What changed in this filing

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Item 1. Financial Statements

2012-08-14 compared with 2012-05-10 · 537 added, 331 removed, 247 unchanged (78% of the section changed)

6 unchanged sentences

Available-for-sale securities

Prepaid expenses and other assets

Prepaid expenses and other current assets

Note receivable and accrued interest

Current assets held for sale

Total current assets

3 unchanged sentences

Intangible assets, net

Noncurrent assets held for sale

Current liabilities:

4 unchanged sentences

Current maturities of long-term debt

Current liabilities held for sale

Total current liabilities

1 unchanged sentence

Deferred tax liability

Noncurrent liabilities held for sale

Total liabilities

3 unchanged sentences

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

15,159,544 shares issued;

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

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

15,551,410 and 15,159,544 shares issued;

15,456,410 and 15,039,544

shares outstanding at June 30, 2012 and December 31, 2011, respectively

Additional paid-in capital

6 unchanged sentences

INNOVARO, INC.

Consolidated Statements of Operations and Comprehensive Income

Three Months Ended March 31,

Consolidated Statements of Comprehensive Income

Three Months Ended June 30,

Six Months Ended June 30,

Strategic services

8 unchanged sentences

Depreciation and amortization

Impairment loss

Other (income) and expense:

1 unchanged sentence

Interest expense, net

Loss before income taxes

Loss from continuing operations before income taxes

Provision for income tax expense (benefit)

Loss from continuing operations

Income (loss) from discontinued operations, net of tax

Net loss attributable to the noncontrolling interest

Net loss attributable to Innovaro stockholders

Other comprehensive income

Other comprehensive income (loss)

Comprehensive loss

Net loss attributable to Innovaro stockholders per share:

Basic and diluted

Basic and diluted income (loss) per share:

Loss from continuing operations

Income (loss) from discontinued operations

Weighted average shares outstanding:

3 unchanged sentences

Consolidated Statements of Cash Flows

Three Months Ended March 31,

Six Months Ended June 30,

Operating Activities:

Net loss attributable to Innovaro stockholders

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

Net loss attributable to noncontrolling interest

Income from discontinued operations, net of tax

Loss from continuing operations

Adjustments to reconcile net loss from continuing operations to net cash flows from operating activities:

Depreciation and amortization

Amortization of debt discount from investor warrants

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

Stock issued for services

Goodwill impairment

Intangible asset impairment

Loss (gain) on sale and impairment of available-for-sale securities

Loss on derivative liabilities

5 unchanged sentences

Deferred revenue

Accounts payable, accrued expenses and accrued bonus

Net cash flows from operating activities

Accounts payable and other liabilities

Net cash flows from operating activities of continuing operations

Investing Activities:

2 unchanged sentences

Proceeds from sale of available-for-sale securities

Net cash flows from investing activities

Net cash flows from investing activities of continuing operations

Financing Activities:

Net proceeds from stock offering

Payments on long-term debt

Net cash flows from financing activities

Effect of foreign exchange rates on cash

Increase (decrease) in cash

Net cash flows from financing activities of continuing operations

Net cash flows from continuing operations

Net cash flows from discontinued operations

Increase in cash

Cash at beginning of period

Cash at end of period

See accompanying notes

INNOVARO, INC.

Consolidated Statements of Cash Flows (continued)

Six Months Ended June 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

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 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.

(the Company, we, us or Innovaro) as of June 30, 2012 and 2011 and for the three and six 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 six months ended June 30, 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.

Innovaros mission is to help companies

innovate and grow.

Innovaro offers a comprehensive set of services and software to ensure 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.

These consolidated financial statements have been prepared in accordance with GAAP including the assumption of a going concern basis which contemplates

the realization of assets and the settlement of liabilities and commitments in the normal course of business.

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

The Company incurred a net loss of $(6,174,658) and

$(4,920,723) for the six months ended June 30, 2012 and the year ended December 31, 2011, respectively.

In addition, the Company has a working capital deficit of $(4,638,285) and an accumulated deficit of $(82,623,709) as of June 30,

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.

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

a lesser extent, proceeds from the sale from time to time of its investments and common stock.

The Company currently intends to fund its

liquidity needs, including its software development costs, with existing cash balances, cash generated from operations, collections of its existing receivables, the potential sales of its investments and the potential sale of certain of the

Companys operating divisions and assets.

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

$4,183,006 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

7 unchanged sentences

Principles of Consolidation

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

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

Innovaro Europe, Ltd.

1 unchanged sentence

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.

1 unchanged sentence

Accounts Receivable

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.

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.

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.

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.

The expense associated with the allowance for

doubtful accounts is recognized as general and administrative expense in the consolidated statements of comprehensive income.

The allowance for doubtful accounts was approximately $0 and $29,000 as of June 30, 2012 and December 31, 2011,

respectively.

Cost Method Investments

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.

Cost method investments were not evaluated for impairment as of June 30, 2012.

The Company does not estimate the fair value of a cost method investment if there are no identified events or changes in

circumstances that may have a significant adverse effect on the fair value because it is not practicable to estimate fair value on a quarterly basis.

Software Development Costs

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.

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

In addition, costs incurred to enhance existing software products or after the general release of the product are required to be expensed as incurred as research and development costs.

In accordance with FASB ASC Subtopic 985-20, the Company has expensed all costs incurred to establish the technological feasibility of Versions 1.0 and

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

In addition, the Company capitalized approximately $46,000 in software development costs related to Version 1.0 for the six months ended June 30,

The Company will amortize capitalized software costs by the greater of (a) the ratio that current gross revenues for a product

bear to the total of current and anticipated future gross revenues for that product, or (b) the straight-line method over the remaining estimated economic life of the product including the period being reported on.

During the second quarter of

2012, the Company had a general release of Version 1.0, and accordingly, began amortizing capitalized software costs.

The Company recorded amortization expense related to software development costs of approximately $8,000 for the six months ended

June 30, 2012.

Goodwill and Intangible Assets

In accordance with FASB ASC Topic 350 Intangibles Goodwill and Other , management performs interim assessments of goodwill if impairment indicators are present.

At the end of the second

quarter of 2012, management concluded that its revenue projections for its strategic services segment needed to be revised as a result of concerns that the business may not meet its revenue and cash flow projections for the year ending

December 31, 2012 due to a diminished backlog that is not expected to turn around in the near term.

This conclusion triggered a review for impairment outside of the Companys next scheduled annual impairment evaluation date of

December 31, 2012.

Management determined that the goodwill was impaired and the Company recognized impairment of $3,386,898 to its goodwill for the three and six months ended June 30, 2012.

In addition, subsequent to June 30, 2012,

the Company began discussions to sell certain of its intangible assets related to its strategic services segment.

Based on the terms of this discussion, management determined that these intangible assets were impaired.

The Company recognized

impairment of $1,370,000 to its intangible assets for the three and six months ended June 30, 2012.

The impairment expense is classified as impairment loss in the consolidated statements of comprehensive income for the three and six months

ended June 30, 2012.

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

Accrued expenses include approximately $409,000 and $213,000 of accrued salaries, vacation and related taxes as of June 30, 2012 and December 31, 2011.

Earnings per Share (EPS)

Basic earnings per share is computed on the basis of the weighted-average number of shares of common stock outstanding during the period.

Diluted earnings per share is computed on the basis of the

weighted-average number of shares of common stock outstanding plus the potential dilutive effect of outstanding stock options, warrants and unvested shares of restricted stock.

Components of basic and diluted per share data are

Three Months Ended June 30,

Six Months Ended June 30,

Weighted-average outstanding shares of common stock

2 unchanged sentences

Shares excluded from calculation of diluted EPS (1)

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.

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

Fair Value of Financial Instruments

The Companys financial instruments consist of investments, cash, accounts receivable, accounts payable, accrued expenses and long-term debt.

fair value of cash, accounts receivable, accounts payable and certain accrued expenses approximate their carrying amounts in the financial statements due to the short-term nature of such instruments.

The estimated fair value of the Companys

long-term debt is not materially different from its carrying value of $5,433,006 and $5,642,439 as of June 30, 2012 and December 31, 2011, respectively.

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

Fair Value Measurements and Disclosures .

In accordance with FASB ASC Topic 820, the Company groups financial assets and financial liabilities measured at fair value in three levels based on the principal markets in which the assets and

liabilities are transacted and the observability of the data points used to determine fair value.

The 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.

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 $6,552 and $55,038 as of June 30, 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 value of our equity interests in public companies for which

market quotations are readily available is based on quoted market prices for such equity interests.

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

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

Concentrations of Credit Risk

Financial instruments that the Company holds with significant credit risk include cash and investments.

3 unchanged sentences

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.

accounts as of June 30, 2012.

All of the Companys non-interest bearing cash balances were fully insured as of June 30, 2012.

Major Customers

The Company had three major customers during each of the three months ended June 30, 2012 and 2011 and two major customers during each of the six months ended June 30, 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 92% and 65% of the Companys revenue during the three months ended June 30,

2012 and 2011, respectively.

Major customers accounted for approximately 77% and 62% of the Companys revenue during the six months ended June 30, 2012 and 2011, respectively.

In addition, four customers accounted for approximately 70% of

accounts receivable as of June 30, 2012.

New Accounting Pronouncements

In January 2012, the Company adopted the provisions of FASB ASU 2011-05 Presentation of Comprehensive Income, which revises the manner in which

entities present comprehensive income in their financial statements.

The new guidance requires entities to report components of comprehensive income in either (1) a continuous statement of comprehensive income or (2) two separate but

consecutive statements.

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

Discontinued Operations

During the quarter ended June 30, 2012, as part of the Companys strategy to maximize cash flow as discussed in Note 1, the

Company decided to dispose of certain of its operating divisions that are included in its intelligence and insights segment.

On June 4, 2012, the Company entered into a non-binding letter of intent with IPFlow International, LLC to sell its

Pharmalicensing, Pharma Transfer, Global Licensing and Knowledge Express operating divisions and all related assets for $2,000,000.

Under the letter of intent, a definitive agreement had to be reached before August 4, 2012.

However, the Company

is in continuing discussions with the buyer and believes that it is probable that a definitive agreement will still be reached.

The agreement remains subject to customary conditions including negotiation of mutually agreeable terms, satisfactory

completion of due diligence and the buyer securing financing.

No assurances can be provided that a definitive agreement will be reached and that the sale will be completed.

The Company has determined that these divisions meet the criteria for classification as discontinued operations as of June 30, 2012.

Should the sale be completed, the operations and cash flows of

these divisions will be eliminated from the Companys ongoing operations, and the Company will have no significant continuing involvement in these divisions operations.

Based on an estimate of proceeds from the sale of these divisions,

the Company recognized impairment totaling $255,126 in the second quarter of 2012.

The Company has reflected the operations of these divisions as discontinued operations in the statements of comprehensive income for all periods presented.

addition, the Company has classified the assets and liabilities of the discontinued divisions as current and noncurrent assets and liabilities held for sale in the consolidated balance sheets for all periods presented.

Substantially all the cash

flows from discontinued operations for all periods presented relate to operating activities, and accordingly, the Company has presented cash flows from discontinued operations as a single line item in the consolidated statements of cash flows.

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The results of

operations of the aforementioned divisions are included in discontinued operations.

The summary comparative financial results of discontinued operations are as follows:

Three Months Ended June 30,

Six Months Ended June 30,

Long-lived asset impairment charge

Operating expense

Income (loss) before income taxes

Provision for income tax (expense) benefit

Income (loss) from discontinued operations, net of tax

The assets and liabilities classified as held for sale as of June 30, 2012 and

December 31, 2011 were as follows:

June 30, 2012

December 31, 2011

Receivables, net of allowance for doubtful accounts

Prepaid expenses and other current assets

Current assets held for sale

Property, plant and equipment

Intangible assets

Noncurrent assets held for sale

Accounts payable

Accrued expenses

Deferred revenue

Current liabilities held for sale

Deferred tax liability

Noncurrent liabilities held for sale

Contracts in Process

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

Contracts in process consist of the following as of June 30, 2012 and December 31,

Contract costs and estimated earnings on uncompleted contracts

1 unchanged sentence

Total contracts in process

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

Components of contracts in process consist of the following as of June 30,

2012 and December 31, 2011:

Costs and estimated earnings in excess of billings on uncompleted contracts

1 unchanged sentence

Total contracts in process

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Accumulated Other Comprehensive Income

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

The following table presents the components comprising the accumulated

other comprehensive income balance for the six months ended June 30, 2012.

Unrealized gain

available-for-sale

available-for-

sale securities

Foreign currency

comprehensive

Balance at December 31, 2011

Gain for the period

Balance at March 31, 2012

Gain (loss) for the period

Balance at June 30, 2012

Comprehensive loss for the six months ended June 30, 2012 per the consolidated statement of comprehensive income agrees to the gain (loss)

for the period related to the unrealized gain (loss) from available-for-sale securities.

The gain (loss) for the period related to the foreign currency translation adjustment is included in discontinued operations for the six months ended

June 30, 2012.

Securities Offering

On June 20, 2012, the Company entered into a securities purchase agreement with Messrs.

Mark Berset and Bruce Lucas, each a member of the

Companys Board of Directors, pursuant to which the Company agreed to issue them, in a registered offering, 271,740 shares of the Companys common stock priced at $0.92 per share along with Series A warrants to purchase up to 135,870

shares of common stock with an exercise price of $1.16 per share.

The Series A warrants are exercisable for a three-year period commencing on the date of their issuance.

If the average closing price of the shares is greater than or equal to $1.16

for any 20 consecutive trading day period after the date the Series A warrants are issued, then the Company may force the holders of the Series A warrants to exercise their warrants.

On June 20, 2012, the Company completed the offering and

raised gross proceeds of $250,000 before offering expenses.

These securities were offered pursuant to a registration statement previously filed and declared effective by the Securities and Exchange Commission.

Other Common Stock Issuances

second quarter of 2012, the Company issued 120,126 shares of common stock with a value of $97,499 to members of its Board of Directors and certain others in lieu of payment for services rendered.

Other (Income) Expense

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

Three Months Ended

Components comprising the balance in other (income) expense from continuing

operations for the three and six months ended June 30, 2012 and 2011 are as follows:

Three Months Ended June 30,

Six Months Ended June 30,

Loss (gain) on sale and impairment of investments

Dividend income

Loss on derivative liabilities

1 unchanged sentence

Other (income) expense

Page 12 of 29

Segment Reporting

4 unchanged sentences

The line of business management structure is the primary basis for which the allocation of resources and financial results are assessed.

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

For the Three Months Ended March 31, 2012

On June 4, 2012, the Company entered into a non-binding letter of intent to sell its Pharmalicensing, Pharma Transfer, Global Licensing and

Knowledge Express operating divisions and all related assets for $2,000,000 (see Note 3).

These divisions operate out of the United States and the United Kingdom as part of the intelligence and insights services segment.

The Company has reflected

the operations of these divisions as discontinued operations for all periods presented.

As a result, revenue, income (loss) from continuing operations before income taxes, and depreciation and amortization do not include amounts related to these

In addition, the Company has classified the assets and liabilities of these divisions as current and noncurrent assets and liabilities held for sale for all periods presented.

A summary of revenue and other

financial information by reportable geographic operating segment is shown below:

United States

Loss before income taxes

Long-lived assets as of June 30, 2012

Total assets as of June 30, 2012

Long-lived assets as of Dec 31, 2011

Total assets as of Dec 31, 2011

For the Three Months Ended June 30, 2012

United States

Loss from continuing operations before income taxes

Depreciation and amortization

For the Three Months Ended March 31, 2011

For the Three Months Ended June 30, 2011

United States

Loss before income taxes

Loss from continuing operations before income taxes

Depreciation and amortization

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

For the Three Months Ended March 31, 2012

For the Six Months Ended June 30, 2012

United States

Loss from continuing operations before income taxes

Depreciation and amortization

For the Six Months Ended June 30, 2011

United States

Loss from continuing operations before income taxes

Depreciation and amortization

The Company recognized a $4,756,898 impairment loss for the United States segment during the three and six months ended June 30, 2012.

Page 13 of 29

A summary of revenue and other financial information by reportable line of

business segment is shown below:

For the Three Months Ended June 30, 2012

Administrative

Income (loss) before income taxes

For the Three Months Ended March 31, 2011

Income (loss) from continuing operations before income taxes

Income (loss) from discontinued operations, net of tax

For the Three Months Ended June 30, 2011

Administrative

Income (loss) before income taxes

Income (loss) from continuing operations before income taxes

Income (loss) from discontinued operations, net of tax

For the Six Months Ended June 30, 2012

Administrative

Income (loss) from continuing operations before income taxes

Income (loss) from discontinued operations, net of tax

For the Six Months Ended June 30, 2011

Administrative

Income (loss) from continuing operations before income taxes

Income (loss) from discontinued operations, net of tax

The Company recognized a $4,756,898 impairment loss for the strategic services business segment during the three and six months ended June 30,

Page 14 of 29

14 unchanged sentences

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.

Our mission is to help companies innovate and grow.

We offer a comprehensive set of services and software to ensure 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

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

4 unchanged sentences

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:

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;

4 unchanged sentences

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.

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.

From current market research to

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

Our research identifies and explains key consumer trends - including emerging trends not covered by other sources - and delivers insights about

how these trends will shape the future operating environment.

These services include:

Online marketplaces

Technology licensing

IP consulting

Global lifestyles and technology foresight

Page 11 of 22

We provide the insight and intelligence our clients require, applied to

their markets today and into the future.

From current market research to predictive intelligence, we help our clients find insights at the intersections affecting their business.

Our research identifies and explains key consumer trends - including

emerging trends not covered by other sources - and delivers insights about how these trends will shape the future operating environment.

In all of our work, our end goal is to focus on what the changing technology landscape will mean to our

clients business.

Innovaro LaunchPad

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.

We have had a

general release to market of Version 1.0 of the software and are proceeding with the development of the next components of LaunchPad with Version 2.0.

Page 15 of 29

Recent Developments

On June 4, 2012, we entered into a non-binding letter of intent with IPFlow International, LLC to sell our Pharmalicensing, Pharma Transfer, Global Licensing and Knowledge Express operating divisions

and all related assets for $2,000,000.

Under the letter of intent, a definitive agreement had to be reached before August 4, 2012.

However, the Company is in continuing discussions with the buyer and believes that it is probable that a

definitive agreement will still be reached.

The agreement remains subject to customary conditions including negotiation of mutually agreeable terms, satisfactory completion of due diligence and the buyer securing financing.

No assurances can be

provided that a definitive agreement will be reached and that the sale will be completed.

Based on an estimate of proceeds from the sale of this business, we recognized impairment totaling $255,126 in the second quarter of 2012.

We have reflected

the results of these operations as discontinued operations for all periods presented.

On June 7, 2012, we held our 2012 annual meeting

of stockholders, where our stockholders approved two proposals.

Our stockholders elected five directors of our Board of Directors, each of whom will serve for a one-year term expiring in 2013.

Our stockholders also ratified the selection of Pender

Newkirk & Company LLP to serve as our independent registered public accounting firm for the year ending December 31, 2012

Effective June 14, 2012, our Board of the Directors appointed Bruce Lucas as a member of the Board of Directors.

receive customary cash fees and equity compensation for his service on our Board of Directors.

On June 20, 2012, we entered into a

securities purchase agreement with Messrs.

Mark Berset and Bruce Lucas, each a member of our Board of Directors, pursuant to which we agreed to issue them, in a registered offering, 271,740 shares of our common stock priced at $0.92 per share along

with Series A warrants to purchase up to 135,870 shares of our common stock with an exercise price of $1.16 per share.

The Series A warrants are exercisable for a three-year period commencing on the date of their issuance.

If the average closing

price of the shares is greater than or equal to $1.16 for any 20 consecutive trading day period after the date the Series A warrants are issued, then we may force the holders of the Series A warrants to exercise their warrants.

2012, we completed the offering and raised gross proceeds of $250,000 before offering expenses.

These securities were offered pursuant to a registration statement previously filed and declared effective by the Securities and Exchange Commission.

As of June 30, 2012, our management concluded that its revenue projections for our strategic services segment needed to be revised as a

result of concerns that the business may not meet its revenue and cash flow projections for the year ending December 31, 2012 due to a diminished backlog that is not expected to turn around in the near term.

This conclusion triggered a review

for impairment outside of our next scheduled annual impairment evaluation date of December 31, 2012.

Our management determined that the goodwill was impaired and we recognized an impairment loss of $3,386,898 to our goodwill in the current

In addition, subsequent to June 30, 2012, we began discussions to sell certain of our intangible assets related to our strategic services segment.

Based on the terms of this discussion, management determined that these intangible assets

were impaired and recognized impairment of $1,370,000 to our intangible assets in the current period.

On June 12, 2012, we received

notice from the NYSE MKT LLC (the Exchange) indicating that we are not in compliance with certain of the Exchanges continued listing standards.

Specifically, the Exchange has notified us that we are not in compliance with

Section 1003(a)(iv) of the Exchange Company Guide in that the Exchange believes that we have sustained losses which are so substantial in relation to our overall operations or our existing financial resources, or our financial condition has

become so impaired that it appears questionable, in the opinion of the exchange, as to whether we will be able to continue operations and/or meet our obligations as they mature.

In order to maintain the listing of our common stock on the Exchange, we were required to submit, and have submitted, a plan to the Exchange by July 12, 2012, addressing how we intend to regain

compliance with Section 1003(a)(iv) by November 30, 2012.

If the Exchange accepts the plan, then we may be able to continue the listing of our common stock on the Exchange during the plan period, up to November 30, 2012, during which

time we will be subject to periodic reviews to determine whether we are making progress consistent with the plan.

If we fail to submit a plan acceptable to the Exchange or if the plan is accepted but the Exchange determines that we are not making

progress consistent with the plan by November 30, 2012 or at any time prior to such date, then the Exchange may initiate delisting proceedings.

On August 8, 2012, Bruce Lucas, a member of our Board of Directors, notified us that he was resigning from our Board of Directors effective immediately.

On August 9, 2012, Charlie Pope, the

Chairman of our Board of Directors, notified us that he was resigning from our Board of Directors effective immediately.

Each director confirmed that his resignation was not a result of any disagreement with us with respect to our policies,

operations or practices.

Page 16 of 29

Financial Condition

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

Our total assets were $15.0 million and $20.8 million as of June 30, 2012 and December 31, 2011, respectively.

As of June 30, 2012, we had $570,000 in cash, $640,000 in accounts receivable,

$38,000 in contracts in process, $3.0 million in accounts payable, accrued expenses and accrued bonus, and $5.4 million in total debt outstanding (of which $1.25 million is due in October 2012 and $2.8 million is due in May 2013).

December 31, 2011, we had $268,000 in cash, $507,000 in accounts receivable, $513,000 in contracts in process, $2.4 million in accounts payable, accrued expenses and accrued bonus, and $5.6 million in total debt outstanding.

As of June 30,

2012, we had a working capital deficit of $4.6 million and an accumulated deficit of $(82.6) million.

Results of Continuing Operations

(in thousands, except percentages)

4 unchanged sentences

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

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.

Our strategic services revenue decreased by $2.8 million for the three months ended June 30, 2012 in

comparison to the three months ended June 30, 2011.

In addition, our strategic services revenue decreased by $5.1 million for the six months ended June 30, 2012 in comparison to the six months ended June 30, 2011.

This decrease is the

result of the Company having a significantly lower number of contracts in the first half of 2012 than we had in the first half of 2011.

We attribute the decreased contract level in 2012 to the departure of certain key 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.

As discussed under recent developments, we incurred impairment to the goodwill of our strategic services segment in connection with a reduction in

prospective work.

As a result, we expect that our strategic services revenue will continue to decrease for the remainder of 2012.

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.

intelligence and insights services revenue is derived from our foresight and trend research revenue.

Our intelligence and insights services revenue increased by $37,000 for the three months ended June 30, 2012 in comparison to the three months

ended June 30, 2011, which is primarily related to the closing of one large job in the current period.

Our intelligence and insights

services revenue decreased by $28,000 for the six months ended June 30, 2012 in comparison to the six months ended June 30, 2011.

The decreased revenue resulted from a 50% reduction in the number of projects that were completed during the

current period.

We expect that our intelligence and insights services revenue will remain consistent with the second quarter of 2012 for the

remainder of 2012.

Page 17 of 29

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)

1 unchanged sentence

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.

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.

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

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

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

Direct costs of revenue

- strategic services decreased by $3.4 million for the three months ended June 30, 2012 in comparison to the three months ended June 30, 2011.

In addition, direct costs of revenue - strategic services decreased by $4.2 million for the six

months ended June 30, 2012 in comparison to the six months ended June 30, 2011.

These decreases are partially related to a reduction in the use of outside consultants due to the lower number of jobs in process during the first half of

In addition, we had a significant reduction in salaries expense during 2012 related to the departure of certain consulting professionals near the end of 2011.

As discussed under recent developments, we incurred impairment to the goodwill of our strategic services segment in connection with a reduction in prospective work.

As a result, we expect that our direct

costs of revenue - strategic services will continue to decrease for the remainder of 2012.

Direct costs of revenue - intelligence and

insights services include certain salaries and related taxes, commissions, certain outside services and other direct costs directly related to our intelligence and insights services business.

Direct costs of revenue - intelligence and insights

services increased by $19,000 for the three months ended June 30, 2012 in comparison to the three months ended June 30, 2011.

In addition, direct costs of revenue - intelligence and insights services increased by $50,000 for the six months

ended June 30, 2012 in comparison to the six months ended June 30, 2011.

These increases were related to the hiring of sales personnel for this business.

We expect that our direct costs of revenue - intelligence and insights services will remain consistent with the second 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 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.

Salaries and wages decreased by $111,000 for the three months ended June 30, 2012 in comparison to the three months ended June 30, 2011.

The decrease is primarily related to a $95,000 decrease in stock compensation expense as

a result of the grant of equity compensation to our CEO upon his hiring in April 2011, and a $16,000 decrease in administrative staff.

Salaries and wages decreased by $16,000 for the six months ended June 30, 2012 in comparison to the six months ended June 30, 2011.

decrease is primarily related to an $80,000 decrease in stock compensation expense as a result of the grant of equity compensation to our CEO upon his hiring in April 2011, partially offset by a $62,000 increase in salary expense as a result of

having hired our CEO in April 2011.

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

remainder of 2012.

Page 18 of 29

Professional Fees

Three Months Ended

(In thousands, except percentages)

3 unchanged sentences

Professional fees

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

decreased by $5,000 for the three months ended June 30, 2012 in comparison to the three months ended June 30, 2011, primarily as a result of a reduction in legal fees of $33,000, partially offset by an increase in accounting and valuation

fees of $28,000.

Professional fees decreased by $14,000 for the six months ended June 30, 2012 in comparison to the six months ended

June 30, 2011, primarily as a result of a reduction in legal fees of $59,000, partially offset by an increase in accounting and valuation fees of $45,000.

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

Research and Development

Three Months Ended

(In thousands, except percentages)

3 unchanged sentences

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.

Research and development costs decreased by $190,000 for the three months ended June 30, 2012 in comparison to the

three months ended June 30, 2011.

The decrease relates primarily to our having scaled back the amount of resources, including personnel and outside services, allocated to the development of LaunchPad.

Fewer resources are necessary at this time

because the current projects are less labor intensive than the prior year projects.

Research and development costs decreased by $394,000 for

the six months ended June 30, 2012 in comparison to the six months ended June 30, 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.

In addition, we scaled back the amount of resources allocated to the development of LaunchPad to approximately $349,000 in total for the first half of 2012.

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

Sales and Marketing

Three Months Ended

(In thousands, except percentages)

3 unchanged sentences

travel and other business development expenses.

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.

Sales and marketing expense decreased by $9,000 for the three months ended June 30, 2012 compared to the three months ended June 30, 2011.

The decrease relates primarily to decreased

participation in sales conferences in the second quarter of 2012.

Sales and marketing expense increased by $5,000 for the six months ended June 30, 2012 compared to the six months ended June 30, 2011.

The increase relates primarily to

increased participation in sales conferences in the first quarter of 2012.

Page 19 of 29

We expect that our sales and marketing expense will increase over the second quarter of 2012 for the

remainder of 2012 due to an increase in marketing related to LaunchPad.

General and Administrative

Three Months Ended

(In thousands, except percentages)

1 unchanged sentence

As a percent of revenue

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.

General and administrative expense increased by $6,000 for the three months ended June 30, 2012 compared to the

three months ended June 30, 2011.

In addition, general and administrative expense decreased by $4,000 for the six months ended June 30, 2012 compared to the six months ended June 30, 2011.

We expect that our general and administrative expense will remain consistent with the second 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 $51,000 and $101,000 for the three and six months ended June 30, 2012 in

comparison to the three and six months ended June 30, 2011, respectively.

Amortization expense decreased by $42,000 and $81,000 for the three and six months ended June 30, 2012 as compared to the same periods in 2011, as a result of the

impairment charges related to our intangible assets that were incurred in 2011.

In addition, depreciation expense decreased by $8,000 and $20,000 for the three and six months ended June 30, 2012 as compared to the same periods in 2011.

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

Impairment Loss

of June 30, 2012, our management concluded that its revenue projections for our strategic services segment needed to be revised as a result of concerns that the business may not meet its revenue and cash flow projections for the year ending

December 31, 2012 due to a diminished backlog that is not expected to turn around in the near term.

This conclusion triggered a review for impairment outside of our next scheduled annual impairment evaluation date of December 31, 2012.

management determined that the goodwill was impaired and we recognized an impairment loss of $3,386,898 to our goodwill in the current period.

In addition, subsequent to June 30, 2012, we began discussions to sell certain of our intangible

assets related to our strategic services segment.

Based on the terms of this discussion, management determined that these intangible assets were impaired and recognized impairment of $1,370,000 to our intangible assets in the current period.

Page 20 of 29

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)

2 unchanged sentences

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.

Other (income) expense changed by $(240,000) for the three months ended June 30, 2012 in comparison to the three months ended June 30, 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.

$231,000 for the three months ended June 30, 2012 is comprised primarily of rental income of $102,000, dividend income of $58,000, capital gains of $35,000 and miscellaneous income of $36,000.

The net other expense of $9,000 for the three

months ended June 30, 2011 is comprised primarily of a loss of $79,000 related to adjusting our derivative liabilities to fair value, partially offset by rental income of $67,000 and miscellaneous other net income of $3,000.

Other (income) expense changed by $(367,000) for the six months ended June 30, 2012 in comparison to the six months ended June 30, 2011.

net other income of $352,000 for the six months ended June 30, 2012 is comprised primarily of rental income of $203,000, dividend income of $58,000, capital gains of $48,000 and miscellaneous income of $43,000.

The net other expense of $15,000

for the six months ended June 30, 2011 is comprised primarily of a loss of $151,000 related to adjusting our derivative liabilities to fair value, partially offset by rental income of $138,000.

Interest Expense, Net

Three Months Ended

(In thousands, except percentages)

Interest expense, net

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,

Interest expense, net increased by $61,000 for the three months ended June 30, 2012 in comparison to the three

months ended June 30, 2011.

The net interest expense of $143,000 for the three months ended June 30, 2012 is primarily comprised of interest expense on debt and other payables of $136,000 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.

The net interest expense of $82,000 for the three months ended June 30, 2011 is primarily comprised of interest expense on long-term debt of $49,000 and amortization of our

debt discount of $33,000.

Interest expense, net increased by $54,000 for the six months ended June 30, 2012 in comparison to the six

months ended June 30, 2011.

The net interest expense of $277,000 for the six months ended June 30, 2012 is primarily comprised of interest expense on debt and other payables of $263,000 and amortization of our debt discount of $66,000,

partially offset by interest income on our note receivable of $52,000.

The net interest expense of $223,000 for the six months ended June 30, 2011 is primarily comprised of interest expense on long-term debt of $211,000 and amortization of our

debt discount of $66,000, partially offset by interest income on our note receivable of $52,000.

Liquidity and Capital Resources

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:

flows from operating activities of continuing operations of $(74,000) for the six months ended June 30, 2012 decreased $570,000 from $496,000 for the six months ended June 30, 2011.

Total cash flows from operations of $(74,000) in the

current period are primarily attributable to:

$3.4 million in non-cash goodwill impairment related to our strategic services business segment;

$1.4 million in non-cash intangible asset impairment related to our strategic services business segment;

$586,000 in non-cash depreciation and amortization;

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

$287,000 in non-cash stock-based compensation expense related to vesting options and stock issued for services;

$343,000 decrease in accounts receivable and contracts in process;

1 unchanged sentence

$562,000 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.

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Partially offset by:

$6.2 million net loss;

$516,000 in deferred tax benefit.

Cash flows from investing activities of continuing operations of $18,000 for the six months ended June 30, 2012 increased $41,000 from $(23,000) for the six months ended June 30, 2011.

cash flows from investing activities of $18,000 are related to $64,000 in proceeds from the sale of our available-for-sale securities, partially offset by $45,000 in the capitalization of software development costs.

Cash flows from financing activities of continuing operations of $(54,000) for the six months ended June 30, 2012 increased $329,000 from $(383,000)

for the six months ended June 30, 2011.

Total cash flows from financing of $(54,000) are related to principal payments on long-term debt of $286,000, partially offset by net proceeds from our stock offering of $232,000.

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.

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

We have had a general release to market of Version 1.0 and are proceeding with the development of

the next components of LaunchPad with Version 2.0.

As of June 30, 2012, we had invested $2.3 million in this software platform.

We expect to incur approximately $200,000 in additional expenditures for product development of Version 2.0 and

refinement of Version 1.0 for the remainder of 2012.

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

We incurred a net loss of approximately $1.3 million

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

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

million as of March 31, 2012.

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

Our primary cash

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

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

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

We currently intend to fund our liquidity

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

Given our cash position, working capital deficit and

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

We are exploring opportunities for obtaining a credit

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

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

However, if such

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

timely manner.

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

Our failure to generate sufficient cash from our operations could have a

material adverse effect on us.

Our future success depends on our ability to raise capital and ultimately generate revenue and attain

profitability.

We cannot be certain that additional capital, whether through selling additional debt or equity securities or obtaining a line of credit or other loan, will be available to us or, if available, will be on terms acceptable to us.

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

We incurred a net loss of $(6,174,658) and $(4,920,723) for the six months ended June 30, 2012 and the year ended

December 31, 2011, respectively.

In addition, we have a working capital deficit of $(4,638,285) and an accumulated deficit of $(82,623,709) as of June 30, 2012.

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

Our primary cash requirements include working capital, research and development expenditures, principal and interest payments on

indebtedness, and employee salaries.

Our primary sources of funds are cash received from customers in connection with operations and, to a lesser extent, proceeds from the sale from time to time of our investments and our common stock.

We currently intend to fund our liquidity needs, including our software development costs, with existing cash balances, cash generated from operations,

collections of our existing receivables, the potential sales of our investments and the potential sale of certain of our operating divisions and assets.

Given our cash position, working capital deficit and expected revenues in the near term, we do

not expect that we will be able to fund our scheduled debt service payments of $4.2 million (of which $1.25 million is due in October 2012 and $2.8 million is due in May 2013) and our operating requirements for the next twelve months.

secured by our office building and land.

We are exploring opportunities for obtaining a credit facility, as well as selling equity securities and certain other assets.

In addition, we have the capability to delay all cash intensive activities,

including our software development costs, and will look to reduce costs further.

However, if such measures prove inadequate, we could face liquidity problems and might be required to reduce or delay planned capital expenditures and other initiatives

and sell assets, and we may be unable to take any of these actions on satisfactory terms or in a timely manner.

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

Our failure to generate sufficient cash from our operations could have a material adverse effect on us.

success depends on our ability to raise capital and ultimately generate revenue and attain profitability.

We cannot be certain that additional capital, whether through selling additional debt or equity securities or obtaining a line of credit or

other loan, will be available to us or, if available, will be on terms acceptable to us.

If we issue additional securities to raise funds, these securities may have rights, preferences, or privileges senior to those of our common stock, and our

current shareholders may experience dilution.

If we are unable to obtain funds when needed or on acceptable terms, we may be required to curtail our current development programs, cut operating costs and forego future development and other

opportunities.

Without sufficient capital to fund our operations, we will be unable to continue as a going concern.

Page 22 of 29

Critical Accounting Estimates

5 unchanged sentences

There have been no material changes

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

to our critical accounting estimates during the six months ended June 30, 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