Innovaro, Inc. 10-K

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.