Item
2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
As
used in this Form 10-Q, references to “Point Capital”, “Company”, “we”, “our”
or “us” refer to Point Capital, Inc. unless the context otherwise indicates.
Forward-Looking
Statements
The
following discussion should be read in conjunction with our financial statements, which are included elsewhere in this Form 10-Q
(the “Report”). This Report contains forward-looking statements which relate to future events or our future financial
performance. In some cases, you can identify forward-looking statements by terminology such as “may”, “should”,
“expects”, “plans”, “anticipates”, “believes”, “estimates”, “predicts”,
“potential”, or “continue” or the negative of these terms or other comparable terminology. These statements
are only predictions and involve known and unknown risks, uncertainties, and other factors that may cause our or our industry’s
actual results, levels of activity, performance or achievements to be materially different from any future results, levels of
activity, performance or achievements expressed or implied by these forward-looking statements.
While
these forward-looking statements, and any assumptions upon which they are based, are made in good faith and reflect our current
judgment regarding the direction of our business, actual results will almost always vary, sometimes materially, from any estimates,
predictions, projections, assumptions or other future performance suggested herein. Except as required by applicable law, including
the securities laws of the United States, we do not intend to update any of the forward-looking statements to conform these statements
to actual results.
Overview
We
are a closed-end, non-diversified investment company that has elected to be regulated as a business development company under
the Investment Company Act of 1940, as amended (the “1940 Act”). As a business development company, we
are required to comply with certain regulatory requirements. For instance, we generally have to invest at least 70%
of our total assets in “qualifying assets,” including securities of private U.S. companies, cash, cash equivalents,
U.S. government securities and high-quality debt investments that mature in one year or less. Through March 31, 2017, we were
treated for tax purposes as a regulated investment company, or a RIC, under Subchapter M of the Internal Revenue Code of 1986,
as amended (the “Code”). However, since March 31, 2017, we failed a RIC diversification test since our
investment in IPSIDY INC. (formerly ID Global Solutions Corporation) (“IDGS”) accounted for over 25% of our total
assets (49.6% of total assets at September 30, 2017). We were eligible for relief under certain RIC provisions. Unless we would
otherwise be in compliance, in order to cure the failure, we must dispose of the asset causing the failure within six months of
the end of the quarter in which we identified the failure. Additionally, we may be required to pay an excise tax of $50,000. As
of the September 30, 2017, we had not cured our failure to retain our status as a RIC and we do not intend to retain our RIC status.
Accordingly, we are subject to income taxes at corporate tax rates. The loss of our status as a RIC is not expected to have any
impact on our financial position or results of operations.
Investment
Strategy
We
seek to invest in companies that are asset rich and generating cash flow on a sustainable basis. Further, when identifying prospective
portfolio companies, we seek the following attributes, which we believe will help us generate higher total returns with an acceptable
level of risk. These attributes are:
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Strong
management teams with meaningful equity ownership.
We will seek experienced management teams with an established track
record of success in place or available. We will typically require the portfolio companies to have proper incentives to align
management’s goals with ours. Generally, we will seek companies in which the management teams have significant equity
interests.
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Secure
market positions that present attractive growth opportunities.
We will seek companies that we believe possess advantages
in scale, scope, customer loyalty, product pricing, or product quality versus their competitors, minimizing sales risk and
generating margins that can be readily forecast.
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Industries
with favorable trends.
We will seek industries with favorable industry trends and companies performing well
within their industries and poised to benefit from a catalyst.
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Investing
in private companies
. We do not expect to invest in start-up companies or companies with speculative business plans. We
may also consider companies that are underperforming compared to their potential due to structural impediments with opportunities
to restructure and refocus strategy and resources.
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Diversification
.
We will seek to diversify our portfolio among companies engaged in a variety of industries, thereby potentially reducing the
risk of a downturn in any one industry having a disproportionate impact on the value of our portfolio. We cannot assure you
that we will be successful in this regard.
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Structure
financing terms to limit down side risk.
Originating our own lending opportunities through our network will
permit us to structure loans to enhance the element of capital preservation for our stockholders.
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Private
equity sponsorship
. Often we will seek to participate in transactions sponsored by what we believe to be high-quality
private equity firms. Point Capital’s senior management team believes that a private equity sponsor’s willingness
to invest significant sums of equity capital into a company provides an additional level of due diligence investigation and
is an implicit endorsement of the quality of the investment. Further, by co-investing with quality private equity firms which
commit significant sums of equity capital with junior priority to our future debt investments, we may benefit from having
due diligence on our investments performed by both parties.
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Viable
exit strategy
. We intend to focus our investment activity primarily in companies whose business models and growth prospects
offer attractive exit possibilities, including repayment of our investments, with the potential for capital gain on any equity
interest we hold through an initial public offering of common stock, a merger, a sale or other recapitalization. See “Investment
Objectives and Strategy.”
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We
plan to be the lead investor for transactions, as well as a co-investor with investment institutions for other transactions. Moreover,
we may acquire investments in the secondary loan market, and, in analyzing such investments, we will employ the same analytical
process that we use for our primary investments.
Portfolio
Update
As
of September 30, 2017, we held 16 portfolio companies. All are non-controlled and non-affiliated investments.
Accelerize,
Inc. (ACLZ) –
As of September 30, 2017, we own 100,379 shares of common stock and 60,000 warrants of Accelerize Inc.,
an OTCQB listed company. Each warrant expires on August 18, 2020 and is exercisable at an exercise price of $1.32 per common share.
ACLZ owns and operates CAKE, a Software-as-a-Service, or SaaS, platform providing online tracking and analytics solutions
for advertisers and online marketers. The Company provides software solutions for businesses interested in optimizing their digital
advertising spend.
Actinium
Pharmaceuticals Inc. (ATNM) -
As of September 30, 2017, we own 29,250 warrants of Actinium Pharmaceuticals Inc., a NYSE listed
company. ATNM operates as a biopharmaceutical company that develops alpha particle immunotherapeutic and other radiopharmaceuticals
for select applications. The warrants expire on February 11, 2019 and are exercisable at $6.50 per common share.
Arista
Power, Inc. (ASPW)
-
On March 31, 2014, we completed a $100,000 investment in 9% convertible preferred stock and 750,000
warrants of Arista Power, Inc., a company that develops and manufactures renewable power equipment. ASPW produces wind turbines,
solar energy systems, and custom-designed power management systems. The Preferred Stock is convertible into shares of common stock
at a conversion price equal to $0.20 per common share. The warrants expire on March 31, 2019 and the exercise price of the warrants
is $0.25 per common share. In March 2015, ASPW filed a form with the Securities and Exchange Commission to t
ermination
its registration under Section 12(g) of the securities exchange act of 1934. On December 31, 2015, we determined that the fair
value of ASPW was zero and accordingly, for the year ended December 31, 2015, we recorded a realized loss on investments of $100,000.
Cesca
Therapeutics, Inc.
(KOOL) - As of September 30, 2017, we own 825 warrants (adjusted to reflect 1 for 20 reverse split effective
March 7, 2016) of Cesca Therapeutics, Inc., a Nasdaq-listed company, who operates as a supplier of products targeting the worldwide
adult stem cell market. The company offers automated and semi-automated devices and single-use processing disposables that enable
the collection, processing and cryopreservation of stem cells and other cellular tissues from cord blood and bone marrow used
in regenerative medicine. These warrants are exercisable at a price of $31.00 per share and expire on June 18, 2019.
CombiMatrix
Corp. (CBMX) -
On December 19, 2013, we completed an investment in warrants of CombiMatrix Corp., a Nasdaq-listed company.
CBMX is a molecular diagnostics company specializing in DNA-testing services for development disorders. We currently hold 2,589
warrants of CombiMatrix. The warrants expire on December 19, 2018 and the exercise price of the warrants is $46.80 per common
share. (All warrant information adjusted to reflect 1 for 15 reverse split effective January 29, 2016).
DatChat
Inc. -
Between February 6, 2015 and April
2, 2015, we completed a $100,150 investment in 2,000,000 shares of common stock in DatChat, Inc., a private company that develops
mobile messaging applications as well as other intellectual property. Additionally, on May 2015, we completed a $30,000 investment
in a 10% debenture. In February 2016, we increased the principal amount of this debenture by $5,000 in connection with the extension
of debenture due date to December 2016.
Home
Bistro, Inc. (“Home Bistro”) -
On August 7, 2015, we completed an investment of $150,000 in a 15% convertible
debenture and 75,000 warrants of Home Bistro, Inc. We have the right to convert all or any portion of the then aggregate outstanding
principal amount of this note, together with any accrued and unpaid interest thereon, into shares of common stock of Home Bistro
at any time following a closing date, at 75% of the pricing of the Home Bistro’s securities offered at their next round
of financing. Each warrant expires on August 7, 2020 and is exercisable at an exercise price equal to 150% of the pricing of Home
Bistro’s next round of financing. Home Bistro, Inc. is a private company.
IPSIDY
INC. (formerly ID Global Solution Corp.) (IDGS)
-
On June 25, 2015, we completed an investment of $100,000 in a 10% convertible debenture and 2,200,000 warrants of ID Global Solution
Corp., an OTCPinks listed company. We had the right to convert all or any portion of the then aggregate outstanding principal
amount of this debenture, together with any accrued and unpaid interest thereon, into shares of common stock of IDGS at a conversion
price of $.03 per share. Each warrant expires on June 25, 2020 and is exercisable at an exercise price of $0.05. In March 2016,
we purchased 20,000 common shares IDGS of for $9,190 and during the six months ended June 30, 2017, we sold these 20,000 common
shares. In January 2017, we converted the $100,000 10% convertible debt and accrued interest receivable of $16,000 into 3,866,667
share common shares of IDGS. IDGS is an international biometrics and payment processing company with a unique technology platform
that provides valuable, secure payment processing for consumers as well as for merchants.
iNeedMD
Holdings, Inc. (NEMD) -
On October 15, 2014,
we completed a $795 investment in 25,000 shares of common stock of iNeedMD Holdings Inc., an OTCPinks listed company that manufactures
medical devices that acquires and transmits health related data.
MabVax
Therapeutics Holdings Inc. (MBVX) -
As of
September 30, 2017, we own 9,009 warrants (adjusted to reflect 1 for 7.4 reverse split effective August 16, 2016) of
MabVax
Therapeutics Holdings Inc., a NASDAQ listed company. Each warrants expired on October 6, 2017. MabVax Therapeutics Holdings Inc.
is a biopharmaceutical company that discovers, develops, and commercializes small molecule drugs to treat serious diseases. MVBX’s
most advanced product development programs are for the treatment of cancer and diabetes.
MultiMedia
Platforms Inc. (MMPW) -
On July 6, 2015, we completed an investment of $100,000 in a 9% convertible debenture and 333,334
warrants of MultiMedia Platforms Inc., an OTCQB listed company. We have the right
to
convert all or any portion of the then aggregate outstanding principal amount of this note, together with any accrued and unpaid
interest thereon, into shares of common stock of MMPW at the lower of $.30 per share or at such price that equals 85% of the price
of the MMPW’s common stock or common stock equivalent sold at the next equity or convertible debt financing with gross proceeds
to MMPW of no less than $1,000,000.
Each warrant expires on July 6, 2019 and is exercisable
at an exercise price equal to the lesser of (i) $0.75 or (ii)
85% of the exercise price of the warrants issued at the next
equity or convertible debt financing with gross proceeds to MMPW of no less than $1,000,000
.
In October 2015, we received 15,000 common shares of MMPW as payment of accrued interest receivable. MultiMedia Platforms Inc.
is a
multimedia technology and publishing company that integrates print media with social media, and related online platforms,
to deliver information and advertising to niche markets. On October 4, 2016, MMPW filed a voluntary petition under Chapter 11
of Title 11 under the United States Code. The cases were filed in the United States Bankruptcy Court, Southern District of Florida.
Accordingly, at September 30, 2017, our investment in MMPW is valued at zero.
Orbital
Tracking Corp. (TRKK) -
On October 10, 2014, we completed a $150,000 investment in 200,000 shares of Series C Preferred Stock
and 100,000 shares of Series D Preferred Stock of Orbital Tracking Corp., an OTCQB listed company that provides satellite telecommunications
voice airtime, tracking devices and services, and ground station construction. TRKK provides mobile voice and data communications
services globally via satellite. During 2016, each share of Series C Preferred converted into 10 shares of TRKK common stock for
an aggregate of 2,000,000 common shares. Each share of Series D Preferred converts into 20 shares of TRKK common stock for an
aggregate of 2,000,000 common shares. On June 6, 2016, we converted 76,551 Series D preferred shares into 1,531,020 shares of
TRKK common stock, At September 30, 2017, we own 23,449 Series D preferred shares which are convertible into 468,980 shares of
common stock, and 531,020 common shares.
Pish
Posh Baby LLC.
- On July 2, 2014, we made an investment of $150,000 in Convertible Preferred Stock of PishPosh, Inc. is a
private company that operates a commerce platform serving parents and grandparents of newborns, infants, and toddlers. $100,000
of the Convertible Preferred Stock was convertible at $1.00 and $50,000 was convertible at $0.2666. In January 2016, pursuant
to an Asset Purchase Agreement, all holders of notes, shares of its common stock, Series A Preferred Stock and warrants to purchase
common stock exchange their securities into 420,000 membership units (the “Units”) issued by Pish Posh Baby LLC, a
Delaware limited liability company (“PPB”). Accordingly, we currently own 19,155 membership units in PPB.
Provectus
BioPharmaceuticals Inc. (PVCT) -
On June
22, 2015, we completed an investment of $75,000 in 100,000 shares of common stock and 100,000 warrants in Provectus BioPharmaceuticals
Inc., an NYSE listed company. Each warrant expires on June 22, 2020 and is exercisable at an exercise price of $0.85. Provectus
BioPharmaceuticals Inc. is a development-stage biopharmaceutical company that is primarily engaged in developing ethical pharmaceuticals
for oncology and dermatology indications. PVCTs goal is to develop alternative treatments that are safer, more effective, less
invasive and more economical than conventional therapies. During the three months ended September 30, 2017, we sold all 100,000
shares of common stock.
Vapor
Corp. (VPCO) -
On November 14, 2014, we completed a $100,000 investment in a 7% convertible debenture and warrants of Vapor
Corp., an OTCQB listed company that markets and distributes electronic cigarettes. VPCO distributes electronic devices that vaporize
a liquid solution, which provides users an experience akin to smoking without actual combustion. On August 3, 2015, the Company
collected the principal amount of $100,000 and all unpaid and accrued interest. Additionally, in September 2015, pursuant to certain
anti-dilutive provisions in the convertible debt agreement, the Company received common shares of VPCO. In February 2016, VPCO
effected a 1 for 70 reverse stock split and in June 2016, VPCO effected a 1 for 20,000 reverse stock split. All share and warrant
information has been adjusted to reflect 1 for 70 and 1 for 20,000 reverse split which adjusted our share and warrant amounts
to zero.
Xtant
Medical Holdings, Inc. (XTNT)
-
As
of September 30, 2017, we own 11,513 warrants of
Xtant Medical Holdings, Inc., a NYSE listed
company that produces human tissue for orthopedic procedures. XTNT produces allografts of human cancellous bone which has been
demineralized. XTNT also produces medical devices for orthopedic, plastic, and cardiovascular surgery; and antimicrobial coatings
for medical devices. The warrants expire on August 1, 2019 and the exercise price of the warrants is $7.12 per share.
Results
of Operations
For
the three and nine months ended September 30, 2017 and 2016, the principal measure of our financial performance was the net increase
(decrease) in our net assets resulting from operations, which includes (i) net investment income (loss), (ii) net realized gain
(loss) on investments, and (iii) net change in unrealized appreciation (depreciation) on investments. Net investment
income (loss) is the difference between our income from interest, dividends, fees and other investment income and our operating
expenses. Net realized gain (loss), if any, is the difference between the net proceeds from the disposition of portfolio
company securities and their stated cost. Net unrealized appreciation (depreciation) from investments is the net change
in the fair value of our investment portfolio.
Investment
Income:
For the three months ended September 30, 2017 and 2016, we earned interest income of $6,504 and $11,256,
and for the nine months ended September 30, 2017 and 2016, we earned interest income of $20,478 and $40,789, respectively, primarily
resulting from interest earned on convertible debt and other debt. The decrease was attributable to a decrease in income-earning
investments.
Operating
Expenses:
For the three and nine months ended September 30, 2017 and 2016, total operating expenses consisted of the following:
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For the Three Months Ended
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For the Nine Months Ended
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September
30,
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September
30,
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2017
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2016
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2017
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2016
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Compensation expense
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$
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45,000
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$
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40,000
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$
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135,000
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$
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97,500
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Professional fees
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36,890
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35,509
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129,567
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221,267
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Filing fees
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484
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1,266
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3,246
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2,958
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Insurance expense
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8,925
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8,225
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26,774
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23,405
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Bad debt expense
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-
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-
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6,750
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General and administrative
expenses
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6,860
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8,097
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20,196
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22,488
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Total
operating expenses
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$
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98,159
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$
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93,097
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$
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321,533
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$
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367,618
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Changes
in operating expenses primarily consisted of the following:
Compensation
expense: For the three months ended September 30, 2017, we incurred compensation expense of $45,000 as compared $40,000 for the
three months ended September 30, 2016, an increase of $5,000 or 12.5%. During the three months ended September 30, 2017, compensation
paid to our chief executive officer was $15,000 as compared to $10,000 during the three months ended September 30, 2016. For the
nine months ended September 30, 2017, we incurred compensation expense of $135,000 as compared $97,500 for the nine months ended
September 30, 2016, an increase of $37,500 or 38.5%. During the nine months ended September 30, 2017, compensation paid to our
chief executive officer was $45,000 as compared to $10,000 during the nine months ended September 30, 2016.
Professional
fees: For the three months ended September 30, 2017, professional fees increased by $1,381 or 3.9% as compared to the three months
ended September 30, 2016. This increases was attributable to an increase in legal fees of $16,777 and a decrease in accounting
fees of $15,395. For the nine months ended September 30, 2017, professional fees decreased by $91,700 or 41.1% as compared to
the nine months ended September 30, 2016. These decreases was attributable to a decrease in legal fees of $37,081, a decrease
in accounting fees of $48,619, and a decrease in consulting fees of $6,000.
Bad
debt expense: For the three and nine months ended September 30, 2017, we wrote off interest receivable of $0 and $6,750 deemed
uncollectable, respectively. We did not incur bad debt expense in the 2016 periods.
Net
Investment loss:
For the three months ended September 30, 2017 and 2016, net investment loss amount to $91,655 and
$81,841, respectively. For the nine months ended September 30, 2017 and 2016, net investment loss amount to $301,055 and
$326,829, respectively.
Net
Realized And Unrealized (Loss) Gain On Investments:
Net
Realized Gain (Loss) on Investments:
During the three months ended September 30, 2017 and 2016, we disposed of certain
investment positions and recognized a net realized gain (loss) of $(80,913) and $131, respectively. During the nine months ended
September 30, 2017 and 2016, we disposed of certain investment positions and recognized a net realized (loss) gain of $(79,879)
and $23,400, respectively.
Net
Change in Unrealized Loss on Investments
: At September 30, 2017 and December 31, 2016, we had a cost basis in our portfolio
companies of $996,642 and $1,098,096 with a fair market value of $1,064,005 and $634,873, respectively. The net unrealized loss
on investments for the three months ended September 30, 2017 and 2016 was $346,575 and $349,795, respectively. The net unrealized
gain (loss) on investments for the nine months ended September 30, 2017 and 2016 was $530,586 and $(666,541), respectively. During
the nine months ended September 30, 2017, we converted our debt investment in Ipsidy, Inc. (f/k/s ID Global Solutions, Inc,) of
$100,000 and the related interest receivable of $16,000 into 3,866,667 common shares of Ipsidy, Inc. Based on our analysis of
the fair value of our investments in Ipsidy, Inc., for the three and nine months ended September 30, 2017, we recorded an unrealized
(loss) gain of approximately $(410,058) and $539,280, respectively.
Net
Decrease in Net Assets Resulting from Operations:
For the three months ended September 30, 2017 and 2016, the net decrease
in net assets resulting from operations was $519,143 and $431,505, respectively. For the nine months ended September 30, 2017
and 2016, the net increase (decrease) in net assets resulting from operations was $149,652 and $(969,970), respectively.
Liquidity
and Capital Resources
As
of September 30, 2017, we had $301,690 in cash and cash equivalents, compared to $579,209 as of December 31, 2016, a decrease
of $277,519. We primarily used operating cash to pay professional fees and compensation expense.
The
Company believes that our existing available cash and liquid investments will enable the Company to meet its working capital requirements
for at least 12 months from the date of this report.
The
Company has no agreements or arrangements to raise capital.
Since
inception we have funded our operations and the purchase of our investments primarily through equity financings and we expect
that we will continue to fund our operations through the equity and debt financing, either alone or through strategic alliances.
Additional funding may not be available on favorable terms, if at all. We intend to continue to fund our business by way of equity
or debt financing until realized gains on our investments can support our operations. If we raise additional capital through the
issuance of equity or convertible debt securities, the percentage ownership of our company held by existing shareholders will
be reduced and those shareholders may experience significant dilution. We cannot assure you that we will be able to raise the
working capital as needed in the future on terms acceptable to us, if at all.
Although
we believe that our existing available cash will enable us to meet our working capital requirements for at least 12 months, we
may need to raise additional funds to continue investing in portfolio companies. If we are unable to raise capital, we may be
required to reduce the scope of our investment activities, which could harm our business plans, financial condition and operating
results, or cease our operations entirely, in which case, you will lose all of your investment.
We
currently have no commitments with any person for any capital expenditures.
Off-Balance
Sheet Arrangements
We
have no off-balance sheet arrangements.
Critical
Accounting Policies
Basis
of Presentation
The
accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted
in the United States of America (“U.S. GAAP”). We formed a wholly-owned subsidiary, Hemp Funding, Inc., to invest
in companies that are positioned for growth in the legal cannabis industry. The subsidiary has not made investments to date. The
Company consolidates the subsidiary. All significant intercompany balances and transactions have been eliminated in consolidation.
Cash
and Cash Equivalents
We
consider all highly liquid instruments purchased with an original maturity of three months or less and money market accounts to
be cash equivalents.
Securities
Transactions
Securities
transactions are recorded on a trade date basis. Securities transactions outside conventional channels, such as private transactions,
are recorded as of the date the Company obtains the right to demand the securities purchased or to collect the proceeds from a
sale, and incurs an obligation to pay for securities purchased or to deliver securities sold, respectively. We record interest
and dividend income on an accrual basis beginning on the trade settlement date (the date on which a financial transaction is settled
and monies from the transaction have occurred) or the ex-dividend date, respectively, to the extent that we expect to collect
such amounts. Commissions and other costs associated with transactions involving securities, including legal costs, are included
in the cost basis of purchases and deducted from the proceeds of sales.
Net
Realized Gains or Losses and Net Change in Unrealized Gains or Losses on Investments
Realized
gain or loss is recognized when an investment is disposed of and is computed as the difference between the Company’s cost basis
and the net proceeds received from such disposition. Net change in unrealized gains or losses is computed as the difference between
the fair value of the investment and the cost basis of such investment.
Valuation
of Investments
Our
investments consist of loans and securities issued by public and privately-held companies, including convertible debt, loans,
equity warrants and preferred and common equity securities.
We
apply the accounting guidance of Accounting Standards Codification Topic 820,
“Fair Value Measurement and Disclosures”
(“ASC 820”).
This guidance defines fair value as the price that would be received from selling an asset
or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When
determining the fair value measurements for assets and liabilities required to be recorded at fair value, we consider the principal
or most advantageous market in which it would transact business and considers assumptions that marketplace participants would
use when pricing the asset or liability, such as inherent risk, transfer restrictions, and risk of nonperformance.
The
guidance also establishes a fair value hierarchy for measurements of fair value as follows:
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Level
1 - Valuations based on unadjusted quoted market prices in active markets for identical assets or liabilities.
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Level
2 - Valuations based on inputs other than quoted market prices that are observable, either directly or indirectly, such as
quoted prices in active markets for similar assets or liabilities, quoted prices for identical or similar assets or liabilities
in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially
the full term of the assets or liabilities.
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Level
3 - Valuations based on inputs that are unobservable and where there is little, if any, market activity at the measurement
date. The inputs for the determination of fair value may require significant management judgment or estimation and is based
upon management’s assessment of the assumptions that market participants would use in pricing the assets or liabilities.
These investments include debt and equity investments in private companies or assets valued using the market or income approach
and may involve pricing models whose inputs require significant judgment or estimation because of the absence of any meaningful
current market data for identical or similar investments. The inputs in these valuations may include, but are not limited
to, capitalization and discount rates, earnings before interest, taxes, depreciation and amortization (“EBITDA”)
multiples, and discounts for lack of marketability.
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On
a quarterly basis, the Board of Directors (the “Board”) of the Company, in good faith, determines the fair value of
investments in the following manner:
Equity
securities which are listed on a recognized stock exchange are valued at the closing trade price on the last trading day of the
valuation period. For equity securities that carry a restriction inherent to the security, a restriction discount is applied,
as appropriate. Investments in warrants are valued at fair value using the Black-Scholes option pricing model based on inputs
such as stock volatility, risk-free interest rates, holding period and dividend yield. Investments in securities which are convertible
at a date in the future are valued assuming a full conversion into common shares and valued based on the methodology for equity
securities described above, or at the respective investment’s face value, whichever is a better indicator of fair value.
Investments in unlisted securities are valued using a market approach net of the appropriate discount for lack of marketability.
Investments
without a readily determined market value are primarily valued using a market approach, an income approach, or both approaches,
as appropriate. The market approach uses prices and other relevant information generated by market transactions involving identical
or comparable assets or liabilities (including a business). The income approach uses valuation techniques to convert future amounts
(for example, cash flows or earnings) to a single present amount (discounted). The measurement is based on the value indicated
by current market expectations about those future amounts. In following these approaches, the types of factors that we may take
into account in fair value pricing our investments include, as relevant: available current market data, including relevant and
applicable market trading and transaction comparables, applicable market yields and multiples, security covenants, call protection
provisions, information rights, the nature and realizable value of any collateral, the portfolio company’s ability to make payments,
its earnings and discounted cash flows, the markets in which the portfolio company does business, comparisons of financial ratios
of peer companies that are public, M&A comparables, and enterprise values, among other factors.
Because
there is not a readily available market value for some of the investments in its portfolio, we value substantially all of our
portfolio investments at fair value as determined in good faith by our board of directors, as described herein. Due to the inherent
uncertainty of determining the fair value of investments that do not have a readily available market value, the fair value of
our investments may fluctuate from period to period. Additionally, the fair value of our investments may differ significantly
from the values that would have been used had a readily available market existed for such investments and may differ materially
from the values that we may ultimately realize. Further, such investments are generally subject to legal and other restrictions
on resale or otherwise are less liquid than publicly traded securities. If we were required to liquidate a portfolio investment
in a forced or liquidation sale, we could realize significantly less than the value at which we have recorded it.
Revenue
Recognition
We
record interest and dividend income on an accrual basis to the extent that we expect to collect such amounts. We do not accrue
as a receivable interest on debt or dividend of preferred shares for accounting purposes if there is reason to doubt the ability
to collect such interest.
Income
Taxes
Through
March 31, 2017, we elected to be treated as a RIC under Subchapter M of the Code and operated in a manner so as to qualify for
the tax treatment applicable to RICs.
In
order to qualify for favorable tax treatment as a RIC, we are required to distribute annually to our stockholders at least 90%
of our investment company taxable income, as defined by the Code. To avoid federal excise taxes, we must distribute annually at
least 98% of our ordinary income and 98.2% of net capital gains from the current year and any undistributed ordinary income and
net capital gains from the preceding years. The Company, at its discretion, may 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 stockholders. We will accrue excise tax on estimated undistributed
taxable income as required. Additionally, if more than 25% of our total assets is invested in the securities of one entity, we
would not meet the diversification tests in order to qualify as a RIC for federal income tax purposes.
Since March 31, 2017,
we failed this diversification test since our investment in IPSIDY INC. (formerly ID Global Solutions Corporation) (“IDGS”)
accounted for over 25% of our total assets (49.6% of total assets at September 30, 2017). We may be eligible for relief under
certain RIC provisions. A fund which meets the requirements of the diversification test at the close of any quarter shall not
lose its status as a RIC because of a discrepancy during a subsequent quarter between the value of its various investments and
such requirements unless such discrepancy exists immediately after the acquisition of any security or other property and is wholly
or partly the result of such acquisition. This discrepancy was not caused by the acquisition of any security. The failure was
not a result of willful neglect. If we were to correct the failure, we should have disposed of the asset causing the failure within
six months of the end of the quarter in which we identified the failure to cure the failure unless we would otherwise be in compliance
within the six month period and we would be required to pay an excise tax of $50,000. As of the September 30, 2017, we had not
cured the failure to retain our status as a RIC and we do not intend to retain our RIC status. Accordingly, we are subject to
income taxes at corporate tax rates. The loss of our status as a RIC is not expected to have any impact on our financial position
or results of operations.
Distributions
from net investment income and net realized capital gains are determined in accordance with U.S. federal income tax regulations,
which may differ from those amounts determined in accordance with GAAP. These book/tax differences are either temporary or permanent
in nature. To the extent these differences are permanent, they are charged or credited to paid-in-capital in excess of par or
accumulated net realized loss, as appropriate, in the period that the differences arise. Temporary and permanent differences are
primarily attributable to differences in the tax characterization of income or loss and any non-deductible expenses. These differences
are generally determined in conjunction with the preparation of our annual tax returns.
We
did not have any distributable income as of September 30, 2017 or 2016.