22, 2012, the lender agreed to extend the maturity date on the $1.25 million that would otherwise be due on that date until October 22, 2015. As of December 31, 2011, we had $268,000 in cash, $102,000 in accounts receivable, $878,000 in accounts payable and accrued expenses, and $5.6 million in total debt outstanding. As of September 30, 2012, we had a working capital deficit of $3.9 million and an accumulated deficit of $(84.0) million.

Page 17 of 29

Results of Continuing Operations

Revenue


	Three Months Ended September 30,				Percentage Change			Nine months Ended September 30,				Percentage Change
(in thousands, except percentages)	2012		2011					2012		2011
Intelligence and insights services		190		61		210	%		417		317		32	%

Intelligence and Insights Services

Our intelligence and insights services revenue is derived from our foresight and trend research revenue. Our intelligence and insights services revenue increased by $129,000 for the three months ended September 30, 2012 in comparison to the three months ended September 30, 2011. This relates primarily to the completion of two large projects in the current three month period compared to no projects having been completed in the same period of 2011.

Our intelligence and insights services revenue increased by $100,000 for the nine months ended September 30, 2012 in comparison to the nine months ended September 30, 2011. This relates primarily to the completion of four large projects in the current nine month period compared to the completion of two projects in the same period of 2011.

We expect that our intelligence and insights services revenue will be consistent with that of 2011 for the remainder of 2012.

Direct Costs of Revenue


	Three Months Ended September 30,				Percentage Change			Nine months Ended September 30,				Percentage Change
(in thousands, except percentages)	2012		2011					2012		2011
Direct costs of revenue - Intelligence and insights services		177		154		15	%		543		479		13	%

Direct costs of revenue - intelligence and insights services include certain salaries and related taxes, commissions, certain outside services and other direct costs directly related to our intelligence and insights services business. Direct costs of revenue - intelligence and insights services increased by $23,000 for the three months ended September 30, 2012 in comparison to the three months ended September 30, 2011. In addition, direct costs of revenue - intelligence and insights services increased by $64,000 for the nine months ended September 30, 2012 in comparison to the nine months ended September 30, 2011. These increases were related to the hiring of sales personnel and outside services used to complete projects for this division.

We expect that our direct costs of revenue - intelligence and insights services will be consistent with that of 2011 for the remainder of 2012.

Page 18 of 29

Salaries and Wages


	Three Months Ended September 30,						Percentage Change			Nine months Ended September 30,						Percentage Change
(In thousands, except percentages)	2012			2011						2012			2011
Salaries and wages	$	170		$	258			(34	)%	$	575		$	665			(14	)%
As a percent of revenue		89	%		420	%		(331	)ppt		138	%		210	%		(72	)ppt

*	The abbreviation “ppt” denotes percentage points.

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 $88,000 for the three months ended September 30, 2012 in comparison to the three months ended September 30, 2011. The decrease is primarily related to a $53,000 decrease in stock compensation expense as a result of the fully vested grant of equity compensation to our CEO upon his hiring in April 2011, and a $35,000 decrease in administrative staff and certain officers’ salaries.

Salaries and wages decreased by $90,000 for the nine months ended September 30, 2012 in comparison to the nine months ended September 30, 2011. The decrease is primarily related to a $109,000 decrease in stock compensation expense as a result of the fully vested grant of equity compensation to our CEO upon his hiring in April 2011 and a $89,000 decrease in administrative staff and certain officers’ salaries, partially offset by a $108,000 increase in salary expense as a result of having hired our CEO in April 2011.

We expect that our salaries and wages will remain consistent with the third quarter of 2012 for the remainder of 2012.

Professional Fees


	Three Months Ended September 30,						Percentage Change			Nine months Ended September 30,						Percentage Change
(In thousands, except percentages)	2012			2011						2012			2011
Professional fees	$	97		$	97			0	%	$	254		$	275			(8	)%
As a percent of revenue		51	%		158	%		(107	)ppt		61	%		87	%		(26	)ppt

Professional fees include accounting fees, legal fees and valuation expenses for our investments. Professional fees remained consistent for the three months ended September 30, 2012 in comparison to the three months ended September 30, 2011.

Professional fees decreased by $21,000 for the nine months ended September 30, 2012 in comparison to the nine months ended September 30, 2011, primarily as a result of a reduction in legal fees of $68,000, partially offset by an increase in accounting and valuation fees of $47,000.

We expect that our professional fees will increase for the fourth quarter of 2012 due to the legal fees associated with closing the sales of certain of our operating divisions.

Research and Development


	Three Months Ended September 30,						Percentage Change			Nine months Ended September 30,						Percentage Change
(In thousands, except percentages)	2012			2011						2012			2011
Research and development	$	95		$	28			239	%	$	335		$	662			(49	)%
As a percent of revenue		50	%		45	%		5	ppt		80	%		209	%		(129	)ppt

Page 19 of 29

Research and development expense includes salaries, outside services, travel and other costs related to the development of our LaunchPad software platform. Research and development costs increased by $67,000 for the three months ended September 30, 2012 in comparison to the three months ended September 30, 2011. The increase is partially related to the capitalization of $185,000 in software development costs in the third quarter of 2011 rather than the allocation of such costs to research and development expense.

Research and development costs decreased by $327,000 for the nine months ended September 30, 2012 in comparison to the nine months ended September 30, 2011. The decrease is due to the fact that we scaled back the amount of resources allocated to the development of LaunchPad during 2012.

We expect that our research and development expense will remain consistent with the third quarter of 2012 for the remainder of 2012.

Sales and Marketing


	Three Months Ended September 30,						Percentage Change			Nine months Ended September 30,						Percentage Change
(In thousands, except percentages)	2012			2011						2012			2011
Sales and marketing	$	5		$	88			(94	)%	$	46		$	119			(61	)%
As a percent of revenue		3	%		143	%		(140	)ppt		11	%		38	%		(27	)ppt

Sales and marketing expense includes advertising, marketing, commissions paid to outside service providers, certain travel and other business development expenses. Sales and marketing expense decreased by $83,000 and $73,000 for the three and nine months ended September 30, 2012 compared to the three and nine months ended September 30, 2011, respectively. The decrease for both periods relates primarily to decreased attendance at conferences and reduction in production of marketing materials.

We expect that our sales and marketing expense will increase over the third quarter of 2012 for the remainder of 2012 due to an increase in marketing related to LaunchPad.

General and Administrative


	Three Months Ended September 30,						Percentage Change			Nine months Ended September 30,						Percentage Change
(In thousands, except percentages)	2012			2011						2012			2011
General and administrative	$	250		$	282			(11	)%	$	939		$	940			0	%
As a percent of revenue		132	%		458	%		(326	)ppt		225	%		297	%		72ppt

General and administrative expense decreased by $31,000 for the three months ended September 30, 2012 compared to the three months ended September 30, 2011. The decrease relates primarily to decreased insurance premiums and other employee related costs due to the decrease in the number of employees in 2012 compared to 2011. In addition, general and administrative expense remained consistent for the nine months ended September 30, 2012 compared to the nine months ended September 30, 2011.

We expect that our general and administrative expense will remain consistent with the third quarter of 2012 for the remainder of 2012.

Page 20 of 29

Depreciation and Amortization


	Three Months Ended September 30,						Percentage Change			Nine months Ended September 30,						Percentage Change
(In thousands, except percentages)	2012			2011						2012			2011
Depreciation and amortization	$	247		$	262			(6	)%	$	758		$	868			(13	)%
As a percent of revenue		130	%		426	%		(296	)ppt		182	%		274	%		(92	)ppt

Depreciation and amortization decreased by $15,000 and $110,000 for the three and nine months ended September 30, 2012 in comparison to the three and nine months ended September 30, 2011, respectively. Amortization expense decreased by $10,000 and $91,000 for the three and nine months ended September 30, 2012 as compared to the same periods in 2011, respectively. In addition, depreciation expense decreased by $5,000 and $19,000 for the three and nine months ended September 30, 2012 as compared to the same periods in 2011, respectively.

We expect that our depreciation and amortization will remain consistent with the third quarter of 2012 for the remainder of 2012.

Other (Income) Expense


	Three Months Ended September 30,						Percentage Change			Nine months Ended September 30,						Percentage Change
(In thousands, except percentages)	2012			2011						2012			2011
Other (income) expense	$	(156	)	$	(88	)		77	%	$	(512	)	$	(71	)		621	%

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 $68,000 for the three months ended September 30, 2012 in comparison to the three months ended September 30, 2011. The net other income of $156,000 for the three months ended September 30, 2012 is comprised of rental income of $35,000, dividend income of $70,000, and miscellaneous income of $52,000. The net other income of $88,000 for the three months ended September 30, 2011 is comprised primarily of rental income of $86,000.

Other (income) expense changed by $441,000 for the nine months ended September 30, 2012 in comparison to the nine months ended September 30, 2011. The net other income of $512,000 for the three months ended September 30, 2012 is comprised of rental income of $290,000, dividend income of $128,000, capital gain income of $48,000 and miscellaneous income of $47,000. The net other income of $71,000 for the nine months ended September 30, 2011 is comprised primarily of rental income of $224,000, partially offset by a loss of $151,000 related to adjusting our derivative liabilities to fair value.

Interest Expense, Net


	Three Months Ended September 30,				Percentage Change			Nine months Ended September 30,				Percentage Change
(In thousands, except percentages)	2012		2011					2012		2011
Interest expense, net	$	101	$	106		(5	)%	$	315	$	329		(4	)%

Interest expense, net decreased by $5,000 for the three months ended September 30, 2012 in comparison to the three months ended September 30, 2011. The net interest expense of $101,000 for the three months ended September 30, 2012 is primarily comprised of interest expense on debt and other payables of $97,000 and amortization of our debt discount of $33,000, partially offset by interest income on our notes receivable of $29,000. The net interest expense of $106,000 for the three months ended September 30, 2011 is primarily comprised of interest expense on debt and other payables of $99,000 and amortization of our debt discount of $33,000, partially offset by interest income on our notes receivable of $26,000.

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Interest expense, net decreased by $14,000 for the nine months ended September 30, 2012 in comparison to the nine months ended September 30, 2011. The net interest expense of $316,000 for the nine months ended September 30, 2012 is primarily comprised of interest expense on debt and other payables of $298,000 and amortization of our debt discount of $99,000, partially offset by interest income on our note receivable of $81,000. The net interest expense of $329,000 for the nine months ended September 30, 2011 is primarily comprised of interest expense on long-term debt of $308,000 and amortization of our debt discount of $99,000, partially offset by interest income on our note receivable of $78,000.

Liquidity and Capital Resources

Cash Flows

Cash flows from operating activities of continuing operations of $(1,161,000) for the nine months ended September 30, 2012 increased $844,000 from $(2,005,000) for the nine months ended September 30, 2011. Total cash flows from operations of $(1,161,000) in the current period are primarily attributable to:

•

$2,835,000 net loss.

Partially offset by:

•

$857,000 in non-cash depreciation and amortization;

•

$360,000 in non-cash stock-based compensation expense related to vesting options and stock issued for services; and

•

$423,000 increase in accounts payable and other liabilities.

Cash flows from investing activities of continuing operations of $618,000 for the nine months ended September 30, 2012 increased $830,000 from $(212,000) for the nine months ended September 30, 2011. Total cash flows from investing activities of $618,000 are related to $600,000 in proceeds from the sale of certain of our operating divisions and $64,000 in proceeds from the sale of our available-for-sale securities, partially offset by $45,000 in the capitalization of software development costs.

Cash flows from financing activities of continuing operations of $(235,000) for the nine months ended September 30, 2012 increased $290,000 from $(525,000) for the nine months ended September 30, 2011. Total cash flows from financing of $(235,000) are related to principal payments on long-term debt of $458,000, partially offset by net proceeds from our stock offering of $223,000.

Software Development Costs

We are continuing the development of our LaunchPad software. We have had a general release to market of Version 1.0 and are proceeding with the development of the next components of LaunchPad with Version 2.0. As of September 30, 2012, we had invested $2.3 million in this software platform. We expect to incur approximately $100,000 in additional expenditures for product development of Version 2.0 and refinement of Version 1.0 for the remainder of 2012.

Liquidity

We have incurred recurring losses and negative cash flows from operations. We incurred a net loss of $(7,572,110) and $(4,920,723) for the nine months ended September 30, 2012 and the year ended December 31, 2011, respectively. In addition, we have a working capital deficit of $(3,907,425) and an accumulated deficit of $(84,019,275) as of September 30, 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. 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 and our common stock.

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, the potential sales of our investments and the sale of our common stock. 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 $4.0 million (of which $1.25 million was due in October 2012 and $2.75 million is due in May 2013) and our operating requirements for the next twelve months. Our debt is secured by our office building and land. On October 22, 2012, the lender agreed to extend the maturity date on the $1.25 million that would otherwise be due on that date until October 22, 2015. See “Item 2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations – Recent Developments” for additional information about this agreement. We are exploring opportunities for obtaining a credit facility, as well as selling equity securities. 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 we may

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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 management’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 nine months ended September 30, 2012.

ITEM 3. Quantitative and Qualitative Disclosures about Market Risks

Not applicable.

ITEM 4. Controls and Procedures

Disclosure Controls and Procedures

As of the end of the period covered by this Quarterly Report on Form 10-Q, our chief executive officer and chief financial officer conducted an evaluation of the effectiveness of the design and operation of the Company’s disclosure controls and procedures, (as is defined in Rules 13a-15(e) under the Securities Exchange Act of 1934). Based on their evaluation, our chief executive officer and chief financial officer concluded that our disclosure controls and procedures were effective such that the information required to be disclosed in our reports filed or submitted under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission rules and forms and such that information required to be disclosed in our reports filed or submitted under the Securities Exchange Act of 1934 is accumulated and communicated to our management, including our chief executive officer and chief financial officer, as appropriate to allow timely decisions regarding required disclosure.

Internal Control over Financial Reporting

There have been no changes in our internal control over financial reporting (as defined in Rule13a-15(f) of the Securities Exchange Act of 1934) that occurred during the most recently completed fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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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 September 30, 2012, 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

ITEM 6. Exhibits

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



4.1		Form of Series A Warrants. (Incorporated by reference to Exhibit 4.1 to Form 8-K filed on June 26, 2012.)

4.2		Series B Warrant. (Incorporated by reference to Exhibit 4.1 to Form 8-K filed on September 14, 2012.)

10.1	—	Securities Purchase Agreement by and among Innovaro, Inc. and Mark Berset and Bruce Lucas dated as of June 20, 2012. (Incorporated by reference to Exhibit 10.1 to Form 8-K filed on June 26, 2012.)

10.2	—	Asset Purchase Agreement between Innovaro, Inc., Innovaro Europe, Ltd. and IP Technology Exchange, Inc. dated September 12, 2012. (Incorporated by reference to Exhibit 10.1 to Form 8-K filed on September 14, 2012.)

10.3	—	Securities Purchase Agreement by and among Innovaro, Inc. and JJJ Family LLLP dated as of September 27, 2012. (Incorporated by reference to Exhibit 10.1 to Form 8-K filed on October 3, 2012.)

10.4	—	Asset Purchase Agreement between Innovaro, Inc., Strategos, Inc., Gary Getz and Ian Pallister dated October 2, 2012. (Incorporated by reference to Exhibit 10.1 to Form 8-K filed on October 12, 2012.)

10.5	—	Form of Separation and Release Agreement. (Incorporated by reference to Exhibit 10.2 to Form 8-K filed on October 12, 2012.)

10.6	—	Technology License Agreement between Innovaro, Inc. and Strategos, Inc. (Incorporated by reference to Exhibit 10.3 to Form 8-K filed on October 12, 2012.)

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: November 14, 2012						/s/ Asa Lanum
						Asa Lanum
						Chief Executive Officer

Date: November 14, 2012						/s/ Carole R. Wright
						Carole R. Wright, CPA
						Chief Financial Officer

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