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UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-K

 

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

 

For the Fiscal Year ended December 31, 2012

 

Commission file number 814-00720

INVENT VENTURES, INC.

(FORMERLY KNOWN AS LOS ANGELES SYNDICATE OF TECHNOLOGY, INC.)

(Exact name of Registrant as specified in its charter)

 

NEVADA 20-5655532
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)

 

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

(Address of Principal Executive Offices) (Zip Code)

 

(702) 943-0320

(Registrant’s telephone number)

 

Securities Registered under Section 12(b) of the Exchange Act: None

 

Securities Registered under Section 12(g) of the Exchange Act:

Common Stock, $.001 par value

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ¨ No x

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ¨ No x

 

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

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendments to this Form 10-K. ¨

 

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 aggregate market value of the Registrant’s common stock held by non-affiliates of the Registrant at June 30, 2012 (the last business day of the Registrant’s most recently completed second quarter) was $4,839,799 based upon the last sales price reported for such date. For purposes of this disclosure, shares of common stock beneficially owned by persons who own 5% or more of the outstanding shares of common stock and shares beneficially owned by executive officers and directors of the Registrant and members of their families have been excluded in that such persons may be deemed to be affiliates. This determination of affiliate status is not necessarily conclusive for other purposes. The Registrant has no non-voting common stock.

 

The number of shares outstanding of the issuer's Common Stock, $.001 par value, as of March 25, 2012 was 36,928,197 shares.

 

DOCUMENTS INCORPORATED BY REFERENCE

 

No documents are incorporated by reference into this report except those Exhibits so incorporated as set forth in the Exhibit Index.

 

 
 

 

INVENT VENTURES, INC.

(FORMERLY KNOWN AS LOS ANGELES SYNDICATE OF TECHNOLOGY, INC.)

 

INDEX

 

    Page
PART I    
     
ITEM 1: BUSINESS 3
ITEM 1A: RISK FACTORS 8
ITEM 2: PROPERTIES 15
ITEM 3: LEGAL PROCEEDINGS 16
ITEM 4: [REMOVED AND RESERVED] 16
     
PART II    
     
ITEM 5: MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES 16
ITEM 6: SELECTED FINANCIAL DATA 20
ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION 20
ITEM 7A: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 25
ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 26
ITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE 48
ITEM 9AT: CONTROLS AND PROCEDURES 48
ITEM 9B: OTHER INFORMATION 49
     
PART III    
     
ITEM 10: DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE 49
ITEM 11: EXECUTIVE COMPENSATION 54
ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS 56
ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE 57
ITEM 14: PRINCIPAL ACCOUNTANT FEES AND SERVICES 59
     
PART IV    
     
ITEM 15: EXHIBITS AND FINANCIAL STATEMENT SCHEDULES 59

 

Page 2 of 62
 

 

INTRODUCTION

 

This report contains forward-looking statements and the Company's actual results could differ materially from those anticipated in these forward looking statements as a result of numerous factors, including those set forth below and elsewhere in this report.

 

In this Annual Report on Form 10-K, or Annual Report, the “Company,” “INVENT,” “we,” “us” and “our” refer to INVENT Ventures, Inc. unless the context otherwise requires.

 

PART I

 

ITEM 1:          BUSINESS

 

General Development of Business

 

INVENT Ventures, Inc. (“INVENT”), formerly known as Los Angeles Syndicate of Technology, Inc., is a technology venture fund that creates, builds, and invests in web and mobile technology companies. We develop businesses in the consumer Internet, mobile and biotechnology markets, and own six companies at different stages of development.

 

We supply our companies with the capital to cultivate 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 new ideas to market.

 

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).

 

Our stock is publicly listed on the OTCQB market under the symbol “IDEA”.

 

Market Opportunity

 

The web and mobile technology industries are rapidly growing sectors of the U.S. economy, and companies building social media applications have grown their user bases and revenues at unprecedented rates in recent years. We believe that an attractive opportunity exists for a public investment company focused on building a portfolio of early-stage technology companies, and key elements of our opportunity include:

 

·Global adoption of Internet infrastructure and the proliferation of mobile technology. The cost of Internet access continues to decline, facilitating an increasing number of Internet users and driving up time spent online. This trend is magnified by the proliferation of smartphones and mobile technology, resulting in users with perpetual access to the Internet. As the Internet becomes more accessible, more data is being transmitted online, requiring evolving applications and businesses to manage this flow of information.

 

Page 3 of 62
 

 

·Dramatic shifts in the way people share and consume information. The growing usage and availability of the Internet results in an increasing number of human connections. As more people are connected, an increasing volume of information is being shared. The benefits of this information flow manifest themselves in more ways than simply interacting with friends, and the Internet is becoming an increasingly important tool in businesses’ marketing programs. Connectivity among humans, when harnessed by businesses, can drive marketing costs down to virtually zero. We believe that as more consumption occurs on the Internet, more mediums of efficiently disseminating information are required. This secular shift creates vast opportunities for companies creating and investing in these technologies.

 

·Declining costs to build web- and mobile-based technology. The cost of starting and operating an Internet-based business has dramatically declined over the last decade as a result of dropping hardware costs and maturing open-source software. This decline has resulted in a shift in the capabilities web technology founders look for in a partner. Increasingly, entrepreneurs are valuing business support, brand connections, marketing and product support over the level of funding available from a partner. This adaptation creates a large and growing opportunity for web-technology incubators providing comprehensive support services to entrepreneurs.

 

·Increasing focus on web-based technology companies by the capital market. The explosive growth of social media companies has attracted significant capital from investors. As builders of technology businesses, we benefit from this heightened desire for social media investments through greater subsequent financing and sale opportunities for our portfolio companies.

 

Our Business Strategy

 

Our goal is to build and invest in web and mobile technology companies that will generate capital appreciation and realized gains. We believe that by developing technology internally and partnering with entrepreneurs at inception, we can generate the highest return and add the most value for our syndicate of entrepreneurs. The following are key elements of our strategy:

 

·Guide our portfolio companies through the challenges of early development.  We provide portfolio companies with the capital to cultivate their product and grow into profitability. Beyond capital support, INVENT reduces costs and time to market through managerial assistance, marketing resources, and technological collaboration. As the companies mature, we prepare them for subsequent financing rounds or other liquidity events by providing strategic guidance, legal and accounting resources, and access to the capital markets.

 

·Apply a structured investment process to our deployment of capital. Web-based technology is becoming increasingly capital-efficient, and our model is optimized to leverage this trend. By investing in the earliest stages of our companies’ lifecycles we are able to generate significant returns with minimal capital investment. Capital is deployed based on pre-determined development milestones, with a maximum investment of $500,000 per portfolio company. The INVENT diligence process includes both qualitative and quantitative analyses, and input from our network constituents to determine the value proposition, viability and defensibility of each business.

 

·Build a diverse portfolio of innovative and dynamic technology companies. The low capital investment requirements of our target industries, coupled with the short development timeline of technology companies, enable us to spread our capital base across a wide spectrum of investments. Some companies will achieve positive cash flow, some will require further capital, and some will fail. Through the construction of a diverse portfolio we believe we will mitigate risk and enhance the value of our network.

 

Page 4 of 62
 

 

Corporate 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 we filed a notification under Form N-54A with the SEC indicating our election to be regulated as a BDC under the 1940 Act.

 

On November 24, 2008, we filed Form N-54C with the SEC to notify the SEC of the withdrawal of our previous election to be regulated as a BDC under the 1940 Act. This action was taken to best facilitate our planned business model of developing and producing oil and natural gas. The company entered into a letter of intent to acquire all the major oil and gas properties of Xtreme Oil & Gas, Inc. (XTOG.PK), which was a major shareholder of the Company. After several attempts to reach a deal to purchase the properties of Xtreme, it became evident that a deal could not be reached in the 4th Quarter of 2009.

 

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 1940 Act.

 

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 in enact a 1 for 50 reverse stock split of the Company’s outstanding Common Stock.  Both corporate actions were effective with FINRA 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. (“LAST”).  The name change was effective with FINRA on October 14, 2010.

 

On February 9, 2011, the Company’s Board of Directors was notified by Management that Vineet Jindal and Brendon Crawford, previously the Chief Investment Officer and Chief Technology Officer of INVENT, resigned from LAST to assume the Chief Executive Officer and lead engineer positions, respectively, at Stockr, 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 2,700,000 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 600,000 shares at Mr. Jindal’s cost value and then cancelled those shares.  The Company transferred its right to repurchase the remaining 2,100,000 to employees of INVENT, who repurchased these shares at Mr. Jindal’s original cost value.

 

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 September 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 permanently 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.

 

Page 5 of 62
 

 

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”.

 

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. Pursuant to FASB Topic 250, the Company had a change in accounting principle when it re-elected to BDC status. Topic 250 requires retroactive restatement of the company’s financial statements to conform to the current presentation for all periods presented.

 

A BDC must make significant managerial assistance available to the issuers of eligible portfolio securities in which it invests. Making available significant managerial assistance means, among other things, any arrangement whereby the BDC, through its directors, officers or employees, offers to provide, and, if accepted does provide, significant guidance and counsel concerning the management, operations or business objectives and policies of a portfolio company.

 

We provide a variety of services to portfolio companies, including the following:

 

·product development and design;

 

·corporate formation and structure;

 

·investment of our capital;

 

·introductions to sources of outside capital;

 

·office space and related office services;

 

·marketing, branding and public relations

 

·formulating operating strategies and corporate goals;

 

·formulating intellectual property and other legal strategies;

 

·introductions to investment bankers and other professionals;

 

·mergers and acquisitions advice;

 

·introductions to potential joint venture partners, suppliers and customers; and

 

·assisting in financial planning.

 

We may derive income from our portfolio companies for the performance of these services, which may be paid in cash or securities.

 

Page 6 of 62
 

 

Under the 1940 Act, a BDC is subject to restrictions on the amount of warrants, options, restricted stock or rights to purchase shares of capital stock that it may have outstanding at any time. In particular, the amount of capital stock that would result from the conversion or exercise of all outstanding warrants, options or rights to purchase capital stock cannot exceed 25% of the BDC's total outstanding shares of capital stock. This amount is reduced to 20% of the BDC's total outstanding shares of capital stock if the amount of warrants, options or rights issued pursuant to an executive compensation plan would exceed 15% of the BDC'stotal outstanding shares of capital stock.

 

We will be permitted, under specified conditions, to issue multiple classes of indebtedness and one class of stock senior to our common stock if our asset coverage, as defined in the 1940 Act, is at least equal to 200% immediately after each such issuance. In addition, we may not be permitted to declare any cash dividend or other distribution on our outstanding common shares, or purchase any such shares, unless, at the time of such declaration or purchase, we have asset coverage of at least 200% after deducting the amount of such dividend, distribution, or purchase price. We may also borrow amounts up to 5% of the value of our total assets for temporary or emergency purposes.

 

Compliance with the Sarbanes-Oxley Act of 2002

 

On July 30, 2002, then-President Bush signed into law the Sarbanes-Oxley Act of 2002 (the "Sarbanes-Oxley Act"). The Sarbanes-Oxley Act imposes a wide variety of new regulatory requirements on publicly held companies and their insiders. Many of these requirements affect us. For example:

 

Our chief executive officer and chief financial officer must now certify the accuracy of the financial statements contained in our periodic reports;

 

Our periodic reports must disclose our conclusions about the effectiveness of our controls and procedures;

 

Our periodic reports must disclose whether there were significant changes in our internal controls or in other factors that could significantly affect these controls subsequent to the date of their evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses; and

 

We may not make any loan to any director or executive officer and we may not materially modify any existing loans.

 

Income Tax Considerations

 

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 (“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.

 

EMPLOYEES

 

At December 31, 2012 and 2011, we had 4 and 5 full-time employees, respectively.

 

Our employees are not represented by a labor union. We have experienced no work stoppage and believe that our employee relationships are good.

 

Page 7 of 62
 

 

ITEM 1A:        RISK FACTORS

 

We recently undertook our current business model and as a result, historical results may not be relied upon with regard to our operating history

 

In March 2010, we formally began implementing our current business model of providing seed capital and support to web and mobile technology companies. We are classified as an investment company under the 1940 Investment Company Act. As such, we have presented our financial results and accompanying notes in such fashion. Conversely, in previous years our operating results were presented in the format and style of an operating company. As a result, our financial performance and statements may not be comparable between these years.

 

We and our portfolio companies are in early stages of development, and are among many that have entered the emerging web-based technology market. Specific risks to our business include our:

 

·ability to source and market innovative businesses and acquire ownership interests in attractive companies;
·dependence on our portfolio companies to reach positive cash flow generation, a liquidity event, or our ability to access the capital markets;
·need to manage our expanding portfolio and operational footprint; and
·continuing need to increase spending to retain and attract key personnel, build the INVENT brand and increase awareness of our portfolio companies.

 

Our business model is largely unproven and may not generate the returns we anticipate

 

Our approach to venture capital investing is based on a new, untested business model involving sourcing, cultivating and operating businesses in an evolving web-based technology market. While competitors pursuing a similar strategy exist, insufficient time has elapsed to judge whether their portfolio companies will ultimately be successful. As an increasing number of incubators compete for the same ideas and innovative companies, the cost of acquiring ownership of such companies may increase, driving potential returns down.  In addition, due to the inherent long-term nature of venture capital investments, we may forego short-term gains that we could otherwise realize by selling interests in our portfolio companies.

 

The Company Historically Lost Money and Losses May Continue in the Future

 

The Company has historically lost money and future losses could occur. Accordingly, we may experience significant liquidity and cash flow problems if we are not able to raise additional capital as needed and on acceptable terms.  No assurances can be given that we will be successful in reaching or maintaining profitable operations.

 

The Company's expenses are higher than our current cash flow, which will require the Company to issue equity to raise capital. This could result in substantial dilution to our shareholders’ equity or hinder our ability to continue in operations should additional capital not be raised

 

In 2012, the Company had $105,987 in operating revenues. Consequently, the Company will have to sell shares of the Company's common stock or issue promissory notes to raise the cash necessary to pay ongoing expenses. Moreover, there is no assurance the Company will be able to find investors willing to purchase Company shares at a price and on terms acceptable to the Company, in which case, the Company could further deplete its cash resources.

 

Page 8 of 62
 

 

The success of the Company will depend on management's ability to make successful investments

 

If the Company is unable to select profitable investments, the Company will not achieve its objectives and miss any projected earnings targets.

 

The Company's investment activities are inherently risky

 

The Company's investment activities involve a significant degree of risk. The performance of any investment is subject to numerous factors which are neither within the control of, nor predictable by, the Company. Such factors include a wide range of economic, political, competitive and other conditions which may affect investments in general, or specific industries or companies.

 

The Company's equity investments may lose all or part of their value, causing the Company to lose all or part of its investment in those companies

 

The equity interests in which the Company invests may not appreciate in value and may decline in value. Accordingly, the Company may not be able to realize gains from its investments and any gains realized on the disposition of any equity interests may not be sufficient to offset any losses experienced. Moreover, the Company's primary objective is to invest in early-stage web and mobile technology companies whose products will frequently not have demonstrated market acceptance. Many portfolio companies will lack depth of management and have limited financial resources. All of these factors make investments in the Company's portfolio companies particularly risky.

 

We may change our investment policies without further shareholder approval

 

Although we are limited by the 1940 Act with respect to the percentage of our assets that must be invested in qualified portfolio companies, we are not limited with respect to the minimum standard that any investment must meet, neither are we limited to the industries in which those portfolio companies must operate. We may make investments without shareholder approval and such investments may deviate significantly from our historic operations. Any change in our investment policy or selection of investments could adversely affect our stock price, liquidity, and the ability of our shareholders to sell their stock.

 

The Company's concentration of portfolio company securities

 

The Company will attempt to hold the securities of several different portfolio companies. However, a significant amount of the Company's holdings could be concentrated in the securities of only a few companies. This risk is particularly acute during this time period of early Company operations, which could result in significant concentration with respect to a particular issuer or industry. The concentration of the Company's portfolio in any one issuer or industry would subject the Company to a greater degree of risk with respect to the failure of one or a few issuers or with respect to economic downturns in such industry than would be the case with a more diversified portfolio.

 

Because many of the Company's portfolio securities will be recorded at values as determined in good faith by the Board of Directors, the prices at which the Company is able to dispose of these holdings may differ from their respective recorded values

 

The Company values its portfolio securities at fair value as determined in good faith by the Board of Directors. For privately held securities, and to a lesser extent, for publicly-traded securities, this valuation is more of an art than a science. The Board of Directors may retain an independent valuation firm to aid it on a selective basis in making fair value determinations. The types of factors that may be considered in fair value pricing of an investment include the markets in which the portfolio company does business, comparison of the portfolio company to (other) publicly traded companies, discounted cash flow of the portfolio company, and other relevant factors. Because such valuations are inherently uncertain, may fluctuate during short periods of time, and may be based on estimates, determinations of fair value may differ materially from the values that would have been used if a ready market for these securities existed. As a result, the Company may not be able to dispose of its holdings at a price equal to or greater than the determined fair value. Net asset value could be adversely affected if the determination regarding the fair value of Company investments is materially higher than the values ultimately realized upon the disposal of such securities.

 

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Holding securities of privately held companies may be riskier than holding securities of publicly held companies due to the lack of available public information

 

The Company will primarily hold securities in privately held companies which may be subject to higher risk than holdings in publicly held companies. Generally, little public information exists about privately held companies, and the Company will be required to rely on the ability of management to obtain adequate information to evaluate the potential risks and returns involved in investing in these companies. If the Company is unable to uncover all material information about these companies, it may not make a fully informed investment decision, and it may lose some or all of the money it invests in these companies. These factors could subject the Company to greater risk than holding securities in publicly traded companies and negatively affect investment returns.

 

The Company is subject to risks created by the valuation of its portfolio investments

 

There is typically no public market for equity securities of the small privately held companies in which the Company will invest. As a result, the valuations of the equity securities in the Company’s portfolio are stated at fair value as determined by the good faith estimate of the Company’s Board of Directors. In the absence of a readily ascertainable market value, the estimated value of the Company’s portfolio of securities may differ significantly, favorably or unfavorably, from the values that would be placed on the portfolio if a ready market for the equity securities existed. Any changes in estimated value are recorded in the statement of operations as “Change in unrealized appreciation (depreciation) of investments.”

 

The Company’s portfolio investments are illiquid

 

Most of the Company’s investments are, and will be, equity securities acquired directly from small companies. The Company’s portfolio of equity securities is, and will usually be, subject to restrictions on resale or otherwise have no established trading market. The illiquidity of most of the Company’s portfolio may adversely affect the ability of the Company to dispose of the securities at times when it may be advantageous for the Company to liquidate investments.

 

Investing in private companies involves a high degree of risk

 

The Company will invest a substantial portion of its assets in small, private companies. These private businesses may be thinly capitalized, unproven companies with risky technologies, may lack management depth, and may not have attained profitability. Because of the speculative nature and the lack of a public market for these investments, there is significantly greater risk of loss than is the case with traditional investment securities. The Company expects that some of its venture capital investments will be a complete loss or will be unprofitable and that some will appear to be likely to become successful but never realize their potential. Even if the Company’s portfolio companies are able to develop commercially viable products, the market for new products and services is highly competitive and rapidly changing. Commercial success is difficult to predict and the marketing efforts of the portfolio companies may not be successful.

 

The Company is subject to risks created by its regulated environment

 

The Company is regulated by the SEC. Changes in the laws or regulations that govern BDCs could significantly affect the Company’s business. Regulations and laws may be changed periodically, and the interpretations of the relevant regulations and laws are also subject to change. Any change in the regulations and laws governing the Company’s business could have a material impact on its financial condition or its results of operations.

 

Page 10 of 62
 

 

The Company is dependent upon key management personnel for future success

 

The Company is dependent on the diligence and skill of its senior officers for the selection, structuring, closing and monitoring of its investments. The future success of the Company depends to a significant extent on the continued service and coordination of its senior management. The departure of any of its executive officers could adversely affect the Company’s ability to implement its business strategy. The Company does not maintain key man life insurance on any of its officers or employees.

 

The Company operates in a competitive market for investment opportunities

 

The Company faces competition in its investing activities from many entities including SBICs, private venture capital funds, investment affiliates of large companies, wealthy individuals and other domestic or foreign investors. The competition is not limited to entities that operate in the same geographical area as the Company. As a regulated BDC, the Company is required to disclose quarterly and annually the name and business description of portfolio companies and the value of its portfolio securities. Most of its competitors are not subject to this disclosure requirement. The Company’s obligation to disclose this information could hinder its ability to invest in certain portfolio companies. Additionally, other regulations, current and future, may make the Company less attractive as a potential investor to a given portfolio company than a private venture capital fund.

 

We may be negatively affected by adverse changes in the general economic conditions of the domestic and global markets.

 

The continued economic crisis and related turmoil in the global financial markets has had and may continue to have an impact on the Company’s portfolio companies and the overall financial condition of the Company. If the current market conditions deteriorate, the Company may suffer losses on its investment portfolio, which could have a material adverse effect on net asset value.

 

We may experience fluctuations of quarterly and annual operating results

 

The Company’s quarterly and annual operating results could fluctuate significantly as a result of a number of factors. These factors include, among others, variations in and the timing of the recognition of realized and unrealized gains or losses, the degree to which portfolio companies encounter competition in their markets, and general economic conditions. As a result of these factors, results for any one quarter should not be relied upon as being indicative of performance in future quarters.

 

There is a risk that investors in our equity securities may not receive dividends or that our dividends may not grow over time.

 

We intend to make distributions on a quarterly basis to our stockholders out of assets legally available for distribution. There can be no assurance that we will achieve investment results that will allow us to make a specified level of cash distributions or year-to-year increases in cash distributions. If we declare a dividend and if more stockholders opt to receive cash distributions rather than participate in our dividend reinvestment plan, we may be forced to sell some of our investments in order to make cash dividend payments. In addition, due to the asset coverage test applicable to us as a BDC, we may be limited in our ability to make distributions. Further, if we invest a greater amount of assets in equity securities that do not pay current dividends, it could reduce the amount available for distribution.

 

Page 11 of 62
 

 

We may in the future choose to pay dividends in our own stock, in which case our stockholders may be required to pay tax in excess of the cash they receive, and which may adversely affect the market price of our common stock.

 

We may distribute taxable dividends that are payable in part in our stock. Under a recently issued IRS revenue procedure, up to 90% of any such taxable dividend for taxable years ending prior to 2012 could be payable in our stock. The IRS has also issued (and where Revenue Procedure 2009-15 or 2010-12 is not currently applicable, the IRS continues to issue) private letter rulings on cash/stock dividends paid by regulated investment companies and real estate investment trusts using a 20% cash standard (instead of the 10% cash standard of Revenue Procedures 2009-15 and 2010-12) if certain requirements are satisfied. Taxable stockholders receiving such dividends will be required to include the full amount of the dividend as ordinary income (or as long-term capital gain to the extent such distribution is properly designated as a capital gain dividend) to the extent of our current and accumulated earnings and profits for United States federal income tax purposes. As a result, a U.S. stockholder may be required to pay tax with respect to such dividends in excess of any cash received. If a U.S. stockholder sells the stock it receives as a dividend in order to pay this tax, the sales proceeds may be less than the amount included in income with respect to the dividend, depending on the market price of our stock at the time of the sale. Furthermore, with respect to non-U.S. stockholders, we may be required to withhold U.S. tax with respect to such dividends, including in respect of all or a portion of such dividend that is payable in stock. In addition, if a significant number of our stockholders determine to sell shares of our stock in order to pay taxes owed on dividends, it may put downward pressure on the trading price of our stock.

 

Regulations governing operations of a BDC will affect the Company's ability to raise capital, which could result in the Company not being able to raise additional capital

 

Applicable law requires that business development companies must invest 70% of their assets in privately held U.S. companies, small, publicly traded U.S. companies with market capitalizations under $250 million, certain high-quality debt, and cash. The Company is not generally able to issue and sell common stock at a price below net asset value per share. The Company may, however, sell common stock, or warrants, options or rights to acquire common stock, at prices below the current net asset value of the common stock if the Board of Directors determines that such sale is in the best interests of the Company, and its stockholders approve such sale. In any such case, the price at which the Company's securities are to be issued and sold may not be less than a price which, in the determination of the Board of Directors, closely approximates the market value of such securities (less any distributing commission or discount).

 

Limited regulatory oversight may require potential investors to fend for themselves

 

The Company has elected to be treated as a BDC under the 1940 Act which makes the Company exempt from some provisions of that statute. The Company is not registered as a broker-dealer or investment advisor because the nature of its proposed activities does not require it to do so; moreover it is not registered as a commodity pool operator under the Commodity Exchange Act, based on its intention not to trade commodities or financial futures. However, the Company is a reporting company under the Securities Exchange Act of 1934. As a result of this limited regulatory oversight, the Company is not subject to certain operating limitations, capital requirements, or reporting obligations that might otherwise apply and investors may be left to fend for themselves.

 

Because we are required to distribute substantially all of our net investment income and net realized capital gains to our stockholders, we will continue to need additional capital to finance our growth.

 

We have elected to be taxed for federal income tax purposes as a RIC under Subchapter M of the Code. If we can meet certain requirements, including source of income, asset diversification and distribution requirements, and if we continue to qualify as a BDC, we will continue to qualify to be a RIC under the Code and will not have to pay corporate-level taxes on income we distribute to our stockholders as dividends, allowing us to substantially reduce or eliminate our corporate-level tax liability. As a BDC, we are generally required to meet a coverage ratio of total assets to total senior securities, which includes all of our borrowings and any preferred stock we may issue in the future, of at least 200%. This requirement limits the amount that we may borrow. Because we will continue to need capital to grow our investment portfolio, this limitation may prevent us from incurring debt and require us to raise additional equity at a time when it may be disadvantageous to do so. We cannot assure you that debt and equity financing will be available to us on favorable terms, if at all, and debt financings may be restricted by the terms of any of our outstanding borrowings. In addition, as a BDC, we are generally not permitted to issue equity securities priced below net asset value without stockholder approval. If additional funds are not available to us, we could be forced to curtail or cease new lending and investment activities, and our net asset value and profitability could decline.

 

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Loss of status as a RIC would reduce our net asset value and distributable income.

 

We currently qualify as a RIC under the Code and intend to continue to qualify each year as a RIC. As a RIC we do not have to pay federal income taxes on our income (including realized gains) that is distributed to our stockholders, provided that we satisfy certain distribution requirements. Accordingly, we are not permitted under accounting rules to establish reserves for taxes on our unrealized capital gains. If we fail to qualify for RIC status in any year, to the extent that we had unrealized gains, we would have to establish reserves for taxes, which would reduce our net asset value. In addition, if we, as a RIC, were to decide to make a deemed distribution of net realized capital gains and retain the net realized capital gains, we would have to establish appropriate reserves for taxes that we would have to pay on behalf of stockholders. It is possible that establishing reserves for taxes could have a material adverse effect on the value of our common stock.

 

There is a risk that we may not make distributions and consequently will be subject to corporate-level income tax.

 

We intend to make distributions on a quarterly basis to our stockholders out of assets legally available for distribution. We may not be able to achieve operating results that will allow us to make distributions at a specific level or to increase the amount of these distributions from time to time. In addition, due to the asset coverage test applicable to us as a BDC, we may be limited in our ability to make distributions. Also, restrictions and provisions in our existing and any future debt arrangements may limit our ability to make distributions. If we do not distribute a certain percentage of our income annually, we could fail to qualify for tax treatment as a RIC, and we would be subject to corporate-level federal income tax. We cannot assure you that you will receive distributions at a particular level or at all.

 

We may have difficulty paying our required distributions if we recognize income before or without receiving cash representing such income.

 

In accordance with U.S. generally accepted accounting principles, or GAAP, and tax regulations, we include in income certain amounts that we have not yet received in cash, such as accrued dividends or payment-in-kind interest (“PIK” interest), which represents contractual interest added to the loan balance and due at the end of the loan term. The increases in dividends receivable and loan balances as a result of accrued dividends and contracted payment-in-kind arrangements are included in income for the period in which such amount was accrued, which is often in advance of receiving cash payment. Any warrants that we receive in connection with our investments are generally valued as part of the negotiation process with the particular portfolio company. As a result, a portion of the aggregate purchase price for the equity or debt investments and warrants are allocated to the warrants that we receive. This may result in “original issue discount” for tax purposes, which we must recognize as ordinary income, increasing the amounts we are required to distribute to qualify for the federal income tax benefits applicable to RICs. Because such original issue discount income would not be accompanied by cash, we would need to obtain cash from other sources to satisfy such distribution requirements. If we are unable to obtain cash from other sources to satisfy such distribution requirements, we may fail to qualify for favorable tax treatment as a RIC and, thus, could become subject to a corporate-level income tax on all of our income. Since in certain cases we may recognize income before or without receiving cash representing such income, we may have difficulty meeting the requirement to distribute at least 90% of our net ordinary income and realized net short-term capital gains in excess of realized net long-term capital losses, if any. If we are unable to meet these distribution requirements, we will not qualify for favorable tax treatment as a RIC or, even if such distribution requirements are satisfied, we may be subject to tax on the amount that is undistributed. Accordingly, we may have to sell some of our assets, raise additional debt or equity capital or reduce new investment originations to meet these distribution requirements and avoid tax.

 

Page 13 of 62
 

 

We will be subject to corporate-level income tax if we are unable to maintain our qualification as a RIC under Subchapter M of the Code or do not satisfy the annual distribution requirement.

 

To maintain RIC status and be relieved of federal taxes on income and gains distributed to our stockholders, we must meet the following annual distribution, income source and asset diversification requirements.

 

The annual distribution requirement for a RIC will be satisfied if we distribute to our stockholders on an annual basis at least 90% of our net ordinary income and realized net short-term capital gains in excess of realized net long-term capital losses, if any. Because we may use debt financing, we are subject to an asset coverage ratio requirement under the 1940 Act and we may be subject to certain financial covenants under our debt arrangements that could, under certain circumstances, restrict us from making distributions necessary to satisfy the distribution requirement. If we are unable to obtain cash from other sources, we could fail to qualify for RIC tax treatment and thus become subject to corporate-level income tax.

 

The income source requirement will be satisfied if we obtain at least 90% of our income for each year from dividends, interest, gains from the sale of stock or securities or similar sources.

 

The asset diversification requirement will be satisfied if we meet certain asset diversification requirements at the end of each quarter of our taxable year. To satisfy this requirement, at least 50% of the value of our assets must consist of cash, cash equivalents, U.S. government securities, securities of other RICs, and other acceptable securities; and no more than 25% of the value of our assets can be invested in the securities, other than U.S. government securities or securities of other RICs, of one issuer, of two or more issuers that are controlled, as determined under applicable Code rules, by us and that are engaged in the same or similar or related trades or businesses or of certain “qualified publicly traded partnerships.” We also expect to rely on certain exemptions from the asset diversification test by nature of our investment in development corporations. Failure to meet these requirements or qualify for these exemptions may result in our having to dispose of certain investments quickly in order to prevent the loss of RIC status. Because most of our investments will be in private companies, and therefore will be relatively illiquid, any such dispositions could be made at disadvantageous prices and could result in substantial losses.

 

If we fail to qualify for or maintain RIC status for any reason and are subject to corporate-level income tax, the resulting corporate-level taxes could substantially reduce our net assets, the amount of income available for distribution and the amount of our distributions. Such a failure would have a material adverse effect on us and our stockholders.

 

Our common stock is traded on the "Over-the-Counter Bulletin Board," which may make it more difficult for investors to resell their shares due to suitability requirements

 

Our common stock is currently listed on the OTCBB and OTCQB markets under the symbol (“IDEA”).  Some broker-dealers decline to trade in OTCBB stocks given the markets for such securities are often limited, the stocks are more volatile, and the risk to investors is greater. These factors may reduce the potential market for our common stock by reducing the number of potential investors. This may make it more difficult for investors in our common stock to sell shares to third parties or to otherwise dispose of their shares. This could cause our stock price to decline.

 

Our officers and directors have the ability to exercise significant influence over matters submitted for stockholder approval and their interests may differ from other stockholders

 

Our executive officers and directors have the ability to appoint a majority to the Board of Directors. Accordingly, our directors and executive officers, whether acting alone or together, may have significant influence in determining the outcome of any corporate transaction or other matter submitted to our Board for approval, including issuing common and preferred stock, appointing officers, which could have a material impact on mergers, acquisitions, consolidations and the sale of all, or substantially all, of our assets, and the power to prevent or cause a change in control. The interests of the executive officers and directors may differ from the interests of the other stockholders.

 

Page 14 of 62
 

 

Our share ownership is concentrated

 

Our Company's Management team beneficially owns more than 70% of the Company's voting shares. As a result, Management will exert significant influence over all matters requiring stockholder approval, including the election and removal of directors, any merger, consolidation or sale of all, or substantially all, of the assets, as well as any charter amendment and other matters requiring stockholder approval. In addition, the chief executive officer may dictate the day to day management of the business. This concentration of ownership may delay or prevent a change in control and may have a negative impact on the market price of the Company's common stock by discouraging third party investors. In addition, the interests of Company Management may not always coincide with the interests of the Company's other stockholders.

 

The Company's common stock may be subject to the penny stock rules, which might make it harder for stockholders to sell

 

As a result of our stock price, our shares are subject to the penny stock rules. Because a "penny stock" is, generally speaking, one selling for less than $5.00 per share, the Company's common stock may be subject to the following rules. The application of these penny stock rules may affect stockholders' ability to sell their shares because some broker-dealers may not be willing to make a market in the Company's common stock because of the burdens imposed upon them by the penny stock rules which include but are not limited to:

 

·Section 15(g) of the Securities Exchange Act of 1934 and SEC Rules 15g-1 through 15g-6, which impose additional sales practice requirements on broker-dealers who sell Company securities to persons other than established customers and accredited investors.
·Rule 15g-2 declares unlawful any broker-dealer transactions in penny stocks unless the broker-dealer has first provided to the customer a standardized disclosure document.
·Rule 15g-3 provides that it is unlawful for a broker-dealer to engage in a penny stock transaction unless the broker-dealer first discloses and subsequently confirms to the customer the current quotation prices or similar market information concerning the penny stock in question.
·Rule 15g-4 prohibits broker-dealers from completing penny stock transactions for a customer unless the broker-dealer first discloses to the customer the amount of compensation or other remuneration received as a result of the penny stock transaction.
·Rule 15g-5 requires that a broker-dealer executing a penny stock transaction, other than one exempt under Rule 15g-1, disclose to its customer, at the time of or prior to the transaction, information about the sales person’s compensation.

 

Our independent registered public accounting firm, in their audit report related to our financial statements for the years ended December 31, 2012, 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, 2012, 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:          PROPERTIES

 

Our principal headquarters is located at 135 and 137 Bay Street in Santa Monica, California. The Company’s executive team and several of our portfolio companies have offices at these building campuses, for which the Company pays $9,125 a month, $7,125 of which is allocated to the portfolio companies currently occupying their respective offices, and is classified as advances to portfolio companies. We believe these facilities, which are in good physical condition, are adequate to support our growth over the next 12 months.

 

Page 15 of 62
 

 

Our corporate headquarters are located at 3651 Lindell Road, Suites D #145-146, Las Vegas, Nevada 89103. We pay approximately $200 a month for two executive offices and administrative support.

 

ITEM 3:LEGAL PROCEEDINGS

 

We are not currently subject to any legal proceedings, nor, to our knowledge, is any legal proceeding threatened against us.

 

ITEM 4:MINE SAFTEY DISCLOSURES

 

Not Applicable.

 

PART II

 

ITEM 5:MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

 

MARKET

 

Our Common Stock trades on the OTCQB market under the symbol: IDEA.

 

HISTORICAL MARKET PRICE DATA

 

These prices represent prices between broker-dealers and do not include retail markups and markdowns or any commission to broker-dealers. In addition, these prices may not reflect prices in actual transactions.

 

Shares of BDCs may trade at a market price that is more or less than the value of the net assets attributable to those shares. The possibility that our shares of common stock will trade at a discount from net asset value or at premiums that are unsustainable over the long term are separate and distinct from the risk that our net asset value will decrease. At times, our shares of common stock have traded at a premium to net asset value and at times our shares of common stock have traded at a discount to the net assets attributable to those shares.

 

The following table sets forth the range of high and low closing sales prices for our Common Stock for the periods indicated and has been adjusted for the 3 for 1 forward stock split which was effective September 19, 2012:

 

   High   Low 
         
Fiscal Year Ending December 31, 2012          
           
First Quarter  $0.83   $0.58 
Second Quarter  $0.83   $0.50 
Third Quarter  $0.67   $0.37 
Fourth Quarter  $3.00   $0.50 
           
Fiscal Year Ending December 31, 2011          
           
First Quarter  $0.83   $0.83 
Second Quarter  $0.85   $0.83 
Third Quarter  $0.85   $0.85 
Fourth Quarter  $0.85   $0.75 

 

Page 16 of 62
 

 

NUMBER OF SHAREHOLDERS AND TOTAL OUTSTANDING SHARES

 

As of December 31, 2012, there were approximately 840 holders of record of our common stock and we had 36,928,197 common shares issued and outstanding.

 

DIVIDENDS

 

Prior to the Company’s election to operate so as to qualify to be taxed as an RIC under Subchapter M of the Code, the Company did not historically pay cash dividends. Our quarterly dividends, if any, are determined by our Board of Directors. An estimate of our annual taxable income available for distribution to stockholders and the amount of taxable income carried over from the prior year for distribution in the current year is considered when declaring dividends. We cannot assure stockholders that they will receive any dividends and distributions or dividends and distributions at a particular level. No dividends have been declared between the fiscal years ended December 31, 2006 to December 31, 2012.

 

Tax characteristics of all dividends are reported to stockholders on Form 1099 after the end of the calendar year.

 

We have elected to be taxed as a RIC under Subchapter M of the Code. In order to maintain favorable RIC tax treatment, we must distribute annually to our stockholders at least 90% of our ordinary income and realized net short-term capital gains in excess of realized net long-term capital losses, if any, out of the assets legally available for distribution. In order to avoid certain excise taxes imposed on RICs, we must distribute during each calendar year an amount at least equal to the sum of:

 

·98% of our ordinary income for the calendar year

 

·98% of our capital gains in excess of capital losses for the one-year period ending October 31; and

 

·any ordinary income and net capital gains for preceding years that were not distributed during such years.

 

 These restrictions are collectively referred to as the Excise Tax Avoidance Requirement. We may, at our discretion, carry forward taxable income in excess of calendar year distributions and pay a 4% excise tax on this income. If we choose to do so, all else equal, this would increase expenses and reduce the amounts available to be distributed to our stockholders. We will accrue excise tax on estimated taxable income as required. In addition, although we currently intend to distribute realized net capital gains (i.e., net long-term capital gains in excess of short-term capital losses), if any, at least annually, out of the assets legally available for such distributions, we may in the future decide to retain such capital gains for investment.

 

We may not be able to achieve operating results that will enable us to make dividends and distributions at a specific level or to increase the amount of these dividends and distributions over time. We may also be limited in our ability to make dividends and distributions due to the asset coverage test applicable to us as a BDC under the 1940 Act. Additionally, if we do not distribute a certain percentage of our income annually, we will suffer adverse tax consequences, including possible loss of RIC tax treatment. In accordance with U.S. generally accepted accounting principles and tax regulations, we may include in income certain amounts that we have not yet received in cash, such as accrued dividends and payment-in-kind interest, which represents contractual interest added to the loan balance that becomes due at the end of the loan term. Since we may recognize income before or without receiving cash representing such income, we may have difficulty meeting the requirement to distribute at least 90% of our investment company taxable income to obtain tax benefits as a RIC and may be subject to an excise tax.

 

Page 17 of 62
 

 

In order to satisfy the annual distribution requirement applicable to RICs, we have the ability to declare a large portion of a dividend in shares of our common stock instead of in cash. As long as a portion of such dividend is paid in cash (which portion can be as low as 10% for our taxable years ending prior to 2012) and certain requirements are met, the entire distribution would be treated as a dividend for U.S. federal income tax purposes.

 

OPTIONS

 

There are no options related to the Company’s common stock currently outstanding.

 

WARRANTS

 

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. The foregoing description of the OIBASA Warrant is qualified in its entirety by reference to the complete text of the OIBASAWarrant, a copy of which is filed as an exhibit to this Annual Report on Form 10-K.

 

On January 14, 2013, the Company issued warrants to Threshold Financial, LLC. (“Threshold”) in conjunction with the conversion of the $100,000 advance from non-affiliates into a promissory note. See Note 12: Subsequent Events for further detail surrounding the warrant issuance to Threshold and promissory note conversion.

 

SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS

 

On November 25, 2008, the board of directors terminated the 1997 Stock Option Plan, the 2004 Stock Option Plan, and the Shared Savings Plan and a Profit Sharing Plan enacted in 2006, each of which is no longer used by the Company and none of which have any outstanding obligations.

 

On November 25, 2008, the board of directors adopted the Small Cap Strategies, Inc. 2008 Stock Option Plan which designated 9,000 shares of the Company’s common stock to be available for issuance to officers, directors, employees and consultants. In January 2009, 8,741 shares were issued to consultants pursuant to consulting agreements, leaving a balance of 259 shares available. No options are outstanding as of December 31, 2012.

 

The following table summarizes certain information as of December 31, 2012, with respect to compensation plans (including individual compensation arrangements) under which our common stock is authorized for issuance:

 

   Number of securities to be         
   issued upon exercise of   Weighted average exercise   Number of securities 
   outstanding options,   price of outstanding   remaining available for 
Plan category  warrants and rights   options, warrants and rights   future issuance 
             
Equity compensation plans approved by security holders 1997 Plan   0    N/A    - 
Equity compensation plans not approved by security holders   -    -    - 
                
Total   0    N/A    - 

 

Page 18 of 62
 

 

In the 1st Quarter of 2010, 6,541 of the shares issued to consultants in January 2009 were turned in and cancelled because of non-performance of duties.

In the 1st Quarter of 2010, the Company cancelled the 2008 Stock Option Plan.

In the 1st Quarter of 2010, the Company established a non-equity incentive Profit Sharing Plan for its executive officers in accordance with Section 57(n) of the Investment Company Act of 1940 (the “1940 Act”). The profit sharing plan provides for incentive compensation to the named executive officers based on a stated percentage of net realized capital gains and after reduction for realized and unrealized losses on the investment portfolio. Any profit sharing paid cannot exceed 20% of the Company’s net income, as defined. There have been no accruals for, or contributions to, the Profit Sharing Plan since its inception in 2010.

 

RECENT SALES OF UNREGISTERED SECURITIES

 

During the year ended December 31, 2012, the Company sold 502,500 shares of its common stock for $167,500 in cash and issued 1,050,000 shares of its common stock for the purchase of software assets valued at $350,000. The shares were sold pursuant to an exemption from registration under 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.

 

RE-PURCHASE OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS

 

We did not re-purchase any shares during 2012.

 

SHAREHOLDER RETURN PERFORMANCE GRAPH

 

The following graph compares the return on our common stock with that of the Standard & Poor’s 500 Stock Index and the NASDAQ Composite Index for the period December 28, 2007 through December 31, 2012. The graph assumes that, on December 28, 2007, a person invested $100 in each of our common stock (“IDEA” in the graph), the S&P 500 Index (“S&P 500”), and the NASDAQ Composite Index (“NASDAQ Composite”). The graph measures total shareholder return, which takes into account both changes in stock price and dividends. It assumes that dividends paid are invested in like securities.

 

 

The graph and other information furnished under this part II Item 5 of this Form 10-K shall not be deemed to be “soliciting material” or to be “filed” with the SEC or subject to Regulation 14A or 14C, or to the liabilities of Section 18 of the Securities Exchange Act of 1934, or the Exchange Act. The stock price performance included in the above graph is not necessarily indicative of future stock performance.

 

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ITEM 6:      Selected Financial Data

 

The following table sets forth selected financial data as of and for each of the five fiscal years ended December 31, 2012, 2011, 2010, 2009 and 2008 and is derived from our audited financial statements. The data set forth below should be read in conjunction with "Item 8: Financial Statements" and related Notes to Financial Statements appearing elsewhere herein and "Item 7: Management's Discussion and Analysis of Financial Condition and Results of Operations."

 

   2012   2011   2010   2009   2008 
           (Restated)         
                     
Revenues  $105,987   $88,500   $45,000   $-   $5,614 
Administrative expenses   966,221    213,097    145,631    359,783    154,574 
Net (loss) from operations before income taxes   (857,634)   (124,597)   (100,631)   (359,783)   (158,960)
Net (loss) from operations   (857,634)   (151,597)   (73,631)   (343,896)   (148,960)
Net realized and unrealized gains (losses)   (1,351,847)   2,782,904    5,852,766    (2,045)   (72,680)
                          
Net increase (decrease) in net assets from operations   (2,209,481)   5,243,307   $5,779,135   $(345,941)  $(221,640)
Net earnings (loss) per share basic and diluted   (0.06)   0.15    0.62    (0.09)   (0.10)
Dividends declared per common share   -    -    -    -    - 
                          
Balance sheet data:                         
                          
Investments at fair value  $10,353,093   $11,659,497   $8,710,548   $723   $5,024 
Cash   112,449    11,462    374    15,808    928 
Total assets   10,919,607    11,689,362    8,728,361    22,782    7,415 
Long-term debt and other long-term obligations   -    -    -    -    - 
Total liabilities   796,861    126,435    2,898,891    199,897    61,462 
Net assets (liabilities)   10,122,746    11,562,927    5,829,470    (177,115)   (54,047)
                          
Common stock outstanding at year end   36,928,197    35,375,697    35,668,089    77,109    50,889 

 

The Company began operating as a BDC on December 15, 2005 and continued operating in this manner until filing Form N-54C with the SEC to withdraw its previous election to be regulated as a BDC under the 1940 Act on November 24, 2008. We filed this election to withdraw to pursue the acquisition of Xtreme Oil & Gas, Inc. In November 2009, we determined that the acquisition of Xtreme would not occur and our board of directors authorized the Company's officers to make the necessary filings to again be regulated as a BDC.

 

ITEM 7:MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION

 

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;

 

Page 20 of 62
 

 

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

 

·general economic or business conditions may be worse than expected

 

·the performance of our portfolio companies may not achieve projected levels;

 

·legislative or regulatory changes may adversely affect our business;

 

·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; and

 

·our inability to raise additional capital if needed.

 

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.

 

MANAGEMENT’S ANALYSIS OF BUSINESS

 

INVENT Ventures, Inc. (“INVENT”) is a technology venture fund that creates, builds, and invests in web and mobile technology companies. We develop businesses in the consumer Internet, mobile and biotechnology markets, and own six companies at different stages of development.

 

We supply our companies with the capital to cultivate 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 new ideas to market.

 

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).

 

Our stock is publicly listed on the OTCQB market under the symbol “IDEA”.

 

LIQUIDITY AND CAPITAL RESOURCES AND CAPITAL EXPENDITURES

 

At December 31, 2012 and 2011, respectively, the Company had current assets of $215,699 and $11,462; current liabilities of $245,408 and $126,435; a working capital deficit of $29,709 and $114,973. The Company incurred a net loss from operations of $857,634 during the year ended December 31, 2012. The Company’s only source of cash flow has been from investments in the Company’s common stock, management fees, and loans from its CEO.

 

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The Company is in process of raising funds through private placements of common stock.

 

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

 

RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 2012, 2012 AND 2010

 

REVENUES

 

During the years ended December 31, 2012, 2011 and 2010, we had revenues as follows.

 

   2012   2011   2010 
           (Restated) 
Investment Income:               
From controlled investments:               
Management fees  $105,000   $88,500   $45,000 
Interest   987    -    - 
Dividends   -    -    - 
Total revenues   105,987    88,500    45,000 

 

Revenues in 2012, 2011 and 2010 are primarily derived from management fees from our portfolio companies. We expect that management fees from our portfolio companies will continue to be the primary source of revenues for the Company. During the fiscal year ended December 31, 2012, we also received interest income related to our investment in Virurl, Inc. (“VIRURL”). On January 9, 2012, we converted $85,000 of advances to VIRURL into an $85,000 convertible note carrying an 8% interest rate. On March 2, 2012, VIRURL closed a preferred equity financing transaction 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. The interest income represents the amount accrued on our $85,000 note between January 9, 2012 and March 2, 2012.

 

EXPENSES

 

Our annual expenses have grown from $145,631 in 2010, to $966,221 in 2012, primarily driven by non-cash expenses incurred in 2012, and are summarized as follows.

 

Expenses:  2012   2011   2010 
Officer and employee compensation   546,480    38,005    60,000 
Professional fees   292,987    50,410    26,130 
Director fees   1,000    3,000    2,000 
Rent   29,483    53,117    30,113 
Office supplies and expenses   9,807    19,115    1,339 
Other general and administrative expense   86,271    49,450    26,049 
Interest expense   193    -    - 
Total expenses   966,221    213,097    145,631 

 

Page 22 of 62
 

 

Officer and employee compensation increased by $508,475 in 2012 compared to 2011. This increase reflects the Company’s initiation of monthly payroll in 2012 for its executive team and the associated payroll tax expenses.

 

Professional fees increased by $242,577 in 2012 from 2011 due primarily to a $146,482 increase in non-cash consulting fees. Other contributors to the increase in professional fees include increased legal fees, investor and public relations fees and video production expense, partially offset by a decline in accounting fees. Professional fees increased by $24,280 in 2011 from 2010 due to increased consulting fees, partially offset by a decline in audit fees and accounting fees. Professional fees declined by $11,363 in 2010, primarily due to a decline in audit fees compared to 2009. We expect our cash professional fees to grow as our portfolio expands and our non-cash professional fees to decline as we recognize the prepaid expenses related to the CEO share transfers referenced in Note 6.

 

Rent expense decreased $23,634 in 2012 compared to 2011, after an increase of $23,004 in 2011. The decrease in 2012 represents consolidation of INVENT office space after one of our portfolio companies, Sanguine Biosciences, Inc. moved into a new laboratory and out from our Bay Street offices.

 

After a $17,776 increase in 2011 to facilitate the growth of our portfolio, office supplies and expenses declined $9,308 in 2012 compared to 2011. As our portfolio companies mature and grow their management teams, we may require additional office supplies to support this growth.

 

Other general and administrative expense has grown each year since 2010, due primarily to increases in depreciation and amortization, travel, meals and entertainment, transfer agent fees, and insurance.

 

NET REALIZED AND UNREALIZED GAIN (LOSS)

 

Net realized and unrealized gain (loss) for the years ended December 31, 2012, 2011 and 2010 is as follows:

 

Net realized and unrealized gains (losses):  2012   2011   2010 
Net realized loss on investments, net of income taxes of none   -    (393)   (100)
Change in unrealized appreciation (depreciation) of investments, net of deferred tax of none   (1,351,847)   2,783,297    5,852,866 
Net realized and unrealized gains (losses)   (1,351,847)   2,782,904    5,852,766 

 

Realized and unrealized gains and losses are a function of the value of investments, either at the end of the year if still held, or when sold. The unrealized gains in 2010 and 2011 are due to unrealized appreciation of portfolio company investments discussed in Note 4 to the financial statements. The $1,351,847 of unrealized depreciation in 2012 is due to reductions in our carrying value of Clowd, Inc. (“Clowd”) and VIRURL, partially offset by an increase in the carrying value of Sanguine Biosciences, Inc. (“Sanguine”), as discussed in more detail below.

 

On January 9, 2012, we converted $85,000 of advances to one of our portfolio companies, VIRURL 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. The preferred equity transaction was structured in tranches, with $400,000 due at close, and the additional $600,000 subject to performance hurdles. VIRURL achieved all hurdles in 2012, and subsequently received the remaining $600,000 over the course of 2012. 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. As a result, in 2012 we recorded a $1,609,460 reduction in the carrying value of our VIRURL common stock holdings. Should a liquidity event occur at a valuation in excess of the valuation implied by VIRURL’s 2012 preferred equity financing, then we expect this reduction in carrying value to reverse as the preferred equity holders will convert their holdings to common stock to maximize their return.

 

Page 23 of 62
 

 

In the quarter ended June 30, 2012, the INVENT Board of Directors approved the change in valuation method applied to Sanguine from the Asset Approach to the Market Approach, and a $1,785,766 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.

 

Additionally, in the 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 from $2,987,551 to $1,486,375 due to a material change in the Company’s expected business model and growth trajectory.

 

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. Management does not believe any of these accounting pronouncements has had or will have a material impact on the Company’s financial position or operating results. See Note 3 to the financial statements.

 

Critical Accounting Policies

 

The preparation of consolidated financial statements in conformity with U.S. generally accepted accounting principles (“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 consolidated financial statements, and revenues and expenses during the period reported. On an ongoing basis, our management evaluates its estimates and assumptions, which are based on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. Actual results could differ from those estimates. Changes in our estimates and assumptions could materially impact our results of operations and financial condition.

 

The SEC issued Financial Reporting Release No. 60, “Cautionary Advice Regarding Disclosure about Critical Accounting Policies” (“FRR 60”), suggesting companies provide additional disclosure and commentary on their most critical accounting policies. In FRR 60, the SEC defined the most critical accounting policies as the ones that are most important to the portrayal of a company’s financial condition and operating results, and require management to make its most difficult and subjective judgments, often as a result of the need to make estimates of matters that are inherently uncertain. Based on this definition our most critical accounting policy is the valuation of our investments. The methods, estimates and judgments we use in applying this accounting policy has a significant impact on the results we report in our financial statements.

 

As a BDC, we are regulated by the 1940 Act. Section 2(a)(41) 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 this conversion, 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, most 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 teams, financial conditions, and products and services of the portfolio companies. In situations that warrant such an evaluation, an independent business valuation may be obtained.

 

Page 24 of 62
 

 

TABULAR DISCLOSURE OF CONTRACTUAL OBLIGATIONS

 

Not applicable.

 

ITEM 7A:Quantitative and Qualitative Disclosures About Market RISK

 

Market risk is the risk of loss arising from adverse changes in market rates and prices. We are primarily exposed to equity price risk. The following is a discussion of our equity price risk.

 

Equity price risk 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 our Board of Directors' good faith determination of their fair value (which is primarily based on our valuation methods discussed in Critical Accounting Policies above). Market prices of common equity securities, in general, are subject to fluctuations, which could cause the amount to be realized upon 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.

 

Page 25 of 62
 

 

ITEM 8:FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA SCHEDULES OF FINANCIAL RATIOS

 

INVENT VENTURES, INC.

(FORMERLY KNOWN AS LOS ANGELES SYNDICATE OF TECHNOLOGY, INC.)

 

FINANCIAL STATEMENTS

 

TABLE OF CONTENTS

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMS 27-28
   
STATEMENTS OF NET ASSETS (LIABILITIES) 29
   
STATEMENTS OF OPERATIONS 30
   
STATEMENTS OF CASH FLOWS 31
   
STATEMENTS OF CHANGES IN NET ASSETS (LIABILITIES) 32
   
SCHEDULES OF INVESTMENTS 33-34
   
NOTES TO FINANCIAL STATEMENTS 35-47
   
SCHEDULES OF FINANCIAL RATIOS

 

Page 26 of 62
 

 

 

Report of Independent Registered Public Accounting Firm

 

Board of Directors

Invent Ventures, Inc.

Las Vegas, Nevada

 

We have audited the accompanying Statements of Net Assets of Invent Ventures, Inc. (the “Company”) as of December 31, 2012 and 2011, including the schedule of investments, the related statements of operations, cash flows, changes in net assets and financial highlights for each of the years in the three year period ended December 31, 2012. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements 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 the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provide a reasonable basis for our opinion.

 

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Invent Ventures, Inc. as of December 31, 2012 and 2011, and the results of its operations, its cash flows and changes in Net Assets and its financial highlights for the above referenced period in conformity with accounting principles generally accepted in the United States of America.

 

The accompanying financial statements have been prepared assuming that Invent Ventures, Inc. will continue as a going concern. As discussed in Note 2 to the financial statements, the Company will need to raise capital through sales of Company stock to provide sufficient cash flow to fund the Company’s operations. These conditions raise substantial doubt about the Company’s ability to continue as a going concern. Management’s plans regarding these matters are also described in Note 2. The financial statements do not include any adjustments that may result from the outcome of these uncertainties.

 

Paritz & Company, P.A.

 

Paritz & Company, P.A.

Hackensack, New Jersey

March 18, 2013

 

Page 27 of 62
 

 

Report of Independent Registered Public Accounting Firm

 

Board of Directors

Small Cap Strategies, Inc.

Las Vegas, Nevada

 

We have audited the accompanying statement of net liabilities of Small Cap Strategies, Inc. (name changed to Los Angeles Syndicate of Technology, Inc. on September 24, 2010) (the “Company”) at December 31, 2009, including the schedule of investments as of December 31, 2009, and the related statements of operations, cash flows, changes in net assets (liabilities) and financial highlights for the years ended December 31, 2009 and 2008. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these 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 financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

 

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Los Angeles Syndicate of Technology, Inc., (formerly Small Cap Strategies, Inc.) as of December 31, 2009, and the results of its operations, its cash flows and changes in net assets (liabilities) and its financial highlights for the above referenced periods in conformity with accounting principles generally accepted in the United States of America.

 

As discussed in Notes 2 and 3 to the financial statements, management has determined that the Company is a business development company (BDC) and has returned to the accounting and reporting requirements of the Investment Company Act of 1940. Therefore, the financial statements for 2008 have been restated to conform to the BDC format.

 

The accompanying financial statements have been prepared assuming that Los Angeles Syndicate of Technology, Inc. (formerly Small Cap Strategies, Inc.) will continue as a going concern. As discussed in Note 2 to the financial statements, the Company had plans to acquire Xtreme Oil & Gas, Inc. and utilize funds from its operations to fund the Company’s financial commitments. The Company has abandoned attempts to complete the acquisition and has determined to become a Business Development Company to provide sufficient cash flow to fund the Company’s operations. These conditions raise substantial doubt about the Company’s ability to continue as a going concern. Management’s plans regarding these matters are also described in Note 2. The financial statements do not include any adjustments that may result from the outcome of these uncertainties.

 

/s/ Turner, Stone & Company, LLP  
Turner, Stone & Company, LLP  

 

Certified Public Accountants

Dallas, Texas

April 12, 2010

 

Page 28 of 62
 

 

PART 1: FINANCIAL INFORMATION

ITEM 1: FINANCIAL STATEMENTS

 

INVENT Ventures, Inc.

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

Statements of Net Assets (Liabilities)

As of December 31, 2012 and 2011

 

   2012   2011 
         
ASSETS          
Investments in portfolio companies:          
Controlled (cost $452,467 at December 31, 2012 and $411,004 at December 31, 2011)  $10,353,093   $11,659,497 
Total investments   10,353,093    11,659,497 
Cash   112,449    11,462 
Prepaid expenses and deposits   111,850    8,600 
Office furniture and equipment, net   9,715    9,803 
Purchased Software, net   332,500    - 
TOTAL ASSETS   10,919,607    11,689,362 
           
LIABILITIES          
Accounts payable, trade   55,502    5,445 
Amounts due to related parties   87,923    120,990 
Advances from non-affiliates   100,000    - 
Notes payable   1,983    - 
Accrued executive payroll expenses   551,453    - 
TOTAL LIABILITIES   796,861    126,435 
NET ASSETS  $10,122,746   $11,562,927 
           
Commitments and contingencies (Note 9)          
           
COMPOSITION OF NET ASSETS:          
Common stock, $.001 par value, authorized 100,000,000 shares; 36,928,197 and 35,375,697 shares issued and outstanding at December 31, 2012 and 2011   36,928    35,376 
Additional paid in capital   4,313,223    3,547,275 
Stock subscription receivable   (13,300)   (15,100)
Accumulated deficit:          
Accumulated net operating loss   (3,766,506)   (2,908,872)
Net realized (loss) on investments   (344,245)   (344,245)
Net unrealized appreciation of investments   9,896,646    11,248,493 
NET ASSETS  $10,122,746   $11,562,927 
NET ASSET VALUE PER SHARE  $0.27   $0.33 

 

See accompanying notes to financial statements.

 

Page 29 of 62
 

 

INVENT Ventures, Inc.

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

Statements of Operations

Three Years Ended December 31, 2012, 2011 and 2010

 

   2012   2011   2010 
           (Restated) 
Investment Income:               
From controlled investments:               
Management fees  $105,000   $88,500   $45,000 
Interest   987    -    - 
Dividends   -    -    - 
Total revenues   105,987    88,500    45,000 
Expenses:               
Officer and employee compensation   546,480    38,005    60,000 
Professional fees   292,987    50,410    26,130 
Director fees   1,000    3,000    2,000 
Rent   29,483    53,117    30,113 
Office supplies and expenses   9,807    19,115    1,339 
Other general and administrative expense   86,271    49,450    26,049 
Interest expense   193    -    - 
Total expenses   966,221    213,097    145,631 
Other income   2,600    -      
Loss before income taxes   (857,634)   (124,597)   (100,631)
Income tax expense (benefit)   -    -    (27,000)
Continuing operations income tax adjustment (See Note 7)   -    (27,000)   - 
Net loss from operations   (857,634)   (151,597)   (73,631)
                
Net realized and unrealized gains (losses):               
Net realized loss on investments, net of income taxes of none               
Non-controlled / Non-Affiliate   -    (393)   (100)
Change in unrealized appreciation (depreciation) of investments, net of deferred tax of none               
Controlled   (1,351,847)   2,783,297    5,852,866 
Net realized and unrealized gains (losses)   (1,351,847)   2,782,904    5,852,766 
                
Unrealized appreciation income tax adjustment (See Note 7)        2,612,000    - 
Net increase (decrease) in net assets (liabilities) from operations  $(2,209,481)  $5,243,307   $5,779,135 
                
Net increase (decrease) in net assets (liabilities) from operations per share, basic and diluted  $(0.06)  $0.15   $0.62 
                
Weighted average common shares outstanding, basic and diluted   36,086,824    35,030,905    9,342,339 

 

See accompanying notes to financial statements.

 

Page 30 of 62
 

 

INVENT Ventures, Inc.

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

Statements of Cash Flows

Three Years Ended December 31, 2012, 2011 and 2010

 

   2012   2011   2010 
             (Restated) 
Cash flows from operating activities:               
Net increase (decrease) in net assets (liabilities) from operations  $(2,209,481)  $5,243,307   $5,779,135 
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   1,351,847    (2,783,297)   (8,464,866)
Net realized loss on investments   -    393    100 
Deferred income taxes   -    -    2,585,000 
Deferred income tax adjustment   -    (2,585,000)   - 
Advances to portfolio companies   (45,443)   (231,045)   (97,571)
Non-cash consulting expenses   151,977    -    - 
Depreciation and amortization   20,644    3,036    2,430 
Changes in operating assets and liabilities:               
Deposits and prepaid expenses   (5,227)   (4,000)   (4,600)
Increase in accounts payable   50,057    3,416    2,029 
Increase in accrued liabilities   551,453    -    - 
Increase (Decrease) in amounts due to related parties   (33,067)   (15,872)   171,477 
Increase in advances from non-affiliates   100,000    -    - 
Issuance of notes payable   1,983    -    - 
Net cash used by operating activities   (65,257)   (369,062)   (26,866)
Cash flows from investing activities:               
Purchase of furniture and equipment   (3,056)   -    (9,018)
Net cash used in investing activities   (3,056)   -    (9,018)
Cash flows from financing activities:               
Proceeds from issuance of common stock   167,500    327,500    20,450 
Collection of stock subscriptions   1,800    52,650    - 
Net cash provided by financing activities   169,300    380,150    20,450 
Net increase (decrease) in cash and cash equivalents   100,987    11,088    (15,434)
Cash, beginning of period   11,462    374    15,808 
Cash, end of period  $112,449   $11,462   $374 
                
Supplemental Cash Flow Information:               
                
Non-cash investing and financing activities:               
Common stock issued in exchange for:               
Amounts due related parties   -    -    77,000 
Stock subscriptions receivable cancelled   -    -    - 
Purchase of portfolio company rescinded   -    -    - 
Asset purchase   350,000    -    130,000 
Capital contributed for consulting services (Note 6)   250,000    -    - 

 

See accompanying notes to financial statements.

 

Page 31 of 62
 

 

INVENT Ventures, Inc.

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

Condensed Statements of Changes in Net Assets (Liabilities)

Three Years Ended December 31, 2012, 2011 and 2010

 

   2012   2011   2010 
       (Restated)     
Changes in net assets (liabilities) from operations:               
Net loss from operations  $(857,634)  $(151,597)  $(73,631)
Net realized loss on sale of investments   -    (393)   (100)
Change in net unrealized appreciation (depreciation) of investments, net   (1,351,847)   2,783,297    5,852,866 
Unrealized appreciation income tax adjustment (1)   -    2,612,000    - 
                
Net increase (decrease) in net assets (liabilities) from operations   (2,209,481)   5,243,307    5,779,135 
                
Capital stock transactions:               
Common stock issued:               
Cash   167,500    327,500    20,450 
Amount due shareholder   -    175,000    77,000 
Asset purchases   350,000    -    130,000 
Stock subscriptions collected   1,800    52,650    - 
Rescission of investment acquisition   -    (65,000)   - 
Related party share transfers for non-cash consulting expenses   250,000         - 
Net increase in net assets from stock transactions   769,300    490,150    227,450 
                
Net increase (decrease) in net assets (liabilities)   (1,440,181)   5,733,457    6,006,585 
Net assets (liabilities), beginning of period   11,562,927    5,829,470    (177,115)
Net assets, end of period  $10,122,746   $11,562,927   $5,829,470 

 

(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.

 

Page 32 of 62
 

 

INVENT Ventures, Inc.

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

Schedule of Investments

December 31, 2012

 

       Percent/                 
   Date of   shares   Number of   Historical   Fair 
   acquisition   owned   Shares / Units   cost   value 
                               
Investments in controlled portfolio companies:                
             Common Stock   Preferred
Stock
           
Virurl, Inc.    Jul-10     48%   5,780,000    338,422   $92,343   $1,277,980 
Stockr, Inc.    Jul-10     63%   5,666,667    -    67,671    2,661,455 
LottoPals, Inc.    Jul-10     99%   6,000,000    -    56,185    3,000,000 
Clowd, Inc.    Sep-10     99%   6,000,000    -    93,508    1,486,375 
Sanguine Biosciences, Inc.    Jul-10     42%   4,000,000    -    105,241    1,889,764 
Stocktown Productions, Inc.    Jul-10     81%   16,704,953    -    37,519    37,519 
                          452,467    10,353,093 
                                 
          Total investments   $452,467    10,353,093 
          Cash and other assets, less liabilities         (230,347)
          Net asset value at December 31, 2012        $10,122,746 

 

See accompanying notes to financial statements.

 

Page 33 of 62
 

 

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.  Jul-10   64%   5,780,000   $96,398   $2,887,440 
Stockr, Inc.  Jul-10   63%   5,666,667    66,169    2,661,455 
LottoPals, Inc.  Jul-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.  Jul-10   42%   4,000,000    92,902    92,902 
Stocktown Productions, Inc.  Jul-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.

 

Page 34 of 62
 

 

INVENT VENTURES, INC.

(FORMERLY KNOWN AS LOS ANGELES SYNDICATE OF TECHNOLOGY, INC.)

NOTES TO FINANCIAL STATEMENTS

 

NOTE 1:   GENERAL ORGANIZATION AND BUSINESS

 

INVENT Ventures, Inc. (“INVENT”), formerly known as Los Angeles Syndicate of Technology, Inc., is a technology venture fund that creates, builds, and invests in web and mobile technology companies. We develop businesses in the consumer Internet, mobile and biotechnology markets, and own six companies at different stages of development.

 

We supply our companies with the capital to cultivate 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 new ideas to market.

 

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).

 

Our stock is publicly listed on the OTCQB market under the symbol “IDEA”.

 

Corporate 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 we filed a notification under Form N-54A with the SEC indicating our election to be regulated as a BDC under the 1940 Act.

 

On November 24, 2008, we filed Form N-54C with the SEC to notify the SEC of the withdrawal of our previous election to be regulated as a BDC under the 1940 Act. This action was taken to best facilitate our planned business model of developing and producing oil and natural gas. The company entered into a letter of intent to acquire all the major oil and gas properties of Xtreme Oil & Gas, Inc. (XTOG.PK), which was a major shareholder of the Company. After several attempts to reach a deal to purchase the properties of Xtreme, it became evident that a deal could not be reached in the 4th Quarter of 2009.

 

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 1940 Act.

 

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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 in enact a 1 for 50 reverse stock split of the Company’s outstanding Common Stock.  Both corporate actions were effective with FINRA 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 with FINRA on October 14, 2010.

 

On February 9, 2011, the Company’s Board of Directors was notified by Management that Vineet Jindal and Brendon Crawford, previously the Chief Investment Officer and Chief Technology Officer of INVENT, resigned from LAST to assume the Chief Executive Officer and lead engineer positions, respectively, at Stockr, 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 2,700,000 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 600,000 shares at Mr. Jindal’s cost value and then cancelled those shares.  The Company transferred its right to repurchase the remaining 2,100,000 to employees of INVENT, who repurchased these shares at Mr. Jindal’s original cost value.

 

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 permanently 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.

 

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”.

 

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. Pursuant to FASB Topic 250, the Company had a change in accounting principle when it re-elected to BDC status. Topic 250 requires retroactive restatement of the company’s financial statements to conform to the current presentation for all periods presented.

 

NOTE 2:   GOING CONCERN

 

At December 31, 2012 and 2011, respectively, the Company had current assets of $215,699 and $11,462; current liabilities of $245,408 and $126,435; a working capital deficit of $29,709 and $114,973. The Company incurred a net loss from operations of $857,634 during the year ended December 31, 2012. The Company’s only source of cash flow has been from investments in the Company’s common stock, management fees, and loans from its CEO.

 

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The Company is in the process of raising funds through private placements of common stock.

 

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

 

NOTE 3:   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Basis of Presentation

As noted above, when the Company filed its election to be regulated pursuant to the 1940 Act, it resulted in a change in accounting principle. Accordingly, the financial statements for the years ended December 31, 2009 and 2008 have been restated as if the Company was operating as a BDC for all periods presented. Pursuant to Regulation S-X, Rule 6, the Company will operate on a non-consolidated basis.

 

Management Estimates

The preparation of financial statements in conformity with generally accepted accounting principles in the United States of America 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.

 

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 December 31, 2012, there were 1,000,000 warrants outstanding at an exercise price of $0.33. These warrants may only be exercised if certain performance goals are attained. The Company has not placed a value on these warrants as the performance requirements are yet to be reached. There were no potentially dilutive shares outstanding at December 31, 2011 and 2010.

 

Valuation of Investments (as an Investment Company)

As a BDC, we are regulated by the 1940 Act. Section 2(a)(41) 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 this conversion, 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.

 

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Income Taxes

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 (“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.

 

As of December 31, 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.

 

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. This treatment is similar to the treatment discussed above.

 

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. 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 all long-lived assets is evaluated periodically to determine if adjustment to the depreciation and amortization period or the unamortized balance is warranted. Based upon its most recent analysis, the Company believes that no impairment of property and equipment exists at December 31, 2012 and 2011. Maintenance and repairs are charged to operations when incurred. Betterments and renewals are capitalized. When property and equipment 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.

 

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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.

 

At December 31, 2012, and 2011 there are no options outstanding. As of December 31, 2010 and 2009 there were options outstanding for 434 shares from the 1997 Plan, which expired in 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. In the opinion of Management, none of these pronouncements is expected to have a material effect on the financial position, results of operations or cash flows of the Company.

 

NOTE 4:   INVESTMENTS AND VALUATION

 

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

 

   2012   2011 
         
Cost  $452,467   $411,004 
Unrealized appreciation (depreciation)   9,900,626    11,248,493 
Fair market value  $10,353,093   $11,659,497 

 

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. The three levels are defined as follows:

 

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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.

 

Assets and liabilities measured at fair value on a recurring basis are summarized in the following tables according to FASB ASC 820 pricing levels.

 

   Fair Value Measurement Using 
       Quoted prices         
       in active   Significant     
       markets of   other   Significant 
       identical   observable   Unobservable 
   Recorded   assets   inputs   Inputs 
   value   (Level 1)   (Level 2)   (Level 3) 
December 31, 2012                    
Assets:                    
Portfolio company securities  $10,353,093   $-        $10,353,093 
                     
December 31, 2011                    
Assets:                    
Portfolio company securities  $11,659,497   $-        $11,659,497 

 

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 include the terms of recent capital transactions with unaffiliated 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.

 

Topic 820 establishes a framework for measuring fair value that includes three distinct valuation techniques as follows: (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.

 

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·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 by unaffiliated investors 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 unaffiliated 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 two discounted cash flow (“DCF”) methods to derive estimates of fair value.

 

·Asset Approach. The asset approach is based on the fair market value of the company’s assets less the fair market value of the company’s liabilities. When applying this approach, we consider the cost to a market participant to acquire or construct a substitute asset of comparable utility, adjusted for obsolescence, the aggregate amount of capital invested by INVENT in such company, and the current fair market value of the company’s assets and 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.

 

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, evaluates the value of the company’s assets net of its liabilities, 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 multiple 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 BOD and subsequently discussed with members of our advisory board, as required.

 

3.The BOD 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 December 31, 2012, 100% of our investments in portfolio companies represented investments recorded at fair value, as determined by our BOD. 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 is the schedule of our controlled investments as of December 31, 2012.

 

Company  Industry  Sub-Industry  % Owned   Market Value 
               
Virurl, Inc.  Web-based tech  Advertising   48%   1,277,980 
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%   37,519 
                 
              $10,353,093 

 

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 to create instant viral advertising campaigns on the web. The VIRURL platform enables marketers to launch viral campaigns by compensating Internet users to share videos, articles, music, and other media with their friends via email, social networks, and anywhere else on the web.

 

2)Stockr, Inc. – stockr.com (live)

 

Stockr, Inc. (“Stockr”) is a social platform for the stock market. Stockr connects investors directly to the people, publishers and companies they care about, enabling users to see and discuss which stocks other users are trading in real-time. Users are empowered to exchange trading ideas, track the trades of those within their network, and gauge their investment performance relative to the Stockr community. Stockr embraces the social element of investing, and brings identity and transparency to an otherwise anonymous environment, unveiling a new layer of market information.

 

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

 

Sanguine Biosciences, Inc. (“Sanguine”) provides highly viable primary human cells and tissues to the academic and industrial life science research community. The product offering spans customers’ needs mainly in the In Vitro Research & Development stage of Drug Development. The organization holds proprietary cryopreservation technology that allows for >90% post-thaw viability of primary human cells and tissues. Sanguine’s vision is to develop into the global leader in high quality cells and tissues for life science research and development.

 

4)Clowd, Inc. – clowd.com (stealth)

 

Clowd, Inc. (“Clowd”) is developing technologies in the mobile telehealth industry to improve patient-doctor interaction and make it easier for patients to connect with doctors and medical professionals.

 

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5)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.

 

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

 

Stocktown Productions, Inc. (“Stocktown”) 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.

 

NOTE 5:      COMPOSITION OF NET ASSETS (LIABILITIES) - STOCKHOLDERS’ EQUITY (DEFICIT)

 

The Company is authorized to issue 100,000,000 shares of common stock with a par value of $0.001 per share. Each share has one voting right. There are 36,928,197 and 35,375,697 common shares issued and outstanding at December 31, 2012 and 2011, respectively.

 

Effective September 19, 2012, pursuant to shareholder consent, the Company completed at 3 for 1 forward stock split. All share transactions disclosed in the financial statements have been restated to give effect to these changes.

 

During the year ended December 31, 2012, the Company sold 502,500 shares of its common stock for $167,500 in cash.

 

On July 27, 2012, the Company issued 1,050,000 shares of its common stock to purchase various assets that enhance the services we can offer to our current and future portfolio companies and to broaden our reach and exposure to the Northern California technology market, including developed software and 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. The common shares were valued at the same price used for recent third party placement sales.

 

NOTE 6:      RELATED PARTY TRANSACTIONS

 

The officers 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.

 

On May 10, 2010, Knight, Inc., pursuant to an Asset Purchase Agreement, sold $40,000 of receivables due to Knight by the Company to an unaffiliated third party for $40,000 in cash and other mutually agreed upon consideration. This transaction was later cancelled in the 3rd Quarter of 2010.

 

As a result of the Xtreme merger not being completed and effective July 1, 2010, officers and employees of Xtreme returned 5,800 shares of the Company's common stock to be cancelled. Mr. Knight also returned 541 shares to be cancelled. The 6,341 shares were cancelled by the transfer agent on July 19, 2010. The cancellation of the shares was recorded as a contribution to capital by the shareholders on July 1, 2010.

 

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Effective July 11, 2010, Knight, Inc., wholly owned by Bryce Knight, Chief Executive Officer of the Company, acquired 10,000 newly issued shares of the Company's common stock in exchange for $5,000 in cash previously paid to the Company. On September 27, 2010, Knight, Inc. acquired 3,250,000 shares pursuant to a share purchase agreement in exchange for $65,000 owed to Knight, Inc.

 

On September 27th, 2010 the Company entered into restricted share purchase agreements to offer restricted shares of the Company’s common stock for $.02 per share. The Company issued 11,510,000 shares to the CEO and 21 other individuals that had been engaged to join INVENT as executive officers, advisors, and consultants. The share purchase agreements contain a one year lock on the transfer of the shares and a 36 month vesting and repurchase provision that allows the Company to repurchase unvested shares at cost should an individual break the terms of their engagement agreement.

 

On September 28th, 2010 the Company issued 350,000 shares of Company common stock to Brad Curry pursuant to a debt to equity conversion agreement. Under the agreement, Mr. Curry agreed to convert $3,500 remaining debt to common stock at $.01 per share and forgive $3,000 of debt owed by the Company.

 

At December 31, 2012 and December 31, 2011, the Company owed its CEO $87,923 and $120,990, respectively, for loans, accrued compensation and expense reimbursements, which is included in amounts due to related parties. The amount owed at December 31, 2010 included a non-interest bearing convertible note in the amount of $133,807 which was convertible at $0.50 per share or NAV per share, whichever was greater. The convertible note was converted at a price of $1.00 per share at March 30, 2011.

 

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.

 

On February 23, 2012 and April 11, 2012, Knight, Inc., wholly owned by Bryce Knight, Chief Executive Officer of the Company, transferred 150,000 and 100,000 shares, respectively, to consultants for services to be rendered for the Company.

 

These shares were valued at $1.00 per share 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 engineering, financial and managerial assistance provided by the Company to VIRURL.

 

NOTE 7:     INCOME TAXES

 

We have elected to be taxed as a RIC under Subchapter M of the Code and currently qualify, and intend to continue to qualify each year, as a RIC under the Code. In order to qualify as a RIC, we are required to meet certain income and asset diversification tests, and distribute annually at least 90% of investment company taxable income, as defined by the Code, to our stockholders. To avoid federal excise taxes, we must distribute annually at least 98% of our income from the current year (both ordinary income and net capital gains) and any undistributed ordinary income and net capital gains from the preceding years. We may, at our discretion, carry forward taxable income in excess of calendar year distributions and pay a 4% excise tax on this income. If we choose to do so, all other things being equal, this would increase expenses and reduce the amount available to be distributed to our stockholders. We will accrue excise tax on estimated excess taxable income as required.

 

Taxable income, as defined by the Code, 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.

 

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In the year ended December 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.

 

NOTE 8:      STOCK OPTION AND EMPLOYEE BENEFIT PLANS

 

EXECUTIVE COMPENSATION PLAN

 

Effective July 20, 2010, pursuant to a majority consent of shareholders and the unanimous consent of the board of directors, the executive compensation plan which provides executive compensation in the range of $5,000 to $20,000 per month for the chief executive officer, chief financial officer, chief investment officer, chief technology officer and chief operations officer and provides for an executive profit sharing plan of 20% of the Company's net income after taxes was approved.

 

NOTE 9:                COMMITMENTS AND CONTINGENCIES

 

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 currently maintain operations offices in Santa Monica, California under month-to-month leases. Rent expense totaled $29,483 and $53,117 in the years ended December 31, 2012 and 2011, respectively.

 

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.

 

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INVENT Ventures, Inc.

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

Financial Highlights

Five Years Ended December 31, 2012, 2011, 2010, 2009, and 2008

 

   2012   2011   2010   2009   2008 
   (Restated) 
PER SHARE INFORMATION                         
Net asset (liability) value, beginning of period  $0.33   $0.16   $(0.05)  $(0.02)  $0.08 
Net decrease from operations   (0.02)   (0.00)   (0.01)   (0.09)   (0.07)
Net change in realized gains (losses) and unrealized appreciation (depreciation) of investments   (0.04)   0.08    0.63    (0.0)   (0.03)
Net increase from changes in deferred liabilities (1)   -    0.07    -    -    - 
Net increase from stock transactions (2)   0.01    0.02    (0.41)   0.06    (0.00)
Share transfers for non-cash consulting expenses (2)   0.00    -    -    -      
                          
Net asset (liability) value, end of period  $0.28   $0.33   $0.16   $(0.05)  $(0.02)
                          
Per share market value:                         
Beginning of period  $0.75   $0.83   $1.67   $7.33   $2.83 
End of period  $0.55   $0.75   $0.83   $1.67   $7.33 
                          
Investment return, based on change in market price from beginning to end of period   (26.7)%   (10.0)%   (50.0)%   (77.3)%   158.8%
                          
RATIOS/SUPPLEMENTAL DATA                         
                          
Net assets (liabilities), end of period  $10,122,746   $11,562,927   $5,829,470   $(177,115)  $(54,047)
Average net assets (liabilities)   10,842,837    10,840,147    2,074,559    (117,244)   (41,665)
Ratio of expenses to average net assets (liabilities)   8.9%   2.0%   7.0%   (306.9)%   (371.0)%
Ratio of net increase (decrease) in net assets (liabilities) from  operations to average net assets (liabilities)   (20.4)%   48.4%   278.6%   295.1%   532.0%
Shares outstanding at end of period   36,928,197    35,030,905    9,342,339    76,677    47,904 
Weighted average shares outstanding during period   36,086,824    35,375,697    35,668,089    77,109    50,889 

 

(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.

 

See accompanying notes to financial statements.

 

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NOTE 10:   AMENDMENT TO CONSOLIDATED FINANCIAL STATEMENTS

 

References to the annual period ended December 31, 2010 refer to the Form 10-K/A filed by the Company with the Securities and Exchange Commission on August 24, 2011 (the “2010 10-K/A”). The 2010 10-K/A amended the Registrant’s annual report on form 10-K for the annual period ended December 31, 2010, as filed with the Securities and Exchange Commission on April 15, 2011 (the “Amendment”).

 

The Amendment recorded a deferred tax liability related to unrealized gains generated by the Company in the year ended December 31, 2010. See Note 7: Provision for Income Taxes for additional detail. The Amendment also reclassified the input level upon which we base our fair value measurements from Level 2 inputs to Level 3 inputs. See Note 4: Investments and Valuations for additional detail on the fair value hierarchy. Additionally, the Amendment added a shareholder return performance graph to Part II, Item 5 of the 2010 10-K/A.

 

NOTE 11:      CURRENT YEAR ADJUSTMENTS

 

Certain reclassifications have been made in the accompanying financial statements to reflect changes in expense categorization as contained in the quarterly reports contained in the fiscal year. Prior period amounts have been restated to reflect the reclassification of professional fees related to share transfers by the CEO in the quarter ended March 31, 2012 and the accrual of professional fees and general and administrative services for the quarters ended June 30, 2012 and September 30, 2012. The net impact of these adjustments is immaterial.

 

NOTE 12:       SUBSEQUENT EVENTS

 

The Company has evaluated events occurring after the date of these financial statements through March 25, 2013, the date that these financial statements were issued. There were no material subsequent events as of that date which would require disclosure in or adjustments to these financial statements other than the following.

 

On January 14, 2013, the Company converted the $100,000 advance from non-affiliates into a promissory note in the amount of U.S. $110,000 (the “Threshold Note”) to Threshold Financial, LLC, a Wisconsin corporation (“Threshold”). The Threshold Note was priced to Threshold at $100,000, equal to 90.91% of its principal amount. The Threshold Note is due on the earlier of January 14, 2014 or the receipt of no less than U.S. $2,000,000 in funding from any private placement of equity securities (a “Qualified Equity Financing”). During the first six months outstanding, the Threshold Note bears interest at 7% per annum, increasing to 12% for the remaining six months until the Threshold Note is due. All amounts owed by the Company under the Threshold Note become immediately due and payable upon an event of default, which includes the Company’s failure to pay the Threshold Note for 10 days after Threshold’s notice thereof and the Company’s insolvency or failure to pay its debts as they become due.

 

In conjunction with the Threshold Note, the Company also issued Threshold a warrant to purchase shares of Company common stock (the “Threshold Warrant”). The Threshold Warrant has a term of three years and entitles Threshold to purchase $100,000 of shares of Common Stock at an exercise price equal to the lesser of $0.50 per share or the price per share of the Company’s capital stock sold to investors in its next Qualified Equity Financing. In issuing the Threshold Warrant, the Company relied on the exemption from registration set forth in Section 4(2) of the Securities Act of 1933, as amended, based upon the limited nature of the issuance.

 

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Item 9:Changes in and Disagreements With Accountants on Accounting and Financial Disclosure

 

None.

 

Item 9A(T): Controls and Procedures

 

Evaluation of Disclosure Controls and Procedures

 

We maintain disclosure controls and procedures (as defined in Rules 13a-15(e) under the Securities Exchange Act of 1934, as amended) that are designed to provide reasonable assurance that the information required to be disclosed by us in reports filed under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission.

 

We carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer of the effectiveness of our disclosure controls and procedures as of the end of the period covered by this Annual Report. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures as of December 31, 2011 were effective.

 

Management’s Annual Report on Internal Control Over Financial Reporting

 

The management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting and for the assessment of the effectiveness of internal control over financial reporting. Internal control over financial reporting is defined in Rule 13a-15(f) or 15d-15(f) promulgated under the Securities Exchange Act of 1934 as a process designed by, or under the supervision of, the Company’s principal executive and principal financial officers and effected by the Company’s board of directors, management and other personnel, 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. The Company’s internal control over financial reporting is supported by written 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 Company’s assets; (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 the Company’s management and directors; 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.

 

The Company’s internal control system was designed to provide reasonable assurance to the Company’s management and board of directors regarding the preparation and fair presentation of published financial statements. All internal control systems, no matter how well designed, have inherent limitations which may not prevent or detect misstatements. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. 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.

 

Management conducted an evaluation of the effectiveness of the Company’s internal control over financial reporting as of December 31, 2012. In making this assessment, management used the framework set forth in the report entitled “Internal Control-Integrated Framework” issued by the Committee of Sponsoring Organizations of the Treadway Commission, or (“COSO”). The COSO framework summarizes each of the components of a company’s internal control system, including (i) the control environment, (ii) risk assessment, (iii) control activities, (iv) information and communication, and (v) monitoring. Based on this evaluation, management concluded that the Company’s internal control over financial reporting was effective as of December 31, 2012. Management concluded that the Company’s internal control policies were effective.

 

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This annual report does not include an attestation report of our registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by our registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permits us to provide only management’s report in this annual report.

 

Changes in Internal Control over Financial Reporting

 

There was no change in our internal controls over financial reporting that occurred during the period covered by this report, that has materially affected, or is reasonable likely to materially affect, our internal controls over financial reporting.

 

Item 9B:Other Information

 

None.

 

PART III

 

ITEM 10:DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

 

The following table includes the names, ages and positions of our directors and executive officers as of December 31, 2012. There are no family relationships between the officers and directors. A summary of the background and experience of each of these individuals immediately follows the table.

 

NAME   AGE   POSITION   OFFICER OR
DIRECTOR SINCE
             
Bryce Knight   29   Chairman and Chief Executive Officer   2005
             
James Jago   30   Chief Financial Officer   2010
             
Timothy Symington   30   Chief Investment Officer   2010
             
Aaron Moore   36   Chief Operating Officer   2010
             
Bryan Engler   29   Independent Director   2012

 

Bryce Knight. Bryce serves as INVENT’s Chairman and Chief Executive Officer, and serves on the investment council. Bryce founded INVENT in 2010 to create the only publicly-traded investment company in the United States focused exclusively on building technology startups. Bryce tailored the team and built the infrastructure to execute on this model, and has guided the portfolio through its early growth.

 

In 2005, Bryce was named the Chief Financial Officer of Global Beverage Solutions, Inc., a publicly-traded Business Development Company that invested in the development of new, proprietary beverage products including structured water and sugar-free sports drinks.  During his one-year tenure at Global, the Company’s Market Capitalization increased by 320%, creating $28 million of value for shareholders as multiple portfolio companies introduced new products to the national market.

 

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Bryce left Global to become the Chief Executive Officer of Small Cap Strategies, Inc. (SMCA) another publicly-traded Business Development Company.   In 2008, he sold controlling interest of SMCA to Oil & Gas Company in Dallas.

 

In 2008, Bryce founded Knight Inc., a boutique advisory and venture capital firm that provided a full suite of services to small public companies and companies that desired to access the public markets.  While running Knight Inc., Bryce assisted dozens of companies with hundreds of transactions including Registration Statements, Acquisitions and Asset Purchases, Reverse Mergers, Public Offerings, Private Offerings, Initial Listings and with Regulatory Reporting and Compliance with the SEC, DTCC and FINRA.   Bryce has eight years of experience working with and managing other small-cap specialists including Securities Attorneys, Auditors, Transfer Agents, Broker Dealers, Market Makers and Investor Relations professionals.  

 

Bryce graduated Magna Cum Laude with an M.B.A. and B.A. in Business from Bellarmine University, Rubel School of Business.

 

James Jago, CFA. James is the Company’s Chief Financial Officer and serves on the investment council. James controls INVENT’s financial reporting and forecasting, and guides portfolio company CEOs and accountants through the process of setting up accounting software and financial statement account hierarchies, monthly journal entry booking, initiation of employee payroll and health benefits, and reporting financial results to board of directors and investors.

 

Before joining INVENT, James worked at Pangaea Asset Management, a boutique investment firm with approximately $1 billion of assets under management. He was responsible for managing a $150 million portfolio of 50 companies, and for underwriting new transactions. During his time at Pangaea, James underwrote investment commitments aggregating over $400 million across a wide spectrum of transaction types and industries.

 

Before working at Pangaea, James worked at Merrill Lynch Capital where he was responsible for the oversight of a $500 million loan portfolio composed of both asset-based and cash-flow based loans. Prior to working at Merrill Lynch Capital, James was a consultant providing consulting services spanning internal audit, credit risk, and financial reporting capacities.

 

James is a CFA charterholder and graduated with honors from the A.B. Freeman School of Business at Tulane University with a Bachelors of Science in Management.

 

Timothy Symington. Tim serves as the Company’s Chief Investment Officer and serves on the investment council. He is responsible for managing and monitoring the development of the company’s investment portfolio.

 

Tim is a veteran entrepreneur and product specialist with a combination of expertise spanning many aspects of web and mobile technology.  Having overseen 100,000 man-hours of product development on dozens of products, Tim has developed expert-level knowledge of the design, construction and marketing of Internet startups. Tim’s specialties include user experience and user interface design, highly scalable systems, real-time information systems, communication platforms, behavioral design, product management, viral marketing, online advertising platforms, social platforms, application programming interfaces, agile development, data driven development, and cloud computing.  His technologies are currently processing over 20 million data points per month, serving 100,000 publishers, and 1,000 advertisers in over 100 countries.

 

Tim is a successful web entrepreneur that has founded several technology companies starting in 2004 when he successfully built and sold a web-advertising platform, after having grown it to over 90,000 publishers in under six months of operation.

 

Tim founded and was Chief Architect for Clowd, Inc., which was acquired by INVENT in 2010. While at Clowd, he designed the algorithms and infrastructure for measuring knowledge and influence amongst humans, for use in the search and advertising verticals.

 

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Tim has held strategic roles in many web technology firms; most recently with Titan Gaming, who recently acquired XFire.com, the largest online gaming portal in the world.

 

Aaron Moore. Aaron serves as the Company’s Chief Operating Officer and Chief Compliance Officer for INVENT. Aaron oversees INVENT’s operations and works closely with our portfolio companies to develop financing strategies and operating plans. Aaron structures use of proceeds, develops organization charts, assembles management teams and advisory boards, creates growth strategy and conversion metrics, develops a sales and business development strategy, and oversees PR and publicity.

 

Prior to INVENT, Aaron worked in the IP Licensing and Technology group at Gray Cary, a law firm with a culture and focus of working with Silicon Valley entrepreneurs. At Gray Cary, Aaron identified a need for technological innovation in the litigation support industry. As email became the primary mode of corporate communication, attorneys needed practical ways to review vast quantities of electronic data. Aaron left Gray Cary in 2003 to pursue this opportunity, and spent the next several years working with several different startups that were focused on selling electronic discovery software and services to large law firms and Fortune 500 companies.

 

Aaron received his JD from the UCLA School of Law and his undergraduate degree from U.C. Berkeley.

 

Bryan Engler. Bryan Engler, CFA, brings eight years of capital markets experience focused on public company valuation, trading and capital structure consulting. Mr. Engler's core priorities include protecting INVENT’s corporate governance system, ensuring that management compensation is aligned to create shareholder wealth and reviewing capital allocation decisions.

 

Mr. Engler calls on his public markets acumen developed as a Director of Corporate Advisory for Thomson Reuters, where he advised numerous S&P 500 companies, and as a Securities Analyst for Great Lakes Advisors, where he currently works on a team deploying $4.5 Billion in assets. To accomplish those priorities listed above, Mr. Engler provides oversight of portfolio company valuation, approves INVENT’s capital deployment plans, directs corporate audits and determines managements compensation structure.

 

Advisory Board

 

Ernest Odinec. Ernest is the Managing Director of SOL Capital Management Company in New York, NY. Prior to joining SOL, Ernest was a Vice President at Neuberger Berman. He has developed investment strategies for a range of clients including a $50 billion defined benefit plan for a major public company.

 

Ernest earned a BA in Economics from the University of California at Berkeley, received an MSc in Economic History from the London School of Economics, and graduated Beta Gamma Sigma from Columbia Business School, earning an MBA with a concentration in Finance.

 

Nate Snyder. Nate has been working with startup technology companies since 1996. His experience includes product development and co-developing the online marketing group at BizRate.com (now Shopzilla.com), which was sold in 2005 for $525 million.

 

Nate switched gears from technology to health care while earning his MBA at the Wharton School of Business at the University of Pennsylvania. After concentrating in Health Care Management and Entrepreneurship, Nate co-founded Redyns Medical, an orthopedic-focused design and development company that has developed proprietary medical devices currently being sold in over 60 countries around the world.

Nate joined Physicians Surgery Centers in 2010, a small partnership that owns and operates 11 outpatient surgery centers and one specialty hospital located throughout Southern California and Arizona

 

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Evan Vogel. Evan is the Founder and Managing Partner of the Night Agency, an award-winning New York City based Creative Advertising Agency.

 

Under Evan’s leadership, Night Agency was named one of Advertising Age’s top Independent Agencies in 2007 and recently named to the Inc. 500/5000 list of fastest –growing, private companies in the U.S.

 

Evan graduated from Syracuse University where he was a Varsity Letterman for the Men’s NCAA Syracuse Basketball Team.

 

Matthew Reilly. Matthew is the President of Rough House Pictures, a film and TV production company, with Danny McBride, Jody Hill, and David Gordon Green.

 

Prior to Rough House, Matthew served as Vice President of Production at Warner Bros. He was recently named one of Hollywood’s top executives 35 and under in The Hollywood Reporter’s annual Next Generation issue.

 

Matthew grew up in New Jersey and graduated with a degree in English literature from University of Pennsylvania.

 

Nick DeVito. Nick is the COO of Xtreme Oil & Gas, Inc. (XTOG.PK). Previously, Nick served as CEO of several subsidiaries in a successful telecommunications company. His prior experience includes 15 years at AT&T engineering and Bell Laboratories where he was awarded three patents for his work in disaster recovery, network architecture, and network design algorithms.

 

Nick has also served in roles as Chief Operating Officer of an alternative energy development company and as Chief Operating Officer in turning around distressed companies and successfully implementing growth strategies at others. He has deep technical experience and has successfully brought development stage products to market achieving over $250 Million in sales.

 

Nick has a BSEE and MSEE from Columbia University and an MBA in Management from New York University.

 

COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT

 

Section 16(a) of the Exchange Act requires our officers and directors, and persons who own more than 10% of a registered class of our equity securities, to file reports of ownership and change in ownership with the SEC. Our officers, directors and greater than 10% stockholders are required by SEC regulations to furnish us with copies of all Section 16(a) forms they file. We believe our directors have made all required filings.

 

CODE OF ETHICS

 

We have adopted a code of ethics for its officers and directors, which is attached as Exhibit 14 to the March 31, 2007 Form 10-Q.

 

AUDIT COMMITTEE

 

On March 6, 2006 the Company formerly chartered an audit committee to provide guidance and direction in matters relating to the accounting of the Corporation and review and preparation of independent accounting statements and other matters relating to financial accounting all for the best governance of the Corporation.

 

The Audit Committee is comprised of one member, Bryan Engler, who is an independent director of the Company. The Company has determined that Bryan Engler qualifies as the Audit Committee Financial Expert.

 

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The Audit Committee has received and discussed the audited financial statements with management; has discussed with the independent auditors the matters required to be discussed by the statement on Auditing Standards No. 61, as amended; has received the written disclosure and the letter from the independent accountants required by Independence Standards Board Standard No. 1 and has discussed with the independent accountant the independent accountant’s independence; and based on the forgoing reviews and discussions, has recommended to the board of directors that the audited financial statements be included in the Company’s annual report on Form 10-K.

 

NOMINATING COMMITTEE

 

Our independent director serves as the nominating committee.

 

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ITEM 11:          EXECUTIVE COMPENSATION

 

The following table sets forth the cash and other compensation we paid during the last three fiscal years to our Chief Executive Officer, President, and other individuals who serve or served as executive officers.

 

Summary Compensation table

 

          Stock awards   Directors fee     
Name and     Salary   and Bonus   earned or paid     
Principal Position  Year  ($)   ($)   in cash ($)   Total ($) 
                    
Bryce Knight, CEO since  2012  $120,000   $-   $-   $120,000 
September 19, 2006 and CFO  2011  $15,000   $-   $-   $15,000 
until October 1, 2010  2010  $60,000   $-   $-   $60,000 
                        
James Jago, CFO since  2012  $120,000   $-   $-   $120,000 
October 1, 2010  2011  $-   $-   $-   $- 
   2010  $-   $-   $-   $- 
                        
Timothy Symington  2012  $120,000   $-   $-   $120,000 
Chief Operating officer from October 1, 2010  2011  $-   $-   $-   $- 
to February 12, 2011, and Chief Investment  2010  $-   $-   $-   $- 
Officer thereafter                       
                        
Aaron Moore  2012  $120,000   $-   $-   $120,000 
Chief Compliance officer from October 1, 2010  2011  $-   $-   $-   $- 
to February 12, 2011, and Chief Operating  2010  $-   $-   $-   $- 
Officer thereafter                       
                        
Brendon Crawford  2012  $-   $-   $-   $- 
Chief Technology Officer from  2011  $10,000   $-   $-   $10,000 
10/1/2010 to February 12, 2011  2010  $-   $-   $-   $- 

 

Required columns for option awards, non-entity incentive plan compensation, change in pension value and nonqualified deferred compensation earnings and all other compensation are omitted from the table above as the amounts are all zero.

 

Narrative discussion of compensation

 

Compensation for our officers and directors is based on comparative compensation levels for similar positions and time.

 

The company intends to pay its Executives and Directors salaries, wages, or fees commensurate with experience and industry standards in relationship to the success of the company.

 

b)Options/SAR Grants Table

 

There were no grants of options or SARs during the year for the named individual.

 

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c)Aggregated option/SAR exercises and fiscal year-end option/SAR value table.

 

There were no option/SAR exercises or any options/SARs outstanding at fiscal year-end for the named individual.

 

d)Long-term incentive plan ("LTIP") awards table

 

There were no LTIP awards during the year for the named individual.

 

e)Compensation of directors

 

Directors are generally compensated $1,000 for each meeting attended during the year. We incurred $1,000 of Directors fees in the fiscal year ended December 31, 2012.

 

f)Employment contracts and termination of employment and changes in control arrangements

 

The Company has employment agreements with its executive officers. The Company intends to pay its Executives and Directors salaries, wages, or fees commensurate with experience and industry standards in relationship to the success of the company.

 

The Company does not have any changes in control arrangements.

 

g)Report on repricing of options/SARs

 

The Company has no options or SARs outstanding during 2010 or 2009 which were repriced.

 

h)Compensation committee

 

The outside directors make up the compensation committee. The compensation committee does not currently have a charter, but plans to add one during 2012.

 

The Company intends to pay its Executives and Directors salaries, wages or fees commensurate with experience and industry standards in relationship to the success of the Company.

 

The compensation committee sets the compensation for executive officers and directors. The compensation of employees may be delegated to the CEO.

 

i)Compensation committee interlocks and insider participation

 

The outside Directors serve on the compensation committee. There is no relationship between the CEO and any of the outside directors or the companies for whom they work.

 

j)Compensation committee report

 

Based on the Compensation Discussion and Analysis required by Item 402(b) between the compensation committee and management, the compensation committee recommended to the Board of Directors that the Compensation Discussion and Analysis be included in the 10-K.

 

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ITEM 12:SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

 

The following table sets forth, as of December 31, 2012, certain information concerning the beneficial ownership of each class of our voting stock held by:

 

-each beneficial owner of 5% or more of our voting stock, based on reports filed with the SEC and certain other information;

 

-each of our directors;

 

-each of our executive officers; and

 

-all of our executive officers and directors as a group.

 

There were 36,928,197 shares of our common stock issued and outstanding at December 31, 2012.

 

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NAME AND ADDRESS (1)  COMMON (2)   % COMMON 
         
Timothy Symington   9,750,000    26.4%
           
Knight, Inc.   9,579,000    25.9%
           
James Jago   3,600,000    9.7%
           
Aaron Moore   3,600,000    9.7%
           
Bryan Engler   -    - 
           
Officers and Directors as a group (five persons)   26,529,000    71.7%

 

(1)     The address of all parties listed is C/O INVENT Ventures, Inc., 137 Bay Street, Santa Monica, CA 90405.

 

(2)     Unless otherwise indicated, we believe that all persons named in the table have sole voting and investment power with respect to all shares of common stock beneficially owned by them. A person is deemed to be the beneficial owner of securities which may be acquired by such person within 60 days from the date on which beneficial ownership is to be determined upon the exercise of options, warrants or convertible securities. Shares are as of December 31, 2012.

 

Securities authorized for issuance under equity compensation plans

 

See Item 5.

 

ITEM 13:CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

 

The officers 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.

 

On November 24, 2008, the Company amended its Letter of Intent dated October 1, 2008, in which the Company agreed to acquire working interests in certain oil and gas properties and two operating companies from a shareholder, Xtreme Oil & Gas, Inc. The parties agreed to extend the closing date until March 30, 2009, in exchange for issuance of 50,000 shares of the Company’s common stock to Xtreme as an extension fee. The total purchase price was to be reduced by the extension fee. The shares were originally valued at $1,275,000, the amount at which the stock was trading on the date of the amendment and the total was initially expensed as an extension fee. On April 6, 2009, the Company and Xtreme agreed to rescind the extension agreement and the 50,000 shares were returned to the Company and cancelled. The LOI expired under its original terms on December 31, 2008, therefore the extension fee is not reflected in the financial statements. Xtreme owned 32.66% of the Company's common stock as of December 31, 2009. On May 10, 2010, Xtreme entered into a stock purchase agreement with the Company's CEO and the Company's CEO acquired the 8,000 shares previously owned by Xtreme.

 

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At December 31, 2009, the Company had received advances from Xtreme and owed $40,000, which was included in due to related parties. As a part of the transaction discussed above, the Company's CEO acquired the obligation owed to Xtreme.

 

On May 10, 2010, Knight, Inc., pursuant to an Asset Purchase Agreement, sold $40,000 of receivables due to Knight by the Company to an unaffiliated third party for $40,000 in cash and other mutually agreed upon consideration. This transaction was later cancelled in the 3rd Quarter of 2010.

 

As a result of the Xtreme merger not being completed and effective July 1, 2010, officers and employees of Xtreme returned 5,800 shares of the Company's common stock to be cancelled. Mr. Knight also returned 541 shares to be cancelled. The 6,341 shares were cancelled by the transfer agent on July 19, 2010. The cancellation of the shares was recorded as a contribution to capital by the shareholders on July 1, 2010.

 

On September 27th, 2010 the Company entered into restricted share purchase agreements to offer restricted shares of the Company’s common stock for $.02 per share. The Company issued 11,510,000 shares to the CEO and 21 other individuals that had been engaged to join INVENT as executive officers, advisors, and consultants. The share purchase agreements contain a one year lock on the transfer of the shares and a 36 month vesting and repurchase provision that allows the Company to repurchase unvested shares at cost should an individual break the terms of their engagement agreement.

 

On September 28th, 2010 the Company issued 350,000 shares of Company common stock to Brad Curry pursuant to a debt to equity conversion agreement. Under the agreement, Mr. Curry agreed to convert $3,500 remaining debt to common stock at $.01 per share and forgive $3,000 of debt owed by the Company.

 

On February 12, 2011 the Company’s Board of Directors were notified by Management that the Company would exercise its repurchase option to purchase 2,700,000 shares of Company Common Stock pursuant to its Share Purchase Agreement and Employment Agreement with a Vineet Jindal, a previous officer of the Company.  Per the terms of the agreement, INVENT repurchased 600,000 shares at Mr. Jindal’s cost value and then cancelled those shares.  The Company transferred its right to repurchase the remaining 2,100,000 to employees of INVENT, who repurchased these shares at Mr. Jindal’s original cost value.

 

Effective July 11, 2010, Knight, Inc., wholly owned by Bryce Knight, Chief Executive Officer of the Company, acquired 10,000 newly issued shares of the Company's common stock in exchange for $5,000 in cash previously paid to the Company. On September 27, 2010, Knight, Inc. acquired 3,250,000 shares pursuant to a share purchase agreement in exchange for $65,000 owed to Knight, Inc.

 

At December 31, 2011 and December 31, 2010, the Company owed its CEO $120,990 and $311,862, respectively, for loans, accrued compensation and expense reimbursements, which is included in amounts due to related parties. The amount owed at December 31, 2010 included a non-interest bearing convertible note in the amount of $133,807 which was convertible at $0.50 per share or NAV per share, whichever was greater. The convertible note was converted at a price of $1.00 per share at March 30, 2011.

 

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

 

On February 12, 2011 the Company’s Board of Directors were notified by Management that the Company would exercise its repurchase option to purchase 2,700,000 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 600,000 shares at Mr. Jindal’s cost value and then cancelled those shares.  The Company transferred its right to repurchase the remaining 2,100,000 to employees of INVENT, who repurchased these shares at Mr. Jindal’s original cost value.

 

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On February 23, 2012 and April 11, 2012, Knight, Inc., wholly owned by Bryce Knight, Chief Executive Officer of the Company, transferred 150,000 and 100,000 shares, respectively, to consultants for services to be rendered for the Company. These shares were valued at $1.00 per share 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 engineering, financial and managerial assistance provided by the Company to VIRURL.

 

ITEM 14:PRINCIPAL ACCOUNTANT FEES AND SERVICES

 

The aggregate fees billed for professional services rendered by our current principal accountants for the audit of our annual financial statements and review of our quarterly financial statements were $15,930 and $14,575 during the years ended December 31, 2012 and 2011, respectively. Billings in 2012 included the 2011 audit and billings in 2011 included the 2010 audit. The 2012 audit will be billed in 2013.

 

Audit-Related Fees: None

Tax Fees - None by current auditor.

All Other Fees - None.

 

PART IV

 

ITEM 15:EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

 

(a)The following documents are filed as a part of this report:
1.Financial Statements – The following financial statements of INVENT Ventures, Inc. are contained in Item 8 of this Form 10-K:
·Report of Independent Registered Public Accounting Firms
·Statements of Net Assets (Liabilities) at December 31, 2012 and 2011
·Statements of Operations – For the fiscal years ended December 31, 2012, 2011 and 2010
·Statements of Cash Flows – For the fiscal years ended December 31, 2012, 2011 and 2010
·Statements of Changes in Net Assets (Liabilities) – For the fiscal years ended December 31, 2012, 2011 and 2010
·Schedules of Investments December 31, 2012 and 2011
·Notes to the Financial Statements
·Financial Highlights - For the fiscal years ended December 31, 2012, 2011, 2010, 2009 and 2008

 

2.Financial Statement Schedules were omitted, as they are not required or are not applicable, or the required information is included in the Financial Statements.

 

3.Exhibits – The following exhibits are filed with this report or are incorporated herein by reference to a prior filing, in accordance with Rule 12b-32 under the Securities Exchange Act of 1934.

 

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Exhibit   Description
     
4.1   Form of Overseas Investment Banking Alliance, S.A. Warrant incorporated by reference to the Company's Form 8-K filed with the SEC on October 31, 2012.
     
4.2   Form of Threshold Financial, LLC. Promissory Note incorporated by reference to the Company's Form 8-K filed with the SEC on January 18, 2013.
     
4.3   Form of Threshold Financial, LLC. Warrant incorporated by reference to the Company's Form 8-K filed with the SEC on January 18, 2013.
     
31.1   Certificate of Chief Executive Officer required by Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith).
     
31.2   Certificate of Chief Financial Officer required by Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith).
     
32.1   Certificate of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith).
     
32.2   Certificate of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith).
     
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 Section 3 or 15(d) of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

DATE: March 25, 2012 INVENT VENTURES, INC.
   
  /s/ Bryce Knight
  Bryce Knight
  President, Chief Executive Officer

 

Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the Registrant in the capacities and on the dates indicated.

 

DATE SIGNATURE/TITLE
   
March 25, 2012 /s/ Bryce Knight
  Bryce Knight
  Chief Executive Officer
  and Chairman
   
March 25, 2012 /s/ James Jago
  James Jago
  Chief Financial Officer
   
March 25, 2012 /s/ Bryan Engler
  Bryan Engler
  Director

 

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