What changed in this filing

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Item 1. Financial Statements

2012-11-14 compared with 2012-08-14 · 479 added, 467 removed, 317 unchanged (75% of the section changed)

2 unchanged sentences

Consolidated Balance Sheets

September 30,

Current assets:

Accounts receivable, net

Contracts in process

Stock subscription receivable

Available-for-sale securities

Prepaid expenses and other current assets

Note receivable and accrued interest

Current portion of notes receivable and accrued interest

Current assets held for sale

2 unchanged sentences

Equity method investments

Note receivable, net of current portion

Fixed assets, net

4 unchanged sentences

Accrued expenses

Accrued bonus pool

Deferred revenue

12 unchanged sentences

15,471,410 and 15,039,544

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

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

Common stock payable

Additional paid-in capital

7 unchanged sentences

Consolidated Statements of Comprehensive Income

Three Months Ended June 30,

Six Months Ended June 30,

Strategic services

Three Months Ended

September 30,

Nine Months Ended

September 30,

Intelligence and Insights services

Direct costs of revenue Strategic services

Direct costs of revenue Intelligence and Insights services

5 unchanged sentences

Depreciation and amortization

Impairment loss

Other (income) and expense:

4 unchanged sentences

Loss from continuing operations

Income (loss) from discontinued operations, net of tax

Income (loss) from discontinued operations, net of tax (including loss on disposal)

Net loss attributable to the noncontrolling interest

10 unchanged sentences

Consolidated Statements of Cash Flows

Six Months Ended June 30,

Nine Months Ended

September 30,

Operating Activities:

Income from discontinued operations, net of tax

Income (loss) from discontinued operations, net of tax

Loss from continuing operations

3 unchanged sentences

Stock issued for services

Goodwill impairment

Intangible asset impairment

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

3 unchanged sentences

Changes in operating assets and liabilities:

Accounts receivable and contracts in process

Accounts receivable

Prepaid expenses and other assets

5 unchanged sentences

Capitalization of software development costs

Proceeds from disposal of business

Proceeds from sale of available-for-sale securities

9 unchanged sentences

Cash at end of period

See accompanying notes

INNOVARO, INC.

Consolidated Statements of Cash Flows (continued)

Six Months Ended June 30,

Nine Months Ended

September 30,

Supplemental Disclosures of Non-Cash Investing and Financing Activities

1 unchanged sentence

Derivative liability extinguished in connection with exercise of investor warrants

The Company disposed of its Pharmalicensing, Global Licensing, Pharma Transfer and Knowledge Express operating divisions.

conjunction with the disposal, the Company received the following consideration:

Cash received

Note receivable received

Liabilities assumed by buyer

Total sale price

Supplemental Disclosures of Cash Flow Information

7 unchanged sentences

The financial information for Innovaro, Inc.

(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.

(the Company, we, us or Innovaro) as of September 30, 2012 and for the three and nine month periods ended

September 30, 2012 and 2011 is unaudited, but includes all adjustments, which, in the opinion of management are necessary in order to make the consolidated financial statements not misleading at such dates and for those periods.

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 nine months ended September 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 delivering innovation solutions to our clients through a combination of software and associated services as well as information for strategic

decision making.

Innovaro offers software to ensure the success of any innovation project, regardless of the size or intent.

The Companys LaunchPad software provides an integrated innovation environment and intelligence and insights services

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

These services are provided primarily from the Companys offices in the United States.

Going Concern

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

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

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

The Company incurred a net loss of $(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 consolidated financial statements have been prepared in accordance

with GAAP including the assumption of a going concern basis which contemplates the realization of assets and the settlement of liabilities and commitments in the normal course of business.

The Company has incurred recurring losses and negative cash

flows from operations.

The Company incurred a net loss of $(7,572,110) and $(4,920,723) for the nine months ended September 30, 2012 and the year ended December 31, 2011, respectively.

In addition, the Company has a working capital

deficit of $(3,907,425) and an accumulated deficit of $(84,019,275) as of September 30, 2012.

These factors raise doubt about the 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.

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

indebtedness, and employee salaries.

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

The Company currently intends to fund its liquidity needs, including its software development costs, with existing cash balances, cash

generated from operations, collections of its existing receivables, the proceeds from sales of its investments and the sale of the Companys common stock.

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 $4,043,591 and its operating requirements for the next twelve months.

Subsequent to the end of the third quarter, the Company successfully

negotiated with the creditors of its $1.25 million debt due in October 2012 to extend the due date of this note.

The Company is exploring opportunities for obtaining a credit facility, as well as selling equity securities.

In addition, the Company

has the capability to delay all cash intensive activities, including its software development costs, and will look to reduce costs further.

However, if such measures prove inadequate, the Company could face liquidity problems and might be required

to reduce or delay planned capital expenditures and other initiatives, and it may be unable to take any of these actions on satisfactory terms or in a timely manner.

Further, any of these actions may not be sufficient to allow the Company to service

18 unchanged sentences

Significant Accounting Policies

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.

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 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 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.

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

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

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

Software Development Costs

4 unchanged sentences

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.

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

September 30, 2012.

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

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

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

The Company recorded amortization expense related to software development costs of approximately $8,500 and

$17,000 for the three and nine months ended September 30, 2012, respectively.

Goodwill and Intangible Assets

5 unchanged sentences

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.

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

In addition, the Company began discussions to sell

certain of its intangible assets related to its strategic services segment.

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

The Company recognized

impairment of $1,370,000 to its intangible assets for the 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.

The Company recognized impairment of $1,370,000 to its intangible

assets for the nine months ended September 30, 2012.

The impairment expense is included in loss from discontinued operations in the consolidated statements of comprehensive income for the nine months ended September 30, 2012.

Accrued Expenses

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.

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

Earnings per Share (EPS)

2 unchanged sentences

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,

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

Three Months Ended

September 30,

Nine Months Ended

September 30,

Weighted-average outstanding shares of common stock

14 unchanged sentences

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.

long-term debt is not materially different from its carrying value of $5,293,591 and $5,642,439 as of September 30, 2012 and December 31, 2011, respectively.

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

In accordance with FASB ASC Topic 820, the

Company groups financial assets and financial liabilities measured at fair value in three levels based on the principal markets in which the assets and liabilities are transacted and the observability of the data points used to determine fair value.

The 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 $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.

Level 2 includes valuations for quoted prices in active markets for similar assets or liabilities, or quoted prices for

identical or similar assets or liabilities in markets that are not active, or inputs other than quoted prices that are observable for the asset or liability.

Available-for-sale securities were $5,242 and $55,038 as of September 30, 2012 and

December 31, 2011, respectively.

The 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

These securities are generally thinly traded and may be subject to certain restrictions on resale.

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

Concentrations of Credit Risk

4 unchanged sentences

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

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.

accounts as of September 30, 2012.

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

New Accounting Pronouncements

4 unchanged sentences

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.

Discontinued Operations and Divestitures

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

The Company sold the Pharmalicensing, Global Licensing, Pharma Transfer and Knowledge Express operating divisions to IP Technology Exchange, Inc.

(IP Tech Ex) effective as of August 31, 2012, pursuant to an asset purchase agreement dated September 12, 2012.

Under the terms of the agreement, the Company will receive $2,000,000, consisting of (i) a lump-sum payment of

$600,000 upon closing, (ii) the assumption of approximately $70,000 of debt relating to the divisions, (iii) quarterly payments of $100,000 through August 2014, and (iv) payment of the remaining balance on September 1, 2014.

November 30, 2012, any outstanding balance will begin accruing interest at 5% per annum.

IP Tech Ex is entitled to a $125,000 reduction in the purchase price if all amounts are paid to the Company by May 1, 2013.

See Note 7 for

related party disclosure.

In connection with the sale of these divisions, the Company recognized a loss on disposal of business of $87,539

during the three and nine months ended September 30, 2012.

This loss is included as a component of income (loss) from discontinued operations in the consolidated statements of comprehensive income.

These divisions operated out of the United

States and the United Kingdom as part of the Companys intelligence and insights services segment.

Strategic Services Operating

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

Companys Board of Directors approved the disposal of the strategic services division.

The sale of this division was subsequently completed on October 2, 2012.

See Note 8 for further discussion of the terms of this sale.

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

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

In addition, the Company has classified the assets and liabilities of the

discontinued divisions as current and noncurrent assets and liabilities held for sale in the consolidated balance sheets for all periods presented.

Substantially all the cash flows from discontinued operations for all periods presented relate to

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

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The results of

operations of the aforementioned divisions are included in discontinued operations.

The results of operations of the aforementioned divisions are included in discontinued operations in the

statements of comprehensive income.

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

Three Months Ended June 30,

Six Months Ended June 30,

Three Months Ended September 30, 2012

Long-lived asset impairment charge

Operating expense

Other (income) expense

Loss on disposal of business

Income (loss) before income taxes

1 unchanged sentence

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

Three Months Ended September 30, 2011

Long-lived asset impairment charge

Operating expense

Other (income) expense

Income (loss) before income taxes

Provision for income tax (expense) benefit

Income (loss) from discontinued operations, net of tax

Nine Months Ended September 30, 2012

Long-lived asset impairment charge

Operating expense

Other (income) expense

Loss on disposal of business

Income (loss) before income taxes

Provision for income tax (expense) benefit

Income (loss) from discontinued operations, net of tax

Nine Months Ended September 30, 2011

Long-lived asset impairment charge

Operating expense

Other (income) expense

Income (loss) before income taxes

Provision for income tax (expense) benefit

Income (loss) from discontinued operations, net of tax

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

2011 were as follows:

September 30,

December 31, 2011

Receivables, net of allowance for doubtful accounts

Contracts in progress

Prepaid expenses and other current assets

5 unchanged sentences

Accrued expenses

Accrued bonus

Deferred revenue

2 unchanged sentences

Noncurrent liabilities held for sale

Contracts in Process

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

Contract costs and estimated earnings on uncompleted contracts

billings to date

Total contracts in process

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

Billings in excess of costs and estimated earnings on uncompleted contracts

Total contracts in process

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Accumulated Other Comprehensive Income

The following table presents the components comprising the accumulated

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

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

Unrealized gain

5 unchanged sentences

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.

Reclassification into accumulated deficit in connection with disposal of business

Balance at September 30, 2012

Comprehensive loss for the nine months ended September 30, 2012 per the consolidated statement of comprehensive income agrees to the gain

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

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

September 30, 2012.

Securities Offering

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

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On September 27, 2012, the Company entered into a securities purchase agreement with JJJ Family LLLP

pursuant to which we agreed to issue, in a registered offering, 531,915 shares of its common stock priced at $0.47 per share along with Series B warrants to purchase up to 531,915 shares of common stock with an exercise price of $0.47 per share of

common stock.

The Series B warrants will be exercisable for a five-year period commencing on the six month anniversary of the date of its issuance.

The securities purchase agreement provides the buyer with the right to participate in future

offerings of our securities, in an amount up to $250,000 in each offering, for a period of one year after the date of the sale.

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

Securities and Exchange Commission.

On October 2, 2012, the Company completed the offering to JJJ Family LLLP and raised gross proceeds

of $250,000 before offering expenses.

As a result of the closing date having been subsequent to the end of the quarter, the Company recorded a subscription receivable and common stock payable for this amount in the consolidated balance sheets as of

September 30, 2012.

Other Common Stock Issuances

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.

During the nine months ended September 30, 2012, the Company issued 120,126 shares of common stock under the Innovaro, Inc.

Equity compensation plan with a value of $97,499 to members of its Board of

Directors and certain others in lieu of payment for services rendered.

Other (Income) Expense

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

Components comprising the balance in other (income) expense from continuing operations for the three and nine months ended

September 30, 2012 and 2011 are as follows:

Three Months Ended

September 30,

Nine Months Ended

September 30,

Loss (gain) on sale and impairment on investments

Dividend income

2 unchanged sentences

Other (income) expense

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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.

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

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 June 30, 2011

United States

Loss from continuing operations before income taxes

Depreciation and amortization

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.

The Company sold the Pharmalicensing, Global Licensing, Pharma Transfer and Knowledge Express operating divisions during the third quarter of 2012.

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

In addition, the Companys board of directors approved the disposal of the strategic services division during the

third quarter of 2012.

See Note 3 and Note 8 for further discussion of the sale of these divisions.

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

revenue and income (loss) from continuing operations before income taxes shown below do not include amounts related to these divisions.

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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

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

Long-lived assets as of September 30, 2012

Total assets as of September 30, 2012

Long-lived assets as of December 31, 2011

Total assets as of December 31, 2011

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

For the Three Months Ended September 30, 2012

Administrative

1 unchanged sentence

Income (loss) from discontinued operations, net of tax

For the Three Months Ended June 30, 2011

For the Three Months Ended September 30, 2011

Administrative

1 unchanged sentence

Income (loss) from discontinued operations, net of tax

For the Six Months Ended June 30, 2012

For the Nine Months Ended September 30, 2012

Administrative

1 unchanged sentence

Income (loss) from discontinued operations, net of tax

For the Six Months Ended June 30, 2011

For the Nine Months Ended September 30, 2011

Administrative

1 unchanged sentence

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,

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Managements Discussion and Analysis of Financial Condition and Results of Operations

The following discussion should be read in conjunction with our consolidated financial statements and the notes thereto included elsewhere in this Form 10-Q.

This Form 10-Q contains forward-looking

statements regarding the plans and objectives of management for future operations.

These forward-looking statements may involve known and unknown risks, uncertainties and other factors which may cause our actual results, performance or achievements

to be materially different from future results, performance or achievements expressed or implied by any forward-looking statements.

Forward-looking statements, which involve assumptions and describe our future plans, strategies and expectations, are

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

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

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

will come to pass.

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

Related Party Transactions

During the three months ended September 30, 2012, the Company sold three of its operating divisions to IP Tech Ex for $2,000,000.

See Note 3 for further discussion of this transaction.

Wright, the Chief Financial Officer of the Company, has a 7% equity interest in IP Tech Ex.

Reiber, the Companys general counsel, indirectly owns a 7% equity position in

Neither party holds a seat on the Board of Directors of IP Tech Ex, nor do they have a role in managing the Company.

The price established by the Board for the three divisions was based on a separate letter of intent previously submitted

to the Company for the same three divisions.

IP Tech Ex has a note payable to the Company for the remaining unpaid balance of $1,329,670 plus interest, which accrues at 5% per annum.

Subsequent Events

On October 2, 2012, the Company entered into an asset purchase agreement to sell certain assets, primarily intellectual property

rights and equipment, relating to our strategic services division, known as Strategos, to one of its officers and employees for $100,000.

In connection with the asset purchase agreement, the Company entered into separation and release agreements

with all of the officers and employees of our Strategos division pursuant to which they agreed to forgo approximately $1.4 million in bonuses owed to them by the Company (and which bonuses had previously been accrued as an expense in the

Companys financial statements) in exchange for $150,000.

Finally, as part of the transaction, the Company also entered into a technology license agreement with Strategos, Inc., a newly formed company that will carry on the business formerly

conducted by our Strategos division, pursuant to which we agreed to license Strategos, Inc.

certain technology and intellectual property rights relating to our Strategos division, including the use of the name Strategos, for royalty

payments equal to 12.5% of the professional fee revenue earned by Strategos, Inc.

in excess of $10 million during the period from October 2, 2012 to December 31, 2015.

In connection with the sale of this division, the Company will

recognize a gain on disposal of business of approximately $1.3 million during the fourth quarter of 2012.

Subsequent to the end of the third

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

Page 15 of 29

Managements Discussion and Analysis of Financial Condition

and Results of Operations

The following discussion should be read in conjunction with our consolidated financial statements and the

notes thereto included elsewhere in this Form 10-Q.

This Form 10-Q contains forward-looking statements regarding the plans and objectives of management for future operations.

These forward-looking statements may involve known and unknown risks,

uncertainties and other factors which may cause our actual results, performance or achievements to be materially different from future results, performance or achievements expressed or implied by any forward-looking statements.

Forward-looking

statements, which involve assumptions and describe our future plans, strategies and expectations, are generally identifiable by use of the words may, will, should, expect, anticipate,

estimate, believe, intend or project or the negative of these words or other variations on these words or comparable terminology.

These forward-looking statements are based on assumptions that may be

incorrect, and we cannot assure you that the projections included in these forward-looking statements will come to pass.

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

various factors.

Business Overview

We are The Innovation Solutions Company focused on innovation management

consulting and software.

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.

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.

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 are The Innovation Solutions Company focused on delivering innovation solutions to our clients through a combination of software and associated services as well as information for strategic decision

We offer software to ensure the success of any innovation project, regardless of the size or intent.

Our LaunchPad software provides an integrated innovation environment and our intelligence and insights services provide any business with

the innovation support they need to drive success.

These services are provided primarily from our offices in the United States.

innovation management software platform, Launchpad, is designed to enable our clients to become more efficient by finding new avenues to grow, fighting commoditization, improving return on investment, transforming the organization, and removing

barriers to innovation.

Business value is delivered to clients through our Launchpad software capable of unlocking an organizations capacity by:

Identifying and developing new segments and markets;

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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.

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.

Discontinued Operations and Divestitures

During the second and third quarters of 2012, we made the strategic decision to divest of our strategic services division and a large portion of the intelligence and insights segment including the

Pharmalicensing, Global Licensing, Pharma Transfer and Knowledge Express operating divisions.

The sale allows us to focus our investments on sales and marketing to promote the growth of our software and innovation solutions businesses, which we

believe offers significant growth opportunities.

Further, we expect the sale will strengthen our balance sheet and help provide us with the financial wherewithal to extend our software capabilities and deliver additional solutions.

explicitly described as held for sale or as discontinued operations, and unless otherwise noted, all discussions and amounts presented herein relate to our continuing operations.

Prior years presented have been reclassified to conform to current

year presentation.

Page 16 of 29

Recent Developments

On 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

On October 19, 2012, the Company received notice that the NYSE MKT LLC (the Exchange) approved the Companys plan for regaining compliance with Section 1003(a)(iii) of the

Exchange Company Guide by December 12, 2013.

Previously, on August 16, 2012, the Exchange notified the Company that it was not in compliance with Section 1003(a)(iii) of the Exchange Company Guide because the Company reported

stockholders equity of less than $6,000,000 at June 30, 2012 and losses from continuing operations and/or net losses in its five most recent fiscal years ended December 31, 2011.

On August 24, 2012, the Exchange approved the Companys plan for regaining compliance with Section 1003(a)(iv) of the Exchange Company Guide by

November 30, 2012.

The Company had violated Section 1003(a)(iv) of the Exchange Company Guide in that the Exchange believed that the Company had sustained losses which are so substantial in relation to its overall operations or its

existing financial resources, or its financial condition had become so impaired that it appeared questionable, in the opinion of the Exchange, as to whether the Company would be able to continue operations and/or meet its obligations as they

The Company may be able to continue the listing of its common stock on the Exchange while under each plan, during which time the

Company will be subject to periodic reviews to determine whether it is making progress consistent with each plan.

If the Exchange determines that the Company is not making progress consistent with either plan, then the Exchange may initiate

delisting proceedings.

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

Board of Directors effective immediately.

On August 9, 2012, Charlie Pope, the Chairman of our Board of Directors, notified us that he was resigning from our Board of Directors effective immediately.

Each director confirmed that his resignation

was not a result of any disagreement with us with respect to our policies, operations or practices.

On September 12, 2012, we sold our

Pharmalicensing, Global Licensing, Pharma Transfer and Knowledge Express operating divisions to IP Technology Exchange, Inc.

effective as of August 31, 2012.

Under the Asset Purchase Agreement, IP Technology Exchange, Inc.

will pay $2,000,000

consisting of (i) a lump-sum payment of $600,000 on the closing date, (ii) assumption of approximately $70,000 of debt relating to these divisions, (iii) quarterly payments of $100,000 through August 2014, and (iv) the remaining

balance of the purchase price on September 1, 2014.

On November 30, 2012, any outstanding balance of the purchase price will begin accruing interest at 5% per annum.

IP Technology Exchange, Inc.

is entitled to a $125,000 reduction in

the purchase price if all amounts are paid to us by May 1, 2013.

Wright, our Chief Financial Officer and Mr.

Reiber, our general counsel, each own a 7% equity interest in IP Technology Exchange, Inc., although neither party holds a board or

management position with the entity.

On October 2, 2012, we entered into an asset purchase agreement to sell certain assets, primarily

intellectual property rights and equipment, relating to our strategic services division, known as Strategos, to one of our officers and employees for $100,000.

In connection with the asset purchase agreement, we entered into separation and release

agreements with all of the officers and employees of our Strategos division pursuant to which they agreed to forgo approximately $1.4 million in bonuses we owned them (and which bonuses had previously been accrued as an expense in our financial

statements) in exchange for $150,000.

Finally, as part of the transaction, we also entered into a technology license agreement with Strategos, Inc., a newly formed company that will carry on the business formerly conducted by our Strategos division,

pursuant to which we agreed to license Strategos, Inc.

certain technology and intellectual property rights relating to our Strategos division, including the use of the name Strategos, for royalty payments equal to 12.5% of the

professional fee revenue earned by Strategos, Inc.

in excess of $10 million during the period from October 2, 2012 to December 31, 2015.

On October 22, 2012, Gators Lender, LLC agreed to extend the maturity date on the $1.25 million that would otherwise be due on that date until October 22, 2015.

As an inducement to extend the maturity

date of such indebtedness, we agreed to repay (i) $250,000 of such amount on or before November 21, 2012, (ii) an additional $250,000 of such amount on or before October 22, 2013 and (iii) the final $750,000 of such amount on or before October 22,

We also agreed to issue Gators Lender, LLC (i) warrants to purchase up to 150,000 shares of our common stock as soon as practicable subsequent to October 22, 2012;

(ii) warrants to purchase up to 75,000 shares of our common stock if our

indebtedness to Gators Lender, LLC has not been repaid in full by October 22, 2013 and (iii) warrants to purchase up to an additional 75,000 shares of our common stock if our indebtedness to Gators Lender, LLC has not been repaid in full by October

The interest rate payable on such indebtedness will remain unchanged at 8.0% per year and there is no penalty if we pre-pay the indebtedness prior to the scheduled repayments dates set forth above.

We and Gators Lender, LLC are in the

process of documenting the above-described agreement.

Financial Condition

Our total assets were $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.

Our total assets were $12.5 million and $20.8 million as of September 30, 2012 and December 31, 2011, respectively.

As of September 30, 2012, we had $314,000 in cash, $117,000 in accounts

receivable, $1.2 million in accounts payable and accrued expenses and $5.3 million in total debt outstanding (of which $1.25 million was due in October 2012 and $2.8 million is due in May 2013).

On October 22, 2012, the lender agreed to extend the

maturity date on the $1.25 million that would otherwise be due on that date until October 22, 2015.

As of December 31, 2011, we had $268,000 in cash, $102,000 in accounts receivable, $878,000 in accounts payable and accrued expenses, and $5.6

million in total debt outstanding.

As of September 30, 2012, we had a working capital deficit of $3.9 million and an accumulated deficit of $(84.0) million.

Page 17 of 29

Results of Continuing Operations

September 30,

(in thousands, except percentages)

Strategic services

Intelligence and insights services

Total revenue

Strategic Services

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

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

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

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

Our intelligence and insights services revenue increased by $129,000 for the three months ended

September 30, 2012 in comparison to the three months ended September 30, 2011.

This relates primarily to the completion of two large projects in the current three month period compared to no projects having been completed in the same

period of 2011.

Our intelligence and insights services revenue increased by $100,000 for the nine months ended September 30, 2012 in

comparison to the nine months ended September 30, 2011.

This relates primarily to the completion of four large projects in the current nine month period compared to the completion of two projects in the same period of 2011.

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

Direct Costs of Revenue

September 30,

(in thousands, except percentages)

Direct costs of revenue - Strategic services

Direct costs of revenue - Intelligence and insights services

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.

Direct costs of revenue - intelligence and insights services include certain salaries and related taxes, commissions,

certain outside services and other direct costs directly related to our intelligence and insights services business.

Direct costs of revenue - intelligence and insights services increased by $23,000 for the three months ended September 30, 2012

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

In addition, direct costs of revenue - intelligence and insights services increased by $64,000 for the nine months ended September 30, 2012 in comparison to the nine months ended

September 30, 2011.

These increases were related to the hiring of sales personnel and outside services used to complete projects for this division.

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

Page 18 of 29

Salaries and Wages

September 30,

(In thousands, except percentages)

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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 $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

Salaries and wages decreased by $88,000 for the three months ended September 30, 2012 in comparison to the three months ended September 30, 2011.

The decrease is primarily related to a $53,000 decrease in stock compensation

expense as a result of the fully vested grant of equity compensation to our CEO upon his hiring in April 2011, and a $35,000 decrease in administrative staff and certain officers salaries.

Salaries and wages decreased by $90,000 for the nine months ended September 30, 2012 in comparison to the nine months ended September 30, 2011.

The decrease is primarily related to a $109,000 decrease in stock compensation expense as a result of the fully vested grant of equity compensation to our CEO upon his hiring in April 2011 and a $89,000 decrease in administrative staff and certain

officers salaries, partially offset by a $108,000 increase in salary expense as a result of having hired our CEO in April 2011.

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

Professional Fees

September 30,

(In thousands, except percentages)

3 unchanged sentences

Professional fees

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.

remained consistent for the three months ended September 30, 2012 in comparison to the three months ended September 30, 2011.

Professional fees decreased by $21,000 for the nine months ended September 30, 2012 in comparison to the nine months ended September 30, 2011,

primarily as a result of a reduction in legal fees of $68,000, partially offset by an increase in accounting and valuation fees of $47,000.

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

our operating divisions.

Research and Development

September 30,

(In thousands, except percentages)

1 unchanged sentence

As a percent of revenue

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 $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.

Page 19 of 29

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

development of our LaunchPad software platform.

Research and development costs increased by $67,000 for the three months ended September 30, 2012 in comparison to the three months ended September 30, 2011.

The increase is partially related

to the capitalization of $185,000 in software development costs in the third quarter of 2011 rather than the allocation of such costs to research and development expense.

Research and development costs decreased by $327,000 for the nine months ended September 30, 2012 in comparison to the nine months ended September 30, 2011.

The decrease is due to the fact that

we scaled back the amount of resources allocated to the development of LaunchPad during 2012.

We expect that our research and development

expense will remain consistent with the third quarter of 2012 for the remainder of 2012.

Sales and Marketing

September 30,

(In thousands, except percentages)

3 unchanged sentences

travel and other business development expenses.

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.

Sales and marketing expense decreased by $83,000 and $73,000 for the three and nine months ended September 30, 2012 compared to the three and nine months ended September 30, 2011,

respectively.

The decrease for both periods relates primarily to decreased attendance at conferences and reduction in production of marketing materials.

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

General and Administrative

September 30,

(In thousands, except percentages)

1 unchanged sentence

As a percent of revenue

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.

General and administrative expense decreased by $31,000 for the three months ended September 30, 2012 compared to

the three months ended September 30, 2011.

The decrease relates primarily to decreased insurance premiums and other employee related costs due to the decrease in the number of employees in 2012 compared to 2011.

In addition, general and

administrative expense remained consistent for the nine months ended September 30, 2012 compared to the nine months ended September 30, 2011.

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

Page 20 of 29

Depreciation and Amortization

September 30,

(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.

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Depreciation and amortization decreased by $15,000 and $110,000 for the three and nine months ended September 30,

2012 in comparison to the three and nine months ended September 30, 2011, respectively.

Amortization expense decreased by $10,000 and $91,000 for the three and nine months ended September 30, 2012 as compared to the same periods in 2011,

respectively.

In addition, depreciation expense decreased by $5,000 and $19,000 for the three and nine months ended September 30, 2012 as compared to the same periods in 2011, respectively.

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

Other (Income) Expense

September 30,

(In thousands, except percentages)

2 unchanged sentences

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

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

$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.

Other (income) expense changed by $68,000 for the three months ended September 30, 2012 in comparison to the three months ended September 30, 2011.

The net other

income of $156,000 for the three months ended September 30, 2012 is comprised of rental income of $35,000, dividend income of $70,000, and miscellaneous income of $52,000.

The net other income of $88,000 for the three months ended

September 30, 2011 is comprised primarily of rental income of $86,000.

Other (income) expense changed by $441,000 for the nine months

ended September 30, 2012 in comparison to the nine months ended September 30, 2011.

The net other income of $512,000 for the three months ended September 30, 2012 is comprised of rental income of $290,000, dividend income of $128,000,

capital gain income of $48,000 and miscellaneous income of $47,000.

The net other income of $71,000 for the nine months ended September 30, 2011 is comprised primarily of rental income of $224,000, partially offset by a loss of $151,000 related

to adjusting our derivative liabilities to fair value.

Interest Expense, Net

September 30,

(In thousands, except percentages)

Interest expense, net

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 $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.

Interest expense, net decreased by $5,000 for the three months ended September 30, 2012 in comparison to the three

months ended September 30, 2011.

The net interest expense of $101,000 for the three months ended September 30, 2012 is primarily comprised of interest expense on debt and other payables of $97,000 and amortization of our debt discount of

$33,000, partially offset by interest income on our notes receivable of $29,000.

The net interest expense of $106,000 for the three months ended September 30, 2011 is primarily comprised of interest expense on debt and other payables of $99,000

and amortization of our debt discount of $33,000, partially offset by interest income on our notes receivable of $26,000.

Page 21 of 29

Interest expense, net decreased by $14,000 for the nine months ended September 30, 2012 in comparison

to the nine months ended September 30, 2011.

The net interest expense of $316,000 for the nine months ended September 30, 2012 is primarily comprised of interest expense on debt and other payables of $298,000 and amortization of our debt

discount of $99,000, partially offset by interest income on our note receivable of $81,000.

The net interest expense of $329,000 for the nine months ended September 30, 2011 is primarily comprised of interest expense on long-term debt of

$308,000 and amortization of our debt discount of $99,000, partially offset by interest income on our note receivable of $78,000.

Liquidity and Capital Resources

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;

Cash flows from

operating activities of continuing operations of $(1,161,000) for the nine months ended September 30, 2012 increased $844,000 from $(2,005,000) for the nine months ended September 30, 2011.

Total cash flows from operations of $(1,161,000)

in the current period are primarily attributable to:

$2,835,000 net loss.

Partially offset by:

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

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

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

$123,000 increase in deferred revenue;

$562,000 increase in accounts payable and accrued expenses.

Page 21 of 29

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.

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

Cash flows from investing activities of continuing operations of $618,000 for the nine months ended September 30, 2012 increased $830,000 from $(212,000) for the nine months ended September 30,

Total cash flows from investing activities of $618,000 are related to $600,000 in proceeds from the sale of certain of our operating divisions and $64,000 in proceeds from the sale of our available-for-sale securities, partially offset by

$45,000 in the capitalization of software development costs.

Cash flows from financing activities of continuing operations of $(235,000) for

the nine months ended September 30, 2012 increased $290,000 from $(525,000) for the nine months ended September 30, 2011.

Total cash flows from financing of $(235,000) are related to principal payments on long-term debt of $458,000,

partially offset by net proceeds from our stock offering of $223,000.

Software Development Costs

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 are continuing the development of our LaunchPad software.

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

development of the next components of LaunchPad with Version 2.0.

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

We expect to incur approximately $100,000 in additional expenditures for product

development of Version 2.0 and refinement of Version 1.0 for the remainder of 2012.

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

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

We incurred a net loss of $(7,572,110) and $(4,920,723) for the nine

months ended September 30, 2012 and the year ended December 31, 2011, respectively.

In addition, we have a working capital deficit of $(3,907,425) and an accumulated deficit of $(84,019,275) as of September 30, 2012.

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

Our primary cash requirements include working capital, research

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

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

time to time of our investments and our common stock.

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

costs, with existing cash balances, cash generated from operations, collections of our existing receivables, the potential sales of our investments and the sale of our common stock.

Given our cash position, working capital deficit and expected

revenues in the near term, we do not expect that we will be able to fund our scheduled debt service payments of $4.0 million (of which $1.25 million was due in October 2012 and $2.75 million is due in May 2013) and our operating requirements for the

next twelve months.

Our debt is secured by our office building and land.

On October 22, 2012, the lender agreed to extend the maturity date on the $1.25 million that would otherwise be due on that date until October 22, 2015.

See Item 2

Managements Discussion and Analysis of Financial Condition and Results of Operations Recent Developments for additional information about this agreement.

We are exploring opportunities for obtaining a credit facility, as well as

selling equity securities.

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

However, if such measures prove inadequate, we could face

liquidity problems and might be required to reduce or delay planned capital expenditures and other initiatives, and we may

Page 22 of 29

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.

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.

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

We cannot be certain that additional capital, whether through selling additional debt

or equity securities or obtaining a line of credit or other loan, will be available to us or, if available, will be on terms acceptable to us.

If we issue additional securities to raise funds, these securities may have rights, preferences, or

privileges senior to those of our common stock, and our current shareholders may experience dilution.

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

costs and forego future development and other opportunities.

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

Page 22 of 29

Critical Accounting Estimates

The preparation of financial statements in conformity with GAAP requires management to make assessments, estimates and assumptions that affect the amounts reported in the financial statements.

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 six months ended June 30, 2012.

The preparation of financial statements in conformity with

GAAP requires management to make assessments, estimates and assumptions that affect the amounts reported in the financial statements.

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

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 nine months ended September 30, 2012.

Quantitative and Qualitative Disclosures about Market Risks

1 unchanged sentence

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