Innovaro (INNI) 10-Q 2010 Q3 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2010

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number 001-15941

INNOVARO, INC.

(Exact name of registrant as specified in its charter)

Delaware	59-3603677
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

2109 Palm Avenue

Tampa, FL 33605

(Address of principal executive offices)

(813) 754-4330

(Registrant’s telephone number)

UTEK CORPORATION

(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ¨    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer	¨	Accelerated filer	¨
Non-accelerated filer	¨  (Do not check if a smaller reporting company)	Smaller reporting company	x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

On November 8, 2010, there were 14,136,275 shares outstanding of registrant’s common stock, $0.01 par value.

INNOVARO, INC.

FORM 10-Q TABLE OF CONTENTS

PART I. FINANCIAL INFORMATION
	ITEM 1.	Financial Statements
	Consolidated Balance Sheets as of September 30, 2010 (unaudited) and December 31, 2009		3
	Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2010 and 2009 (unaudited)		4
	Consolidated Statement of Changes in Equity for the Nine Months Ended September 30, 2010 (unaudited)		5
	Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2010 and 2009 (unaudited)		6
	Notes to Consolidated Financial Statements (unaudited)		8
	ITEM 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	21
	ITEM 3.	Quantitative and Qualitative Disclosures about Market Risks	31
	ITEM 4.	Controls and Procedures	31
PART II. OTHER INFORMATION
	ITEM 1.	Legal Proceedings	31
	ITEM 1A.	Risk Factors	31
	ITEM 2.	Unregistered Sales of Equity Securities and Use of Proceeds	32
	ITEM 3.	Defaults Upon Senior Securities	32
	ITEM 4.	Reserved	32
	ITEM 5.	Other Information	32
	ITEM 6.	Exhibits	32
	Signatures		33
	Exhibits

Page 2 of 37

PART I. FINANCIAL INFORMATION

ITEM 1. Financial Statements

INNOVARO, INC.

Consolidated Balance Sheets

	September 30, 2010 (Unaudited)			December 31, 2009
ASSETS
Current assets:
Cash and cash equivalents	$	2,208,344		$	2,118,970
Accounts receivable, net		2,793,957			1,481,548
Certificates of deposit		—			492,246
Available-for-sale securities		146,800			729,800
Investments under cost method		—			588,085
Prepaid expenses and other assets		388,179			569,829
Total current assets		5,537,280			5,980,478
Investments under cost method		564,085			—
Investments under equity method		329,310			—
Note receivable and accrued interest		1,674,000			1,596,000
Fixed assets, net		6,911,601			8,388,263
Goodwill		6,437,453			15,874,139
Intangible assets, net		6,461,035			8,492,301
Total assets	$	27,914,764		$	40,331,181
LIABILITIES
Current liabilities:
Accounts payable	$	647,204		$	454,509
Accrued expenses		2,391,917			462,802
Accrued severance payable		—			876,400
Deferred revenue		1,024,044			1,634,096
Current maturities of long-term debt		154,590			975,360
Derivative liabilities		508,599			664,972
Total current liabilities		4,726,354			5,068,139
Long-term debt, less current maturities		5,380,156			5,353,892
Deferred tax liability		894,789			1,303,031
Total liabilities		11,001,299			11,725,062
EQUITY
Innovaro stockholders’ equity:
Preferred stock, $.01 par value, 1,000,000 shares authorized; none issued and outstanding		—			—
Common stock, $.01 par value, 29,000,000 shares authorized; 14,602,419 and 12,286,768 shares issued; 14,136,275 and 11,797,140 shares outstanding at September 30, 2010 and December 31, 2009, respectively		141,363			117,971
Additional paid-in capital		84,807,424			81,010,460
Total accumulated loss under Investment Company Accounting		(52,073,915	)		(52,073,915	)
Accumulated income (deficit) under Operating Company Accounting:
Accumulated deficit		(16,637,091	)		(624,006	)
Accumulated other comprehensive income (loss)		147,997			175,609
Total Innovaro stockholders’ equity		16,385,778			28,606,119
Noncontrolling interest		527,687			—
Total equity		16,913,465			28,606,119
Total liabilities and equity	$	27,914,764		$	40,331,181

See accompanying notes

Page 3 of 37

INNOVARO, INC.

Consolidated Statements of Operations

(Unaudited)

	Operating Company Accounting			Investment Company Accounting			Operating Company Accounting			Investment Company Accounting
	Three Months Ended Sept. 30, 2010			Three Months Ended Sept. 30, 2009			Nine Months Ended Sept. 30, 2010			Nine Months Ended Sept. 30, 2009
Revenue / Income from operations:
Strategic services	$	3,337,416		$	1,544,407		$	6,684,046		$	4,798,695
Technology marketplaces		220,825			362,446			783,073			1,179,098
Insights and research		648,173			432,228			1,810,501			1,727,267
Investment income, net		—			2,100			—			59,604
		4,206,414			2,341,181			9,277,620			7,764,664
Expenses:
Direct costs of revenue		3,488,993			1,573,358			6,538,396			5,679,371
Salaries and wages		648,118			533,942			2,117,273			4,768,390
Professional fees		142,494			229,700			509,591			649,723
Research and development		297,587			—			848,241			—
Sales and marketing		18,867			65,673			456,744			354,988
General and administrative		593,136			620,721			1,770,808			2,286,193
Depreciation and amortization		388,095			384,686			1,184,503			1,206,777
Impairment loss		11,620,708			—			11,620,708			2,368,458
		17,197,998			3,408,080			25,046,264			17,313,900
Other (income) and expense:
Other (income) expense (Note 12)		283,239			—			126,850			—
Interest expense, net		235,136			—			512,374			—
		518,375						639,224
Loss before income taxes		(13,509,959	)		(1,066,899	)		(16,407,868	)		(9,549,236	)
Provision for income tax benefit		(300,529	)		(36,000	)		(390,338	)		(208,585	)
Net loss from operations		(13,209,430	)		(1,030,899	)		(16,017,530	)		(9,340,651	)
Net realized and unrealized gains (losses) from investment company activity:
Net realized gains (losses) on investments		—			(12,156,063	)		—			(49,591,193	)
Net change in unrealized appreciation (depreciation) of investments		—			10,768,155			—			44,292,068
Net loss / Net decrease in net assets from operations		(13,209,430	)	$	(2,418,807	)		(16,017,530	)	$	(14,639,776	)
Net loss attributable to noncontrolling interest		(2,084	)					(4,445	)
Net loss attributable to Innovaro stockholders	$	(13,207,346	)				$	(16,013,085	)
Net loss attributable to Innovaro stockholders per share / Net decrease in net assets from operations per share: Basic and diluted	$	(0.91	)	$	(0.21	)	$	(1.26	)	$	(1.30	)
Weighted average shares outstanding: Basic and diluted		14,536,396			11,561,091			12,745,278			11,257,663

See accompanying notes

Page 4 of 37

INNOVARO, INC.

Consolidated Statement of Changes in Equity

(Unaudited)

	Innovaro Stockholders’ Equity																					Noncontrolling Interest			Total Equity
	Common Stock									Total Accumulated Loss under Investment Company Accounting			Comprehensive Income (loss)			Accumulated Deficit			Accumulated Other Comprehensive Income (Loss)
	Shares Issued		Shares Outstanding		Par Value		Additional Paid- In Capital
Balances at December 31, 2009		12,286,768		11,797,140	$	117,971	$	81,010,460		$	(52,073,915	)				$	(624,006	)	$	175,609		$	—		$	28,606,119
Settlement of severance liability for 32% interest in Cortez 114, LLC		—		—		—		17,868			—						—			—			532,132			550,000
Comprehensive loss:
Net loss		—		—		—		—			—		$	(16,013,085	)		(16,013,085	)		—			(4,445	)		(16,017,530	)
Other comprehensive income (loss):
Unrealized gain (loss) from available-for-sale securities		—		—		—		—			—			171,047			—			—			—			—
Foreign currency translation adjustments		—		—		—		—			—			(198,659	)		—			—			—			—
Other comprehensive loss		—		—		—		—			—			(27,612	)		—			(27,612	)		—			(27,612	)
Comprehensive loss													$	(16,040,697	)
Investment in Verdant Ventures Advisors, LLC		243,933		243,933		2,439		997,686			—						—			—			—			1,000,125
Private offering of equity securities, net of offering costs of $593,440		1,481,481		1,481,481		14,815		3,191,744			—						—			—			—			3,206,559
Warrants issued as direct offering costs in connection with private equity securities offering		—		—		—		(661,236	)		—						—			—			—			(661,236	)
Issuance of shares upon exercise of warrants		590,237		590,237		5,903		(5,903	)		—						—			—			—			—
Earnout accrual		—		23,484		235		43,445																		43,680
Stock-based compensation expense		—		—		—		213,360			—						—			—			—			213,360
Balances at September 30, 2010		14,602,419		14,136,275	$	141,363	$	84,807,424		$	(52,073,915	)				$	(16,637,091	)	$	147,997		$	527,687		$	16,913,465

See accompanying notes

Page 5 of 37

INNOVARO, INC.

Consolidated Statements of Cash Flows

(Unaudited)

	Operating Company Accounting			Investment Company Accounting
	Nine Months Ended Sept. 30, 2010			Nine Months Ended Sept. 30, 2009
Operating Activities:
Net loss attributable to Innovaro stockholders / Net decrease in net assets from operations	$	(16,013,085	)	$	(14,639,776	)
Adjustments to reconcile net loss attributable to Innovaro stockholders / net decrease in net assets from operations to net cash flows from operating activities:
Change in net unrealized (appreciation) depreciation of investments from investment company activity		—			(44,292,068	)
Loss on sale of investments from investment company activity		—			49,591,193
Net proceeds from sale (purchase) of short-term investments		—			(198,420	)
Proceeds from sale of equity investments from investment company activity		—			681,727
Goodwill and intangible asset impairment		10,332,628			2,368,458
Net loss attributable to noncontrolling interest		(4,445	)		—
Depreciation and amortization		1,184,503			1,206,777
Amortization of debt discount from investor warrants		247,252			—
Loss on sale and impairment of investments		1,136,865			—
Fixed asset impairment		1,288,080			—
Gain on derivative liabilities		(817,609	)		—
Stock-based compensation		213,360			438,217
Severance compensation paid for in escrowed shares		—			2,544,580
Deferred income taxes		(390,338	)		(208,585	)
Other		(24,974	)		102,213
Changes in operating assets and liabilities:
Accounts receivable		(1,318,457	)		985,238
Prepaid expenses and other assets		103,604			324,374
Deferred revenue		(599,461	)		(836,752	)
Accounts payable and accrued expenses		1,802,353			(642,577	)
Net cash flows from operating activities		(2,859,724	)		(2,575,401	)
Investing Activities:
Capital expenditures		(39,546	)		(7,006	)
Cash paid in connection with Strategos acquisition		—			(292,468	)
Proceeds from sale of available-for-sale securities		311,997			—
Proceeds from redemption of certificates of deposit		492,246			—
Net cash flows from investing activities		764,697			(299,474	)
Financing Activities:
Net proceeds (repayments) on bank line of credit		(250,000	)		250,000
Payments on long-term debt		(791,758	)		(198,791	)
Gross proceeds from private equity securities offering		3,799,999			—
Offering costs paid from private equity securities offering		(593,440	)		—
Net cash flows from financing activities		2,164,801			51,209
Effect of foreign exchange rates		19,600			20,528
Increase (decrease) in cash and cash equivalents		89,374			(2,803,138	)
Cash and cash equivalents at beginning of period		2,118,970			3,922,297
Cash and cash equivalents at end of period	$	2,208,344		$	1,119,159

See accompanying notes

Page 6 of 37

INNOVARO, INC.

Consolidated Statements of Cash Flows (continued)

(Unaudited)

	Nine Months Ended September 30,
	2010			2009
Supplemental Disclosures of Non-Cash Investing and Financing Activities
The Company received a note in connection with the sale of certain investments				$	1,500,000
The Company received 100,000 shares in Technology Capital Services, LLC in connection with the sale of certain investments				$	69,568
The Company received 375,000 shares in Oxygen Biotherapeutics, Inc. in connection with the redemption of 750,000 warrants				$	148,750
The Company issued stock in connection with an investment in UTEK Real Estate Holdings, Inc. as follows:
176,470 shares of Innovaro common stock				$	1,500,000
240,964 shares of NeoStem, Inc. common stock					200,000
				$	1,700,000
The Company issued 23,484 and 85,950 shares of common stock in connection with certain acquisition earnout contingencies during the nine months ended September 30, 2010 and 2009, respectively	$	43,680		$	506,051
Unrealized gain (loss) from available-for-sale securities	$	171,047
The Company transferred certain equity interests in a subsidiary to satisfy a severance obligation resulting in the following:
Noncontrolling interest	$	532,132
Increase to additional paid-in capital		17,868
	$	550,000
The Company issued 243,933 shares of common stock in connection with its investment in Verdant Ventures Advisors, LLC	$	1,000,125
Warrants issued as direct offering costs in connection with private equity securities offering	$	(661,236	)
Supplemental Disclosures of Cash Flow Information
Cash paid for taxes	$	—		$	—
Cash paid for interest	$	367,748		$	50,206

See accompanying notes

Page 7 of 37

INNOVARO, INC.

Notes to Consolidated Financial Statements

(Unaudited)

1. Basis of Presentation and Significant Accounting Policies

Interim Financial Information

The financial information for Innovaro, Inc. (the “Company”, “we”, “us” or “Innovaro”) as of September 30, 2010 and 2009 and for the three and nine month periods then ended is unaudited, but includes all adjustments (consisting only of normal recurring accruals), which, in the opinion of management are necessary in order to make the consolidated financial statements not misleading at such dates and for those periods. These consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America 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 for complete consolidated financial statements. These consolidated financial statements should be read in conjunction with the consolidated audited financial statements and related notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2009. Operating results for the nine months ended September 30, 2010 are not necessarily indicative of the results that may be expected for the entire year.

Basis of Presentation

Until September 30, 2009, the Company was a non-diversified, closed-end management investment company that had elected to be treated as a business development company (“BDC”) under the Investment Company Act of 1940 (“1940 Act”). On October 1, 2009, the Company filed a notification on Form N-54C with the Securities and Exchange Commission (“SEC”) withdrawing its election to be regulated as a BDC under the 1940 Act. As such, the Company began reporting as an operating company as of October 1, 2009.

As a result of our de-election from BDC status, we make reference to both Investment Company Accounting and Operating Company Accounting throughout these consolidated financial statements. Investment Company Accounting, as we refer to it, is defined as accounting in accordance with generally accepted accounting principles in the United States (“GAAP”) for investment companies under the 1940 Act and Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 946Financial Services - Investment Companies. Operating Company Accounting, as we refer to it, is defined as accounting in accordance with GAAP other than for investment companies under the 1940 Act and Topic 946.

Presentation of Financial Statements

The Company made the following adjustments in order to present two periods of financial statements together for which the periods include two different methods of accounting. Changes made to the accompanying consolidated statements of operations include the following:

• Operations in the consolidated statements of operations are presented comparatively in two different formats to properly report results of operations in accordance with the accounting in effect during the respective periods. Operations for the three and nine months ended September 30, 2010 are presented in operating company format and operations for the three and nine months ended September 30, 2009 are presented in investment company format.

• The statements of operations for the three and nine months ended September 30, 2010 are presented in operating company format. Certain operating company balances are not applicable to an investment company and are not included for the three and nine months ended September 30, 2009. These include other (income) expense and interest expense, net.

• UTEK Real Estate Holdings, Inc.’s results of operations are consolidated with those of Innovaro for the three and nine months ended September 30, 2010 and intercompany transactions, including intercompany borrowings and rent, are eliminated in consolidation. At September 30, 2009, UTEK Real Estate Holdings, Inc. was included as one of the Company’s portfolio companies and its results of operations are not consolidated into those of Innovaro for the three and nine months ended September 30, 2009.

• The statements of operations for the three and nine months ended September 30, 2009 are presented in investment company format. Certain investment company balances are not applicable to an operating company and are not included for the three and nine months ended September 30, 2010. These include investment income, net realized gains (losses) on investments and net change in unrealized appreciation (depreciation) of investments. During the three and nine months ended September 30, 2010, income and losses from these sources are classified as follows:

• Investment income is included in other (income) expense or interest expense, net, depending on its source.

• Realized gains (losses) on investments are included in other (income) expense.

Page 8 of 37

• Unrealized gain (loss) from available-for-sale securities is reported in operating company equity as a component of accumulated other comprehensive income (loss) in the consolidated balance sheet.

Other changes include the following:

• Other comprehensive income (loss) is not applicable to investments companies, and therefore, any related disclosures are applicable only for the three and nine months ended September 30, 2010.

• The Consolidated Schedule of Investments, Consolidated Statement of Changes in Net Assets and Financial Highlights are not presented as they are financial statement requirements under Investment Company Accounting.

The Company

The Company provides services that help clients become stronger innovators, develop compelling strategies to drive and catalyze growth, rapidly source externally developed technologies, create value from their intellectual property (“IP”) and gain foresight into marketplace and technology developments that affect their business. These services are primarily provided internationally from our offices in the United States and the United Kingdom.

On March 16, 2010, the Company began doing business as Innovaro and changed its ticker symbol to NYSE Amex: “INV.” On July 8, 2010, the Company’s shareholders voted to amend the Company’s certificate of incorporation to change the Company’s name to Innovaro, Inc. The name change became effective on July 12, 2010.

Principles of Consolidation

The consolidated financial statements include the accounts of Innovaro and its wholly owned subsidiaries: Innovaro Europe, Ltd. (formerly UTEK Europe, Ltd.) and UTEK Real Estate Holdings, Inc. (as of October 1, 2009). All intercompany transactions and balances are eliminated in consolidation.

The Company is reporting as an investment company for the three and nine months ended September 30, 2009. As an investment company, portfolio investments are held for the purpose of deriving investment income and future capital gains. The operating results of the Company’s portfolio companies, including UTEK Real Estate Holdings, Inc., are not consolidated with the Company’s financial statements for the three and nine months ended September 30, 2009.

The Company is reporting as an operating company for the three and nine months ended September 30, 2010. As such, the Company is required to consolidate UTEK Real Estate Holdings, Inc. and its subsidiaries: Ybor City Group, Inc., 22nd Street of Ybor City, Inc., ABM of Tampa Bay, Inc., and Cortez 114, LLC (collectively “UTEK Real Estate”). The results of operations of UTEK Real Estate have been included in the Company’s operations for the three and nine months ended September 30, 2010. In addition, the assets and liabilities of UTEK Real Estate have been included in the Company’s financial position as of September 30, 2010 and December 31, 2009. As of September 30, 2010, none of the Company’s other equity investments qualify for consolidation in accordance with GAAP.

Accounts Receivable

The allowance for doubtful accounts was approximately $3,000 and $83,000 as of September 30, 2010 and December 31, 2009, respectively.

Revenue Recognition

Beginning in March 2010, the Company reorganized into three new lines of business, all working under the Innovaro brand: Strategic Services – driven by Strategos, an advanced innovation consultancy; Technology Marketplaces – online platforms, partnering services, global licensing and technology transfer services; and Insights & Research – futures and trends, research, information services and IP consulting.

Strategic Services

The Company has revenues from fixed fee contracts for the sale of strategic consulting services. These revenues are recognized on a pro rata basis based upon costs incurred to date compared to total estimated contract costs. Prior to the commencement of a client engagement, the Company and the client agree on fees for services based upon the scope of the project, staffing requirements and the level of client involvement. Total revenues are comprised of professional fees for services rendered to clients plus reimbursement of out-of-pocket expenses and exclude applicable taxes. The Company bills clients for services and expenses incurred in accordance with the terms of the client engagement agreement.

Page 9 of 37

Revenues from strategic consulting services are also provided on a time-and-expense basis. Time-and-expense billing arrangements generally require the client to pay based on the number of hours worked by our consulting professionals at agreed-upon rates. Time-and-expense revenues are billed and recognized as incurred.

Technology Marketplaces

Revenues from the sale of subscriptions to the Company’s online marketplaces are initially deferred and subsequently recognized ratably over the term of the subscription, which is typically one year.

Global technology licensing services are performed pursuant to service agreements in which the Company provides consulting services by identifying and evaluating technology licensing opportunities for clients. These agreements are typically cancelable with thirty days notice.

Revenues from the sale of technology rights are recognized upon consummation of the agreement and transfer of the technology rights.

Insights and Research

Revenues from the sale of subscriptions to the Company’s information services websites and online futures programs are initially deferred and subsequently recognized ratably over the term of the subscription, which is typically one year.

The Company has certain consulting revenue that is derived from the sale of research services in intellectual property insight, technology foresight, forecasting, scenario playing, vision, creativity and leadership, as well as the sale of services to provide for the design, development and implementation of custom software applications. Vendor specific objective evidence is not available to allocate among the respective deliverables in contracts with multiple deliverables. Accordingly, the Company recognizes revenue for these consulting services at the point when all the deliverables associated with the consulting contract have been provided to the customer.

Before the Company recognizes revenue, the following criteria must be met:

• Evidence of a financial arrangement or agreement must exist between the Company and its customer. Purchase orders, signed contracts, or electronic confirmations are three examples of items accepted by the Company to meet this criterion.

• Delivery of the products or services must have occurred. The Company treats either physical or electronic delivery as having met this requirement.

• The price of the products or services is fixed and measurable.

• Collectability of the sale is reasonably assured and receipt is probable. Collectability of a sale is determined on a customer-by-customer basis.

Differences between the timing of billings and the recognition of revenue are recognized as either unbilled services (included as a component of accounts receivable) or deferred revenue in the consolidated balance sheets. Client prepayments and retainers are classified as deferred revenue and recognized over future periods as earned.

Direct Costs of Revenue

Direct costs of revenue consist of direct costs related to the Company’s strategic services, technology marketplaces and insights & research segments. Direct costs of revenue include salaries and related taxes, bonuses and commissions, certain outside services, business development costs, royalties and other direct project costs.

Research and Development

In accordance with ASC Subtopic 985-20Costs of Software to Be Sold, Leased, or Marketed, the Company expenses all costs incurred to establish the technological feasibility of a computer product to be sold, leased, or otherwise marketed as research and development costs. Research and development costs incurred to date have been expensed in the accompanying statements of operations as the Company’s innovation software platform has not reached technological feasibility.

Reclassifications

In connection with the change in the Company’s business segments, certain reclassifications have been made to the 2009 balances to conform to the 2010 financial statement presentation. Reclassifications were made to revenue to conform to the Company’s new line

Page 10 of 37

of business segments. Reclassifications were also made to expenses to move direct costs associated with these business lines into direct costs of revenue. In addition, reclassifications were made to 2010 balances to segregate research and development costs on the statements of operations.

Earnings per Share (EPS)

Basic earnings per share is computed on the basis of the weighted-average number of shares of common stock outstanding during the period. Diluted earnings per share is computed on the basis of the weighted-average number of shares of common stock outstanding plus the effect of dilutive potential common shares outstanding during the period using the treasury stock method. The Company’s dilutive potential common shares consist of outstanding stock options and warrants.

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

	Three Months Ended September 30				Nine Months Ended September 30
	2010		2009		2010		2009
Weighted-average outstanding shares of common stock		14,536,396		11,561,091		12,745,278		11,257,663
Dilutive effect of stock options and warrants		—		—		—		—
Common stock and common stock equivalents		14,536,396		11,561,091		12,745,278		11,257,663
Shares excluded from calculation of diluted EPS (1)		2,584,483		1,014,400		2,584,483		1,014,400

(1) These shares attributable to outstanding common stock options and warrants were excluded from the calculation of diluted EPS because their inclusion would have been anti-dilutive, primarily as a result of the net loss/ net decrease in net assets from operations during the periods presented.

Financial Instruments and Concentrations of Credit Risk

The Company’s financial instruments consist of cash and cash equivalents, accounts receivable, certificates of deposit, investments, accounts payable, accrued expenses, long-term debt and the derivative liabilities. With the exception of investments under cost method discussed in Note 2, investments under equity method discussed in Note 3 and fair value measurements discussed in Note 5, the carrying amounts of the Company’s financial instruments approximate their fair values.

Financial instruments with significant credit risk include cash and cash equivalents, certificates of deposit and investments. The Company invests its cash and cash equivalents and certificates of deposit with high credit quality financial institutions. Certain cash and cash equivalents were in excess of FDIC insurance limits at September 30, 2010 and December 31, 2009. The Company has not experienced any losses on such accounts.

The Company had two major customers during the three months ended September 30, 2009, one major customer during the nine months ended September 30, 2009, four major customers during the three months ended September 30, 2010 and two major customers during the nine months ended September 30, 2010, all of which were customers of the strategic services line of business. Major customers, those generating greater than 10% of total revenue, accounted for approximately 62% and 22% of the Company’s revenue during the three months ended September 30, 2010 and 2009, respectively. Major customers accounted for approximately 26% and 11% of the Company’s revenue during the nine months ended September 30, 2010 and 2009, respectively. In addition, three customers accounted for approximately 61% of accounts receivable at September 30, 2010.

2. Investments under Cost Method

The Company classifies its investments in equity securities of noncontrolled entities that do not have readily determinable fair values as investments under cost method in accordance with ASC Subtopic 325-20Cost Method Investments. Investments under cost method comprising $564,085 have been classified as non-current assets in accordance with the Company’s intent and ability regarding liquidity of the investments. During the third quarter of 2010, these investments were reclassified from current assets based on the Company’s ability to liquidate these investments. The Company estimated that the fair value of these investments exceeded their respective carrying amounts as of September 30, 2010.

3. Investments under Equity Method

On April 14, 2010, the Company entered into a limited liability company agreement to form Verdant Ventures Advisors, LLC (“Verdant Ventures”). Under this agreement, the Company made an investment of 243,933 shares of the Company’s common stock worth $1,000,125 in exchange for a 15% ownership in Verdant Ventures. Verdant Ventures operates as an independently

Page 11 of 37

managed technology transfer venture fund. John Micek, one of the Company’s directors, is managing partner of Verdant Ventures, as well as a member of two limited liability companies that are also parties to the limited liability company agreement of Verdant Ventures. Pursuant to the agreement, the Company is not required to make any additional capital contributions or loans to Verdant Ventures and is not involved in its management. Verdant Ventures may sell up to one-third of the Company’s contributed shares each year during a three-year period from the date the Company first contributed the shares.

The Company evaluated its investment in Verdant Ventures under ASC Topic 810Consolidation and concluded that this investment does not meet the requirements for consolidation. This investment has been recorded as an investment under equity method in the accompanying balance sheet as of September 30, 2010. Management changed the classification of this investment from the cost method to the equity method in the current period as a result of having obtained new information. Any adjustments made to the accompanying financial statements as a result of this change in classification were immaterial. This investment has been classified as a non-current asset in accordance with the Company’s intent and ability regarding liquidity of the investment.

As a result of the substantial decline in our stock price subsequent to June 30, 2010, the Company recorded an impairment loss to its investment in Verdant Ventures of approximately $671,000 during the quarter ended September 30, 2010. This realized loss is included as a component of other (income) expense in the consolidated statements of operations for the three and nine months ended September 30, 2010.

4. Available-for-Sale Securities

The Company classifies its investments in freely tradable equity securities as available-for-sale in accordance with ASC Topic 320Investments – Debt and Equity Securitiesand its intentions regarding these instruments. A summary of the estimated fair value of available-for-sale securities is as follows as of September 30, 2010.

			Unrealized (1)				Realized
	Cost		Gains		Losses		Losses			Fair Value
Equity securities (available-for-sale)	$	420,800	$	100,101	$	—	$	(374,101	)	$	146,800

(1) The net unrealized gain of $100,101 is included in operating company equity as a component of accumulated other comprehensive income (loss) in the consolidated balance sheets.

Proceeds from the sale of available-for-sale securities were approximately $63,000 and $312,000 for the three and nine months ended September 30, 2010, respectively. As of September 30, 2010, none of our six total available-for-sale securities were in an unrealized loss position. Gross realized gains (losses) as a result of the sale of available-for-sale securities were approximately $(57,000) and $54,000 for the three and nine months ended September 30, 2010, respectively. In addition, the Company recognized losses as a result of impairment to available-for-sale securities of approximately $374,000 and $520,000 for the three and nine months ended September 30, 2010, respectively. $146,000 of the loss during the nine months ended September 30, 2010 related to certain warrants classified as available-for-sale securities that the Company determined were permanently impaired. These warrants subsequently expired unexercised. The remaining $374,000 loss related to three securities that had significant unrealized losses to date as of September 30, 2010. These losses were written off in the third quarter of 2010 as a result of management’s determination that these losses were other-than-temporary. These realized losses are included as a component of other (income) expense in the consolidated statements of operations for the three and nine months ended September 30, 2010.

Unrealized gain (loss) from available-for-sale securities for the nine months ended September 30, 2010 is shown in the accompanying statement of equity net of the reclassification adjustment. Disclosure of the gross amounts of the current period gain (loss) and amounts that were reclassified out of accumulated other comprehensive income (loss) into earnings are as follows:

	Nine months Ended Sept.  30, 2010
Unrealized holding gain (loss) arising during the period	$	(45,900	)
Add back: reclassification adjustment for net (gains) losses included in net income		216,947
Unrealized gain (loss) from available-for-sale securities, net	$	171,047

Page 12 of 37

5. Fair Value Measurements

The Company performs fair value measurements in accordance with the guidance provided by ASC Topic 820Fair Value Measurements and Disclosures. Topic 820 defines fair value as the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When determining the fair value measurements for assets and liabilities required to be recorded at fair value, management considers the principal or most advantageous market in which the Company would transact and considers assumptions that market participants would use when pricing the asset or liability, such as inherent risk, transfer restrictions, and risk of nonperformance.

Topic 820 establishes a fair value hierarchy that encourages and is based on the use of observable inputs, but allows for unobservable inputs when observable inputs do not exist. When there are multiple inputs for determining the fair value of an investment, the Company classifies the investment in the fair value hierarchy based on the lowest level input that is significant to the fair value measurement. Inputs are classified into one of three categories:

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

• Level 2—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.

• Level 3—Unobservable inputs for the asset or liability.

Assets measured at fair value on a recurring basis by level within the fair value hierarchy as of September 30, 2010 and December 31, 2009 are as follows:

	Fair Value Measurements  at September 30, 2010 Using						Fair Value Measurements at December 31, 2009 Using
	Level 2			Total			Level 2			Total
Assets:
Certificates of deposit	$	—		$	—		$	492,246		$	492,246
Available-for-sale securities		146,800			146,800			729,800			729,800
Total assets	$	146,800		$	146,800		$	1,222,046		$	1,222,046
Liabilities:
Derivative liabilities	$	(508,599	)	$	(508,599	)	$	(664,972	)	$	(664,972	)
Total liabilities	$	(508,599	)	$	(508,599	)	$	(664,972	)	$	(664,972	)

The Company’s investments in certificates of deposit and available-for-sale securities are classified within Level 2 of the fair value hierarchy. The equity interests in companies for which there is no liquid public market are valued using quoted market prices for identical or similar instruments in markets that are not active. The determined values are generally discounted to account for the illiquid nature of the investment and minority ownership positions. The value of our equity interests in public companies for which market quotations are readily available are based on quoted market prices for similar instruments in an active market. These securities are generally thinly traded and/or carry discounts from the public market value for certain restrictions on resale. The Company utilized the assistance of an independent valuation firm in determining these values at December 31, 2009. The Company and the valuation firm utilized the market approach in determining the fair value of these securities.

The Company’s derivative liabilities are classified within Level 2 of the fair value hierarchy. The Company utilizes the Black-Scholes Option Pricing Model to value the derivative liabilities utilizing observable inputs such as the Company’s common stock price, the exercise price of the related warrants, and expected volatility, which is based on historical volatility. The Black-Scholes model employs the market approach in the determination of fair value. See Notes 9 and 10 for further discussion of the derivative liabilities.

6. Fixed Assets

The Company recorded impairment of approximately $1,288,000 to certain of its land, building and building improvements during the third quarter of 2010. The commercial real estate market for the property has taken a significant downturn that is not expected to reverse in the near future. As a result, management determined that the decrease in the fair value of the property was other-than-temporary. The amount of the impairment was determined based on a third party valuation of the property. This impairment expense is included as a component of impairment loss in the consolidated statements of operations for the three and nine months ended September 30, 2010.

Page 13 of 37

7. Goodwill and Intangible Assets

In accordance with ASC Topic 350Intangibles – Goodwill and Other, management performs interim assessments of goodwill if impairment indicators are present. One such indicator is an adverse change in the business climate. As previously discussed in the Company’s Form 10-Q for the quarter ended June 30, 2010, the Company’s stock price declined significantly subsequent to June 30, 2010. A decline in stock price may be an indicator of an adverse change in business climate. In addition, a decline in stock price affects the Company’s market capitalization and may affect fair value measurements for the Company’s reporting units.

As of September 30, 2010, management concluded that the decline in the Company’s stock price is other than short-term in nature. This conclusion, coupled with the severity of the decline, triggered a review for impairment outside of the Company’s next scheduled annual impairment evaluation date of December 31, 2010. Due to the reduction in the Company’s market capitalization, third party valuation reports were performed to determine the fair value of the respective reporting units. As a result of the reduction in the fair value of the reporting units, management determined that the implied fair value of its goodwill and intangible assets is less than their carrying values by approximately $10.3 million. The Company recognized goodwill impairment of approximately $9.4 million and intangible assets impairment of approximately $971,000. The $10.3 million impairment expense is included as a component of impairment loss in the consolidated statements of operations for the three and nine months ended September 30, 2010.

If the decline in the Company’s stock is significantly further extended, additional material write-downs or impairment charges may be required in the future. The magnitude and timing of those charges would be dependent on the severity and duration of the decline and cannot be determined at this time. However, any additional material non-cash impairment charges related to goodwill or other intangible assets would have a material adverse effect on the Company’s operating results.

The following table presents goodwill and intangible assets as of September 30, 2010 and December 31, 2009.

	September 30, 2010								December 31, 2009
	Weighted Average Life		Gross Carrying Amount		Accumulated Amortization		Net Carrying Amount		Gross Carrying Amount		Accumulated Amortization		Net Carrying Amount
Amortizable intangible assets:
Trade names/ trademarks/ websites		5.0 years	$	666,056	$	498,223	$	167,833	$	674,293	$	438,574	$	235,719
Proprietary software/ processes/ know-how		6.1 years		2,410,000		920,212		1,489,788		3,172,396		807,598		2,364,798
Non-compete agreements		3.4 years		700,574		481,108		219,466		709,862		324,701		385,161
Customer list		7.3 years		3,077,414		1,070,682		2,006,732		3,749,493		833,054		2,916,439
Total amortizable intangible assets, net								3,883,819						5,902,117
Infinite-lived intangible assets:
Trade names								2,577,216						2,590,184
Total intangible assets, net							$	6,461,035					$	8,492,301
Goodwill							$	6,437,453					$	15,874,139

The changes to the net carrying value of goodwill by product segment for the nine months ended September 30, 2010 are as follows:

	Strategic Services			Technology Marketplaces			Insights & Research			Total
Balance as of December 31, 2009	$	7,300,096		$	1,928,824		$	6,645,219		$	15,874,139
Increases due to acquisitions and earnouts		43,680			—			—			43,680
Impairment		(3,891,678	)		(511,263	)		(4,958,219	)		(9,361,160	)
Translation adjustment		(65,200	)		(54,006	)		—			(119,206	)
Balance as of September 30, 2010	$	3,386,898		$	1,363,555		$	1,687,000		$	6,437,453

Page 14 of 37

The changes to the net carrying value of intangible assets by product segment for the nine months ended September 30, 2010 are as follows:

	Strategic Services			Technology Marketplaces			Insights & Research			Total
Balance as of December 31, 2009	$	7,066,788		$	488,258		$	937,255		$	8,492,301
Increases due to acquisitions and earnouts		—			—			—			—
Amortization		(793,777	)		(77,033	)		(101,619	)		(972,429	)
Impairment		(971,469	)		—			—			(971,469	)
Translation adjustment		(74,101	)		(13,267	)		—			(87,368	)
Balance as of September 30, 2010	$	5,227,441		$	397,958		$	835,636		$	6,461,035

8. Severance Liabilities

Clifford M. Gross, Ph.D. retired from his position as the Company’s chief executive officer on March 1, 2009 following the conclusion of the term of his employment agreement. The Company entered into a separation agreement with Dr. Gross on April 8, 2009 that modified the payment terms, but not the monetary obligation amount that Dr. Gross was entitled to receive pursuant to the employment agreement. In connection therewith, the Company issued to Dr. Gross a $550,000 promissory note that did not bear any interest and was due and payable on March 1, 2010. Pursuant to the terms of the promissory note, the Company had the option to elect to transfer certain equity interests in one of its subsidiaries, Cortez 114, LLC (“Cortez”), which owns real estate located in Hernando County, Florida, to Dr. Gross in lieu of making the $550,000 cash payment upon maturity of the promissory note.

On March 2, 2010, the Company satisfied its remaining severance obligation to Dr. Gross through the conveyance of a 32% ownership interest in Cortez. In connection with this severance payment, the Company paid approximately $320,000 to satisfy the related payroll taxes, which included an income tax gross-up.

This transaction was accounted for in accordance with ASC Topic 810Consolidation. The Company recognized a noncontrolling interest in the amount of $532,132, as determined by the carrying value of Company’s investment in Cortez. The Company also recorded $17,868 as additional paid-in capital for the excess of the liability reduction of $550,000 over the adjustment to the carrying amount of the noncontrolling interest. The noncontrolling interest is adjusted each quarter based on the net profit or loss of Cortez.

9. Long-term Debt

Note and Warrant Purchase Agreement

On October 22, 2009, the Company entered into a Note and Warrant Purchase Agreement (the “Purchase Agreement”) with Gators Lender, LLC (the “Lender”), pursuant to which the Company borrowed $1,750,000 from the Lender. In connection with this transaction, the Company issued a Promissory Note (the “Note”) to the Lender in the principal amount of $1,750,000. UTEK Real Estate is a co-borrower under the Note.

Pursuant to an Absolute Guaranty of Payment and Performance, this loan is guaranteed by all of the Company’s subsidiaries. In addition, this guaranty was secured pursuant to a Mortgage and Security Agreement encumbering vacant real property located in Hernando County, Florida (the “Collateral”), which is owned by Cortez 114, LLC (“Cortez”), a subsidiary of UTEK Real Estate.

Pursuant to a February 26, 2010, Substitution of Collateral Agreement and a Membership Interest Pledge Agreement and Release of Mortgage, the Lender’s security interest in the Collateral was released and replaced by a security interest in 68% of the outstanding membership interests of Cortez. In addition, the Note was amended and restated to provide that Innovaro and UTEK Real Estate must pay down $500,000 of the indebtedness to the Lender within 60 days. At Innovaro’s request, the Lender subsequently extended the repayment date for the $500,000 payment, which was made in accordance with this extension on July 12, 2010.

In accordance with ASC Topic 815Derivatives and Hedging, the Company recognized a derivative liability for the value of certain warrants that were granted in conjunction with the Purchase Agreement. The Company adjusts the derivative liability to fair value at the end of each quarter. The Company recognized a gain on adjustment of this derivative liability of approximately $207,000 and $249,000 for the three and nine months ended September 30, 2010, respectively. The gain on derivative liability is included as a component of other (income) expense in the consolidated statements of operations.

Page 15 of 37

10. Equity

Accumulated Other Comprehensive Income (Loss)

Components comprising the balance in accumulated other comprehensive income (loss) for the nine months ended September 30, 2010 are as follows:

	Unrealized gain (loss) from available-for- sale securities			Foreign currency translation adjustment			Accumulated other comprehensive income (loss)
Balance at December 31, 2009	$	(70,946	)	$	246,555		$	175,609
Gain (loss) for the period		171,047			(198,659	)		(27,612	)
Balance at September 30, 2010	$	100,101		$	47,896		$	147,997

Securities Offering

On July 8, 2010, the Company entered into a definitive securities purchase agreement (the “Securities Purchase Agreement”) with three institutional investors, pursuant to which the Company agreed to issue to the investors in a registered offering 1,481,481 shares (the “Shares”) of the Company’s common stock priced at $2.565 per share along with Series A warrants to purchase up to 1,481,481 shares of common stock with an exercise price of $3.43 per share of common stock and Series B warrants to purchase up to 893,519 shares of common stock with an exercise price of $0.01 per share of common stock. These securities were offered pursuant to our effective shelf registration statement on Form S–3 (File No. 333–165859).

On July 9, 2010, the Company entered into an amendment to the Securities Purchase Agreement with each of the investors to increase the exercise price of the Series A warrants to be issued in connection therewith from $3.43 per share to $3.49 per share. The exercise price of the Series A warrants is subject to certain conditions and adjustments that make the exercise price variable pursuant to the Series A warrant agreement.

On July 12, 2010, the Company completed the offering contemplated by the Securities Purchase Agreement and raised gross proceeds in connection therewith of approximately $3.8 million before advisory fees and offering expenses.

The Series A warrants are exercisable for a five-year period commencing nine months after the date of their issuance. The Series B warrants are exercisable for a five-year period commencing on the 120 day anniversary of the date of their issuance. 595,680 of the Series B warrants were exercised as of September 30, 2010.

In addition, the Company granted each investor in the offering the right of first refusal to purchase 100% of the shares of the Company’s common stock or securities convertible into or exercisable for shares of the Company’s common stock to be issued by the Company in certain offerings until the one (1) year anniversary of the date of the issuance of the Shares. Thereafter, each investor will have the right of first refusal to purchase 50% of the shares of the Company’s common stock or securities convertible into or exercisable for shares of the Company’s common stock to be issued by the Company in certain offerings until the two (2) year anniversary of the date of the issuance of the Shares.

The Company determined that the embedded feature (ratchet down of exercise price) in the Series A warrants is not indexed to the Company’s own stock due to the variability in the exercise price of the Series A warrants and, therefore, is an embedded derivative financial liability, which requires bifurcation and to be separately accounted for pursuant to GAAP. The Company uses the Black-Scholes option pricing model to estimate the fair value of the derivative instrument, for which we employed certain assumptions as follows: The expected dividend yield is based on the current historical yield of 0%. The expected volatility is based on historical volatility for a period equal to the expected life of the warrants of 41%. The risk-free interest rate is based on the US Treasury yield curve in effect of 1.85% at July 12, 2010 and 1.27% at September 30, 2010. The expected term of the warrants is based on the contractual term of the warrants and expectations of the warrants holders’ behavior of 5 years. This model also uses the current market price of the Company’s common stock and the exercise price of the warrants in the fair value calculation.

In accordance with ASC Topic 815Derivatives and Hedging, the Company recognized a derivative liability for the value of the Series A warrants granted in conjunction with the Securities Purchase Agreement. The Company determined the value of the derivative instrument to be $661,236 upon issuance of the Series A warrants and recorded a derivative liability which offsets additional paid-in capital. In accordance with Topic 815, the derivative liability is required to be adjusted to fair value at the end

Page 16 of 37

of each reporting period. The Company recognized a gain on adjustment of this derivative liability of approximately $568,000 for the three and nine months ended September 30, 2010. The gain on derivative liability is included as a component of other (income) expense in the consolidated statements of operations.

The Company determined that the Series B warrants are a component of equity and have been included in the cash proceeds of the securities offering as such.

Employee Stock Option Plan

On July 8, 2010, the Company’s shareholders voted in favor of a proposal to amend the Company’s Amended and Restated Employee Stock Option Plan (the “Option Plan”) to increase the number of shares authorized for issuance by 600,000 shares. The maximum number of shares that may be issued through the exercise of options granted under the Option Plan as amended is 2,811,274.

Restricted Stock Plan

On July 8, 2010, the Company’s shareholders voted in favor of a proposal to adopt the Company’s Restricted Stock Plan (the “Restricted Stock Plan”). The purpose of the Restricted Stock Plan is to provide selected members of the board of directors, executive officers, key employees, consultants and advisors of the Company with awards consisting of shares of the Company’s common stock contingent on their long-term continued employment and/or their relationship with the Company. The maximum number of shares of common stock that may be issued to participants under the Restricted Stock Plan is 1,500,000.

11. Stock-Based Compensation

The Company had two stock-based equity compensation plans at September 30, 2010. See Note 9 of our consolidated financial statements included in the Company’s Form 10-K for the year ended December 31, 2009.

Options under both plans are granted at the fair market value of the stock on the date of grant, except in the case of a more than 10% stockholder, for which grants are exercisable at 110% of fair market value of the stock on the date of grant. Options generally become fully vested three to four years from the date of grant and expire five to seven years from the date of grant. The Company granted 246,667 and 291,667 options to purchase shares of common stock during the three and nine months ended September 30, 2010, respectively. The Company granted 211,500 and 436,500 options to purchase shares of common stock during the three and nine months ended September 30, 2009, respectively. On July 8, 2010, the number of shares authorized for issuance was increased by 600,000 shares by stockholder vote. As of September 30, 2010, there were 3,126,274 shares authorized for issuance and the Company had 1,393,485 shares available for future stock option grants under existing plans.

The Company accounts for stock option grants in accordance with the provisions of ASC Topic 718Compensation – Stock Compensation. Compensation cost recognized during the nine months ended September 30, 2010 and 2009 includes compensation cost for all share-based payments granted subsequent to January 1, 2006, based on the grant date fair value estimated in accordance with the provisions of Topic 718. The Company recognizes compensation expense on a straight-line basis over the requisite service period. The Company estimates forfeitures, both at the grant date as well as throughout the requisite service period, based on the Company’s historical experience and future expectations.

Topic 718 requires management to estimate, at the grant date, the number of stock options for which the requisite service is expected to be rendered. The Company applies a forfeiture rate to account for the number of stock options for which the requisite service period is not expected to be rendered. The Company applied a 20% forfeiture rate to stock options issued from 2006 through 2008, and applied a forfeiture rate of between 20% and 40% to stock options issued from 2009 through the current period of 2010. Management revised its estimate of the forfeiture rate of its options in the third quarter of 2010 to account for significant variances between the estimated forfeitures and the actual forfeitures. The revision to the forfeiture rate is accounted for as a change in estimate and its cumulative effect of approximately $178,000, a reduction in stock-based compensation, was recognized in the third quarter of 2010. In addition, stock-based compensation for the third quarter of 2010 was reduced by approximately $83,000 and compensation for prospective periods will be reduced by approximately $538,000 over the next 3.25 years. The change in estimate resulted in a beneficial effect of $0.02 per share on the Company’s net loss attributable to Innovaro stockholders per share for each of the three and nine months ended September 30, 2010.

Page 17 of 37

12. Other (Income) Expense

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

	Three Months Ended Sept.  30, 2010			Nine Months Ended Sept. 30, 2010
Loss on sale and impairment of investments	$	1,102,064		$	1,136,865
Derivative (gain) loss		(775,659	)		(817,609	)
Rental income		(42,065	)		(125,745	)
Other		(1,101	)		(66,661	)
Other (income) expense	$	283,239		$	126,850

13. Segment Reporting

ASC Topic 280Segment Reporting establishes standards for reporting information about operating segments. Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker, or decision making group, in deciding how to allocate resources and in assessing performance. The Company is organized geographically and by line of business. The line of business management structure is the primary basis for which the allocation of resources and financial results are assessed.

From time to time, the Company will reorganize its internal organizational structure to better align its service offerings. In connection with the Company’s rebranding as Innovaro in March 2010, the Company reorganized into three new lines of business: Strategic Services – driven by Strategos, an advanced innovation consultancy; Technology Marketplaces – online platforms, partnering services, global licensing and technology transfer services; and Insights & Research – futures and trends, research, information services and IP consulting. Previously reported segment information has been restated to reflect this change.

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

	United Kingdom			United States			Total
Long-lived assets September 30, 2010	$	2,472,005		$	17,338,084		$	19,810,089
Total assets September 30, 2010		2,564,093			25,350,671			27,914,764
Long-lived assets December 31, 2009		5,887,520			26,867,183			32,754,703
Total assets December 31, 2009		6,411,846			33,919,335			40,331,181
	For the Three Months Ended Sept. 30, 2010
	United Kingdom			United States			Total
Revenue	$	136,130		$	4,070,284		$	4,206,414
Loss before income taxes		(3,056,991	)		(10,452,968	)		(13,509,959	)
Depreciation and amortization		106,620			281,475			388,095
	For the Three Months Ended Sept. 30, 2009
	United Kingdom			United States			Total
Revenue	$	464,764		$	1,876,417		$	2,341,181
Loss before income taxes		(195,235	)		(871,664	)		(1,066,899	)
Depreciation and amortization		112,772			271,914			384,686

Page 18 of 37

	For the Nine Months Ended Sept. 30, 2010
	United Kingdom			United States			Total
Revenue	$	527,007		$	8,750,613		$	9,277,620
Loss before income taxes		(3,444,986	)		(12,962,882	)		(16,407,868	)
Depreciation and amortization		317,137			867,366			1,184,503
	For the Nine Months Ended Sept. 30, 2009
	United Kingdom			United States			Total
Revenue	$	1,540,788		$	6,223,876		$	7,764,664
Loss before income taxes		(374,564	)		(9,174,672	)		(9,549,236	)
Depreciation and amortization		320,855			885,922			1,206,777

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

	For the Three Months Ended September 30, 2010
	Strategic Services			Technology Marketplaces			Insights & Research			Administrative and Other			Total
Revenue	$	3,337,416		$	220,825		$	648,173		$	—		$	4,206,414
Loss before income taxes		(4,828,711	)		(536,397	)		(4,781,203	)		(3,363,648	)		(13,509,959	)
	For the Three Months Ended September 30, 2009
	Strategic Services			Technology Marketplaces			Insights & Research			Administrative and Other			Total
Revenue	$	1,544,407		$	362,446		$	432,228		$	2,100		$	2,341,181
Income (loss) before income taxes		242,666			7,049			(69,597	)		(1,247,017	)		(1,066,899	)
	For the Nine months Ended September 30, 2010
	Strategic Services			Technology Marketplaces			Insights & Research			Administrative and Other			Total
Revenue	$	6,684,046		$	783,073		$	1,810,501		$	—		$	9,277,620
Loss before income taxes		(3,966,183	)		(797,066	)		(4,631,407	)		(7,013,212	)		(16,407,868	)
	For the Nine months Ended September 30, 2009
	Strategic Services			Technology Marketplaces			Insights & Research			Administrative and Other			Total
Revenue	$	4,798,695		$	1,179,098		$	1,727,267		$	59,604		$	7,764,664
Loss before income taxes		(4,103,371	)		(116,805	)		(1,021,456	)		(4,307,604	)		(9,549,236	)

Page 19 of 37

14. Commitments and Contingencies

Resignation of Chief Executive Officer

Effective August 16, 2010, Douglas Schaedler resigned from his position as Chief Executive Officer of the Company and from his position as a member of the board of directors. Per his employment agreement, Mr. Schaedler is entitled to receive pay for the 90 days following his giving notice to the Company as well as a onetime lump sum payment equal to six months’ pay, totaling $243,750, less payroll taxes and other applicable payroll deductions. In addition, under the employment agreement, 137,835 of the 325,000 stock options previously granted to Mr. Schaedler vested on a pro rata basis upon termination of his employment contract, and the remaining stock options and the 60,000 shares of restricted stock previously granted to Mr. Schaedler were deemed terminated and forfeited. Pursuant to the employment agreement, Mr. Schaedler remains bound by a one-year covenant not to compete with the Company and a covenant regarding protection of the Company’s confidential information.

In place of Mr. Schaedler, the Company’s board of directors appointed Mr. Asa Lanum as Interim Chief Executive Officer. The Company’s board of directors will engage in a search for a permanent Chief Executive Officer and, as part of such search, will identify and evaluate Chief Executive Officer candidates from within and outside the Company.

Employment Contracts

The Company’s strategic services revenue in recent years has largely been dependent on the efforts of certain key consulting professionals whose employment contracts with the Company expire in April 2011. If the Company is not successful in retaining these consulting professionals or hiring similarly qualified and skilled consulting professionals to replacement them, then the Company may not be able to maintain the level of strategic services revenue it has generated in recent years. For more information relating to this risk, see “Item 1A. Risk Factors” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2009.

Page 20 of 37

ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion should be read in conjunction with our consolidated financial statements and the notes thereto included elsewhere in this Form 10-Q. This Form 10-Q contains forward-looking statements regarding the plans and objectives of management for future operations. These forward-looking statements may involve known and unknown risks, uncertainties and other factors which may cause our actual results, performance or achievements to be materially different from future results, performance or achievements expressed or implied by any forward-looking statements. Forward-looking statements, which involve assumptions and describe our future plans, strategies and expectations, are generally identifiable by use of the words “may,” “will,” “should,” “expect,” “anticipate,” “estimate,” “believe,” “intend” or “project” or the negative of these words or other variations on these words or comparable terminology. These forward-looking statements are based on assumptions that may be incorrect, and we cannot assure you that the projections included in these forward-looking statements will come to pass. Our actual results could differ materially from those expressed or implied by the forward-looking statements as a result of various factors.

Recent Developments

On July 8, 2010, we held an annual meeting of stockholders to: (i) elect nine directors who will serve for one year, or until their successors are elected and qualified; (ii) ratify the selection of Pender Newkirk & Company LLP to serve as our registered independent public accounting firm for the year ending December 31, 2010; (iii) approve an amendment to our amended and restated employee stock option plan to increase the number of shares authorized for issuance; (iv) approve the adoption of our restricted stock plan; and (v) approve an amendment to our certificate of incorporation to change our name to Innovaro, Inc.

All matters submitted to a vote of our stockholders at the annual meeting were approved and all director nominees were elected. However, because Holly Callen Hamilton, Keith A. Witter and Kwabena Gyimah-Brempong received a greater number of votes “withheld” for election as a director than votes “for” such election, they tendered their respective conditional resignations to our board of directors on July 8, 2010. Pursuant to our Corporate Governance Guidelines and Majority Withheld Vote Policy contained therein, directors are expected to tender a conditional offer of resignation to our board of directors following certification of the stockholder vote at which he or she receives a greater number of votes “withheld” for his or her election as a director than votes “for” such election. The conditional resignation offers were first considered by the nominating and corporate governance committee of our board of directors (with Messrs. Witter and Gyimah-Brempong and Ms. Callen Hamilton abstaining) and then by our full board of directors (also with Messrs. Witter and Gyimah-Brempong and Ms. Callen Hamilton abstaining). In light of the results at the annual meeting, our board of directors, following the deliberation process outlined in our Corporate Governance Guidelines, determined unanimously to accept the resignations of Messrs. Witter and Gyimah-Brempong and Ms. Callen Hamilton as members of our board of directors.

With the addition of three new board members in February 2010, we currently have an appropriate number of independent board members in accordance with NYSE guidelines for a smaller reporting company. In addition, we believe the current board members have the required business knowledge and breadth of experience.

Effective August 16, 2010, Douglas Schaedler resigned from his position as our Chief Executive Officer and from his position as a member of the board of directors. Per his employment agreement, Mr. Schaedler is entitled to receive pay for the 90 days following his giving notice as well as a onetime lump sum payment equal to six months’ pay, totaling $243,750, less payroll taxes and other applicable payroll deductions. In addition, under the employment agreement, 137,835 of the 325,000 stock options previously granted to Mr. Schaedler vested on a pro rata basis upon termination of his employment contract, and the remaining stock options and the 60,000 shares of restricted stock previously granted to Mr. Schaedler were deemed terminated and forfeited. Pursuant to the employment agreement, Mr. Schaedler remains bound by a one-year covenant not to compete with us and a covenant regarding protection of our confidential information.

In place of Mr. Schaedler, the board of directors appointed Mr. Asa Lanum as Interim Chief Executive Officer. The board of directors will engage in a search for a permanent Chief Executive Officer and, as part of such search, will identify and evaluate Chief Executive Officer candidates from within and outside the organization.

On July 12, 2010, we completed the registered offering of 1,481,481 shares of our common stock priced at $2.565 per share along with Series A warrants to purchase up to 1,481,481 shares of common stock with an exercise price of $3.43 per share (subsequently amended to $3.49 per share) of common stock and Series B warrants to purchase up to 893,519 shares of common stock with an exercise price of $0.01 per share of common stock. We raised gross proceeds of approximately $3.8 million before advisory fees and offering expenses in connection with the offering.

The Series A warrants are exercisable for a five-year period commencing nine months after the date of their issuance. The Series B warrants are exercisable for a five-year period commencing on the 120 day anniversary of the date of their issuance. 595,680 of the Series B warrants were exercised as of September 30, 2010.

Page 21 of 37

In addition, we granted each investor the right of first refusal to purchase 100% of the shares of our common stock or securities convertible into or exercisable for shares of our common stock to be issued by us in certain offerings until July 12, 2011. Thereafter, each investor will have the right of first refusal to purchase 50% of the shares of our common stock or securities convertible into or exercisable for shares of our common stock to be issued by the Company in certain offerings until the July 12, 2012.

As previously discussed in our Form 10-Q for the quarter ended June 30, 2010, our stock price declined significantly subsequent to June 30, 2010. A decline in stock price may be an indicator of an adverse change in business climate. In addition, a decline in stock price affects market capitalization and may affect fair value measurements for our reporting units.

As of September 30, 2010, management concluded that the decline in our stock price is other than short-term in nature. This conclusion, coupled with the severity of the decline, triggered a review for impairment outside of our next scheduled annual impairment evaluation date of December 31, 2010. Due to the reduction in our market capitalization, third party valuation reports were performed to determine the fair value of the respective reporting units. As a result of the reduction in the fair value of the reporting units, management determined that the implied fair value of its goodwill and intangible assets is less than their carrying values by approximately $10.3 million. We recognized goodwill impairment of approximately $9.4 million and intangible assets impairment of approximately $971,000.

If the decline in our stock is significantly further extended, additional material write-downs or impairment charges may be required in the future. The magnitude and timing of those charges would be dependent on the severity and duration of the decline and cannot be determined at this time. However, any additional material non-cash impairment charges related to goodwill or other intangible assets would have a material adverse effect on our operating results.

We also recorded impairment of approximately $1,288,000 to certain of our land, building and building improvements during the third quarter of 2010. The commercial real estate market for the property has taken a significant downturn that is not expected to reverse in the near future. As a result, management determined that the decrease in the fair value of the property was other-than-temporary. The amount of the impairment was determined based on a third party valuation of the property.

Business Overview

General

We provide services that help clients become stronger innovators, develop compelling strategies to drive and catalyze growth, rapidly source externally developed technologies, create value from their intellectual property (“IP”) and gain foresight into marketplace and technology developments that affect their business. These services are primarily provided throughout the United States and the United Kingdom.

In the first quarter of 2010, we began development of an innovation software platform designed to enhance and complement our innovation services deliverable to clients. The purpose of the innovation software platform is to enable our clients to access, apply and extract value from a proven innovation approach through an on-demand service. Management is planning to begin testing and marketing of the software platform in 2011.

On March 16, 2010, we began doing business as Innovaro and changed our ticker symbol to NYSE Amex: “INV.” On July 12, 2010, we formally changed our name to “Innovaro, Inc.” In connection with our rebranding as Innovaro, we reorganized into three new lines of business, all working under the Innovaro brand: Strategic Services – driven by Strategos, an advanced innovation consultancy; Technology Marketplaces – online platforms, partnering services, global licensing and technology transfer services; and Insights & Research – futures and trends, research, information services and IP consulting. In connection therewith, our business segments have changed beginning with the reporting period ended March 31, 2010 and this change has required certain reclassifications to prior period financial information.

Strategic Services

Our clients require strategies to help them embrace improved innovation capabilities. We apply innovation insights, build those strategies with supporting infrastructure, processes and mechanisms; creating a culture primed for repeatable innovation success. We help organizations create and realize new, breakthrough growth strategies, create and execute non-incremental new growth platforms and opportunities, and develop the capability for ongoing creation and execution of those growth platforms and concepts.

We provide strategic innovation consulting 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 organization’s capacity by:

• Identifying and developing new segments and markets;

Page 22 of 37

• Creating and acting on game-changing strategies;

• Building an enterprise-wide capability for innovation;

• Accelerating and improving new product development processes; and

• Assessing a company’s innovation capability.

Technology Marketplaces

Whether partnering or licensing, our clients need exposure to the broadest and most relevant communities to identify needs, fulfill technology demands, and take technology development forward and into the market. We offer expansive networks, experts in scouting, partner sourcing and licensing experiences, and a world leading online marketplace. An important aspect of licensing is understanding the true potential value of the intellectual property portfolio. We assess that value by building a roadmap for our clients to use to uncover opportunities and options to realize latent value.

Online Marketplaces

• Innovaro Pharmalicensing is a biopharmaceutical innovation resource designed for life science professionals driving partnering, licensing and business development worldwide. Pharmalicensing.com affords clients the ability to in-license and out-license intellectual property and also provides partnering services, business development reports, industry news and a jobs source for candidates and employers. We are tracking at approximately 200,000 unique visitors per month and developing partnerships with external search partners to further drive traffic.

• Innovaro Medical Device Licensing is an online global resource for open innovation, partnering, licensing and business development within the medical device industry. Medical Device Licensing benefits from the Pharmalicensing traffic and strategic partnerships as well as establishing its own with member associations around the globe to further its reach and exposure.

Global Technology Licensing

Our global technology licensing service enables clients to enhance their new product pipeline through the acquisition of proprietary technologies primarily from universities, medical centers, federal research laboratories, select corporations and university incubator programs. A global network of technology providers, coupled with an in-house staff of scientists and researchers, offers companies low-cost, low-risk access to review and acquire new technologies from research centers around the world. After gaining an understanding of our clients’ technology and business needs, we find and assess technologies for our clients. With the added benefit of our licensing professionals, we can negotiate agreements on behalf of our clients and offer a variety of flexible terms and transaction models.

Insights and Research

Our clients require intelligence applied to their markets in order to have confidence in where to put their development capital. From current market research to predictive intelligence, we help clients determine the factors impacting or that will likely impact their business including social, geopolitical, competitive, economic, environmental and technological factors.

Information Services

Knowledge Express is an online, information service built for those who need it most – business development, technology transfer and marketing professionals across technology industries. It is a premier business development resource with expert IP search capabilities and report generation functionality. Our service includes access to key corporate profiles, industry contacts, technology pipelines, investigational technologies, deal information, sales data and patent data.

Foresight and Trend Research

Foresight is the ability of an organization to understand the ways in which the future might emerge and to apply that understanding in organizationally useful ways. Strategic foresight may also be used to detect adverse conditions, guide policy and help shape strategy. We provide services to clients that build the capacity for foresight, including monitoring trends, researching topics of interest, forecasting alternative scenarios, developing technology roadmaps, creating growth platforms and embedding futures thinking within the organization.

Page 23 of 37

We offer innovative futures programs that provide clients with up-to-the-minute knowledge, expert insight, high-level learning experiences, and opportunities to network with experts and peers, including:

• Futures Consortium - a membership service that provides access to research briefs, member meetings and networking events, and onsite workshops.

• Futures Observatory - a membership service that provides a steady stream of “observations” that illustrate the latest developments in key global trends. The observations are brief, timely discussions of real-life events or circumstances in key markets, which exemplify how trends are playing out in the market.

• Futures Interactive - a customizable, web-based knowledge management tool that gathers and organizes information from across a client in one, intuitive platform.

IP Consulting

We also offer IP Consulting to deliver value through the identification of intellectual property opportunities and execution of IP optimization and exploitation strategies for clients in a wide range of industries. Our approach is designed to help our clients determine market viability, product viability and buyer viability and determine the best means to maximize the value from commercially available assets.

Our IP analysis coupled with collaborative planning and execution delivers focused results. Because our model is science-based, the result has a greater probability of high value realization. Strategies we employ are directly proportional to the return on IP investment and our holistic IP value consists of several phases in order to determine the right IP for our clients – one that employs strategies designed to deliver the desired business goals.

Current Market Conditions

We believe that our financial results for the first nine months of 2010 continued to be negatively impacted by weakened economic conditions. The deterioration in consumer confidence and a general reduction in spending by consumers and businesses have had an adverse effect on our operations as businesses have delayed spending on these types of services. Recent improvements in demand trends globally may not continue, and our future financial results and growth could be further harmed or constrained if the recovery was to stall or conditions were to worsen.

Results of Operations

Revenue / Income from Operations

	Three Months Ended September 30,				Percentage Change			Nine months Ended September 30,				Percentage Change
(in thousands, except percentages)	2010		2009					2010		2009
Strategic services	$	3,337	$	1,544		116	%	$	6,684	$	4,799		39	%
Technology marketplaces		221		362		(39	)%		783		1,179		(34	)%
Insights and research		648		432		50	%		1,811		1,727		5	%
Investment income, net		—		2		NM	(1)		—		60		NM	(1)
Total revenue / income from operations	$	4,206	$	2,341		80	%	$	9,278	$	7,765		19	%

(1) This percentage change is not meaningful given that it relates to the manner in which we reported our operating results during the two reporting periods. For more information, see Note 1 to our consolidated financial statements included elsewhere in this Form 10-Q.

Strategic Services

Our strategic services revenue is derived from consulting services we provide to our clients. Our strategic services revenue increased by $1.8 million and $1.9 million, respectively, for the three and nine months ended September 30, 2010 in comparison to the same periods ended September 30, 2009. Strategic services revenue declined in 2009 as a result of adverse economic conditions. We attribute the increased revenue in 2010 to a renewed interest in innovation efficiency and new product development in the US and abroad. Strategic services revenue for the quarter ended September 30, 2010 was at a level not previously seen for this segment since 2008. Based on current activity, we expect these revenues to increase compared to 2009 for the remainder of 2010.

Page 24 of 37

Our strategic services revenue in recent years has largely been dependent on the efforts of certain key consulting professionals whose employment contracts with us expire in April 2011. If we are not successful in retaining these consulting professionals or hiring similarly qualified and skilled consulting professionals to replacement them, then we may not be able to maintain the level of strategic services revenue we have generated in recent years. For more information relating to this risk, see “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2009.

Technology Marketplaces

Our technology marketplaces revenue is a combination of global technology licensing search retainer fees and our online marketplaces subscription fees. Our technology marketplaces revenue decreased $142,000 and $396,000, respectively, for the three and nine months ended September 30, 2010 in comparison to the same periods of 2009. The decreased revenue in 2010 is due to a reduced number of both retainer based and online marketplace customers for our global technology licensing services. Based on current activity, we expect these revenues to remain flat for the remainder of 2010.

Insights and Research

Our insights and research revenue is made up of our online information services, foresight and trend research and IP consulting. Our insights and research revenue increased $216,000 and $84,000, respectively, for the three and nine months ended September 30, 2010 in comparison to the same periods of 2009. The increased revenue in 2010 is primarily a result of an increase in our IP consulting revenue and consulting engagements for our insights division; partially offset by a decrease in renewals of our information services subscriptions. Based on current activity, we expect these revenues to be lower in 2010 as compared to 2009.

Investment Income, net

As an operating company, investment income is recorded as other (income) and expense in the accompanying statements of operations for the three and nine months ended September 30, 2010.

Direct Costs of Revenue

(in thousands, except percentages)	Three Months Ended Sept. 30, 2010		Gross Profit			Three Months Ended Sept. 30, 2009		Gross Profit			Nine months Ended Sept. 30, 2010		Gross Profit			Nine months Ended Sept. 30, 2009		Gross Profit
Direct costs of strategic services	$	3,126		6	%	$	1,103		29	%	$	5,301		21	%	$	4,241		12	%
Direct costs of technology marketplaces		93		58	%		120		67	%		327		58	%		456		61	%
Direct costs of insights and research		270		58	%		350		19	%		910		50	%		982		43	%
Total direct costs of revenue	$	3,489				$	1,573				$	6,538				$	5,679

Direct costs of strategic services revenue are comprised of certain salaries and related taxes, bonuses, certain outside services and other business development costs related to strategic services. Our direct costs of strategic services revenue increased by $2.0 million and $1.1 million for the three and nine months ended September 30, 2010 in comparison to the same periods of 2009. The majority of the increase in direct costs of strategic services for both the three and nine month periods related to a third quarter accrual pertaining to the year-end bonus pool, an increase in the use of outside contractors and increased travel expense, partially offset by a decrease in salaries and related payroll taxes throughout 2010. We expect these costs to increase for the remainder of 2010 in connection with an increase in the related revenue.

The strategic services gross profit margin decreased to 6% for the third quarter of 2010 as compared to 29% for the third quarter of 2009. This decrease is related to the significantly higher revenues having generated bonus pool earnings for employees in the third quarter of 2010, which was not the case until the fourth quarter of 2009. The strategic services gross profit margin increased to 21% for the nine months ended September 30, 2010 as compared to 12% for the nine months ended September 30, 2009. This increase is primarily the result of employees of this segment having been fully utilized in 2010. In comparison, this operating segment was overstaffed for a period of time in 2009, which unnecessarily increased costs related to the jobs. In addition, certain employees have been replaced by other personnel with lower salaries.

Page 25 of 37

Direct costs of technology marketplaces revenue are comprised of certain salaries and related taxes, commissions, certain outside services and other direct costs related to online marketplaces. Our direct costs of technology marketplaces revenue decreased by $27,000 and $128,000, respectively, for the three and nine months ended September 30, 2010 in comparison to the same periods of 2009. The majority of the decrease in direct costs of technology marketplaces during 2010 is related to a decrease in salaries and commissions due to a reduction in sales. Gross profit margins for this operating segment remained relatively uniform during 2009 and 2010. We expect these costs to remain flat for the remainder of 2010.

Direct costs of insights and research revenue are comprised of certain salaries and related taxes, certain outside services, business development costs and royalty costs related to information services. Our direct costs of insights and research revenue decreased by $79,000 and $72,000, respectively, for the three and nine months ended September 30, 2010 in comparison to the same periods of 2009. The majority of the decrease in direct costs of insights and research during 2010 is due to a decrease in salaries related to significant staff cuts in 2009. We expect these costs to remain flat for the remainder of 2010.

The insights and research gross profit margin increased to 58% for the third quarter of 2010 as compared to 19% for the third quarter of 2009. This increase is the result of the recognition of certain consulting revenues and IP consulting revenues, which generally have high margins. Gross profit margins remained relatively uniform during the nine months ended September 30, 2009 and 2010.

Salaries and Wages

	Three Months Ended September 30,						Percentage Change			Nine months Ended September 30,						Percentage Change
(In thousands, except percentages)	2010			2009						2010			2009
Salaries and wages	$	648		$	534			21	%	$	2,117		$	4,768			(56	)%
As a percent of revenue		15	%		23	%		(8	)ppt		23	%		61	%		(38	)ppt

* The abbreviation “ppt” denotes percentage points.

Salaries and wages include non-sales employee and officer salaries that are not otherwise allocated to direct costs, employee related benefits including bonuses, and stock-based compensation. Salaries and wages increased $114,000 for the three months ended September 30, 2010 compared to the three months ended September 30, 2009. The increase related to severance pay to the former CEO in August of 2010 in the amount of $244,000 and increase in salaries of $70,000, partially offset by a change in estimate related to stock options that resulted in a decrease of $201,000 in stock-based compensation quarter over quarter.

Salaries and wages decreased $2.7 million for the nine months ended September 30, 2010 compared to the nine months ended September 30, 2009. Approximately $2.5 million of the decrease related to a charge to salaries and wages related to the modification of the acquisition and employment agreements with the division manager of our Social Technologies division in 2009. In addition, the retirement of our former CEO in 2009 resulted in a decrease in salaries of $300,000 and a change in estimate related to stock options resulted in a decrease of $225,000 in stock-based compensation over 2009. These decreases were partially offset by an increase related to severance pay to the former CEO in August of 2010 in the amount of $244,000 and an increase in other salaries of $170,000.

We expect salaries and wages to remain flat for the remainder of 2010.

Professional Fees

	Three Months Ended September 30,						Percentage Change			Nine months Ended September 30,						Percentage Change
(In thousands, except percentages)	2010			2009						2010			2009
Professional fees	$	142		$	230			(38	)%	$	510		$	650			(22	)%
As a percent of revenue		3	%		10	%		(7	)ppt		5	%		8	%		(3	)ppt

Professional fees include accounting fees, legal fees and valuation expenses for our investments. Professional fees decreased $87,000 and $140,000, respectively, for the three and nine months ended September 30, 2010 compared to the same periods of 2009. The decrease in professional fees for the three and nine month periods relates primarily to a decrease in valuation expenses due to the reduced number of investment holdings requiring valuations in 2010. In addition, there was a decrease in legal fees from 2009 related employment issues, restricted stock plan preparation and Verdant Venture structure discussions that were not repeated in 2010.

Page 26 of 37

We expect to continue to have a decrease in professional fees over 2009 for the remainder of 2010 as a result of a reduction in the number of investments requiring quarterly valuations and a reduction in legal and accounting fees related to the change from an investment company to an operating company.

Research and Development

	Three Months Ended September 30,						Percentage Change			Nine months Ended September 30,						Percentage Change
(In thousands, except percentages)	2010			2009						2010			2009
Research and development	$	298		$	—			—	%	$	848		$	—			—	%
As a percent of revenue		7	%		—	%		7	ppt		9	%		—	%		9	ppt

Research and development costs include salaries, outside services, travel and other costs related to the development of our innovation software platform, which is designed to enhance and complement our innovation services deliverable to clients. Management is planning to begin testing and marketing the software platform in 2011. We expect to incur additional software platform costs of $300,000 by year-end and an additional $950,000 to commercialize the platform.

Sales and Marketing

	Three Months Ended September 30,						Percentage Change			Nine months Ended September 30,						Percentage Change
(In thousands, except percentages)	2010			2009						2010			2009
Sales and marketing	$	19		$	66			(71	)%	$	457		$	355			29	%
As a percent of revenue		0	%		3	%		(3	)ppt		5	%		5	%		0	ppt

Sales and marketing expenses include advertising, marketing, commissions paid to outside service providers, certain travel and other business development expenses. Sales and marketing expenses decreased $47,000 for the three months ended September 30, 2010 compared to the three months ended September 30, 2009. The decrease in sales and marketing expenses relates to a credit received in the third quarter of 2010 for previously expensed costs of partnering with external search partners of $45,000.

Sales and marketing expenses increased $102,000 for the nine months ended September 30, 2010 compared to the nine months ended September 30, 2009. The increase in sales and marketing expenses relates primarily to $91,000 in rebranding costs and $105,000 in costs of partnering with external search partners to market our products on their websites, partially offset by a decrease in travel expenses.

We expect sales and marketing expenses to remain flat for the remainder of 2010.

General and Administrative

	Three Months Ended September 30,						Percentage Change			Nine months Ended September 30,						Percentage Change
(In thousands, except percentages)	2010			2009						2010			2009
General and administrative	$	593		$	621			(4	)%	$	1,771		$	2,286			(23	)%
As a percent of revenue		14	%		27	%		(13	)ppt		19	%		29	%		(10	)ppt

General and administrative expenses decreased $28,000 for the three months ended September 30, 2010 compared to the three months ended September 30, 2009. The decrease relates to a $41,000 loss related to fixed asset dispositions in 2009 and a $98,000 reduction in rent related to consolidating UTEK Real Estate operations, closing one of our offices in the United Kingdom, closing our Pennsylvania office, and reducing the amount of space leased for our Washington, DC office; partially offset by an increase in insurance of $17,000 mostly related to a workers’ compensation audit, a $36,000 increase in outside services, a $20,000 increase in investor relations costs and an $18,000 increase in administrative travel related to the interim CEO’s visits to all divisions.

General and administrative expenses decreased $515,000 for the nine months ended September 30, 2010 compared to the nine months ended September 30, 2009. The decrease relates to a $67,000 reduction in insurance due to having fewer employees; a $306,000 reduction in rent related to consolidating UTEK Real Estate operations, closing one of our offices in the United Kingdom, closing our Pennsylvania office, and reducing the amount of space leased for our Washington, DC office; a $51,000

Page 27 of 37

reduction in investment banking related to our having de-listed from the London Stock Exchange AIM; a $75,000 reduction in bad debt expense due to implementation of a strict collection policy; and a continued overall company plan to reduce all aspects of overhead.

We expect general and administrative expenses to remain flat for the remainder of 2010.

Depreciation and Amortization

	Three Months Ended September 30,						Percentage Change			Nine months Ended September 30,						Percentage Change
(In thousands, except percentages)	2010			2009						2010			2009
Depreciation and amortization	$	388		$	385			1	%	$	1,185		$	1,207			(2	)%
As a percent of revenue		9	%		16	%		(7	)ppt		13	%		16	%		(3	)ppt

Depreciation and amortization expense increased $3,000 for the three months ended September 30, 2010 compared to the three months ended September 30, 2009. Depreciation and amortization expense decreased $22,000 for the nine months ended September 30, 2010 compared to the nine months ended September 30, 2009. Amortization expense decreased by $18,000 and $91,000 for the three and nine months ended September 30, 2010 compared to the three and nine months ended September 30, 2009, respectively, resulting primarily from a decrease of $700,000 in definite-lived intangible assets as a result of impairment in the second quarter of 2009. Depreciation expense increased by $22,000 and $69,000 for the three and nine months ended September 30, 2010 compared to the three and nine months ended September 30, 2009, respectively, resulting primarily from the addition of $4 million in depreciable assets from the consolidation of UTEK Real Estate in the fourth quarter of 2009.

We expect depreciation and amortization expenses for the remainder of 2010 to remain flat in comparison to 2009.

Impairment Loss

As previously discussed in our Form 10-Q for the quarter ended June 30, 2010, our stock price declined significantly subsequent to June 30, 2010. A decline in stock price may be an indicator of an adverse change in business climate. In addition, a decline in stock price affects market capitalization and may affect fair value measurements for our reporting units.

As of September 30, 2010, management concluded that the decline in our stock price is other than short-term in nature. This conclusion, coupled with the severity of the decline, triggered a review for impairment outside of our next scheduled annual impairment evaluation date of December 31, 2010. Due to the reduction in our market capitalization, third party valuation reports were performed to determine the fair value of the respective reporting units. As a result of a reduction in the fair value of the reporting units, management determined that the implied fair value of its goodwill and intangible assets is less than their carrying values by approximately $10.3 million. We recognized goodwill impairment of approximately $9.4 million and intangible assets impairment of approximately $971,000.

If the decline in our stock is significantly further extended, additional material write-downs or impairment charges may be required in the future. The magnitude and timing of those charges would be dependent on the severity and duration of the decline and cannot be determined at this time. However, any additional material non-cash impairment charges related to goodwill or other intangible assets would have a material adverse effect on our operating results.

We also recorded impairment of approximately $1,288,000 to certain of our land, building and building improvements during the third quarter of 2010. The commercial real estate market for the property has taken a significant downturn that is not expected to reverse in the near future. As a result, management determined that the decrease in the fair value of the property was other-than-temporary. The amount of the impairment was determined based on a third party valuation of the property.

In 2009, the Social Technologies division of Innovaro had a significant decrease in revenues related to their futures and foresight projects. The state of the economy during 2009 contributed to potential Social Technologies’ clients focusing on short-term survival rather than long-term foresight planning. As a result, management terminated the majority of the division’s employees in favor of an independent, network based approach in an effort to reduce overhead. Management concluded that this division had suffered a significant adverse change in the business, which included a projection of continuing operating and cash flow losses. We determined that there was impairment of the division’s purchased intangible assets of approximately $1.0 million and impairment of the division’s goodwill of approximately $1.3 million, which is included in the consolidated statement of operations for the nine months ended September 30, 2009.

Page 28 of 37

Other (Income) Expense

Other (income) expense is a new line item in our statement of operations related to reporting as an operating company. The net other expense of $283,000 for the three months ended September 30, 2010 is comprised primarily of a loss on the impairment of investments of $1,045,000 and a loss on the sale of investments of $57,000, partially offset by a gain of $776,000 related to adjusting our derivative liabilities to fair value and rental income of $42,000 from the consolidation of UTEK Real Estate.

The net other expense of $127,000 for the nine months ended September 30, 2010 is comprised primarily of a loss on the impairment of investments of $1,191,000, partially offset by a gain on the sale of investments of $54,000, a gain of $818,000 related to adjusting our derivative liabilities to fair value and rental income of $126,000 from the consolidation of UTEK Real Estate.

Other income may continue to increase or decrease significantly as the value of our derivative liability increases or decreases in connection with a change in our stock price.

Interest Expense, Net

Interest expense, net is a new line item in our statement of operations related to reporting as an operating company. The net interest expense of $235,000 for the three months ended September 30, 2010 is primarily comprised of interest expense on long-term debt of $108,000 and amortization of our debt discount of $156,000, partially offset by interest income on our note receivable of $28,000.

The net interest expense of $512,000 for the nine months ended September 30, 2010 is primarily comprised of interest expense on long-term debt of $351,000 and amortization of our debt discount of $247,000, partially offset by interest income on our note receivable of $85,000.

Net Realized Gains (Losses) on Investments from Investment Company Accounting

In connection with our plan to de-elect business development company status, we liquidated a significant portion of our investment portfolio during the first nine months of 2009. We sold some or all of our shares in a significant number of our portfolio companies for $2.6 million in cash and other assets, which resulted in net realized losses of $49.6 million for the nine months ended September 30, 2009.

Net Change in Unrealized Appreciation (Depreciation) on Investments from Investment Company Accounting

The net unrealized appreciation of $44.3 million for the nine months ended September 30, 2009 was primarily due to the reversal of unrealized depreciation on various investments upon their sale during the period of approximately $42.9 million.

Liquidity and Capital Resources

Cash Flows

Cash used in operating activities of $2.86 million for the nine months ended September 30, 2010 increased approximately $284,000 from cash used in operating activities of $2.58 million for the nine months ended September 30, 2009. Total cash used in operations of $2.86 million in the current period is primarily attributable to:

• $16.0 million net operating loss;

• $818,000 non-cash gain on derivative liabilities;

• $1.3 million decrease in accounts receivable related to significant billings in the third quarter of 2010;

• $599,000 decrease in deferred revenue;

• $320,000 cash payment for payroll taxes, which included an income tax gross-up, paid in conjunction with the settlement of our severance liability; and

• $374,000 cash payment for other severance liabilities.

Partially offset by:

• $11.6 million in non-cash impairment charges;

• $1.4 million in non-cash depreciation and amortization;

• $1.1 million in non-cash losses on investments;

• $213,000 in non-cash stock-based compensation expense related to vesting options; and

• $1.8 million increase in accounts payable and accrued expenses.

Page 29 of 37

Cash provided by (used in) investing activities of $765,000 for the nine months ended September 30, 2010 increased $1,064,000 from $(299,000) for the nine months ended September 30, 2009. Total cash provided by operations of $765,000 in the current period is primarily attributable to:

• $312,000 in proceeds from available-for-sale securities; and

• $492,000 in proceeds from the redemption of certificates of deposit.

Cash provided by (used in) financing activities of $2.16 million for the nine months ended September 30, 2010 increased $2.11 million from $51,000 for the nine months ended September 30, 2009. Total cash provided by financing of $2.16 million is primarily attributable to:

• $3.8 million in gross proceeds from a private equity securities offering.

Partially offset by:

• $593,000 in offering costs from a private equity securities offering;

• $250,000 in cash paid on our line of credit; and

• $792,000 in cash paid for long-term debt.

Changes to Contractual Obligations

On October 22, 2009, we entered into a Promissory Note (the “Note”) with Gators Lender, LLC (the “Lender”), pursuant to which we borrowed $1,750,000 from the Lender. Interest is payable at an annual rate of 8% on a quarterly basis, in arrears, beginning April 15, 2010. The entire principal amount outstanding and all accrued interest is payable in full no later than October 22, 2012. UTEK Real Estate is a co-borrower under the Note and the loan is guaranteed by all of our subsidiaries. In addition, the guaranty was secured pursuant to a security agreement encumbering vacant real property located in Hernando County, Florida (the “Collateral”), which is owned by Cortez 114, LLC (“Cortez”), a subsidiary of UTEK Real Estate.

On February 26, 2010, we entered into a Substitution of Collateral Agreement and a Membership Interest Pledge Agreement and Release of Mortgage, pursuant to which the Lender’s security interest in the Collateral was released and replaced by a security interest in 68% of the outstanding membership interests of Cortez. In addition, the Note was amended and restated to provide that Innovaro and UTEK Real Estate must pay down $500,000 of the indebtedness to the Lender within 60 days of February 26, 2010. At our request, the Lender subsequently extended the repayment date for the $500,000 payment, which was made in accordance with this extension on July 12, 2010.

During the third quarter of 2010, we repaid all outstanding obligations on our line of credit and closed the account.

Financing

On July 12, 2010, we completed a registered offering of 1,481,481 shares of our common stock priced at $2.565 per share along with Series A warrants to purchase up to 1,481,481 shares of common stock with an exercise price of $3.43 per share (subsequently amended to $3.49 per share) of common stock and Series B warrants to purchase up to 893,519 shares of common stock with an exercise price of $0.01 per share of common stock. We raised gross proceeds of approximately $3.8 million before advisory fees and offering expenses in connection with the offering.

Research and Development Expenditures

In the first quarter of 2010, we began development of an innovation software platform designed to enhance and complement our innovation services deliverable to clients. As of September 30, 2010, we have invested $848,000 in this software platform. Management is planning to begin testing and marketing the software platform in 2011. We are forecasting additional software platform costs of $300,000 by year-end and an additional $950,000 to commercialize the platform.

Liquidity

Our primary cash requirements include working capital, research and development expenditures, principal and interest payments on indebtedness and employee bonuses. Our primary sources of funds are cash received from customers in connection with operations and proceeds from the sale of our investments. At September 30, 2010, we had cash and cash equivalents of $2.2 million and accounts receivable of $2.8 million.

During the three months ended September 30, 2010, we redeemed our certificates of deposit resulting in an increase in our cash and cash equivalents balance. In addition, we repaid all outstanding obligations on our line of credit and closed the account.

Page 30 of 37

We currently intend to fund our research and development expenditures and liquidity needs with existing cash and cash equivalent balances, cash generated from operations, collections of our existing receivables and the potential sales of our investments. We believe that these sources will be sufficient to fund our scheduled debt service and provide required resources for working capital for the next twelve months.

Critical Accounting Estimates

The preparation of financial statements in conformity with GAAP requires management to make assessments, estimates and assumptions that affect the amounts reported in the financial statements. We evaluate the accounting policies and estimates used to prepare the financial statements on an ongoing basis. Critical accounting estimates are those that require management’s most difficult, complex, or subjective judgments and have the most potential to impact our financial position and operating results. For a detailed discussion of our critical accounting estimates, see our Annual Report on Form 10-K for the year ended December 31, 2009 and our Quarterly Report on Form 10-Q for the quarter ended June 30, 2010.

ITEM 3. Quantitative and Qualitative Disclosures about Market Risks

Not required.

ITEM 4. Controls and Procedures

Disclosure Controls and Procedures

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

Internal Control over Financial Reporting

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

PART II. OTHER INFORMATION

ITEM 1. Legal Proceedings

Although we may from time to time be involved in litigation and claims arising out of our operations in the normal course of our business, as of September 30, 2010, we were not a party to any material legal proceedings.

ITEM 1A. Risk Factors

Except as described below, there have been no material changes to the risk factors previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2009 and our Quarterly Report on Form 10-Q for the quarter ended June 30, 2010.

Our future success depends on the completion and marketability of our innovation software platform.

We have expended significant funds in the development of an innovation software platform designed to enhance and complement our innovation services deliverable to clients. We expect to make substantial additional expenditures and incur substantial losses in the future as we continue the completion and eventual marketing of the innovation software platform. If the innovative software platform fails to perform as we planned or does not achieve market acceptance, we will not likely become profitable in the foreseeable future.

Page 31 of 37

ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds

None.

ITEM 3.Defaults upon Senior Securities

None.

ITEM 4. Reserved

ITEM 5. Other Information

None.

ITEM 6. Exhibits

Exhibit Index
3.1*	—	Certificate of Amendment to Certificate of Incorporation dated July 8, 2010, as filed and recorded with the Secretary of State of the State of Delaware on July 12, 2010.
4.1	—	Form of Series A Warrants to Securities Purchase Agreement dated as of July 8, 2010. (Incorporated by reference to Exhibit 4.1 to Form 8-K/A filed on July 9, 2010.)
4.2	—	Form of Series B Warrants to Securities Purchase Agreement dated as of July 8, 2010. (Incorporated by reference to Exhibit 4.2 to Form 8-K filed on July 8, 2010.)
10.1	—	Limited Liability Company Agreement for Verdant Ventures Advisors, LLC dated April 14, 2010 by among Verdant Ventures Managers, LLC, Silicon Prairie Partners, LLC and UTEK Corporation. (Incorporated by reference to Exhibit 10.1 to Form 10-Q filed on August 10, 2010.)
10.2	—	Securities Purchase Agreement dated July 8, 2010 by and among UTEK Corporation and three institutional investors. (Incorporated by reference to Exhibit 10.1 to the Company’s Form 8-K filed on July 8, 2010.)
10.3	—	Form of Amendment to Securities Purchase Agreement. (Incorporated by reference to Exhibit 10.2 to the Company’s Form 8-K/A filed on July 9, 2010.)
10.4	—	Innovaro Amended and Restated Employee Stock Option Plan. (Incorporated by reference to Exhibit A filed with the Company’s Proxy Statement filed on April 16, 2010.)
10.5	—	Innovaro Restricted Stock Plan. (Incorporated by reference to Exhibit B filed with the Company’s Proxy Statement filed on April 16, 2010.)
10.6*	—	Separation Agreement and Release between Innovaro, Inc. and Doug Schaedler dated August 23, 2010.
10.7*	—	Consulting Agreement between Innovaro, Inc. and Asa Lanum of The CTO Group dated August 13, 2010.
31.1*	—	Certification of the Chief Executive Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934.
31.2*	—	Certification of the Chief Financial Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934.
32.1*	—	Certification of the Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 USC. Section 1350.
32.2*	—	Certification of the Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 USC. Section 1350.

* Filed Herewith.

Page 32 of 37

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	INNOVARO, INC.
	(Registrant)
Date: November 12, 2010	/s/ Asa Lanum
	Asa Lanum
	Chief Executive Officer
Date: November 12, 2010	/s/ Carole R. Wright
	Carole R. Wright, CPA
	Chief Financial Officer

Page 33 of 37