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UNITED STATES SECURITIES AND EXCHANGE COMMISSION

 

WASHINGTON, DC 20549

 

FORM 10-Q

 

Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

 

For Quarter Ended: September 30, 2012

 

Commission File Number: 814-00720

 

 

INVENT Ventures, INC.

(Exact name of registrant as specified in its charter)

 

Nevada 20-5655532
(State or Jurisdiction of (IRS Employer ID No)
Incorporation or Organization)  

 

3651 Lindell Road, Suite D #146, Las Vegas, NV 89103

(Address of principal executive office) (zip code)

 

(702) 943-0320

(Issuer’s telephone number)

 

Los Angeles Syndicate of Technology, Inc.

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

 

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

 

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

 

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

 

Large accelerated filer ¨   Accelerated filer ¨   Non-accelerated filer x   Smaller reporting company ¨

 

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

 

The number of shares outstanding of registrant’s common stock, par value $.001 per share, as of November 8, 2012, is 36,928,197.

 

 
 

 

INVENT Ventures, Inc.

 

INDEX

 

    Page
No.
     
Part I Financial Information  
     
Item 1: Condensed Financial Statements  
   
  Statements of Net Assets as of September 30, 2012 and December 31, 2011 3
  Statements of Operations – For the Three Months Ended September 30, 2012 and 2011 4
  Statements of Operations – For the Nine Months Ended September 30, 2012 and 2011 5
  Statements of Cash Flows – For the Nine Months Ended September 30, 2012 and 2011 6
  Statements of Changes in Net Assets – For the Nine Months Ended September 30, 2012 and 2011 7
  Financial Highlights – For the Nine Months Ended September 30, 2012 and 2011 8
  Schedule of Investments as of September 30, 2012 9
  Schedule of Investments as of December 31, 2011 10
  Notes to Condensed Financial Statements 11
Item 2: Managements' Discussion and Analysis of Financial Condition and Results of Operations 27
Item 3: Quantitative and Qualitative Disclosure about Market Risk 33
Item 4: Controls and Procedures 33
     
Part II Other Information 34
     
Item 1: Legal Proceedings 34
Item 1A: Risk Factors 34
Item 2: Unregistered Sales of Equity Securities and Use of Proceeds 34
Item 3: Defaults Upon Senior Securities 34
Item 4: Mine Safety Disclosures 34
Item 5: Other Information 34
Item 6: Exhibits 35
Signatures 36

 

2
 

 

PART 1: FINANCIAL INFORMATION

ITEM1: FINANCIAL STATEMENTS

 

INVENT Ventures, Inc.

(Formerly Known As Los Angeles Syndicate of Technology, Inc.)

Statements of Net Assets (Liabilities)

September 30, 2012 (unaudited) and December 31, 2011

 

   2012   2011 
   (Unaudited)   Restated 
ASSETS          
Investments in portfolio companies:          
Controlled (cost $446,135 at September 30, 2012 and $411,004 at December 31, 2011)  $10,514,964   $11,659,497 
Total investments   10,514,964    11,659,497 
Cash   47,321    11,462 
Prepaid expenses   152,464    - 
Office furniture and equipment, net   10,572    9,803 
Purchased Software   350,000      
Other assets   8,600    8,600 
           
TOTAL ASSETS   11,083,921    11,689,362 
           
LIABILITIES          
Accounts payable, trade   31,592    5,445 
Amounts due to related parties   106,591    120,990 
Notes payable   4,933    - 
Accrued payroll expenses   417,633    - 
           
TOTAL LIABILITIES   560,749    126,435 
           
NET ASSETS  $10,523,172   $11,562,927 
           
Commitments and contingencies (Note 9)          
           
COMPOSITION OF NET ASSETS:          
Common stock, $.001 par value, authorized 100,000,000 shares; 36,800,697 and 35,375,697 shares issued and outstanding at September 30, 2012 and December 31, 2011   36,801    35,376 
Additional paid in capital   4,270,850    3,547,275 
Stock subscription receivable   (13,300)   (15,100)
Accumulated deficit:        - 
Accumulated net operating loss   (3,491,783)   (2,908,872)
Net realized (loss) on investments   (344,245)   (344,245)
Net unrealized appreciation of investments   10,064,849    11,248,493 
NET ASSETS  $10,523,172   $11,562,927 
           
NET ASSET VALUE PER SHARE  $0.29   $0.33 

 

See accompanying notes to financial statements.

 

3
 

 

INVENT Ventures, Inc.

(Formerly Known As Los Angeles Syndicate of Technology, Inc.)

Statements of Operations

Three Months Ended September 30, 2012 and 2011

(Unaudited)

 

   2012   2011 
         
Investment Income:          
From controlled investments:          
Management fees  $31,150   $25,000 
           
Total revenues   31,150    25,000 
Expenses:          
Officer and employee compensation   136,620    11,720 
Professional fees   79,657    9,875 
Director fees   1,000    750 
Rent   7,420    6,580 
Office supplies and expenses   2,722    3,053 
Other general and administrative expense   26,307    7,814 
Interest expense   94    - 
           
Total expenses   253,820    39,792 
           
Other income (expense)   2,600      
           
Loss before income taxes   (220,070)   (14,792)
           
Net loss from operations   (220,070)   (14,792)
           
Net realized and unrealized gains (losses):          
Net realized loss on investments, net of income taxes of none          
Controlled   -    - 
Non-controlled / Non-Affiliate   -    - 
Change in unrealized appreciation (depreciation) of investments, net of deferred tax of none          
Controlled   (195,787)   (54,023)
Net realized and unrealized gains (losses)   (195,787)   (54,023)
           
Net (decrease) in net assets (liabilities) from operations  $(415,857)  $(68,815)
           
Net (decrease) in net assets (liabilities) from operations per share, basic and diluted  $(0.01)  $(0.00)
           
Weighted average common shares outstanding, basic and diluted   36,441,675    34,769,529 

 

See accompanying notes to financial statements.

 

4
 

 

INVENT Ventures, Inc.

(Formerly Known As Los Angeles Syndicate of Technology, Inc.)

Statements of Operations

Nine Months Ended September 30, 2012 and 2011

(Unaudited)

 

   2012   2011 
         
Investment Income:          
From controlled investments:          
Management fees  $73,150   $82,500 
Interest   987    - 
           
Total revenues   74,137    82,500 
Expenses:          
Officer and employee compensation   409,860    80,120 
Professional fees   163,209    36,123 
Director fees   1,000    3,000 
Rent   23,074    20,513 
Office supplies and expenses   8,189    7,270 
Other general and administrative expense   54,183    24,397 
Interest expense   133      
           
Total expenses   659,648    171,423 
           
Loss before income taxes   (585,511)   (88,923)
Other income (expense)   2,600      
           
Income tax (benefit)   -    (27,000)
           
Net loss from operations   (582,911)   (115,923)
           
Net realized and unrealized gains (losses):          
Net realized loss on investments, net of income taxes of none          
Controlled   -    - 
Non-controlled / Non-Affiliate   -    (393)
Change in unrealized appreciation (depreciation) of investments, net of deferred tax of none in 2012 and 2011          
Controlled   (1,183,644)   2,808,778 
Non-controlled / Non-Affiliate   -    - 
Net realized and unrealized gains (losses)   (1,183,644)   2,808,385 
           
Unrealized appreciation income tax adjustment (See Note 7)        2,612,000 
Net increase (decrease) in net assets (liabilities) from operations  $(1,766,555)  $5,304,462 
           
Net increase (decrease) in net assets (liabilities) from operations per share, basic and diluted  $(0.05)  $0.15 
           
Weighted average common shares outstanding, basic and diluted   35,818,744    34,929,246 

 

See accompanying notes to financial statements.

5
 

 

INVENT Ventures, Inc.

(Formerly Known As Los Angeles Syndicate of Technology, Inc.)

Statements of Cash Flows

Nine Months Ended September 30, 2012 and 2011

(Unaudited)

 

   2012   2011 
Cash flows from operating activities:          
Net increase (decrease) in net assets (liabilities) from operations  $(1,766,555)  $5,304,462 
Adjustments to reconcile net increase (decrease) in net assets from operations to net cash used by operating activities:          
Change in net unrealized depreciation (appreciation) of investments   1,183,644    (2,808,778)
Net realized (gain) loss on investments   -    393 
Deferred income taxes   -    (2,585,000)
Advances to portfolio companies   (39,110)   (187,218)
Depreciation and amortization   2,287    2,277 
Changes in operating assets and liabilities:          
Deposits and prepaid expenses   (7,851)   (2,000)
Non-cash consulting expenses   105,387      
Increase in accounts payable   26,147    9,300 
Increase in accrued liabilities   417,633      
Decrease in amounts due to related parties   (14,399)   (31,568)
Issuance of notes payable   4,933    - 
Net cash used by operating activities   (87,884)   (298,132)
Cash flows from investing activities:          
Purchase of furniture and equipment   (3,056)   - 
Net cash used in investing activities   (3,056)   - 
Cash flows from financing activities:          
Proceeds from issuance of common stock   125,000    277,500 
Collection of stock subscriptions   1,800    52,650 
Net cash provided by financing activities   126,800    330,150 
Net increase in cash and cash equivalents   35,860    32,018 
Cash, beginning of period   11,462    374 
Cash, end of period  $47,322   $32,392 
           
Supplemental Cash Flow Information:          
           
Non-cash investing and financing activities:          
Common stock issued in exchange for:          
Amounts due related parties   -    175,000 
Stock subscriptions receivable cancelled   -    12,000 
Purchase of portfolio company rescinded   -    65,000 
Asset Purchases   350,000    - 
Consulting services (Note 5)   250,000    - 

 

See accompanying notes to financial statements.

 

6
 

 

INVENT Ventures, Inc.

(Formerly Known As Los Angeles Syndicate of Technology, Inc.)

Condensed Statements of Changes in Net Assets (Liabilities)

Nine Months Ended September 30, 2012 and 2011

(Unaudited)

 

   2012   2011 
Changes in net assets (liabilities) from operations:          
Net loss from operations  $(582,911)  $(115,923)
Net realized loss on sale of investments   -    (393)
Change in net unrealized appreciation (depreciation) of investments, net   (1,183,644)   2,808,778 
Unrealized appreciation income tax adjustment (1)   -    2,612,000 
Related party share transfers for non-cash consulting expenses   250,000      
Net increase (decrease) in net assets (liabilities) from operations   (1,516,555)   5,304,462 
           
Capital stock transactions:          
Common stock issued:          
Cash   125,000    277,500 
Amount due shareholder   -    175,000 
Asset purchases   350,000      
Stock subscriptions collected   1,800    52,650 
Rescission of investment acquisition   -    (65,000)
Net increase in net assets from stock transactions   476,800    440,150 
           
Net increase (decrease) in net assets (liabilities)   (1,039,755)   5,744,612 
Net assets (liabilities), beginning of period   11,562,927    5,829,470 
Net assets (liabilities), end of period  $10,523,172   $11,574,082 

 

(1) From incorporation through December 31, 2010, the Company was taxed as a corporation under Subchapter C of the Internal Revenue Code of 1986, (the “Code”). Effective January 1, 2011, the Company has elected to be treated for tax purposes as a regulated investment company, or RIC, under the Code (see Note 7).

 

See accompanying notes to financial statements.

 

7
 

 

INVENT Ventures, Inc.

(Formerly Known As Los Angeles Syndicate of Technology, Inc.)

Financial Highlights

Nine Months Ended September 30, 2012 and 2011

(Unaudited)

 

   2012   2011 
         
PER SHARE INFORMATION          
Net asset (liability) value, beginning of period  $0.33   $0.16 
Net decrease from operations   (0.02)   (0.00)
Net change in realized gains (losses) and unrealized appreciation (depreciation) of investments   (0.04)   0.08 
Net increase from changes in deferred liabilities (1)   -    0.07 
Net increase from stock transactions (2)   0.01    0.02 
Share transfers for non-cash consulting expenses   0.01      
           
Net asset (liability) value, end of period  $0.29   $0.33 
           
Per share market value:          
Beginning of period  $0.53   $0.85 
End of period  $0.67   $0.85 
          
Investment return, based on change in market price from beginning to end of period (3)   26.4%   0.0%
           
RATIOS/SUPPLEMENTAL DATA          
           
Net assets (liabilities), end of period  $10,523,172   $11,574,082 
Average net assets (liabilities)   11,043,050    10,606,258 
Annualized expenses   879,531    229,193 
Annualized net increase (decrease) in net assets (liabilities) from operations   (2,355,407)   7,092,046 
Annualized ratio of expenses to average net assets (liabilities)   8.0%   2.2%
Annualized ratio of net increase (decrease) in net assets (liabilities) from operations to average net assets (liabilities)   (21.3)%   66.9%
Shares outstanding at end of period   36,800,697    35,225,697 
Weighted average shares outstanding during period   35,818,744    34,929,246 

 

(1) From incorporation through December 31, 2010, the Company was taxed as a corporation under Subchapter C of the Internal Revenue Code of 1986, (the “Code”). Effective January 1, 2011, the Company has elected to be treated for tax purposes as a regulated investment company, or RIC, under the Code (see Note 7).

(2) Includes the effect of using weighted average shares outstanding during the period for components of net asset (liability) and using actual shares outstanding at the end of the period for net asset (liability) at the end of the period.

(3) Periods of less than one year are not annualized.

 

See accompanying notes to financial statements.

 

8
 

 

INVENT Ventures, Inc.

(Formerly Known As Los Angeles Syndicate of Technology, Inc.)

Schedule of Investments

September 30, 2012

 

       Percent/                  
   Date of   shares   Number of    Historical   Fair 
   acquisition   owned   Shares / Units   cost   value 
                          
Investments in controlled portfolio companies:                           
            Common    Preferred            
            Stock    Stock            
Virurl, Inc.   Sep-10    51%   5,780,000    338,422    $92,849   $1,438,983 
Stockr, Inc.   Sep-10    63%   5,666,667    -     67,671   $2,661,455 
LottoPals, Inc.   Sep-10    99%   6,000,000    -     51,712   $3,000,000 
Clowd, Inc.   Sep-10    99%   6,000,000    -     91,510   $1,486,375 
Sanguine Biosciences, Inc.   Sep-10    42%   4,000,000    -     104,006   $1,889,764 
Stocktown Productions, Inc.   Sep-10    81%   16,704,953    -     38,387   $38,387 
                     446,135    10,514,964 
                                
        Total investments    $446,135    10,514,964 
        Cash and other assets, less liabilities         8,208 
        Net asset value at September 30, 2012        $10,523,172 

  

See accompanying notes to financial statements.

 

9
 

 

INVENT Ventures, Inc.

(Formerly Known As Los Angeles Syndicate of Technology, Inc.)

Schedule of Investments

December 31, 2011

 

       Percent/             
   Date of   shares   Number of   Historical   Fair 
   acquisition   owned   Shares / Units   cost   value 
                     
Investments in controlled portfolio companies:                         
                          
Virurl, Inc.   Sep-10    64%   5,780,000   $96,398   $2,887,440 
Stockr, Inc.   Sep-10    63%   5,666,667    66,169    2,661,455 
LottoPals, Inc.   Sep-10    99%   6,000,000    40,359    3,000,000 
Clowd, Inc.   Sep-10    99%   6,000,000    85,027    2,987,551 
Sanguine Biosciences, Inc.   Sep-10    42%   4,000,000    92,902    92,902 
Stocktown Productions, Inc.   Sep-10    81%   16,704,953    30,149    30,149 
                   411,004    11,659,497 
                          
        Total investments   $411,004    11,659,497 
        Cash and other assets, less liabilities        (96,570)
        Net asset value at December 31, 2011       $11,562,927 

 

See accompanying notes to financial statements.

 

10
 

 

INVENT Ventures, Inc.

 

NOTES TO CONDENSED FINANCIAL STATEMENTS

 

NOTE 1:DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION

 

Business and Operations

 

Overview

 

INVENT Ventures, Inc. (“INVENT”) is a technology incubator located in Santa Monica, California that builds web and mobile technology companies. We develop businesses in digital media, consumer Internet, and social networking, and we own six companies at different stages of development.

 

We supply our companies with the capital to build their initial product, and provide hands-on support services to reduce startup costs and accelerate time to market. Our services include product development and design, corporate formation and structure, and exposure to additional financing. INVENT also provides office space, financial and accounting resources, marketing and branding, and legal guidance. By offering these services, we enable our network of entrepreneurs to focus on developing their products. We believe that this structure offers the most value for entrepreneurs and the highest return potential to investors, and results in efficiencies in how companies are built and brought to market.

 

Our mission is to foster technology innovation in Los Angeles by partnering with the most talented entrepreneurs in southern California and providing them with the capital and tools to bring our ideas to market. Los Angeles has no shortage of entrepreneurs or innovation, but we believe that it currently lacks the infrastructure, capital and expertise to develop these businesses as efficiently as other markets. INVENT is working to change this.

 

INVENT operates as an internally-managed, non-diversified, closed-end investment company that has elected to be treated as a business development company (“BDC”) under the Investment Company Act of 1940. From incorporation through December 31, 2010, the Company was taxed as a corporation under Subchapter C of the Internal Revenue Code of 1986, (the “Code”). Effective January 1, 2011, the Company has elected to be treated for tax purposes as a regulated investment company, or RIC, under the Code (see Note 7).

 

11
 

 

History

 

The Company, formerly Bay Street Capital (“BSC”), Small Cap Strategies (“SCS”), and Photonics Corporation (“Photonics”), was re-domiciled in Nevada through a reverse merger effective on September 30, 2006 where Photonics, a California corporation, merged into Small Cap Strategies, Inc., a Nevada corporation, with SCS being the surviving entity. The effect of this corporate action was to change the Company’s state of incorporation from the State of California to the State of Nevada.

 

On March 7, 2006, the Company filed a notification under Form N54a with the SEC indicating our election to be regulated as a business development company under the 1940 Act.

 

On November 24, 2008, the Company filed Form N-54C with the Securities and Exchange Commission (“SEC”) to notify the SEC of the withdrawal of our previous election to be regulated as a Business Development Company (“BDC”) under the Investment Company Act of 1940 (the “1940 Act”).

 

The Board of Directors resolved on November 15, 2009 that the Company would again pursue the business model of an investment and management company. On April 12, 2010, we filed Form N-54a with the SEC to elect to be treated as a BDC governed under the Investment Act of 1940.

 

On July 20, 2010, the Company’s Board of Directors unanimously approved and a majority of shareholders consented to a Name Change to Bay Street Capital, Inc. and authorized the Company to enact a 1-for-50 reverse stock split of the Company’s outstanding Common Stock. Both corporate actions were effective on August 31, 2010.

 

On September 24, 2010, the Company’s Board of Directors unanimously approved and a majority of shareholders consented to a name change to Los Angeles Syndicate of Technology, Inc. The name change was effective on October 14, 2010.

 

On July 20, 2012, the Company’s Board of Directors and stockholders holding a majority of our voting shares authorized the following actions:

 

·The amendment of our Articles of Incorporation to change our corporate name to INVENT Ventures, Inc. (the “Name Change”). The Name Change was effective on Septemer 19, 2012;

 

·Request to FINRA that our stock symbol be changed from “LAST” to “IDEA” (the “Symbol Change”). Our stock symbol was temporarily changed by FINRA to “LASTD” until October 19, 2012 when it permenantly changed to “IDEA”;

 

·The implementation of a forward stock split of our common stock issued and outstanding where every one (1) share of our common stock owned by a stockholder automatically changed into and become three (3) new shares of our common stock (the “Forward Stock Split”). The Forward Stock Split became effective on September 19, 2012.

 

12
 

 

Following the Forward Stock Split, there were 36,800,697 shares outstanding as of September 30, 2012.

 

The Company currently operates as an internally managed closed-end non-diversified Business Development Company and is traded under the symbol “IDEA” (temporarily traded under the ticker “LASTD” until October 15, 2012).

 

Pursuant to Regulation S-X, Rule 6, the Company operates on a non-consolidated basis. Operations of portfolio companies are reported at the portfolio company level and only the appreciation or impairment of these investments is included in the Company’s financial statements.

 

Unaudited Condensed Interim Financial Statements Basis of Presentation

 

Interim financial statements are prepared in accordance with accounting principles generally accepted in the United States (GAAP) for interim financial information and pursuant to the requirements for reporting on Form 10-Q and Article 10 of Regulation S-X. Accordingly, certain disclosures accompanying annual financial statements prepared in accordance with GAAP are omitted. In the opinion of management, all adjustments necessary for the fair presentation of financial statements for the interim periods have been included. The current period’s results of operations are not necessarily indicative of results that ultimately may be achieved for the year. The interim unaudited financial statements and notes thereto should be read in conjunction with the financial statements and notes thereto included in the Company’s Form 10-K for the fiscal year ended December 31, 2011, as filed with the Securities and Exchange Commission.

 

The accompanying financial statements reflect the accounts of INVENT and the related results of its operations. In accordance with Article 6 of Regulation S-X under the Securities Act of 1933 and Securities Exchange Act of 1934, the Company does not consolidate portfolio company investments in which the Company has a controlling interest.

 

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GOING CONCERN

 

The Company incurred a loss from operations of $582,911 during the nine months ended September 30, 2012. The Company’s sources of cash flow have been from the sale of the Company’s common stock, management fees from portfolio companies, and loans from the CEO.

 

The Company actively monitors its financing needs and intends to seek funds through private placements of common stock to meet its operating expense requirements and to meet the initial funding requirements of its controlled portfolio companies. If the Company is unable to continue to raise sufficient capital to meet its operating needs or generate cash flow from operations, substantial doubt exists regarding the Company's ability to continue as a going concern.

 

The financial statements do not include any adjustments that may result from the outcome of these uncertainties.

 

NOTE 2:SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Basis of Presentation

 

Pursuant to Regulation S-X, Rule 6, the Company operates, and will to operate on a non-consolidated basis.

 

Management Estimates

 

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that 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 revenues and expenses during the reporting period. Actual results could differ from those estimates.

 

Cash and Cash Equivalents

 

For purposes of the statements of cash flows, the Company considers all highly liquid investments purchased with an original maturity date of three months or less to be cash equivalents. None of the Company’s cash is restricted.

 

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Net Increase (Decrease) in Net Assets (Liabilities) from Operations Per Share (Earnings (Loss) per Share)

 

The Company is required to report both basic earnings per share, which is based on the weighted-average number of common shares outstanding, and diluted earnings per share, which is based on the weighted-average number of common shares outstanding plus all potentially dilutive shares outstanding. At September 30, 2012 and 2011, there are no potentially dilutive common stock equivalents. Accordingly, no common stock equivalents are included in the earnings (loss) per share calculations and basic and diluted earnings per share are the same for all periods presented.

 

Valuation of Investments (as an Investment Company)

 

As a BDC, we are regulated by the Investment Company Act of 1940 (the “Act”). Section 2(a)(41) of the Act defines Value as (i) the market price for those securities for which a market quotation is readily available and (ii) for all other securities and assets, fair value is determined in good faith by the Board of Directors (“BOD”). We expect that few, if any, of our portfolio companies will have market quotations, and as such, we expect to rely on market transactions involving our portfolio companies and the fair value determined in good faith by our BOD for the valuation of our portfolio companies. Prior to our conversion a BDC, only marketable debt and equity securities and certain derivative securities were required to be carried at market value.

 

Portfolio assets for which market prices are available are valued at those prices. Securities that are traded in the over-the-counter market or on a stock exchange generally will be valued at the prevailing bid price on the valuation date. However, some of the Company’s current investments were acquired in privately negotiated transactions and may have no readily determinable market values. These securities are carried at fair value as determined by the BOD and outside professionals as necessary under the Company’s valuation policy. Currently, the valuation policy provides for management’s review of the management team, financial conditions, and products and services of the portfolio company. In situations that warrant such an evaluation, an independent business valuation may be obtained.

 

Income Taxes

 

The Company intends to operate so as to qualify to be taxed as a RIC under Subchapter M of the Code and, as such, will not be subject to federal income tax on the portion of taxable income and gains distributed to stockholders (See Note 7).

 

As of September 30, 2012 and 2011, the Company had no accrued interest or penalties relating to any tax obligations. The Company currently has no federal or state examinations in progress, nor has it had any federal or state tax examinations since its inception. The last three years of the Company's tax returns are subject to federal and state tax examination.

 

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Comprehensive Income

 

All items required to be recognized under accounting standards as components of comprehensive income are required to be reported in a financial statement that is displayed with the same prominence as other financial statements. Standards require that an enterprise (a) classify items of other comprehensive income by their nature in financial statements and (b) display the accumulated balance of other comprehensive income separately in the equity section of the balance sheet for all periods presented. The Company’s comprehensive income (loss) does not differ from its reported net income (loss).

 

As an investment company, the Company must report changes in the fair value of its investments outside of its operating income on its statement of operations and reflect the accumulated appreciation or depreciation in the fair value of its investments as a separate component of its stockholders’ deficit.

 

Fair Value of Financial Instruments

 

Disclosure of fair value information about financial instruments is required when it is practicable to estimate that value. The carrying amounts of the Company’s cash, marketable equity securities, accounts receivable and accounts payable approximate their estimated fair value due to the short-term maturities of these financial instruments and because related interest rates offered to the Company approximate current rates.

 

Fixed Assets

 

Fixed assets are stated at cost, less accumulated depreciation or amortization. Depreciation is recorded using the straight-line method over the estimated useful lives of the respective assets (generally five and seven years). The carrying amount of our fixed assets, primarily consisting of purchased software, computers, electronics and other office furniture, is evaluated periodically to determine if adjustment to the depreciation or amortization period or the unamortized balance is warranted. Based upon its most recent analysis, the Company believes that no impairment of any of its fixed assets exist at September 30, 2012 and December 31, 2011. 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 in operations.

 

Stock Based Compensation

 

The compensation cost relating to share-based payment transactions (including the cost of all employee stock options) is required to be recognized in the financial statements. That cost will be measured based on the estimated fair value of the equity or liability instruments issued. The Company’s financial statements reflect an expense for all share-based compensation arrangements granted on or after January 1, 2006 and for any such arrangements that are modified, cancelled or repurchased after that date, based on the grant-date estimated fair value.

 

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As of September 30, 2012 and December 31, 2011, there were zero options outstanding under any of the Company’s equity compensation plans. These options expired in September 2011.

 

Concentration of Credit Risk

 

Cash is maintained at financial institutions. The Federal Deposit Insurance Corporation (“FDIC”) insures accounts at each institution for up to $250,000. At times, cash balances may exceed the FDIC insurance limit of $250,000.

 

Recent Accounting Pronouncements

 

There are several new accounting pronouncements issued by the Financial Accounting Standards Board ("FASB") which are not yet effective. Each of these pronouncements, as applicable, has been or will be adopted by the Company. At September 30, 2012, none of these pronouncements is expected to have a material effect on the financial position, results of operations or cash flows of the Company.

 

Current Year Adjustments

 

Certain reclassifications have been made in the accompanying financial statements to reflect changes in expense categorization during the quarter ended March 31, 2012. Prior period amounts have been restated to reflect the reclassification and the resulting reduction of legal fees incurred in the quarter ended March 31, 2012.

 

NOTE 3:INVESTMENTS AND VALUATION

 

The Company’s investment securities are summarized as follows at September 30, 2012 and December 31, 2011, the valuation of which are all based on Level 3 inputs:

 

   2012   2011 
         
Cost  $446,135   $411,004 
Unrealized appreciation (depreciation)   10,068,829    11,248,493 
Fair market value  $10,514,964   $11,659,497 

 

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We follow Accounting Standards Codification (‘‘ASC’’) Topic 820 — Fair Value Measurements and Disclosures (“Topic 820”) for measuring the fair value of portfolio investments. Fair value is the price that would be received in the sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Where available, fair value is based on observable market prices or parameters, or derived from such prices or parameters. Where observable prices or inputs are not available, valuation models are applied. These valuation models involve a degree of management estimation and judgment, the degree of which is dependent on the price transparency for the instruments or market and the instruments’ complexity.

 

Our fair value analysis includes an analysis of recent capital transactions with unrelated investors, the future cash flow projections of our investments, value of intellectual property and other proprietary assets. Financial investments recorded at fair value in the Company’s financial statements are categorized for disclosure purposes based upon the level of judgment associated with the inputs used to measure their value. The valuation hierarchical levels are based upon the transparency of the inputs to the valuation of the investment as of the measurement date. Topic 820 provides the following description of the three levels:

 

Level 1:     Inputs are unadjusted, quoted prices in active markets for identical financial instruments at the measurement date.

 

Level 2:     Inputs include quoted prices for similar financial instruments in active markets and inputs that are observable for the financial instruments, either directly or indirectly. Level 2 inputs also include inputs, other than quoted prices, that are observable for the asset or liability being valued, either directly or indirectly.

 

Level 3:     Inputs include unobservable inputs for the asset or liability. The inputs into the determination of fair value are based upon the best information available and require management judgment.

 

In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, an investment’s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement. Our assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment, and we consider factors specific to the investment.

 

The following section describes the types of inputs we use for level 3 within the fair value hierarchy in which the investment is categorized, and the valuation techniques we use to measure the fair value of our investments.

 

Level 3 inputs we use include the terms of recent capital transactions with unrelated investors, financial statement metrics of comparable companies, nonfinancial-statement metrics of comparable companies, projected cash flows of our investments, applicable discount rates, the value of developed intellectual property, the value of the domain name and other proprietary assets.

 

At September 30, 2012, all of our portfolio investments are valued based on level 3 inputs.

 

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FASB provides guidance on the determination of fair value. Accounting Standards Codification Topic 820 establishes a framework for measuring fair value that includes three distinct valuation techniques, (i) the Market Approach, (ii) the Income Approach and (iii) the Asset Approach. There is no single standard for determining fair value in good faith under any of these approaches, and as a result, determining fair value requires judgment be applied to the facts and circumstances of each of our portfolio investments. Topic 820 notes that in some cases the use of multiple valuation techniques will be appropriate. Under such circumstances, Topic 820 recommends that the results of the various techniques be evaluated and weighted appropriately. For investments where multiple valuation techniques are used to measure fair value, management evaluates and weights the results, considering the reasonableness of the range indicated by those results.

 

Following are descriptions of each technique and how we apply them to our portfolio companies.

 

·Market Approach. The market approach uses prices and other relevant information generated by market transactions involving our portfolio companies, or identical or comparable assets or liabilities. Common applications of this approach include our use of the valuation implied by market transactions in our portfolio companies and market multiples derived from a set of comparable companies. When determining fair value under the Market Approach, we often draw from the terms of recent capital transactions with unrelated investors.

 

·Income Approach. The income approach incorporates estimates of future cash flows or earnings and discounts them to a single present value based on current market expectations. Under the Income Approach we apply multiple discounted cash flow (“DCF”) methods to derive estimates of fair value.

 

·Asset Approach. The asset approach is based on the fair value of the portfolio company’s assets less the fair value of its liabilities. When applying this approach, we evaluate (1) the aggregate amount of capital invested by INVENT in such company (our “Cost Basis”), and (2) the fair value of the company’s assets less the fair value of the company’s liabilities.

 

As an investment company, the Company will invest in illiquid securities including equity securities of private companies. The structure of each equity security is specifically negotiated to enable the Company to protect its investment and maximize its returns. The Company’s investments are generally subject to some restrictions on resale and generally have no established trading market.

 

We expect that the majority of our investments will continue to be recorded at fair value based on Level 2 and Level 3 inputs and values determined in good faith by our Board of Directors utilizing the input of our management and advisory board. With respect to investments for which market quotations are not readily available, we undertake a disciplined valuation process on a quarterly basis, which is detailed below.

 

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1.Management considers which fair value techniques are applicable based on the type of investment being valued. If applying the asset approach, our management team aggregates the costs spent to develop the business and estimates the current cost to replicate such technology by another party. Under the market approach, our management team considers all transactions involving the portfolio company, as well as examines the current valuation levels of comparable investments. When applying the income approach, our management team develops cash flow forecasts and utilizes various discounted cash flow valuation techniques to approximate fair value. Management evaluates and weights the resulting valuations, considering the reasonableness of the range indicated by those results.

 

2.Preliminary valuation conclusions are discussed with the Board of Directors and subsequently discussed with members of our advisory board.

 

3.The Board of Directors considers the proposed valuations and determines the value of our portfolio companies in good faith based on the input of our management team and our advisory board.

 

We will record unrealized depreciation on investments when we believe that an investment has decreased in value or if the collection of a loan is doubtful. Conversely, we will record unrealized appreciation if we believe that the underlying portfolio company has appreciated in value and, therefore, our investment has also appreciated in value, where appropriate.

 

At September 30, 2012, 100% of our assets represented investments in portfolio companies recorded at fair value, as determined by our Board of Directors. Due to the inherent uncertainty in determining the fair value of investments that do not have a readily available market value, the fair value of our investments determined in good faith by our Board of Directors may differ significantly from the value that would have been used had a ready market existed for such investments, and the differences could be material. Additionally, changes in the market environment and other events that may occur over the life of the investments may cause the gains or losses ultimately realized on these investments to be different than the valuations currently assigned.

 

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Our Portfolio of Investments

 

The following table represents our schedule of our controlled investments as of September 30, 2012.

 

Company  Industry  Sub-Industry  % Owned   Market Value 
               
Virurl, Inc.  Web-based tech  Advertising   51%   1,438,983 
Stockr, Inc.  Web-based tech  Financial Services   63%   2,661,455 
LottoPals, Inc.  Web-based tech  Social Gaming   99%   3,000,000 
Clowd, Inc.  Web-based tech  Location-based Communication   99%   1,486,375 
Sanguine Biosciences, Inc.  Biotechnology  Life Science   42%   1,889,764 
Stocktown Productions, Inc.  Creative Arts  Productions   81%   38,387 
                 
              $10,514,964 

 

The following are descriptions of our portfolio companies.

 

1)Virurl, Inc. – virurl.com (revenue-generating)

 

Virurl, Inc. (“VIRURL”) is an online marketplace that allows brands and marketers to create instant viral advertising campaigns. The VIRURL platform enables marketers to launch viral campaigns by paying Internet users to share videos, articles, music, and other media with their friends via email, social networks, and anywhere else on the web.

 

The enormous value created for brands through peer-to-peer sharing on the web is unmatched by any form of marketing in history. VIRURL was built specifically to help marketers create and accelerate this powerful peer-to-peer effect by incentivizing sharing behavior among consumers.

 

2)Stockr, Inc. – stockr.com (LIVE)

 

Stockr, Inc. (“Stockr”) is a social network built for the stock market that allows users to see and discuss what stocks other users are trading in real time.

 

The Stockr platform empowers users to discover, share and discuss market information with investors and companies. Stockr brings identity and transparency to an otherwise anonymous environment, unveiling a new layer of market information.

 

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3)LottoPals, Inc. – lottopals.com (stealth)

 

LottoPals, Inc. (“LottoPals”) is developing web and mobile applications to allow people to play state lotteries with their friends online. Every week, millions of people play the lottery, both individually and by forming pools with friends, family and coworkers. LottoPals is bringing the lottery online, making the experience more convenient and fun.

 

4)Clowd, Inc. – clowd.com (stealth)

 

Clowd, Inc. (“Clowd”) is a communication platform that connects users based on location, not on who they know or follow. Clowd enables users to engage with those nearby from their phone to see the conversations happening at that moment. From nearby conversations among conference attendees to mobilized groups in distant countries, Clowd helps you connect with similar people in unfamiliar environments.

 

5)Sanguine Biosciences, Inc. – sanguinebio.com (revenue-generating)

 

Sanguine Biosciences, Inc. (“Sanguine”) is an international supplier of DNA data and bio-specimen to research organizations for the development of personalized medicines. Sanguine provides highly viable primary human cells and tissues to both the academic and industrial life science research communities through a new direct-to-patient platform. The current product offering spans customers’ needs in the in vitro research & development stage of drug development. Sanguine’s vision is to develop into the global leader in high quality cells and tissues for life science research and development.

 

6)Stocktown Productions, Inc. – stocktownproductions.com (revenue-generating)

 

Stocktown Productions is a creative production company based in Santa Monica, California, specializing in video, animation and visual effects. In addition to video production, Stocktown provides web design, photography and graphic design work- bringing an original style and cutting-edge concepts to each project.

 

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NOTE 4:COMPOSITION OF NET ASSETS (STOCKHOLDERS’ EQUITY)

 

Common Stock

The Company is authorized to issue 100,000,000 shares of common stock with a par value of $0.001 with each share having one voting right. There are 36,800,697 and 35,375,697 common shares outstanding at September 30, 2012 and December 31, 2011, respectively.

 

On July 20, 2012, the Company's the Board of Directors approved a resolution implementing a three-for-one forward stock split of the Company's Common Stock, which became effective on September 19, 2012.

 

During the nine months ended September 30, 2012, the Company sold 375,000 shares of its common stock for $125,000 in cash.

 

On July 27, 2012, the Company issued 1,050,000 shares to purchase various assets that enhance the services we can offer to our portfolio companies and to broaden our reach and exposure to the Northern California technology market, including relationships with entrepreneurs, advisors, angel investors, and investor relations companies (the “GGAA”). The Company has recorded these assets at their cost basis as fixed assets in the accompanying financial statements.

 

Retroactive Adjustment For Forward Stock Split 

 

On September 19, 2012, the Company effected a three-for-one forward stock split of its Common Stock. Consequently, all earnings per share and other share-related amounts and disclosures have been retroactively adjusted for this action.

 

NOTE 5:RELATED PARTY TRANSACTIONS

 

The officer and directors of the Company are involved in other business activities and may, in the future, become involved in other business opportunities as they become available. The officer and directors may face a conflict in selecting between the Company and their other business interests. The Company has not formulated a policy for the resolution of such conflicts.

 

At September 30, 2012 and December 31, 2011, the Company owed its CEO $106,592 and $120,990, respectively, for loans and expense reimbursements, which is included in due to related parties. On March 30, 2011, the Company issued its CEO 175,000 shares of its common stock in exchange for $175,000 owed to the CEO.

 

Officer’s compensation and director’s fees related to the services provided by Bryce Knight, CEO and Director of the Company, are paid directly to Knight Inc. (formerly Knight Enterprises, Inc.), a Nevada corporation 100% owned by Bryce Knight.

 

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During the quarter ended March 31, 2011 Vineet Jindal and Brendon Crawford, previously the Chief Investment Officer and Chief Technology Officer of INVENT, resigned from INVENT to assume the Chief Executive Officer and Chief Technology Officer positions, respectively, at Stockr, Inc., a majority owned portfolio company of INVENT.

 

On February 12, 2011 the Company’s Board of Directors were notified by Management that the Company would exercise its repurchase option to purchase 8,100,000 shares of Company Common Stock pursuant to its Share Purchase Agreement and Employment Agreement with Mr. Jindal. Per the terms of the agreement, INVENT repurchased 1,800,000 shares at Mr. Jindal’s cost value and then cancelled those shares. The Company transferred its right to repurchase the remaining 6,300,000 shares to employees of INVENT, who repurchased these shares at Mr. Jindal’s original cost value.

 

On February 23, 2012 and April 11, 2012, Knight, Inc., wholly owned by Bryce Knight, Chief Executive Officer of the Company, transferred 450,000 and 300,000 shares, respectively, to consultants for services to be rendered for the Company. These shares were valued at $0.33 per share (valued at $1.00 pre-split) representing the price at which shares were sold during the period. The cost is being amortized over the estimated life of the consulting agreements, generally determined to be one year except for one consultant where the cost is being amortized over 33 months.

 

INVENT currently collects $10,500 per month from VIRURL for managerial assistance provided by the Company to VIRURL.

 

NOTE 6:COMMITMENTS AND CONTINGENCIES

 

General

From time-to-time, some of the Company’s portfolio companies may receive correspondence or other notices of alleged breach of license agreement or other contract. Some of these notifications provide a period of time in which to cure an alleged breach or default. The failure of the Company’s portfolio companies to cure an alleged breach or default may have a material adverse impact on the Company’s results of operations and financial position.

 

Leases

 

The Company currently maintains its corporate office at 3651 Lindell Road, Suite D#146, Las Vegas, Nevada 89103 on a month-to-month basis. Our chief executive officer is providing the space at minimal cost.

 

In addition, we have maintained operations offices in Santa Monica, California, one of which is under a month-to-month lease. Rent expense totaled $7,420 and $6,580 in the quarters ended September 30, 2012 and 2011, respectively.

 

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The Company maintains offices on a month-to-month basis for its portfolio companies at 137 Bay Street, Santa Monica, California. These costs are classified as advances to portfolio companies.

 

NOTE 7:INCOME TAXES

 

The Company intends to operate so as to qualify to be taxed as a RIC under Subchapter M of the Code and, as such, will not be subject to federal income tax on the portion of taxable income and gains distributed to stockholders.

 

To qualify as a RIC, we are required to meet certain income and asset diversification tests. In addition, in order to be eligible for pass-through tax treatment as a RIC, we must distribute to our stockholders, for each taxable year, at least 90% of our “investment company taxable income” as defined by the Code.

 

Taxable income includes the Company’s taxable interest, dividend and fee income, as well as taxable net capital gains. Taxable income generally differs from net income for financial reporting purposes due to temporary and permanent differences in the recognition of income and expenses, and generally excludes net unrealized appreciation or depreciation, as gains or losses are not included in taxable income until they are realized.

 

In the three months ended March 31, 2011, the Company recorded two income tax adjustments to reflect the reversal of a deferred tax liability associated with unrealized gains generated by increases in value of our portfolio companies in periods prior to our RIC election as these taxes are no longer payable.

 

NOTE 8:SUBSEQUENT EVENTS

 

Subsequent events have been evaluated through November 8, 2012, the date the financial statements were available to be issued.

 

On August 10, 2012, the Company sold 127,500 shares of its common stock for $42,500 in cash.

 

On October 25, 2012, the Company entered into a consulting agreement with Overseas Investment Banking Alliance, SA, a Panamanian anonymous society (“OIBASA”). Pursuant to the Agreement, the Company issued OIBASA a warrant to purchase 1,000,000 shares of Company common stock as a retainer for its consulting services (the “OIBASA Warrant”). The OIBASA Warrant has a term of two years, an exercise price of $0.33 per share, includes registration rights and becomes exercisable upon the occurrence of events for which OIBASA is providing consulting services.

 

There were no other items that would have a material impact to the financial statements presented in this Form 10-Q

 

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NOTE 9:PRIOR YEAR ADJUSTMENTS

 

Certain reclassifications have been made in the accompanying financial statements to reflect changes in the treatment of the elimination of a deferred tax liability related to unrealized gains generated by the Company in the year ended December 31, 2010. Two income tax adjustments were applied to Statement of Operations for the period ended March 31, 2011 to reflect the elimination of the associated deferred tax liability. See Note 7: Income Taxes for more detail on these adjustments.

 

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ITEM 2:             MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

FORWARD LOOKING STATEMENTS

 

Certain statements contained in this report that are not historical fact are "forward-looking statements" as that term is defined in the Private Securities Litigation Reform Act of 1995. The words or phrases "will likely result," "are expected to," "will continue," "is anticipated," "believes," "estimates," "projects" or similar expressions are intended to identify these forward-looking statements. These statements are subject to risks and uncertainties beyond our reasonable control that could cause our actual business and results of operations to differ materially from those reflected in our forward-looking statements. The safe harbor provisions provided in the Securities Litigation Reform Act do not apply to forward-looking statements we make in this report. Forward-looking statements are not guarantees of future performance. Factors that may cause actual results to differ materially from those contemplated by our forward-looking statements include the following:

 

·our limited operating history;

 

·our ability to successfully compete with other venture capital companies in obtaining attractive portfolio companies;

 

·the general economy and its impact on our current and any future portfolio companies and the industries in which they operate;

 

·the financial condition and ability of our current and any future portfolio companies to achieve their objectives;

 

·legislative or regulatory changes may adversely affect our business and that of our portfolio companies;

 

·our operating costs may be greater than expected;

 

·we could lose key personnel, or spend a greater amount of resources attracting, retaining and motivating them than we have projected;

 

·our inability to raise additional capital if needed; and

 

·our ability to maintain our qualification as a regulated investment company and as a business development company.

 

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We based our forward-looking statements on our current expectations about future events. Although we believe that the expectations reflected in our forward-looking statements are reasonable, we cannot guarantee you that these expectations actually will be achieved. We are under no duty to update any of the forward-looking statements after the date of this filing to conform those statements to actual results. In evaluating these statements, you should consider various factors, including the Risk Factors set out in Part I, Item 1.A in our Annual Report on Form 10-K for the year ended December 31, 2011.

 

Company

INVENT Ventures, Inc. (“INVENT”) is a technology incubator located in Santa Monica, California that builds web and mobile technology companies. We develop businesses in digital media, consumer internet, and social networking, and we own six companies at different stages of development.

 

We supply our companies with the capital to build their initial product, and provide hands-on support services to reduce startup costs and accelerate time to market. Our services include product development and design, corporate formation and structure, and exposure to additional financing. INVENT also provides office space, financial and accounting resources, marketing and branding, and legal guidance. By offering these services, we enable our network of entrepreneurs to focus on developing their products. We believe that this structure offers the most value for entrepreneurs and the highest return potential to investors, and results in efficiencies in how companies are built and brought to market.

 

Our mission is to foster technology innovation in Los Angeles by partnering with the most talented entrepreneurs in southern California and providing them with the capital and tools to bring our ideas to market. Los Angeles has no shortage of entrepreneurs or innovation, but we believe that it currently lacks the infrastructure, capital and expertise to develop these businesses as efficiently as other markets. INVENT is working to change this.

 

INVENT operates as an internally-managed, non-diversified, closed-end investment company that has elected to be treated as a business development company (“BDC”) under the Investment Company Act of 1940. From incorporation through December 31, 2010, the Company was taxed as a corporation under Subchapter C of the Internal Revenue Code of 1986, (the “Code”). Effective January 1, 2011, the Company has elected to be treated for tax purposes as a regulated investment company, or RIC, under the Code (see Note 7).

 

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Critical Accounting Policies and Estimates

 

Management's Discussion and Analysis of Financial Condition and Results of Operations section discusses our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. On an on-going basis, we will evaluate our estimates and judgments, including those related to revenue recognition, valuation of investments in portfolio companies, accrued expenses, financing operations, contingencies and litigation. We will base our estimates and judgments on historical experience and on various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. We became a non-diversified internally managed, closed-end investment company under the Investment Company Act of 1940, as amended, in November 2009. Accordingly, the most significant accounting estimates inherent in the preparation of our financial statements include estimates as to the appropriate carrying value of certain assets and liabilities which are not readily apparent from other sources, such as the investments in portfolio companies. These accounting policies are described at relevant sections in this discussion and analysis and in the "Notes to Financial Statements" included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2011.

 

Results of Operations

 

Comparison of the three months ended September 30, 2012 and 2011

 

Revenues - The Company received $31,150 in management fee revenues from its controlled portfolio companies in 2012, up slightly from $25,000 for the same period in 2011. As the Company's group of portfolio companies expands and matures, the Company expects its management fee income from its portfolio companies will increase.

 

The following table details expenses for the three months ended September 30, 2012:

 

Expenses:          
Officer and employee compensation   136,620    11,720 
Professional fees   79,657    9,875 
Director fees   1,000    750 
Rent   7,420    6,580 
Office supplies and expenses   2,722    3,053 
Other general and administrative expense   26,307    7,814 
Interest expense   94    - 
Total expenses   253,820    39,792 

 

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Officer and employee compensation increased in the three months ended September 30, 2012 to $136,620. This increase reflects the Company’s initiation of monthly payroll for its executive team and the associated payroll tax expenses in the first quarter of 2012. Professional fees increased in the three months ended September 30, 2012, driven by increases in non-cash consulting expenses, marketing, investor relations and public relations expenses, partially offset by declines in legal fees, audit fees, and accounting fees. Other general and administrative expense increased in the three months ended September 30, 2012, due primarily to an increase in travel and entertainment expenses, filing fees, and insurance, partially offset by a decline in transfer agent fees.

 

The following table details the net realized and unrealized gains (losses) for the three months ended September 30, 2012 and 2011:

 

  2012   2011 
Net realized and unrealized gains (losses):          
Net realized loss on investments, net of income taxes of none   -    - 
Change in unrealized appreciation (depreciation) of investments, net of deferred tax of none in 2011 and 2010   (195,787)   (54,023)
Net realized and unrealized gains (losses)   (195,787)   (54,023)

 

On September 25, 2012, one of our portfolio companies, VIRURL, received additional preferred equity funding on the same terms as its previous preferred equity financing. Given the rights and privileges of the preferred equity relative to the common equity, the preferred equity is carried at a higher price per share than the common equity, and because the valuation at which the preferred equity was invested did not change, the relative value of VIRURL’s common equity versus its preferred equity declined. As a result, in the three months ended September 30, 2012, we recorded a $185,061 reduction in the carrying value of our VIRURL holdings, with the remainder of the reduction in unrealized appreciation stemming from increases in the cost bases of our remaining portfolio companies.

 

Comparison of the nine months ended September 30, 2012 and 2011

 

Revenues - The Company received $73,150 in management fee revenues from its controlled portfolio companies in the nine months ended September 30, 2012, down from $82,500 for the same period in 2011, and $987 of interest income from convertible notes prior to the conversion of such notes into preferred stock of Virurl, Inc. As the Company's group of portfolio companies expands and matures, the Company expects its management fee income from its portfolio companies will increase and become more consistent.

 

The following table details expenses for the nine months ended September 30, 2012:

 

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   2012   2011 
Expenses:          
Officer and employee compensation   409,860    80,120 
Professional fees   163,209    36,123 
Director fees   1,000    3,000 
Rent   23,074    20,513 
Office supplies and expenses   8,189    7,270 
Other general and administrative expense   54,183    24,397 
Interest expense   133    - 
Total expenses   659,648    171,423 

 

Officer and employee compensation increased in the nine months ended September 30, 2012 to $409,860. This increase reflects the Company’s initiation of monthly payroll for its executive team and the associated payroll tax expenses in the first quarter of 2012. Professional fees increased in the nine months ended September 30, 2012, driven by increases in non-cash consulting expenses, marketing, investor relations, legal, and public relations expenses, partially offset by declines in audit fees and accounting fees. Other administrative expense increased in the nine months ended September 30, 2012, due in part to the increase in travel and entertainment expenses, insurance and filing fees, partially offset by declines in transfer agent fees.

 

The following table details the net realized and unrealized gains (losses) for the nine months ended September 30, 2012 and 2011:

 

   2012   2011 
Net realized and unrealized gains (losses):          
Net realized loss on investments, net of income taxes of none   -    (393)
Change in unrealized appreciation (depreciation) of investments, net of deferred tax of none in 2011 and 2010   (1,183,644)   2,808,778 
Net realized and unrealized gains (losses)   (1,183,644)   2,808,385 

 

On January 9, 2012, we converted $85,000 of advances to one of our portfolio companies, Virurl, Inc., into an $85,000 convertible note carrying an 8% interest rate. On March 2, 2012, Virurl. closed a preferred equity financing transaction with third party investor, whereby Virurl, issued new shares of preferred equity in return for cash proceeds and the conversion of the outstanding convertible notes, including any accrued interest thereon. In connection with this transaction, in the first quarter of 2012, the Company recorded a $1,263,396 reduction to the carrying value of Virurl.

 

In the nine months ended September 30, 2012, the INVENT Board of Directors approved the change in valuation method applied to Sanguine Biosciences, Inc. from the Asset Approach to the Market Approach, and an increase in the carrying value of Sanguine based on the valuation implied by Sanguine’s convertible note issuance in the quarter ended June 30, 2012. Under the Market Approach, our investment in Sanguine is carried at $1,889,764, as opposed to the Asset Approach valuation of $103,998, at June 30, 2012.

 

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In the second fiscal quarter ended June 30, 2012 as part of the Company’s quarterly valuation process, the INVENT Board of Directors resolved to write down our investment in Clowd, Inc. from $2,987,551 to $1,486,375 based on the current estimate of fair market value, in accordance with our valuation policy.

 

On September 25, 2012, one of our portfolio companies, Virurl, Inc. (“VIRURL”), received additional preferred equity funding on the same terms as its previous preferred equity financing. Given the rights and privileges of the preferred equity relative to the common equity, the preferred equity is carried at a higher price per share than the common equity, and because the valuation at which the preferred equity was invested did not change, the relative value of VIRURL’s common equity versus its preferred equity declined. As a result, in the third quarter of 2012, we recorded a $185,061 reduction in the carrying value of our VIRURL holdings, with the remainder of the reduction in unrealized appreciation stemming from increases in the cost bases of our remaining portfolio companies.

 

More detail surrounding unrealized appreciation of investments is discussed in Note 3.

 

Liquidity and Capital Resources

 

The Company incurred a loss from operations of $582,911 during the nine months ended September 30, 2012.

 

The Company’s sources of cash flow have been from the sale of the Company’s common stock, management fees from its portfolio companies and advances from the CEO. The Company has historically relied on these sources of capital in recent years to sustain its operations. Based on our cash position at September 30, 2012, we need additional capital to continue our operations.

 

The Company actively monitors its financing needs and intends to seek funds through private placements of common stock to meet its operating expense requirements and to meet the initial funding requirements of its controlled portfolio companies. If the Company is unable to continue to raise sufficient capital to meet its operating needs, doubt exists about the Company's ability to continue as a going concern.

 

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Net Asset Value

 

As a BDC, certain of our activities and disclosures are made in reference to Net Asset Value (“NAV”) which is the value of our portfolio assets less liabilities and preferred stock. This may be viewed, simply and generalized, as the value of our assets available to our common stock holders. As of the date of the financial information in this report, the value of our portfolio of assets including investments and securities in portfolio companies, other assets and cash is $11,087,077 and from this, are subtracted liabilities of $560,749. There are no shares of preferred stock outstanding but the rights of preferred stockholders would be included if there were. The resulting NAV at September 30, 2012 is $10,529,228. The Net Asset Value per Share (“NAV/S”) is calculated by dividing the NAV by the number of common shares outstanding (36,800,697). The NAV/S is $0.29 at September 30, 2012.

 

ITEM 3:QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

Market risk is the risk of loss arising from changes in market rates and prices. We are primarily exposed to equity price risk, which arises from exposure to securities that represent an ownership interest in our portfolio companies. The value of our equity securities and our other investments are based on quoted market prices or our Board of Directors’ good faith determination of their fair value (which is based, in part, on quoted market prices). Market prices of common equity securities, in general, are subject to fluctuations, which could cause the amount to be realized upon the sale or exercise of the instruments to differ significantly from the current reported value. The fluctuations may result from perceived changes in the underlying economic characteristics of our portfolio companies, the relative price of alternative investments, general market conditions and supply and demand imbalances for a particular security.

 

ITEM 4:CONTROLS AND PROCEDURES

 

(a) Evaluation of Disclosure Controls and Procedures

 

The Company’s Chief Executive Officer and Chief Financial Officer have reviewed and evaluated the effectiveness of the Company’s disclosure controls and procedures (as defined in Rules 240.13a-15(e) and 15d-15(e) promulgated under the Securities Exchange Act of 1934) as of September 30, 2012. Based on that review and evaluation, the CEO and CFO concluded that the Company’s current disclosure controls and procedures, as designed and implemented, are effective in ensuring that information relating to the Company required to be disclosed in the reports the Company files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, including insuring that such information is accumulated and communicated to the Company’s management, including the CEO and CFO, as appropriate to allow timely decisions regarding required disclosure.

 

(b) Changes in Internal Controls

 

There have been no changes in internal controls or in other factors that could materially affect these controls during the quarter ended September 30, 2012, including any corrective actions with regard to significant deficiencies and material weaknesses.

 

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PART II:OTHER INFORMATION

 

ITEM 1:LEGAL PROCEEDINGS

 

Not Applicable.

 

ITEM 1A:RISK FACTORS

 

There have been no material changes to the risk factors previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2011 except as set forth below.

 

Our independent registered public accounting firm, in their audit report related to our financial statements for the years ended December 31, 2011 and 2010, expressed substantial doubt about our ability to continue as a going concern.

 

As a result of our continued losses, our independent auditors have included an explanatory paragraph in their report on our financial statements for the fiscal years ended December 31, 2011 and 2010, expressing substantial doubt as to our ability to continue as a going concern. The inclusion of a going concern explanatory paragraph in the report of our independent auditors could make it more difficult for us to secure additional financing on terms acceptable to us, if at all, and could materially and adversely affect the terms of any financing that we might obtain. If we cannot raise additional capital in the future and our operating expenses continue to exceed our operating income, the value of our common stock could decline significantly.

 

ITEM 2:UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

 

During the nine months ended September 30, 2012, the Company sold 375,000 shares of its common stock for $125,000 in cash. The shares were sold pursuant to an exemption from registration under Regulation D Rule 506 and Section 4(2) promulgated under the Securities Act of 1933, as amended, and the proceeds of such sales were used for general corporate purposes and to support the growth of our portfolio companies.

 

ITEM 3:DEFAULTS UPON SENIOR SECURITIES

 

Not Applicable.

 

ITEM 4:MINE SAFETY DISCLOSURES

 

Not applicable

 

ITEM 5:OTHER INFORMATION

 

Not applicable

 

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ITEM 6:EXHIBITS

 

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

 

3.1.1 Articles of Incorporation, as amended September 19, 2012.
   
31.1 Certification pursuant to 18 U.S.C. Section 1350 Section 302 of the Sarbanes-Oxley Act of 2002 of Chief Executive Officer.
   
31.2 Certification pursuant to 18 U.S.C. Section 1350 Section 302 of the Sarbanes-Oxley Act of 2002 of Chief Financial Officer.
   
32.1 Certification pursuant to 18 U.S.C. Section 1350 Section 906 of the Sarbanes-Oxley Act of 2002 of Chief Executive Officer.
   
32.2 Certification pursuant to 18 U.S.C. Section 1350 Section 906 of the Sarbanes-Oxley Act of 2002 of Chief Financial Officer.
   
101.INS  XBRL Instance Document.
   
101.SCH XBRL Taxonomy Extension Schema Document.
   
101.CAL XBRL Taxonomy Extension Calculation Linkbase Document.
   
101.DEF XBRL Taxonomy Extension Definition Linkbase Document.
   
101.LAB XBRL Taxonomy Extension Label Linkbase Document.
   
101.PRE XBRL Taxonomy Extension Presentation Linkbase Document.

 

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SIGNATURE

 

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

 

  INVENT VENTURES, INC.
       
DATE         SIGNATURE/TITLE
       
November 8, 2012   By: /s/ Bryce Knight
    Bryce Knight
    Chief Executive Officer and
    Chairman
       
November 8, 2012   By: /s/ James Jago
    James Jago
    Chief Financial Officer

 

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