Innovaro, Inc. 10-K

10-K 1 d10k.htm FOERM 10-K Foerm 10-K Table of Contents UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 10-K x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2010 OR ¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 COMMISSION FILE NUMBER: 001-15941 INNOVARO, INC. Delaware 59-3603677 (State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.) 2109 Palm Avenue Tampa, FL 33605 (Address of principal executive offices) (813) 754-4330 (Registrant’s telephone number) SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED COMMON STOCK, $.01 PAR VALUE NYSE Amex SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: NONE Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ¨ No x Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes ¨ No x Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter periods as the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨ Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ¨ No ¨ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K x Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. Large accelerated filer ¨ Accelerated filer ¨ Non-accelerated filer ¨ Smaller reporting company x (Do not check if a smaller reporting company) Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ¨ No x The aggregate market value of the registrant’s common stock held by non-affiliates at June 30, 2010 was $44,621,515. As of March 16, 2011, there were 14,710,261 shares of the registrant’s common stock outstanding. DOCUMENTS INCORPORATED BY REFERENCE Portions of the registrant’s definitive proxy statement for the 2011 Annual Meeting of Shareholders are incorporated by reference into Part III of this report. Table of Contents TABLE OF CONTENTS INNOVARO, INC. Annual Report on Form 10-K for the Fiscal Year Ended December 31, 2010 Page PART I 1 ITEM 1. Business 1 ITEM 1A. Risk Factors 7 ITEM 1B. Unresolved Staff Comments 14 ITEM 2. Properties 14 ITEM 3. Legal Proceedings 14 ITEM 4. Reserved 14 PART II 15 ITEM 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities 15 ITEM 6. Selected Financial Data 15 ITEM 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations 16 ITEM 8. Financial Statements 32 ITEM 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 69 ITEM 9A. Controls and Procedures 69 ITEM 9B. Other Information 69 PART III 70 ITEM 10. Directors, Executive Officers and Corporate Governance 70 ITEM 11. Executive Compensation 70 ITEM 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters 70 ITEM 13. Certain Relationships and Related Transactions, and Director Independence 70 ITEM 14. Principal Accountant Fees and Services 70 PART IV 71 ITEM 15. Exhibits and Financial Statement Schedules 71 Signatures 74 Table of Contents PART I FORWARD-LOOKING STATEMENTS From time to time, we and our representatives may provide information, whether orally or in writing, including certain statements in this Annual Report on Form 10-K, which are deemed to be “forward-looking” within the meaning of the Private Securities Litigation Reform Act of 1995 (the “Litigation Reform Act”). These forward-looking statements and other information are based on our beliefs as well as assumptions made by us using information currently available. The words “anticipate,” “believe,” “estimate,” “expect,” “intend,” “will,” “should” and similar expressions, as they relate to us, are intended to identify forward-looking statements. Such statements reflect our current views with respect to future events and are subject to certain risks, uncertainties and assumptions. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those described herein as anticipated, believed, estimated, expected or intended or using other similar expressions. We do not intend to update these forward-looking statements, except as required by law. In accordance with the provisions of the Litigation Reform Act, we are making investors aware that such forward-looking statements, because they relate to future events, are by their very nature subject to many important factors that could cause actual results to differ materially from those contemplated by the forward-looking statements contained in this Annual Report on Form 10-K, any exhibits to this Form 10-K and other public statements we make. Such factors include, but are not limited to: changes in economic conditions, licensing requirements and regulations in the United States and in the foreign countries in which we do business; actions of competitors; development of new products and services; cost of borrowing and access to capital markets; our ability to protect our intellectual property rights; our ability to obtain adequate pricing for our products and services and to maintain and improve cost efficiency of operations; the risk that unexpected costs will be incurred; our ability to recover capital investments; the risk that contracts with our clients could be terminated prior to the end of the contract term; the risk that individually identifiable information of customers, clients and employees could be inadvertently disclosed or disclosed as a result of a breach of our security; and other factors that are set forth in the “Risk Factors” section, the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section and other sections of this Annual Report on Form 10-K, as well as in our Quarterly Reports on Form 10-Q and Current Reports on Form 8-K. Item 1. Business Unless the context requires otherwise, reference in this Form 10-K to “Innovaro,” the “Company,” “we,” “us” and words of similar import refer to Innovaro, Inc. and its wholly owned subsidiaries, Innovaro Europe, Ltd. (“Europe”) and UTEK Real Estate Holdings, Inc. (“UTEK Real Estate”). 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. Until September 30, 2009, we were 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, we filed a notification on Form N-54C with the Securities and Exchange Commission (“SEC”) withdrawing our election to be regulated as a BDC under the 1940 Act. As such, we are reporting as an operating company as of October 1, 2009 and forward. We provide services that help clients become stronger innovators, develop compelling strategies to drive and catalyze growth, rapidly source externally developed technologies, create value from their intellectual property (“IP”) and gain foresight into marketplace and technology developments that affect their business. These services are provided internationally from our offices in the United States and the United Kingdom. 1 Table of Contents In the first quarter of 2010, we began development of an innovation management software platform designed to enhance and complement our innovation service offerings to our clients. The purpose of the innovation management software platform is to enable our clients to access, apply and extract value from a proven innovation approach through an on-demand software application. Management has begun testing and marketing of the software platform in 2011. The release to general availability of phase one of the software is dependent on the results of our testing, but is tentatively scheduled for the end of the second quarter of 2011. During the first quarter of 2011, phase one of the software will have reached technological feasibility and additional costs will be capitalized. On March 16, 2010, we began doing business as Innovaro and changed our ticker symbol to NYSE Amex: “INV”. On July 12, 2010, we formally changed our name to “Innovaro, Inc.” We have reorganized into two new lines of business, all working under the Innovaro brand: Strategic Services—driven by Strategos, an advanced innovation consultancy, and Technology Services—online platforms, partnering services, global licensing, technology transfer services, futures trends, research and information services and IP consulting. Business Strategy Innovaro has evolved from a technology transfer firm, organized as a BDC, into an operating company. We have shifted the focus of the business to become an innovation services business. We provide innovation consulting services, IP licensing, technology acquisition and partnering and trends analysis. During the course of 2010, Innovaro recognized the opportunity to develop a new innovation management software platform with the intent to bring the product to market beginning in 2011. Innovaro envisions the continued evolution of its business to include the development and sale of software products such as the innovation management software platform to support its innovation services business. Over time, we expect the software product component of our business to grow at a greater rate than the growth in our other business segments and we feel it will represent an important component of our overall revenue stream. As the innovation management software capability matures, we expect to evolve into an innovation solutions company which will include all of our current services as well as the software platform to form the basis of an innovation engine . This innovation engine will allow us to more broadly engage clients depending on their requirements, whether people, software or data across their innovation cycle. A key component of our strategy is to embrace both software and information offerings from other firms through an open innovation approach. Open innovation is a paradigm that assumes that firms can and should use external ideas as well as internal ideas, and internal and external paths to market, as the firms look to advance their technology. Using this approach, our clients will be able to incorporate our offerings to suit their requirements to most effectively drive innovation. Operating Segments We currently have strategically aligned our business into two reportable segments: Strategic Services and Technology Services. Strategic Services Segment Overview Our clients require strategies to help them embrace improved innovation capabilities. We apply innovation insights; build those strategies with supporting infrastructure, processes and mechanisms; creating a culture primed for repeatable innovation success. We help organizations create and realize new, breakthrough growth strategies, create and execute non-incremental new growth platforms and opportunities, and develop the capability for ongoing creation and execution of those growth platforms and concepts. 2 Table of Contents We provide strategic services to enable our clients to become more efficient by finding new avenues to grow, fighting commoditization, improving return on investment, transforming the organization, and removing barriers to innovation. Business value is delivered to clients through working with a team of seasoned and experienced professionals capable of unlocking an organization’s capacity by: • Identifying and developing new segments and markets; • Creating and acting on game-changing strategies; • Building an enterprise-wide capability for innovation; • Accelerating and improving new product development processes; and • Assessing a company’s innovation capability. Clients Approximately 75% and 63% of our revenue in 2010 and 2009, respectively, was from strategic services. We have a global client base including both private and public sector organizations, representing multiple industries including fast moving consumer goods, consumer packaged goods, retail, medical, telecommunications, chemicals, media, financial services, energy, utilities and government agencies. Strategic services had two significant clients for the year ended December 31, 2010 and one significant client for the year ended December 31, 2009, which accounted for 28% and 10% of the total revenue, respectively. Competition The strategic services business is highly competitive. We currently have significant competitors for many of our service offerings, including, but not limited to, McKinsey & Company, The Boston Consulting Group and Monitor Group, Inc. for strategic services. Technology Services Segment Overview Whether partnering or licensing, our clients need exposure to the broadest and most relevant communities to identify needs, fulfill technology demands, and take technology development forward and into the market. We offer expansive networks, experts in scouting, partner sourcing and licensing expertise, and a world leading online marketplace. An important aspect of licensing is understanding the true potential value of the intellectual property portfolio. We assess that value by building a roadmap for our clients to use to uncover opportunities and options to realize latent value. Our clients require intelligence applied to their markets in order to have confidence in deploying their development capital. From current market research to predictive intelligence, we help clients determine the factors impacting or that will likely impact their business including social, geopolitical, competitive, economic, environmental and technological factors. Online Marketplaces Innovaro Pharmalicensing is a biopharmaceutical innovation resource designed for life science professionals driving partnering, licensing and business development worldwide. Pharmalicensing.com affords clients the ability to in-license and out-license intellectual property and also provides partnering services, business development reports, industry news and a jobs source for candidates and employers. We are tracking at approximately 200,000 unique visitors per month and developing partnerships with external search partners to further drive traffic. Knowledge Express is an online, information service built for those who need it most—business development, technology transfer and marketing professionals across technology industries. It is a premier 3 Table of Contents business development resource with expert IP search capabilities and report generation functionality. Our service includes access to key corporate profiles, industry contacts, technology pipelines, investigational technologies, deal information, sales data and patent data. Pharma Transfer provides a source of research and peer reviewed 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. Global Technology Licensing Our global technology licensing service enables clients to enhance their new product pipeline through the acquisition of proprietary technologies primarily from universities, medical centers, federal research laboratories, select corporations and university incubator programs. A global network of technology providers, coupled with an in-house staff of scientists and researchers, offers companies low-cost, low-risk access to review and acquire new technologies from research centers around the world. After gaining an understanding of our clients’ technology and business needs, we find and assess technologies for our clients. With the added benefit of our licensing professionals, we can negotiate agreements on behalf of our clients and offer a variety of flexible terms and transaction models. Foresight and Trend Research Foresight is the ability of an organization to understand the ways in which the future might emerge and to apply that understanding in organizationally useful ways. Strategic foresight may also be used to detect adverse conditions, guide policy and help shape strategy. We provide services to clients that build the capacity for foresight, including monitoring trends, researching topics of interest, forecasting alternative scenarios, developing technology roadmaps, creating growth platforms and embedding futures thinking within the organization. We offer innovative futures programs that provide clients with up-to-the-minute knowledge, expert insight, high-level learning experiences, and opportunities to network with experts and peers, including: • Futures Consortium— a membership service that provides access to research briefs, member meetings and networking events, and onsite workshops. • Futures Observatory— a membership service that provides a steady stream of “observations” that illustrate the latest developments in key global trends. The observations are brief, timely discussions of real-life events or circumstances in key markets, which exemplify how trends are playing out in the market. • Futures Interactive— a customizable, web-based knowledge management tool that gathers and organizes information from across a client in one, intuitive platform. IP Consulting We also offer IP Consulting to deliver value through the identification of intellectual property opportunities and execution of IP optimization and exploitation strategies for clients in a wide range of industries. Our approach is designed to help our clients determine market viability, product viability and buyer viability and determine the best means to maximize the value from commercially available assets. Our IP analysis, coupled with collaborative planning and execution, delivers focused results. Because our model is science-based, the result has a greater probability of high value realization. Strategies we employ are directly proportional to the return on IP investment and our holistic IP value consists of several phases in order to determine the right IP for our clients—one that employs strategies designed to deliver the desired business goals. 4 Table of Contents Clients Approximately 25% and 36% of our revenue in 2010 and 2009, respectively, was from technology services. We have a global client base including private and public sector organizations of varying sizes, representing a wide range of industries. Clients for our subscription services include universities, research centers and primarily large companies across a diversified group of industries. Clients for our other services within the technology services segment include both private and public sector organizations, representing multiple industry sectors including retail, government, telecommunications, chemicals, media, financial services, energy and utilities. Competition We have capable competitors in the global technology licensing business including IP Group plc, British Technology Group plc, Intellectual Ventures, Yet2.com, Competitive Technologies, Inc. and many other firms. Competitors for online marketplace services are significant and include: Reed Elsevier, PharmaVentures, Nerac, Inc., Thomson S.A., BioPharm Insight, EvaluatePharma and many others. Competitors for IP consulting services include: The Patent Board, Ocean Tomo, LLC, PatentCafé, 1790 Analytics and many other private firms and Forrester Research, Inc. and Gartner, Inc. for foresight and trend research. In addition, university technology commercialization offices also provide location specific competition with regard to the licensing of IP technology that they have developed. We believe the primary factors affecting competition in our markets include firm and consultant reputations, client relationships and experiences, a legacy of successes, referrals and referral sources, the ability to attract and retain top talent, the ability to manage client engagements effectively, responsiveness, and the ability to listen and provide high quality services. There is competition on price, as evidenced by the price competition we experienced during the recent severe economic downturn. However, given the critical nature of many of the issues that our services address, we are not typically competing on price alone. Many of our competitors have a greater share of the markets in which we operate, more high profile personnel and greater financial and marketing resources than we do. We believe that our experience, our reputation (collectively and as previously independent businesses), our focus on innovation, and our comprehensive approach to our clients’ innovation challenges enable us to compete favorably and effectively in this marketplace. Research and Development Currently, our research and development activities are related to the continuing development of an innovation management software platform. In fiscal 2010 and fiscal 2009, our research and development expenses were $1.2 million and $0, respectively. Our research and development expenses consist primarily of personnel and related expenses, including payroll and employee benefits, expenses for facilities and payments made to outside software development contractors and, to a lesser degree, depreciation of capital equipment. We estimate that we have spent approximately 17,000 hours on research and development activities during 2010. The software platform has not reached technological feasibility as of December 31, 2010 and accordingly all related costs have been expensed in 2010. Intellectual Property We consider our products as proprietary. We attempt to protect our proprietary technology by relying primarily on a combination of copyright and trademark laws, trade secrets, confidentiality procedures and contractual provisions. Business Development and Marketing Our business development and marketing efforts are aimed at developing relationships and building strong awareness and brand reputation with the key economic buyers, specifically; innovation leaders, business and business unit leaders, research and consumer insights professionals, R&D leaders, product marketers, brand 5 Table of Contents managers, licensing professionals, industry analysts, academic institutions, law firms, and others. We believe strong relationships and a client-driven approach to service are critical to building and maintaining our business and brand reputation. We emphasize high quality client service to all of our employees. We generate new business opportunities through relationships with individuals, through direct sales, cross selling, trade show and conference participation and sponsorship, direct marketing outreach, and our extensive network of contacts. We hold ongoing thought leadership programs to generate awareness and build brand recognition. These activities include a quarterly Innovation Index which ranks businesses in a different industry each quarter in terms of their level of innovation; an Innovation Update, which is a topical monthly opinion piece; bi-annual Innovation Leaders rankings; and book sponsorships. Financial Information about Financial Reporting Segments and Geographic Areas Information concerning revenue and segment income attributable to each of our financial reporting segments and geographic areas is set forth in Note 18 of our Notes to Consolidated Financial Statements under Item 8. “Financial Statements and Supplementary Data” and is incorporated herein by reference. Recent Developments The following developments that occurred during the year ended December 31, 2010 are considered to be significant to our business: • We raised gross proceeds of approximately $3.8 million before advisory fees and offering expenses in connection with a registered offering of our common stock; • We began development of our innovation software management platform, for which we have subsequently begun testing and marketing in 2011; • Our Chief Executive Officer, Douglas Schaedler, resigned from his position as CEO and member of the Board of Directors. The Board of Directors appointed Mr. Asa Lanum as Interim Chief Executive Officer; • We recorded impairment losses of $11.8 million related to goodwill, intangible assets and fixed assets; • We recognized $1.6 million in losses on investments; and • We significantly decreased our operating costs, which we expect will have an impact on 2011 operating results. Costs and Effects of Compliance with Environmental Laws and Regulations We are not in a business that involves the use of materials in a manufacturing stage where such materials are likely to result in the violation of any existing environmental rules and/or regulations. Therefore, we do not anticipate that there will be any substantial costs associated with complying with environmental laws and regulations. Scientific Advisory Council Our Scientific Advisory Council is comprised of more than 40 experts in a broad range of scientific, medical and engineering disciplines. Our Scientific Advisory Council assists our management in the evaluation of new technologies for our clients. Employees As of March 17, 2011, we had 39 full-time employees. We believe our relations with our employees are good. 6 Table of Contents Corporate Offices and Available Information Our executive offices are located at 2109 Palm Avenue, Tampa, Florida 33605 and our telephone number is (813) 754-4330. We also have offices in Illinois, Washington D.C., California and the United Kingdom. Our Internet address is www.innovaro.com . We make available free of charge through our website our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to those reports as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC. Information contained on our website is not incorporated by reference into this Annual Report on Form 10-K, and you should not consider information contained on our website to be part of this Annual Report on Form 10-K. Item 1A. Risk Factors Investing in our common stock involves a high degree of risk. As a result, there can be no assurance that we will achieve our business objectives. You should consider carefully the risks described below. RISKS RELATED TO ECONOMIC CONDITIONS Current challenging economic conditions may adversely affect our business. Challenging economic conditions related to the protracted worldwide economic downturn that began in 2008 may affect our sales and renewals of our products and services, and could negatively affect our revenues and our ability to maintain or grow our business. Instability in the financial markets associated with the economic downturn has resulted in a tightening of credit markets, which could impair the ability of our customers to obtain credit to finance purchases of our products or impair our ability to obtain credit to finance our business. Our client base is diverse and each client or potential client faces a unique set of risks. These risks include, for example, the availability of public funds and the possibility of state and local budget cuts, or lower revenues, any of which could lead to a reduction in overall spending, including information technology spending, by our current and potential clients and a corresponding decline in demand for our products and services. A prolonged economic downturn may result in a reduction in overall demand for our products and services, which could cause a decline in both new sales and renewals of our existing products and difficulty in establishing a market for our new products and services. In addition, we have experienced some lengthening of payment cycles and, depending on the future economic climate, may see a continuation of this trend. Furthermore, our accounts receivable may increase and the relative aging of our receivables may deteriorate if our clients delay or are unable to make their payments due to the tightening of credit markets and the lack of available funding. RISKS RELATED TO OUR PRODUCTS AND SERVICES The consulting services business is highly competitive, and we may not be able to compete effectively. The consulting services business in which we operate includes a large number of participants and is intensely competitive. We face competition from business operations and financial consulting firms, general management consulting firms, the consulting practices of major accounting firms, technical and economic advisory firms, regional and specialty consulting firms and the internal professional resources of organizations. In addition, because there are relatively low barriers to entry, we expect to continue to face additional competition from new entrants into the business operations and financial consulting industries. Many of our competitors have a greater national and international presence, as well as have significantly greater personnel, financial, technical and marketing resources. In addition, these competitors may generate greater revenues and have greater name recognition than we do. Our ability to compete also depends in part on the ability of our competitors to hire, retain and motivate skilled professionals, the price at which others offer comparable services and our competitors’ responsiveness to their clients. If we are unable to compete successfully with our existing competitors or with any new competitors, it could negatively affect our operating results. 7 Table of Contents The profitability of our fixed-fee engagements with clients may not meet our expectations if we underestimate the cost of these engagements. When making proposals for fixed-fee engagements, we estimate the costs and timing for completing the engagements. These estimates reflect our best judgment regarding the efficiencies of our methodologies and consultants as we plan to deploy them on engagements. Any increased or unexpected costs or unanticipated delays in connection with the performance of fixed-fee engagements, including delays caused by factors outside our control, could make these contracts less profitable or unprofitable, which could negatively affect our operating results. The absence of long-term contracts with our clients reduces the predictability of our revenue. Our clients are generally able to reduce or cancel their use of our professional services without penalty and, in some circumstances, with little notice. As a result, we believe that the number of clients or the number and size of our existing projects are not reliable indicators or measures of future revenue. We will need to continuously acquire new clients and/or new projects to pay our expenses. When a client defers, modifies or cancels a project, there is no assurance that we will be able to rapidly redeploy our professionals to other projects in order to minimize the underutilization of employees and the resulting adverse impact on operating results. We may not be able to replace cancelled or reduced contracts with new business and because our expenses are generally longer term in nature, our revenue and profits may decline. It is important to our future success that we expand the breadth and depth of our service offerings to stay abreast of the competition and to enhance our potential for growth of revenues and profits. We are primarily a service business. It is important to our future success to expand the breadth and depth of our service offerings to stay abreast of the competition and to enhance our potential for growth of revenues and profits. Expansion of our service categories and service offerings in this manner will require significant additional expenditures and could strain our management, financial and operational resources. For example, we are developing an innovation software platform to create a new revenue stream. We cannot be certain that we will be able to do so in a cost-effective or timely manner or that we will be able to offer certain services in demand by our clients, or to do so in a quality manner. Furthermore, any new service offering that is not favorably received by our clients could damage our reputation. The lack of market acceptance of new services or our inability to generate satisfactory revenues from expanded service offerings to offset their costs could harm our business. If we do not successfully expand our operations, our revenues may fall below expectations. If we do not successfully expand our operations on an ongoing basis to accommodate increases in demand, we will not be able to fulfill our clients’ needs in a timely manner, which would harm our business. We may experience outages and disruptions in connection with our online licensing services if we fail to maintain an adequate operations infrastructure. We have spent and expect to continue to spend substantial amounts to maintain equipment and to upgrade our technology and network infrastructure relating to our online licensing services. However, any inefficiencies or operational failures could diminish the quality of our services, and client experience, resulting in damage to our reputation and loss of current and potential users, and subscribers, harming our operating results and financial condition. A significant portion of our revenue is derived from a limited number of clients, which may cause our operating results to be unpredictable. We have derived, and expect to continue to derive, a significant portion of our revenue from a limited number of clients. Our clients typically retain us on an engagement-by-engagement basis, rather than under fixed-term contracts; the volume of work performed for any particular client is likely to vary from year to year and a major client in one fiscal period may not require or decide not to use our services in any subsequent fiscal 8 Table of Contents period. Moreover, a large portion of our new engagements comes from existing clients. Accordingly, the failure to obtain new large engagements or multiple engagements from existing or new clients could have a material adverse effect on the amount of revenues we generate. In addition, if we fail to collect a large trade receivable or group of receivables, we could be subject to significant financial exposure. Our ability to maintain and attract new business depends upon our reputation, the professional reputation of our revenue-generating employees and the quality of our services. Our ability to secure new engagements depends heavily upon our corporate brand and reputation and the individual reputations of our professionals. Any factor that diminishes our reputation or that of our employees, including not meeting client expectations, misconduct by our employees, or dissemination of inappropriate information from outside sources, could make it substantially more difficult for us to attract new engagements and clients. Similarly, because we obtain many of our new engagements from former or current clients or from referrals by those clients or by law firms that we have worked with in the past, any client that questions the quality of our work or that of our consultants could impair our ability to secure additional new engagements and clients. We depend on successful technology development. We believe that it will be necessary for us to continue to incur significant research and development expenditures in order for us to remain competitive. While we believe our research and development expenditures will improve our product lines, because of the uncertainty of software development projects and risks posed by the current economic downturn, these expenditures will not necessarily result in successful product introductions or sustained revenue levels. Uncertainties affecting the success of software development project introductions include technical difficulties, delays in the introductions of new products, market conditions, competitive products, and customer acceptance of and demand for new products and the operating systems they run on. We also face certain challenges in integrating third-party technology embedded in our products. These challenges include the technological challenges of integration, which may result in development delays, and uncertainty regarding the economic terms of our relationship with our third-party technology providers, which may result in delays of the commercial release of new products. In addition, if we are required to adopt cost-conservation measures, we may be compelled to reduce the amounts of our investment in research and development activities, which could adversely affect our ability to maintain the competitiveness of our existing products, our ability to develop new products, and our future research and development capabilities. Failure to continue to timely develop technologies and products necessary for us to remain competitive is likely to have a material and adverse effect on our business. RISKS RELATED TO BUSINESS OPERATIONS Our quarterly and annual results fluctuate significantly. Our quarterly and annual operating results fluctuate significantly due to a number of factors. These factors include fluctuations in the amount of consulting services we provide, the degree to which we encounter competition in our markets, and general economic conditions. As a result of these factors, quarterly and annual results are not necessarily indicative of our performance in future quarters and years. We have grown, and may continue to grow, through acquisitions and strategic investments, which could involve substantial risks. We have made and may continue to make acquisitions of or significant investments in, businesses that offer complementary products and services. The risks involved in each acquisition or investment include the possibility of paying more than the value we derive from the acquisition, dilution of the interests of our current stockholders or decreased working capital, increased indebtedness, the assumption of undisclosed liabilities and unknown and unforeseen risks, the ability to retain key personnel of the acquired company, the inability to integrate the business of the acquired company, the time to train the sales force to market and sell the products of 9 Table of Contents the acquired business, the potential disruption of our ongoing business and the distraction of management from our business. The realization of any of these risks could adversely affect our business. Additionally, we face competition in identifying acquisition targets and consummating acquisitions. The failure to integrate or negotiate successfully any future acquisitions could harm our business and operating results. If we acquire businesses in the future and are unable to integrate successfully these businesses, it could harm our business and operating results. In order to remain competitive or to expand our business, we may find it necessary or desirable to acquire other businesses, products or technologies. We may be unable to identify appropriate acquisition candidates. If we identify an appropriate acquisition candidate, we may not be able to negotiate the terms of the acquisition successfully, finance the acquisition or integrate the acquired businesses, products or technologies into our existing business and operations. Further, completing a potential acquisition and integrating an acquired business may strain our resources and require significant management time. In addition, we may revalue or write-down the value of goodwill and other intangible assets in connection with future acquisitions, which would negatively affect our operating results. Our inability to hire and retain talented people in an industry where there is great competition for talent could have a serious negative effect on our services and results of operations. Our consulting services business involves the delivery of professional services and is highly labor-intensive. Our success depends largely on our general ability to attract, develop, motivate and retain highly skilled professionals. The loss of a significant number of our professionals or the inability to attract, hire, develop, train and retain additional skilled personnel could have a serious negative effect on us, including our ability to manage, staff and successfully complete our existing engagements and obtain new engagements. Qualified professionals are constantly in demand, and we face significant competition for both senior and junior professionals with the requisite credentials and experience. Our principal competition for talent comes from other research and consulting firms, as well as from organizations seeking to staff their internal professional positions. Many of these competitors may be able to offer significantly greater compensation and benefits or more attractive lifestyle choices, career paths or geographic locations than we do. Therefore, we may not be successful in attracting and retaining the skilled consultants we require to conduct and expand our operations successfully. Increasing competition for these revenue-generating professionals may also significantly increase our labor costs, which could negatively affect our operating results. The failure to renew our employment contracts with certain with key consulting professionals could have a serious negative effect on our financial condition and results of operations. Our strategic services revenue in recent years has largely been dependent on the efforts of certain key consulting professionals, including Peter Skarzynski, the managing director of our Strategos Services division, whose employment contracts with us expire in April 2011. If we are not successful in retaining these consulting professionals or timely hiring similarly qualified and skilled consulting professionals to replacement them, then we may not be able to maintain the level of strategic services revenue we have generated in recent years and our financial condition and results of operations will likely be negatively impacted. We have a history of operating losses and may not achieve profitability on an annual basis in the future. For the years ended December 31, 2010 and December 31, 2009, we recorded net losses of $19.1 million and $15.3 million, respectively. As of December 31, 2010, our accumulated deficit was $71.8 million. We expect to continue to make significant expenditures related to the continued development of our business, including our innovation management software platform. We may therefore sustain significant operating losses and negative cash flows in the future. We will have to maintain significant increased revenue and product gross margins to achieve profitability on an annual basis. 10 Table of Contents We may need additional capital, which may not be available on acceptable terms, if at all, and any additional financing may be on terms adverse to your interests. We may need additional cash to fund our operations. Our capital needs will depend on numerous factors, including market conditions and our profitability. We cannot be certain that we will be able to obtain additional financing on favorable terms, if at all. If additional financing is not available when required or is not available on acceptable terms, we may be unable to fund our innovation software business, successfully promote our brand name, develop or enhance our services, take advantage of business opportunities, or respond to competitive pressures or unanticipated requirements, any of which could seriously harm our business and reduce the value of your investment. If we are able to raise additional funds, if and when needed, by issuing additional equity securities, you may experience significant dilution of your ownership interest and holders of these new securities may have rights senior to yours as a holder of our common stock. Changes in the laws or regulations that govern us could have a material impact on our operations. Any change in the laws or regulations that govern our business could have a material impact on us or on our operations. Laws and regulations may be changed from time to time, and the interpretations of the relevant laws and regulations also are subject to change. We are subject to certain risks associated with our foreign operations. We have operations in the United Kingdom and may seek to expand our operations in other countries. Certain risks are inherent in foreign operations, including: • difficulties in enforcing agreements and collecting receivables through certain foreign legal systems; • foreign clients may have longer payment cycles than clients in the US; • tax rates in certain foreign countries may exceed those in the US and foreign earnings may be subject to withholding requirements, exchange controls or other restrictions; • general economic and political conditions in countries where we operate may have an adverse effect on our operations; • exposure to risks associated with changes in foreign exchange rates; • difficulties associated with managing a large organization spread throughout various countries; • difficulties in enforcing intellectual property rights; and • required compliance with a variety of foreign laws and regulations. Investing in foreign companies, including innovation services firms, may expose us to additional risks not typically associated with investing in US companies. These risks include changes in foreign exchange rates, exchange control regulations, political and social instability, expropriation, imposition of foreign taxes, less liquid markets and less available information than is generally the case in the US, higher transaction costs, less government supervision of exchanges, brokers and issuers, less developed bankruptcy laws, difficulty in enforcing contractual obligations, lack of uniform accounting and auditing standards and greater price volatility. As we continue to expand our business globally, our success will depend, in part, on our ability to anticipate and effectively manage these and other risks. We cannot assure you that these and other factors will not have a material adverse effect on our international operations or our business as a whole. We may incur additional impairments to goodwill and intangible assets. We are required to test goodwill and intangible assets for impairment annually or if a triggering event occurs in accordance with the provisions of ASC Topic 350 Intangibles—Goodwill and Other . Such impairment could be caused by internal factors as well as external factors beyond our control. 11 Table of Contents Significant negative industry or economic trends, including the lack of recovery in the market price of our common stock, reduced estimates of future cash flows, disruptions to our business, slower growth rates or lack of growth in the areas in which we generate revenues could lead to an impairment charge for any of our intangible assets or goodwill. If, in any period, our stock price decreases to the point where the fair value of the Company, as determined by our market capitalization, is less than our book value, this too could indicate a potential impairment and we may be required to record an impairment charge in our statement of operations in that period which would cause an increase in our net loss. Our valuation methodology for assessing impairment requires management to make judgments and assumptions based on historical experience and to rely heavily on projections of future operating performance. We operate in highly competitive environments and projections of future operating results and cash flows may vary significantly from actual results. Additionally, if a significant decline in our stock price and/or market capitalization result in impairment to our goodwill, we may be required to record a charge to earnings in our financial statements during a period in which such impairment is determined to exist, which may negatively impact our results of operations. RISKS RELATED TO OUR COMMON STOCK AND DEBT FINANCING ARRANGEMENTS The continued listing of our common stock on the NYSE Amex is subject to compliance with continued listing requirements. While we have not received any notice of intent to delist our common stock, if our common stock were delisted, the ability of investors in our common stock to make transactions in such stock would be limited. Our common stock is listed on the NYSE Amex. The continued listing of our common stock on the NYSE Amex requires us to meet continued listing requirements set forth in the NYSE Amex’s Company Guide. These requirements include both quantitative and qualitative standards. While we have not received any notice of intent to delist our common stock, investors should be aware that if the NYSE Amex were to delist our common stock from trading on its exchange, this would limit investors’ ability to make transactions in our common stock. We may issue shares of our common stock and warrants to purchase shares of our common stock at a discount to the market price for such shares, which may put downward pressure on the market price for shares of our common stock. If we issue shares of our common stock at a discount to the market price for such shares or warrants to purchase shares of our common stock with an exercise price below the market price for such shares, it may put downward pressure on the market price for shares of our common stock. Such downward pressure could in turn encourage short sales or similar trading with respect to shares of our common stock, which could in itself, place further downward pressure on the market price for shares of our common stock. We may issue shares of our common stock in conjunction with the acquisition of other businesses, which may put downward pressure on the market price for shares of our common stock and create additional dilution of the current shares outstanding. Consistent with our current strategy, we may seek to acquire other businesses through the issuances of common stock and or cash. If common stock is used in these transactions, it would create additional dilution of the current shares outstanding. Further, such issuances may result in downward pressure on our share price as a result of these additional shares being issued. Also, there is the potential that the market may not respond favorably to potential new acquisitions, which could also negatively affect our share price. Our common stock price may be volatile. The trading price of our common stock has fluctuated significantly and may continue to fluctuate substantially, depending on many factors, many of which are beyond our control and may not be directly related to operating performance. These factors include the following: • price and volume fluctuations in the overall stock market from time to time; 12 Table of Contents • significant volatility in the market price and trading volume of securities of innovation services firms and technology transfer companies; • changes in regulatory policies, accounting or tax guidelines with respect to innovation services firms and technology transfer companies; • actual or anticipated changes in our sales or earnings or fluctuations in our operating results; • changes in financial reporting requirements; • general economic conditions and trends; • loss of a major funding source; • departures of key personnel; • changes to the market or shareholders’ acceptance of our unique technology transfer business; or • the consummation of mergers or acquisitions of related businesses. The agreements relating to our indebtedness may restrict our current and future operations. Our debt agreements contain, and any future agreements may include, a number of restrictive covenants that impose significant operating and financial restrictions on, among other things, our ability to: • incur additional debt, including guarantees; • incur liens; • sell or otherwise dispose of assets; • make investments, loans or advances; • make some acquisitions; • engage in mergers or consolidations; • make capital expenditures; and • pay dividends. Any future debt could contain financial and other covenants more restrictive than those that are currently applicable. Our failure to comply with the agreements relating to our outstanding indebtedness, including as a result of events beyond our control, could result in an event of default that could materially and adversely affect our operating results and our financial condition. If there were an event of default under any of the agreements relating to our outstanding indebtedness the holders of the defaulted debt could cause all amounts outstanding with respect to that debt to be due and payable immediately. We cannot assure you that our assets or cash flow would be sufficient to fully repay borrowings under our outstanding debt instrument, either upon maturity or if accelerated upon an event of default. Further, if we were unable to repay, refinance or restructure our indebtedness under our secured debt, the holders of such debt could proceed against the collateral securing that indebtedness. In addition, any event of default or declaration or acceleration under one debt instrument could also result in an event of default under one or more of our other debt instruments. We may not be able to generate sufficient cash flow to meet our debt service obligations. Our ability to generate sufficient cash flow from operations to make scheduled payments on our debt obligations will depend on our future financial performance, which will be affected by a range of economic, 13 Table of Contents competitive and business factors, many of which are outside our control. If we do not generate sufficient cash flow from operations to satisfy our debt obligations, we may have to undertake alternative financing plans, such as refinancing or restructuring our debt, selling assets, reducing or delaying capital investments or seeking to raise additional capital. We cannot assure you that any refinancing would be possible, that any assets could be sold, or, if sold, of the timing of the sales and the amount of proceeds realized from those sales, or that additional financing could be obtained on acceptable terms, if at all, or would be permitted under the terms of our various debt agreements then in effect. Our inability to generate sufficient cash flow to satisfy our debt obligations, or to refinance our obligations on commercially reasonable terms, would have an adverse effect on our business, financial condition and results of operations, as well as on our ability to satisfy our debt obligations. Item 1B. Unresolved Staff Comments None. Item 2. Properties Our principal office is located in Tampa, Florida. This office space is owned by our subsidiary, UTEK Real Estate, and is encumbered by a $4.1 million mortgage thereon. This property is utilized by all of our product segments and is adequate for our current domestic office needs. If our office requirements increase beyond our current expectations, we believe that additional office space may be available for use at this location. We also lease office space in Illinois, Washington D.C., California and the United Kingdom. The Illinois property is utilized by our Strategic Services segment and the Washington D.C., California and United Kingdom properties are utilized by our Technology Services segment. These properties are adequate for our current needs. Item 3. Legal Proceedings We may be a party from time to time in certain lawsuits in the normal course of our business. While the outcome of these legal proceedings cannot at this time be predicted with certainty, we do not expect that these proceedings will have a material effect upon our financial condition or results of operations. Item 4. Reserved 14 Table of Contents PART II Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Through March 15, 2010, our shares of common stock traded on the NYSE Amex under the symbol “UTK.” As of March 16, 2010, we began doing business as Innovaro and changed our ticker symbol on the NYSE Amex to “INV.” Computershare Trust Company, Inc., 350 Indiana Street, Suite 800, Golden, CO 80401; 303-262-0600, serves as transfer agent for our common stock. We had approximately 3,000 stockholders of record at March 1, 2011. Price Range of Common Stock and Dividends The following table reflects the high and low closing prices for our common stock as reported on the NYSE Amex and the cash dividends declared per common share for the periods indicated: High Low Dividends Fiscal year 2010 First quarter $ 5.11 $ 4.10 — Second quarter $ 4.06 $ 3.10 — Third quarter $ 3.53 $ 0.86 — Fourth quarter $ 1.43 $ 0.70 — Fiscal year 2009 First quarter $ 8.90 $ 6.00 — Second quarter $ 6.65 $ 3.79 — Third quarter $ 5.15 $ 3.75 — Fourth quarter $ 4.55 $ 3.60 — Our Board of Directors has sole discretion in determining whether to declare and pay cash dividends in the future. The declaration of cash dividends will depend on our profitability, financial condition, cash requirements, future prospects and other factors deemed relevant by our Board of Directors. Our ability to pay cash dividends in the future could be limited or prohibited by the terms of financing agreements that we may enter into or by the terms of any preferred stock that we have or may authorize and issue. Item 6. Selected Financial Data Not applicable. 15 Table of Contents Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations Overview We provide services that help clients become stronger innovators, develop compelling strategies to drive and catalyze growth, rapidly source externally developed technologies, create value from their intellectual property and gain foresight into marketplace and technology developments that affect their business. These services are provided to clients located in countries throughout the world. We have two business segments: Strategic Services and Technology Services. Our strategic services segment helps clients achieve and sustain industry leadership through innovation, developing game-changing strategies for growth, and implementing these strategies through capability development, opportunity management and organizational excellence. We also help our clients programmatically develop a core competence for innovation. In addition, we assist clients apply innovation tools and techniques to create and act on breakthrough strategies and profitable growth platforms and opportunities. We work closely with our clients to jointly structure and execute a tailored journey that is right for their situation. We combine the business acumen of seasoned executives, the learning focus of a leadership development expert and the creativity of an innovation specialist to get our clients on the path to sustainable and profitable growth. These services include: • Strategic innovation consulting • Business model and product development consulting • Identify and develop new segments and markets • Create and act on game-changing strategies Our technology services segment offers expansive networks, experts in scouting, partner sourcing and licensing expertise, and world leading online marketplaces. We also provide an important foundation to successful licensing—understanding the true potential value of our clients’ IP and IP portfolio. We access that value and build a roadmap for our clients’ use, and uncover opportunities and options to realize any latent value. We have an online information service, purpose-built for those who need it most-technology transfer, business development, intellectual property, competitive intelligence, and marketing professionals across the physical and life sciences We also provide the insight and intelligence our clients require, applied to their markets today and into the future. From current market research to predictive intelligence, we help our clients find insights at the intersections affecting their business. Our research identifies and explains key consumer trends—including emerging trends not covered by other sources—and delivers insights about how these trends will shape the future operating environment. These services include: • Futures scenario development and planning • Custom and syndicated research • Online information services • IP consulting • IP and market landscape analysis • Technology search 16 Table of Contents • In- and out-licensing • Online marketplaces • Partner search and profiling Strategies to Drive Our Growth into the Future We remain focused on growing our business with the objectives of improving our financial results and generating returns for our shareholders. We continue to focus on delivering strong financial performance in both the near term and the long term. We have identified the following four key challenges and related strategic business imperatives that we believe will enable us to drive growth into the future. Continue to develop our innovation management software platform Our first imperative is to continue to develop our innovation management software platform. We announced the controlled release of the first phase of our software product in December 2010, for which we have subsequently begun testing in 2011. We anticipate the controlled release of two additional phases of the software product during 2011, thereby expanding the product capability further into the innovation cycle process. The full-scale release of the complete product is dependent on the results of our testing procedures, which is dependent on the use of third-party consultants. Over time, we expect the software product component of our business to grow at a greater rate than the growth in our current business segments until it represents an important component of our overall revenue stream. A key component of our strategy is to embrace both software and information offerings from other firms through an open innovation approach. Using this approach, our clients that have already begun to utilize other software and information services will be able to incorporate our offerings to suit their requirements to most effectively drive innovation. Build and expand our current consulting and technology services business Our second imperative is to sustainably and profitably grow our current consulting and technology services businesses worldwide. We have recently hired a Senior Vice President of Sales who brings with him twenty years of global experience in technology sales at the enterprise and executive sales management level. As the Senior Vice President of Sales at Innovaro, he will establish sales and engagement models while continuing to build upon our core pillars of business. He will also take on identical responsibilities as we move into the future with our software product offering. Cherish our Innovaro associates Our third imperative is to cherish our Innovaro associates. Our continued growth requires us to hire, retain and develop our leadership bench. We are fortunate to employ, worldwide, a truly remarkable set of associates. The market becomes more competitive every day and innovation is the key to success. It is people who hold that key and to be a good employer is one of the most important strategic decisions a company has to make. Achieve operational excellence Our fourth and final imperative is the sum total of the other three. Our continued success requires that we do everything we can to position ourselves to achieve operational excellence in each of the areas mentioned above. By focusing on the four key challenges and related strategic business imperatives discussed above, we believe we can achieve this goal. 17 Table of Contents Financial Condition Our total assets were $24.7 million at December 31, 2010 compared to $40.3 million at December 31, 2009. At December 31, 2010, we had $263,000 in cash and cash equivalents, $2.0 million in accounts receivable, $1.5 million in accounts payable and accrued expenses and $5.8 million in long-term debt outstanding. At December 31, 2009, we had $2.1 million in cash and cash equivalents, $492,000 in certificates of deposit, $1.5 million in accounts receivable, $917,000 in accounts payable and accrued expenses and $6.3 million in long-term debt outstanding. Our cash balance as of December 31, 2010 was significantly lower than our historical cash position. The cash balance decreased significantly in the fourth quarter of 2010 as a result of the Company having to pay bonuses to employees of its strategic services business segment in accordance with the terms of the Strategos Bonus Plan. We have subsequently rebuilt our cash position to approximately $700,000 as of the date of this filing. See the Liquidity section for further discussion. Current Market Conditions We believe that our financial results for 2010 continued to be negatively impacted by weakened economic conditions. Since mid-2007, global credit and other financial markets have suffered substantial stress, volatility, illiquidity and disruption. These forces reached unprecedented levels in late 2008, resulting in the bankruptcy or acquisition of, or government assistance to, several major domestic and international financial institutions. These events significantly diminished overall confidence in the financial markets and caused increasing global economic uncertainty. This reduced confidence and uncertainty could further exacerbate the overall market disruptions and risks to businesses in need of capital, including us. Moreover, the deterioration in the equity markets has had a negative impact on the cash proceeds that we have been able to obtain upon the sale of our investments and has resulted in our having to recognize certain impairment losses related to decreases in the fair value of our assets. In addition, the deterioration in consumer confidence and a general reduction in spending by consumers and business have had an adverse effect on certain of our operations as businesses have delayed spending on these types of services. Recent improvements in demand trends globally may not continue, and our future financial results and growth could be further harmed or constrained if the recovery was to stall or conditions were to worsen. Investment Portfolio Activity Until September 30, 2009, we were 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, because we no longer met the requirements, we filed a notification on Form N-54C with the SEC withdrawing our election to be regulated as a BDC under the 1940 Act. As such, we began reporting as an operating company as of October 1, 2009. In connection with our plan to de-elect BDC status, we liquidated a significant portion of our investment portfolio during 2009. We sold some or all of our shares in a significant number of our portfolio companies for $3.1 million in cash and other assets, which resulted in 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. Conversion from Investment Company Presentation to Operating Company Presentation The withdrawal of our election to be regulated as a BDC under the 1940 Act resulted in a significant change in our method of accounting. Investment company financial statement presentation and accounting utilizes the value method of accounting used by investment companies, which requires investment companies to value their investments at market value as opposed to historical cost, and recognize income related to unrealized gains and 18 Table of Contents losses in the current period. As an operating company, the required financial statement presentation and accounting for investments held is either fair value or historical cost methods of accounting, depending on the classification of the investment and the Company’s intent with respect to the period of time it intends to hold the investment. In addition, the financial accounts of majority-owned entities were not consolidated with ours under Investment Company Accounting; rather, investments in those entities were reflected in our balance sheet at fair value. As an operating company, we are required to consolidate the accounts of majority-owned entities in which we have a controlling financial interest with our accounts. In this regard, the accounts of UTEK Real Estate Holdings, Inc., which was previously reflected as an investment at fair value in our balance sheet, have been consolidated with our accounts from October 1, 2009. For a detailed discussion of the impact of the withdrawal of our election to be regulated as a BDC under the 1940 Act on our method of accounting and a discussion of how we account for investments as an operating company, see Notes 1 and 2 to the Consolidated Financial Statements contained elsewhere in this Annual Report on Form 10-K. Results of Operations for the Years Ended December 31, 2010 and 2009 For comparability purposes, the revenues and expenses for the nine months ended September 30, 2009 under investment company accounting and for the three months ended December 31, 2009 under operating company accounting are presented combined for the year ended December 31, 2009 in this section. Management believes this presentation is more meaningful to readers as there was no significant change in revenue streams as a result of our change in status from an investment company to an operating company. Revenue / Income from Operations (in thousands, except percentages) 2010 2009 Percent Change 2010 versus 2009 Strategic services $ 9,783 $ 6,834 43 % Technology services 3,313 3,884 (15 )% Investment income, net — 60 NM (1) Revenue $ 13,096 $ 10,778 22 % (1) This percentage change is not meaningful (“NM”) given that it relates to the manner in which we reported our operating results during the two reporting periods. For more information, see Note 1 to our consolidated financial statements included elsewhere in this annual report on Form 10-K. Strategic Services Our strategic services revenue is derived from consulting services we provide to our clients. Our strategic services revenue increased by $2.9 million for the year ended December 31, 2010 in comparison to the year ended December 31, 2009. This increase is the result of the Company having a significant number of new contracts in the second half of 2010. We attribute the increased revenue in 2010 to a renewed interest in innovation efficiency and new product development in the U.S. and abroad. Our strategic services revenue in recent years has largely been dependent on the efforts of certain key consulting professionals whose employment contracts with us expire in April 2011. If we are not successful in retaining these consulting professionals or timely hiring of similarly qualified and skilled consulting professionals to replace them, then we may not be able to maintain the level of strategic services revenue we have generated in recent years. 19 Table of Contents We expect 2011 strategic services revenue to remain consistent with 2010 levels, unless all or a substantial portion of the employment contracts described above are not renewed. Technology Services Our technology services revenue is a combination of global technology partnering search retainer fees, our online subscription fees, online information services revenue, foresight and trend research revenue and IP consulting revenue. Our technology services revenue decreased by $571,000 for the year ended December 31, 2010 in comparison to the year ended December 31, 2009. The decreased revenue in 2010 is primarily a result of a reduction of $433,000 in monthly fees for our global technology partnering services and a reduction of $464,000 in online marketplace fees, partially offset by a $300,000 increase in IP consulting revenue. We expect 2011 technology services revenue to remain consistent with 2010 levels. Investment Income, net Beginning on October 1, 2009, we changed from Investment Company Accounting to Operating Company Accounting. As an operating company, investment income is recorded as other (income) and expense in the accompanying statements of operations for the year ended December 31, 2010 and the three months ended December 31, 2009. Expenses Direct Costs of Revenue (in thousands, except percentages) 2010 Gross Profit Margin 2009 Gross Profit Margin Direct costs of revenue—strategic services $ 8,454 14 % $ 5,579 18 % Direct costs of revenue—technology services 1,492 55 % 1,978 49 % Total direct costs of revenue $ 9,946 $ 7,557 Direct Costs of Revenue—Strategic Services Direct costs of strategic services revenue are comprised of certain salaries and related taxes, bonuses, certain outside services and other business development costs related to strategic services. Our direct costs of strategic services revenue increased by $2.9 million for the year ended December 31, 2010 in comparison to the year ended December 31, 2009. The majority of the increase in direct costs of strategic services related to the year-end bonus pool and an increase in the use of outside contractors. The Strategos Bonus Plan is 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 , but no later than December 31 st , of each year and are accrued on a quarterly basis. Approximately 85% to 90% of Strategos division net income is required to be paid out in connection with this bonus plan. The Company recognized bonus expense of approximately $3.3 million and $1.7 million in connection with the Strategos Bonus Plan during the years ended December 31, 2010 and 2009, respectively. The strategic services gross profit margin decreased to 14% for the year ended December 31, 2010 as compared to 18% for the year ended December 31, 2009. This decrease relates to our foresight and trend research division. This division had significantly more consulting projects in 2009 than in 2010, the loss of which caused a reduction in our overall profit margin. 20 Table of Contents We expect 2011 costs of strategic services to remain consistent with 2010 levels. Direct Costs of Revenue—Technology Services Direct costs of technology services revenue are comprised of certain salaries and related taxes, commissions, certain outside services and other direct costs related to technology services. Our direct costs of technology services revenue decreased by $486,000 for the year ended December 31, 2010 in comparison to the year ended December 31, 2009. The majority of the decrease in direct costs of technology services during 2010 is related to a decrease in salaries and commissions due to staff cuts and a reduction in sales. The technology services gross profit margin increased to 55% for the year ended December 31, 2010 as compared to 49% for the year ended December 31, 2009. This increase is the result of a decrease in salaries related to having fewer employees in exchange for the utilization of outside contractors on an as needed basis. We expect 2011 costs of technology services to remain consistent with 2010 levels. Salaries and Wages (in thousands, except percentages) 2010 2009 Percent Change 2010 versus 2009 Salaries and wages $ 2,636 $ 5,295 (50 )% As a percent of revenue 20 % 49 % (29 )ppt* * The abbreviation “ppt” throughout this section denotes percentage points. Salaries and wages include non-sales employee and officer salaries that are not otherwise allocated to direct costs of revenue, employee related benefits including bonuses, and stock-based compensation. Salaries and wages decreased by $2.6 million for the year ended December 31, 2010 compared to the year ended December 31, 2009. Decreases in salaries in wages during 2010 related to 1) the modification of the acquisition and employment agreements with the division manager of our former Social Technologies division resulting in a $2.5 million charge to salaries and wages in 2009; 2) the retirement of our former CEO in 2009 resulting in a decrease in salaries of $300,000 in 2010; and 3) a change in estimate related to stock options resulting in a decrease of $289,000 in stock-based compensation in 2010. These decreases were partially offset by increases of $244,000 in severance pay, related to another former CEO in August of 2010, and $152,000 in other salaries. We expect salaries and wages to decrease in 2011 due to a reduced number of employees over that of 2010. Professional Fees (in thousands, except percentages) 2010 2009 Percent Change 2010 versus 2009 Professional fees $ 609 $ 814 (25 )% As a percent of revenue 5 % 8 % (3 )ppt Professional fees include accounting fees, legal fees and valuation expenses for our investments. Professional fees decreased by $205,000 for the year ended December 31, 2010 compared to the year ended December 31, 2009. Valuation expenses were reduced by $73,000 because our investments required fewer valuations in 2010. Accounting fees were reduced by $77,000 as a result of our having changed to a smaller reporting company in 2010. As a smaller reporting company, we are not required to have an audit of our internal 21 Table of Contents controls over financial reporting. Legal fees were reduced by $55,000 because of 2009 employment issues, restricted stock plan preparation and other legal matters that were not repeated in 2010. We expect our professional fees for 2011 to remain relatively consistent with 2010. Research and Development in thousands, except percentages) 2010 2009 Percent Change 2010 versus 2009 Research and development $ 1,231 $ — — % As a percent of revenue 9 % — % 9ppt Research and development costs include salaries, outside services, travel and other costs related to the development of our innovation management software platform, which is designed to enhance and complement our innovation services offerings to clients. The release of phase one of the software is dependent on the results of our testing, but is tentatively scheduled for the end of the second quarter of 2011. During the first quarter of 2011, phase one of the software will have reached technological feasibility and additional costs will be capitalized. Management has subsequently begun testing and marketing the software platform in 2011. We expect to incur additional research and development expenses of approximately $900,000 to commercialize all phases of the platform. Sales and Marketing in thousands, except percentages) 2010 2009 Percent Change 2010 versus 2009 Sales and marketing $ 544 $ 455 20% As a percent of revenue 4 % 4 % -ppt Sales and marketing expenses include advertising, marketing, commissions paid to outside service providers, certain travel and other business development expenses. Sales and marketing expenses increased by $89,000 for the year ended December 31, 2010 compared to the year ended December 31, 2009. During 2010, we incurred $91,000 in name change costs and $105,000 in costs of partnering with external search partners to market our products on their websites. These additional costs were offset by a decrease in sales related travel expenses of $129,000 in 2010. We expect sales and marketing expenses to decrease for the year ending December 31, 2011 because we will not have rebranding costs or partnering costs, the latter of which have been discontinued. General and Administrative (in thousands, except percentages) 2010 2009 Percent Change 2010 versus 2009 General and administrative $ 2,254 $ 2,756 (18 )% As a percent of revenue 17 % 26 % (9 )ppt General and administrative expenses decreased by $502,000 for the year ended December 31, 2010 compared to the year ended December 31, 2009. The decrease relates to a $111,000 reduction in insurance and payroll taxes due to having fewer employees; a $283,000 reduction in rent related to consolidating UTEK Real Estate operations, closing one of our offices in the United Kingdom, closing our Pennsylvania office, and reducing the amount of space leased for our Washington, DC office; a $51,000 reduction in investment banking 22 Table of Contents related to our having delisted from the Aim market of the London Stock Exchange; a $78,000 reduction in bad debt expense due to implementation of a strict collection policy and the collections of such amount by us; and a continued overall company plan to reduce all aspects of overhead; partially offset by an increase of $170,000 for outside services which includes consulting services of $65,000 and payments to our interim CEO of $99,000. We expect 2011 general and administrative expenses to remain consistent with 2010 levels. Amortization and Depreciation (in thousands, except percentages) 2010 2009 Percent Change 2010 versus 2009 Amortization and depreciation $ 1,527 $ 1,616 (5 )% As a percent of revenue 12 % 15 % (3 )ppt Depreciation and amortization expense decreased by $89,000 for the year ended December 31, 2010 compared to the year ended December 31, 2009. Amortization expense decreased $150,000 as a result of the impairment of certain definite-lived intangible assets in the second quarter of 2009 and the third quarter of 2010. Depreciation expense increased $61,000 as a result of the addition of $4 million in depreciable assets from the consolidation of UTEK Real Estate in the fourth quarter of 2009. We expect amortization and depreciation for the year ending December 31, 2011 to decrease from 2010 as a result of impairment to certain of these assets in 2010. Impairment Loss (in thousands, except percentages) 2010 2009 Percent Change 2010 versus 2009 Impairment loss $ 11,771 $ 2,368 397 % Our stock price declined significantly subsequent to June 30, 2010. Management considered the fact that a decline in stock price may be an indicator of an adverse change in business climate. In addition, a decline in stock price affects market capitalization and may affect fair value measurements for our reporting units. At the end of the third quarter of 2010, management concluded that the decline in our stock price was other than short-term in nature. This conclusion, coupled with the severity of the decline, triggered a review for impairment outside of our next scheduled annual impairment evaluation date of December 31, 2010. Due to the reduction in our market capitalization, third party valuations were obtained to assist in the determination of the fair value of the respective reporting units. As a result of a reduction in the fair value of the reporting units, management determined that the implied fair value of its goodwill and intangible assets was less than its carrying values by approximately $10.3 million. We recognized goodwill impairment of approximately $9.4 million and intangible assets impairment of approximately $971,000 in 2010. We also recorded impairment of approximately $1,438,000 to certain of our land, building and building improvements during 2010. The commercial real estate market for such property has taken a significant downturn that is not expected to reverse in the near future. As a result, management determined that the decrease in the fair value of the property was other-than-temporary. The impairment loss was determined based on third party valuations of the respective property. In 2009, the then existing Social Technologies division of Innovaro had a significant decrease in revenues related to its futures and foresight projects. The state of the economy during 2009 contributed to potential Social 23 Table of Contents Technologies’ clients focusing on short-term survival rather than long-term foresight planning. As a result, management terminated the majority of the division’s employees in favor of an independent, network based approach in an effort to reduce overhead. Management concluded that this division had suffered a significant adverse change in the business, which included a projection of continuing operating and cash flow losses. We recognized impairment of the division’s purchased intangible assets of approximately $1.0 million and impairment of the division’s goodwill of approximately $1.3 million in 2009. Other (Income) Expense (in thousands, except percentages) 2010 2009 Percent Change 2010 versus 2009 Other (income) expense $ 1,150 $ 70 1549 % Other (income) expense is a new line item in our statement of operations related to reporting as an operating company. The net other expense of $1.15 million for the year ended December 31, 2010 is comprised of a net loss on the sale and impairment of investments of $1.6 million, partially offset by a gain of $186,000 related to adjusting our derivative liabilities to fair value and rental income of $178,000 from the consolidation of UTEK Real Estate. Other (income) expense may continue to increase or decrease significantly as the value of our derivative liability increases or decreases in connection with a change in our stock price. For more information on the derivative liability, see the Notes 10 and 12 to the Consolidated Financial Statements located elsewhere in this Annual Report on Form 10-K. Interest Expense, Net (in thousands, except percentages) 2010 2009 Percent Change 2010 versus 2009 Interest expense, net $ 621 $ 85 627 % Interest expense, net is a new line item in our statement of operations related to reporting as an operating company. The net interest expense of $621,000 for the year ended December 31, 2010 is primarily comprised of interest expense on long-term debt of $453,000 and amortization of our debt discount of $281,000, partially offset by interest income on our note receivable of $112,000. Net Realized Gains or Losses on Investments and Net Changes in Unrealized Appreciation or Depreciation on Investments (from investment company activity) In connection with our plan to de-elect BDC status, we liquidated a significant portion of our investment portfolio during 2009. We sold some or all of our shares in a significant number of our portfolio companies for $3.1 million in cash and other assets, which resulted in 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. Income Tax Matters 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 24 Table of Contents 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, we are taxed at regular corporate rates on ordinary income and recognize gains on distributions of appreciated property. As an investment company, we were 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, we did not distribute at least 90% of “investment company taxable income” as required by the Internal Revenue Code for such treatment. We do not have any income tax benefit related to the net loss from operations in 2010 or 2009, nor do we have a deferred tax asset related to our net operating loss carryforward, because of a 100% valuation allowance. We do have an income tax benefit from the reversal of a deferred tax liability related to the impairment and amortization of an indefinite-lived intangible asset of approximately $56,000 and $275,000 for the years ended December 31, 2010 and 2009, respectively. Liquidity and Capital Resources Cash Flows Cash used in operating activities of $4.9 million for the year ended December 31, 2010 increased approximately $1.2 million from cash used in operating activities of $3.7 million for the year ended December 31, 2009. Total cash used in operations of $4.9 million in the current period is primarily attributable to: • $19.1 million net operating loss; • $529,000 increase in accounts receivable related to significant billings in the last half of 2010; and • $646,000 decrease in deferred revenue. Partially offset by: • $11.8 million in non-cash impairment charges; • $1.6 million in non-cash losses on investments; • $1.8 million in non-cash depreciation and amortization; • $288,000 in non-cash stock-based compensation expense related to vesting options; and • $255,000 increase in accounts payable and accrued expenses. Cash provided by investing activities of $754,000 for the year ended December 31, 2010 increased $585,000 from $169,000 for the year ended December 31, 2009. Total cash provided by investing activities of $754,000 in the current period is primarily attributable to: • $342,000 in proceeds from the sale of available-for-sale securities; and • $492,000 in proceeds from the redemption of certificates of deposit. Partially offset by: • $80,000 in capital expenditures. 25 Table of Contents Cash provided by financing activities of $2.3 million for the year ended December 31, 2010 increased $591,000 from $1.7 million for the year ended December 31, 2009. Total cash provided by financing of $2.3 million is primarily attributable to: • $3.8 million in gross proceeds from a registered equity securities offering; and • $200,000 in related party proceeds. Partially offset by: • $593,000 in offering costs from a registered equity securities offering; • $250,000 in cash payments on the line of credit; and • $845,000 in cash payments on debt. Financing On July 12, 2010, we completed a registered offering of 1,481,481 shares of our common stock priced at $2.565 per share along with Series A warrants to purchase up to 1,481,481 shares of common stock with an exercise price of $3.43 per share (subsequently amended to $3.49 per share) of common stock and Series B warrants to purchase up to 893,519 shares of common stock with an exercise price of $0.01 per share of common stock. We raised gross proceeds of approximately $3.8 million before advisory fees and offering expenses in connection with the offering. Research and Development Expenditures In the first quarter of 2010, we began development of an innovation management software platform designed to enhance and complement our innovation services deliverable to clients. As of December 31, 2010, we have invested $1.2 million in this software platform. Management has begun testing and marketing the software platform in 2011. We expect to incur additional software platform costs of approximately $900,000 to commercialize all phases of the platform during 2011. Borrowings As of October 1, 2009, the financial results of UTEK Real Estate have been consolidated with those of Innovaro. UTEK Real Estate has a $3 million bank note payable 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. As of December 31, 2010, the amount outstanding on this note was approximately $2.9 million. In addition, UTEK Real Estate has a $1.5 million note payable due in monthly installments of interest at 7.00% with principal due in full on October 1, 2015. As of December 31, 2010, the amount outstanding on this note was approximately $1.25 million. These loans were entered into in connection with the purchases of land and building that serves as our company headquarters and certain other undeveloped land located in Hillsborough County, Florida. These loans are collateralized by the property related to the purchases. On October 22, 2009, we entered into a Promissory Note (the “Note”) with Gators Lender, LLC (the “Lender”), pursuant to which we borrowed $1,750,000 from the Lender. Interest is payable at an annual rate of 8% on a quarterly basis, in arrears, beginning April 15, 2010. The entire principal amount outstanding and all accrued interest is payable in full no later than October 22, 2013. UTEK Real Estate is a co-borrower under the Note and the loan is guaranteed by all subsidiaries. In addition, the guaranty was secured pursuant to a security agreement encumbering vacant real property located in Hernando County, Florida (the “Collateral”), which is owned by Cortez 114, LLC (“Cortez”), a subsidiary of UTEK Real Estate. On February 26, 2010, we entered into a Substitution of Collateral Agreement and a Membership Interest Pledge Agreement and Release of Mortgage (the “Modification Agreements”), pursuant to which the Lender’s security interest in the Collateral was released 26 Table of Contents and replaced by a security interest in 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. At our request, the Lender subsequently extended the repayment date for the $500,000 payment, which was made in accordance with this extension on July 12, 2010. As of December 31, 2010, the face amount outstanding on the Note was approximately $1.25 million. As additional consideration for the Note, we also entered into a Warrant Agreement with the Lender to allow the Lender to purchase up to 437,500 shares of our common stock at an exercise price of $4.48 until October 22, 2014. The exercise price is subject to certain conditions and adjustments that make the exercise price variable. During December 2010, the Company borrowed $200,000 for operations from one of its Directors under a promissory note. The note was subsequently repaid in full on February 21, 2011 including interest at 3.5% and 3.0 points. This transaction is not necessarily indicative of amounts, terms and conditions that the Company may have received with unrelated third parties. Cash and Accounts Receivable Balances Our cash balance as of December 31, 2010 was significantly lower than our historical cash position. The cash balance decreased significantly in the fourth quarter of 2010 as a result of the Company having to pay bonuses to employees in its strategic services business segment in accordance with the terms of the Strategos Bonus Plan. These bonuses are based on adjusted earnings of the strategic services business segment without taking into account any working capital requirements of the business segment and are required to be paid by December 15 th , but no later than December 31 st , of each year with respect to such year. Accounts receivable related to the strategic services business segment due within 30 days of December 31, 2010 were included in the amounts eligible to be paid as bonuses under the terms of the Strategos Bonus Plan. As a result, we were required to pay bonuses to these employees prior to our collection of the related amounts of accounts receivable, which significantly lowered the Company’s cash balance as of December 31, 2010. We have subsequently rebuilt our cash position to approximately $700,000 as of the date of this filing. Our accounts receivable balance as of December 31, 2010 was significantly higher than our historical accounts receivable balance. The increase in our accounts receivable balance during the third and fourth quarters of 2010 is a result of a significant increase in revenue. Revenue increased because the Company had a significant number of new contracts in the second half of 2010. Revenue for the third and fourth quarters of 2010 increased 58% over revenue for the first and second quarters of 2010. It is not unusual for our accounts receivables balance to sustain an elevated balance during periods of increased revenues. Of the outstanding receivables balance of $2.0 million at December 31, 2010, only 14%, or $279,000, was overdue. As of the date of this filing, we have collected all but $26,000 of the total accounts receivable balance outstanding at December 31, 2010. Liquidity Our primary cash requirements include working capital, research and development expenditures, principal and interest payments on indebtedness, and employee bonuses. Our primary sources of funds are cash received from customers in connection with operations and proceeds from the sale of our investments. At December 31, 2010, we had cash and cash equivalents of $263,000 and accounts receivable of $2.0 million. We had $316,000 in working capital as of December 31, 2010. We currently intend to fund our research and development expenditures and liquidity needs with existing cash and cash equivalent balances, cash generated from operations, collections of our existing receivables and the potential sales of our investments. We believe that these sources will be sufficient to fund our scheduled debt service and provide required resources for working capital for the next twelve months. 27 Table of Contents As of December 31, 2010, our strategic services business segment had $6.0 million of contracts in progress, of which $3.5 million had been billed, leaving $2.5 million to be billed in 2011. As of the date of this filing, this business has already secured an additional $4.5 million in contracts to be fulfilled before the end of 2011. In addition, we are in the process of modifying the aforementioned Strategos Bonus Plan to be more reflective of cash collected. In addition to the confirmed revenue stream for 2011, we have significantly cut our costs in each of the expense categories listed below: • Salaries and Wages: $1.2 million reduction; • Sales and Marketing: $200,000 reduction in non-repetitive costs related to name change and partner search fees; and • General and Administrative: $350,000 reduction in employee related costs such as health insurance, payroll taxes and retirement funding; travel expenses related to certain terminated employees; and investor relations costs. We expect these reductions in costs, coupled with the expected revenue for 2011, to be sufficient to fund our working capital for the next twelve months. Should we face a restricted cash flow scenario during 2011, we have the capability to delay all cash intensive activities, including our research and development expenditures, and look to reduce costs further. Off-Balance Sheet Arrangements We have no off-balance sheet arrangements that have or are materially likely to have a current or future material effect on our financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources. Critical Accounting Estimates The preparation of financial statements in conformity with US Generally Accepted Accounting Principles (“GAAP”) requires management to make assessments, estimates and assumptions that affect the amounts reported in the financial statements. Critical accounting estimates are those that require management’s most difficult, complex, or subjective judgments and have the most potential to impact our financial position and operating results. We consider the following accounting policies and related estimates to be critical as they require the most subjective judgment or involve uncertainty that could have a material impact on our financial statements. Revenue Recognition The Company has revenues from fixed fee contracts for the sale of strategic consulting services. These revenues are recognized on a pro rata basis based upon costs incurred to date compared to total estimated contract costs. The determination of estimated contract costs is critical to the determination of revenue recognition in any given period. If costs incurred to date are compared to total estimated contract costs that have not been updated for the most recent information, material variances in revenue recognition can occur. As a result, management evaluates the accuracy of estimated contract costs for each in-process job in light of available information regarding job status at the end of each reporting period. In addition, management prepares an analysis to determine the accuracy of our estimated total contract costs on closed jobs. We have historically been able to estimate total contract costs with the required accuracy to produce materially correct revenue results. Valuation and Impairment of Investments Our investments include cost method investments, available-for-sale securities, and equity method investments. The assessment of the fair value of certain of our cost method and equity method investments can 28 Table of Contents be difficult and subjective due in part to our having only limited information on these investments. In addition, determination of permanent impairment for available-for-sale securities can be difficult and subjective due in part to limited trading activity of certain of these equity instruments. We conduct periodic reviews to identify and evaluate each investment that has an unrealized loss, in accordance with the meaning of other-than-temporary impairment and its application to certain investments, as required under current accounting standards. An unrealized loss exists when the current fair value of an individual security is less than its amortized cost basis. Unrealized losses on available-for-sale securities that are determined to be temporary are recorded in accumulated other comprehensive loss. For available-for-sale equity securities with unrealized losses, management performs an analysis to assess whether the security’s decline in fair value would be deemed to be other-than-temporary. This can be difficult as many of our holdings have limited trading activity and prices can fluctuate significantly. Fluctuations in price are generally determined to be temporary unless the price level is maintained for an extended period of time. Significant declines in a security’s fair value are determined to be other-than-temporary when the decline is maintained over several reporting periods. When a decline in stock price is deemed to be other-than-temporary, the unrealized loss included in accumulated other comprehensive loss is reversed and recorded as a capital loss in the statement of operations. Our cost method investments and equity method investments are in small, privately held companies. These investments are not publicly traded, and, therefore, because no established market for these securities exists, the estimate of the fair value of our investments requires significant judgment. Investments that are accounted for using the cost method are valued at cost unless an other-than-temporary impairment in their value occurs or the investment is liquidated. For investments that are accounted for using the equity method, we record our share of the investee’s operating results each period. We review the fair value of our investments on a regular basis to evaluate whether an other-than-temporary impairment in the investment has occurred. We record impairment charges when we believe that an investment has experienced a decline in value that is other-than-temporary. Future adverse changes in market conditions or poor operating results of underlying investments could result in losses or an inability to recover the carrying value of the investments that may not be reflected in an investment’s current carrying value, thereby possibly requiring an impairment charge in the future. Stock-Based Compensation Stock-based compensation cost for share-based payments are based on their relative grant date fair values estimated in accordance with current accounting standards. The Company recognizes compensation expense on a straight-line basis over the requisite service period. The determination of the fair value of stock-based compensation requires significant judgment and the use of estimates, particularly surrounding assumptions such as stock price volatility, expected option lives and forfeiture rates. These estimates involve inherent uncertainties and the application of management judgment. As a result, if circumstances change and we use different assumptions, our stock-based compensation expense could be materially different in the future. 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. We are required to estimate future forfeitures of stock-based awards for recognition of compensation expense. We will record additional expense if the actual forfeitures are lower than estimated and will record a recovery of prior recognized expense if the actual forfeitures are higher than estimated. The actual expense recognized over the vesting period will only be for those awards that vest. If our actual forfeiture rate or performance outcomes are materially different from our estimate, the actual stock-based compensation expense could be significantly different from what we have recorded in the current period. 29 Table of Contents Valuation and Impairment of Goodwill and Intangible Assets Goodwill represents the excess of the aggregate consideration paid for an acquisition over the fair value of the net tangible and intangible assets acquired. 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 these acquisitions. Intangible assets with finite lives are amortized on a straight-line basis over their estimated useful lives, which range from 5 to 12 years. In accordance with current accounting standards, goodwill and intangible assets determined to have indefinite lives are not subject to amortization but are tested for impairment annually, or more frequently if events or changes in circumstances indicate a potential impairment may have occurred. Circumstances that may indicate impairment include qualitative factors such as an adverse change in the business climate, loss of key personnel, and unanticipated competition. Additionally, management considers quantitative factors such as current estimates of the future profitability of the Company’s reporting units, the current stock price, and the Company’s market capitalization compared to its book value. The consideration of qualitative and quantitative factors when considering circumstances that may indicate impairment requires the application of management judgment. As a result, management’s determinations with regard to current circumstances affecting the Company could have a significant affect the recognition of impairment charges. If management determines that an impairment test is necessary, it must determine the fair value of the respective reporting units. The determination of the fair value of reporting units requires significant judgment. Management typically enlists the assistance of a third-party valuation firm in determining fair value of reporting units for use in its impairment analysis. 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 impairment test using balances as of December 31. The Company accounts for long-lived assets, including intangibles that are amortized, in accordance with GAAP, which requires that all long-lived assets be reviewed for impairment whenever events or circumstances indicate that the carrying amount of an asset may not be recoverable. Management considers both qualitative and quantitative factors when considering circumstances that may indicate impairment. This consideration requires significant management judgment and could have a significant affect of the recognition of impairment charges. If indicators of impairment are present, reviews are performed to determine whether the carrying value of an asset to be held and used is impaired. Such reviews involve a comparison of the carrying amount of an asset to future net undiscounted cash flows expected to be generated by the asset over its remaining useful life. The determination of future cash flows involves inherent uncertainties and the application of management judgment regarding the future operations of the Company. If the comparison indicates that there is impairment, the impaired asset is written down to its fair value. The impairment to be recognized as a non-cash charge to earnings is measured by the amount by which the carrying amount of the asset exceeds the fair value of the asset. Assets to be disposed are reported at the lower of the carrying amount or fair value, less cost to dispose. Valuation of Derivative Liabilities ASC Topic 815 Derivatives and Hedging 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. 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. We estimate the fair value of these instruments using the Black-Scholes option pricing model, which takes into account a variety of factors that require judgment, including estimating the expected term of the warrants and the expected volatility of the Company’s stock price. The expected term of the warrants represents the period of time that they are expected to be outstanding and is based on the contractual term of the warrants and expectations of the warrants holders’ 30 Table of Contents behavior. The expected volatility is based upon our historical market price at consistent points in a period equal to the expected life of the warrants. These estimates involve inherent uncertainties and the application of management judgment. As a result, if circumstances change and we use different assumptions, our derivative liability and the related gain or loss could be materially different in the future. Recently Issued Accounting Pronouncements Information concerning recently issued accounting pronouncements is set forth in Note 2 of our Notes to Consolidated Financial Statements under Item 8. “Financial Statements and Supplementary Data” and is incorporated herein by reference. 31 Table of Contents Item 8. Financial Statements and Supplementary Data INNOVARO, INC. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULES Documents Page Report of Independent Registered Public Accounting Firm 33 Report of Independent Registered Public Accounting Firm on Internal Control over Financial Reporting 34 Consolidated Balance Sheets as of December 31, 2010 and 2009 35 Consolidated Statements of Operations for the Year Ended December 31, 2010, the Three Months Ended December 31, 2009 and the Nine Months Ended September 30, 2009 36 Consolidated Statements of Changes in Equity for the Year Ended December 31, 2010, the Three Months Ended December 31, 2009, and the Nine Months Ended September 30, 2009 37 Consolidated Statements of Cash Flows for the Year Ended December 31, 2010, the Three Months Ended December 31, 2009 and the Nine Months Ended September 30, 2009 39 Notes to Consolidated Financial Statements 41 32 Table of Contents REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM Board of Directors Innovaro, Inc. and Subsidiaries Tampa, Florida We have audited the accompanying consolidated balance sheets of Innovaro, Inc. and subsidiaries (the “Company”) as of December 31, 2010 and 2009 and the related consolidated statements of operations, changes in equity and cash flows for the year ended December 31, 2010, the three months ended December 31, 2009 and the nine months ended September 30, 2009. 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 audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. For the year ended December 31, 2010, the Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit for the year ended December 31, 2010 included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. 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 referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2010 and 2009 and the results of its operations and cash flows for the year ended December 31, 2010, the three month period ended December 31, 2009 and the nine month period ended September 30, 2009 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 date 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 30, 2011 33 Table of Contents REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ON INTERNAL CONTROL OVER FINANCIAL REPORTING Board of Directors Innovaro, Inc. and Subsidiaries Tampa, Florida We have audited the internal control over financial reporting of Innovaro, Inc. (formerly 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 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 changes in equity for the year ended December 31, 2009 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 34 Table of Contents Innovaro, Inc. Consolidated Balance Sheets December 31, 2010 December 31, 2009 ASSETS Current assets: Cash and cash equivalents $ 262,619 $ 2,118,970 Certificates of deposit — 492,246 Accounts receivable, net 2,011,188 1,481,548 Available-for-sale securities 171,139 729,800 Cost method investments — 588,085 Prepaid expenses and other assets 791,432 569,829 Total current assets 3,236,378 5,980,478 Cost method investments 95,589 — Equity method investments 303,454 — Note receivable and accrued interest 1,700,000 1,596,000 Fixed assets, net 6,736,567 8,388,263 Goodwill 6,407,640 15,874,139 Intangible assets, net 6,174,792 8,492,301 Total assets $ 24,654,420 $ 40,331,181 LIABILITIES Current liabilities: Accounts payable $ 1,078,088 $ 454,509 Accrued expenses 420,707 462,802 Accrued severance payable — 876,400 Deferred revenue 987,624 1,634,096 Current maturities of long-term debt 433,964 975,360 Total current liabilities 2,920,383 4,403,167 Long-term debt, less current maturities 5,358,173 5,353,892 Derivative liabilities 1,140,005 664,972 Deferred tax liability 1,220,687 1,303,031 Total liabilities 10,639,248 11,725,062 Commitments and contingencies (Note 19) — — EQUITY Innovaro stockholders’ equity: Preferred stock, $.01 par value, 1,000,000 shares authorized; none issued and outstanding — — Common stock, $.01 par value, 29,000,000 shares authorized; 14,631,950 and 12,286,768 shares issued; 14,585,261 and 11,797,140 shares outstanding at December 31, 2010 and 2009, respectively 145,853 117,971 Additional paid-in capital 85,024,704 81,010,460 Total accumulated loss under Investment Company Accounting (52,073,915 ) (52,073,915 ) Accumulated income (deficit) under Operating Company Accounting: Accumulated deficit (19,755,429 ) (624,006 ) Accumulated other comprehensive income (loss) 147,922 175,609 Total Innovaro stockholders’ equity 13,489,135 28,606,119 Noncontrolling interest 526,037 — Total equity 14,015,172 28,606,119 Total liabilities and equity $ 24,654,420 $ 40,331,181 See accompanying notes 35 Table of Contents Innovaro, Inc. Consolidated Statements of Operations Operating Company Accounting Investment Company Accounting Year Ended Dec 31, 2010 Three Months Ended Dec 31, 2009 Nine Months Ended Sept 30, 2009 Revenue / Income from operations: Strategic services $ 9,783,318 $ 2,035,295 $ 4,798,695 Technology services 3,312,808 977,544 2,906,365 Investment income, net — — 59,604 13,096,126 3,012,839 7,764,664 Expenses: Direct costs of revenue—Strategic services 8,453,549 1,337,491 4,241,502 Direct costs of revenue—Technology services 1,492,396 540,302 1,437,869 Salaries and wages 2,636,166 526,950 4,768,390 Professional fees 608,591 164,570 649,723 Research and development 1,230,671 — — Sales and marketing 544,307 99,691 354,988 General and administrative 2,254,324 470,030 2,286,193 Depreciation and amortization 1,527,344 409,087 1,206,777 Impairment loss 11,770,708 — 2,368,458 30,518,056 3,548,121 17,313,900 Other (income) and expense: Other (income) expense 1,149,798 69,731 Interest expense, net 621,371 85,467 1,771,169 155,198 Loss before income taxes (19,193,099 ) (690,480 ) (9,549,236 ) Provision for income taxes (55,581 ) (66,474 ) (208,585 ) Net loss from operations (19,137,518 ) (624,006 ) (9,340,651 ) Net realized and unrealized gains (losses) from investment company activity: Net realized losses on investments (49,591,193 ) Net change in unrealized appreciation (depreciation) of investments 44,292,068 Net loss / Net decrease in net assets from operations (19,137,518 ) $ (624,006 ) $ (14,639,776 ) Net loss attributable to noncontrolling interest (6,095 ) Net loss attributable to Innovaro stockholders $ (19,131,423 ) Net loss attributable to Innovaro stockholders per share / Net decrease in net assets from operations per share: Basic and diluted $ (1.44 ) $ (0.05 ) $ (1.30 ) Weighted average shares outstanding: Basic and diluted 13,288,179 11,605,373 11,257,663 See accompanying notes 36 Table of Contents UTEK Corporation Consolidated Statement of Changes in Equity Innovaro Stockholders’ Equity 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) Noncontrolling Interest Totals Shares Issued Shares Outstanding Par Value Paid-In Capital 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 ) — Comprehensive loss: Net loss — — — — $ (624,006 ) (624,006 ) (624,006 ) Other comprehensive income (loss): Unrealized gain (loss) from available-for-sale securities — — — — $ (70,946 ) — — Foreign currency translation adjustments — — — — 246,555 — — Other comprehensive gain (loss) — — — — 175,609 — $ 175,609 175,609 Comprehensive loss — — — — $ (448,397 ) Stock-based compensation expense — — — 138,960 $ — — 138,960 Earnout accruals and escrow adjustments (309 ) 169,213 1,692 822,273 — — 823,965 37 Table of Contents UTEK Corporation Consolidated Statement of Changes in Equity (continued) Innovaro Stockholders’ Equity 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) Noncontrolling Interest Totals Shares Issued Shares Outstanding Par Value Paid-In Capital Balances at December 31, 2009 12,286,768 11,797,140 $ 117,971 $ 81,010,460 $ (52,073,915 ) $ (624,006 ) $ 175,609 $ 28,606,119 Settlement of severance liability for 32% interest in Cortez 114, LLC — — — 17,868 — — $ 532,132 550,000 Comprehensive loss: — Net loss — — — — $ (19,131,423 ) (19,131,423 ) — (6,095 ) (19,137,518 ) Other comprehensive income (loss): Unrealized gain (loss) from available-for-sale securities — — — — 199,986 — — — — Foreign currency translation adjustments — — — — (227,673 ) — — — — Other comprehensive loss — — — — (27,687 ) — (27,687 ) — (27,687 ) Comprehensive loss $ (19,159,110 ) Investment in Verdant Ventures Advisors, LLC 243,933 243,933 2,439 997,686 — — — 1,000,125 Private offering of equity securities, net of offering costs of $593,440 1,481,481 1,481,481 14,815 3,191,744 — — — 3,206,559 Warrants issued as direct offering costs in connection with private equity securities offering — — — (661,236 ) — — — (661,236 ) Issuance of shares upon exercise of warrants 884,347 884,347 8,844 (8,844 ) — — — — Earnout accruals and escrow adjustments (264,579 ) 178,360 1,784 188,721 — — — 190,505 Stock-based compensation expense — — — 288,305 — — — 288,305 Balances at December 31, 2010 14,631,950 14,585,261 $ 145,853 $ 85,024,704 $ (52,073,915 ) $ (19,755,429 ) $ 147,922 $ 526,037 $ 14,015,172 See accompanying notes 38 Table of Contents Innovaro, Inc. Consolidated Statements of Cash Flows Operating Company Accounting Investment Company Accounting Year Ended Dec 31, 2010 Three Months Ended Dec 31, 2009 Nine Months Ended Sept 30, 2009 Operating Activities: Net loss attributable to Innovaro stockholders / Net decrease in net assets from operations $ (19,131,423 ) $ (624,006 ) $ (14,639,776 ) Adjustments to reconcile net loss attributable to Innovaro stockholders / net decrease in net assets from operations to net cash flows from operating activities: Change in net unrealized appreciation (depreciation) of investments from investment company activity — — (44,292,068 ) Loss on sale of investments from investment company activity — — 49,591,193 Proceeds from sale of equity investments from investment company activity — — 681,727 Net proceeds from sale (purchases) of short-term investments from investment company activity — — (198,420 ) Net loss attributable to noncontrolling interest (6,095 ) — — Depreciation and amortization 1,527,344 409,087 1,206,777 Amortization of debt discount from investor warrants 280,558 35,478 — Goodwill, intangible asset and fixed asset impairment 11,770,708 — 2,368,458 Loss on sale and impairment of investments 1,605,817 (19,733 ) — Loss on disposal of fixed assets 15,224 4,131 67,062 (Gain) loss on derivative liability (186,203 ) 110,000 — Bad debt expense (34,380 ) 8,398 35,151 Stock-based compensation 288,305 138,960 438,217 Compensation paid out in escrowed shares 146,825 — 2,544,580 Deferred income taxes (55,581 ) (66,474 ) (208,585 ) Changes in operating assets and liabilities: Accounts receivable (495,260 ) 183,028 985,238 Prepaid expenses and other assets (248,010 ) (53,095 ) 324,374 Deferred revenue (646,472 ) (734,928 ) (836,752 ) Accounts payable and accrued expenses 255,084 (533,050 ) (642,577 ) Net cash flows from operating activities (4,913,559 ) (1,142,204 ) (2,575,401 ) Investing Activities: Capital expenditures (80,063 ) (7,643 ) (7,006 ) Cash received (paid) in connection with consolidation/ acquisitions — 23,170 (292,468 ) Proceeds from sale of available-for-sale securities 341,997 452,708 — Proceeds from redemption of certificates of deposit 492,246 — — Net cash flows from investing activities 754,180 468,235 (299,474 ) Financing Activities: Net (repayments) proceeds on bank line of credit (250,000 ) — 250,000 Proceeds from related party debt 200,000 1,750,000 — Payments on debt (845,266 ) (80,720 ) (198,791 ) Gross proceeds from registered equity securities offering 3,799,999 — — Offering costs paid from registered equity securities offering (593,440 ) — — Net cash flows from financing activities 2,311,293 1,669,280 51,209 Effect of foreign exchange rates (8,265 ) 4,500 20,528 Increase (decrease) in cash and cash equivalents (1,856,351 ) 999,811 (2,803,138 ) Cash and cash equivalents at beginning of period 2,118,970 1,119,159 3,922,297 Cash and cash equivalents at end of period $ 262,619 $ 2,118,970 $ 1,119,159 See accompanying notes 39 Table of Contents Innovaro, Inc. Consolidated Statements of Cash Flows (continued) Year Ended Dec 31, 2010 Three Months Ended Dec 31, 2009 Nine Months Ended Sept 30, 2009 The Company issued 23,484, 58,338 and 85,950 shares of common stock in connection with certain acquisition earnout contingencies $ 43,680 $ 823,965 $ 506,051 The Company received a note in connection with the sale of certain investments $ 1,500,000 The Company received 100,000 shares in Technology Capital Services, LLC in connection with the sale of certain investments $ 69,568 The Company received 375,000 shares in Oxygen Biotherapeutics, Inc. in connection with the redemption of 750,000 warrants $ 148,750 The Company issued stock in connection with an investment in UTEK Real Estate Holdings, Inc. as follows: 176,470 shares of 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 Unrealized gain (loss) from available-for-sale securities $ 199,986 The Company transferred certain equity interests in a subsidiary to satisfy a severance obligation resulting in the following: Noncontrolling interest $ 532,132 Increase in additional paid-in capital 17,868 $ 550,000 The Company issued 243,933 shares of common stock in connection with its investment in Verdant Ventures Advisors, LLC $ 1,000,125 Warrants issued as direct offering costs in connection with registered equity securities offering $ (661,236 ) Cash paid for taxes $ — $ — $ — Cash paid for interest $ 543,893 $ 84,914 $ 50,206 40 Table of Contents INNOVARO, INC. 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 strategic consulting and technology services to companies in exchange for cash as opposed to equity interests. Thus, because of the Company’s current business focus of providing strategic consulting and technology 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 (“GAAP”) for investment companies under the 1940 Act. Operating Company Accounting, as we refer to it, is defined as accounting in accordance with GAAP other than for investment companies under the 1940 Act. 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 were greater than 20% of the outstanding equity interests of any individual company, and accordingly, consolidation was not required for these investments. 41 Table of Contents 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. Conversion from Investment Company Presentation to Operating Company Presentation ASC Topic 250, Accounting Changes and Error Corrections The Company 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 GAAP and is considered nonauthoritative. The initial determination of whether the Company 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 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 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 consolidated 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 42 Table of Contents 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. • UTEK Real Estate’s results of operations are consolidated with those of the Company 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 30, 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 stockholders’ equity presentation has separate classification for earnings accounts under Investment Company Accounting and Operating Company Accounting. Total accumulated loss under Investment Company Accounting includes earnings through September 30, 2009. Accumulated deficit under Operating Company Accounting includes earnings incurred subsequent to the date of change of October 1, 2009. • The Consolidated Schedule of Investments, 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 are not included as they are requirements under Investment Company Accounting. • The consolidated statements of changes in equity are included for the year ended December 31, 2010, the three months ended December 31, 2009 and the nine months ended September 30, 2009. In addition, this statement includes the statement of comprehensive income (loss) for the year ended December 31, 2010 and 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. Cash flows for the nine months ended September 30, 2009 are presented in investment company format and cash flows for the three months ended December 31, 2009 are presented in operating company format. 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 43 Table of Contents intellectual property (“IP”) and gain foresight into marketplace and technology developments that affect their business. These services are provided internationally from our offices in the United States and the United Kingdom. As of March 16, 2010, we began doing business as Innovaro and changed our ticker symbol to NYSE Amex: “INV”. On July 8, 2010, the Company’s shareholders voted to amend the Company’s certificate of incorporation to change the Company’s name to Innovaro, Inc. The name change became effective on July 12, 2010. Principles of Consolidation The consolidated financial statements include the accounts of Innovaro and its wholly owned subsidiaries: Innovaro Europe, Ltd. (formerly UTEK Europe, Ltd.) and UTEK Real Estate Holdings, Inc. (as of October 1, 2009). All intercompany transactions and balances are eliminated in consolidation. The Company is reporting as an investment company for the nine months ended September 30, 2009. As an investment company, portfolio investments are held for the purpose of deriving investment income and future capital gains. The operating results of the Company’s portfolio companies, including UTEK Real Estate Holdings, Inc., are not consolidated with the Company’s financial statements through September 30, 2009. The Company is reporting as an operating company for the year ended December 31, 2010 and the three months ended December 31, 2009. As such, the Company is required to consolidate UTEK Real Estate Holdings, Inc. and its subsidiaries: Ybor City Group, Inc., 22nd Street of Ybor City, Inc., ABM of Tampa Bay, Inc., and Cortez 114, LLC (collectively “UTEK Real Estate”). The results of operations of UTEK Real Estate have been included in the Company’s operations for the year ended December 31, 2010 and the three months ended December 31, 2009. In addition, the assets and liabilities of UTEK Real Estate have been included in the Company’s financial position as of December 31, 2010 and 2009. 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 ASC Topic 805 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. During the purchase price allocation period (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. 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. 44 Table of Contents Accounts Receivable The Company accounts for accounts receivable in accordance with ASC Topic 310 Receivables . In accordance therewith, the allowance for doubtful accounts is deducted from the accounts receivable balance. 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. The Company determines the allowance based on historical bad debt experience, current receivables aging, expected future write-offs, as well as an assessment of specific identifiable customer accounts considered at risk or uncollectible. It is not the Company’s policy to accrue interest on past due receivables. The expense associated with the allowance for doubtful accounts is recognized as general and administrative expense in the consolidated statements of operations. The provision for doubtful accounts and notes was approximately $15,000 and $83,000 as of December 31, 2010 and 2009, respectively. In addition, bad debt expense was approximately $(34,000) and $44,000 for the years ended December 31, 2010 and 2009, respectively. Accounts receivable also includes recoverable contract costs and, where applicable, accrued profit related to long-term contracts that have been inventoried until the customer is billed. Contract costs consist primarily of labor and travel expenses. See Note 3 for further discussion. Certificates of Deposit Certificates of deposit are short term investments that are carried at their fair values. Available-for-Sale Securities The Company classifies all investments in freely tradable equity securities as available-for-sale in accordance with ASC Topic 320 Investments—Debt and Equity Securities 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. Unrealized gains and losses are reported in operating company equity as a component of accumulated other comprehensive income (loss) in the consolidated balance sheets. Realized gains and losses from the sale of available-for-sale securities are determined on the first-in first-out (“FIFO”) method of accounting and are included as a component of other (income) expense in the consolidated statements of operations for the year ended December 31, 2010 and the three months ended December 31, 2009. Should management determine that an available-for-sale security has an other-than-temporary decline in fair value, the Company recognizes the investment loss in the consolidated statement of operations. Available-for-sale securities were evaluated for other-than-temporary impairment at December 31, 2010. See Note 4 for further discussion. Cost Method Investments The Company classifies its investments in equity securities of noncontrolled entities that do not have readily determinable fair values as cost method investments in accordance with ASC Subtopic 325-20 Cost Method Investments . Cost method investments were reclassified to non-current assets during 2010 in accordance with the Company’s intent and ability regarding liquidity of the investments. Individual securities classified as cost method investments remain at cost basis unless there is a permanent impairment. The Company determines 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 45 Table of Contents 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. Realized gains and losses from the sale or impairment of cost method investments are determined on the FIFO method of accounting and are included as a component of other (income) expense in the consolidated statements of operations for the year ended December 31, 2010 and the three months ended December 31, 2009. Cost method investments were considered for impairment at December 31, 2010. The Company determined that two of its cost method investments had suffered a decline in fair value below that of their respective carrying amounts and this decline was determined to be other-than-temporary. The Company recognized a loss on impairment of its cost method investments of approximately $468,000 for the year ended December 31, 2010. Equity Method Investments The Company evaluated its investment in Verdant Ventures under ASC Topic 810 Consolidation and concluded that this investment does not meet the requirements for consolidation. This investment has been recorded as an equity method investment in the consolidated balance sheet as of December 31, 2010. Management changed the classification of this investment from the cost method to the equity method in the current period as a result of having obtained new information. Any adjustments made to the accompanying financial statements as a result of this change in classification were immaterial. The Company’s share of Verdant Venture’s net loss was $(25,856) for the year ended December 31, 2010, which is included as a component of other (income) expense in the consolidated statements of operations. This investment has been classified as a non-current asset in accordance with the Company’s intent and ability regarding liquidity of the investment. See Note 5 for a more detailed discussion of the Verdant Ventures transaction. 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 $104,000 and $96,000 of accrued interest income on the note for the years ended December 31, 2010 and 2009, respectively. 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 the 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 unrecorded impairment of fixed assets exists at December 31, 2010. See Note 7 for impairment discussion. 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 statements 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 certain of 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 ASC Topic 350 Intangibles—Goodwill and Other , goodwill and intangible assets determined to have indefinite lives are not subject to amortization. 46 Table of Contents 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. See Note 8 for impairment discussion. 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, unless there are triggering events earlier in the year. Derivative Liability ASC Topic 815 Derivatives and Hedging requires bifurcation of embedded derivative instruments and measurements of their fair value for accounting purposes. In addition, freestanding derivative instruments such as certain warrants are also derivative liabilities. The Company estimates the fair value of these instruments using the Black-Scholes option pricing model. As discussed in Notes 10 and 12, the Company has certain derivative warrants with a variable exercise price. The Company considered the use of a Binomial model, but determined that the probability of the exercise price adjusting downward was remote. Derivative liabilities are recorded at fair value at inception and then are adjusted to reflect fair value at the end of each reporting period, with any increase or decrease in the fair value being recorded in as a component of other (income) expense in the consolidated statements of operations. Foreign Currency Translation The functional currency of the Company’s United Kingdom (“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 were reported as a component of investment company equity. 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 sheets. Foreign currency transaction gains and losses are included in other (income) expense in the consolidated statements of operations for the year ended December 31, 2010 and the three months ended December 31, 2009 and are immaterial for these periods. Revenue Recognition The Company reorganized into two new lines of business, all working under the Innovaro brand: Strategic Services—driven by Strategos, an advanced innovation consultancy; and Technology Services—online platforms, partnering services, global licensing, technology transfer services, futures and trends, research, information services and IP consulting. Strategic Services The Company has revenues from fixed fee contracts for the sale of strategic consulting services. These revenues are recognized on a pro rata basis based upon costs incurred to date compared to total estimated contract costs. Prior to the commencement of a client engagement, the Company and the client agree on fees for services based upon the scope of the project, staffing requirements and the level of client involvement. Total 47 Table of Contents revenues are comprised of professional fees for services rendered to clients and exclude applicable taxes. The Company bills clients for services and expenses incurred in accordance with the terms of the client engagement agreement. Differences between the timing of billings and the recognition of revenue are recognized as either unbilled services (included as a component of accounts receivable) or deferred revenue in the consolidated balance sheets. Client prepayments and retainers are classified as deferred revenue and recognized in future periods when earned. Revenues from strategic consulting services are also provided on a time-and-expense basis. Time-and-expense billing arrangements generally require the client to pay based on the number of hours worked by our consulting professionals at agreed-upon rates. Time-and-expense revenues are billed and recognized as incurred. Technology Services Revenues from the sale of subscriptions to the Company’s online marketplaces, information services websites and online futures programs are initially deferred and subsequently recognized ratably over the term of the subscription, which is typically one year. Global technology licensing services are performed pursuant to service agreements in which the Company provides consulting services by identifying and evaluating technology licensing opportunities for clients. These agreements are typically cancelable with thirty days notice. The Company has certain consulting revenue that is derived from the sale of research services in intellectual property insight, technology foresight, forecasting, scenario playing, vision, creativity and leadership, as well as the sale of services to provide for the design, development and implementation of custom software applications. Vendor specific objective evidence is not available to allocate among the respective deliverables in contracts with multiple deliverables. Accordingly, the Company recognizes revenue for these consulting services at the point when all the deliverables associated with the consulting contract have been provided to the customer. Before the Company recognizes revenue, the following criteria must be met: • Evidence of a financial arrangement or agreement must exist between the Company and its customer. Purchase orders, signed contracts, or electronic confirmations are three examples of items accepted by the Company to meet this criterion. • Delivery of the products or services must have occurred. The Company treats either physical or electronic delivery as having met this requirement. • The price of the products or services is fixed and measurable. • Collectability of the sale is reasonably assured and receipt is probable. Collectability of a sale is determined on a customer-by-customer basis. Differences between the timing of billings and the recognition of revenue are recognized as either unbilled services (included as a component of accounts receivable) or deferred revenue in the consolidated balance sheets. Client prepayments and retainers are classified as deferred revenue and recognized over future periods as earned. Direct Costs of Revenue Direct costs of revenue consist of direct costs related to the Company’s strategic services and technology services segments. Direct costs of revenue include salaries and related taxes, bonuses and commissions, certain outside services, business development costs, royalties and other direct project costs. 48 Table of Contents Research and Development In accordance with ASC Subtopic 985-20 Costs of Software to Be Sold, Leased, or Marketed , the Company expenses all costs incurred to establish the technological feasibility of a computer product to be sold, leased, or otherwise marketed as research and development costs. Research and development costs incurred to date have been expensed in the accompanying statements of operations as the Company’s innovation management software platform has not reached technological feasibility. Stock-Based Compensation At December 31, 2010, the Company had two stock-based equity compensation plans, which are described more fully in Note 14. The Company accounts for stock option grants in accordance with ASC Topic 718 Compensation—Stock Compensation . Stock-based compensation cost recognized during the years ended December 31, 2010 and 2009 includes 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 Topic 718. 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. 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, 2010 and 2009. The Company does not have any income tax benefit related to its net loss from operations in 2010 and 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 and amortization of certain indefinite-lived intangible assets for the years ended December 31, 2010 and 2009. 49 Table of Contents Net Realized Gains or Losses and Net Change in Unrealized Appreciation or Depreciation from Investment Company Activity Realized gains or losses through September 30, 2009 were 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. 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. Reclassifications In connection with the change in the Company’s business segments, certain reclassifications have been made to the 2009 balances to conform to the 2010 financial statement presentation. Reclassifications were made to revenue to conform to the Company’s new line of business segments. Reclassifications were also made to expenses to move direct costs associated with these business lines into direct costs of revenue. In addition, the Company reclassified its derivative liabilities to a non-current asset for both years ended December 31, 2010 and 2009 as management determined this treatment to be more appropriate given the nature of the liability. There was no effect on net loss or earnings per share from these reclassifications for all periods presented. Earnings per Share (EPS) Basic earnings per share is computed on the basis of the weighted-average number of shares of common stock outstanding during the period. Diluted earnings per share is computed on the basis of the weighted-average number of shares of common stock outstanding plus the effect of dilutive potential common shares outstanding during the period using the treasury stock method. The Company’s dilutive potential common shares consist of outstanding stock options and warrants. Components of basic and diluted per share data are as follows: Year Ended Dec 31, 2010 Three Months Ended Dec 31, 2009 Nine Months Ended Sept 30, 2009 Weighted average outstanding shares of common stock 13,288,179 11,605,373 11,257,663 Dilutive effect of stock options and warrants — — — Common stock and common stock equivalents 13,288,179 11,605,373 11,257,663 Shares excluded from calculation of diluted EPS(1) 2,751,648 1,739,150 1,014,400 (1) These shares attributable to outstanding common stock options and warrants were excluded from the calculation of diluted EPS because their inclusion would have been anti-dilutive, primarily as a result of the net loss/ net decrease in net assets from operations during the period. 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 derivative liabilities. The fair value of accounts receivable, accounts payable and certain accrued expenses approximate their carrying amounts in the financial statements due to the short maturity of such instruments. The estimated fair value of the Company’s long-term debt at December 31, 2010 and 2009 is not materially different from its carrying values of $5.8 million and $6.3 million, respectively. The fair value of certificates of deposit, available-for-sale securities and derivative liabilities are determined as described in Note 6. 50 Table of Contents Financial instruments with significant credit risk include investments and cash and cash equivalents. The Company maintains its cash and cash equivalents with high credit quality financial institutions in the United States and, at times, balances may exceed federally insured limits. The Company hasn’t experienced any losses related to these balances. All of the non-interest bearing cash balances were insured at December 31, 2010 due to a temporary federal program in affect from December 31, 2010 through December 31, 2012. Under the program, there is no limit to the amount of insurance for eligible accounts. Beginning in 2013, insurance will revert to $250,000 per depositor at each financial institution, and the non-interest bearing cash balances may again exceed federally insured limits. As of December 31, 2010, the Company did not hold any amounts in interest-bearing accounts. The Company had two major customers during the year ended December 31, 2010 and one major customer during the year ended December 31, 2009. Major customers, those generating greater than 10% of total revenue, accounted for approximately 28% and 10% of the Company’s revenue during the years ended December 31, 2010 and 2009, respectively. Major customers relate to the strategic services business segment for both years ended December 31, 2010 and 2009. In addition, two customers accounted for approximately 52% of accounts receivable at December 31, 2010. Use of Estimates The preparation of the Company’s consolidated financial statements in conformity with ASC Topic 275 Risks and Uncertainties requires management to make estimates and assumptions that could affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. The Company’s most significant estimates relate to revenue recognition, the valuation and impairment of certain investments, stock-based compensation, the valuation and impairment of goodwill and intangible assets, and the derivative liabilities. Actual results could differ from those estimates. Recently Issued Accounting Pronouncements In April 2010, the FASB issued new guidance that establishes a revenue recognition model for contingent consideration that is payable upon the achievement of an uncertain future event, referred to as a milestone. The scope of this guidance is limited to research and development arrangements and requires an entity to record the milestones payment in its entirety in the period received if the milestone meets all necessary criteria to be considered substantive. This guidance is effective for fiscal years and interim periods beginning June 15, 2010 and is not expected to have a material impact on the Company’s consolidated financial statements. In December 2010, the FASB issued amended guidance to clarify the acquisition date that should be used for reporting pro-forma financial information for business combinations. If comparative financial statements are presented, the pro-forma revenue and earnings of the combined entity for the comparable prior reporting period should be reported as though the acquisition date for all business combinations that occurred during the current year had been completed as of the beginning of the comparable prior annual reporting period. The amendments in this guidance are effective prospectively for business combinations for which the acquisition date is on or after January 1, 2011. There will be no impact in the Company’s operations or financial condition as the amendments relate only to additional disclosures. In December 2010, the FASB issued amendments to the guidance on goodwill impairment testing. The amendments modify Step 1 of the goodwill impairment test for reporting units with zero or negative carrying amounts. For those reporting units, an entity is required to perform Step 2 of the goodwill impairment test if it is more likely than not that a goodwill impairment exists. In making that determination, an entity should consider whether there are any adverse qualitative factors indicating that impairment may exist. The amendments are effective for fiscal years and interim periods beginning January 1, 2011 and are not expected to have a material impact on the Company’s consolidated financial statements. 51 Table of Contents 3. Accounts Receivable Accounts receivable consist of the following at December 31, 2010 and 2009: December 31, 2010 2009 Trade accounts receivable $ 1,408,047 $ 1,463,730 Less: allowance for doubtful accounts (14,926 ) (82,755 ) Contracts in process 214,734 — Unbilled client costs 403,333 100,573 Total accounts receivable $ 2,011,188 $ 1,481,548 Contracts in process consist of the following at December 31, 2010 and 2009: December 31, 2010 2009 Contract costs and estimated profits on uncompleted contracts $ 3,712,143 $ 947,061 Less advances and progress payments 3,497,409 980,000 Total contracts in process $ 214,734 $ (32,939 ) Contracts in process of $(32,939) are included in deferred revenue as of December 31, 2009. 4. Available-for-Sale Securities The Company classifies its investments in freely tradable equity securities as available-for-sale in accordance with ASC Topic 320 Investments—Debt and Equity Securities 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, 2010 and 2009. Unrealized(1) Realized Losses Cost Gain Loss Fair Value As of December 31, 2010 $ 225,400 $ 129,132 $ (93 ) $ (183,300 ) $ 171,139 As of December 31, 2009 $ 800,746 $ 282,684 $ (353,630 ) $ — $ 729,800 (1) The net unrealized gain (loss) is included in operating company equity as a component of accumulated other comprehensive income (loss) in the consolidated balance sheets. Proceeds from the sale of available-for-sale securities were approximately $342,000 and $453,000 for the year ended December 31, 2010 and the three months ended December 31, 2009, respectively. As of December 31, 2010, one of our five total available-for-sale securities was in an unrealized loss position. Gross realized gain (loss) as a result of the sale of available-for-sale securities was approximately $79,000 and $20,000 for the year ended December 31, 2010 and the three months ended December 31, 2009, respectively. The Company recognized a loss from the impairment of certain available-for-sale securities of approximately $520,000 for the year ended December 31, 2010. $146,000 of the loss related to certain warrants classified as available-for-sale securities that the Company determined were permanently impaired and subsequently expired unexercised. The remaining $374,000 loss related to three securities that had significant unrealized losses that were written off in the third quarter of 2010 as a result of management’s determination that these losses were other-than-temporary. The realized loss is included as a component of other (income) expense in the consolidated statement of operations for the year ended December 31, 2010. 52 Table of Contents Unrealized gain (loss) on available-for-sale securities for the year ended December 31, 2010 and the three months ended December 31, 2009 are shown in the accompanying statement of changes in equity net of the reclassification adjustment. Disclosure of the gross amounts of the current period gain (loss) and amounts that were reclassified out of accumulated other comprehensive income (loss) into earnings are as follows: Year Ended December 31, 2010 Three Months Ended December 31, 2009 Unrealized holding gain (loss) arising during the period $ (16,961 ) $ (70,946 ) Add back: reclassification adjustment for net gains included in net income 216,947 — Unrealized gain (loss) from available-for-sale securities, net $ 199,986 $ (70,946 ) 5. Equity Method Investments On April 14, 2010, the Company entered into a limited liability company agreement to form Verdant Ventures Advisors, LLC (“Verdant Ventures”). Under this agreement, the Company made an investment of 243,933 shares of the Company’s common stock worth $1,000,125 in exchange for a 15% ownership in Verdant Ventures. The Company accounts for Verdant Ventures under the equity method of accounting due to the capital account structure of the investee. Verdant Ventures operates as an independently managed technology transfer venture fund. John Micek, one of the Company’s directors, is managing partner of Verdant Ventures, as well as a member of two limited liability companies that are also parties to the limited liability company agreement of Verdant Ventures. Pursuant to the agreement, the Company is not required to make any additional capital contributions or loans to Verdant Ventures and is not involved in its management. Verdant Ventures may sell up to one-third of the Company’s contributed shares each year during a three-year period from the date the Company first contributed the shares. As a result of the substantial decline in our stock price during 2010, the Company recorded an impairment loss to its investment in Verdant Ventures of approximately $671,000. This realized loss is included as a component of other (income) expense in the consolidated statement of operations for the year ended December 31, 2010. 6. Fair Value Measurements The Company performs fair value measurements in accordance with the guidance provided by ASC Topic 820 Fair Value Measurements and Disclosures . Topic 820 defines fair value as the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When determining the fair value measurements for assets and liabilities required to be recorded at fair value, management considers the principal or most advantageous market in which the Company would transact and considers assumptions that market participants would use when pricing the asset or liability, such as inherent risk, transfer restrictions, and risk of nonperformance. Topic 820 establishes a fair value hierarchy that encourages and is based on the use of observable inputs, but allows for unobservable inputs when observable inputs do not exist. When there are multiple inputs for determining the fair value of an investment, the Company classifies the investment in the fair value hierarchy based on the lowest level input that is significant to the fair value measurement. Inputs are classified into one of three categories: • Level 1—Unadjusted quoted prices in active markets for identical assets or liabilities. • Level 2—Quoted prices in active markets for similar assets or liabilities, or quoted prices for identical or similar assets or liabilities in markets that are not active, or inputs other than quoted prices that are observable for the asset or liability. • Level 3—Unobservable inputs for the asset or liability. 53 Table of Contents Assets measured at fair value on a recurring basis by level within the fair value hierarchy as of December 31, 2010 and December 31, 2009 are as follows: Fair Value Measurements at December 31, 2010 Using Fair Value Measurements at December 31, 2009 Using Level 2 Total Level 2 Total Assets: Certificates of deposit $ — $ — $ 492,246 $ 492,246 Available-for-sale securities 171,139 171,139 729,800 729,800 Total assets $ 171,139 $ 171,139 $ 1,222,046 $ 1,222,046 Liabilities: Derivative liabilities $ (1,140,005 ) $ (1,140,005 ) $ (664,972 ) $ (664,972 ) Total liabilities $ (1,140,005 ) $ (1,140,005 ) $ (664,972 ) $ (664,972 ) The Company’s investments in certificates of deposit and available-for-sale securities are classified within Level 2 of the fair value hierarchy. The equity interests in companies for which there is no liquid public market are valued using quoted market prices for identical or similar instruments in markets that are not active. The determined values are generally discounted to account for the illiquid nature of the investment and minority ownership positions. The value of our equity interests in public companies for which market quotations are readily available are based on quoted market prices for similar instruments in an active market. These securities are generally thinly traded and/or carry discounts from the public market value for certain restrictions on resale. The Company utilizes the market approach in determining the fair value of these securities. The Company’s derivative liabilities are classified within Level 2 of the fair value hierarchy. The Company utilizes the Black-Scholes Option Pricing Model to value the derivative liabilities utilizing observable inputs such as the Company’s common stock price, the exercise price of the warrants, and expected volatility, which is based on historical volatility. The Black-Scholes model employs the market approach in determining fair value. 7. Fixed Assets The Company recorded impairment of approximately $1,438,000 to certain of its land, building and building improvements during 2010. The commercial real estate market for certain property has taken a significant downturn that is not expected to reverse in the near future. As a result, management determined that the decrease in the fair value of the property was other-than-temporary. The amount of the impairment was determined based on third party valuations of the respective property. This impairment expense is included as a component of impairment loss in the consolidated statement of operations for the year ended December 31, 2010. Fixed assets consist of the following: December 31, 2010 2009 Furniture and Fixtures $ 284,630 $ 316,250 Computer Equipment 733,964 651,948 Leasehold Improvements 9,085 9,085 Building 1,854,357 2,169,128 Building Improvements 1,554,742 1,824,546 Land 3,535,120 4,388,625 7,971,898 9,359,582 Less: Accumulated Depreciation (1,235,331 ) (971,319 ) $ 6,736,567 $ 8,388,263 54 Table of Contents Depreciation expense was approximately $277,000 and $215,000 for the years ended December 31, 2010 and 2009, respectively. 8. Goodwill and Intangible Assets In accordance with ASC Topic 350 Intangibles—Goodwill and Other , 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 values 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 as needed 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. In accordance with Topic 350, management performs interim assessments of goodwill if impairment indicators are present. One such indicator is an adverse change in the business climate. The Company’s stock price declined significantly subsequent to June 30, 2010. A decline in stock price may be an indicator of an adverse change in business climate. In addition, a decline in stock price affects the Company’s market capitalization and may affect fair value measurements for the Company’s reporting units. At the end of the third quarter of 2010, management concluded that the decline in the Company’s stock price was other than temporary. This conclusion, coupled with the severity of the decline, triggered a review for impairment outside of the Company’s next scheduled annual impairment evaluation date of December 31, 2010. Due to the reduction in the Company’s market capitalization, third party valuation reports were performed to determine the fair value of the respective reporting units. As a result of the reduction in the fair value of the reporting units, management determined that the implied fair value of its goodwill and intangible assets was less than their carrying values by approximately $10.3 million. The Company recognized goodwill impairment of approximately $9.4 million and intangible assets impairment of approximately $971,000. The $10.3 million impairment expense is included as a component of impairment loss in the consolidated statement of operations for the year ended December 31, 2010. The Company determined that no additional impairment exists at December 31, 2010. 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, which triggered an interim impairment test as of June 30, 2009. 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 year ended December 31, 2009. 55 Table of Contents The following table presents goodwill and intangible assets as of December 31, 2010 and 2009. 2010 2009 Weighted Average Life Gross Carrying Amount Accumulated Amortization Net Carrying Amount Gross Carrying Amount Accumulated Amortization Net Carrying Amount Amortizable intangible assets: Trade names/ trademarks/ websites 5.0 years $ 657,902 $ 511,979 $ 145,923 $ 674,293 $ 438,574 $ 235,719 Proprietary software/ processes/ know-how 6.1 years 2,410,000 1,021,288 1,388,712 3,172,396 807,598 2,364,798 Non-compete agreements 3.4 years 700,574 534,793 165,781 709,862 324,701 385,161 Customer list 7.3 years 3,070,474 1,173,314 1,897,160 3,749,493 833,054 2,916,439 Total amortizable intangible assets, net 3,597,576 5,902,117 Infinite-lived intangible assets: Trade names 2,577,216 2,590,184 Total intangible assets, net $ 6,174,792 $ 8,492,301 Goodwill $ 6,407,640 $ 15,874,139 The changes to the net carrying value of goodwill by business segment for the years ended December 31, 2010 and 2009 are as follows: Strategic Services Technology Services Total Balance as of December 31, 2008 $ 5,673,548 $ 9,572,595 $ 15,246,143 Increases due to acquisitions and earnouts 1,485,783 136,701 1,622,484 Impairment — (1,325,767 ) (1,325,767 ) Translation adjustment 140,765 190,514 331,279 Balance as of December 31, 2009 7,300,096 8,574,043 15,874,139 Increases due to acquisitions and earnouts 43,680 — 43,680 Impairment (3,891,678 ) (5,469,482 ) (9,361,160 ) Translation adjustment (65,200 ) (83,819 ) (149,019 ) Balance as of December 31, 2010 $ 3,386,898 $ 3,020,742 $ 6,407,640 56 Table of Contents The changes to the net carrying value of intangible assets by business segment for the years ended December 31, 2010 and 2009 are as follows: Strategic Services Technology Services Total Balance as of December 31, 2008 $ 7,916,395 $ 2,747,580 $ 10,663,975 Amortization (1,067,838 ) (335,529 ) (1,403,367 ) Impairment — (1,042,692 ) (1,042,692 ) Translation adjustment 218,231 56,154 274,385 Balance as of December 31, 2009 7,066,788 1,425,513 8,492,301 Amortization (1,016,445 ) (234,013 ) (1,250,458 ) Impairment (971,469 ) — (971,469 ) Translation adjustment (74,101 ) (21,481 ) (95,582 ) Balance as of December 31, 2010 $ 5,004,773 $ 1,170,019 $ 6,174,792 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 $1,250,000 and $1,401,000 for the years ended December 31, 2010 and 2009, 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, 2011 $ 1,040,073 2012 897,936 2013 822,468 2014 574,690 2015 177,289 Thereafter 85,120 Total $ 3,597,576 9. 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. The Company entered into a separation agreement with Dr. Gross on April 8, 2009 that modified the payment terms, but not the monetary obligation amount that Dr. Gross was entitled to receive pursuant to the employment agreement. In connection therewith, the Company issued to Dr. Gross a $550,000 promissory note that did not bear any interest and was due and payable on March 1, 2010. Pursuant to the terms of the promissory note, the Company had the option to elect to transfer certain equity interests in one of its subsidiaries, Cortez 114, LLC (“Cortez”), which owns real estate located in Hernando County, Florida, to Dr. Gross in lieu of making the $550,000 cash payment upon maturity of the promissory note. On March 2, 2010, the Company satisfied its remaining severance obligation to Dr. Gross through the conveyance of a 32% ownership interest in Cortez. In connection with this severance payment, the Company paid approximately $320,000 to satisfy the related payroll taxes, which included an income tax gross-up. This transaction was accounted for in accordance with ASC Topic 810 Consolidation . The Company recognized a noncontrolling interest in the amount of $532,132, as determined by the carrying value of Company’s investment in Cortez. The Company also recorded $17,868 as additional paid-in capital for the 57 Table of Contents excess of the liability reduction of $550,000 over the adjustment to the carrying amount of the noncontrolling interest. In addition, the Company has recognized 32% of the profit or loss from Cortez as net income or loss attributable to noncontrolling interest in the consolidated statement of operations for the year ended December 31, 2010. 10. Long-term Debt The Company had the following long-term debt at December 31, 2010 and 2009: December 31, 2010 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 $ 2,867,215 $ 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 1,011,064 1,230,506 $1,500,000 note payable, due in monthly installments of interest at 7.00% with principal due in full on October 1, 2015; collateralized by undeveloped land in Hillsborough County, Florida 1,250,000 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 311,672 456,613 $450,000 bank revolving line of credit, due in monthly installments of interest of 5.25%; collateralized by certificates of deposit — 250,000 $200,000 short term related party promissory note, due in full by February 27, 2011 including interest at 3.50% plus 3.0 points(1) 200,000 — Capital leases on computer equipment, due in monthly installments of up to $1,635 expiring through July 2010, imputed interest rates of between 9.5% and 16.3% 8,761 45,015 Insurance financing, due in monthly installments of $11,376 and $9,711 including principal and interest at 5.44% and 5.83% through July 2010 and September 2009, respectively 77,593 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% 43,774 48,524 $25,000 bank credit card financing, due in monthly installments of interest at 6.5% 22,058 25,000 Total long-term debt 5,792,137 6,329,252 Less current maturities 433,964 975,360 Non current portion $ 5,358,173 $ 5,353,892 (1) Subsequent to December 31, 2010, this related party note was paid in full. 58 Table of Contents Payments required for the next five years on the long-term debt balance as of December 31, 2010 are as follows: For the years ending December 31, 2011 $ 434,335 2012 1,360,396 2013 2,747,777 2014 — 2015 1,250,000 5,792,508 Less imputed interest on capital lease obligations (371 ) $ 5,792,137 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 the Company and UTEK Real Estate must pay down $500,000 of the indebtedness to the Lender within 60 days. At Innovaro’s request, the Lender subsequently extended the repayment date for the $500,000 payment, which was made in accordance with this extension on July 12, 2010. Interest is payable on the outstanding principal amount of the Note on a quarterly basis, in arrears, at an annual rate of 8.00%. The entire principal amount outstanding and all accrued interest is payable in full on 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 exercise price of the warrants was subsequently adjusted down to $0.01. 59 Table of Contents 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 ASC Topic 815 Derivatives and Hedging . The Company uses the Black-Scholes option pricing model to estimate the fair value of the derivative instrument, for which we employed the following assumptions at inception and for the years ended December 31, 2010 and 2009: December 31, 2010 December 31, 2009 October 22, 2009 Expected dividend yield 0 % 0 % 0 % Expected volatility 54 % 39 % 39 % Risk-free interest rate 2.01 % 2.69 % 2.39 % Expected life of options 3.8 years 4.8 years 5.0 years Fair value $ 1.42 $ 1.52 $ 1.27 The Company determined the initial 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 $280,558 and $35,478 related to the amortization of debt discount for the years ended December 31, 2010 and 2009. In accordance with Topic 815, the derivative liability is required to be adjusted to fair value at the end of each reporting period. The Company recognized a gain (loss) related to this derivative of approximately $44,000 and $(110,000) for the years ended December 31, 2010 and 2009, respectively. The derivative gain is included as a component of other (income) expense in the consolidated statements of operations. The following shows the components comprising the carrying value of this note: December 31, 2010 2009 Original issue price of note $ 1,750,000 $ 1,750,000 Principal payments (500,000 ) — Original issue discount (554,972 ) (554,972 ) Amortization of discount 316,036 35,478 Carrying value of note $ 1,011,064 $ 1,230,506 11. Accumulated Other Comprehensive Income (Loss) Components comprising the balance in accumulated other comprehensive income (loss) for the three months ended December 31, 2009 and the year ended December 31, 2010 are as follows: Unrealized gain (loss) from available-for- sale securities Foreign currency translation adjustment Accumulated other comprehensive income (loss) Balance at September 30, 2009 $ — $ — $ — Gain (loss) for the period (70,946 ) 246,555 175,609 Balance at December 31, 2009 (70,946 ) 246,555 175,609 Gain (loss) for the period 199,986 (227,673 ) (27,687 ) Balance at December 31, 2010 $ 129,040 $ 18,882 $ 147,922 60 Table of Contents 12. Securities Offering On July 8, 2010, the Company entered into a definitive securities purchase agreement (the “Securities Purchase Agreement”) with three institutional investors, pursuant to which the Company agreed to issue to the investors in a registered offering 1,481,481 shares (the “Shares”) of the Company’s common stock priced at $2.565 per share along with Series A warrants to purchase up to 1,481,481 shares of common stock with an exercise price of $3.43 per share of common stock and Series B warrants to purchase up to 893,519 shares of common stock with an exercise price of $0.01 per share of common stock. These securities were offered pursuant to our effective shelf registration statement on Form S–3 (File No. 333—165859). On July 9, 2010, the Company entered into an amendment to the Securities Purchase Agreement with each of the investors to increase the exercise price of the Series A warrants to be issued in connection therewith from $3.43 per share to $3.49 per share. The Series A warrants are exercisable for a five-year period commencing nine months after the date of their issuance. The exercise price of the Series A warrants is subject to certain conditions and adjustments that make the exercise price variable pursuant to the Series A warrant agreement. The exercise price can only adjust downward if the Company issues any securities outside of the Company’s plans described in Notes 14 and 17. On July 12, 2010, the Company completed the offering contemplated by the Securities Purchase Agreement and raised gross proceeds in connection therewith of approximately $3.8 million before advisory fees and offering expenses. The Series B warrants are exercisable for a five-year period commencing on the 120 day anniversary of the date of their issuance. The Company determined that the Series B warrants are a component of equity and have been included in the cash proceeds of the securities offering as such. All of the 893,519 Series B warrants were exercised as of December 31, 2010. In addition, the Company granted each investor in the offering the right of first refusal to purchase 100% of the shares of the Company’s common stock or securities convertible into or exercisable for shares of the Company’s common stock to be issued by the Company in certain offerings until the one (1) year anniversary of the date of the issuance of the Shares. Thereafter, each investor will have the right of first refusal to purchase 50% of the shares of the Company’s common stock or securities convertible into or exercisable for shares of the Company’s common stock to be issued by the Company in certain offerings until the two (2) year anniversary of the date of the issuance of the Shares. The Company determined that the embedded feature (ratchet down of exercise price) in the Series A warrants is not indexed to the Company’s own stock due to the variability in the exercise price of the Series A warrants and, therefore, is an embedded derivative financial liability, which requires bifurcation and to be separately accounted for pursuant to ASC Topic 815 Derivatives and Hedging . The Company uses the Black-Scholes option pricing model to estimate the fair value of the derivative instrument, for which we employed the following assumptions at inception and for the year ended December 31, 2010: December 31, 2010 July 12, 2010 Expected dividend yield 0 % 0 % Expected volatility 53 % 41 % Risk-free interest rate 2.01 % 1.85 % Expected life of options 5.0 years 5.0 years Fair value $ 0.35 $ 0.45 In accordance with Topic 815, the Company recognized a derivative liability for the value of the Series A warrants granted in conjunction with the Securities Purchase Agreement. The Company determined the value of the derivative instrument to be $661,236 upon issuance of the Series A warrants and recorded a derivative 61 Table of Contents liability which offsets additional paid-in capital. In accordance with Topic 815, the derivative liability is required to be adjusted to fair value at the end of each reporting period. The Company recognized a gain related to this derivative of approximately $143,000 for the year ended December 31, 2010. The derivative gain is included as a component of other (income) expense in the consolidated statement of operations. 13. Income Taxes Deferred income tax assets and liabilities are determined based upon differences between financial reporting and the 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 for 2009 are as follows: Year Ended December 31, 2010 2009 Current: Federal $ — $ — State — — Foreign — — $ — $ — Deferred: Federal $ 33,731 $ (85,270 ) State 3,601 (9,104 ) Foreign (92,913 ) (180,685 ) (55,581 ) (275,059 ) Provision for income taxes $ (55,581 ) $ (275,059 ) A reconciliation of the differences between the effective income tax rate and the statutory federal tax rate follows: Year Ended December 31, 2010 2009 Tax at US statutory rate $ (6,523,582 ) $ (3,396,646 ) State taxes, net of federal benefit (696,488 ) (357,147 ) Foreign rate differential 152,054 38,929 Stock options 99,656 202,999 Impairment and amortization of intangible assets 3,522,604 510,508 Other items (63,686 ) — (3,509,442 ) (3,001,357 ) Change in valuation allowance 3,453,861 2,726,298 Provision for income taxes $ (55,581 ) $ (275,059 ) The Company has unrealized gains on available-for-sale securities of $199,986 and foreign currency translation adjustments of $(227,673) for the year ended December 31, 2010. These amounts are included as a component of equity in 2010. 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 2010. 62 Table of Contents Significant components of the Company’s deferred tax assets and liabilities are as follows: December 31, 2010 2009 Current Accrued expenses $ 16,228 $ 19,246 Revenue recognition (40,863 ) 48,996 Subtotal current deferred tax asset (liability) (24,635 ) 68,242 Non-current Net operating loss carryforward 11,025,062 11,575,000 Capital loss carryforward 7,056,766 3,350,600 Intangible assets (2,213,378 ) (3,049,271 ) Investments 2,617,919 2,330,697 Other 658,357 251,057 Subtotal non-current deferred tax asset (liability) 19,144,726 14,458,083 Total deferred tax asset 19,120,091 14,526,325 Less: valuation allowance (20,340,778 ) (15,829,356 ) Net deferred tax liability $ (1,220,687 ) $ (1,303,031 ) The Company is currently subject to examination by federal and state taxing authorities for 2007 and subsequent years. The change in valuation allowance does not correspond to the change reported in the statutory rate reconciliation due to the adjustments to the deferred tax balances related to prior periods. ASC Topic 740 Income Taxes 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. The Company’s management previously determined that it was more likely than not that the Company’s net operating loss and capital loss carryforwards would not be utilized in the future. Accordingly, a valuation allowance of $20.3 million and $15.8 million was recorded for 2010 and 2009, respectively. At December 31, 2010, the Company had available U.S. net operating loss carryforwards of approximately $28,370,000, 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; 2029-$7,343,000; and 2030-$3,854,000. The Company has available U.S. capital loss carryforwards of approximately $18,753,000, which expire as follows: 2012-$381,000; 2013-$860,000; 2014-$16,669,000; and 2015-$843,000. 14. Stock-Based Compensation The Company has two stock-based equity compensation plans at December 31, 2010. 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 issue options to purchase up to 2,811,274 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, as amended, the Company is authorized to issue options to purchase up to 315,000 shares of the Company’s common stock. The Company may only issue options under the 2000 Plan 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, 2010, the Company had 1,226,320 shares available for future stock option grants under existing plans. 63 Table of Contents Stock-based compensation cost recognized during the years ended December 31, 2010 and 2009 includes 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 ASC Topic 718 Compensation—Stock Compensation . The Company recognizes compensation expense on a straight-line basis over the requisite service period. The Company estimates forfeitures, both at the grant date as well as throughout the requisite service period, based on the Company’s historical experience and future expectations. Topic 718 requires management to estimate, at the grant date, the number of stock options for which the requisite service is expected to be rendered. The Company applies a forfeiture rate to account for the number of stock options for which the requisite service period is not expected to be rendered. The Company applied a 20% forfeiture rate to stock options issued from 2006 through 2008, and applied a forfeiture rate of between 20% and 40% to stock options issued from 2009 through 2010. Management revised its estimate of the forfeiture rate of its options in 2009 and again in 2010 to account for significant variances between the estimated forfeitures and the actual forfeitures. The revision to the forfeiture rate is accounted for as a change in estimate in accordance with ASC Topic 250 Accounting Changes and Error Corrections and the cumulative effect of approximately $178,000 and $78,000, a reduction in stock-based compensation, was recognized for the years ended December 31, 2010 and 2009, respectively. In addition, the revision to the forfeiture rate caused an additional reduction in stock-based compensation of approximately $587,000 and $376,000 for the years ended December 31, 2010 and 2009, respectively. The change in estimate resulted in a beneficial effect of $0.06 and $0.04 per share on the Company’s net loss per share for the years ended December 31, 2010 and 2009, respectively. In connection with these revisions, stock-based compensation for prospective periods will be reduced by approximately $829,000 over the next 3 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—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. The following table summarizes the assumptions used to estimate the fair value of stock options granted during the years ended December 31, 2010 and 2009: 2010 2009 Expected dividend yield 0 % 0 % Expected volatility 42-55 % 37-44 % Risk-free interest rate 0.59-1.44 % 1.28-1.84 % Expected life of options 4.0 years 4.0 years Weighted average grant date fair value $ 0.51 $ 1.48 The Company did not have any cash proceeds from the exercise of stock options for the years ended December 31, 2010 and 2009. Total compensation cost related to stock options was approximately $288,000 and $577,000 for the years ended December 31, 2010 and 2009, respectively. At December 31, 2010, there was approximately $677,000 of unrecognized compensation cost related to stock options, which is expected to be recognized over a weighted average period of 2.5 years. 64 Table of Contents The following table represents stock option activity as of and for the two years ended December 31, 2010: Number of Shares Weighted Average Exercise Price Weighted Average Remaining Contractual Life Aggregate Intrinsic Value 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 Granted 681,667 $ 1.35 Exercised — Forfeited/cancelled/expired (713,150 ) $ 7.71 Options Outstanding—December 31, 2010 1,270,167 $ 4.45 5.74 years $ 227,450 Options Exercisable—December 31, 2010 285,792 $ 9.11 4.13 years $ 3,150 The total grant date fair value of options vested during the years ended December 31, 2010 and 2009 was approximately $622,000 and $544,000, respectively. The following table summarizes information about outstanding and exercisable stock options as of December 31, 2010: Outstanding Options Exercisable Options Range of Exercise Prices Outstanding at 12/31/10 Weighted Average Exercise Price Remaining Contractual Life in Years Exercisable at 12/31/10 Weighted Average Exercise Price $0.77 - $1.60 621,667 $ 1.12 6.78 30,417 $ 1.43 $3.97 - $5.05 391,500 4.71 5.67 94,125 4.72 $9.30 - $10.50 182,500 10.31 4.46 91,250 10.31 $13.00 - $13.48 33,500 13.27 0.81 29,000 13.30 $18.40 - $22.04 41,000 19.23 0.53 41,000 19.23 1,270,167 $ 4.45 5.74 285,792 $ 9.11 65 Table of Contents 15. Other (Income) Expense Components comprising the balance in other (income) expense for the year ended December 31, 2010 and three months ended December 31, 2009 are as follows: Year Ended Dec 31, 2010 Three Months Ended Dec 31, 2009 Gain on sale of investments $ (79,451 ) $ (19,733 ) Impairment of investments 1,659,411 — Share in loss of equity method investment 25,856 — Derivative (gain) loss (186,203 ) 110,000 Rental income (178,404 ) (40,064 ) Other (91,411 ) 19,528 Other (income) expense $ 1,149,798 $ 69,731 16. Employee Benefit Plan On February 1, 2009, the Company adopted the UTEK Corporation 401k Plan (the “401k Plan”). 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 $161,000 and $170,000 for the years ended December 31, 2010 and 2009, respectively. 17. Restricted Stock Plan On July 8, 2010, the Company’s shareholders voted in favor of a proposal to adopt the Company’s Restricted Stock Plan (the “Restricted Stock Plan”). The purpose of the Restricted Stock Plan is to provide selected members of the Board of Directors, executive officers, key employees, consultants and advisors of the Company with awards consisting of shares of the Company’s common stock contingent on their long-term continued employment and/or their relationship with the Company. The maximum number of shares of common stock that may be issued to participants under the Restricted Stock Plan is 1,500,000. 18. Segment Reporting ASC Topic 280 Segment Reporting establishes standards for reporting information about operating segments. Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker, or decision making group, in deciding how to allocate resources and in assessing performance. The Company is organized geographically and by line of business. The line of business management structure is the primary basis for which the allocation of resources and financial results are assessed. From time to time, the Company will reorganize its internal organizational structure to better align its service offerings. We have reorganized into two new lines of business, all working under the Innovaro brand: Strategic Services—driven by Strategos, an advanced innovation consultancy and Technology Services—online platforms, partnering services, global licensing, technology transfer services, futures and trends, research, information services and IP consulting. As a result, business segment information for the year ended December 31, 2009 has been restated to reflect the new business segments. The Company has two reportable geographical operating segments: United Kingdom and the United States. The United Kingdom segment includes the Company’s wholly owned subsidiary Innovaro Europe, Ltd. and the United States segment includes Innovaro, Inc. and UTEK Real Estate. 66 Table of Contents 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, 2010 $ 1,711,729 $ 17,607,270 $ 19,318,999 Total assets December 31, 2010 1,796,827 22,857,593 24,654,420 Long-lived assets December 31, 2009 5,887,520 26,867,183 32,754,703 Total assets December 31, 2009 6,411,846 33,919,335 40,331,181 For the Year Ended December 31, 2010 United Kingdom United States Consolidated Revenue $ 644,448 $ 12,451,678 $ 13,096,126 Income (loss) before income taxes (3,486,700 )(1) (15,706,399 )(2) (19,193,099 ) Depreciation and amortization 345,635 1,181,709 1,527,344 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 )(3) (10,239,716 ) Depreciation and amortization 434,286 1,181,578 1,615,864 (1) The Company recognized a $2.9 million impairment loss for the United Kingdom segment during 2010. (2) The Company recognized a $8.9 million impairment loss for the United States segment during 2010. (3) The Company recognized a $2.4 million impairment loss for the United States segment during 2009. The Company also has business segments for which certain information can be reported. These reportable business segments include Strategic Services and Technology 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 business segment is shown below: For the Year Ended December 31, 2010 Strategic Services Technology Services Administrative and Other Total Revenue $ 9,783,318 $ 3,312,808 $ — $ 13,096,126 Loss before income taxes (1,792,324 ) (1) (8,919,398 ) (2) (8,481,377 ) (19,193,099 ) For the Year Ended December 31, 2009 Strategic Services Technology Services Administrative and Other Total Revenue / Income from operations $ 6,833,990 $ 3,883,909 $ 59,604 $ 10,777,503 Income (loss) before income taxes (3,712,017 ) (3) (907,982 ) (5,619,717 ) (10,239,716 ) (1) The Company recognized a $4.9 million impairment loss for the strategic services segment during 2010. (2) The Company recognized a $5.5 million impairment loss for the technology services segment during 2010. (3) The Company recognized a $2.4 million impairment loss for the strategic services segment during 2009. 67 Table of Contents 19. Commitments and Contingencies Employment Contracts The Company’s strategic services business in recent years has largely been dependent on the efforts of certain key consulting professionals whose employment contracts with the Company expire in April 2011. If the Company is not successful in retaining these consulting professionals or hiring similarly qualified and skilled consulting professionals to replacement them, then the Company may not be able to maintain the level of strategic services revenue it has generated in recent years. The Company has various other employment agreements with certain of its executive officers and 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 $643,000 for the year ending December 31, 2011. In addition, certain agreements provide for discretionary bonuses and severance packages. 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 , but not later than December 31 st , of each year and are accrued on a quarterly basis. Approximately 85% to 90% of Strategos net income is required to be paid out in connection with this bonus plan. The Company recognized bonus expense of approximately $3.3 million and $1.7 million in connection with the Strategos Bonus Plan during the years ended December 31, 2010 and 2009, respectively. The Company is currently in the process of modifying the Strategos Bonus Plan. 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 $473,000 and $442,000 for the years ended December 31, 2010 and 2009, 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: 2011 $ 110,641 2012 29,929 2013 24,191 $ 164,761 20. Related Party Transactions During December 2010, the Company borrowed $200,000 for operations from one of its directors, Mark Berset, under a promissory note. This note was subsequently repaid in full on February 21, 2011 including interest at 3.5% and 3.0 points. This transaction is not necessarily indicative of amounts, terms and conditions that the Company may have received with unrelated third parties. 68 Table of Contents Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure Not applicable. Item 9A. Controls and Procedures Evaluation of Disclosure Controls and Procedures Our Chief Executive Officer and Chief Financial Officer have evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) of the Securities Exchange Act of 1934) as of the end of the period covered by this report. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective to ensure that information required to be disclosed by us in reports we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission rules and forms and such that information required to be disclosed in our reports filed or submitted under the Securities Exchange Act of 1934 is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure. Management’s Annual Report on Internal Control over Financial Reporting 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, 2010. 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, 2010. Changes in Internal Control over Financial Reporting There was no significant change in our internal control over financial reporting (as defined in Rule 13a-15(f) of the Securities Exchange Act of 1934) that occurred during our most recently completed fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. Item 9B. Other Information Not applicable. 69 Table of Contents PART III Item 10. Directors, Executive Officers and Corporate Governance Information about our directors may be found under the caption “NOMINEES” in the Company’s Proxy Statement for the 2011 Annual Meeting of Stockholders (the “Proxy Statement”) to be filed pursuant to Regulation 14A under the Securities Exchange Act of 1934 within 120 days from the fiscal year end. Information about our executive officers may be found under the caption “EXECUTIVE OFFICERS” in the Proxy Statement. Information about the audit committee may be found under the captions “MEETINGS OF THE BOARD OF DIRECTORS AND COMMITTEES” and “MEMBERSHIP ON BOARD COMMITTEES” in the Proxy Statement. Information about beneficial ownership may be found under the caption “SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE” in the Proxy Statement. All of the aforementioned information is incorporated herein by reference. Code of Business Conduct and Ethics for Directors and Employees We have adopted a Code of Business Conduct and Ethics for all of our directors and employees, including our Chief Executive Officer and Chief Financial Officer. We have posted a copy of our Code of Business Conduct and Ethics on our Internet website at www.innovaro.com . Any waivers of the Code of Business Conduct and Ethics must be approved, in advance, by our full Board of Directors. Any amendments to, or waivers from the Code of Business Conduct and Ethics that apply to our executive officers and directors will be posted on our Internet website located at www.innovaro.com . Item 11. Executive Compensation The information set forth under the captions “DIRECTOR COMPENSATION,” “EXECUTIVE COMPENSATION,” “COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION” and “COMPENSATION COMMITTEE REPORT” in the Proxy Statement is incorporated herein by reference. Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters The information set forth under the caption “SECURITY OWNERSHIP” and in Proposal 3 under the caption “Securities Authorized for Issuance under Equity Compensation Plans” in the Proxy Statement is incorporated herein by reference. Item 13. Certain Relationships and Related Transactions, and Director Independence The information set forth under the captions “CERTAIN RELATIONSHIPS AND TRANSACTIONS” and “DIRECTOR INDEPENDENCE” in the Proxy Statement is incorporated herein by reference. Item 14. Principal Accountant Fees and Services The information set forth under the captions “FEES BILLED TO THE COMPANY BY REGISTERED INDEPENDENT PUBLIC ACCOUNTING FIRM” and “POLICY ON PRE-APPROVAL OF SERVICES PROVIDED BY REGISTERED INDEPENDENT PUBLIC ACCOUNTING FIRM” in the Proxy Statement is incorporated herein by reference. 70 Table of Contents PART IV Item 15. Exhibits and Financial Statement Schedules (a) The following Financial Statements of Innovaro, Inc. are contained in Item 8 of this Form 10-K: • Consolidated Balance Sheets as of December 31, 2010 and 2009 • Consolidated Statements of Operations for the year ended December 31, 2010, the three months ended December 31, 2009 and the nine months ended September 30, 2009 • Consolidated Statements of Changes in Equity for the year ended December 31, 2010, the three months ended December 31, 2009 and the nine months ended September 30, 2009 • Consolidated Statements of Cash Flows for the year ended December 31, 2010, the three months ended December 31, 2009 and the nine months ended September 30, 2009 • Notes to Consolidated Financial Statements • Report of Independent Registered Public Accounting Firm (b) The following exhibits are filed with this report or are incorporated herein by reference to a prior filing, in accordance with Rule 12b-32 under the Securities Exchange Act of 1934: 3.1 Certificate of Incorporation, dated July 6, 1999, as filed and recorded with the Secretary of State of the State of Delaware on July 13, 1999. (Incorporated by reference to Exhibit 3.1 filed with the Company’s registration statement on Form N-2 (File No. 333-93913) filed on December 30, 1999.) 3.2 Certificate of Amendment to Certificate of Incorporation, dated October 14, 1999, as filed and recorded with the Secretary of State of the State of Delaware on October 15, 1999. (Incorporated by reference to Exhibit 3.2 filed with the Company’s registration statement on Form N-2 (File No. 333-93913) filed on December 30, 1999.) 3.3 By-Laws of UTEK Corporation. (Incorporated by reference to Exhibit 3.3 filed with the Company’s registration statement on Form N-2 (File No. 333-93913) filed on December 30, 1999.) 3.4 Certificate of Amendment to Certificate of Incorporation dated July 23, 2001, as filed and recorded with the Secretary of State of the State of Delaware on July 24, 2001. (Incorporated by reference to Exhibit 3.4 to the Company’s Form 10-K filed on April 1, 2002.) 3.5 Certificate of Amendment to Certificate of Incorporation dated June 12, 2007, as filed and recorded with the Secretary of State of the State of Delaware on July 12, 2007. (Incorporated by reference to Exhibit 3.1 to the Company’s Form 10-Q filed on August 6, 2007.) 3.6 Certificate of Amendment to By-Laws dated February 26, 2008. (Incorporated by reference to Exhibit 3.6 to the Company’s Form 10-K filed on March 10, 2009.) 3.7 Certificate of Amendment to Certificate of Incorporation dated July 8, 2010, as filed and recorded with the Secretary of State of the State of Delaware on July 12, 2010. (Incorporated by reference to Exhibit 3.1 to the Company’s Form 10-Q filed on November 12, 2010.) 4.1 Form of Series A Warrants to Securities Purchase Agreement dated as of July 8, 2010. (Incorporated by reference to Exhibit 4.1 to Form 8-K/A filed on July 9, 2010.) 4.2 Form of Series B Warrants to Securities Purchase Agreement dated as of July 8, 2010. (Incorporated by reference to Exhibit 4.2 to Form 8-K filed on July 8, 2010.) 10.1 Innovaro Amended and Restated Employee Stock Option Plan. (Incorporated by reference to Exhibit A filed with the Company’s Proxy Statement filed on April 16, 2010.) 71 Table of Contents 10.2 UTEK Corporation Amended and Restated Non-Qualified Stock Option Plan. (Incorporated by reference to Exhibit C to the Company’s Proxy Statement filed on April 29, 2004.) 10.3 Form of Incentive Stock Option Agreement. (Incorporated by reference to Exhibit 10.1 to the Company’s Form 10-Q filed on August 9, 2005.) 10.4 Innovaro Restricted Stock Plan. (Incorporated by reference to Exhibit B filed with the Company’s Proxy Statement filed on April 16, 2010.) 10.5 Employment Agreement between UTEK Corporation and Sam Reiber dated February 5, 2010. (Incorporated by reference to Exhibit 10.2 to the Company’s Form 8-K filed on February 8, 2010.) 10.6 Employment Agreement between UTEK Corporation and Peter Skarzynski dated April 17, 2008. (Incorporated by reference to Exhibit 10.20 to the Company’s Form 10-K filed on March 22, 2010.) 10.7 UTEK – Strategos Bonus Plan dated April 10, 2008. (Incorporated by reference to Exhibit 10.21 to the Company’s Form 10-K filed on March 22, 2010.) 10.8 Separation Agreement between UTEK Corporation and Clifford M. Gross, Ph.D. dated April 8, 2009. (Incorporated by reference to Exhibit 10.1 to the Company’s Form 8-K filed on April 13, 2009.) 10.9 Separation Agreement and Release between Innovaro, Inc. and Doug Schaedler dated August 23, 2010. (Incorporated by reference to Exhibit 10.6 to the Company’s Form 10-Q filed on November 12, 2010.) 10.10 Consulting Agreement between Innovaro, Inc. and Asa Lanum of The CTO Group dated August 13, 2010. (Incorporated by reference to Exhibit 10.7 to the Company’s Form 10-Q filed on November 12, 2010.) 10.11 Note and Warrant Purchase Agreement between UTEK Corporation and Gators Lender, LLC dated October 22, 2009. (Incorporated by reference to Exhibit 10.1 to the Company’s Form 8-K filed on October 28, 2009.) 10.12 $1,750,000 Promissory Note between UTEK Corporation, UTEK Real Estate Holdings, Inc. and Gators Lender, LLC dated October 22, 2009. (Incorporated by Reference to Exhibit 10.2 to the Company’s Form 8-K filed on October 28, 2009.) 10.13 Warrant Agreement between UTEK Corporation and Gators Lender, LLC dated October 22, 2009. (Incorporated by reference to Exhibits 10.3 to the Company’s Form 8-K filed on October 28, 2009.) 10.14 Absolute Guaranty of Payment and Performance by Cortez 114, LLC, Ybor City Group, Inc., 22 nd Street of Ybor City, Inc., ABM of Tampa Bay, Inc. and UTEK Europe, Ltd. in favor of Gators Lender, LLC dated October 22, 2009. (Incorporated by reference to Exhibit 10.4 to the Company’s Form 8-K filed on October 28, 2009.) 10.15 Mortgage and Security Agreement by Cortez, LLC for the benefit of Gators Lender, LLC dated October 22, 2009. (Incorporated by reference to Exhibit 10.5 to the Company’s Form 8-K filed on October 28, 2009.) 10.16 Environmental Indemnity Agreement by UTEK Corporation, UTEK Real Estate Holdings, Inc. and Cortez 114, LLC in favor of Gators Lender, LLC dated October 22, 2009. (Incorporated by reference to Exhibit 10.6 to the Company’s Form 8-K filed on October 28, 2009.) 10.17 Substitution of Collateral Agreement among UTEK Corporation, UTEK Real Estate Holdings, Inc., Cortez 114, LLC and Gators Lender, LLC dated February 26, 2010. (Incorporated by reference to Exhibit 10.1 to the Company’s Form 8-K filed on March 5, 2010.) 10.18 Membership Interest Pledge Agreement among UTEK Real Estate Holdings, Inc., Cortez 114, LLC and Gators Lender, LLC dated February 26, 2010. (Incorporated by reference to Exhibit 10.2 to the Company’s Form 8-K filed on March 5, 2010.) 72 Table of Contents 10.19 Amended and Restated Promissory Note made by UTEK Real Estate Holdings, Inc. in favor of Gators Lender, LLC dated February 26, 2010. (Incorporated by reference to Exhibit 10.3 to the Company’s Form 8-K filed on March 5, 2010.) 10.20 Release of Mortgage by Gators Lender, LLC for the benefit of Cortez 114, LLC dated February 26, 2010. (Incorporated by reference to Exhibit 10.4 to the Company’s Form 8-K filed on March 5, 2010.) 10.21 $3,000,000 Promissory Note between Ybor City Group, Inc. and The Bank of Tampa dated May 1, 2008. (Incorporated by reference to Exhibit 10.17 to the Company’s Form 10-K filed on March 22, 2010.) 10.22 $1,500,000 Mortgage and $1,500,000 Mortgage Note between Ybor City Group, Inc. and Jacob M. Buchman, Trustee dated September 30, 2005. (Incorporated by reference to Exhibit 10.18 to the Company’s Form 10-K filed on March 22, 2010.) 10.23 Note and Mortgage Modification Agreement between Ybor City Group, Inc., 22 nd Street of Ybor City, Inc., and ABM of Tampa Bay, Inc. and Jacob M. Buchman, Trustee dated February 16, 2007. (Incorporated by reference to Exhibit 10.19 to the Company’s Form 10-K filed on March 22, 2010.) 10.24 Limited Liability Company Agreement for Verdant Ventures Advisors, LLC dated April 14, 2010 by among Verdant Ventures Managers, LLC, Silicon Prairie Partners, LLC and UTEK Corporation. (Incorporated by reference to Exhibit 10.1 to the Company’s Form 10-Q filed on August 10, 2010.) 10.25 Securities Purchase Agreement dated July 8, 2010 by and among UTEK Corporation and three institutional investors. (Incorporated by reference to Exhibit 10.1 to the Company’s Form 8-K filed on July 8, 2010.) 10.26 Form of Amendment to Securities Purchase Agreement. (Incorporated by reference to Exhibit 10.2 to the Company’s Form 8-K/A filed on July 9, 2010.) 10.27* Amendment to the Amended and Restated Stock Purchase Agreement dated December 3, 2010 by and among Strategos, Inc. and Innovaro, Inc. 10.28* Promissory Note and Assignment and Security Agreement between Innovaro, Inc and Mark Berset dated December 27, 2010. 11.1 Computation of per share earnings is included in Item 8 of this Form 10-K. 21.1* List of subsidiaries of Innovaro, Inc. 31.1* Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350. 31.2* Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350. 32.1* Certification of the Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350. 32.2* Certification of the Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350. * Filed Herewith. 73 Table of Contents SIGNATURES Pursuant to the requirements of Section 13 or 15(d) Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized on March 30, 2011. INNOVARO, INC. By: /s/ A SA L ANUM Asa Lanum Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the Registrant in the capacities and on the dates indicated. Signature Title (Capacity) Date / S / A SA L ANUM Asa Lanum Chief Executive Officer (Principal Executive Officer) March 30, 2011 / S / C AROLE R. W RIGHT Carole R. Wright Chief Financial Officer (Principal Financial and Accounting Officer) March 30, 2011 / S / C HARLES P OPE Charles Pope Chairman March 30, 2011 / S / J OHN M ICEK John Micek Director March 30, 2011 / S / M ARK B ERSET Mark Berset Director March 30, 2011 / S / H ENRY C HESBROUGH Henry Chesbrough Director March 30, 2011 / S / M ARK R ADCLIFFE Mark Radcliffe Director March 30, 2011 74