What changed in this filing

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Item 1. Financial Statements

2012-05-10 compared with 2011-11-09 · 369 added, 672 removed, 209 unchanged (83% of the section changed)

2 unchanged sentences

Consolidated Balance Sheets

September 30,

Current assets:

Cash and cash equivalents

Accounts receivable, net

2 unchanged sentences

Prepaid expenses and other assets

Note receivable and accrued interest

Total current assets

1 unchanged sentence

Equity method investments

Note receivable and accrued interest

Fixed assets, net

3 unchanged sentences

Accrued expenses

Accrued bonus

Accrued bonus pool

Deferred revenue

2 unchanged sentences

Long-term debt, less current maturities

Derivative liabilities

Deferred tax liability

4 unchanged sentences

Common stock, $.01 par value, 29,000,000 shares authorized;

15,161,274 and 14,631,950 shares issued;

15,041,274 and 14,585,261

shares outstanding at September 30, 2011 and December 31, 2010, respectively

15,159,544 shares issued;

15,064,544 and 15,039,544 shares

outstanding at March 31, 2012 and December 31, 2011, respectively

Additional paid-in capital

6 unchanged sentences

Innovaro, Inc.

Consolidated Statements of Operations

Three Months Ended Sept.

Nine Months Ended Sept.

Consolidated Statements of Operations and Comprehensive Income

Three Months Ended March 31,

Strategic services

Technology services

Intelligence and Insights services

Direct costs of revenue Strategic services

Direct costs of revenue Technology services

Direct costs of revenue Intelligence and Insights services

Salaries and wages

4 unchanged sentences

Depreciation and amortization

Impairment loss

Other (income) and expense:

2 unchanged sentences

Loss before income taxes

Provision for income tax benefit

Provision for income tax expense (benefit)

Net loss attributable to the noncontrolling interest

Net loss attributable to Innovaro stockholders

Other comprehensive income

Comprehensive loss

Net loss attributable to Innovaro stockholders per share:

5 unchanged sentences

Consolidated Statements of Cash Flows

Nine Months Ended September 30,

Three Months Ended March 31,

Operating Activities:

1 unchanged sentence

Adjustments to reconcile net loss attributable to Innovaro stockholders to net cash flows from operating

Goodwill and intangible asset impairment

Fixed asset impairment

Net loss attributable to noncontrolling interest

1 unchanged sentence

Amortization of debt discount from investor warrants

Loss on sale and impairment of available-for-sale securities

Loss (gain) on derivative liabilities

(Gain) loss on sale and impairment of available-for-sale securities

Loss on derivative liabilities

Stock-based compensation

10 unchanged sentences

Proceeds from sale of available-for-sale securities

Proceeds from redemption of certificates of deposit

Net cash flows from investing activities

Financing Activities:

Net repayments on bank line of credit

Payments on long-term debt

Gross proceeds from private equity securities offering

Offering costs paid from private equity securities offering

Net cash flows from financing activities

Effect of foreign exchange rates

Increase in cash and cash equivalents

Cash and cash equivalents at beginning of period

Cash and cash equivalents at end of period

See accompanying notes

INNOVARO, INC.

Consolidated Statements of Cash Flows (continued)

Nine Months Ended September 30,

Supplemental Disclosures of Non-Cash Investing and Financing Activities

Unrealized gain (loss) from available-for-sale securities, net

Derivative liability extinguished in connection with exercise of investor warrants

The Company issued 23,484 shares of common stock in connection with certain acquisition earnout contingencies

The Company transferred certain equity interests in a subsidiary to satisfy a severance obligation resulting in the

Noncontrolling interest

Increase to additional paid-in capital

The Company issued 243,933 shares of common stock in connection with its investment in Verdant Ventures Advisors,

Warrants issued as direct offering costs in connection with private equity securities offering

Effect of foreign exchange rates on cash

Increase (decrease) in cash

Cash at beginning of period

Cash at end of period

Supplemental Disclosures of Cash Flow Information

1 unchanged sentence

Cash paid for interest

Supplemental Disclosures of Non-Cash Investing and Financing Activities

Unrealized gain (loss) from available-for-sale securities

See accompanying notes

4 unchanged sentences

The financial information for Innovaro, Inc.

(the Company, we, us or Innovaro) as of September 30, 2011 and for the three and nine month periods ended

September 30, 2011 and 2010 is unaudited, but includes all adjustments (consisting only of normal recurring accruals), 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 (GAAP) for interim financial information and,

therefore, do not include all information and notes required by 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 Companys Annual Report on Form 10-K for the year ended December 31, 2010.

Operating results for the nine months ended September 30, 2011 are not necessarily indicative of the results that may be expected for the

We commenced operations in 1997 and were originally incorporated under the laws of the State of Florida, and subsequently under the laws of the State of

Delaware in July 1999.

Innovaro is The Innovation Solutions Company.

The focus of the business is to help clients innovate and grow.

Innovaro offers a comprehensive set of services and software to assure the success of any

innovation project, regardless of the size or intent.

The Companys unique combination of consulting services provide innovation expertise, its new LaunchPad software product provides an integrated innovation environment, and technology

services provide any business with the innovation support they need to drive success.

These services are provided internationally from offices in the United States and the United Kingdom.

(the Company, we, us or Innovaro) as of March 31, 2012 and 2011 and for the three month periods then ended

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 Companys Annual Report on Form 10-K for the year ended December 31, 2011.

Operating results for the three months ended March 31, 2012 are not necessarily indicative of the results that may be expected for the entire year.

Innovaro is The

Innovation Solutions Company focused on innovation management consulting and software.

Innovaro is all about helping companies innovate and grow.

Innovaro offers a comprehensive set of services and software to assure the success of any innovation

project, regardless of the size or intent.

The Companys unique combination of Strategic consulting services provide innovation expertise, the new LaunchPad software product 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 internationally from the Companys offices in the United States and the United Kingdom.

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.

Company has incurred recurring losses and negative cash flows from operations.

The Company incurred a net loss of approximately $1.3 million and $4.9 million for the three months ended March 31, 2012 and the year ended December 31,

2011, respectively.

In addition, the Company has a working capital deficit of approximately $2.2 million and an accumulated deficit of approximately $77.8 million as of March 31, 2012.

These factors raise doubt about the Companys

ability to continue as a going concern.

The Companys primary cash requirements include working capital, research and development

expenditures, principal and interest payments on indebtedness, and employee salaries and bonuses.

Its primary sources of funds are cash received from customers in connection with operations and, to a lesser extent, proceeds from the sale from time

to time of its investments.

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 and the potential sales of its investments.

Given the Companys 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 $1.6 million and its operating requirements for the next twelve months.

The Company is exploring opportunities for obtaining a credit facility, as well as

selling equity securities and certain other assets.

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 sell assets, and it may be unable to take any of these actions on satisfactory terms or in a

timely manner.

Further, any of these actions may not be sufficient to allow the Company to service its debt obligations or may have an adverse impact on its business.

The failure to generate sufficient cash from operations could have a

material adverse effect on the Company.

The Companys 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 Companys current shareholders may experience

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.

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:

consolidated financial statements include the accounts of Innovaro and its wholly owned subsidiaries:

Innovaro Europe, Ltd.

(formerly UTEK Europe, Ltd.) and UTEK Real Estate Holdings, Inc.

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).

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.

Reclassifications

reclassifications have been made to the 2010 balances to conform to the 2011 financial statement presentation.

In particular, reclassifications were made to the revenue line items in the consolidated statements of operations for the three and nine

months ended September 30, 2010 to conform to the Companys new business segments.

Reclassifications were also made to the expense line items in the consolidated statements of operations for the three and nine months ended

September 30, 2010 to move the direct costs associated with these business lines into two separately captioned line items:

direct costs of revenue strategic services and direct costs of revenue technology services.

In addition, reclassifications were made to the equity section of the December 31, 2010 consolidated balance sheet to conform to the

September 30, 2011 presentation.

Reclassifications were made to combine the total accumulated loss under investment company accounting of $(52,073,915) with the accumulated deficit under operating company accounting of $(19,755,429) into one

accumulated deficit line item with a balance of $(71,829,344) as of December 31, 2010.

Significant Accounting Policies

Accounts Receivable

The Company records an allowance for losses on trade receivables based on a review of the current status of existing receivables and managements

The Company provides an allowance for losses on trade receivables based on a review of the current status of existing receivables and managements

evaluation of periodic aging of accounts.

The Company charges off accounts receivable against the allowance for losses when an account is deemed to be uncollectible.

The Company determines the allowance based on historical

bad debt experience, current receivables aging, expected future write-offs, as well as an assessment of specific identifiable customer accounts considered at risk or uncollectible.

It is not the

Companys policy to accrue interest on past due receivables.

The expense associated with the allowance for doubtful accounts is recognized as a component of general and administrative expense in the consolidated statements of operations.

allowance for doubtful accounts and notes was approximately $14,000 and $15,000 as of September 30, 2011 and December 31, 2010, respectively.

The Company determines the allowance based on historical bad debt experience,

current receivables aging, expected future write-offs, as well as an assessment of specific identifiable customer accounts considered at risk or uncollectible.

It is not the Companys policy to accrue interest on past due receivables.

expense associated with the allowance for doubtful accounts is recognized as general and administrative expense in the consolidated statements of operations and comprehensive income.

The allowance for doubtful accounts was approximately $15,000 and

$29,000 as of March 31, 2012 and December 31, 2011, respectively.

Cost Method Investments

Cost method investments were not evaluated for impairment as of

September 30, 2011.

The Company does not estimate the fair value of a cost method investment, before its annual impairment evaluation date of December 31, 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.

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 ASC Subtopic 985-20, the Company has expensed all costs incurred to establish the technological feasibility of Version 1.0 of the

Innovaro LaunchPad software (LaunchPad) as research and development costs.

As of June 29, 2011, LaunchPad Version 1.0 reached technological feasibility with the introduction of a working model.

The Company is now incurring costs

related to the refinement of Version 1.0, which will be capitalized until the product is available for general release to market.

The Company capitalized $185,000 in software development costs for each of the three and nine months ended

September 30, 2011.

The Company has begun development of the next components of LaunchPad with Version 2.0.

Costs related to the

development of this and other versions of the software will continue to be expensed until they too reach technological feasibility.

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:

September 30,

Cost method investments were not evaluated for impairment as of March 31, 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

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 Version 1.0 of the Innovaro LaunchPad software (LaunchPad) as research and development costs.

During 2011, LaunchPad Version 1.0 reached technological

feasibility with the introduction of a working model.

The Company is now incurring costs related to the refinement of Version 1.0, which will be capitalized until the product is available for general release to market.

The Company capitalized

$46,000 in software development costs for the three months ended March 31, 2012.

The Company is also developing the next components of

LaunchPad with Version 2.0.

Costs related to the development of this and other versions of the software will continue to be expensed until they too reach technological feasibility.

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.

There has not been a general release of the LaunchPad software, and accordingly, we have not

recorded amortization expense related to the capitalized software for any periods presented.

Accrued Expenses

Accrued expenses include approximately $522,000 and $398,000 of accrued salaries, vacation and related taxes as of March 31, 2012 and December 31, 2011, respectively.

Recently Adopted Accounting Pronouncements

In June 2011, the FASB issued ASU 2011-05 Presentation of Comprehensive Incom e, which revises the manner in which entities present comprehensive income in their financial statements.

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 ASU is effective for the interim and annual periods beginning

after December 15, 2011.

The Company has presented a continuous statement of comprehensive income for the current quarter.

Other recent accounting pronouncements issued by the FASB (including its EITF), the AICPA and the Securities and Exchange Commission did

not and are not believed by management to have a material impact on the Companys present or future financial statements.

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

Components of basic and diluted per share data are as follows:

Three Months Ended

Weighted average outstanding shares of common stock (1)

2 unchanged sentences

Shares excluded from calculation of diluted EPS (2)

These shares attributable to outstanding stock options, warrants and unvested restricted stock were excluded from the calculation of diluted EPS

because their inclusion would have been anti-dilutive, primarily as a result of having incurred a net loss during the periods presented.

Financial Instruments and Concentrations of Credit Risk

The Companys financial

instruments consist of investments, cash and cash equivalents, accounts receivable, accounts payable, accrued expenses, long-term debt and derivative liabilities.

The fair value of 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 Companys long-term debt as of September 30, 2011 and December 31, 2010 is not materially

different from its carrying values at such dates.

The fair value of available-for-sale securities and derivative liabilities are determined as described in Note 6.

Financial instruments with significant credit risk include investments and cash and cash equivalents.

Company maintains its cash and cash equivalents with high credit quality financial institutions in the United States and, at times, balances may exceed federally insured limits.

Included in basic earnings per share for the three months ended March 31, 2011 are 437,500 fully vested common stock warrants at $0.01 per share.

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.

Financial Instruments,

Fair Value Measurements and Concentrations of Credit Risk

The Companys financial instruments consist of investments, cash, accounts

receivable, accounts payable, accrued expenses and long-term debt.

The fair value of 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 Companys long-term debt is not materially different from its carrying value of $5.6 million at both March 31, 2012 and December 31, 2011.

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 Companys 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

$57,193 and $55,038 as of March 31, 2012 and December 31, 2011, respectively.

The Companys equity interests in companies for which

there is no liquid public market are valued using quoted market prices for identical or similar instruments in markets that are not active.

The determined values are generally discounted to account for the illiquid nature of the investment and

minority ownership positions.

The value of our equity interests in public companies for which market quotations are readily available is based on quoted market prices for similar instruments in an active market.

These securities are generally thinly

traded and/or carry discounts from the public market value for certain restrictions on resale.

The Company utilizes the market approach in determining the fair value of these securities.

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 Company had four major customers during each of the three months ended September 30, 2011 and 2010 and two major customers during

each of the nine months ended September 30, 2011 and 2010, all of which were customers of the strategic services line of business.

Major customers, those generating greater than 10% of total revenue, accounted for approximately 80% and 62% of

the Companys revenue during the three months ended September 30, 2011 and 2010, respectively.

Major customers accounted for approximately 54% and 26% of the Companys revenue during the nine months ended September 30, 2011 and

2010, respectively.

In addition, two customers accounted for approximately 65% of accounts receivable as of September 30, 2011.

The preparation of the Companys consolidated financial statements in conformity with GAAP 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 Companys most significant estimates relate to revenue recognition, the valuation and impairment of certain investments, stock-based compensation, the valuation and impairment of goodwill and intangible assets, and the

valuation of derivative liabilities.

Actual results could differ from these estimates.

Recently Issued Accounting Pronouncements

In May 2011, the FASB issued Accounting Standards Update (ASU) 2011-04 Amendments to Achieve Common Fair Value Measurement

and Disclosure Requirements in U.S.

GAAP and IFRSs .

The ASU expands ASC Topic 820s existing disclosure requirements for fair value measurements and makes other amendments that could change how the fair value measurement guidance in ASC

Topic 820 is applied.

The ASU is effective for the Company with the reporting period beginning January 1, 2012.

The adoption of this ASU is not expected to have a significant impact on the Companys financial statements or disclosures.

In June 2011, the FASB issued 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

The ASU is effective for the Company with the reporting period beginning January 1, 2012.

The adoption of this ASU will change the way the Company presents comprehensive income in its financial statements.

In September 2011, the FASB issued ASU 2011-08 Testing Goodwill for Impairment.

Under the revised guidance, entities testing goodwill for

impairment have the option of performing a qualitative assessment before calculating the fair value of a reporting unit in step 1 of the goodwill impairment test.

If entities determine, on the basis of qualitative factors, that the fair value of the

reporting unit is more likely than not greater than the carrying amount, a quantitative calculation is not needed.

The ASU is effective for the Companys annual and interim goodwill impairment tests performed with the reporting period beginning

January 1, 2012 with early adoption permitted.

The adoption of this ASU is not expected to have a significant impact on the Companys financial statements.

Accounts Receivable

Accounts receivable consist of the following as of September 30, 2011 and December 31, 2010:

September 30,

Trade accounts receivable

Allowance for doubtful accounts

Unbilled client costs

Total accounts receivable

The Federal Deposit Insurance Corporation provides deposit insurance of $250,000 for substantially all depository

accounts as of March 31, 2012.

All of the Companys non-interest bearing cash balances were fully insured as of March 31, 2012.

The Company had two major customers during each of the three months ended March 31, 2012 and 2011, all of which were customers of the strategic

services line of business.

Major customers, those generating greater than 10% of total revenue, accounted for approximately 50% and 54% of the Companys revenue during the three months ended March 31, 2012 and 2011, respectively.

addition, two customers accounted for approximately 58% of accounts and contracts receivable as of March 31, 2012.

Use of Estimates

The preparation of the Companys 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 Companys 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.

Contracts in Process

Contracts in process consist of the following as of September 30, 2011 and December 31, 2010:

September 30,

Contracts in process consist of the following as of March 31, 2012 and December 31, 2011:

Contract costs and estimated earnings on uncompleted contracts

advances and progress payments

billings to date

Total contracts in process

Components of contracts in process consist of the following as of September 30, 2011 and December 31, 2010:

September 30,

Billings in excess of costs and estimated earnings on uncompleted contracts

Components of contracts in process consist of the following as of March 31, 2012 and December 31, 2011:

Costs and estimated earnings in excess of billings on uncompleted contracts

Billings in excess of costs and estimated earnings on uncompleted contracts

Total contracts in process

Available-for-Sale Securities

The Company classifies its investments in freely tradable equity securities as available-for-sale in accordance with FASB ASC Topic 320

Investments Debt and Equity Securities and its intentions regarding these instruments.

A summary of the estimated fair value of available-for-sale securities as of September 30, 2011 and December 31, 2010 is presented below.

Unrealized (1)

As of September 30, 2011

As of December 31, 2010

The net unrealized gain (loss) is included in equity as a component of accumulated other comprehensive income in the consolidated balance sheets.

As of September 30, 2011, none of our five available-for-sale securities were in an unrealized loss position.

Company had no sales of available-for-sale securities during the three and nine months ended September 30, 2011.

Proceeds from the sale of available-for-sale securities were approximately $63,000 and $312,000 for the three and nine months ended

September 30, 2010, respectively.

The Company recognized an impairment loss of $201 on available-for-sale securities during the nine months ended September 30, 2011.

Gross realized gain (loss) as a result of the sale of available-for-sale

securities was approximately $(57,000) and $54,000 for the three and nine months ended September 30, 2010, respectively.

In addition, the Company recognized an impairment loss to available-for-sale securities of approximately $146,000 during

the nine months ended September 30, 2010.

The realized gain (loss) related to available-for-sale securities is included as a component of other (income) expense in the consolidated statements of operations.

Fair Value Measurements

The Company performs fair value measurements in accordance with the guidance provided by FASB ASC Topic 820 Fair Value Measurements

and Disclosures .

ASC Topic 820 defines fair value as the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.

When determining the fair

value measurements for assets and liabilities required to be recorded at fair value, management considers the principal or most advantageous market in which the Company would transact and considers assumptions that market participants would use when

pricing the asset or liability, such as inherent risk, transfer restrictions, and risk of nonperformance.

ASC Topic 820 establishes a fair

value hierarchy that encourages and is based on the use of observable inputs, but allows for unobservable inputs when observable inputs do not exist.

When there are multiple inputs for determining the fair value of an investment, the Company

classifies the investment in the fair value hierarchy based on the lowest level input that is significant to the fair value measurement.

Inputs are classified into one of three categories:

Level 1Unadjusted quoted prices in active markets for identical assets or liabilities.

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Level 2Quoted prices in active markets for similar assets or liabilities, or quoted prices for identical or similar assets or liabilities in

markets that are not active, or inputs other than quoted prices that are observable for the asset or liability.

Level 3Unobservable inputs for the asset or liability.

Assets and liabilities measured at fair value on a recurring basis by level within the fair value hierarchy as of September 30, 2011 and December 31, 2010 are as follows:

Fair Value Measurements

September 30, 2011 (1)

Fair Value Measurements at

December 31, 2010 (1)

Using Level 2

Available-for-sale securities

Derivative liabilities

Total liabilities

The Company did not have any assets or liabilities measured at fair value using Level 1 or Level 3 of the fair value hierarchy as of September 30,

2011 or December 31, 2010.

The Companys investments in available-for-sale securities are classified within Level

2 of the fair value hierarchy.

Our equity interests in companies for which there is no liquid public market are valued using quoted market prices for identical or similar instruments in markets that are not active.

The determined values are

generally discounted to account for the illiquid nature of the investment and minority ownership positions.

The value of our equity interests in public companies for which market quotations are readily available is based on quoted market prices for

similar instruments in an active market.

These securities are generally thinly traded and/or carry discounts from the public market value for certain restrictions on resale.

The Company utilizes the market approach in determining the fair value of

these securities.

The Companys derivative liabilities are classified within Level 2 of the fair value hierarchy.

The Company utilizes

the Black-Scholes Model to value the derivative liabilities utilizing observable inputs such as the Companys common stock price, the exercise price of the warrants, and expected volatility, which is based on historical volatility.

considered the use of a binomial model, but determined that the probability of the exercise price adjusting downward was remote.

The Black-Scholes Model employs the market approach in determining fair value.

Derivative Liabilities

In accordance with FASB ASC Topic 815 Derivatives and Hedging , the Company has recorded derivative liabilities for certain stock

warrants with variable exercise prices.

Derivative liabilities are recorded at fair value at inception and then are adjusted to reflect fair value at the end of each reporting period, with any increase or decrease in the fair value being recorded as

a component of other (income) expense in the consolidated statements of operations.

The Company recognized a gain (loss) related to the adjustment of these derivatives to fair value of approximately $513,000 and $776,000 for the three months ended

September 30, 2011 and 2010, respectively, and $(911,000) and $818,000 for the nine months ended September 30, 2011 and 2010, respectively.

The Company uses the Black-Scholes Model to estimate the fair value of the derivative instrument.

The Company employed the following assumptions for the Black-Scholes Model at September 30, 2011 and

December 31, 2010:

September 30,

Expected dividend yield

Expected volatility

Risk-free interest rate

Expected life

3.8 - 5.0 years

Page 11 of 30

Warrant Exercise

Effective April 6, 2011, 437,500 of the Companys $0.01 fully vested common stock warrants were exercised.

The derivative liability related to the warrants was adjusted to fair value of

approximately $1.3 million on the date of exercise.

The derivative liability related to the warrants was effectively extinguished through the adjustment of the $1.3 million from derivative liabilities to additional paid-in capital at the above

exercise date.

Accumulated Other Comprehensive Income

Components comprising accumulated other comprehensive income as of and for the nine months ended September 30, 2011 are as follows:

Components comprising the accumulated other comprehensive income balance for the three months ended March 31, 2012 are as follows:

Unrealized gain

available-for-

sale securities

Foreign currency

available-for-sale

comprehensive

Balances at December 31, 2010

Gain (loss) for the period

Balances at September 30, 2011

Balance at December 31, 2011

Gain for the period

Balance at March 31, 2012

Other (Income) Expense

Components comprising other (income) expense for the three and nine months ended September 30, 2011 and 2010 are as follows:

September 30,

Components comprising the balance in other (income) expense for the three months ended March 31, 2012 and 2011 are as follows:

Three Months Ended

Loss (gain) on sale and impairment of investments

Loss (gain) on derivative liabilities

Loss on derivative liabilities

Rental income

Other (income) expense

Comprehensive Income (Loss)

Comprehensive income (loss) for the nine months ended September 30, 2011 and 2010 is as follows:

Nine Months Ended September 30,

Net loss attributable to Innovaro stockholders

Other comprehensive income (loss):

Unrealized gain (loss) from available-for-sale securities

Foreign currency translation adjustment

Other comprehensive income (loss)

Comprehensive loss

Page 12 of 30

Segment Reporting

5 unchanged sentences

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

0000000000000,

For the Three Months Ended September 30, 2011

United States

Loss before income taxes

Depreciation and amortization

For the Three Months Ended September 30, 2010

United States

Loss before income taxes

Depreciation and amortization

000000000000,,

For the Nine Months Ended September 30, 2011

For the Three Months Ended March 31, 2012

United States

1 unchanged sentence

Depreciation and amortization

For the Nine Months Ended September 30, 2010

For the Three Months Ended March 31, 2011

United States

1 unchanged sentence

Depreciation and amortization

Loss before income

taxes for the United Kingdom segment included impairment charges of approximately $2.9 million for each of the three and nine months ended September 30, 2010.

Loss before income taxes for the United States segment included impairment charges of approximately $8.7 million for each of the three and nine months

ended September 30, 2010.

From time to time, the Company will reorganize its internal organizational structure to

better align its service offerings.

In 2011, we reorganized into two new lines of business:

Strategic Services and Technology Services.

As a result, line of business segment information for the three and nine months ended September 30, 2010 has

been restated to reflect these new segments.

Page 13 of 30

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

0000000000000,

For the Three Months Ended September 30, 2011

For the Three Months Ended March 31, 2012

Administrative

Income (loss) before income taxes

For the Three Months Ended September 30, 2010

Administrative

Loss before income taxes

For the Nine Months Ended September 30, 2011

For the Three Months Ended March 31, 2011

Administrative

Income (loss) before income taxes

Administrative00,

For the Nine Months Ended September 30, 2010

Administrative

Loss before income taxes

Loss before income taxes for the strategic services segment included impairment charges of approximately $4.9 million for each of the three and nine

months ended September 30, 2010.

Loss before income taxes for the technology services segment included impairment charges of approximately $5.5 million for each of the three and nine

months ended September 30, 2010.

Loss before income taxes for administrative and other included impairment charges of approximately $1.3 million for each of the three and nine months

ended September 30, 2010.

Stock Compensation Plans

In June 2011, the Companys stockholders approved an amendment and restatement of the Companys three existing equity

compensation plans as one plan, the Innovaro, Inc.

Equity Compensation Plan (the Equity Compensation Plan).

The maximum number of shares available for issuance under the Equity Compensation Plan is 4,626,274, which is the total number of

shares available under the existing Non-Qualified Option Plan, Employee Option Plan and Restricted Stock Plan.

The options and restricted stock previously granted under the three existing equity compensation plans are counted in determining the

shares that remain available for issuance under the Equity Compensation Plan.

The Compensation Committee of the Companys Board of Directors determines those officers, employees, directors and consultants of the Company who are eligible to

participate in the Equity Compensation Plan.

Page 10 of 22

6 unchanged sentences

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.

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.

generally identifiable by use of the words may, will, should, expect, anticipate, estimate, believe, intend or project or the negative of

these words or other variations on these words or comparable terminology.

These forward-looking statements are based on assumptions that may be incorrect, and we cannot assure you that the projections included in these forward-looking statements

will come to pass.

Our actual results could differ materially from those expressed or implied by the forward-looking statements as a result of various factors.

Business Overview

Innovaro is The Innovation Solutions Company.

The focus of our business is to help clients innovate and grow.

Innovaro offers a comprehensive set of

services and software to assure the success of any innovation project, regardless of the size or intent.

Our unique combination of consulting services provide innovation expertise, our new LaunchPad software product provides an integrated innovation

environment, and technology services provide any business with the innovation support they need to drive success.

We are The Innovation Solutions Company focused on innovation management

consulting and software.

We are all about helping companies innovate and grow.

We offer a comprehensive set of services and software to assure the success of any innovation project, regardless of the size or intent.

Our unique combination of

strategic consulting services provide innovation expertise, our new LaunchPad software product provides an integrated innovation environment, and our intelligence and insights services provide any business with the innovation support they need to

drive success.

These services are provided internationally from our offices in the United States and the United Kingdom.

People are the key to providing innovation expertise though our consulting services.

Our people have defined and refined our methodology for over 15

years with more than 250 clients in over 750 engagements, which has created a proven effective process to get a company through the innovation cycle.

This process has served to develop our Leading Edge Innovation Practices (LEIPs)

contained within our methodology.

We provide strategic services to enable our clients to become more efficient by finding new avenues to

grow, fighting commoditization, improving return on investment, transforming the organization, and removing barriers to innovation.

Business value is delivered to clients through working with a team of seasoned and experienced professionals capable

of unlocking an organizations capacity by:

We have two business

Strategic Services and Intelligence and Insights Services.

People are the key to providing innovation expertise through our

strategic consulting services.

Our people have defined and refined our methodology for over 15 years with more than 250 clients in over 750 engagements, which has created a proven effective process to get a company through the innovation cycle.

process has served to develop put Leading Edge Innovation Practices contained within our methodology.

We provide strategic services to enable

our clients to become more efficient by finding new avenues to grow, fighting commoditization, improving return on investment, transforming the organization, and removing barriers to innovation.

Business value is delivered to clients through working

with a team of seasoned and experienced professionals capable of unlocking an organizations capacity by:

Identifying and developing new segments and markets;

3 unchanged sentences

Assessing a companys innovation capability.

Our technology services business provides information to assist clients in gaining insights and making decisions.

We offer expansive networks, experts in scouting, partner sourcing and licensing

expertise, and world leading online marketplaces.

Our intelligence and insights services business provides information to assist clients in gaining insights and making decisions.

We offer expansive networks, experts in scouting, partner sourcing and

licensing expertise, and world leading online marketplaces.

We also provide an important foundation to successful licensing - understanding the true potential value of our clients intellectual property IP and IP portfolio.

We access that

value and build a roadmap for our clients use, and uncover opportunities and options to realize any latent value.

We have an online

information service, purpose-built for those who need it mosttechnology transfer, business development, intellectual property, competitive intelligence, and marketing professionals across the physical and life sciences.

access that value and build a roadmap for our clients use, and uncover opportunities and options to realize any latent value.

an online information service, purpose-built for those who need it most - technology transfer, business development, intellectual property, competitive intelligence, and marketing professionals across the physical and life sciences.

We also provide the insight and intelligence our clients require, applied to their markets today and into the future.

1 unchanged sentence

predictive intelligence, we help our clients find insights at the intersections affecting their business.

Our research identifies and explains key consumer trendsincluding emerging trends not covered by other sourcesand delivers insights

about how these trends will shape the future operating environment.

Our LaunchPad software product provides an integrated innovation

environment which embodies our LEIPs to offer a process that is repeatable, reliable and scalable.

LaunchPad helps innovation teams by making their jobs better, faster and easier.

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.

These services include:

Online marketplaces

Technology licensing

IP consulting

Global lifestyles and technology foresight

Page 11 of 22

Innovaro LaunchPad

We are continuing the development of our innovation management software platform, Innovaro LaunchPad (LaunchPad), which is designed to enhance and complement our innovation service offerings

Previously in 2011, we introduced a working model of Version 1.0 of the LaunchPad software to certain customers.

We will continue to incur costs related to the refinement of Version 1.0 while proceeding with the development of

the next components of LaunchPad with Version 2.0.

The next components of LaunchPad are designed to take the outputs from the current product and extend them further into the organizations product delivery process.

Recent Developments

2011, our Board of the Directors increased its size from four to five directors and, upon the recommendation of the Nominating and Corporate Governance Committee, elected Asa Lanum as a new director.

In addition, our Board of

Directors appointed Mr.

Lanum, who has served as our interim Chief Executive Officer since August 2010, as our permanent Chief Executive Officer.

In connection with such appointment, we agreed to pay Mr.

Lanum an annual base salary of

$325,000 and awarded him options to purchase 250,000 shares of the Companys common stock.

Effective April 22, 2011, Peter C.

Skarzynski resigned from his position as Managing Director of the strategic services division.

In accordance with the terms of his employment agreement, Mr.

Skarzynski remains bound by a covenant regarding the protection of our confidential

information and a one-year covenant not to solicit our clients or employees.

Skarzynski continues to act as a consultant for us.

April 22, 2011, we appointed Gary Getz as Managing Director of the strategic services division.

Getz has held a management position at Innovaro since its acquisition of Strategos in 2008, and held a management position at Strategos

since that companys founding.

In June 2011, our stockholders approved an amendment and restatement of our three existing equity

compensation plans as one plan, the Innovaro, Inc.

Equity Compensation Plan (the Equity Compensation Plan).

The maximum number of shares available for issuance under the Equity Compensation Plan is 4,626,274, which is the total number of

shares available under the existing Non-Qualified Option Plan, Employee Option Plan and Restricted Stock Plan.

The options and restricted stock previously granted under the three existing equity compensation plans are counted in determining the

shares that remain available for issuance under the Equity Compensation Plan.

The Compensation Committee of the Companys Board of Directors determines those officers, employees, directors and consultants who are eligible to participate in the

Equity Compensation Plan.

The amendment and restatement of the three existing plans as the Equity Compensation Plan did not increase the number of shares of common stock authorized for issuance as stock-based incentive compensation, but gives the

Compensation Committee greater flexibility to make grants of non-qualified options, incentive stock options or restricted stock as it deems appropriate, since one maximum limit will apply to all three types of stock-based incentive compensation.

We are continuing the development of our innovation management software platform, Innovaro LaunchPad, which is designed to enhance and complement our innovation service offerings to clients.

completed an external review by user clients of version one of the software, which is evolving based on their feedback, and are moving toward the launch of Innovaro LaunchPad in the marketplace.

Financial Condition

total assets were $24.1 million as of September 30, 2011 and $24.7 million as of December 31, 2010.

As of September 30, 2011, we had $1.5 million in cash and cash equivalents, $1.2 million in accounts receivable and contracts in

process, $3.7 million in accounts payable, accrued expenses and accrued bonus and $5.4 million in total debt outstanding.

As of December 31, 2010, we had $263,000 in cash and cash equivalents, $2.0 million in accounts receivable and contracts

in process, $1.5 million in accounts payable and accrued expenses and $5.8 million in total debt outstanding.

As of September 30, 2011, we had a working capital deficit of $1.4 million and an accumulated deficit of $75.4 million.

Page 16 of 30

Our total assets

were $20.2 million and $20.8 million as of March 31, 2012 and December 31, 2011, respectively.

As of March 31, 2012, we had $162,000 in cash, $1.0 million in accounts receivable and contracts in process, $2.9 million in accounts

payable, accrued expenses and accrued bonus, and $5.6 million in total debt outstanding.

As of December 31, 2011, we had $268,000 in cash, $1.3 million in accounts receivable and contracts in process, $2.5 million in accounts payable, accrued

expenses and accrued bonus, and $5.6 million in total debt outstanding.

As of March 31, 2012, we had a working capital deficit of $2.2 million and an accumulated deficit of $77.8 million.

Results of Operations

Three Months Ended

(in thousands, except percentages)

Strategic services

Technology services

Intelligence and insights services

Total revenue

1 unchanged sentence

Our strategic services revenue is derived from consulting services we provide to our clients.

Our strategic services revenue decreased by $438,000 for the three months ended September 30, 2011 in

comparison to the three months ended September 30, 2010.

The decrease is the result of this division having a 40% decline in the value of contracts in process during the three months ended September 30, 2011 in comparison to the same

period of 2010.

However, certain of the current year contracts have required the work of a specialist consultant who bills out at a significantly higher rate than that of the other consultants, which partially offset the decrease in revenue by

approximately $225,000 for the three months ended September 30, 2011 over the same period of 2010.

Our strategic services revenue

increased by $3.8 million for the nine months ended September 30, 2011 in comparison to the nine months ended September 30, 2010.

The increase is the result of this division having a significant number of new contracts with a higher

average value during the nine months ended September 30, 2011 in comparison to the same period of 2010.

We attribute the increased contract level in 2011 to a renewed interest in innovation efficiency and new product development in the U.S.

In addition, certain of the current year contracts have required the work of a specialist consultant who bills out at a significantly higher rate than that of the other consultants, which contributed to an increase in revenue of

approximately $574,000 for nine months ended September 30, 2011 over the same period of 2010.

An increase in billable expenses related to overseas travel and lodging contributed to an increase in revenue of approximately $714,000 for the nine

months ended September 30, 2011 over the same period of 2010.

Our strategic services revenue in recent years has largely been dependent

on the efforts of certain key consulting professionals whose employment contracts with us expired in April 2011.

We were able to retain the majority of these consulting professionals under new employment contracts or consulting contracts in order to

maintain the level of strategic services revenue we have generated in recent years.

We expect that our strategic services revenue will

decrease from that of the three months ended September 30, 2011 for the remainder of 2011.

Technology Services

Our technology services revenue is derived from a combination of global technology licensing services, online marketplace fees, foresight and trend

research revenue and intellectual property (IP) consulting revenue.

Our technology services revenue decreased by $348,000 for the three months ended September 30, 2011 in comparison to the three months ended September 30, 2010.

The decreased revenue is primarily a result of a reduction of $27,000 in monthly fees for our global technology licensing services, a reduction of $26,000 in online marketplace fees, and a reduction of $342,000 in foresight and trend research

revenue, partially offset by an increase of $44,000 in intellectual property consulting revenue.

Our technology services revenue decreased by

$828,000 for the nine months ended September 30, 2011 in comparison to the nine months ended September 30, 2010.

The decreased revenue is primarily a result of a reduction of $75,000 in monthly fees for our global technology licensing

services, a reduction of $110,000 in online marketplace fees, a reduction of $530,000 in foresight and trend research revenue, and a reduction of $103,000 in intellectual property consulting revenue.

The decreased revenue throughout this division

for the three and nine months ended September 30, 2011 in comparison to the same periods of 2010 results from a reduction in the number of personnel selling and fulfilling projects, as well as budget cuts for a large group of our customers.

This has had a significant, direct impact on new sales and renewals for this line of business.

We expect that our technology services revenue

will remain consistent with that of the three months ended September 30, 2011 for the remainder of 2011.

Our strategic services revenue decreased by $2.3 million for the three months ended March 31, 2012 in

comparison to the three months ended March 31, 2011.

This decrease is the result of the Company having a significantly lower number of contracts in the first quarter of 2012 than we had in the first quarter of 2011.

We attribute the decreased

contract level in 2012 to the departure of certain consulting professionals and a reduction in recurring customers.

Our strategic services revenue in recent years has largely been dependent on the efforts of certain key consulting professionals

whose employment contracts with us expired in April 2011.

We expect that our strategic services revenue for the remainder of 2012 will

increase over the first quarter of 2012, but will not reach 2011 levels.

Intelligence and Insights Services

Our intelligence and insights services revenue is derived from a combination of global technology licensing services, online marketplace fees, foresight

and trend research revenue and IP consulting revenue.

Our intelligence and insights services revenue decreased by $62,000 for the three months ended March 31, 2012 in comparison to the three months ended March 31, 2011.

The decreased

revenue is primarily a result of reductions of $65,000 in foresight and trend research revenue and $68,000 in online marketplace fees, partially offset by a $71,000 increase in our IP consulting revenue.

The decreased revenue results from a

reduction in the number of personnel selling and fulfilling projects, which has had a significant, direct impact on new sales for this line of business.

Page 12 of 22

We expect that our intelligence and insights services revenue will remain consistent with the first quarter

of 2012 for the remainder of 2012.

Direct Costs of Revenue

Three Months Ended

(in thousands, except percentages)

September 30,

Direct costs of revenue - Strategic services

Direct costs of revenue - technology services

Direct Costs of Revenue - Strategic Services

Direct costs of revenue - strategic services are comprised of salaries and related taxes, bonuses, certain outside services and other business development costs related to our strategic services business.

Direct costs of revenue - Intelligence and insights services

Direct costs of revenue - strategic services are comprised of salaries and related taxes, bonuses, certain outside

services and other business development costs related to our strategic services business.

The most significant portion of direct costs of revenue - strategic services is comprised of consulting personnel compensation, which includes bonuses.

Direct costs of revenue - strategic services included a bonus accrual of $805,000 and $2.3

million for the three and nine months ended September 30, 2011, respectively.

In comparison, direct costs of revenue - strategic services included a bonus accrual of $1.8 million for each of the three and nine months ended September 30,

In connection with the expiration of the employment contracts for the management team of the strategic services division in the second

quarter of 2011, we have retained certain of these former professionals as consultants.

The pay rate these consultants receive is higher than the pay rate of most other consultants we use due to their experience and relationship with the customers.

In addition, certain of the contracts have required the work of a specialist consultant whose cost is much higher than that of the other consultants.

We also needed to hire more consultants during 2011 as a result of the high number of contracts in

process and a reduction in the number of employees.

Direct costs of revenue - strategic services decreased by $369,000 for the three months

ended September 30, 2011 in comparison to the three months ended September 30, 2010.

The decrease is primarily related to a $1.0 million decrease in the bonus accrual and a $250,000 decrease in salaries, partially offset by an $859,000

increase in outside consultant expenditures as discussed above.

The gross margin for the strategic services business decreased to 5% for the

three months ended September 30, 2011 in comparison to 6% for the three months ended September 30, 2010.

This gross margin level for the three months ended September 30, 2011 and 2010 is a direct result of the bonus accrual during

these periods.

Direct costs of revenue - strategic services increased by $3.6 million for the nine months ended September 30, 2011 in

comparison to the nine months ended September 30, 2010.

The increase is primarily related to a $533,000 increase in the bonus accrual, a $2.5 million increase in outside consultant expenditures as discussed above, and a $714,000 increase in

overseas travel and lodging, partially offset by a $135,000 decrease in salaries.

The gross margin for the strategic services business

decreased to 15% for the nine months ended September 30, 2011 in comparison to 21% for the nine months ended September 30, 2010.

The decrease is primarily related to the bonus accrual and utilization of consultants at higher than normal

We expect that our direct costs of revenue - strategic services will decrease from that of the three months ended September 30,

2011 for the remainder of 2011.

Direct Costs of Revenue - Technology Services

Direct costs of revenue - technology services are comprised of certain salaries and related taxes, commissions, certain outside services and other direct costs related to technology services.

of revenue - technology services decreased by $61,000 for the three months ended September 30, 2011 in comparison to the three months ended September 30, 2010.

In addition, direct costs of revenue - technology services decreased by

$237,000 for the nine months ended September 30, 2011 in comparison to the nine months ended September 30, 2010.

The decreases primarily relate to a reduction in sales and project management personnel, as well as the reduced utilization of

outside contractors, related to the decline in revenue.

The gross margin for the technology services business decreased to 42% for the three

months ended September 30, 2011 in comparison to 58% for the three months ended September 30, 2010.

In addition, the gross margin for the technology services

Page 18 of 30

business decreased to 43% for the nine months ended September 30, 2011 in comparison to 52% for the nine months ended September 30, 2010.

These decreases are related to the

aforementioned reduction in sales personnel and certain customer budgets having had a more negative impact on new sales and renewals for this business as compared to the impact on the direct costs of revenue for this business.

We expect that our direct costs of revenue - technology services will remain consistent with that of the three months ended September 30, 2011 for

the remainder of 2011.

costs of revenue - strategic services decreased by $858,000 for the three months ended March 31, 2012 in comparison to the three months ended March 31, 2011.

The decrease is primarily related to a reduction in the use of outside

consultants due to the lower number of jobs in process during the first quarter of 2012.

In addition, we had a reduction in salaries expense related to the departure of certain consulting professionals in 2011.

We expect that our direct costs of

revenue - strategic services will increase over the first quarter of 2012 for the remainder of 2012 in anticipation of an increase in related revenue.

Direct costs of revenue - intelligence and insights services are comprised of certain salaries and related taxes, commissions, certain outside services and other direct costs related to our intelligence

and insights services business.

Direct costs of revenue - intelligence and insights services remained consistent for the three months ended March 31, 2012 in comparison to the three months ended March 31, 2011.

We expect that our direct

costs of revenue - intelligence and insights services will remain consistent with the first quarter of 2012 for the remainder of 2012.

Salaries and Wages

Three Months Ended

(in thousands, except percentages)

3 unchanged sentences

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

Salaries and wages decreased by $211,000 for the three months ended September 30, 2011 in comparison to the three months ended September 30, 2010.

The decrease relates to a $209,000 reduction in officers salaries as a

result of severance expense related to our former CEO in the third quarter of 2010 and a $130,000 reduction in administrative staff, partially offset by an increase of $226,000 in stock compensation expense that resulted from a change in estimate

related to stock options in the third quarter of 2010.

Salaries and wages decreased by $870,000 for the nine months ended September 30,

2011 in comparison to the nine months ended September 30, 2010.

The decrease relates to a $342,000 reduction in officers salaries as a result of a CEO change and a $407,000 reduction in administrative staff, partially offset by an

increase of $194,000 in stock compensation expense that resulted from a change in estimate related to stock options in the third quarter of 2010.

We expect that our salaries and wages will remain consistent with that of the three months ended September 30, 2011 for the remainder of 2011.

Salaries and wages increased by $54,000 for the three months ended March 31, 2012 in comparison to the three months ended March 31, 2011.

The increase is primarily related to a $66,000 increase in officer salaries and a

$16,000 increase in stock compensation expense as a result of having hired our CEO in April 2011.

These increases were partially offset by a $28,000 decrease in administrative and other staff.

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

Professional Fees

Three Months Ended

(in thousands, except percentages)

3 unchanged sentences

Professional fees

decreased by $40,000 for the three months ended September 30, 2011 in comparison to the three months ended September 30, 2010.

The majority of the decrease is related to a $53,000 reduction in accounting fees as a result of our having

become a smaller reporting company (a designation under the federal securities laws that impacts the level of our disclosure requirement thereunder) during 2010.

As a smaller reporting company, we are subject to a more streamlined reporting regime

than the reporting regime for larger companies, including the elimination of the requirement to have our auditors audit our internal control over financial reporting.

Professional fees decreased by $223,000 for the nine months ended September 30, 2011 in comparison to the nine months ended September 30, 2010.

Valuation expenses were reduced by $38,000 because

our investments no longer require outside valuations on a quarterly basis.

Accounting fees were reduced by $132,000 as a result of our having become a smaller reporting company during 2010.

Legal fees were reduced by $52,000 because of costs

incurred during the nine months ended September 30, 2010 related to the preparation of our restricted stock plan and the settlement of a severance liability related to our former CEO that were not repeated during the nine months ended

September 30, 2011.

decreased by $9,000 for the three months ended March 31, 2012 in comparison to the three months ended March 31, 2011, primarily as a result of a reduction in legal fees in the first quarter of 2012.

We expect that our professional fees will remain consistent with the first quarter of 2012 for the remainder of 2012.

Page 13 of 22

We expect that our professional fees will remain consistent with that of the three months ended

September 30, 2011 for the remainder of 2011.

Research and Development

Three Months Ended

(in thousands, except percentages)

1 unchanged sentence

As a percent of revenue

Research and development costs include salaries, outside services, travel and other costs related to the development of

our LaunchPad software platform, which is designed to enhance and complement our innovation services offerings to clients.

Research and development costs decreased by $270,000 and $187,000 for the three and nine months ended September 30, 2011

in comparison to the three and nine months ended September 30, 2010, respectively.

The decreases are primarily related to the capitalization of $185,000 in software costs in the third quarter of 2011 rather than the allocation of such costs to

research and development expense.

In addition, we scaled back the amount of resources allocated to the development of LaunchPad to approximately $200,000 in the third quarter of 2011.

In accordance with accounting guidance, we expense all costs incurred to establish the technological feasibility of our LaunchPad software platform as research and development expenses.

Having established

a working model of LaunchPad Version 1.0, all costs related to the refinement of this product will be capitalized until general release of the product to customers.

We will continue to incur costs related to the refinement of Version 1.0 while

proceeding with the development of the next components of LaunchPad with Version 2.0.

The costs related to the development of Version 2.0 will be expensed as research and development until we have completed a working model.

We expect to incur an

additional $150,000 in product development of Version 2.0 and refinement of Version 1.0 during the fourth quarter of 2011.

Since a portion of these costs will be capitalized, we expect that research and development expense will remain relatively

consistent with that of the three months ended September 30, 2011 for the remainder of 2011.

Research and development expense includes salaries, outside services, travel and other costs related to the development

of our LaunchPad software platform, which is designed to enhance and complement our innovation services offerings to clients.

Research and development costs decreased by $203,000 for the three months ended March 31, 2012 in comparison to the

three months ended March 31, 2011.

The decrease is partially related to the capitalization of $45,000 in software development costs in the first quarter of 2012 rather than the allocation of such costs to research and development expense.

addition, we scaled back the amount of resources allocated to the development of LaunchPad from $300,000 in the first quarter of 2011 to approximately $165,000 in total for the first quarter of 2012.

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

Sales and Marketing

Three Months Ended

(in thousands, except percentages)

1 unchanged sentence

As a percent of revenue

Sales and marketing expenses include advertising, marketing, commissions paid to outside service providers, certain

Sales and marketing expense includes advertising, marketing, commissions paid to outside service providers, certain

travel and other business development expenses.

Sales and marketing expenses increased by $95,000 for the three months ended September 30, 2011 in comparison to the three months ended September 30, 2010.

The increase relates primarily to

$86,000 in marketing costs incurred during the three months ended September 30, 2011 in connection with an increase in marketing efforts.

In addition, we received a $45,000 credit against previously paid marketing costs during the three months

ended September 30, 2010, which reduced the expense in that period.

Sales and marketing expenses decreased by $229,000 for the nine

months ended September 30, 2011 in comparison to the nine months ended September 30, 2010.

The decrease relates primarily to certain marketing costs incurred during the nine months ended September 30, 2010, including $89,000 in

rebranding costs and $150,000 for partnering with external search partners, which were not repeated during the nine months ended September 30, 2011.

This decrease in costs was partially offset by $86,000 in marketing costs incurred during the

nine months ended September 30, 2011 in connection with an increase in marketing efforts.

We expect that our sales and marketing costs

for the remainder of 2011 will remain consistent with that of the three months ended September 30, 2011.

Page 20 of 30

Sales and marketing expense increased by $5,000 for the three months ended March 31, 2012 compared to the three months ended March 31, 2011.

The increase relates primarily to increased

participation in conferences in the first quarter of 2012.

We expect that our sales and marketing expense will increase over the first

quarter of 2012 for the remainder of 2012.

General and Administrative

Three Months Ended

(in thousands, except percentages)

1 unchanged sentence

As a percent of revenue

General and administrative expenses decreased by $86,000 for the three months ended September 30, 2011 in comparison

to the three months ended September 30, 2010.

The decrease relates to a $17,000 reduction in insurance and other employee related costs due to having fewer employees;

a $28,000 reduction in investor relations costs;

a $56,000 decrease in

outside services as a result of having hired our CEO in the second quarter of 2011 as opposed to paying him as a consultant;

as well as a continued overall company plan to reduce all aspects of overhead;

partially offset by a $28,000 increase in

real estate taxes.

General and administrative expenses decreased by $235,000 for the nine months ended September 30, 2011 in comparison

to the nine months ended September 30, 2010.

The decrease relates to a $148,000 reduction in insurance and other employee related costs due to having fewer employees;

a $31,000 reduction in printing costs related to the proxy and annual report;

a $46,000 reduction in investor relations costs;

an $81,000 decrease in outside services as a result of having hired our CEO in the second quarter of 2011 as opposed to paying him as a consultant;

as well as a continued overall company plan to

reduce all aspects of overhead;

partially offset by a $38,000 increase in real estate taxes and a $25,000 increase related to moving and relocation expenses for our new CEO and Senior VP of Sales.

We expect that our general and administrative costs will remain consistent with that of the three months ended September 30, 2011 for the remainder

General and administrative expense decreased by $27,000 for the three months ended March 31, 2012 compared to the

three months ended March 31, 2011.

The decrease relates to a $30,000 reduction in insurance and other employee related costs due to having fewer employees and a $32,000 decrease in outside services and travel expense as a result of having hired

our CEO in the second quarter of 2011 as opposed to paying him as a consultant;

partially offset by an increase in bad debt expense of $42,000.

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

Depreciation and Amortization

Three Months Ended

(in thousands, except percentages)

1 unchanged sentence

As a percent of revenue

Depreciation and amortization decreased by $91,000 for the three months ended September 30, 2011 in comparison to

the three months ended September 30, 2010.

Amortization expense decreased by $77,000 as a result of impairment charges related to our intangible assets that were incurred in 2010.

Depreciation expense decreased by $14,000 as a result of

impairment charges related to our fixed assets that were incurred in 2010.

Depreciation and amortization decreased by $208,000 for the nine

months ended September 30, 2011 in comparison to the nine months ended September 30, 2010.

Amortization expense decreased by $172,000 as a result of impairment charges related to our intangible assets that were incurred in 2010.

Depreciation expense decreased by $36,000 as a result of impairment charges related to our fixed assets that were incurred in 2010.

that our depreciation and amortization will remain consistent with that of the three months ended September 30, 2011 for the remainder of 2011.

Impairment Loss

(In thousands, except percentages)

Impairment loss

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At the end of the third quarter of 2010, management concluded that the significant decline in our stock

price subsequent to June 30, 2010 was other than short-term in nature.

This conclusion, coupled with the severity of the decline, triggered a review for impairment outside of our next scheduled annual impairment evaluation date of

December 31, 2010.

A decline in stock price may be an indicator of an adverse change in business climate and it affects market capitalization and may affect fair value measurements for reporting units.

Due to the reduction in our market

capitalization, third party valuations were obtained to assist in the determination of fair value for our reporting units.

As a result of a reduction in fair value of our reporting units, management determined that the implied fair value of our

goodwill and intangible assets was less than their respective carrying values by approximately $10.3 million.

We recognized impairment of approximately $9.4 million to our goodwill and impairment of approximately $971,000 to our intangible assets in

the three and nine months ended September 30, 2010.

We also recorded impairment of approximately $1.3 million to our fixed assets during

the three and nine months ended September 31, 2010.

The commercial real estate market for certain of our properties had taken a significant downturn that was not expected to reverse in the near future.

As a result, management determined that

the decrease in fair value of the property was other-than-temporary.

The impairment loss was determined based on third party valuations of the respective property.

We did not have any events occur during the nine months ended September 30, 2011 that would trigger a review for impairment outside of our next scheduled annual impairment evaluation date of

December 31, 2011.

Depreciation and amortization decreased by $50,000 for the three months ended March 31, 2012 in

comparison to the three months ended March 31, 2011.

Amortization expense decreased by $39,000 as a result of the impairment charges related to our intangible assets that were incurred in 2011.

Depreciation expense decreased by $11,000.

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

Other (Income) Expense

Three Months Ended

(in thousands, except percentages)

1 unchanged sentence

Other (income) expense includes rental income, gains and losses related to adjusting our derivative liabilities to fair

value each reporting period, capital gains and losses and other miscellaneous income.

Other (income) expense changed by $(881,000) for the three months ended September 30, 2011 in comparison to the three months ended September 30, 2010.

The variance is primarily attributable to a $44,000 increase in rental income and a $1.1 million decrease in net capital loss, partially offset by a $263,000 decrease in net gain on adjustment of our derivative liabilities.

Other (income) expense changed by $505,000 for the nine months ended September 30, 2011 in comparison to the nine months ended September 30,

The variance is attributable to a $1.7 million decrease in net gain on adjustment of our derivative liabilities, partially offset by a $98,000 increase in rental income and a $1.1 million decrease in net capital loss.

Other (income) expense may continue to fluctuate significantly as the value of our derivative liability increases or decreases in connection with changes

in our stock price.

value, capital gains and losses and other miscellaneous income (losses).

Other (income) expense increased by $128,000 for the three months ended March 31, 2012 in comparison to the three months ended March 31, 2011.

The net other income of

$121,000 for the three months ended March 31, 2012 is comprised primarily of rental income of $101,000 and miscellaneous income of $20,000.

The net other expense of $6,700 for the three months ended March 31, 2011 is comprised primarily of

a loss of $72,000 related to adjusting our derivative liabilities to fair value and miscellaneous other net losses of $5,300, partially offset by rental income of $71,000.

Interest Expense, Net

Three Months Ended

(in thousands, except percentages)

Interest expense, net

Interest expense, net decreased by $129,000 for the three months ended September 30, 2011 in comparison to the three

months ended September 30, 2010.

The decrease is primarily attributable to lower interest expense from the amortization of our debt discount of $122,000.

Interest expense, net decreased by $182,000 for the nine months ended September 30, 2011 in comparison to the nine months ended September 30, 2010.

The decrease is primarily attributable to

lower interest expense on long-term debt of $42,000 and lower interest expense from the amortization of our debt discount of $148,000.

Page 22 of 30

Interest expense, net decreased by $7,000 for the three months ended March 31, 2012 in comparison to the three

months ended March 31, 2011.

The net interest expense of $135,000 for the three months ended March 31, 2012 is primarily comprised of interest expense on long-term debt of $128,000 and amortization of our debt discount of $33,000,

partially offset by interest income on our note receivable of $26,000.

The net interest expense of $142,000 for the three months ended March 31, 2011 is primarily comprised of interest expense on long-term debt of $109,000 and amortization of

our debt discount of $33,000.

Liquidity and Capital Resources

Cash flows from operating activities of $2,031,000 for the nine months

ended September 30, 2011 increased $4,891,000 from $(2,860,000) for the nine months ended September 30, 2010.

Total cash flows from operations of $2,031,000 in this period are primarily attributable to:

$1.1 million in non-cash depreciation and amortization;

$911,000 non-cash loss on derivative liabilities;

$408,000 in non-cash stock-based compensation expense related to vesting options and restricted stock;

Cash flows from operating activities of $31,000 for the three months

ended March 31, 2012 decreased $660,000 from $692,000 for the three months ended March 31, 2011.

Total cash flows from operations of $31,000 in the current period are primarily attributable to:

$324,000 in non-cash depreciation and amortization;

$98,000 in non-cash stock-based compensation expense related to vesting options;

$298,000 decrease in accounts receivable and contracts in process;

$219,000 decrease in prepaid expenses and other assets;

$2.2 million increase in accounts payable, accrued expenses and accrued bonus;

partially offset by a $3.5 million net loss.

Cash flows from investing activities of $(220,000) for the nine months ended September 30, 2011 decreased $985,000 from $765,000 for the nine months

ended September 30, 2010.

Total cash flows from investing activities of $(220,000) in this period are primarily related to the capitalization of software development costs.

Cash flows from financing activities of $(525,000) for the nine months ended September 30, 2011 decreased $2,690,000 from $2,165,000 for the nine months ended September 30, 2010.

flows from financing activities of $(525,000) in this period are related to principal payments on long-term debt.

Software Development

We are continuing the development of our LaunchPad software, which is designed to enhance and complement our innovation service

offerings to clients.

We will continue to incur costs related to the refinement of Version 1.0 while proceeding with the development of the next components of LaunchPad with Version 2.0.

As of September 30, 2011, we had invested $2.1

million in this software platform.

We expect to incur approximately $150,000 in additional expenditures for product development of Version 2.0 and refinement of Version 1.0 during the fourth quarter of 2011.

$138,000 increase in deferred revenue;

$471,000 increase in accounts payable and accrued expenses.

Partially offset by:

$1.3 million net operating loss.

Cash flows from investing activities of $(30,000) for the three months ended March 31, 2012 decreased $7,000 from $(23,000) for the three months ended March 31, 2011.

Total cash flows from

investing activities of $(30,000) are primarily attributable to capitalization of software development costs.

Cash flows from financing

activities of $(101,000) for the three months ended March 31, 2012 increased $191,000 from $(292,000) for the three months ended March 31, 2011.

Total cash flows from financing activities of $(101,000) are related to principal payments on

long-term debt.

Page 15 of 22

Software Development Costs

We are continuing the development of our LaunchPad software, which is designed to enhance and complement our innovation service offerings to clients.

We will continue to incur costs related to the

refinement of Version 1.0 while proceeding with the development of the next components of LaunchPad with Version 2.0.

As of March 31, 2012, we had invested $2.2 million in this software platform.

We expect to incur approximately $300,000

in additional expenditures for product development of Version 2.0 and refinement of Version 1.0 during 2012.

We have incurred recurring losses and negative cash flows from operations.

We incurred a net loss of approximately $1.3 million

and $4.9 million for the three months ended March 31, 2012 and the year ended December 31, 2011, respectively.

In addition, we have a working capital deficit of approximately $2.2 million and an accumulated deficit of approximately $77.8

million as of March 31, 2012.

These factors raise doubt about our ability to continue as a going concern.

Our primary cash

requirements include working capital, research and development expenditures, principal and interest payments on indebtedness, and employee bonuses.

Our primary sources of funds are cash received from customers in connection with operations and, to a

lesser extent, proceeds from the sale from time to time of our investments.

As of September 30, 2011, we had $1.5 million in cash and cash equivalents, $1.2 million in accounts receivable and contracts in process, $510,000 in investments, and a

working capital deficit of $1.4 million.

We currently intend to fund our liquidity needs, including our software development costs, with

existing cash and cash equivalent balances, cash generated from operations, collections of our existing receivables and the potential sales of our investments.

We expect that our recent reductions in costs, coupled with our expected revenue, will be

sufficient to fund our scheduled debt service payments of $109,000 and our operating requirements for the next twelve months.

However, we are also exploring opportunities for obtaining a credit facility with certain financial institutions.

face a more restricted cash flow scenario than projected during the next twelve months, we have the capability to delay all cash intensive activities, including our software development costs, and will look to reduce costs further.

requirements include working capital, research and development expenditures, principal and interest payments on indebtedness, and employee salaries and bonuses.

Our primary sources of funds are cash received from customers in connection with

operations and, to a lesser extent, proceeds from the sale from time to time of our investments.

We currently intend to fund our liquidity

needs, including our software development costs, with existing cash balances, cash generated from operations, collections of our existing receivables and the potential sales of our investments.

Given our cash position, working capital deficit and

expected revenues in the near term, we do not expect that we will be able to fund our scheduled debt service payments of $1.6 million and our operating requirements for the next twelve months.

We are exploring opportunities for obtaining a credit

facility, as well as selling equity securities and certain other assets.

In addition, we have the capability to delay all cash intensive activities, including our software development costs, and will look to reduce costs further.

However, if such

measures prove inadequate, we could face liquidity problems and might be required to reduce or delay planned capital expenditures and other initiatives, sell assets, restructure or refinance our debt or seek additional equity capital, and we may be

unable to take any of these actions on satisfactory terms or in a timely manner.

measures prove inadequate, we could face liquidity problems and might be required to reduce or delay planned capital expenditures and other initiatives and sell assets, and we may be unable to take any of these actions on satisfactory terms or in a

timely manner.

Further, any of these actions may not be sufficient to allow us to service our debt obligations or may have an adverse impact on our business.

Our failure to generate

sufficient cash from our operations could have a material adverse effect on us.

Page 23 of 30

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.

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

Critical Accounting Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (GAAP) requires management to make assessments, estimates

and assumptions that affect the amounts reported in the financial statements.

We evaluate the accounting policies and estimates used to prepare the financial statements on an ongoing basis.

Critical accounting estimates are those that

require managements 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, 2010.

Recently Issued Accounting Pronouncements

In May 2011, the Financial Accounting Standards Board (FASB) issued new guidance that expands existing disclosure requirements for fair value

measurements and makes other amendments that could change how the fair value measurement guidance is applied.

The guidance is effective for us with the reporting period beginning in January 1, 2012.

The adoption of this guidance is not expected

to have an impact on our operations.

In June 2011, the FASB issued new guidance that 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

The guidance is effective for us with the reporting period beginning in January 1, 2012.

The adoption of this guidance will change the way we present comprehensive income in our financial statements.

In September 2011, the FASB issued new guidance for goodwill impairment testing .

Under the revised guidance, entities testing goodwill for

impairment have the option of performing a qualitative assessment before calculating the fair value of a reporting unit in step 1 of the goodwill impairment test.

If entities determine, on the basis of qualitative factors, that the fair value of the

reporting unit is more likely than not greater than the carrying amount, a quantitative calculation is not needed.

The guidance is effective for us with the reporting period beginning in January 1, 2012 with early adoption permitted.

adoption of this guidance is not expected to have an impact on our operations.

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.

evaluate the accounting policies and estimates used to prepare the financial statements on an ongoing basis.

Critical accounting estimates are those that require managements most difficult, complex, or subjective judgments and have the

most potential to impact our financial position and operating results.

For a detailed discussion of our critical accounting estimates, see our Annual Report on Form 10-K for the year ended December 31, 2011.

There have been no material changes

to our critical accounting estimates during the three months ended March 31, 2012.

Quantitative and Qualitative Disclosures about Market Risks

Not applicable.

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 1. Financial Statements