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IDEA > SEC Filings for IDEA > Form 10-Q on 13-Nov-2012All Recent SEC Filings

Show all filings for INVENT VENTURES, INC.

Form 10-Q for INVENT VENTURES, INC.


13-Nov-2012

Quarterly Report


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

FORWARD LOOKING STATEMENTS

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

our limited operating history;

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

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

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

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

our operating costs may be greater than expected;

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

our inability to raise additional capital if needed; and

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

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

Company

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

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

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

INVENToperates 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).

Critical Accounting Policies and Estimates

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

Results of Operations

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Liquidity and Capital Resources

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

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

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

Net Asset Value

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

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