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IDEA > SEC Filings for IDEA > Form 10-K on 25-Mar-2013All Recent SEC Filings

Show all filings for INVENT VENTURES, INC. | Request a Trial to NEW EDGAR Online Pro

Form 10-K for INVENT VENTURES, INC.


25-Mar-2013

Annual Report


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;

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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

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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.

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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.

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TABULAR DISCLOSURE OF CONTRACTUAL OBLIGATIONS

Not applicable.

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