Innovaro (INNI) 10-Q 2013 Q3 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended September 30, 2013

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

Commission File Number 001-15941

INNOVARO, INC. 

(Exact name of registrant as specified in its charter)

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

2109 Palm Avenue

Tampa, FL 33605

(Address of principal executive offices)

(813) 754-4330

(Registrant’s telephone number)

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

None

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒    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 ☒

On November 1, 2013, there were 16,150,952 shares outstanding of registrant’s common stock, $0.01 par value. 

Page 1 of 21

INNOVARO, INC.

FORM 10-Q TABLE OF CONTENTS

PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements		3
Consolidated Balance Sheets as of September 30, 2013 (unaudited) and December 31, 2012		3
Consolidated Statements of Comprehensive Income for the Three and Nine Months Ended September 30, 2013 and 2012 (unaudited)		4
Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2013 and 2012 (unaudited)		5
Notes to Consolidated Financial Statements (unaudited)		7
ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		14
ITEM 3. Quantitative and Qualitative Disclosures about Market Risks		19
ITEM 4. Controls and Procedures		19
PART II. OTHER INFORMATION
ITEM 1.	Legal Proceedings	19
ITEM 1A.	Risk Factors	19
ITEM 2.	Unregistered Sales of Equity Securities and Use of Proceeds	19
ITEM 3.	Defaults Upon Senior Securities	19
ITEM 4.	Mine Safety Disclosures	19
ITEM 5.	Other Information	19
ITEM 6.	Exhibits	20
Signatures		21
Exhibits

 

Page 2 of 21

PARTI.FINANCIAL INFORMATION

ITEM 1. Financial Statements

INNOVARO, INC.

Consolidated Balance Sheets

	September 30, 2013			December 31, 2012
	(unaudited)
ASSETS
Current assets:
Cash	$	16,919		$	75,910
Accounts receivable, net		179,710			250,426
Available-for-sale securities		1,191			4,765
Prepaid expenses and other assets		101,399			188,567
Current portion of note receivable and accrued interest		676,000			1,199,611
Total current assets		975,219			1,719,279
Cost method investments		17,216			86,784
Equity method investments		22,000			92,148
Note receivable and accrued interest		304,982			829,670
Fixed assets, net		4,914,965			5,420,138
Intangible assets, net		245,615			321,323
Total assets	$	6,479,997		$	8,469,342
LIABILITIES
Current liabilities:
Accounts payable	$	928,958		$	723,211
Accrued expenses		570,374			450,271
Deferred revenue		207,471			250,936
Current maturities of long-term debt		3,167,570			3,294,896
Total current liabilities		4,874,373			4,719,314
Long-term debt, less current maturities		1,958,391			1,938,520
Derivative liabilities		114,658			29,000
Deferred tax liability		38,002			38,002
Total liabilities		6,985,424			6,724,836
Commitments and contingencies		-			-
EQUITY
Innovaro stockholders’ (deficit) 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; 16,165,952 shares issued; 16,150,952 shares outstanding		161,510			161,510
Additional paid-in capital		87,963,591			87,796,900
Accumulated deficit		(88,852,732	)		(86,445,142	)
Accumulated other comprehensive (loss) income		(435	)		3,139
Total Innovaro stockholders’ (deficit) equity		(728,066	)		1,516,407
Noncontrolling interest		222,639			228,099
Total (deficit) equity		(505,427	)		1,744,506
Total liabilities and equity (deficit)	$	6,479,997		$	8,469,342

See accompanying notes

Page 3 of 21

INNOVARO, INC.

Consolidated Statements of Comprehensive Loss

(Unaudited)

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2013			2012			2013			2012
Revenue	$	168,420		$	190,416		$	414,189		$	417,334
Expenses:
Direct costs of revenue		134,772			177,273			347,672			542,525
Salaries and wages		154,767			169,959			525,238			574,943
Professional fees		51,110			97,255			119,616			253,955
Research and development		52,500			94,637			163,125			334,888
Sales and marketing		34,987			5,499			60,538			45,857
General and administrative		180,749			250,448			546,519			939,282
Depreciation and amortization		63,414			246,908			199,220			758,157
Impairment loss		-			-			450,000			-
		672,299			1,041,979			2,411,928			3,449,607
Other (income) and expense:
Other (income) expense		(121,665	)		(156,406	)		77,667			(512,110	)
Interest expense, net		114,857			100,662			337,644			315,161
		(6,808	)		(55,744	)		415,311			(196,949	)
Loss from continuing operations before income taxes		(497,071	)		(795,819	)		(2,413,050	)		(2,835,324	)
Provision for income tax expense (benefit)		-			-			-			-
Loss from continuing operations		(497,071	)		(795,819	)		(2,413,050	)		(2,835,324	)
Loss from discontinued operations, net of tax		-			(601,634	)		-			(4,736,786	)
Net loss		(497,071	)		(1,397,453	)		(2,413,050	)		(7,572,110	)
Net loss attributable to the noncontrolling interest		(1,820	)		(1,886	)		(5,460	)		(6,049	)
Net loss attributable to Innovaro stockholders		(495,251	)		(1,395,567	)		(2,407,590	)		(7,566,061	)
Net loss		(497,071	)		(1,397,453	)		(2,413,050	)		(7,572,110	)
Other comprehensive loss		(870	)		(1,310	)		(3,574	)		(33,523	)
Comprehensive loss	$	(497,941	)	$	(1,398,763	)	$	(2,416,624	)	$	(7,605,633	)
Basic and diluted loss per share:
Loss from continuing operations	$	(0.03	)	$	(0.05	)	$	(0.15	)	$	(0.19	)
Loss from discontinued operations, net of tax		-			(0.04	)		-			(0.31	)
Net loss	$	(0.03	)	$	(0.09	)	$	(0.15	)	$	(0.50	)
Weighted average shares outstanding: Basic and diluted		16,150,952			15,458,040			16,150,952			15,233,278

See accompanying notes

Page 4 of 21

INNOVARO, INC.

Consolidated Statements of Cash Flows

(Unaudited)

	Nine Months Ended
	September 30
	2013			2012
Operating Activities:
Net loss	$	(2,413,050	)		(7,572,110	)
Less: Loss from discontinued operations, net of tax		-			(4,736,786	)
Loss from continuing operations		(2,413,050	)		(2,835,324	)
Adjustments to reconcile net loss to net cash flows from operating activities:
Depreciation and amortization		199,220			758,157
Amortization of debt discount from investor warrants		70,364			98,831
Stock issued for services		-			97,499
Financing costs		37,000			-
Loss on write-down of notes receivable		593,437			-
Realized gain on trading securities		(253,419	)
Loss (gain) on sale and impairment of equity and available-for-sale securities		70,148			(47,630	)
Gain on derivative liabilities		(35,842	)		-
Fixed asset impairment		450,000			-
Stock-based compensation		129,691			262,767
Other		204			52,036
Changes in operating assets and liabilities:
Accounts receivable		70,716			(15,292	)
Prepaid expenses and other assets		86,248			9,644
Deferred revenue		(43,465	)		35,600
Accounts payable and accrued expenses		325,850			422,963
Net cash flows from operating activities of continuing operations		(712,898	)		(1,160,749	)
Investing Activities:
Payments on notes receivable		475,000			-
Capital expenditures		(60,395	)		(661	)
Capitalization of software development costs		-			(45,525	)
Proceeds from disposal of business		-			600,000
Proceeds from sale of securities		322,987			63,903
Net cash flows from investing activities of continuing operations		737,592			617,717
Financing Activities:
Net proceeds from stock offering		-			223,286
Proceeds from line of credit		240,000			-
Proceeds from debt financing		75,000			-
Payments on long-term debt		(398,685	)		(457,909	)
Net cash flows from financing activities of continuing operations		(83,685	)		(234,623	)
Net cash flows from continuing operations		(58,991	)		(777,655	)
Net cash flows from discontinued operations		-			823,272
(Decrease) Increase in cash		(58,991	)		45,617
Cash at beginning of period		75,910			268,170
Cash at end of period	$	16,919		$	313,787

Page 5 of 21

Supplemental Disclosures of Non-Cash Investing and Financing Activities
The Company disposed of its Pharmalicensing, Global Licensing, Pharma Transfer and Knowledge Express operating divisions. In conjunction with the disposal, the Company received the following consideration:
Cash received				$	600,000
Note receivable received					1,329,670
Liabilities assumed by buyer					70,330
Total sale price				$	2,000,000
Debt discount recorded	$	121,500		$	-
Unrealized gain (loss) from available-for-sale securities	$	(3,574	)	$	(33,523	)
Supplemental Disclosures of Cash Flow Information
Cash paid for taxes	$	-		$	-
Cash paid for interest	$	228,017		$	398,213

See accompanying notes

Page 6 of 21

INNOVARO, INC.

Notes to Consolidated Financial Statements

(Unaudited)

1. Basis of Presentation

Interim Financial Information

The financial information for Innovaro, Inc. (the “Company”, “we”, “us” or “Innovaro”) as of September 30, 2013 and for the three months and nine months ended September 30, 2013 and 2012 is unaudited, but includes all adjustments, which, in the opinion of management are necessary in order to make the consolidated financial statements not misleading at such dates and for those periods. These consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and, therefore, do not include all information and notes required by accounting principles generally accepted in the United States of America (“GAAP”) for complete consolidated financial statements. These consolidated financial statements should be read in conjunction with the consolidated audited financial statements and related notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2012. Operating results for the three and nine months ended September 30, 2013 are not necessarily indicative of the results that may be expected for the entire year.

The Company

Innovaro is The Innovation Solutions Company focusedon delivering innovation solutions to our clients through a combination of software and associated services as well as information for strategic decision making. Innovaro offers software to ensure the success of any innovation project, regardless of the size or intent. The Company’s LaunchPad software provides an integrated innovation environment, and intelligence and insights services provide any business with the innovation support they need to drive success. These services are provided primarily from the Company’s offices in the United States.

Going Concern

These consolidated financial statements have been prepared in accordance with GAAPincluding the assumption of a going concern basis which contemplates the realization of assets and the settlement of liabilities and commitments in the normal course of business. The Company has incurred recurring losses and negative cash flows from operations.  The Company incurred a net loss of $(2,413,050) and $(9,999,599) for the nine months ended September 30, 2013 and the year ended December 31, 2012, respectively. In addition, the Company has a working capital deficit of $(3,899,154) and an accumulated deficit of $(88,852,732) as of September 30, 2013. These factors raise doubt about the Company’s ability to continue as a going concern.

The Company’s primary cash requirements include working capital, research and development expenditures, principal and interest payments on indebtedness, and employee salaries. Its primary sources of funds are cash received from collections of notes receivable, payments from customers in connection with operations and, to a lesser extent, proceeds from the sale from time to time of its investments and common stock.

The Company currently intends to fund its liquidity needs, including its software development costs, with existing cash balances, cash generated from operations, collections of its existing receivables, the proceeds from sales of its investments and the sale of certain of the Company’s common stock. Given the Company’s cash position, working capital deficit and expected revenues in the near term, the Company does not expect that it will be able to fund its current scheduled debt service payments of $3,167,570 and its operating requirements for the next twelve months. The Company is exploring opportunities for obtaining a credit facility, as well as selling equity securities. In addition, the Company has the capability to delay all cash intensive activities, including its software development costs, and will look to reduce costs further. However, if such measures prove inadequate, the Company could face liquidity problems and might be required to reduce or delay planned capital expenditures and other initiatives and it may be unable to take any of these actions on satisfactory terms or in a timely manner.  Further, any of these actions may not be sufficient to allow the Company to service its debt obligations or may have an adverse impact on its business. The failure to generate sufficient cash from operations could have a material adverse effect on the Company.

Principles of Consolidation

The consolidated financial statements include the accounts of Innovaro and its wholly owned subsidiaries: Innovaro Europe, Ltd. and UTEK Real Estate Holdings, Inc. and its subsidiaries: Ybor City Group, Inc., 22nd Street of Ybor City, Inc., ABM of Tampa Bay, Inc., and Cortez 114, LLC (collectively “UTEK Real Estate”). All intercompany transactions and balances are eliminated in consolidation.

Page 7 of 21

On January 1, 2013, the Company acquired 100% ownership of an entity as a result of an assignment and transfer of certain collateral shares held in the entity. The Company has consolidated this entity as of January 1, 2013. The entity has no operations, or any liabilities, and the only asset held by the entity relates to certain marketable securities, which the Company classified as trading securities. The Company sold all of these securities to generate profits during the nine months ended September 30, 2013

2. Significant Accounting Policies

Trading Securities

Trading securities include equity securities that the Company intends to sell in the near term to generate profits. Trading securities are carried at fair value in the consolidated balance sheets. Unrealized gains and losses are recorded as a component of other (income) expense in the consolidated statements of comprehensive loss.

The Company recognized a gain on trading securities of $253,419 during the nine months ended September 30, 2013, respectively. All of the Company’s trading securities have been sold as of September 30, 2013.

Equity Method Investments

At March 31, 2013, the Company determined that the equity method investment had suffered a decline in fair value below that of its carrying amounts and this decline was determined to be other-than-temporary. The Company recognized a loss on impairment of its equity method investment of $70,148 for the nine months ended September 30, 2013, which is included as a component of other (income) expense in the consolidated statements of comprehensive loss.

Software Development Costs

Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Subtopic 985-20Costs of Software to Be Sold, Leased or Marketed , requires companies to expense all software development costs incurred until technological feasibility has been established, at which time those costs are capitalized until the product is available for general release to customers. In addition, costs incurred to enhance existing software products or after the general release of the product are required to be expensed as incurred as research and development costs.

In accordance with FASB ASC Subtopic 985-20, the Company has expensed all costs incurred to establish the technological feasibility of the Innovaro LaunchPad software (“LaunchPad”) as research and development costs.

Earnings per Share (EPS)

Basic earnings per share is computed on the basis of the weighted-average number of shares of common stock outstanding during the period. Diluted earnings per share is computed on the basis of the weighted-average number of shares of common stock outstanding plus the potential dilutive effect of outstanding stock options, warrants and unvested shares of restricted stock.The calculation of diluted earnings per share does not include 7,749,681 shares of outstanding stock options, warrants and unvested restricted stock for the three and nine months ended September 30, 2013 and 2,992,918 shares of outstanding stock options, convertible debt warrants and unvested restricted stock for the three and nine months ended September 30, 2012, because their inclusion would have been anti-dilutive, primarily as a result of having incurred a net loss during the periods presented.

Financial Instruments

The Company’s financial instruments consist of investments, cash, accounts receivable, accounts payable, accrued expenses and long-term debt. The fair value of cash, accounts receivable, accounts payable and certain accrued expenses approximate their carrying amounts in the consolidated balance sheets due to the short-term nature of such instruments. The estimated fair value of the Company’s long-term debt is not materially different from its carrying value of $5,125,961 and $5,233,416 as of September 30, 2013 and December 31, 2012, respectively.

Concentrations of Credit Risk

Financial instruments that the Company holds with significant credit risk include cash and investments. The Company maintains its cash with high credit quality financial institutions in the United States and, at times, balances may exceed federally insured limits. The Company has not experienced any losses related to these balances. All of the Company’s non-interest bearing cash balances were fully insured as of September 30, 2013.

Recent Accounting Pronouncements

In December 2011, the FASB issued an accounting standards update to require disclosure of information about the effect of rights of setoff with certain financial instruments on an entity’s financial position. In January 2013, the FASB issued an accounting standards update that clarifies the aforementioned offsetting disclosure requirements. The disclosure requirements are only applicable to rights of setoff of certain derivative instruments, repurchase agreements and reverse purchase agreements, and securities borrowing and securities lending transactions that are either offset in accordance with standards set forth by the FASB Codification or master netting arrangements or similar agreements. The Company has adopted the amendments in these standards effective in the first quarter of 2013. Adoption of this standard had no impact on the Company’s consolidated financial statements.

Page 8 of 21

In February 2013, the FASB issued an accounting standards update that requires presentation for reclassification adjustments from accumulated other comprehensive income into net income in a single note or on the face of the financial statements. The Company has adopted the amendments in this standard effective in the first quarter of 2013. Adoption of this standard did not have a significant effect on the Company’s consolidated financial statements.

The Company’s management does not believe that any recent codified pronouncements by the FASB (including its Emerging Issues Task Force), the American Institute of Certified Public Accountants or the Securities and Exchange Commission will have a material impact on the Company’s current or future consolidated financial statements.

Use of Estimates

The preparation of the Company’s consolidated financial statements in conformity with FASB ASC Topic 275Risks and Uncertainties requires management to make estimates and assumptions that could affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. The Company’s most significant estimates relate to the valuation and impairment of certain investments, stock-based compensation, and the valuation of fixed assets and intangible assets. Actual results could differ from those estimates.

3. Discontinued Operations

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

Pursuant to an asset purchase agreement dated September 12, 2012, the Company sold the Pharmalicensing, Global Licensing, Pharma Transfer and Knowledge Express operating divisions to IP Technology Exchange, Inc. (“IP Tech Ex”) effective as of August 31, 2012. These divisions operated out of the United States and the United Kingdom as part of the Company’s intelligence and insights services segment. Under the terms of the original agreement, the Company was receive $2,000,000, consisting of (i) a lump-sum payment of $600,000 upon closing, (ii) the assumption of approximately $70,000 of debt relating to the divisions, (iii) quarterly payments of $100,000 through August 2014, and (iv) payment of the remaining balance on September 1, 2014. In addition, IP Tech Ex was entitled to a $125,000 reduction in the purchase price if all amounts were paid to the Company by May 1, 2013.The outstanding balance accrued interest at 5% per annum.

The Company’s Board of Directors approved a reduction to the balance of the note receivable from IP Tech Ex in return for the acceleration of the payments on the note. IP Tech Ex agreed to make a $400,000 payment in May 2013 and a $300,000 in December 2014 in full satisfaction of the note. Accordingly, the Company recorded a loss of approximately $489,000 during the first quarter of 2013 related to the write-down of this note to its net realizable value of approximately $700,000. The outstanding balance will accrue interest at 5% per annum.

Strategic Services operating division

On October 2, 2012, the Company entered into an asset purchase agreement to sell certain assets, primarily intellectual property rights and equipment, relating to our strategic services division, known as Strategos, to one of its officers and employees for $100,000. In connection with the asset purchase agreement, the Company entered into separation and release agreements with all of the officers and employees of our Strategos division pursuant to which they agreed to forgo approximately $1,489,000 in accrued bonuses owed them in exchange for $150,000. Finally, as part of the transaction, the Company also entered into a technology license agreement with Strategos, Inc., a newly formed company that will carry on the business formerly conducted by our Strategos division, pursuant to which we agreed to license Strategos, Inc. certain technology and intellectual property rights relating to our Strategos division, including the use of the name “Strategos,” for royalty payments equal to 12.5% of the professional fee revenue earned by Strategos, Inc. in excess of $10,000,000 during the period from October 2, 2012 to December 31, 2015.

The Company has reflected the operations of these divisions as discontinued operations in the consolidated statements of comprehensive loss for the three and nine months ended September 30, 2012. Substantially all the cash flows from discontinued operations for all periods presented relate to operating activities, and accordingly, the Company has presented cash flows from discontinued operations as a single line item in the consolidated statements of cash flows.

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The summary financial results of discontinued operations are as follows:

	Three Months Ended September 30, 2012						Nine Months Ended September 30, 2012
	Strategic Services			Intelligence & Insights			Strategic Services			Intelligence & Insights
Revenue	$	22,004		$	247,866		$	2,500,534		$	1,199,098
Long-lived asset impairment charge		-			-			(4,756,898	)		(255,126	)
Operating expense		(405,953	)		(271,469	)		(2,711,484	)		(963,610	)
Other income (loss)		(102,163	)		10			(169,170	)		144
Loss on disposal of business		-			(87,539	)		-			(87,539	)
Loss before income taxes		(486,112	)		(111,132	)		(5,137,018	)		(107,033	)
Provision (benefit) for income tax expense		-			(4,390	)		515,531			(8,266	)
Loss from discontinued operations, net of tax	$	(486,112	)	$	(115,522	)	$	(4,621,487	)	$	(115,299	)

4. Fair Value Measurements

The Company performs fair value measurements in accordance with the guidance provided by FASB 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, 2013 and December 31, 2012 are as follows:

	Fair Value Measurements at September 30, 2013(1)				Fair Value Measurements at December 31, 2012(1)
	Using Level 2		Total		Using Level 2		Total
Assets:
Available-for-sale securities	$	1,191	$	1,191	$	4,765	$	4,765
Total assets	$	1,191	$	1,191	$	4,765	$	4,765
Liabilities:
Derivative liability	$	114,658	$	114,658	$	29,000	$	29,000
Total liabilities	$	114,658	$	114,658	$	29,000	$	29,000

⁽¹⁾   The Company did not have any assets or liabilities measured at fair value using Level 1 or Level 3 of the fair value hierarchy as of September 30, 2013 and December 31, 2012.

The Company’s investments in 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 have certain restrictions on resale. The Company utilizes the market approach in determining the fair value of these securities.

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The Company’s derivative liabilities is 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 warrants, conversion price of the convertible debt and expected volatility, which is based on historical volatility. The Black-Scholes model employs the market approach in determining fair value.

5. Fixed Assets

In the process of refinancing the mortgage on the corporate headquarters, the Company had a third party valuation of the property. As a result of the valuation, management determined that there was a decrease in the fair value of the property which was considered to be other than temporary. Therefore, the Company recorded impairment of $450,000 during the second quarter of 2013. This impairment expense is included as a component of impairment loss in the consolidated statements of operations for the nine months ended September 30, 2013.

6. Accrued Expenses

Accrued expenses are comprised of the following:

	September 30, 2013		December 31, 2012
Accrued salaries and related expenses	$	248,136	$	178,030
Property taxes payable		219,686		163,279
Board of Director fees payable		49,500		49,500
Accrued interest		40,749		43,265
Other		12,303		16,197
Total	$	570,374	$	450,271

7. Debt

On August 15, 2013, the Company entered into a securities purchase agreement with Asher Enterprises, Inc. (“Asher”) pursuant to which it sold to Asheran 8% convertible note in the aggregate principal amount of $78,500, convertible into shares of the Company’s common stock upon the terms and subject to the limitations and conditions set forth in the convertible note. The variable conversion price of the debt created a derivative instrument. The Company recorded the derivative liability of $79,418, which was offset by a debt discount of $78,500 and fair value loss on derivative of $918. The derivative liability is adjusted to fair value at each reporting period with gains or losses recognized as a component of other (income) loss in the statements of comprehensive income. The debt discount is being amortized using the straight-line method over the life of the debt of 8.5 months.

On August 21, 2013, the Company entered into a revolving credit and security agreement with JJJ Family LLLP (“JJJ Family”) pursuant to which it can borrow up to $400,000 from JJJ Family. In connection with this transaction, we issued a revolving promissory note to JJJ Family in the principal amount of $400,000. Borrowings under the credit facility will be used for general corporate purposes.

As additional consideration for this credit facility, the Company also entered into a warrant agreement with JJJ Family to allow them to purchase up to 400,000 shares of our common stock at an exercise price of $0.14 per share. These warrants become exercisable beginning six months after the issuance date and ending five years from that date. The exercise price is subject to certain conditions and adjustments that make the exercise price variable. This variability in the exercise price of the warrants created a derivative instrument. The Company recorded a derivative liability in the amount of $43,000 with an offset to debt discount.The derivative liability is adjusted to fair value at each reporting period with gains or losses recognized as a component of other (income) loss in the statements of comprehensive income.The debt discount is being amortized using the straight-line method over the life of the debt of 12 months.

The Company also agreed to amend the exercise price of all outstanding options and warrants previously granted to JJJ Family to $0.14 per share. The Company valued the repricing of the options and warrants using the Black-Scholes option pricing model, which resulted in the Company recording additional financing costs of $37,000. These financing costs are included as a component of interest expense during the three and nine months ended September 30, 2013.

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8. Other (Income) Expense

Components comprising the balance in other (income) expense from continuing operations for the three and nine months ended September 30, 2013 and 2012 are as follows:

	Three Months Ended September 30,						Nine Months Ended September 30,
	2013			2012			2013			2012
Loss (gain) on sale and impairment of investments	$	-		$	-		$	70,148		$	(47,630	)
Realized gain on trading securities		-			-			(253,419	)		-
Loss on write-down of notes receivable to net realizable value		-			-			593,437			-
Dividend income		-			(70,000	)		-			(127,500	)
(Gain) on derivative liabilities		(12,842	)		-			(35,842	)		-
Rental income		(83,878	)		(34,643	)		(247,436	)		(289,803	)
Other		(24,945	)		(51,763	)		(49,221	)		(47,177	)
Other (income) expense	$	(121,665	)	$	(156,406	)	$	77,667		$	(512,110	)

9. Segment Reporting

FASB 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.

The Company sold certain of its operating divisions during the year ended December 31, 2012. See Note 3 for further discussion of the sale of these divisions. Accordingly, the Company has reflected the operations of these divisions as discontinued operations for the three and nine months ended September 30, 2012. As a result, revenue and income (loss) from continuing operations before income taxes shown below for the three and nine months ended September 30, 2012 do not include amounts related to these divisions.

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

	United Kingdom		United States		Total
Long-lived assets as of September 30, 2013	$	-	$	5,160,580	$	5,160,580
Total assets as of September 30, 2013		80		6,479,917		6,479,997
Long-lived assets as of December 31, 2012		-		5,741,461		5,741,461
Total assets as of December 31, 2012		3,064		8,466,278		8,469,342

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

	For the Three Months Ended September 30, 2013
	Strategic Services		Intelligence & Insights Services		Administrative and Other			Total
Revenue	$	-	$	168,420	$	-		$	168,420
Income (loss) from continuing operations before income taxes		-		18,474		(515,545	)		(497,071	)

	For the Three Months Ended September 30, 2012
	Strategic Services			Intelligence & Insights Services			Administrative and Other			Total
Revenue	$	-		$	190,416		$	-		$	190,416
Income (loss) from continuing operations before income taxes		-			49,759			(845,578	)		(795,819	)
Loss from discontinued operations, net of tax(1)		(486,112	)		(115,522	)		-			(601,634	)

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	For the Nine Months Ended September 30, 2013
	Strategic Services		Intelligence & Insights Services		Administrative and Other			Total
Revenue	$	-	$	414,189	$	-		$	414,189
Income (loss) from continuing operations before income taxes		-		33,256		(2,446,306	)		(2,413,050	)

	For the Nine Months Ended September 30, 2012
	Strategic Services			Intelligence & Insights Services			Administrative and Other			Total
Revenue	$	-		$	417,334		$	-		$	417,334
Income (loss) from continuing operations before income taxes		-			35,841			(2,871,165	)		(2,835,324	)
Loss from discontinued operations, net of tax(1)		(4,621,487	)		(115,299	)		-			(4,736,786	)

⁽¹⁾ The Company recognized a $4,756,898 impairment loss for the strategic services business segment during the nine months ended September 30, 2012.

10. Subsequent Events

In October 2013, the Company entered into an additional securities purchase agreement with Asher pursuant to which it sold to Asheran 8% convertible note in the aggregate principal amount of $42,500, convertible into shares of our common stock upon the terms and subject to the limitations and conditions set forth in the convertible note.

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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.

Innovaro is The Innovation Solutions Company focused on delivering innovation solutions to our clients through a combination of innovation management software and social media mining as well as information for strategic decision making. We offer a comprehensive set of software to ensure the success of any innovation project, regardless of the size or intent. Our unique combination of our innovation management software platform LaunchPad (an integrated innovation environment), and our trends and foresight services provide any business with the innovation support they need to drive success. Our offices are located in the United States.

We currently have one business segment: Intelligence and Insights Services. We envision the continued evolution of our business to include a second segment: Innovation Software and Services, which is the ongoing development and sale of software products such as the our LaunchPad software platform to support the innovation services business.

Our LaunchPad software platform is designed to be enhanced and complemented by innovation service offerings to clients. We have general release to market of LaunchPad Imagine, LaunchPad Design and LaunchPad Listen. Through LaunchPad we will provide software and associated 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.

We deliver business value to our clients via our team of seasoned and experienced professionals capable of unlocking an organization’s capacity by:

• Identifying and developing new segments and markets;

• Creating and acting on game-changing strategies;

• Building an enterprise-wide capability for innovation;

• Accelerating and improving new product development processes; and

• Assessing a company’s innovation capability.

Our Intelligence and Insights Services business provides insights about new market opportunities and gives organizations the long-range perspective required for strategy and planning activities. From current market research to predictive intelligence, we help our clients find insights at the intersections affecting their business. Our research identifies and explains key consumer trends, including emerging trends not covered by other sources, and delivers insights about how these trends will shape the future operating environment. In all of our work, our end goal is to focus on what the changing technology landscape will mean to our clients’ business.

Innovaro LaunchPad

Our LaunchPad software product provides an integrated innovation environment which embodies our Leading Edge Innovation Practices to offer a process that is repeatable, reliable and scalable. LaunchPad helps innovation teams by making their jobs better, faster and easier. We introduced LaunchPad Imagine to the market in 2011. We have continued to expand the capabilities of Imagine during 2013 to include a number of new data sources. We introduced LaunchPad Design to provide customers with support in developing and validating business models to continue their innovation journey. We also introduced LaunchPad Listen in 2012 to allow clients to monitor social media and analyze sentiment as key input to their business and to the innovation process. We are continuing to incur costs related to the refinement of LaunchPad Imagine, Design and Listen while proceeding with the design of the next components of LaunchPad Accelerate.

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Discontinued Operations

During 2012, we made the strategic decision to divest of our Strategic Services division and a large portion of our Intelligence and Insights services including the Pharmalicensing, Global Licensing, Pharma Transfer and Knowledge Express operating divisions. The sale allowed us to focus our investments on sales and marketing to promote the growth of our software and innovation solutions businesses, which we believe offer significant growth opportunities. Further, we expect the sale will strengthen our balance sheet and help provide us with the financial wherewithal to extend our software capabilities and deliver additional solutions. Except as explicitly described as discontinued operations, and unless otherwise noted, all discussions and amounts presented herein relate to our continuing operations.

Significant Developments

On January 1, 2013, we acquired 100% ownership of an entity as a result of an assignment and transfer of certain collateral shares held in the entity. We have consolidated this entity as of January 1, 2013. The entity has no operations, or any liabilities, and the only asset held by the entity relates to certain marketable securities, which we classified as trading securities. We sold all of these securities to generate profits during the nine months ended September 30, 2013.

Our Board of Directors approved a reduction to the balance of our note receivable from IP Tech Ex in return for the acceleration of the payments on the note. IP Tech Ex agreed to make a $400,000 payment in May 2013 and a $300,000 in December 2014 in full satisfaction of the note. As a result, we recorded a loss of approximately $489,000 during the first quarter of 2013 related to the write-down of this note to its net realizable value of approximately $700,000. The outstanding balance will accrue interest at 5% per annum.

On August 15, 2013, we entered into a securities purchase agreement with Asher Enterprises, Inc. (“Asher”) pursuant to which we sold to Asheran 8% convertible note in the aggregate principal amount of $78,500, convertible into shares of our common stock upon the terms and subject to the limitations and conditions set forth in the convertible note. In October 2013, we entered into an additional securities purchase agreement with Asher pursuant to which we sold to Asheran 8% convertible note in the aggregate principal amount of $42,500, convertible into shares of our common stock upon the terms and subject to the limitations and conditions set forth in the convertible note.

On August 21, 2013, we entered into a revolving credit and security agreement with JJJ Family LLLP (“JJJ Family”) pursuant to which we can borrow up to $400,000 from the JJJ Family. In connection with this transaction, we issued a revolving promissory note to JJJ Family in the principal amount of $400,000. Borrowings under the credit facility will be used for general corporate purposes. As additional consideration for this credit facility, we also entered into a warrant agreement with JJJ Family to allow them to purchase up to 400,000 shares of our common stock at an exercise price of $0.14 per share. These warrants become exercisable beginning six months after the issuance date and ending five years from that date. The exercise price is subject to certain conditions and adjustments. As additional consideration for extension of the credit facility, we agreed to amend the exercise price of all previously granted options and warrants to $0.14 per share.

Financial Condition

Our total assets were $6.5 million and $8.5 million as of September 30, 2013 and December 31, 2012, respectively. As of September 30, 2013, we had $17,000 in cash, $180,000 in accounts receivable, $1.5 million in accounts payable and accrued expenses, and $5.1 million in total debt outstanding. As of December 31, 2012, we had $76,000 in cash, $250,000 in accounts receivable, $1.2 million in accounts payable and accrued expenses, and $5.2 million in total debt outstanding. As of September 30, 2013, we had a working capital deficit of $(3.9) million and an accumulated deficit of $(88.9) million.

Results of Continuing Operations

Revenue

Our revenue is derived from foresight and trend research revenue. Our revenue decreased by $22,000 for the three months ended September 30, 2013 in comparison to the three months ended September 30, 2012. The decreased revenue results from a decrease in the number of custom projects completed in three months ended September 30, 2013. Our revenue decreased by $3,000 for the nine months ended September 30, 2013 in comparison to the nine months ended September 30, 2012.

We expect that our revenue will remain consistent with the first nine months of 2013 for the remainder of 2013.

Direct Costs of Revenue

Direct costs of revenue are comprised of certain salaries and related taxes, commissions, certain outside services and other direct costs related to our intelligence and insights services business. Direct costs of revenue decreased by $43,000 and $195,000 for the three and nine months ended September 30, 2013 in comparison to the three and nine months ended September 30, 2012, respectively, due to a reduction in sales staff and the elimination of the sales manager position.

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We expect that our direct costs of revenue will remain consistent with the first nine months of 2013 for the remainder of 2013.

Salaries and Wages

Salaries and wages include non-sales employee and officer salaries and related benefits, including bonuses and stock-based compensation that are not otherwise allocated to direct costs of revenue.  Salaries and wages decreased by $15,000 and $50,000 for the three and nine months ended September 30, 2013 in comparison to the three and nine months ended September 30, 2012, respectively. The decrease is primarily related to a decrease in officer salaries and a decrease in stock compensation expense.

We expect that our salaries and wages will continue to decrease over the 2012 totals due to the resignation of our general counsel.

Professional Fees

Professional fees include accounting fees, legal fees and valuation expenses for our investments. Professional fees decreased by $46,000 and $134,000 for the three and nine months ended September 30, 2013 in comparison to the three and nine months ended September 30, 2012, respectively primarily as a result of a reduction in audit and legal fees due to our limited operations.

We expect that our professional fees will remain consistent with the first nine months of 2013 for the remainder of 2013.

Research and Development

Research and development expense includes outside services and other costs related to the continued development of our LaunchPad software platform, which is designed to enhance and complement our innovation services offerings to clients. Research and development costs decreased by $42,000 and $172,000 for the three and nine months ended September 30, 2013 in comparison to the three and nine months ended September 30, 2012, respectively. The decrease is related to scaling back the amount of resources allocated to the development of LaunchPad.

We expect that our research and development expense will remain consistent with the first nine months of 2013 for the remainder of 2013.

Sales and Marketing

Sales and marketing expense includes advertising, marketing, commissions paid to outside service providers, certain travel and other business development expenses. Sales and marketing expense increased by $29,000 and $15,000 for the three and nine months ended September 30, 2013 in comparison to the three and nine months ended September 30, 2012, respectively, due to our recent marketing push related to our LaunchPad Listen application of the innovation management software .

We expect that our sales and marketing expense will continue to increase over the 2012 totals due to continued market efforts.

General and Administrative

General and administrative expense decreased by $70,000 for the three months ended September 30, 2013 in comparison to the three months ended September 30, 2012. The decrease primarily relates to a $62,000 reduction in outside services and a $7,000 reduction in rent expense. General and administrative expense decreased by $393,000 for the nine months ended September 30, 2013 in comparison to the nine months ended September 30, 2012. The decrease primarily relates to a $282,000 reduction in outside services, a $17,000 reduction in bad debt, a $54,000 reduction in insurance and other employee related costs due to having fewer employees, and a $45,000 reduction in rent and building expenses.

We expect that our general and administrative expense will remain consistent with the first nine months of 2013 for the remainder of 2013.

Depreciation and Amortization

Depreciation and amortization expense decreased by $183,000 and $559,000 for the three and nine months ended September 30, 2013 in comparison to the three and nine months ended September 30, 2012, respectively. Amortization expense decreased by $181,000 and $543,000 for the three and nine months ended September 30, 2013, respectively, as a result of the impairment charges related to our intangible assets that were incurred in 2012. Depreciation expense decreased by $2,000 and $16,000 for the three and nine months ended September 30, 2013, respectively.

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We expect that our depreciation and amortization will remain consistent with the first nine months of 2013 for the remainder of 2013.

Impairment Loss

We recorded an impairment loss of $450,000 related to a decrease in the fair value of our corporate headquarters during the nine months ended September 30, 2013.

Other (Income) Expense

Other (income) expense includes rental income, gains and losses related to adjusting our derivative liabilities to fair value, investment gains and losses and other miscellaneous income and expenses. The net other income of $122,000 for the three months ended September 30, 2013 is comprised primarily of a gain on derivative liabilities of $13,000, rental income of $84,000, and miscellaneous income of $25,000. The net other expense of $78,000 for the nine months ended September 30, 2013 is comprised primarily of a loss on write down of a note receivable of $593,000, partially offset by rental income of $247,000, investment net income of $183,000, a gain of $36,000 related to adjusting our derivative liabilities and miscellaneous income of $49,000.

Interest Expense, Net

Interest expense, net increased by $14,000 for the three months ended September 30, 2013 in comparison to the three months ended September 30, 2012. The net interest expense of $115,000 for the three months ended September 30, 2013 is primarily comprised of interest expense on debt of $95,000 and amortization of our debt discount of $25,000, partially offset by interest income on our notes receivable of $5,000. The net interest expense of $101,000 for the three months ended September 30, 2012 is primarily comprised of interest expense on debt and other payables of $39,000 and amortization of our debt discount of $91,000, partially offset by interest income on our notes receivable of $29,000.

Interest expense, net increased by $22,000 for the nine months ended September 30, 2013 in comparison to the nine months ended September 30, 2012. The net interest expense of $338,000 for the nine months ended September 30, 2013 is primarily comprised of interest expense on debt of $288,000 and amortization of our debt discount of $70,000, partially offset by interest income on our notes receivable of $20,000. The net interest expense of $315,000 for the nine months ended September 30, 2012 is primarily comprised of interest expense on debt and other payables of $298,000 and amortization of our debt discount of $99,000, partially offset by interest income on our notes receivable of $81,000.

Liquidity and Capital Resources

Cash Flows

Cash flows from operating activities of ($713,000) for the nine months ended September 30, 2013 increased $448,000 from ($1,161,000) for the nine months ended September 30, 2012. Total cash flows from operations of ($713,000) in the current period are primarily attributable to:

• $2.4 million net operating loss;

• $253,000 realized gain on trading securities;

• $43,000 decrease in deferred revenue; and

• $36,000 gain on derivative liabilities.

Partially offset by:

• $270,000 in non-cash depreciation and amortization;

• $593,000 in loss on write down of note receivable;

• $70,000 loss on impairment of investment securities

• $450,000 loss on impairment of fixed assets

• $130,000 in non-cash stock-based compensation expense related to vesting options;

• $71,000 decrease in accounts receivable;

• $86,000 decrease in prepaid expense and other assets; and

• $326,000 increase in accounts payable and accrued expenses.

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Cash flows from investing activities of $738,000 for the nine months ended September 30, 2013 increased $120,000 from $618,000 for the nine months ended September 30, 2012. Total cash flows from investing activities of $738,000 for the nine months ended September 30, 2013 are primarily attributable to $475,000 in collection of notes receivable and $323,000 in proceeds from sale of securities, partially offset by capital expenditures of $60,000.

Cash flows from financing activities of ($84,000) for the nine months ended September 30, 2013 decreased $(151,000) from $(235,000) the nine months ended September 30, 2012. Total cash flows from financing activities of $(84,000) for the nine months ended September 30, 2013 are related to principal payments on long-term debt of $399,000, partially offset by proceeds from additional debt of $315,000.

Software Development Costs

We are continuing the development of our LaunchPad software, which is designed to enhance and complement our innovation service offerings to clients. As of September 30, 2013, we had invested $2.8 million in this software platform. We expect to incur approximately $70,000 in additional expenditures for the development and refinement of the software platform for the remainder of 2013.

Liquidity

We incurred a net loss of $(2.4) million and $(10.0) million for the nine months ended September 30, 2013 and the year ended December 31, 2012, respectively. In addition, we have a working capital deficit of $(3.9) million and an accumulated deficit of $(88.9) million as of September 30, 2013. These factors raise doubt about the Company’s ability to continue as a going concern Our primary cash requirements include working capital, research and development expenditures, principal and interest payments on indebtedness, and employee salaries and bonuses. Our primary sources of funds are cash received from collections of notes receivable, customers in connection with operations and, to a lesser extent, proceeds from the sale from time to time of our investments.

We currently intend to fund our liquidity needs, including our software development costs, with existing cash balances, cash generated from operations, collections of our existing receivables and the proceeds for the sales of our investments. Given our cash position, working capital deficit and expected revenues in the near term, we do not expect that we will be able to fund our scheduled debt service payments of $3.2 million and our operating requirements for the next twelve months. We are exploring opportunities for obtaining a credit facility, as well as selling equity securities and certain other assets. In addition, we have the capability to delay all cash intensive activities, including our software development costs, and will look to reduce costs further. However, if such measures prove inadequate, we could face liquidity problems and might be required to reduce or delay planned capital expenditures and other initiatives and sell assets, and we may be unable to take any of these actions on satisfactory terms or in a timely manner. Further, any of these actions may not be sufficient to allow us to service our debt obligations or may have an adverse impact on our business. Our failure to generate sufficient cash from our operations could have a material adverse effect on us.

Our future success depends on our ability to raise capital and ultimately generate revenue and attain profitability. We cannot be certain that additional capital, whether through selling additional debt or equity securities or obtaining a line of credit or other loan, will be available to us or, if available, will be on terms acceptable to us. If we issue additional securities to raise funds, these securities may have rights, preferences, or privileges senior to those of our common stock, and our current shareholders may experience dilution. If we are unable to obtain funds when needed or on acceptable terms, we may be required to curtail our current development programs, cut operating costs and forego future development and other opportunities. Without sufficient capital to fund our operations, we will be unable to continue as a going concern.

Critical Accounting Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make assessments, estimates and assumptions that affect the amounts reported in the financial statements. 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, 2012. There have been no material changes to our critical accounting estimates during the nine months ended September 30, 2013.

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ITEM 3. Quantitative and Qualitative Disclosures about Market Risks

Not applicable.

ITEM 4. Controls and Procedures

Disclosure Controls and Procedures

Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of our disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e) under the Securities and Exchange Act of 1934, as amended (the “Exchange Act”)) as of the end of the period covered by this Quarterly Report on Form 10-Q to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission’s rules and forms, and is accumulated and communicated to our management as appropriate to allow timely decisions regarding required disclosure.

Based on this evaluation and taking into account that certain material weaknesses existed as of December 31, 2012, our Chief Executive Officer and Chief Financial Officer have each concluded that our disclosure controls and procedures were not effective. As a result of this conclusion, the financial statements for the period covered by this Quarterly Report on Form 10-Q were prepared with particular attention to the material weaknesses previously disclosed. Notwithstanding the material weaknesses in internal controls that continue to exist as of September 30, 2013, we have concluded that the financial statements included in this Quarterly Report on Form 10-Q present fairly, the financial position, results of operations and cash flows of the Company as required for interim financial statements.

Internal Control over Financial Reporting

During the nine months ended September 30, 2013, there was no change in our internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. Management has concluded that the material weaknesses in internal control as described in Item 9A of the Company’s Form 10-K for the year ended December 31, 2012 have not been remediated. Due to the small number of employees dealing with general administrative and financial matters and the expenses associated with increasing the number of employees to remediate the disclosure control and procedure material weaknesses that have been identified, the Company continued to operate without changes to its internal controls over financial reporting for the period covered by this Quarterly Report on Form 10-Q while continuing to seek the expertise its needs to remediate the material weaknesses.

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, 2013, we were not a party to any material pending legal proceedings.

ITEM 1A. Risk Factors

Not applicable.

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

None.

ITEM 3.Defaults upon Senior Securities

None.

ITEM 4. Mine Safety Disclosures

Not applicable.

ITEM 5. Other Information

None

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ITEM 6. Exhibits

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

31.1	—	Certification of the Chief Executive Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934.
31.2	—	Certification of the Chief Financial Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934.
32.1	—	Certification of the Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350.
32.2	—	Certification of the Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350.
101.INS	—	XBRL Instance Document
101.SCH	—	XBRL Taxonomy Extension Schema
101.CAL	—	XBRL Taxonomy Extension Calculation Linkbase
101.DEF	—	XBRL Taxonomy Extension Definition Linkbase
101.LAB	—	XBRL Taxonomy Extension Label Linkbase
101.PRE	—	XBRL Taxonomy Extension Presentation Linkbase

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 SIGNATURES

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

	INNOVARO, INC.
	(Registrant)
Date: November 8, 2013	/s/ Asa Lanum
	Asa Lanum
	Chief Executive Officer

Date: November 8, 2013	/s/ Carole R. Wright
	Carole R. Wright, CPA
	Chief Financial Officer

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