Innovaro, Inc. 10-K

Item 8. Financial Statements and Supplementary Data UTEK CORPORATION INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULES Documents Page Report of Independent Registered Public Accounting Firm 42 Report of Management on Internal Control over Financial Reporting 43 Report of Independent Registered Public Accounting Firm on Internal Control over Financial Reporting 44 Consolidated Balance Sheet as of December 31, 2009 and Consolidated Statement of Assets and Liabilities as of December 31, 2008 45 Consolidated Statements of Operations and Comprehensive Income (Loss) for the three months ended December 31, 2009, the nine months ended September 30, 2009, and the years ended December 31, 2008 and 2007 46 Consolidated Statements of Stockholders’ Equity (Deficit) and Comprehensive Income (Loss) for the years ended December 31, 2009, 2008 and 2007 47 Consolidated Statements of Cash Flows for the three months ended December 31, 2009, the nine months ended September 30, 2009, and the years ended December 31, 2008 and 2007 48 Consolidated Statements of Changes in Net Assets for the nine months ended September 30, 2009 and the years ended December 31, 2008 and 2007 51 Consolidated Schedule of Investments for the year ended December 31, 2008 52 Notes to Consolidated Financial Statements 56 41 Table of Contents REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM Board of Directors UTEK Corporation and Subsidiaries Tampa, Florida We have audited the accompanying consolidated balance sheet of UTEK Corporation and subsidiaries (the “Company”) as of December 31, 2009 and the related consolidated statements of operations and comprehensive income (loss), and cash flows for the three months ended December 31, 2009 and the nine months ended September 30, 2009, and the statement of changes in net assets for the nine months ended September 30, 2009. We have audited the accompanying consolidated statement of stockholders’ equity and comprehensive income (loss) for the year ended December 31, 2009. We have also audited the accompanying consolidated statement of assets and liabilities of the Company including the schedule of investments as of December 31, 2008 and the related consolidated statements of operations, cash flows and changes in net assets for the two years ended December 31, 2008 and 2007. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements and schedule of investments referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2009 and 2008 and the results of its operations and cash flows for the three month period ended December 31, 2009, the nine month period ended September 30, 2009, and the two years ended December 31, 2008 and 2007 in conformity with accounting principles generally accepted in the United States of America. We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company’s internal control over financial reporting as of December 31, 2009, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 22, 2010 expressed an unqualified opinion thereon. Effective October 1, 2009, the Company filed a notification with the Securities and Exchange Commission withdrawing its election to be regulated as a business development company pursuant to the Investment Company Act of 1940, as more fully discussed in Note 1 to the consolidated financial statements. /s/ P ENDER N EWKIRK & C OMPANY Pender Newkirk & Company LLP Certified Public Accountants Tampa, Florida March 22, 2010 42 Table of Contents REPORT OF MANAGEMENT ON INTERNAL CONTROL OVER FINANCIAL REPORTING UTEK Corporation Management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting as such term is defined in Rule 13a-15(f) under the Securities Exchange Act of 1934 (“Exchange Act”). The Company’s internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of the consolidated financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements and even when determined to be effective, can only provide reasonable assurance with respect to financial statement preparation and presentation. Management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2009. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), in Internal Control—Integrated Framework. Based on our assessment, management believes that the Company maintained effective internal control over financial reporting as of December 31, 2009. Our internal control over financial reporting as of December 31, 2009 has been audited by Pender Newkirk & Company LLP, an independent registered public accounting firm, as stated in their report which is included herein. 43 Table of Contents REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ON INTERNAL CONTROL OVER FINANCIAL REPORTING Board of Directors UTEK Corporation and Subsidiaries Tampa, Florida We have audited the internal control over financial reporting of UTEK Corporation and Subsidiaries (the “Company”) as of December 31, 2009, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. In our opinion the Company maintained effective internal control over financial reporting as of December 31, 2009, in all material respects, based on the COSO criteria. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet of the Company as of December 31, 2009 and the related statements of operations and comprehensive income (loss), and cash flows for the three months ended December 31, 2009 and the nine months ended September 30, 2009, and the statement of changes in net assets for the nine months ended September 30, 2009. We have audited the statement of stockholders’ equity and comprehensive income (loss) for the year ended December 31, 2009. In addition, we have audited the consolidated statement of assets and liabilities including the schedule of investments as of December 31, 2008 and the related statements of operations, cash flows and changes in net assets for each of the two years ended December 31, 2008 and 2007 and our report dated March 22, 2010 expressed an unqualified opinion thereon. /s/ P ENDER N EWKIRK & C OMPANY Pender Newkirk & Company LLP Certified Public Accountants Tampa, Florida March 22, 2010 44 Table of Contents UTEK Corporation Consolidated Balance Sheet (2009)/ Consolidated Statement of Assets and Liabilities (2008) December 31, 2009 December 31, 2008 ASSETS Current assets: Cash and cash equivalents $ 2,118,970 $ 3,922,297 Accounts receivable, net 1,481,548 2,290,363 Investments: Non-affiliate investments (cost: 2008 - $36,994,463) — 5,603,440 Affiliate investments (cost: 2008 - $38,559,629) — 3,477,200 Control investments (cost: 2008 - $10,637,748) — 2,987,500 Certificates of deposit (cost: 2008 - $291,581) 492,246 291,581 Available-for-sale securities 729,800 — Investments under cost method 588,085 — Total investments 1,810,131 12,359,721 Prepaid expenses and other assets 569,829 750,502 Total current assets 5,980,478 Note receivable and accrued interest 1,596,000 — Fixed assets, net 8,388,263 653,208 Goodwill 15,874,139 15,246,143 Intangible assets, net 8,492,301 10,663,975 Total assets $ 40,331,181 45,886,209 LIABILITIES Current liabilities: Accounts payable $ 454,509 575,988 Accrued expenses 462,802 995,652 Accrued severance liability 876,400 1,651,814 Deferred revenue 1,634,096 2,849,270 Current maturities of long-term debt 975,360 — Derivative liability 664,972 — Total current liabilities 5,068,139 Long-term debt, less current maturities 5,353,892 839,765 Deferred tax liability 1,303,031 1,773,441 Total liabilities 11,725,062 8,685,930 Net assets $ 37,200,279 STOCKHOLDERS’ EQUITY/ COMPOSITION OF NET ASSETS: Preferred stock, $.01 par value, 1,000,000 shares authorized; none issued and outstanding — — Common stock, $.01 par value, 29,000,000 shares authorized; 12,286,768 and 12,134,959 shares issued; 11,797,140 and 10,879,900 shares outstanding at December 31, 2009 and 2008, respectively 117,971 $ 108,800 Additional paid-in capital 81,010,460 75,067,857 Accumulated income (loss) under Investment Company Accounting: Accumulated net operating income 23,463,295 Net realized loss on investments, net of income taxes (7,744,736 ) Net unrealized depreciation of investments, net of deferred income taxes (51,921,150 ) Foreign currency translation adjustment (1,773,787 ) Total accumulated loss under Investment Company Accounting (52,073,915 ) Accumulated income (deficit) under Operating Company Accounting: Accumulated deficit (624,006 ) — Accumulated other comprehensive income (loss) 175,609 — Total stockholders’ equity/ Net assets 28,606,119 $ 37,200,279 Total liabilities and stockholders’ equity $ 40,331,181 Net asset value per share $ 3.42 See accompanying notes 45 Table of Contents UTEK Corporation Consolidated Statements of Operations and Comprehensive Income (Loss) Operating Company Accounting Investment Company Accounting Three Months Ended Dec 31, 2009 Nine Months Ended Sept 30, 2009 Year Ended Dec 31, 2008 Year Ended Dec 31, 2007 Revenue / Income from operations: Innovation consulting services $ 2,190,703 $ 5,300,331 $ 11,134,855 $ — Sale of technology rights — — 4,684,680 16,372,550 Subscription and other services 822,136 2,404,729 3,959,243 3,343,134 Investment income, net — 59,604 399,341 585,265 3,012,839 7,764,664 20,178,119 20,300,949 Expenses: Direct costs of innovation consulting services 1,337,491 4,967,243 10,124,462 — Acquisition of technology rights — — 1,780,000 3,815,844 Salaries and wages 526,950 4,768,390 6,153,771 3,518,769 Professional fees 164,570 649,723 1,257,307 1,358,668 Sales and marketing 639,993 1,067,116 2,322,406 2,035,860 General and administrative 470,030 2,286,193 3,781,008 2,625,559 Depreciation and amortization 409,087 1,206,777 1,096,490 212,350 Impairment loss — 2,368,458 — 210,140 3,548,121 17,313,900 26,515,444 13,777,190 Other (income) and expense: Other (income) expense 69,731 Interest expense, net 85,467 155,198 (Loss) income before income taxes (690,480 ) (9,549,236 ) (6,337,325 ) 6,523,759 Provision for income taxes (66,474 ) (208,585 ) 3,697,487 2,747,017 Net (loss) income from operations (624,006 ) (9,340,651 ) (10,034,812 ) 3,776,742 Net realized and unrealized gains (losses) from investment company activity: Net realized losses on investments, net of income tax benefit (49,591,193 ) (4,232,138 ) (1,447,380 ) Net change in unrealized appreciation (depreciation) of investments, net of deferred tax expense (benefit) 44,292,068 (12,217,977 ) (10,806,048 ) Net loss/ Net decrease in net assets from operations $ (624,006 ) $ (14,639,776 ) $ (26,484,927 ) $ (8,476,686 ) Other comprehensive gain (loss): Unrealized gain (loss) from available-for-sale securities (70,946 ) Cumulative translation adjustment 246,555 Comprehensive income (loss) $ (448,397 ) Net loss/ Net decrease in net assets from operations per share: Basic and diluted $ (0.05 ) $ (1.30 ) $ (2.66 ) $ (0.94 ) Weighted average shares: Basic and diluted 11,605,373 11,257,663 9,947,221 8,989,234 Dividend declared or paid per share: — — — — See accompanying notes 46 Table of Contents UTEK Corporation Consolidated Statement of Stockholders’ Equity (Deficit) and Comprehensive Income (Loss) Investment Company Accounting Operating Company Accounting Common Stock Accumulated Net Operating Income Net Realized Loss on Investments Net Unrealized Depreciation of investments Foreign Currency Translation Adjustment Total Accumulated Loss under Investment Company Accounting Comprehensive Income (Loss) Accumulated Deficit Accumulated Other Comprehensive Income (Loss) Shares Issued Shares Outstanding Par Value Paid-In Capital Totals Balances at January 1, 2007 8,936,009 8,936,009 $ 89,361 $ 51,993,822 $ 29,721,366 $ (2,065,218 ) $ (28,897,125 ) $ 138,956 $ 50,981,162 Employee stock options exercised 75,267 75,267 753 541,928 — — — — 542,681 Stock-based compensation expense — — — 612,893 — — — — 612,893 Cumulative translation adjustment 14,498 14,498 Change in net assets — — — — 3,776,742 (1,447,380 ) (10,806,048 ) (8,476,686 ) Balances at December 31, 2007 9,011,276 9,011,276 $ 90,114 $ 53,148,643 $ 33,498,108 $ (3,512,598 ) $ (39,703,173 ) $ 153,454 $ 43,674,548 Employee stock options exercised 31,015 31,015 310 189,484 — — — — 189,794 Stock-based compensation expense — — — 779,865 — — — — 779,865 Acquisition of Pharmalicensing, Ltd. 153,967 153,967 1,540 2,148,460 — — — — 2,150,000 Acquisition of Strategos 1,248,960 502,970 5,030 6,035,640 — — — — 6,040,670 Acquisition of Innovaro Ltd. 691,714 345,857 3,458 3,660,855 — — — — 3,664,313 Acquisition of Social Technologies Group, Inc. 998,027 499,014 4,990 5,083,448 — — — — 5,088,438 Earnout accruals for all companies — 335,801 3,358 4,021,462 — — — — 4,024,820 Cumulative translation adjustment (1,927,241 ) (1,927,241 ) Change in net assets — — — — (10,034,812 ) (4,232,138 ) (12,217,977 ) (26,484,927 ) Balances at December 31, 2008 12,134,959 10,879,900 $ 108,800 $ 75,067,857 $ 23,463,295 $ (7,744,736 ) $ (51,921,150 ) $ (1,773,787 ) $ 37,200,279 Stock-based compensation expense — — — 438,217 — — — — 438,217 Common stock issued to acquire interest in a subsidiary of UTEK Real Estate Holdings, Inc. 176,470 176,470 1,765 1,498,235 — — — — 1,500,000 Severance compensation paid out in escrowed shares — 485,607 4,856 2,539,725 — — — — 2,544,581 Earnout accruals and escrow adjustments (24,352 ) 85,950 858 505,193 — — — — 506,051 Cumulative translation adjustment 542,239 542,239 Change in net assets — — — — (9,340,651 ) (49,591,193 ) 44,292,068 (14,639,776 ) Balances at September 30, 2009 12,287,077 11,627,927 $ 116,279 $ 80,049,227 $ 14,122,644 $ (57,335,929 ) $ (7,629,082 ) $ (1,231,548 ) $ 28,091,591 Adoption of Operating Company Accounting on Oct 1, 2009 — — — — (14,122,644 ) 57,335,929 7,629,082 1,231,548 $ (52,073,915 ) — Stock-based compensation expense — — — 138,960 $ — 138,960 Earnout accruals and escrow adjustments (309 ) 169,213 1,692 822,273 — 823,965 Unrealized gain (loss) from available-for-sale securities — — — — $ (70,946 ) — — Cumulative translation adjustment — — — — 246,555 — — Other comprehensive gain (loss) — — — — 175,609 — $ 175,609 175,609 Comprehensive income (loss) — — — — $ 175,609 — — — Net income (loss) — — — — (624,006 ) — (624,006 ) 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 See accompanying notes 47 Table of Contents UTEK Corporation Consolidated Statements of Cash Flows Operating Company Accounting Investment Company Accounting Three Months Ended Dec 31, 2009 Nine Months Ended Sept 30, 2009 Year Ended Dec 31, 2008 Year Ended Dec 31, 2007 Operating Activities: Net loss/ Net decrease in net assets from operations $ (624,006 ) $ (14,639,776 ) $ (26,484,927 ) $ (8,476,686 ) Adjustments to reconcile net loss/ 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 ) 10,466,219 17,325,713 Loss on sale of investments from investment company activity — 49,591,193 6,785,540 2,320,637 Proceeds from sale of equity investments from investment company activity — 681,727 2,265,430 1,923,528 Net proceeds from sale (purchases) of short-term investments from investment company activity — (198,420 ) 1,206,766 3,086,305 Net repayment from (investment in) UTEK Real Estate — — 1,965,261 (783,789 ) Depreciation and amortization 409,087 1,206,777 1,096,490 212,350 Amortization of debt discount from investor warrants 35,478 — — — Goodwill and intangible asset impairment — 2,368,458 — 210,140 Loss on sale of available-for-sale securities (19,733 ) — — — Loss on disposal of fixed assets 4,131 67,062 13,448 22,403 Loss on derivative liability 110,000 — — — Bad debt expense 8,398 35,151 78,150 364,586 Stock-based compensation 138,960 438,217 779,865 612,893 Severance compensation paid out in escrowed shares — 2,544,580 — — Deferred income taxes (66,474 ) (208,585 ) 2,870,820 (4,645,904 ) Investment securities received in connection with the sale of technology rights — — (4,559,680 ) (16,172,550 ) Consulting and other services rendered in exchange for investment securities — — (45,269 ) (1,021,117 ) Changes in operating assets and liabilities: Accounts receivable 183,028 985,238 1,749,091 124,231 Prepaid expenses and other assets (53,095 ) 324,374 (126,445 ) (3,241 ) Deferred revenue (734,928 ) (836,752 ) (577,448 ) (222,059 ) Accounts payable and accrued expenses (533,050 ) (642,577 ) 183,762 363,920 Net cash flows from operating activities (1,142,204 ) (2,575,401 ) (2,332,927 ) (4,758,640 ) Investing Activities: Capital expenditures (7,643 ) (7,006 ) (23,772 ) (50,042 ) Cash received (paid) in connection with consolidation/ acquisitions 23,170 (292,468 ) 813,211 — Proceeds from sale of available-for-sale securities 452,708 — — — Net cash flows from investing activities 468,235 (299,474 ) 789,439 (50,042 ) Financing Activities: Net increase in line of credit — 250,000 — — Proceeds from exercise of stock options — — 189,794 542,681 Proceeds from debt financing 1,750,000 — — — Distributions to stockholders — — — (179,032 ) Payments on notes payable and other debt (80,720 ) (198,791 ) (12,248 ) — Net cash flows from financing activities 1,669,280 51,209 177,546 363,649 Effect of foreign exchange rates 4,500 20,528 33,663 14,498 Increase (decrease) in cash and cash equivalents 999,811 (2,803,138 ) (1,332,279 ) (4,430,535 ) Cash and cash equivalents at beginning of period 1,119,159 3,922,297 5,254,576 9,685,111 Cash and cash equivalents at end of period $ 2,118,970 $ 1,119,159 $ 3,922,297 $ 5,254,576 See accompanying notes 48 Table of Contents UTEK Corporation Consolidated Statements of Cash Flows (continued) Three Months Ended Dec 31, 2009 Nine Months Ended Sept 30, 2009 Year Ended Dec 31, 2008 Year Ended Dec 31, 2007 Supplemental Disclosures of Non-Cash Investing and Financing Activities The Company issued 153,967 shares of common stock to purchase Pharmalicensing Limited. In conjunction with the acquisition, liabilities were assumed as follows: Fair value of assets acquired $ 2,534,197 Less: Fair value of common stock issued 2,150,000 Liabilities assumed $ 384,197 The Company issued 502,970 shares of common stock to purchase Carmi, Inc., a 100% owned subsidiary of Strategos, LLC. In conjunction with the acquisition, liabilities were assumed as follows: Fair value of assets acquired $ 9,339,383 Less: Fair value of common stock issued 6,040,669 Less: contingent liability incurred 1,952,340 Liabilities assumed $ 1,346,374 The Company issued 345,857 shares of common stock to purchase Innovaro Limited. In conjunction with the acquisition, liabilities were assumed as follows: Fair value of assets acquired $ 4,945,313 Less: Fair value of common stock issued 3,664,313 Less: Foreign currency translation adjustment 52,875 Liabilities assumed $ 1,228,125 The Company issued 499,014 shares of common stock to purchase Social Technologies Group, Inc. In conjunction with the acquisition, liabilities were assumed as follows: Fair value of assets acquired $ 8,782,600 Less: Fair value of common stock issued 5,088,438 Liabilities assumed $ 3,694,162 The Company issued 58,338, 85,950 and 335,801 shares of common stock in connection with certain acquisition earnout contingencies $ 823,965 $ 506,051 $ 4,024,820 Investment securities received for unearned global technology licensing services (net) $ 87,500 $ 280,463 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 49 Table of Contents UTEK Corporation Consolidated Statements of Cash Flows (continued) Three Months Ended Dec 31, 2009 Nine Months Ended Sept 30, 2009 Year Ended Dec 31, 2008 Year Ended Dec 31, 2007 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 UTEK common stock $ 1,500,000 240,964 shares of NeoStem, Inc. common stock 200,000 $ 1,700,000 The consolidation of UTEK Real Estate Holdings, Inc. as of October 1, 2009 resulted in the addition of the following assets and liabilities to the balance sheet: Accounts receivable $ 87,921 Cost method investments 494,517 Other tangible assets 441,696 Fixed assets 8,002,162 Accounts payable and accrued expenses (104,757 ) Debt (4,184,709 ) Derivative liability recorded upon issuance of investor warrants $ 554,972 Cash paid for taxes $ — $ — $ — $ — Cash paid for interest $ 84,914 $ 50,206 $ — $ — 50 Table of Contents UTEK Corporation Consolidated Statements of Changes in Net Assets Nine Months Ended Sept 30, 2009(1) Year Ended Dec 31, 2008 Year Ended Dec 31, 2007 Changes in net assets from operations: Net (loss) income from operations $ (9,340,651 ) $ (10,034,812 ) $ 3,776,742 Net realized loss on sale of investments, net of related income taxes (49,591,193 ) (4,232,138 ) (1,447,380 ) Change in net unrealized appreciation (depreciation) of investments, net of related deferred taxes 44,292,068 (12,217,977 ) (10,806,048 ) Net decrease in net assets from operations (14,639,776 ) (26,484,927 ) (8,476,686 ) Distributions to Stockholders (Paid or Declared): From net income from operations(2) — — — Capital stock transactions: Proceeds from the exercise of stock options — 189,794 542,681 Issuance of stock options for compensation 438,217 779,865 612,893 Severance compensation paid for in escrowed shares 2,544,580 — — Common stock issued in acquisition of Pharmalicensing Ltd. — 2,150,000 — Common stock issued in acquisition of Strategos — 6,040,669 — Common stock issued in acquisition of Innovaro, Ltd. — 3,664,313 — Common stock issued in acquisition of Social Technologies Group, Inc. — 5,088,438 — Escrow shares earnout 506,051 4,024,820 — Investment in UTEK Real Estate Holdings, Inc 1,500,000 — — Net increase in net assets from stock transactions 4,988,848 21,937,899 1,155,574 Foreign currency translation adjustment 542,240 (1,927,241 ) 14,498 Net decrease in net assets (9,108,688 ) (6,474,269 ) (7,306,614 ) Net assets at beginning of period 37,200,279 43,674,548 50,981,162 Net assets at end of period $ 28,091,591 $ 37,200,279 $ 43,674,548 (1) Information is presented for the nine months ended September 30 of the current year because the Company ceased operating as an investment company on October 1, 2009. As an operating company, measurement of certain items included in this table is not applicable or appropriate. Therefore, certain items included in this table agree to financial statements included in the Company’s September 30, 2009 quarterly report on Form 10-Q as opposed to financial statements included in this annual report on Form 10-K. See Note 1 for further discussion of the Company’s change from an investment company to an operating company. (2) Distributions to shareholders as noted in the Consolidated Statement of Cash Flows for the year ended December 31, 2007 was accrued at December 31, 2006; therefore, it is not reflected as a distribution to shareholders for purposes of this schedule. See accompanying notes 51 Table of Contents UTEK Corporation Consolidated Schedule of Investments December 31, 2008 Shares Dates of Acquisition Non-Affiliate Investments(1) Original Cost Basis Value Percentage of Net Assets 560,003 1/07 MiMedx Group, Inc. (MiMedx, Inc.) Connective tissue technology $ — $ 1,971,200 5.3 % Advanced Medical Isotope Corporation (8) Medical isotope processes 95,000 9/06 Series A Convertible Preferred Stock 1,803,417 1,750,400 4.7 148,000 11/06-1/07 Cyberlux Corporation LED lighting solutions Series C Convertible Preferred Stock 2,181,640 1,133,400 3.0 25,931,484 1/07 Common Stock 502,558 33,100 0.1 100,000 4/06 Advanced Refractive Technologies, Inc. Ophthalmic technologies Series D Convertible Preferred Stock 1,996,176 140,000 0.4 97,000 3/06 Series C Convertible Preferred Stock 2,066,063 135,800 0.4 97,000 12/05 Series B Convertible Preferred Stock 1,032,675 70,600 0.2 4,000,000 5/06 Common Stock 76,368 140 <0.1 (6) 4/07 Oxygen Biotherapeutics, Inc.(Synthetic Blood Intn’l, Inc) Biotechnology products 120,000 151,000 0.4 321,020 6/08 CSMG Technologies, Inc. Environmental and medical technologies 300,300 81,900 0.2 92,000 3/08 Platina Energy Group Inc. Oil and gas exploration and production Series F Convertible Preferred Stock 794,880 66,200 0.2 40,000 7/06 Bacterin International, Inc. (privately held) Bioactive coatings for medical devices 120,000 40,000 0.1 60,000 12/05 Metamorphix Global, Inc. (privately held) Design and manufacture of countertops 120,000 18,000 0.1 109,091 7/06 Turbine Truck Engines, Inc. Heavy-duty highway truck engines 72,000 7,800 <0.1 6,706 5/06-6/06 Codima, Inc.(KKS Venture Management/ Rheologics) Study of blood viscosity 86,100 2,200 <0.1 Island Gas Resources Plc. (KP Renewables Plc) (5) Renewable energy 5/06 Convertible Debenture, due 5/10/07 4,433,403 — 0.0 9/05 Convertible Debenture, due 9/30/06 1,884,920 — 0.0 2,500 3/05 Common Stock 94,500 700 <0.1 1,250,010 5/06 In Veritas Medical Diagnostics, Inc. Medical devices designs and testing 74,400 600 <0.1 940,000 10/06 Laserlock Technologies, Inc. Security solutions for the gaming industry 18,900 400 <0.1 2,971 12/05-8/06 The Renewable Corp. (Industrial Biotechnology Corp.) Provider of renewable resources 3,455,105 — 0.0 387,097 6/06 Tradequest International, Inc. Provider of voice over internet protocol 76,092 — 0.0 1,886 9/05-6/08 Applied Wellness Corporation (New Life Scientific, Inc.) Pharmaceutical biotechnologies 81,816 — 0.0 232,211 5/05 EFuel EFN Corp. (Preservation Sciences, Inc.) Internet sites host — — 0.0 52 Table of Contents Shares Dates of Acquisition Original Cost Basis Value Percentage of Net Assets 2,430,740 2/06-6/06 UBA Technology, Inc . Software development Common Stock 1,652,900 — 0.0 95,000 4/06 Series A Convertible Preferred Stock 1,619,849 — 0.0 7,787,565 6/05-6/06 Trio Industries Group, Inc . Protective powder coating 12,330,401 — 0.0 Total Investments in Non-Affiliates $ 36,994,463 $ 5,603,440 15.1 % Affiliate Investments(2) 100,000 6/08 World Energy Solutions, Inc.(7) Energy saving technologies Series B Convertible Preferred Stock $ 875,000 $ 750,000 2.0 % 100,000 9/08 Series C Convertible Preferred Stock 750,000 700,000 1.9 18,042,749 9/05-6/08 Common Stock 4,715,949 322,100 0.9 17,823 12/06-6/07 MATECH Corporation (Material Technologies, Inc.) Metal fatigue detection Common Stock 4,170,070 58,400 0.2 47,500 1/07 Series E Convertible Preferred Stock 694,640 463,100 1.2 2,040,000 4/06-7/06 CytoDyn, Inc. Novel therapeutic agents Common Stock 3,640,772 171,400 0.5 100,000 1/07 Series A Convertible Preferred Stock 845,000 260,000 0.7 15,150,717 4/05-6/08 Emission & Power Solutions, Inc. (Fuel FX International, Inc .) (privately held) Reductional environmental emissions 4,080,142 287,900 0.8 412,000 9/07 NeoStem, Inc. Stem cell banking services 761,440 164,600 0.4 49,500,000 7/07 MachineTalker, Inc. Intelligent wireless security networks 993,000 133,700 0.4 3,373,107 7/06-9/07 Avalon Oil and Gas, Inc. Oil and gas producers 2,448,681 67,500 0.2 1,426,754 9/07 USTelematics, Inc. (9) Broadband telecommunication for moving vehicles — 59,900 0.1 6,498,845 6/07 American Soil Technologies , Inc. Fertilizer innovation 1,528,289 27,300 0.1 153,417,714 12/06-4/07 Cargo Connection Logistics Holdings, Inc. World trade logistics 959,972 10,700 <0.1 5,724,500 5/06-8/06 NetFabric Holdings, Inc. Information technology services 489,132 600 <0.1 4,426,136 7/06 DME Interactive Holdings, Inc. Multi-media entertainment 752,443 — 0.0 3,000,000 7/07 Pathway One Plc (5) Sales and development licenses 426,150 — 0.0 95,000 1/07 Tesla Vision Corporation (Manakoa Services Corp.) (8) Compliance analysis and monitoring Series B Convertible Preferred Stock 2,280,000 — 0.0 1,559,903 8/04-4/07 Common Stock 2,122,641 — 0.0 33,730,000 4/05-1/06 WebSky, Inc. Broadband wireless 897,750 — 0.0 4,221,165 4/01-12/02 Stealth MediaLabs, Inc.(9) Software products 1,708,000 — 0.0 53 Table of Contents Shares Dates of Acquisition Original Cost Basis Value Percentage of Net Assets 5,346 7/06-9/06 NutriPure Beverages, Inc. (Liberty Diversified Holdings, Inc.) Printing and packaging Common Stock 1,245,258 — 0.0 63,981 2/07 Series D Convertible Preferred Stock 382,800 — 0.0 210,000,000 1/08 RIM Semiconductor Company(7) Data transmission technology 1,792,500 — 0.0 Total Investments in Affiliates $ 38,559,629 $ 3,477,200 9.3 % Control Investments(3) 1,000 11/99-11/06 UTEK Real Estate Holdings, Inc. (privately held) Real estate development $ 4,131,574 $ 2,980,000 8.0 % 15,009,402 3/06-5/07 Klegg Electronics, Inc. Manufacturer/distributor for retail electronic products 6,506,174 7,500 <0.1 Total Investments in Control Investments $ 10,637,748 $ 2,987,500 8.0 % Certificates of Deposit(4) 95,000 8/08 Sun Amern BK Boca Raton FL CD, maturity 1/29/09, interest rate @ 2.60% $ 95,035 $ 95,035 0.3 % 100,000 10/08 Doral BK Catano P R CD, maturity 6/29/09, interest rate @ 3.55% 100,000 100,000 0.3 95,000 8/08 SunTrust Bank CD, maturity 9/12/09, interest rate @ 4.21% 96,546 96,546 0.3 Total Investments in Certificates of Deposit $ 291,581 $ 291,581 0.8 % TOTAL INVESTMENTS $ 86,483,421 $ 12,359,721 33.2 % Cash and other assets, less liabilities 24,840,558 66.8 % Net assets at December 31, 2008 $ 37,200,279 100 % Notes to Schedule of Investments: • Except where otherwise noted, all of the Company’s investments listed above are in common stock of companies that are publicly quoted on the OTC Bulletin Board or listed on the NYSE Amex or other similar markets. • The above investments, with the exception of the U.S. Treasuries and certificates of deposits, are non-income producing. Equity investments that have not paid dividends within the last twelve months are considered non-income producing. • The value of all securities for which there is no readily available market value is determined in good faith by the Board of Directors. In making its determination, the Board of Directors has considered 54 Table of Contents valuation appraisals provided by an independent valuation service provider. (See Note 4 to the Notes to the Consolidated Financial Statements.) • As of December 31, 2008, all of the securities that the Company owns are subject to legal restrictions on resale. As a result, the Company’s ability to sell or otherwise transfer the securities it holds in its portfolio is limited. (1) Non-affiliate investments are generally defined under the Investment Company Act of 1940 as companies in which the Company owns less than 5% of the voting securities. (2) Affiliate investments are generally defined under the Investment Company Act of 1940 as companies in which the Company owns at least 5% but not more than 25% of the voting securities. (3) Control investments are generally defined under the Investment Company Act of 1940 as companies in which the Company owns more than 25% of the voting securities or where the Company holds one or more seats on the company’s Board of Directors. We own 100% of UTEK Real Estate Holdings, Inc. (“UREHI”), which holds four investments: Rosbon LLC, ABM of Tampa Bay, Inc., 22 nd Street of Ybor City, Inc. and Ybor City Group, Inc. UREHI holds 150 of the total membership interests outstanding of Rosbon LLC and all of the outstanding shares of capital stock of ABM of Tampa Bay, Inc., 22 nd Street of Ybor City, Inc. and Ybor City Group, Inc. (4) The Company invests excess cash in a number of certificates of deposit. These short-term investments normally have three-month to one-year maturities and do not qualify as cash or cash equivalents. (5) Non-U.S. company or the company’s principal place of business is outside the U.S. (6) Investment consists of warrants to purchase 1,500,000 shares of Oxygen Biotherapeutics, Inc., formerly Synthetic Blood International, Inc., common stock. (7) During the period ended December 31, 2008, the Company reclassified this investment from Control investments to Affiliate investments based on the criteria in notes (2) and (3). (8) Advanced Medical Isotope Corporation and Tesla Vision Corporation are related through common management. (9) Stealth MediaLabs, Inc. and USTelematics, Inc. are related through common management. See accompanying notes 55 Table of Contents UTEK CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. Withdrawal of the Company’s Election to be Treated as a Business Development Company under the Investment Company Act of 1940 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. Based on the Company’s current business focus and the fact that the equity interests it holds have constituted a declining amount of its assets over the last couple of years, the Company determined that it no longer met the requirements to be regulated as a BDC under the 1940 Act. In this regard, the Company’s current business focus is to provide consulting and technology transfer services to companies in exchange for cash as opposed to equity interests. Thus, because of the Company’s current business focus of providing consulting and technology transfer services to companies in exchange for cash as opposed to equity interests, as well as the fact that the Company no longer holds the requisite level of “investment securities” (as this term is defined in the 1940 Act) to permit it to be an “investment company” under the 1940 Act and, as a result, be regulated as a BDC, the Company is operating, and intends to continue to operate, as an operating company rather than an investment company. Accordingly, and after careful consideration of the requirements applicable to BDCs under the 1940 Act, the cost of compliance with the provisions of the 1940 Act and a thorough assessment of the Company’s current business model, the Company’s Board of Directors determined that the Company should withdraw its election to be regulated as a BDC under the 1940 Act. Under its current business model, the Company intends at all times to conduct its activities in such a way that it will not be deemed an “investment company” subject to regulation under the 1940 Act. Thus, the Company will not hold itself out as being engaged primarily in the business of investing, reinvesting or trading in securities. In addition, the Company intends to conduct its business in a manner so that it will at no time own or propose to acquire investment securities having a value exceeding 40% of the Company’s total assets at any one time. 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 U.S. generally accepted accounting principles (“US GAAP”) for investment companies under the 1940 Act. Operating Company Accounting, as we refer to it, is defined as accounting in accordance with US GAAP other than for investment companies under the 1940 Act. As an operating company, 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”). Under Investment Company Accounting, the fair value of UTEK Real Estate was included in the Company’s portfolio investments and the operating results of these companies were not consolidated with those of the Company. The assets, liabilities and results of operations of UTEK Real Estate have been included in the Company’s consolidated financial statements from October 1, 2009. As of October 1, 2009, none of the Company’s other investments are greater than 20% of the outstanding equity interests of any individual company, and accordingly, consolidation is not required for these investments. The change in reporting did not have a material affect on the Company’s net loss from operations, net loss or related per share amounts for the three months ended December 31, 2009. 56 Table of Contents Conversion from Investment Company Presentation to Operating Company Presentation ASC Topic 250, Accounting Changes and Error Corrections UTEK was required to make the accounting change at the time that it no longer met the requirements of the 1940 Act and filed its Form N-54C with the SEC withdrawing its election to be treated as a BDC under the 1940 Act. The Company has applied the change as of October 1, 2009, which is the first date that it was no longer appropriate for the Company to use Investment Company Accounting. The Company’s change in financial statement presentation from fair value Investment Company Accounting to Operating Company Accounting has been accounted for as the initial adoption of or modification of an accounting principle resulting from a change in events or transactions as contemplated by Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 250-10-45-1. The Company’s change to Operating Company Accounting is clearly different in substance from that previously occurring under Investment Company Accounting. This is not considered to be a change in accounting principle. In accordance with this view, the Company applied the adoption of accounting as an operating company prospectively beginning October 1, 2009. ASC Topic 946, Investment Companies As there was limited authoritative guidance on accounting for the transition from a BDC to an operating company, the Company reviewed the guidance in ASC Topic 946 Financial Services—Investment Companies . The Company relied on the guidance in Topic 946, a significant portion of which has been delayed indefinitely. The guidance that has been delayed is not US GAAP and is considered nonauthoritative. The initial determination of whether UTEK was an investment company within the scope of Topic 946 was made upon formation of the Company. Reconsideration of the provisions of Topic 946 by the Company’s Board of Directors during 2009 resulted in the determination that continuation as a BDC was inappropriate. ASC 946-10-15-5 (delayed) dictates companies that no longer meet the conditions of an investment company should discontinue application of Topic 946 and report the change in status prospectively by accounting for its investments in conformity with applicable US GAAP other than Investment Company Accounting, beginning as of the date of the change using fair value in conformity with Investment Company Accounting at the date of the change as the carrying amount of investments at the date of the change. In accordance with this guidance, the Company reported a change in status and began reporting as an operating company as of October 1, 2009. In addition, the fair value of the Company’s investments as of September 30, 2009 became their cost basis under Operating Company Accounting beginning on October 1, 2009. Presentation of Financial Statements The Company made the following adjustments in order to present two years of financial statements together for which the years include two different methods of accounting. Changes made to the accompanying consolidated balance sheet / consolidated statement of assets and liabilities include the following: • The balance sheet was reformatted as of December 31, 2009 to a classified balance sheet presentation in accordance with Operating Company Accounting. • The investment in UTEK Real Estate Holdings, Inc., which was included as a portfolio investment under Investment Company Accounting, was eliminated and this company’s balance sheet is consolidated with UTEK as of the date of change of October 1, 2009 pursuant to Operating Company Accounting. • Investments are now presented as certificates of deposit and either available-for-sale securities or investments under cost method in accordance with ASC Topic 320 Investments—Debt and Equity Securities and ASC Topic 325 Investments—Other . 57 Table of Contents • The stockholders’ equity presentation has separate classification for earnings accounts under Investment Company Accounting and Operating Company Accounting. Accumulated income (loss) under Investment Company Accounting includes earnings through September 30, 2009. Accumulated income (deficit) under Operating Company Accounting includes earnings incurred subsequent to the date of change of October 1, 2009. Changes made to the accompanying consolidated statements of operations include the following: • Operations for the year ended December 31, 2009 were segregated into two columns in the consolidated statements of operations to properly report results of operations in accordance with the accounting in effect during the respective periods. The nine months ended September 30, 2009 are presented in investment company format and the three months ended December 31, 2009 are presented in operating company format. • The statement of operations was reformatted for the three months ended December 31, 2009 to conform to an operating company presentation. Certain balances are not applicable to an investment company and are not included prior to the date of change of October 1, 2009. These include other (income) expense and interest expense, net. In addition, this statement includes the statement of comprehensive income (loss) for the three months ended December 31, 2009. • UTEK Real Estate’s results of operations are consolidated with those of UTEK as of the date of change of October 1, 2009. Intercompany transactions, including intercompany borrowings and rent, are eliminated in consolidation for the three months ended December 31, 2009. Through September 31, 2009, UTEK Real Estate is included as one of the Company’s portfolio companies and the fair value of this company is included in the Company’s portfolio investments. • Certain balances reported under Investment Company Accounting are not applicable to an operating company and are not included subsequent to the date of change of October 1, 2009. These include investment income, net realized gains (losses) on investments and net change in unrealized appreciation (depreciation) of investments. Under Operating Company Accounting, 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. • Unrealized appreciation (depreciation) on available-for-sale securities are reported in operating company equity as a component of accumulated other comprehensive income (loss) in the consolidated balance sheet. Other changes include the following: • The Consolidated Statements of Changes in Net Assets and the Schedule of Investments in and Advances to Affiliates, as well as Selected Per Share Data and Ratios under Investment Company Accounting included in Note 16, are included only through September 30, 2009 as they are requirements under Investment Company Accounting. Therefore, certain balances as shown will agree to the Company’s quarterly report on Form 10-Q for the nine months ended September 30, 2009 as opposed to the current financial statements included in this annual report on Form 10-K. • The Consolidated Schedule of Investments is presented only for the year ended December 31, 2008. • The consolidated statement of stockholders’ equity (deficit) is included for the years ended December 31, 2009, 2008 and 2007. In addition, this statement includes the statement of comprehensive income (loss) for the three months ended December 31, 2009. • Cash flows for the year ended December 31, 2009 were segregated into two columns in the consolidated statements of cash flows to properly report cash flows in accordance with the accounting in effect during the respective periods. The nine months ended September 30, 2009 are presented in investment company format and the three months ended December 31, 2009 are presented in operating company format. 58 Table of Contents Consolidation of UTEK Real Estate UTEK Real Estate has been consolidated into the Company’s balance sheet as of December 31, 2009. The following reflects the components of UTEK Real Estate’s carrying value as of October 1, 2009: Cash $ 23,170 Accounts receivable 87,921 Cost method investments 494,517 Other tangible assets 441,696 Fixed assets 8,002,162 Accounts payable and accrued expenses (104,757 ) Debt (4,184,709 ) Total carrying value $ 4,760,000 2. Nature of Business and Significant Accounting Policies Organization We commenced operations in 1997 and were originally incorporated under the laws of the State of Florida, and subsequently under the laws of the State of Delaware in July 1999. 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 and gain foresight into marketplace and technology developments that affect their business. These services are primarily provided throughout the United States (“U.S.”) and the United Kingdom (“UK”). Innovation Consulting Services The Company provides strategic innovation consulting services to clients to help them become more efficient by finding new avenues for growth, fighting commoditization, improving return on investment, transforming the organization, and removing barriers to innovation. Business value is delivered to our clients through working with a team of seasoned and experienced professionals capable of unlocking an organization’s capacity for strategy and innovation. In addition, the Company provides 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. The Company also offers 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. Sale of Technology Rights UTEK’s services enable companies to acquire externally developed technologies from universities, university incubators, federal labs, medical centers, and corporate research laboratories worldwide to augment their internal research and development (“R&D”) efforts. A sale of technology rights refers to the process by which these technologies are licensed to companies for potential commercial development and use. UTEK’s goal is to provide its clients an opportunity to acquire and commercialize innovative technologies primarily developed external to their business. 59 Table of Contents Subscription and Other Services Online Licensing Platform The Company’s online licensing services division provides the following subscription-based website services: • Pharmalicensing is a biopharmaceutical innovation resource designed for life science professionals driving partnering, licensing and business development worldwide. Pharmalicensing 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 over 200,000 visitors per month and developing partnerships with sites such as Patents.com to drive further traffic. • 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 partnerships as well as establishing some of its own with member associations around the globe to further its reach and exposure. • Knowledge Express is a searchable database of information for licensing professionals, which provides our clients with comprehensive coverage of licensing agreements, corporate profiles, clinical trials, deals, drug pipelines, drug sales, licensable technologies, patents and royalty rates. • Pharma Transfer provides a source of research and business development opportunities for the international pharmaceutical market encompassing all areas of pipeline development including, early-stage discovery, pre-clinical and clinical trials and registered products that are all available for co-development or licensing. • TekScout enables companies to outsource unfinished R&D projects to scientists from around the world. TekScout provides a platform for companies to supplement internal R&D and resources to accelerate product development. Global Technology Licensing The Company’s 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. Another component of the Company’s global technology licensing division is our patent analytic service designed to help our clients create marketplace value from their intellectual property (“IP”). The Company helps clients identify the strengths and weaknesses of their own IP as well as that of companies in the same or adjacent industries. Additionally, by identifying gaps and opportunities in the IP landscape, the Company assists clients with developing IP acquisition, disposition, and management strategies. Principles of Consolidation The consolidated financial statements include the accounts of UTEK and its wholly owned subsidiaries: UTEK Europe, Ltd. (Europe), UTEK ip , Ltd. (Israel) and UTEK Real Estate Holdings, Inc. UTEK ip , Ltd. was dissolved in 2008 and all operations of that subsidiary are currently being serviced by UTEK. In addition, the legal entities for Innovaro, Ltd., Pharmalicensing, Ltd. and Carmi, Inc. (Strategos) still exist, but their operations have been assumed by UTEK and UTEK Europe, Ltd. All intercompany transactions and balances are eliminated in consolidation. 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 in the Company’s financial statements through September 30, 2009. 60 Table of Contents Effective October 1, 2009, the Company is reporting as an operating company. 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 assets, liabilities and results of operations of UTEK Real Estate have been included in the Company’s consolidated financial statements from October 1, 2009. As of October 1, 2009, none of the Company’s other investments are greater than 20% of the outstanding equity interests of any individual company, and accordingly, equity investment accounting is not warranted for these investments. Reclassifications Certain reclassifications have been made to the 2008 and 2007 balances to conform to the 2009 financial statement presentation. Business Combinations The Company determines and allocates the purchase price of an acquired company to the tangible and intangible assets acquired and liabilities assumed as of the business combination date in accordance with US GAAP for business combinations. The purchase price allocation process requires the Company to use significant estimates and assumptions, including fair value estimates, as of the business combination date. While the Company uses its best estimates and assumptions as a part of the purchase price allocation process to accurately value assets acquired and liabilities assumed at the business combination date, its estimates and assumptions are inherently uncertain and subject to refinement. As a result, during the purchase price allocation period, which is generally one year from the business combination date, the Company records adjustments to the assets acquired and liabilities assumed based on additional information received, with the corresponding offset to goodwill. In addition, there are contingencies based on earnings (commonly referred to as earnouts) included in some of the Company’s purchase agreements entered into during 2008. The earnout is recorded as it is earned over the contingency period, which is generally one to three years from the business combination date. With the exception of unresolved income tax matters or the earnout of contingent consideration, subsequent to the purchase price allocation period any adjustment to assets acquired or liabilities assumed is included in the Company’s operating results in the period in which the adjustment is determined. In January 2009, the Company adopted new US GAAP for business combinations, which requires a number of changes, including changes in the way assets and liabilities are recognized as a result of business combinations. This new US GAAP requires that more assets and liabilities assumed be measured at fair value as of the acquisition date and that liabilities related to contingent consideration be re-measured at fair value in each subsequent reporting period. It also requires the capitalization of in-process research and development at fair value and requires the expensing of acquisition-related costs as incurred. The impact of the adoption of this new US GAAP for business combinations will depend on the nature of acquisitions completed after the date of adoption. Investments Under Investment Company Accounting Through September 30, 2009, the Company operated as a non-diversified, closed-end management investment company that had elected to be treated as a BDC under the 1940 Act and accounted for investments in accordance with Investment Company Accounting. Pursuant to the requirements of the 1940 Act, UTEK’s Board of Directors was responsible for determining, in good faith, the fair value of the Company’s securities and assets for which market quotations are not readily available. In making its determination, the Board of Directors considered valuation appraisals provided by an independent valuation firm. 61 Table of Contents Our equity interests in portfolio companies for which there is no liquid public market are valued using quoted market prices for identical or similar instruments in active markets. 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 portfolio companies for which market quotations are readily available is based on the public market price on the balance sheet date. These securities are generally thinly traded and/or carry discounts from the public market value for certain restrictions on resale. The Board of Directors based its determination upon, among other things, applicable quantitative and qualitative factors. These factors included, but were not limited to, type of securities, nature of business, marketability, market price of unrestricted securities of the same issue (if any), comparative valuation of securities of publicly traded companies in the same or similar industries, current financial conditions and operating results, sales and earnings growth, operating revenues, competitive conditions and current and prospective conditions in the overall stock market. Without a readily available market value, the value of the portfolio of equity securities may differ significantly from the values that would be placed on the portfolio if there existed a ready market for such equity securities, and the differences could be material. Approximately 60% and 28% of the Company’s investments owned at September 30, 2009 and December 31, 2008, respectively, were stated at fair value as determined by the Board of Directors, in the absence of readily available fair values. The Company used the first-in, first-out (FIFO) method of accounting for sales of its investments. Under Operating Company Accounting The Company began reporting as an operating company on October 1, 2009. In connection therewith, the Company modified the accounting treatment for it investments to conform to US GAAP for operating companies. See Note 1 for further discussion of the Company’s withdrawal of its election to be treated as an investment company under the 1940 Act and the effects on the Company’s financial statements. Certificates of Deposit Certificates of deposit are short term investments that are carried at their fair values. These certificates of deposit collateralize the Company’s line of credit as of December 31, 2009. Available-for-Sale Securities As of October 1, 2009, the Company classifies all investments in freely tradable equity securities as available-for-sale in accordance with US GAAP and our intentions regarding these instruments. Investments in equity securities of public companies continue to be accounted for using the fair value method as long as there is a market in the stock that provides readily determinable fair values for these securities. These investments are adjusted to fair value at the end of each quarter, as determined using the assistance of an independent valuation firm. Unrealized gains and losses are reported in operating company equity as a component of accumulated other comprehensive income (loss) in the consolidated balance sheet. Realized gains and losses from the sale of available-for-sale securities are determined on the FIFO method of accounting and are included as a component of other (income) expense in the consolidated statement of operations. Should management determine that an available-for-sale security has an other-than-temporary decline in fair value, the Company would recognize the investment loss in the consolidated statement of operations. Available-for-sale securities were evaluated for other-than-temporary impairment at December 31, 2009. See Note 4 for further discussion. 62 Table of Contents Investments under Cost Method As of October 1, 2009, the Company classifies all investments in non-marketable equity securities in which we do not have a controlling financial interest, constituting 20% interest in the company, or significant influence as investments under cost method in accordance with US GAAP. Pursuant to US GAAP, the fair value of the Company’s non-marketable equity securities at September 30, 2009 became the new cost basis of the investments under cost method on October 1, 2009. Individual securities classified as investments under cost method will remain at cost basis unless there is impairment. The Company must determine whether a decline in fair value below the cost basis is other than temporary. If the decline in fair value is judged to be other than temporary, the cost basis of the individual security will be written down to fair value as a new cost basis and the amount of the impairment will be included in earnings as a realized loss. The new cost basis cannot be adjusted upwards for subsequent recoveries in fair value. Investments under cost method were considered for impairment at December 31, 2009. As of December 31, 2009, the Company determined that the fair value of approximately $418,000 of the Company’s investments under cost method exceeded the carrying amount of these investments. It was not practicable to estimate the fair value of the remaining $170,000 of the Company’s investments under cost method and such an estimate was not made because there were no events or circumstances that could have had a significant adverse effect on the fair value of such investments during 2009. Realized gains and losses from the sale of investments under cost method are determined on the FIFO method of accounting and are included as a component of other (income) expense in the consolidated statement of operations. Cash and Cash Equivalents The Company considers all highly liquid, fixed income investments with maturities of three months or less at the time of acquisition to be cash equivalents. Accounts Receivable The Company provides an allowance for losses on trade receivables based on a review of the current status of existing receivables and management’s evaluation of periodic aging of accounts. The Company charges off accounts receivable against the allowance for losses when an account is deemed to be uncollectible. It is not the Company’s policy to accrue interest on past due receivables. The provision for doubtful accounts and notes was approximately $83,000 and $124,000 as of December 31, 2009 and 2008, respectively. Note Receivable The Company holds a $1,500,000 note receivable from a privately held company. The note was received in exchange for the sale of certain of the Company’s investments in January 2009. The note bears interest at 7% per annum and does not require the payment of such interest or the principal amount of the note until maturity of the note on December 31, 2012. The Company recorded $96,000 of accrued interest income on the note for the year ended December 31, 2009. The note is collateralized by a security interest in certain property located in Pasco County, Florida. Fixed Assets Fixed assets are stated at cost, less accumulated depreciation. Depreciation is recorded using the straight-line method over the estimated useful lives of the respective assets of between 3 and 39.5 years. Leasehold improvements are amortized over the shorter of the estimated useful life of the assets or lease term. The carrying amount of all long-lived assets is evaluated periodically to determine if adjustment to the depreciation and amortization period or the unamortized balance is warranted. The Company believes that no impairment of fixed assets exists at December 31, 2009 and 2008. 63 Table of Contents Maintenance and repairs are charged to operations when incurred. Betterments and renewals are capitalized. When fixed assets are sold or otherwise disposed of, the asset account and related accumulated depreciation account are relieved, and any gain or loss is included as a component of other (income) expense in the consolidated statement of operations. Goodwill and Intangible Assets Goodwill represents the excess of the purchase price over the fair value of the assets acquired in connection with the Company’s acquisitions. Intangible assets represent the cost of trade marks, trade names, websites, customer lists, non-compete agreements, and proprietary processes and software obtained in connection with certain of the Company’s acquisitions. In accordance with US GAAP, goodwill and intangible assets determined to have indefinite lives are not subject to amortization. Goodwill and indefinite-lived intangible assets are reviewed for impairment by applying a fair value based test on an annual basis or more frequently if circumstances indicate a potential impairment. Intangible assets with finite lives are amortized over their estimated useful lives. Impairment of Long-lived Assets Long-lived assets are tested for impairment on at least an annual basis. Impairment testing is required more often than annually if an event or circumstance indicates that an impairment, or decline in value, may have occurred. In conducting its impairment test, the Company compares the fair value of each of its reporting units to the related book value. If the fair value of a reporting unit exceeds its net book value, long-lived assets are considered not to be impaired. If the net book value of a reporting unit exceeds it fair value, an impairment loss is measured and recognized. The Company conducts its annual impairment test using balances as of December 31. Derivative Liability US GAAP requires bifurcation of embedded derivative instruments and measure of their fair value for accounting purposes. In addition, freestanding derivative instruments such as certain warrants are also derivative liabilities. We estimate the fair value of these instruments using the Black-Scholes option pricing model. Derivative liabilities are recorded at fair value at inception and then are adjusted to reflect fair value at the end of each quarter, with any increase or decrease in the fair value being recorded in results of operations as a component of other (income) expense. At December 31, 2009, we had a derivative instrument related to our issuance of a Note and Warrant Purchase Agreement as further discussed in Note 7. The warrants have features that make their exercise price variable. We used the Black-Scholes model to determine the fair value of these warrants at inception, which resulted in a derivative liability of approximately $555,000. We used the Black-Scholes model to determine the fair value of the warrants again as of December 31, 2009, which resulted in a derivative liability of approximately $665,000. The increase in the fair value of the derivative liability from inception is primarily related to the increase in the market price of our stock during the period. Foreign Currency Translation The functional currency of the Company’s UK operations is that country’s local currency. The Company translates the assets and liabilities of its UK subsidiary into U.S. Dollars at the exchange rates in effect at the end of each reporting period. Revenues and expenses of the Company’s UK operations are translated into U.S. Dollars using weighted average exchange rates during the period. Through September 30, 2009, the effects of foreign currency translation adjustments are reported as a component of investment company equity in the consolidated statement of assets and liabilities. Beginning October 1, 2009, the translation adjustments are included in operating company equity as a component of accumulated other comprehensive income (loss) in the consolidated balance sheet. Foreign currency transaction gains and losses are included in other (income) expense in the consolidated statement of operations as of October 1, 2009 and are immaterial for all periods presented. 64 Table of Contents Revenue Recognition Innovation Consulting Services Related to the Company’s Strategos division, revenues on fixed fee contracts 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. Related to the Company’s Social Technologies division, the Company has certain other consulting revenue that is derived from the sale of services in 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 consulting services revenue 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: 1. 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. 2. Delivery of the products or services must have occurred. The Company treats either physical or electronic delivery as having met this requirement. 3. The price of the products or services is fixed and measurable. 4. Collectability of the sale is reasonably assured and receipt is probable. Collectability of a sale is determined on a customer-by-customer basis. Innovation consulting membership services consist of Futures Consortium and Futures Interactive management products that allow clients access to information, research, databases and workshops that provide information on trends in different technologies and industries. Revenues are recognized on a contractual basis, generally on an annual basis. These fees are generally collected in advance of the membership period and the revenue is recognized ratably over the respective months, as services are provided. Differences between the timing of billings and the recognition of revenue are recognized as either unbilled services (included as a component of prepaid expenses and other assets) or deferred revenue in the consolidated balance sheets. Client prepayments and retainers are classified as deferred revenue and recognized over future periods as earned. 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. Sale of Technology Rights The Company recognizes revenue from the sale of technology rights upon the exchange of the securities of its newly formed companies for cash or securities in the portfolio company that acquires such newly formed company and the technology held by such newly formed company. The Company records revenue based on the fair value of the consideration received. Historically, the consideration received for the rights has been unregistered shares of common or preferred stock of the portfolio company. 65 Table of Contents Subscription and Other Services Revenue from the sale of subscriptions to the Company’s websites generally is received in the form of cash and initially is 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 UTEK provides consulting services by identifying and evaluating technology licensing opportunities in exchange for cash, or in previous years, unregistered shares of the portfolio company. These agreements are typically cancelable with thirty days notice. Revenue from global technology licensing agreements in which unregistered shares of common stock are received before they are earned are deferred and recognized over the term of each agreement. For global technology licensing agreements in which the stock is received ratably over the agreement, revenue is recognized as earned. The common stock received as payment is recorded as income based on the fair value of the consideration received. At December 31, 2009 and 2008, the Company did not have any global technology licensing agreements for which payment was to be received in stock. Direct Costs Related to Revenue Direct costs of innovation consulting services are comprised of salaries and related taxes, bonuses, certain outside services and other direct project costs related to innovation consulting services revenue. Acquisition of technology rights costs consist of the direct costs associated with technology transfers, which include cash to further accelerate commercialization efforts, license fees to acquire new technologies, consulting fees with the inventor of the technologies, and sponsored research fees with the university or research facility transferring the technologies. The Company does not report direct costs associated with its subscription and other services revenue as these costs have not been quantified. Stock-Based Compensation At December 31, 2009, the Company had two stock-based equity compensation plans, which are described more fully in Note 9. The Company accounts for stock option grants in accordance with US GAAP. Stock-based compensation cost recognized during the years ended December 31, 2009, 2008 and 2007 includes compensation cost for all share-based payments granted prior to, but not yet vested as of January 1, 2006 and compensation cost for all share-based payments granted subsequent to January 1, 2006, based on their respective grant date fair values estimated in accordance with US GAAP. The Company recognizes compensation expense on a straight-line basis over the requisite service period. The Company uses the Black-Scholes option pricing model to estimate fair value of stock option grants at the grant date. Determination of the fair values of stock option grants at the grant date requires judgment, including estimating the expected term of the relevant grants and the expected volatility of the Company’s stock. Additionally, management must estimate the amount of stock option grants that are expected to be forfeited. The expected term of options granted represents the period of time that the options are expected to be outstanding and is based on historical experience of similar grants, giving consideration to the contractual terms of the grants, vesting schedules and expectations of future employee behavior. The expected volatility is based upon our historical market price at consistent points in a period equal to the expected life of the options. Expected forfeitures are based on historical experience and expectations of future employee behavior. 66 Table of Contents Income Taxes Deferred taxes are provided on the asset and liability method whereby deferred tax assets are recognized for deductible temporary differences and operating loss and tax credit carry forwards and deferred tax liabilities are recognized for taxable temporary differences. Temporary differences are the differences between the reported amounts of assets and liabilities and their tax bases. Future tax benefits for net operating loss carryforwards are recognized to the extent that realization of these benefits is considered more likely than not. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. For federal and state income tax purposes, the Company is taxed at regular corporate rates on ordinary income and recognizes gains on distributions of appreciated property. As an investment company, the Company was not entitled to the special tax treatment available to BDCs that elect to be treated as regulated investment companies under the Internal Revenue Code because, among other reasons, the Company did not distribute at least 90% of “investment company taxable income” as required by the Internal Revenue Code for such treatment. Certain guidance located within ASC Topic 740, Income Taxes , clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements. Topic 740 provides guidance on the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. Topic 740 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosures, and transition. The Company had no uncertain tax positions for the years ended December 31, 2009, 2008 and 2007. The Company does not have any income tax benefit related to its net loss from operations in 2009, nor does it have a deferred tax asset related to its net operating loss carryforward, because of a 100% valuation allowance. The Company does have an income tax benefit from the reversal of a deferred tax liability related to the impairment of an indefinite-lived intangible asset and from foreign tax for the year ended December 31, 2009. Net Realized Gains or Losses and Net Change in Unrealized Appreciation or Depreciation from Investment Company Activity Realized gains or losses are measured by the difference between the net proceeds from the repayment or sale and the original cost basis of the investment without regard to unrealized appreciation or depreciation previously recognized. The original cost basis of the securities received in connection with global technology licensing agreements and technology transfers is equal to the amount of revenue recognized upon the receipt of such securities. Net change in unrealized appreciation or depreciation of investments through September 30, 2009 reflects the change in portfolio investment values during the reporting period, including the reversal of previously recorded unrealized appreciation or depreciation when gains or losses are realized. 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. 67 Table of Contents Components of basic and diluted per share data are as follows: Three Months Ended Dec 31, 2009 Nine Months Ended Sept 30, 2009 Year Ended Dec 31, 2008 Year Ended Dec 31, 2007 Weighted average outstanding shares of common stock 11,605,373 11,257,663 9,947,221 8,989,234 Dilutive effect of stock options and warrants — — — — Common stock and common stock equivalents 11,605,373 11,257,663 9,947,221 8,989,234 Shares excluded from calculation of diluted EPS(1) 1,739,150 1,014,400 988,400 652,025 (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 period. Dividends to Shareholders Dividends to shareholders are recorded on the date of declaration. Financial Instruments and Concentrations of Credit Risk The Company’s financial instruments consist of investments, certificates of deposit, cash and cash equivalents, accounts receivable, accounts payable, accrued expenses, long-term debt and the derivative liability. The fair value of trade accounts receivable and payable and certain accrued expenses approximate their carrying amounts in the financial statements due to the short maturity of such instruments. The fair value of certificates of deposit is recorded based upon their market value. The fair value of all other investments is determined as further discussed in Note 4. The fair value of the derivative liability is determined as further described in Note 7. The estimated fair value of the Company’s long-term debt at December 31, 2009 is not materially different from the carrying value of $6.3 million. Financial instruments with significant credit risk include investments, certificates of deposit and cash and cash equivalents. 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 December 31, 2009. The Company has not experienced any losses on such accounts. The Company had one major customer during the year ended December 31, 2009, two major customers during the year ended December 31, 2008 and three major customers during the year ended December 31, 2007. Major customers, those generating greater than 10% of total income from operations, accounted for approximately 10%, 27% and 43% of the Company’s revenue during the years ended December 31, 2009, 2008 and 2007, respectively. In addition, one customer accounted for approximately 17% of accounts receivable at December 31, 2009. Use of Estimates The preparation of the Company’s consolidated financial statements in conformity with US GAAP requires management to make estimates and assumptions that could affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. The most significant estimates relate to revenue recognition, the fair value of certain investments, stock-based compensation, the carrying values of goodwill, intangible assets and the derivative liability, and the purchase price allocation process for business combinations. Actual results could differ from those estimates. 68 Table of Contents Recently Issued Accounting Pronouncements In October 2008, the FASB amended ASC Topic 820, Fair Value Measurements and Disclosures . Topic 820 provides an illustrative example of how to determine the fair value of a financial asset in an inactive market. Topic 820 does not change the fair value measurement principles set forth in the original literature. Since adopting Topic 820 in January 2008, UTEK’s practices for determining the fair value of its investment portfolio have been, and continue to be, consistent with the guidance provided in the example in Topic 820 and Topic 825, Financial Instruments . Therefore, UTEK’s adoption of Topics 820 and 825 did not affect its practices for determining the fair value of its investments and did not have a material effect on its consolidated financial statements. In April 2009, the FASB amended ASC Topic 805, Business Combinations . Topic 805 establishes a model to account for certain pre-acquisition contingencies. Under Topic 805, an acquirer is required to recognize at fair value an asset acquired or a liability assumed in a business combination that arises from a contingency if the acquisition-date fair value of that asset or liability can be determined during the measurement period. If the acquisition-date fair value cannot be determined, then the acquirer should follow the recognition criteria in ASC Topic 450, Contingencies , and ASC Topic 450-20, Loss Contingencies . Topic 805 was effective for the Company beginning January 1, 2009, and will apply prospectively to business combinations completed subsequent to that date. The impact of the adoption of Topic 805 will depend on the nature of acquisitions completed after the date of adoption. In June 2009, the FASB issued ASC Topic 105, Generally Accepted Accounting Principles . The FASB Accounting Standards Codification (the “Codification”) became the source of authoritative US GAAP recognized by the FASB to be applied by nongovernmental entities. All of the Codification’s content carries the same level of authority, and the US GAAP hierarchy will be modified to include only two levels: authoritative and nonauthoritative. Topic 105 was effective for the Company as of July 1, 2009 and did not have a material effect on its consolidated financial statements. In June 2009, the FASB issued a new accounting standard which provides amendments to previous guidance on the consolidation of variable interest entities. This standard clarifies the characteristics that identify a variable interest entity (“VIE”) and changes how a reporting entity identifies a primary beneficiary that would consolidate the VIE from a quantitative risk and rewards calculation to a qualitative approach based on which variable interest holder has controlling financial interest and the ability to direct the most significant activities that impact the VIE’s economic performance. This standard requires the primary beneficiary assessment to be performed on a continuous basis. It also requires additional disclosures about an entity’s involvement with a VIE, restrictions on the VIE’s assets and liabilities that are included in the reporting entity’s consolidated balance sheet, significant risk exposures due to the entity’s involvement with the VIE, and how its involvement with a VIE impacts the reporting entity’s consolidated financial statements. The standard was effective for the Company as of January 1, 2010 and did not have a material effect on its consolidated financial statements. In August 2009, the FASB issued ASU 2009-05 (previously exposed for comments as proposed FSP FAS 157-f) to provide guidance on measuring the fair value of liabilities under ASC Topic 820 Fair Value Measurements and Disclosures . ASU 2009-05 clarifies that the quoted price for the identical liability, when traded as an asset in an active market, is also a Level 1 measurement for that liability when no adjustment to the quoted price is required. In the absence of a Level 1 measurement, an entity must use certain valuation techniques to estimate fair value. ASU 2009-05 was effective for the Company on October 1, 2009 and did not have a material effect on its consolidated financial statements. In October 2009, the FASB issued an update to existing guidance on revenue recognition for arrangements with multiple deliverables. This update will allow companies to allocate consideration received for qualified separate deliverables using estimated selling price for both delivered and undelivered items when vendor-specific objective evidence or third-party evidence is unavailable. Additional disclosures discussing the nature of multiple 69 Table of Contents element arrangements, the types of deliverables under the arrangements, the general timing of their delivery, and significant factors and estimates used to determine estimated selling prices are required. This update is effective for the Company beginning January 1, 2011 and is not expected to have a material impact on the Company’s consolidated financial statements. 3. Acquisitions Strategos On April 17, 2008, UTEK purchased all of the shares of Carmi, Inc., a 100% owned subsidiary of Strategos, LLC, wherein Carmi, Inc. became a subsidiary of UTEK. Carmi, Inc. is being dissolved and all operations are included as a unit of UTEK, which is doing business as and is referred to as “Strategos” throughout these financial statements. The financial results of Strategos have been included in the Company’s consolidated financial statements from April 17, 2008. The total purchase price for Strategos was $11.4 million, which consisted of 1,094,084 shares of UTEK unregistered common stock. Strategos stockholders were entitled to 502,970 shares of UTEK unregistered common stock valued at approximately $6,041,000 as of the acquisition date. In addition, Strategos stockholders received an additional 329,670 and 261,444 shares of UTEK unregistered common stock in 2008 and 2009, respectively, pursuant to having met specific revenue targets for those years. In allocating the purchase price based on estimated fair values, the Company recorded approximately $5.8 million of goodwill, $6.4 million of identifiable intangible assets and $(787,000) of net tangible assets. Social Technologies On October 10, 2008, UTEK purchased 100% of Social Technologies Group, Inc. (“Social Technologies”). The financial results of Social Technologies have been included in the Company’s consolidated financial statements from October 10, 2008. The total purchase price for Social Technologies was $5.2 million, which consisted of 512,420 shares of UTEK unregistered common stock. Social Technologies stockholders were entitled to 499,014 shares of UTEK unregistered common stock valued at approximately $5,088,000 as of the acquisition date. In addition, Social Technologies stockholders received an additional 13,406 shares of UTEK unregistered common stock in 2009 pursuant to having met specific revenue targets for that year. In allocating the purchase price based on estimated fair values, we recorded approximately $5.7 million of goodwill, $2.2 million of identifiable intangible assets and $(2.7 million) of net tangible assets. Pharmalicensing On December 20, 2007, the Company entered into a stock purchase agreement with Partnering Intelligence Limited and Bridgehead International Limited to acquire Pharmalicensing Limited (“Pharmalicensing”). The transaction closed and became effective on January 3, 2008, at which time the Company issued 153,967 shares of unregistered UTEK common stock, valued at $2.15 million, to Partnering Intelligence in consideration for all of the shares of Pharmalicensing owned by Partnering Intelligence. In allocating the purchase price based on estimated fair values, we recorded approximately $1.5 million of goodwill, $858,000 of identifiable intangible assets and $(235,000) of net tangible assets. The financial results of Pharmalicensing have been included in the Company’s consolidated financial statements from January 3, 2008. 70 Table of Contents Innovaro On July 3, 2008, the Company entered into a stock purchase agreement to acquire 100% of Innovaro Limited (“Innovaro”), a company incorporated in the United Kingdom and Wales. The financial results of Innovaro have been included in the Company’s consolidated financial statements from July 3, 2008. The total purchase price for Innovaro was $3.8 million, which consisted of 356,962 shares of UTEK unregistered common stock. Innovaro stockholders were entitled to 345,857 shares of UTEK unregistered common stock valued at approximately $3,664,000 as of the acquisition date. In addition, Innovaro stockholders received an additional 6,131 and 4,974 shares of UTEK unregistered common stock in 2008 and 2009, respectively, pursuant to having met specific revenue targets for those years. In allocating the purchase price based on estimated fair values, we recorded approximately $1.7 million of goodwill, $3.0 million of identifiable intangible assets and $(915,000) of net tangible assets. Unaudited Pro Forma Financial Information The unaudited financial information in the table below summarizes the combined results of operations of Strategos, Social Technologies, Innovaro and Pharmalicensing acquired during fiscal 2008, on a pro forma basis, as though the companies had been combined as of the beginning of fiscal 2007. The pro forma financial information is presented for informational purposes only and is not indicative of the results of operations that would have been achieved if the acquisitions had taken place at the beginning of each of the periods presented. The pro forma financial information for all periods presented also includes the business combination accounting effects on the historical companies’ operating results including the amortization expenses from acquired intangible assets, stock-based compensation charges for stock awards to acquired employees, and related tax effects as though the companies had been combined as of the beginning of fiscal 2007. The unaudited pro forma financial information for the year ended December 31, 2008 combines the historical results of UTEK for the year ended December 31, 2008 and the historical results of Strategos, Social Technologies, Innovaro and Pharmalicensing for the year ended December 31, 2008, and the pro forma adjustments discussed above. The unaudited pro forma financial information for the year ended December 31, 2007 combines the historical results of UTEK for the year ended December 31, 2007 and the historical results of Strategos, Social Technologies, Innovaro and Pharmalicensing for the year ended December 31, 2007, and the pro forma adjustments discussed above. Year Ended Dec 31, 2008 2007 Income from operations $ 26,501,545 $ 38,689,163 Net decrease in net assets from operations $ (26,156,397 ) $ (9,975,743 ) Basic and diluted net decrease in net assets from operations per share $ (2.40 ) $ (0.92 ) 4. Investments Under Investment Company Accounting Through September 30, 2009, the Company was operating as an investment company under the 1940 Act and accounted for investments in accordance with Investment Company Accounting. Investments at December 31, 2008 were valued at fair value as determined by the Board of Directors, with the assistance of appraisals provided by an independent valuation service provider, in the absence of readily available market values. The values assigned to these securities were based upon available information and may not reflect amounts that ultimately have been or may be realized. Accordingly, the fair values included in the accompanying schedule of investments as of December 31, 2008 may differ from the values that would have been used had a ready market existed for these securities and such differences could be material. 71 Table of Contents In connection with the Company’s plan to de-elect BDC status, the Company liquidated a significant portion of its investment portfolio during 2009. The Company sold some or all of its shares in a significant number of its investments for $3.1 million in cash and other assets, which included $1.1 million in cash, $218,000 in common stock, $201,000 in an additional investment in UTEK Real Estate Holdings, Inc., and a $1.5 million note receivable. In connection therewith, the Company recognized realized losses of $49.6 million and unrealized appreciation of $44.3 million, which is primarily related to the reversal of previously recorded unrealized depreciation upon the sale of these investments, for the nine months ended September 30, 2009. Under Operating Company Accounting The Company began reporting as an operating company on October 1, 2009. In connection therewith, the Company modified the accounting treatment for it investments to conform to US GAAP for operating companies. See Note 1 for further discussion of the Company’s withdrawal of its election to be treated as an investment company under the 1940 Act and the effects on the Company’s financial statements. Available-for-Sale Securities As of October 1, 2009, the Company classifies its investments in freely tradable equity securities as available-for-sale in accordance with US GAAP and its intentions regarding these instruments. A summary of the estimated fair value of available-for-sale securities is as follows as of December 31, 2009. Cost Unrealized(1) Gains Losses Fair Value Equity securities $ 800,746 $ 282,684 $ (353,630 ) $ 729,800 Available-for-Sale Securities $ 800,746 $ 282,684 $ (353,630 ) $ 729,800 (1) The total of the unrealized gains and losses of $(70,946) is included in operating company equity as a component of accumulated other comprehensive income (loss) in the consolidated balance sheet. As of December 31, 2009, five of our nine total available-for-sale securities were in an unrealized loss position, all of which were for a period of less than twelve months. These securities are in micro-cap companies in various industries and the impairment is significant as it relates to three of the five investments. In all cases, the impairment is deemed to have been caused by general market fluctuations. Based on third-party valuations, the Company believes these impairments are not other-than-temporary. Accordingly, no impairment loss has been recognized on these securities. Proceeds from the sale of available-for-sale securities for the three months ended December 31, 2009 were approximately $453,000. Gross realized gains (losses) were approximately $20,000 for the three months ended December 31, 2009. Fair Value Hierarchy The Company values substantially all of its investments at fair value as determined in good faith by the Board of Directors in accordance with the Company’s valuation policy, the provisions of the 1940 Act and US GAAP through September 30, 2009. Subsequent to October 1, 2009, the Company values its investments in certificates of deposits and available-for-sale securities and its derivative liability at fair value in accordance with US GAAP. US GAAP 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: 72 Table of Contents • 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 of liability. Assets measured at fair value on a recurring basis by level within the fair value hierarchy at December 31, 2009 and 2008, were as follows: Fair Value Measurements at Reporting Date Using Description Fair Value Quoted Prices in Active Markets for Identical Assets (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) Certificates of deposit at 12/31/09 $ 492,246 $ — $ 492,246 $ — Available-for-sale securities at 12/31/09 $ 729,800 $ — $ 729,800 $ — Derivative liability at 12/31/09 $ (664,972 ) $ — $ (664,972 ) $ — Total investments at 12/31/08 $ 12,359,721 $ — $ 12,359,721 $ — The Company’s investments are classified within Level 2 of the fair value hierarchy. Our equity interests in companies for which there is no liquid public market are valued using quoted market prices for identical or similar instruments in markets that are not active. The determined values are generally discounted to account for the illiquid nature of the investment and minority ownership positions. The value of our equity interests in public companies for which market quotations are readily available is based on quoted market prices for similar instruments in an active market. These securities are generally thinly traded and/or carry discounts from the public market value for certain restrictions on resale. The Company utilizes the assistance of an independent valuation firm in determining these values. The Company’s derivative liability is classified within Level 2 of the fair value hierarchy. The Company utilizes the Black-Scholes Option Pricing Model to value the derivative liability utilizing observable inputs such as the Company’s common stock price, the exercise price of the warrants, and expected volatility, which is based on historical volatility. 5. Fixed Assets Fixed assets consist of the following: December 31, 2009 2008 Computer Equipment $ 316,250 $ 708,334 Furniture and Fixtures 651,948 394,314 Leasehold Improvements 9,085 25,883 Building 2,169,128 — Building Improvements 1,824,546 — Land 4,388,625 — 9,359,582 1,128,531 Less: Accumulated Depreciation (971,319 ) (475,323 ) $ 8,388,263 $ 653,208 73 Table of Contents Depreciation expense was approximately $215,000, $164,000 and $145,000 for the years ended December 31, 2009, 2008, and 2007, respectively. 6. Goodwill and Intangible Assets In accordance with US GAAP, goodwill is not subject to amortization. Goodwill and indefinite-lived assets are reviewed for impairment by applying a fair value based test on an annual basis or more frequently if circumstances indicate impairment may have occurred. The Company assesses goodwill for impairment by comparing the carrying value of its reporting units to their respective fair values and reviewing the Company’s market value of invested capital. Management engages an independent valuation firm to assist in its impairment assessment reviews. The Company determines the fair value of its reporting units primarily by comparing the reporting unit to similar business ownership interests that have been sold. The Company also uses comparative price-to-book multiples and other factors to corroborate the reasonableness of the conclusion. As a result of significant declines in revenues related to its futures and foresight projects, management determined that there was possible goodwill and intangible asset impairment for our Social Technologies division (innovation consulting segment). Therefore, interim impairment testing was performed as of June 30, 2009. The state of the economy early in 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 this division’s employees in favor of an independent, network-based approach in an effort to reduce overhead. Management concluded that this division suffered a significant adverse change in the business, which included a projection of continuing operating and cash flow losses. The Company determined that there was impairment of this division’s purchased intangible assets of $1.0 million and impairment of the division’s goodwill of $1.3 million. This impairment loss is included in the Company’s consolidated statement of operations for the nine months ended September 30, 2009. Based on the annual impairment analysis completed with the assistance of an independent valuation firm, the Company determined that no additional impairment exists at December 31, 2009. In connection with our annual impairment analysis in 2007, we determined there was impairment of the goodwill related to the Pharma Transfer, Ltd. and Knowledge Express acquisitions. As a result, we recorded a partial impairment of the related goodwill during 2007. These write-downs resulted in an impairment charge of approximately $159,000 ($99,000 after tax) for the United Kingdom segment and $51,000 ($32,000 after tax) for the United States segment during 2007. This impairment loss is included in the Company’s consolidated statement of operations for the year ended December 31, 2007. 74 Table of Contents The following table presents goodwill and intangible assets as of December 31, 2009 and 2008. 2009 2008 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 $ 674,293 $ 438,574 $ 235,719 $ 636,642 $ 321,037 $ 315,605 Proprietary software/ processes/ know-how 6.1 years 3,172,396 807,598 2,364,798 3,737,093 336,583 3,400,510 Non-compete agreements 3.4 years 709,862 324,701 385,161 697,404 111,585 585,819 Customer list 8.1 years 3,749,493 833,054 2,916,439 3,851,759 370,621 3,481,138 Total amortizable intangible assets, net 5,902,117 7,783,072 Infinite-lived intangible assets: Trade names 2,590,184 2,880,903 Total intangible assets, net $ 8,492,301 $ 10,663,975 Goodwill $ 15,874,139 $ 15,246,143 The changes to the net carrying value of goodwill by product segment for the years ended December 31, 2009 and 2008 are as follows: Innovation Consulting Subscription Services Other Services Total Balance as of December 31, 2007 $ — $ 1,809,000 $ 1,012,064 $ 2,821,064 Increases due to acquisitions and earnouts 11,646,767 1,766,991 — 13,413,758 Impairment — — — — Translation adjustment (374,803 ) (457,867 ) (156,009 ) (988,679 ) Balance as of December 31, 2008 11,271,964 3,118,124 856,055 15,246,143 Increases due to acquisitions and earnouts 1,622,484 — — 1,622,484 Impairment (1,325,767 ) — — (1,325,767 ) Translation adjustment 140,765 143,476 47,038 331,279 Balance as of December 31, 2009 $ 11,709,446 $ 3,261,600 $ 903,093 $ 15,874,139 75 Table of Contents The changes to the net carrying value of intangible assets by product segment for the years ended December 31, 2009 and 2008 are as follows: Innovation Consulting Subscription Services Other Services Total Balance as of December 31, 2007 $ — $ 117,146 $ 6,667 $ 123,813 Increases due to acquisitions and earnouts 11,583,488 858,386 — 12,441,874 Amortization (749,534 ) (173,284 ) (6,667 ) (929,485 ) Impairment — — — — Translation adjustment (772,726 ) (199,501 ) — (972,227 ) Balance as of December 31, 2008 10,061,228 602,747 — 10,663,975 Increases due to acquisitions and earnouts — — — — Amortization (1,247,724 ) (155,643 ) — (1,403,367 ) Impairment (1,042,692 ) — — (1,042,692 ) Translation adjustment 218,231 56,154 — 274,385 Balance as of December 31, 2009 $ 7,989,043 $ 503,258 $ — $ 8,492,301 Finite-lived intangible assets are being amortized over the estimated useful lives of the respective assets, which range between three and twelve years. Total amortization expense related to intangible assets was approximately $1,401,000, $929,500 and $66,000 for the years ended December 31, 2009, 2008 and 2007, respectively. The estimated aggregate future amortization expense related to the Company’s intangible assets with finite lives is as follows: For the years ending December 31, 2010 $ 1,315,440 2011 1,228,790 2012 1,103,754 2013 1,006,368 2014 695,051 Thereafter 552,714 Total $ 5,902,117 76 Table of Contents 7. Long-term Debt The Company had the following long-term debt at December 31, 2009: $3,000,000 note payable, bank, due in monthly installments of $20,436 including principal and interest at 6.50% through April 1, 2013 with a balloon payment due on May 1, 2013; collateralized by the Company’s corporate office building and related land $ 2,921,541 $1,750,000 note payable, due in quarterly installments of interest in arrears at 8.00% with principal due in full on October 22, 2013; less applicable debt discount (discussed below); collateralized by a security interest in 68% of one of the Company’s subsidiaries, which owns undeveloped land in Hernando County, Florida 1,230,506 $1,500,000 note payable, due in monthly installments of interest at 5.25% with principal due in full on October 1, 2015; collateralized by undeveloped land in Hillsborough County, Florida 1,250,000 $600,000 note payable, bank, due in monthly installments of $14,420 including principal and interest at 7.09% through November 2011 456,613 $450,000 bank revolving line of credit, due in monthly installments of interest at 5.25%; collateralized by certificates of deposit 250,000 Capital leases on computer equipment, due in monthly installments of up to $6,053 expiring through July 2010, imputed interest rates of between 7.0% and 13.0% 45,015 Insurance financing, due in monthly installments of $9,711 including principal and interest at 5.83% through September 2009 85,324 $75,000 bank credit card financing, due in monthly installments of interest at 11.99% 16,729 $50,000 bank credit card financing, due in monthly installments of interest at 7.74% 48,524 $25,000 bank credit card financing, due in monthly installments of interest at 7.0% 25,000 Total long-term debt 6,329,252 Less current maturities 975,360 Non current portion $ 5,353,892 Payments required for the next five years on the long-term debt balance as of December 31, 2009 are as follows: For the years ending December 31, 2010 $ 978,318 2011 38,955 2012 1,817,500 2013 2,247,779 2014 — Thereafter 1,250,000 6,332,552 Less imputed interest on capital lease obligations (3,300 ) $ 6,329,252 Amortization expense related to capitalized leases was approximately $27,000 and $4,000 for the years ended December 31, 2009 and 2008, respectively. Accumulated depreciation related to computer equipment under capital lease obligations was approximately $32,000 and $7,000 at December 31, 2009 and 2008, respectively. This depreciation expense relates to approximately $140,000 of equipment purchased under capital lease agreements, of which $125,000 is still under capital lease at December 31, 2009. 77 Table of Contents 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, including newly formed 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 Units, constituting 68% of the outstanding membership interests of Cortez. The Note was amended and restated to provide that UTEK and UTEK Real Estate must pay down $500,000 of the indebtedness to the Lender within 60 days. Interest is payable on the outstanding principal amount of the Note at an annual rate of 8.00%. Interest is payable 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. The entire principal amount outstanding may be repaid earlier at the discretion of the Company, subject to certain prepayment penalties. The Note also includes customary event of default provisions, including the failure to make timely payments, material misrepresentations, change of control of the Company, defaults on other obligations in excess of $100,000, the grant of a senior security interest on the property securing this loan, the liquidation of the Company, bankruptcy and certain judicial judgments. As additional consideration for this loan, the Company also entered into a Warrant Agreement with the Lender to allow the Lender to purchase up to 437,500 shares of the Company’s common stock at any time until October 22, 2014 at an exercise price of $4.48 per share. The exercise price is subject to certain conditions and adjustments that make the exercise price variable prior to the issuance of the Company’s common stock pursuant to the Warrant Agreement. The Company determined that the embedded feature (ratchet down of exercise price) in the warrants is not indexed to the Company’s own stock due to the variability in the exercise price of the warrants and, therefore, is an embedded derivative financial liability, which requires bifurcation and to be separately accounted for pursuant to US 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 39%. The risk-free interest rate is based on the US Treasury yield curve in effect of 2.39% at Oct 22, 2009 and 2.69% at Dec 31, 2009. 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 from inception. 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. The Company determined the value of the derivative instrument to be $554,972 upon issuance of the warrants and recorded a debt discount and offsetting derivative liability. The debt discount is being amortized over the life of the debt, which is three years. The Company recorded interest expense of $35,478 related to the amortization of debt discount for the three months ended December 31, 2009. The derivative liability is required to be revalued to fair value at the end of each quarter and the value is adjusted accordingly. The Company recorded a loss on derivative liability of $110,000 for the three months ended December 31, 2009 in connection with adjusting the derivative liability to fair value. 78 Table of Contents The following shows the components comprising the carrying value of this note at December 31, 2009: Original issue price of note $ 1,750,000 Original issue discount (554,972 ) Amortization of discount 35,478 Carrying value of note $ 1,230,506 8. Income Taxes Deferred income tax assets and liabilities are determined based upon differences between financial reporting and tax basis of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. The components of the income tax provision on operations, excluding income tax expense (benefit) on realized gains (losses) and unrealized appreciation (depreciation) of investments are as follows: Year Ended December 31, 2009 2008 2007 Current: Federal $ — $ — $ — State — — — Foreign — — — $ — $ — $ — Deferred: Federal $ (85,270 ) $ 3,226,295 $ 2,482,024 State (9,104 ) 344,454 264,993 Foreign (180,685 ) 126,738 — (275,059 ) 3,697,487 2,747,017 Provision for income taxes $ (275,059 ) $ 3,697,487 $ 2,747,017 A reconciliation of the differences between the effective income tax rate and the statutory federal tax rate follows: Year Ended December 31, 2009 2008 2007 Tax at US statutory rate $ (3,396,646 ) $ (1,933,074 ) $ 2,218,078 State taxes, net of federal benefit (357,147 ) (206,384 ) 236,812 Foreign rate differential 38,929 140,720 — Stock options 202,999 252,456 149,560 Amortization of intangible assets 510,508 6,739 142,567 (3,001,357 ) (1,739,543 ) 2,747,017 Change in valuation allowance 2,726,298 5,437,030 — Provision for income taxes $ (275,059 ) $ 3,697,487 $ 2,747,017 Related to the Company’s status as an investment company during the nine months ended September 30, 2009, the Company has changes in unrealized losses and realized losses on investments totaling $64,658,725 and $(69,399,078), respectively. Additionally, related to the Company’s status as an operating company from October 1, 2009 through December 31, 2009, the Company has unrealized losses on available-for-sale securities 79 Table of Contents and foreign currency translation adjustments of $70,946 and $(697,682), respectively. These amounts are included as a component of stockholders’ equity in the respective periods. Accordingly, these amounts as tax-effected are included in the Company’s valuation allowance, but would not be reflected in the change in the valuation allowance in the accompanying reconciliation of the effective rate to the statutory rate for 2009. Significant components of the Company’s deferred tax assets and liabilities as of December 31, 2009 are as follows: 2009 Current Accrued expenses $ 19,246 Revenue recognition 48,996 Subtotal current deferred tax asset 68,242 Non-current Net operating loss carryforward 11,575,000 Capital loss carryforward 3,350,600 Intangible assets (3,029,471 ) Investments 2,330,697 Other 231,257 Subtotal non-current deferred tax asset 14,458,083 Total deferred tax asset 14,526,325 Less: valuation allowance (15,829,356 ) Net deferred tax liability $ (1,303,031 ) Significant components of the Company’s deferred tax assets and liabilities as of December 31, 2008 are as follows: 2008 Net operating loss carryforward $ 7,138,377 Intangible assets (4,009,708 ) Other 567,817 Investments 5,680,682 Subtotal 9,377,168 Less: valuation allowance (11,150,609 ) Net deferred tax liability $ (1,773,441 ) US GAAP requires a valuation allowance to reduce the deferred tax assets reported if, based on the weight of the evidence, it is more likely than not that some portion or all of the deferred tax assets will not be realized. During 2008, management determined that it was more likely than not that net operating loss carryforwards in UTEK would not be utilized in the future. Accordingly, a valuation allowance of $15.8 million and $11.2 million and was recorded for 2009 and 2008, respectively. At December 31, 2009, the Company had available U.S. net operating loss carryforwards of approximately $30,011,000, which expire as follows: 2021-$753,000; 2022-$371,000; 2023-$1,645,000; 2024-$69,000; 2025-$3,835,000; 2027-$5,076,000; 2028-$5,423,000; and 2029-$12,839,000. 9. Stock-Based Compensation The Company has two stock-based equity compensation plans at December 31, 2009. The Company adopted a stock option plan in September 1999 (the “1999 Plan”) and a non-qualified stock option plan in February 2000 (the “2000 Plan”). Under the terms of the 1999 Plan, as amended, the Company is authorized to 80 Table of Contents issue options to purchase up to 2,211,274 shares of the Company’s common stock. The options are intended to be incentive stock options within the meaning of Section 422 of the Internal Revenue Code (the “Code”), however, options may be issued under the 1999 Plan, as amended, that do not qualify for incentive treatment under the Code. Under the terms of the 2000 Plan, the Company is authorized to issue options to purchase up to 315,000 shares of the Company’s common stock. Under the 2000 Plan, as amended, the Company may only issue options that do not qualify for incentive treatment under Section 422 of the Code. 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% shareholder 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. At December 31, 2009, the Company had 1,194,837 shares available for future stock option grants under existing plans. Stock-based compensation cost recognized during the years ended December 31, 2009, 2008 and 2007 includes compensation cost for all share-based payments granted prior to, but not yet vested as of January 1, 2006 and compensation cost for all share-based payments granted subsequent to January 1, 2006, based on their respective grant date fair values estimated in accordance with US GAAP. 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. In accordance with US GAAP, the Company is required to estimate at the grant date the number of share options for which the requisite service is expected to be rendered. The Company estimated that 80% of the requisite service of its stock options issued from 2006 through 2008 would be rendered. Management revised its estimate of the forfeiture rate of these options in the second quarter of 2009. The revision to the forfeiture rate was accounted for as a change in estimate and its cumulative effect of $65,000, a reduction in stock-based compensation, was recognized in the second quarter of 2009. In connection with this revision, stock-based compensation for prospective periods will also be reduced by $794,000 over the next 2.75 years. The Company uses the Black-Scholes option pricing model to estimate the fair value of stock-based awards on the date of grant. The assumptions employed in the calculation of the fair value of share-based compensation expense were calculated as follows for all years presented: • Expected dividend yield — based on the Company’s historical dividend yield. • Expected volatility — based on the Company’s historical market price at consistent points in a period equal to the expected life of the options. • Risk-free interest rate — based on the US Treasury yield curve in effect at the time of grant. • Expected life of options — 2008 and 2009: based on the Company’s historical life of options exercised, giving consideration to the contractual terms of the grants, vesting schedules and expectations of future employee behavior; 2007: calculated using the simplified method as prescribed by US GAAP, where the expected life is equal to the sum of the vesting period and the contractual term divided by two. The following table summarizes the assumptions used to estimate the fair value of stock options granted during the years ended December 31, 2009, 2008 and 2007. 2009 2008 2007 Expected dividend yield 0% 0% 0-0.25% Expected volatility 37-44% 34-38% 37-40% Risk-free interest rate 1.28-1.84% 1.18-3.00% 3.40-4.91% Expected life of options 4.0 years 4.0 years 3.75-3.88 years Weighted average grant date fair value $1.48 $3.08 $ 4.73 81 Table of Contents Net cash proceeds from the exercise of stock options were approximately $0, $190,000 and $543,000 for the years ended December 31, 2009, 2008 and 2007, respectively. Total compensation cost related to stock options was approximately $577,000, $780,000 and $613,000 for the years ended December 31, 2009, 2008 and 2007, respectively. The tax benefits from the exercise of common stock options and from the recognition of compensation costs were not significant during 2009, 2008 or 2007. At December 31, 2009, there was approximately $1,473,000 of unrecognized compensation cost related to stock options which is expected to be recognized over a weighted average period of 2.6 years. The following table represents stock option activity as of and for the three years ended December 31, 2009: Number of Shares Weighted Average Exercise Price Weighted Average Remaining Contractual Life Aggregate Intrinsic Value Options Outstanding—December 31, 2006 582,050 $ 13.18 Granted 291,500 13.80 Exercised (75,267 ) 13.44 $ 485,000 Forfeited/cancelled/expired (146,258 ) 7.03 Options Outstanding—December 31, 2007 652,025 $ 14.08 Granted 572,500 9.82 Exercised (31,015 ) 6.12 $ 129,000 Forfeited/cancelled/expired (205,110 ) 13.10 Options Outstanding—December 31, 2008 988,400 $ 12.09 Granted 776,500 4.46 Exercised — Forfeited/cancelled/expired (463,250 ) 11.19 Options Outstanding—December 31, 2009 1,301,650 $ 7.86 5.44 years $ 86,350 Options Exercisable—December 31, 2009 267,650 $ 13.77 2.72 years $ — The total grant date fair value of options vested during the years ended December 31, 2009, 2008 and 2007 was approximately $544,000, $547,000 and $434,000, respectively. The following table summarizes information about outstanding and exercisable stock options at December 31, 2009: Outstanding Options Exercisable Options Range of Exercise Prices Outstanding at 12/31/09 Weighted Average Exercise Price Remaining Contractual Life in Years Exercisable at 12/31/09 Weighted Average Exercise Price $3.97 - $5.05 756,500 $ 4.46 6.73 6,250 $ 4.59 $9.05 - $9.30 83,500 9.27 5.92 21,250 9.27 $10.22 - $10.50 184,250 10.44 5.40 47,000 10.45 $13.00 - $13.95 147,900 13.47 2.04 81,400 13.48 $14.02 - $15.90 88,500 15.59 1.49 73,500 15.56 $18.40 - $22.04 41,000 19.23 1.53 38,250 19.06 1,301,650 $ 7.86 5.44 267,650 $ 13.77 10. Employee Benefit Plan The Company previously offered the UTEK Corporation Simple IRA Plan (the “IRA Plan”) to employees of the Company and its subsidiaries. The IRA Plan allows employees who satisfy the service requirements of the 82 Table of Contents IRA Plan to contribute pre-tax wages to the IRA Plan, subject to legal limits, $10,500 in 2008 with “catch up” deferrals of an additional $2,000 for participants age 50 and older. The Company matched 100% of the first 3% of wages contributed by employees. The Company’s matching contributions vest immediately and were approximately $171,000 and $74,000 for the years ended December 31, 2008 and 2007, respectively. On February 1, 2009, the Company adopted the UTEK Corporation 401k Plan (the “401k Plan”). The 401k Plan replaced the IRA Plan for employees of the Company and its subsidiaries. The 401k Plan allows employees who satisfy the service requirements of the 401k Plan, which include being 21 years of age and having three months of service, to contribute pre-tax wages to the 401k Plan, subject to legal limits. The Company matches 100% of the first 3%, and 50% of the second 2%, of compensation contributed by employees. The Company’s contributions vest immediately and were approximately $170,000 during the year ended December 31, 2009. 11. Segment Reporting The Company’s principal area of activity is providing technology transfer services and supporting innovation consulting services. The Company has three reportable geographical operating segments: United Kingdom, Israel and the United States. The United Kingdom segment includes the Company’s wholly owned subsidiary UTEK-Europe, Ltd., the Israel segment includes the Company’s wholly owned subsidiary UTEK ip , Ltd., and the United States (“U.S.”) segment includes UTEK Corporation. UTEK ip was closed down in the second quarter of 2008 and all operations of that segment are currently being serviced by the US segment. A summary of revenue and other financial information by reportable geographical operating segment is shown below: United Kingdom United States Consolidated 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 Long-lived assets December 31, 2008 5,659,892 20,903,434 26,563,326 Total assets December 31, 2008 6,304,527 39,581,682 45,886,209 For the year ended December 31, 2009 United Kingdom United States Consolidated Revenue / Income from operations $ 1,875,221 $ 8,902,282 $ 10,777,503 Income (loss) before income taxes (648,825 ) (9,590,891 )(2) (10,239,716 ) Depreciation and amortization 434,286 1,181,578 1,615,864 For the year ended December 31, 2008 United Kingdom Israel United States Consolidated Revenue / Income from operations $ 1,694,503 $ 8,638 $ 18,474,978 $ 20,178,119 Income (loss) before income taxes (434,786 ) 634,433 (1) (6,536,972 )(1) (6,337,325 ) Depreciation and amortization 296,300 2,750 797,440 1,096,490 For the year ended December 31, 2007 United Kingdom Israel United States Consolidated Revenue / Income from operations $ 274,221 $ 123,511 $ 19,903,217 $ 20,300,949 Income (loss) before income taxes (116,568 ) (164,481 ) 6,804,808 (1) 6,523,759 Depreciation and amortization 1,658 7,021 203,671 212,350 (1) The Company dissolved UTEK ip , which resulted in a gain for the Israel segment and an offsetting loss for the US segment of approximately $753,000 in 2008. The Company dissolved UTEK ip with the transfer of operations to the US segment. (2) The Company recognized a $2.4 million impairment loss for the U.S. segment during 2009. 83 Table of Contents During 2008, the Company changed the way it classifies and records its revenues and certain expenses to provide additional information for management. As a result of the Company’s new products and services from the acquisitions of Pharmalicensing, Strategos, Social Technologies and Innovaro, the Company now has product segments for which certain information can be reported. These reportable product segments include: technology transfer business; innovation consulting comprised of the consulting portion of Strategos, Social Technologies and Innovaro businesses; subscription services comprised of the Company’s online licensing services business; and all other services comprised of global technology licensing and other services. The administrative and other column represents miscellaneous and other income items and general and administrative type expenses that are not allocated amongst the different businesses. Management does not analyze assets for decision making purposes as it relates to the segments below. Accordingly, information is not available for long-lived assets or total assets. A summary of revenue and other financial information by reportable product segment is shown below: For the Year Ended December 31, 2009 Sale of Technology Rights Innovation Consulting Subscription Services All Other Services Administrative and Other Total Revenue / Income from operations $ — $ 7,491,034 $ 2,091,586 $ 1,135,279 $ 59,604 $ 10,777,503 Income (loss) before income taxes — (4,977,744 ) 305,745 53,942 (5,621,659 ) (10,239,716 ) For the Year Ended December 31, 2008 Sale of Technology Rights Innovation Consulting Subscription Services All Other Services Administrative and Other Total Revenue / Income from operations $ 4,684,680 $ 11,134,855 $ 2,102,015 $ 1,857,228 $ 399,341 $ 20,178,119 Income (loss) before income taxes 1,869,666 (102,657 ) (165,262 ) 157,114 (8,096,186 ) (6,337,325 ) 12. Commitments and Contingencies Employment Agreements and Severance Liability 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. We 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 does not bear any interest and is 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. Subsequent to December 31, 2009, we satisfied our remaining severance obligation to Dr. Gross through the conveyance of a 32% ownership interest in Cortez. In connection with this severance payment, we paid approximately $320,000 to satisfy the related payroll taxes. The Company has various other employment agreements with its executive officers and certain other employees, some of which were entered into in connection with the acquisitions made by the Company during 2008. Obligations under these employment agreements total $2,546,000 and $1,568,000 for the years ending December 31, 2010 and 2011, respectively. In addition, certain agreements provide for discretionary bonuses and severance packages. There are also 25,000 stock options issuable in 2010 under these agreements. 84 Table of Contents Bonus Plans The Company has a Strategos Bonus Plan for qualifying Strategos division employees. The award pool is determined from eligible earnings and aggregate revenues and is limited to the extent required to permit Strategos to maintain sufficient operating cash. Awards are to be paid out by December 15 th of each year and are accrued on a quarterly basis. Approximately 85% to 90% of Strategos net income will be paid out in connection with this bonus plan. The Company recognized bonus expense of approximately $330,000 and $5.9 million in connection with the Strategos Bonus Plan during the years ended December 31, 2009 and 2008, respectively. The Company has an Innovaro Bonus Plan for qualifying Innovaro division employees. The award pool is determined from eligible earnings and aggregate revenues and is limited to the extent required to permit Innovaro to maintain sufficient operating cash. Awards are to be paid out by June 30 th of each year and are accrued on a quarterly basis. Approximately 75% to 85% of Innovaro net income will be paid out in connection with this bonus plan. There was no bonus in connection with the Innovaro Bonus Plan during the years ended December 31, 2009 and 2008. The Company has a Social Technologies Bonus Plan for qualifying Social Technologies division employees. The award pool is determined from eligible earnings and aggregate revenues and is limited to the extent required to permit Social Technologies to maintain sufficient operating cash. The Company recognized bonus expense of $225,000 and $0 in connection with the Social Technologies Bonus Plan for the years ended December 31, 2009 and 2008, respectively. Operating Leases The Company leases its office facilities and certain equipment for various terms under long-term, non-cancelable operating lease agreements. The leases expire at various dates through 2013 and provide for various renewal options. In the normal course of business, it is expected that these leases will be renewed or replaced by leases on other properties. The leases provide for increases in future minimum annual rental payments. Lease expense charged to operations was approximately $442,000, $526,000 and $317,000 for the years ended December 31, 2009, 2008 and 2007, respectively. The Company leases the office space for its corporate headquarters from Ybor City Group, Inc., a subsidiary of UTEK Real Estate. In connection with the consolidation of UTEK Real Estate as of October 1, 2009, the rent expense associated with this lease is eliminated as an intercompany transaction. The following is a schedule by year of future minimum rental payments required under the operating lease agreements: 2010 $ 136,446 2011 108,076 2012 31,234 2013 25,278 $ 301,034 13. Related Party Transactions During the years ended December 31, 2007 and 2006, the Company loaned funds for operations and real estate improvements to certain subsidiaries of UTEK Real Estate. The entire balance of approximately $2 million was repaid to the Company during 2008. The Company leases space for its corporate headquarters from Ybor City Group, Inc., a subsidiary of UTEK Real Estate. The Company paid rent of approximately $269,000, $344,000 and $258,000 to Ybor City Group, Inc. during the nine months ended September 30, 2009 and the years ended December 31, 2008 and 2007, respectively. 85 Table of Contents In connection with the consolidation of UTEK Real Estate as of October 1, 2009, UTEK Real Estate and Ybor City Group, Inc. are no longer related party entities and disclosure of intercompany transactions in not applicable. 14. Subsequent Events As of March 16, 2010, we began doing business as Innovaro and changed our ticker symbol to NYSE Amex: “INV”. Our proxy statement for the 2010 Annual Meeting of Shareholders will include a proposal to amend our articles of incorporation to change the corporate name to Innovaro, Inc. Beginning in March 2010, the Company will reorganize into three primary business groups, 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; Insights & Research – futures and trends, research, information services and more. In connection therewith, our business segments will change beginning with our quarterly reporting period ending March 31, 2010 and this change will require certain reclassifications to prior period financial information. 15. Selected Quarterly Financial Data (Unaudited) March 31 June 30 September 30 December 31 Fiscal year 2009 Revenue / Income from operations $ 2,778,015 (1) $ 2,645,468 $ 2,341,181 $ 3,012,839 Net loss from operations (2,074,820 ) (6,234,932 )(2) (1,030,899 ) (624,006 ) Net loss/ Net decrease in net assets from operations (4,997,735 ) (7,223,234 )(2) (2,418,807 ) (624,006 ) Net loss per share/ net decrease in net assets from operations per share: Basic and diluted $ (0.45 ) $ (0.64 ) $ (0.21 ) $ (0.05 ) Fiscal year 2008 Revenue / Income from operations $ 3,665,566 $ 4,929,618 $ 7,058,406 $ 4,524,529 Net loss from operations (1,653,913 )(3) (540,890 ) (5,874,393 ) (1,965,616 ) Net decrease in net assets from operations (6,330,791 )(3) (3,388,513 ) (12,691,345 ) (4,074,278 ) Net decrease in net assets from operations per share: Basic and diluted $ (0.69 ) $ (0.35 ) $ (1.25 ) $ (0.38 ) Fiscal year 2007 Revenue / Income from operations $ 7,947,771 $ 6,388,449 $ 3,694,914 $ 2,269,815 Net income (loss) from operations 2,233,391 1,935,831 188,192 (580,672 ) Net decrease in net assets from operations (406,569 ) (3,584,734 ) (134,017 ) (4,351,366 ) Net decrease in net assets from operations per share: Basic and diluted $ (0.05 ) $ (0.40 ) $ (0.01 ) $ (0.48 ) (1) Income from operations for the three months ended March 31, 2009 as shown here varies from the amount previously reported on the Company’s March 31, 2009 quarterly report on Form 10-Q of $2,763,721 by $14,294 because of the subsequent reclassification of gains and losses from the disposal of fixed assets out of investment income. (2) Net loss from operations and net decrease in net assets from operations for the three months ended June 30, 2009 includes an impairment loss of $2.4 million and severance compensation of $2.5 million. (3) Net loss from operations and net decrease in net assets from operations for the three months ended March 31, 2008 includes severance compensation of $1.3 million. 86 Table of Contents 16. Selected Per Share Data and Ratios under Investment Company Accounting Nine Months Ended Sept 30, 2009(1) Year Ended December 31 2008 2007 2006 2005 Per share information:(2) Net asset value, beginning of period $ 3.42 $ 4.85 $ 5.71 $ 5.58 $ 3.85 Net income (loss) from operations(2) (0.83 ) (1.01 ) 0.42 2.27 0.80 Net change in realized and unrealized appreciation/depreciation on investments (after taxes)(3) (0.66 ) (2.44 ) (1.41 ) (3.45 ) (1.70 ) Total from investment operations (1.48 ) (3.45 ) (0.99 ) (1.18 ) (0.90 ) Foreign currency translation adjustment(2) 0.05 (0.19 ) — 0.02 (0.02 ) Distributions to shareholders(2) — — — (0.04 ) — Net increase from stock transactions(2) 0.44 2.21 0.13 1.33 2.65 Net asset value, end of period $ 2.42 $ 3.42 $ 4.85 $ 5.71 $ 5.58 Per share market value, end of period $ 4.68 $ 8.85 $ 13.20 $ 11.34 $ 13.79 Investment return, based on market price at end of period(4) (47 )% (33 )% 16 % (18 )% (8 )% Ratios/supplemental data: Net assets, end of period $ 28,091,591 $ 37,200,279 $ 43,674,548 $ 50,981,162 $ 44,441,118 Ratio of expenses to average net assets 53 % 66 % 29 % 52 % 39 % Ratio of net income (loss) from operations to average net assets (29 )% (25 )% 8 % 42 % 17 % Diluted weighted average number of shares outstanding during the period 11,257,663 9,947,221 8,989,234 8,786,605 7,325,312 (1) Information is presented for the nine months ended September 30 of the current year because the Company ceased operating as an investment company on October 1, 2009. As an operating company, measurement of certain items included in this table is not applicable or appropriate. Therefore, certain items included in this table agree to financial statements included in the Company’s September 30, 2009 quarterly report on Form 10-Q as opposed to financial statements included in this annual report on Form 10-K. See Note 1 for further discussion of the Company’s change in status from an investment company to operating company. (2) Calculated based on diluted weighted average number of shares outstanding during the year. (3) Calculated as a balancing amount necessary to reconcile the change in net asset value per share with the other per share information presented. This amount may not agree with the aggregate gains and losses for the period because the difference in the net asset value at the beginning and end of year does not inherently equal the per share changes of the line items disclosed. (4) Calculated as the change in market price during the period divided by the market price at the end of the period. 87 Table of Contents Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure Not applicable.