MAJOR LEAGUE FOOTBALL INC - Quarter Report: 2008 January (Form 10-Q)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_____________________
FORM 10-Q
(Mark One)
ý QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended January 31, 2008
OR
¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number 000-51132
Universal Capital Management, Inc.
(Exact name of registrant as specified in its charter)
Delaware (State or other jurisdiction of Incorporation or Organization) 2601 Annand Drive Suite 16 Wilmington, DE (Address of principal executive offices) | 20-1568059 (I.R.S. Employer Identification No.) ______19808____ (Zip Code) |
Registrants telephone number, including area code: (302) 998-8824 |
Indicate by check mark whether the registrant (1) has 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 ý No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer or a non-accelerated filer. See definition of accelerated filer and large accelerated filer in Rule 12b-2 of the Exchange Act (check one).
Large accelerated filer ¨ Accelerated filer ¨ Non-accelerated filer ý 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 ý
The number of shares of the registrants Common Stock outstanding as of March 24, 2008 was 5,734,954
TABLE OF CONTENTS
PART I FINANCIAL INFORMATION
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| Page |
Item 1 |
| Financial Statements | 1 |
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Item 2 |
| Managements Discussion and Analysis |
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| of Financial Condition and Results of Operations | 16 |
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Item 3 |
| Quantitative and Qualitative Disclosures about Market Risk | 22 |
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Item 4 |
| Controls and Procedures | 22 |
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PART II OTHER INFORMATION | |||
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Item 6 |
| Exhibits | 23 |
PART 1 FINANCIAL INFORMATION
ITEM 1 FINANCIAL STATEMENTS
UNIVERSAL CAPITAL MANAGEMENT, INC.
STATEMENTS OF ASSETS AND LIABILITIES
|
| January 31, |
| April 30, |
| ||
|
| (Unaudited) |
| (Audited) |
| ||
ASSETS |
|
|
|
|
|
|
|
Investments in securities |
|
|
|
|
|
|
|
Non-affiliates (cost: $2,068,116 and $1,537,975) |
| $ | 1,130,606 |
| $ | 1,618,296 |
|
Affiliates (cost: $5,554,112 and $1,001,625) |
|
| 5,803,385 |
|
| 4,393,586 |
|
Total Investments in Securities |
|
| 6,933,991 |
|
| 6,011,882 |
|
Cash and cash equivalents |
|
| 5,969 |
|
| 110,739 |
|
Receivables |
|
|
|
|
|
|
|
Notes receivable - non-affiliates |
|
| 113,939 |
|
| 107,272 |
|
Notes receivable - affiliates |
|
| 26,512 |
|
| |
|
Due from non-affiliates |
|
| 15,000 |
|
| 18,773 |
|
Miscellaneous receivables |
|
| 2,000 |
|
| 13,895 |
|
Due from affiliates |
|
| 48,459 |
|
| 40,239 |
|
Total Receivables |
|
| 205,910 |
|
| 180,179 |
|
Prepaid expenses |
|
| 11,177 |
|
| 41,166 |
|
Property and equipment, net |
|
| 6,854 |
|
| 8,279 |
|
Rent deposit |
|
| 1,100 |
|
| 1,100 |
|
Deferred tax asset |
|
| 261,000 |
|
| 383,000 |
|
TOTAL ASSETS |
| $ | 7,426,001 |
| $ | 6,736,345 |
|
LIABILITIES |
|
|
|
|
|
|
|
LIABILITIES |
|
|
|
|
|
|
|
Accounts payable |
| $ | 378,869 |
| $ | 314,431 |
|
Accrued expenses |
|
| 76,000 |
|
| 113,862 |
|
Current income taxes payable |
|
| 459,000 |
|
| 665,000 |
|
Advances from shareholders |
|
| 296,000 |
|
| 150,000 |
|
Notes payable |
|
| 275,000 |
|
| 425,000 |
|
Accrued interest |
|
| 80,772 |
|
| |
|
|
|
| 1,565,641 |
|
| 1,668,293 |
|
Deferred revenue |
|
|
|
|
|
|
|
Non-affiliates |
|
| 357,958 |
|
| 773,333 |
|
Affiliates |
|
| 2,285,000 |
|
| 197,255 |
|
Total Deferred Revenue |
|
| 2,642,958 |
|
| 970,588 |
|
TOTAL LIABILITIES |
|
| 4,208,599 |
|
| 2,638,881 |
|
NET ASSETS |
| $ | 3,217,402 |
| $ | 4,097,464 |
|
ANALYSIS OF NET ASSETS |
|
|
|
|
|
|
|
Net capital paid in on shares of capital stock |
| $ | 4,089,648 |
| $ | 3,943,802 |
|
Distributable earnings |
|
| (872,246) |
|
| 153,662 |
|
NET ASSETS |
| $ | 3,217,402 |
| $ | 4,097,464 |
|
Equivalent per share value based on 5,658,464 shares of capital stock |
| $ | 0.57 |
| $ | 0.75 |
|
The accompanying notes are an integral part of these financial statements.
- 1 -
UNIVERSAL CAPITAL MANAGEMENT, INC.
SCHEDULE OF INVESTMENTS
JANUARY 31, 2008
(UNAUDITED)
|
| Business |
| % of |
| Number of |
|
| Cost |
| Value at |
| Unrealized |
| ||||
Affiliated Securities (1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Extreme Visual Technologies, Inc. (3) |
| Develops unique graphics imaging technologies |
| 28.84 | % |
| 2,000,000 | (2) |
| $ | 1,813,887 |
| $ | 2,000,000 |
| $ | 186,113 |
|
Vystar Corporation (5) |
| Natural rubber latex |
| 28.84 | % |
| 1,000,000 | (2) |
|
| 2,000,000 |
|
| 2,000,000 |
|
| |
|
Warrants to purchase 500,000 shares |
| Natural rubber latex |
| 4.11 | % |
| 500,000 | (2) |
|
| 285,000 |
|
| 285,000 |
|
| |
|
Creative Energy Solutions, Inc. (3) |
| Develops alternative energy technologies |
| 14.42 | % |
| 2,000,000 | (2) |
|
| 1,000,000 |
|
| 1,000,000 |
|
| |
|
SIVOO, Inc. |
| High speed internet |
| 3.69 | % |
| 800,000 | (2) |
|
| 385,000 |
|
| 256,000 |
|
| (129,000 | ) |
|
| media |
| 1.76 | % |
| 304,401 | (4) |
|
| 68,600 |
|
| 121,760 |
|
| 53,160 |
|
Warrants to purchase 400,000 shares |
| High speed internet media |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
250,000 warrants expiring |
|
|
| 1.23 | % |
| 250,000 | (2) |
|
| |
|
| 85,000 |
|
| 85,000 |
|
150,000 warrants expiring |
|
|
| 0.78 | % |
| 150,000 | (2) |
|
| |
|
| 54,000 |
|
| 54,000 |
|
BF Acquisition Group V, Inc. |
| Inactive company |
| 0.02 | % |
| 100,000 | (2) |
|
| 1,625 |
|
| 1,625 |
|
| |
|
Total Affiliated Securities |
|
|
| 83.69 | % |
|
|
|
|
| 5,554,112 |
|
| 5,803,385 |
|
| 249,273 |
|
Non-affiliated Securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lightwave Logic, Inc., formerly Third-Order |
| Plastics engineering |
| 9.11 | % |
| 1,000,000 | (2) |
|
| 580,000 |
|
| 632,000 |
|
| 52,000 |
|
Nanotechnologies, Inc. |
|
|
| 0.15 | % |
| 12,912 | (4) |
|
| 37,703 |
|
| 10,200 |
|
| (27,503 | ) |
Warrants to purchase 500,000 shares of |
| Plastics engineering |
| 5.67 | % |
| 500,000 | (2) |
|
| 348,000 |
|
| 393,000 |
|
| 45,000 |
|
Theater Xtreme Entertainment Group, Inc. |
| Home theater sales |
| 0.45 | % |
| 650,000 | (2) |
|
| 396,500 |
|
| 31,200 |
|
| (365,300 | ) |
|
| and installation |
| 0.07 | % |
| 75,844 | (4) |
|
| 52,288 |
|
| 4,551 |
|
| (47,737 | ) |
Warrants to purchase 500,000 shares of |
| Home theater sales |
| 0.58 | % |
| 500,000 | (2) |
|
| 277,000 |
|
| 40,000 |
|
| (237,000 | ) |
Neptune Industries, Inc. |
| Seafood production |
| 0.17 | % |
| 47,619 | (4) |
|
| 20,000 |
|
| 11,905 |
|
| (8,095 | ) |
Gelstat Corporation |
| Consumer health care company |
| 0.11 | % |
| 221,429 | (4) |
|
| 350,000 |
|
| 7,750 |
|
| (342,250 | ) |
IPI Fundraising, Inc. |
| Inactive company |
| 0.00 | % |
| 575,000 | (2) |
|
| 6,625 |
|
| |
|
| (6,625 | ) |
Total Non-Affiliated Securities |
|
|
| 16.31 | % |
|
|
|
|
| 2,068,116 |
|
| 1,130,606 |
|
| (937,510 | ) |
Total Securities |
|
|
| 100.00 | % |
|
|
|
| $ | 7,622,228 |
| $ | 6,933,991 |
| $ | (688,237 | ) |
(1)
Each portfolio company in which the Company owns 5% or more of the outstanding voting securities is deemed an "affiliated company".
(2)
Restricted shares - illiquid securities; total illiquid securities of $6,777,825 make up 210.66% of total net assets as of January 31, 2008
(3)
Private company - valued by the Board of Directors
(4)
Unrestricted shares - liquid securities
(5)
Private company -valued by an independent third-party
The accompanying notes are an integral part of these financial statements.
- 2 -
UNIVERSAL CAPITAL MANAGEMENT, INC.
STATEMENTS OF OPERATIONS
FOR THE THREE AND NINE MONTHS ENDING JANUARY 31, 2008 AND 2007
(UNAUDITED)
|
| For the Three |
| For the Three |
| For the Nine |
| For the Nine |
| ||||
INCOME |
|
|
|
|
|
|
|
|
|
|
|
|
|
Management services |
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-affililiates |
| $ | 400,375 |
| $ | |
| $ | 1,088,875 |
| $ | 406,100 |
|
Affiliates |
|
| |
|
| 877,055 |
|
| 197,255 |
|
| 1,933,910 |
|
Total Management Services |
|
| 400,375 |
|
| 877,055 |
|
| 1,286,130 |
|
| 2,340,010 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income |
|
| 2,930 |
|
| 1,916 |
|
| 8,179 |
|
| 20,251 |
|
Accounting services |
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-affililiates |
|
| |
|
| 11,000 |
|
| 35,000 |
|
| 20,000 |
|
Affiliates |
|
| 9,000 |
|
| 9,000 |
|
| 6,400 |
|
| 30,000 |
|
Total Accounting Services |
|
| 9,000 |
|
| 20,000 |
|
| 41,400 |
|
| 50,000 |
|
|
|
| 412,305 |
|
| 898,971 |
|
| 1,335,709 |
|
| 2,410,261 |
|
COST AND EXPENSE |
|
|
|
|
|
|
|
|
|
|
|
|
|
Bad debt |
|
| |
|
| |
|
| 6,000 |
|
| 543 |
|
Depreciation |
|
| 475 |
|
| 475 |
|
| 1,425 |
|
| 1,424 |
|
Dues and subscriptions |
|
| 640 |
|
| |
|
| 2,017 |
|
| |
|
Fees and commissions |
|
| |
|
| 3,639 |
|
| 3,220 |
|
| 17,577 |
|
Insurance |
|
| 16,104 |
|
| 17,794 |
|
| 56,480 |
|
| 55,306 |
|
Interest expense |
|
| 8,059 |
|
| 9,045 |
|
| 28,411 |
|
| 18,082 |
|
License and permits |
|
| |
|
| 75 |
|
| |
|
| 75 |
|
Marketing |
|
| |
|
| 8,190 |
|
| |
|
| 20,779 |
|
Merger costs |
|
| |
|
| |
|
| |
|
| |
|
Miscellaneous general and administrative |
|
| 1,090 |
|
| |
|
| 3,906 |
|
| |
|
Office expenses and supplies |
|
| 2,685 |
|
| 777 |
|
| 5,333 |
|
| 2,388 |
|
Payroll and payroll taxes |
|
| 28,416 |
|
| 159,908 |
|
| 80,450 |
|
| 581,732 |
|
Postage, delivery and shipping |
|
| 1,321 |
|
| 1,236 |
|
| 3,498 |
|
| 3,091 |
|
Professional fees |
|
| 132,625 |
|
| 152,271 |
|
| 726,618 |
|
| 849,017 |
|
Rent |
|
| 4,200 |
|
| 4,200 |
|
| 12,600 |
|
| 12,600 |
|
Taxes - Other |
|
| 6,000 |
|
| |
|
| 6,034 |
|
| 4,814 |
|
Telephone |
|
| 1,243 |
|
| 1,418 |
|
| 3,875 |
|
| 3,582 |
|
Travel and entertainment |
|
| 6,760 |
|
| 1,977 |
|
| 15,909 |
|
| 32,030 |
|
Utilities |
|
| 921 |
|
| 809 |
|
| 2,134 |
|
| 2,493 |
|
|
|
| 210,539 |
|
| 361,814 |
|
| 957,910 |
|
| 1,605,533 |
|
INCOME (LOSS) FROM OPERATIONS |
|
| 201,766 |
|
| 537,157 |
|
| 377,799 |
|
| 804,728 |
|
OTHER INCOME (EXPENSE) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net realized gain on dividend of portfolio |
|
| |
|
| |
|
| |
|
| 343,924 |
|
Interest expense |
|
| (6,575 | ) |
| |
|
| (19,725 | ) |
| |
|
Loss on sale of portfolio stock |
|
| (205,038 | ) |
| |
|
| (395,677 | ) |
| |
|
Unrealized appreciation (depreciation) |
|
| (264,731 | ) |
| (872,414 | ) |
| (1,073,305 | ) |
| (476,570 | ) |
Income tax benefit (provision) |
|
| 1,000 |
|
| 119,300 |
|
| 85,000 |
|
| (267,200 | ) |
NET INCREASE (DECREASE) IN NET |
| $ | (273,578 | ) | $ | (215,957 | ) | $ | (1,025,908 | ) | $ | 404,882 |
|
The accompanying notes are an integral part of these financial statements.
- 3 -
UNIVERSAL CAPITAL MANAGEMENT, INC.
STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDING JANUARY 31, 2008 AND 2007
(UNAUDITED)
|
| For the Nine |
| For the Nine |
| ||
CASH FLOWS FROM OPERATING ACTIVITIES |
|
|
|
|
|
|
|
Net increase (decrease) in net assets resulting from operations |
| $ | (1,025,908 | ) | $ | 404,882 |
|
Adjustments to reconcile net decrease in net assets resulting |
|
|
|
|
|
|
|
Purchase of investment securities |
|
| |
|
| (150,000 | ) |
Gain on dividend of portfolio stock |
|
| |
|
| (343,924 | ) |
Stock (received) granted for interest |
|
| 15,144 |
|
| (13,888 | ) |
Loss on sale of portfolio stock |
|
| 395,677 |
|
| |
|
Investment securities received in exchange for management svcs |
|
| (1,286,130 | ) |
| (2,340,010 | ) |
Depreciation expense |
|
| 1,425 |
|
| 1,424 |
|
Stock based compensation expense |
|
| 7,002 |
|
| 185,612 |
|
Stock options granted for operating expense |
|
| |
|
| 447,000 |
|
Net unrealized (appreciation) depreciation on investments |
|
| 1,073,305 |
|
| 476,570 |
|
Deferred income taxes |
|
| 122,000 |
|
| 57,400 |
|
Income taxes |
|
| (206,000 | ) |
| 209,800 |
|
(Increase) decrease in assets |
|
|
|
|
|
|
|
Notes receivable |
|
| (8,179 | ) |
| |
|
Due from portfolio companies |
|
| 3,773 |
|
| (51,932 | ) |
Miscellaneous receivables |
|
| 11,895 |
|
| (12,502 | ) |
Due from affiliates |
|
| (8,220 | ) |
| (11,593 | ) |
Prepaid expenses |
|
| 29,989 |
|
| 2,386 |
|
Increase (decrease) in liabilities |
|
|
|
|
|
|
|
Accounts payable |
|
| 64,438 |
|
| 40,407 |
|
Accrued interest |
|
| 19,725 |
|
| |
|
Accrued expenses |
|
| (3,115 | ) |
| 453,711 |
|
Net cash used in operating activities |
|
| (793,179 | ) |
| (644,657 | ) |
CASH FLOWS FROM INVESTING ACTIVITIES |
|
|
|
|
|
|
|
Gross proceeds from sale of investments |
|
| 567,409 |
|
| |
|
Loan for notes receivable |
|
| (25,000 | ) |
| (55,000 | ) |
Net cash used in investing activities |
|
| 542,409 |
|
| (55,000 | ) |
CASH FLOWS FROM FINANCING ACTIVITIES |
|
|
|
|
|
|
|
Proceeds from advance from shareholder |
|
| 146,000 |
|
| 50,000 |
|
Proceeds from issuance of debt |
|
| |
|
| 425,000 |
|
Repayment of subscription payable |
|
| |
|
| (100,000 | ) |
Proceeds of issuance from common stock |
|
| |
|
| 241,280 |
|
Net cash provided by financing activities |
|
| 146,000 |
|
| 616,280 |
|
NET DECREASE IN CASH AND CASH EQUIVALENTS |
|
| (104,770 | ) |
| (83,377 | ) |
CASH AND CASH EQUIVALENTS - BEGINNING OF PERIOD |
|
| 110,739 |
|
| 84,272 |
|
CASH AND CASH EQUIVALENTS - END OF PERIOD |
| $ | 5,969 |
| $ | 895 |
|
|
|
|
|
|
|
|
|
NON-CASH INVESTING AND FINANCING ACTIVITIES |
|
|
|
|
|
|
|
Note receivable for issuance of stock options |
| $ | |
| $ | 813,888 |
|
Conversion of notes payable to equity |
| $ | 150,000 |
| $ | |
|
Securities received for deferred revenue |
| $ | 2,958,500 |
| $ | 2,300,000 |
|
Fin 48 for penalties and interest |
| $ | 26,300 |
| $ | |
|
The accompanying notes are an integral part of these financial statements.
- 4 -
UNIVERSAL CAPITAL MANAGEMENT, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 1- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying interim period financial statements of Universal Capital Management, Inc. (the Company) are unaudited pursuant to certain rules and regulations of the Securities and Exchange Commission and include, in the opinion of management, all adjustments (consisting of only normal recurring accruals) necessary for a fair statement of the results of the periods indicated. Such results, however, are not necessarily indicative of results that may be expected for the full year. Certain information and footnote disclosures normally included in the financial statements prepared in accordance with accounting principles generally accepted in the United States have been condensed or omitted pursuant to such rules and regulations. The financial statements should be read in conjunction with the financial statements and notes thereto included in the Companys Annual Report on Form 10-K for the fiscal year ended April 30, 2007, as filed with the Securities and Exchange Commission. The interim operating results for the nine months ended January 31, 2008 are not necessarily indicative of operating results expected for the full year.
History and Nature of Business
Universal Capital Management, Inc. (the Company) is a public venture capital company. The Company is a closed-end, non-diversified management investment company that has elected to be treated as a business development company under the Investment Company Act of 1940. The Company is primarily engaged in the business of furnishing capital and making available managerial assistance to companies that do not have ready access to capital through conventional channels. The Company refers to companies in which it invests as portfolio companies.
Security Valuations
Investments in securities traded on a national securities exchange (or reported on the NASDAQ national market) are stated at the last reported sales price on the day of valuation; other securities traded in the over-the-counter market (such as OTC BB, Pink Sheets, etc) and listed securities for which no sale was reported on that date are stated at the last quoted bid price. Restricted securities and other securities (small, privately-held companies) for which quotations are not readily available are valued at fair value as determined by the board of directors.
Investment securities are exposed to various risks, such as overall market volatility. Due to the level of risk associated with the securities of certain portfolio companies, it is likely that changes in their values will occur in the near term and that such changes could materially affect the amounts reported in the statement of assets and liabilities at future dates.
Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying disclosures. Although these estimates are based on managements best knowledge of current events and actions the Company may undertake in the future, actual results could differ from the estimates.
Cash Equivalents
For the purposes of the statement of cash flows, the Company considers all investment instruments purchased with maturity of three months or less to be cash and cash equivalents.
Concentration of Credit Risk
Certain financial instruments potentially subject the Company to concentrations of credit risk. These financial instruments consist primarily of cash. The Company places its temporary cash investments with high credit quality financial institutions to limit its credit exposure.
- 5 -
UNIVERSAL CAPITAL MANAGEMENT, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 1- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Property and Equipment
Property and equipment are stated at cost, net of accumulated depreciation. For financial accounting purposes, depreciation is generally computed by the straight-line method over the following useful lives:
Furniture and fixtures
5 to 7 years
Computer and office equipment
3 to 7 years
Fair Value of Financial Instruments
The Companys financial instruments consist of cash, receivables, accounts payable and accrued expenses. The carrying values of cash, receivables, accounts payable and accrued expenses approximate fair value because of their short maturities.
The carrying value of the notes payable approximates fair value since the interest rate associated with the debt approximates the current market interest rates.
Income Taxes
Deferred tax assets and liabilities are computed annually for differences between the financial statement and tax bases of assets and liabilities that will result in taxable or deductible amounts in the future based on enacted tax laws and rates applicable to the periods in which the differences are expected to affect taxable income. Deferred income taxes arise principally from the recognition of unrealized gains or losses from appreciation in investment value for financial statements purposes, while for income tax purposes, gains or losses are only recognized when realized (disposition). When unrealized gains and losses result in a net unrealized loss, provision is made for a deferred tax asset. When unrealized gains and losses result in a net unrealized gain, provision is made for a deferred tax liability. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized. Income tax expense is the tax payable to refundable for the period plus or minus the change during the period in deferred tax assets or liabilities.
Recoverability of Long Lived Assets
The Company follows SFAS No. 144 Accounting for the Impairment or Disposal of Long-Lived Assets (Statement 144). Long-lived assets to be held and used are reviewed for impairment whenever events or changes in circumstances indicate that the related carrying amount may not be recoverable. When required, impairment losses on assets to be held and used are recognized based on the excess of the assets carrying amount.
Recently Issued Pronouncements
In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements (SFAS No. 157). SFAS No. 157 establishes a framework for measuring fair value and expands disclosures about fair value measurements. The changes to current practice resulting from the application of this Statement relate to the definition of fair value, the methods used to measure fair value, and the expanded disclosures about fair value measurements. The Statement is effective for fiscal years beginning after November 15, 2007 and will become effective beginning with the first quarter of fiscal 2009. The Company has not yet determined the impact of the adoption of SFAS No. 157 on its financial statements and footnote disclosures.
- 6 -
UNIVERSAL CAPITAL MANAGEMENT, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 1- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Recently Issued Pronouncements (Continued)
In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities. This Statement permits entities to choose to measure many financial instruments and certain other items at fair value that are not currently required to be measured at fair value. The objective is to improve financial reporting by providing entities with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions. This statement also establishes presentation and disclosure requirements designed to facilitate comparisons between entities that choose different measurement attributes for similar types of assets and liabilities. This Statement is effective for financial statements issued for fiscal years beginning after November 15, 2007 and will become effective for the Company beginning with the first quarter of fiscal 2008. The Company has not yet determined the impact of the adoption of SFAS No. 159 on its financial statements and footnote disclosures.
- 7 -
UNIVERSAL CAPITAL MANAGEMENT, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 2 INVESTMENTS
Portfolio Companies consist of the following at January 31, 2008:
|
| Business |
| % of |
| Number of |
|
| Cost |
| Value at |
| Unrealized |
| ||||
Affiliated Securities (1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Extreme Visual Technologies, Inc. (3) |
| Develops unique graphics imaging technologies |
| 28.84 | % |
| 2,000,000 | (2) |
| $ | 1,813,887 |
| $ | 2,000,000 |
| $ | 186,113 |
|
Vystar Corporation (5) |
| Natural rubber latex |
| 28.84 | % |
| 1,000,000 | (2) |
|
| 2,000,000 |
|
| 2,000,000 |
|
| |
|
Warrants to purchase 500,000 shares |
| Natural rubber latex |
| 4.11 | % |
| 500,000 | (2) |
|
| 285,000 |
|
| 285,000 |
|
| |
|
Creative Energy Solutions, Inc. (3) |
| Develops alternative energy technologies |
| 14.42 | % |
| 2,000,000 | (2) |
|
| 1,000,000 |
|
| 1,000,000 |
|
| |
|
SIVOO, Inc. |
| High speed internet |
| 3.69 | % |
| 800,000 | (2) |
|
| 385,000 |
|
| 256,000 |
|
| (129,000 | ) |
|
| media |
| 1.76 | % |
| 304,401 | (4) |
|
| 68,600 |
|
| 121,760 |
|
| 53,160 |
|
Warrants to purchase 400,000 shares |
| High speed internet media |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
250,000 warrants expiring |
|
|
| 1.23 | % |
| 250,000 | (2) |
|
| |
|
| 85,000 |
|
| 85,000 |
|
150,000 warrants expiring |
|
|
| 0.78 | % |
| 150,000 | (2) |
|
| |
|
| 54,000 |
|
| 54,000 |
|
BF Acquisition Group V, Inc. |
| Inactive company |
| 0.02 | % |
| 100,000 | (2) |
|
| 1,625 |
|
| 1,625 |
|
| |
|
Total Affiliated Securities |
|
|
| 83.69 | % |
|
|
|
|
| 5,554,112 |
|
| 5,803,385 |
|
| 249,273 |
|
Non-affiliated Securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lightwave Logic, Inc., formerly Third-Order |
| Plastics engineering |
| 9.11 | % |
| 1,000,000 | (2) |
|
| 580,000 |
|
| 632,000 |
|
| 52,000 |
|
Nanotechnologies, Inc. |
|
|
| 0.15 | % |
| 12,912 | (4) |
|
| 37,703 |
|
| 10,200 |
|
| (27,503 | ) |
Warrants to purchase 500,000 shares of |
| Plastics engineering |
| 5.67 | % |
| 500,000 | (2) |
|
| 348,000 |
|
| 393,000 |
|
| 45,000 |
|
Theater Xtreme Entertainment Group, Inc. |
| Home theater sales |
| 0.45 | % |
| 650,000 | (2) |
|
| 396,500 |
|
| 31,200 |
|
| (365,300 | ) |
|
| and installation |
| 0.07 | % |
| 75,844 | (4) |
|
| 52,288 |
|
| 4,551 |
|
| (47,737 | ) |
Warrants to purchase 500,000 shares of |
| Home theater sales |
| 0.58 | % |
| 500,000 | (2) |
|
| 277,000 |
|
| 40,000 |
|
| (237,000 | ) |
Neptune Industries, Inc. |
| Seafood production |
| 0.17 | % |
| 47,619 | (4) |
|
| 20,000 |
|
| 11,905 |
|
| (8,095 | ) |
Gelstat Corporation |
| Consumer health care company |
| 0.11 | % |
| 221,429 | (4) |
|
| 350,000 |
|
| 7,750 |
|
| (342,250 | ) |
IPI Fundraising, Inc. |
| Inactive company |
| 0.00 | % |
| 575,000 | (2) |
|
| 6,625 |
|
| |
|
| (6,625 | ) |
Total Non-Affiliated Securities |
|
|
| 16.31 | % |
|
|
|
|
| 2,068,116 |
|
| 1,130,606 |
|
| (937,510 | ) |
Total Securities |
|
|
| 100.00 | % |
|
|
|
| $ | 7,622,228 |
| $ | 6,933,991 |
| $ | (688,237 | ) |
- 8 -
UNIVERSAL CAPITAL MANAGEMENT, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 3 INCOME TAXES
As an investment company organized as a corporation, the Company is taxable as a corporation. As discussed in Note 1, the Company utilizes the assets and liability method of accounting for income taxes in accordance with SFAS 109.
The Company adopted the provisions of FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes (FIN 48), on May 1, 2007. As a result of the implementation of FIN 48, the Company recognized a $26,300 addition to the May 1, 2007 balance of net assets. A
The Company recognizes interest and penalties related to unrecognized tax benefits in interest expense. The Company had $26,300 accrued at May 1, 2007 for the payment of any such interest and penalties.
Tax years from 2005 (initial tax year) through 2007 remain subject to examination by major tax jurisdictions.
The income tax expense (benefit) for the nine months ended January 31, 2008 and 2007 have been included in the accompanying financial statements on the basis of an estimated annual effective rate. The estimated annual effective rate differs from the U.S. Statuatory rate primarily due to the change in the valuation allowance to unrealized losses.
The components of deferred tax (assets) liabilities are as follows:
|
| January 31, |
| |
Deferred tax (asset) liability |
|
|
|
|
Deferred charges |
| $ | (90,500 | ) |
Deferred revenue |
|
| 106,100 |
|
Unrealized loss on investments |
|
| (269,400 | ) |
Capital loss carryforward |
|
| (276,700 | ) |
Stock-based compensation |
|
| (77,500 | ) |
Other |
|
| (2,000 | ) |
|
|
|
|
|
Total |
|
| (610,000 | ) |
|
|
|
|
|
Less: Valuation allowance |
|
| 349,000 |
|
|
|
|
|
|
Total deferred tax (asset) liability |
| $ | (261,000 | ) |
- 9 -
UNIVERSAL CAPITAL MANAGEMENT, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 3 INCOME TAXES (CONTINUED)
At January 31, 2008, the Company had a capital loss carryforward of approximately $696,000 which if not used will expire in 2012.
NOTE 4 PREPAID EXPENSES`
In April 2007, the Company entered into various contracts for investor relation fees and insurance. The fees are amortized over the life of each contract, through March 2008. The remaining balance at January 31, 2008 is $11,177.
NOTE 5 DUE FROM AFFILIATES
Due from affiliates consist of the following:
|
|
| January 31, |
| |
| Due from BF Acquisition Group V, Inc |
|
| 48,459 |
|
|
|
|
|
|
|
| Total |
| $ | 48,459 |
|
- 10 -
UNIVERSAL CAPITAL MANAGEMENT, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 6 DEFERRED REVENUE
The deferred revenue represents unearned management fee income. Income is amortized and recognized evenly over the life of the contract unless otherwise stated in the contract. In accordance with EITF 96-18, since the shares received by the Company are non-refundable, the value of the contract is determined by the number of shares the Company receives at the closing market price on the day of the contract (commitment date). Warrants are valued using the Black-Scholes method. Deferred revenue consists of the following:
|
| January 31, |
| |
|
|
|
|
|
Non-Affiliates |
|
|
|
|
Lightwave Logic, Inc., formerly Third-Order Nanotechnologies, Inc., |
|
|
|
|
("LWLG") - One year contract - received 1,000,000 shares of LWLG |
| $ | 48,333 |
|
|
|
|
|
|
Received a warrant to purchase 500,000 shares of LWLG |
|
| 29,000 |
|
|
|
|
|
|
Theater Xtreme Entertainment Group, Inc. ("TXEG") |
|
|
|
|
Received 650,000 shares of TXEG common stock for payment |
|
| 165,206 |
|
|
|
|
|
|
Received a warrant to purchase 500,000 shares of TXEG |
|
| 115,419 |
|
|
|
|
|
|
Total Non-Affiliates |
|
| 357,958 |
|
|
|
|
|
|
Affiliates |
|
|
|
|
Vystar Corporation ("Vystar") |
|
|
|
|
Received 1,000,000 shares of Vystar common stock for payment |
|
| 2,000,000 |
|
|
|
|
|
|
Received a warrant to purchase 500,000 shares of Vystar |
|
| 285,000 |
|
|
|
|
|
|
Total Affiliates |
|
| 2,285,000 |
|
|
|
|
|
|
Total Deferred Revenue |
| $ | 2,642,958 |
|
- 11 -
UNIVERSAL CAPITAL MANAGEMENT, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 6 DEFERRED REVENUE (CONTINUED)
Management service revenue recognized consist of:
|
| For the Three |
| For the Three |
| For the Nine |
| For the Nine |
| ||||
Non-Affiliates |
|
|
|
|
|
|
|
|
|
|
|
|
|
Lightwave Logic, Inc., formerly Third-Order Nanotechnologies, Inc., |
|
|
|
|
|
|
|
|
|
|
|
|
|
("LWLG") - One year contract - Received 200,000 shares of |
| $ | |
| $ | |
| $ | |
| $ | 106,100 |
|
LWLG common stock for payment of services per one year |
|
|
|
|
|
|
|
|
|
|
|
|
|
Received 1,000,000 shares of LWLG common stock for |
|
| 145,000 |
|
| |
|
| 435,000 |
|
| |
|
Received a warrant to purchase 500,000 shares of LWLG |
|
| 87,000 |
|
| |
|
| 261,000 |
|
| |
|
Theater Xtreme Entertainment Group, Inc. ("TXEG") |
|
|
|
|
|
|
|
|
|
|
|
|
|
Received 300,000 shares of TXEG common stock for |
|
| |
|
| |
|
| |
|
| 300,000 |
|
Received 650,000 shares of TXEG common stock |
|
| 99,126 |
|
| |
|
| 231,294 |
|
| |
|
Received a warrant to purchase 500,000 shares of TXEG |
|
| 69,249 |
|
| |
|
| 161,581 |
|
| |
|
Total Non-Affiliates |
|
| 400,375 |
|
| |
|
| 1,088,875 |
|
| 406,100 |
|
Affiliates |
|
|
|
|
|
|
|
|
|
|
|
|
|
Accelapure Corporation ("ACP) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Received 1,000,000 shares of ACP common stock for |
|
| |
|
| 125,000 |
|
| |
|
| 375,000 |
|
Extreme Visual Technologies, Inc. ("EVT") |
|
|
|
|
|
|
|
|
|
|
|
|
|
Received 1,000,000 shares of EVT common stock |
|
| |
|
| 252,055 |
|
| 197,255 |
|
| 558,910 |
|
Creative Energy Solutions, Inc. ("CES") |
|
|
|
|
|
|
|
|
|
|
|
|
|
Received 1,000,000 shares of CES common stock for |
|
| |
|
| 500,000 |
|
| |
|
| 1,000,000 |
|
Total Affiliates |
|
| |
|
| 877,055 |
|
| 197,255 |
|
| 1,933,910 |
|
Total Management Services Revenue |
| $ | 400,375 |
| $ | 877,055 |
| $ | 1,286,130 |
| $ | 2,340,010 |
|
- 12 -
UNIVERSAL CAPITAL MANAGEMENT, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 7 NOTE PAYABLE
Notes payable consists of the following:
|
| January 31, | |
|
|
|
|
Note payable. Interest accrued at the |
|
|
|
Principal and interest are payable on demand |
| $ | 275,000 |
NOTE 8 ADVANCES FROM SHAREHOLDERS
Amount represents advances from shareholders to cover operating expenses. There are no stated interest rate or repayment terms.
NOTE 9 STOCK BASED COMPENSATION
In December 2004, the Financial Accounting Standards Board (FASB) issued SFAS 123 (revised 2004), Share-Based Payment (SFAS 123R). SFAS 123(R) supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees, and amends SFAS No. 95, Statement of Cash Flows. Generally, the approach in SFAS 123(R) is similar to the approach described in SFAS 123. However, SFAS 123(R) requires share-based payments to employees, including grants of employee stock options, to be recognized in the income statement based on their fair values at the date of grant. Pro forma disclosure is no longer an alternative.
On May 1, 2006, the Company adopted SFAS 123(R) using the modified prospective method as permitted under SFAS 123(R). Under this transition method, compensation cost recognized in the first quarter of 2006 includes compensation cost for all share-based payments granted prior to but not yet vested as of April 30, 2006 based on the grant-date fair value estimated in accordance with the provisions of SFAS 123. In accordance with the modified prospective method of adoption, the Companys results of operations and financial position for prior periods have not been restated.
The Company uses the Black-Scholes option pricing model to calculate the grant-date fair value of an award, with the following assumptions: no dividend yield, expected volatility of 34%, risk-free interest rate between 3.8% and 5.1% and expected option life of two and ten years.
During the nine months ending January 31, 2008, the Companys net income was approximately $7,002 lower as a result of stock-based compensation expense as a result of the adoption of SFAS 123(R). As of January 31, 2008, there was approximately $12,052 of unrecognized compensation expense related to non-vested market-based share awards that is expected to be recognized through May 2009.
Prior to May 1, 2006, the Company followed the provisions of SFAS No. 123, Accounting for Stock-Based Compensation. The provisions of SFAS No. 123 allowed companies to either expense the estimated fair value of stock options or to continue to follow the intrinsic value method set forth in Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees (APB 25), but disclose the pro forma effects on net income had the fair value of the options been expensed. The Company elected to apply APB 25 in accounting for its stock option incentive plans.
There were no employee stock options issued by the Company prior to May 1, 2006.
- 13 -
UNIVERSAL CAPITAL MANAGEMENT, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 9 STOCK BASED COMPENSATION (CONTINUED)
The following tables summarize all stock option activity of the Company since April 30, 2007:
|
| Stock Options Outstanding |
| |||||||
|
| Number of |
| Exercise |
| Weighted |
| |||
|
|
|
|
|
|
|
|
|
|
|
Outstanding, April 30, 2007 |
|
| 185,000 |
| $ | 2.00 |
| $ | 2.00 |
|
|
|
|
|
|
|
|
|
|
|
|
Expired |
|
| (60,000 | ) | $ | |
| $ | |
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding, January 31, 2008 |
|
| 125,000 |
| $ | 2.00 |
| $ | 2.00 |
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable, January 31, 2008 |
|
| 118,324 |
| $ | 2.00 |
| $ | 2.00 |
|
|
| Stock Options Outstanding |
|
|
|
| ||||
Rance of |
| Number |
| Weighted Average |
| Weighted Average |
| |||
$ 2.00 |
|
| 118,324 |
|
| 1.33 years |
|
| $ 2.00 |
|
NOTE 10 CONTINGENCY
McCrae Associates, LLC Lawsuit
In July 2006, McCrae Associates, LLC (McCrae) filed a lawsuit against the Company and its directors and officers in the United States District Court for the District of Connecticut. The lawsuit alleges that McCrae is the owner of 300,000 shares of the Companys common stock and that the Company did not deliver to and is wrongfully withholding such shares from McCrae. The lawsuit alleges that the directors and officers conspired with the Company to deprive McCrae of such shares, and that the directors and officers owed a fiduciary duty to McCrae that they violated by refusing to tender the shares to McCrae upon demand. The lawsuit also alleges that all of the defendants violated the Connecticut Unfair Trade Practices Act. McCrae seeks delivery of a stock certificate covering the shares, unspecified monetary damages, including treble damages, attorney fees and punitive damages. The Company is vigorously defending the action and has filed a counter-claim against McCrae and a third-party claim against Stephen Funk seeking to rescind the issuance of shares to McCrae and to recover monetary damages on fraud and breach of contract theories. The Company also filed similar claims in the Chancery Court in Wilmington, Delaware seeking to rescind the issuance of 200,000 shares of common stock to Liberator, LLC, a company it believes is controlled by Stephen Funk. Recently, the parties agreed to the voluntary dismissal of the action in Delaware with the express understanding that Liberator would be bound by the decision of the Court in Connecticut with respect to the McCrae shares. Recent efforts by the Company and McCrae to settle the litigation have been unsuccessful and the parties have commenced discovery.
The Company believes that McCraes claims lack merit and intends to defend against such claims vigorously.
- 14 -
UNIVERSAL CAPITAL MANAGEMENT, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 10 CONTINGENCY (CONTINUED)
Ronald R. Genova Lawsuit
During July 2007, Ronald R. Genova filed a lawsuit in Philadelphia County, Court of Common Pleas. Ronald R. Genova is the Plaintiff. Lightwave Logic, Inc., formerly Third-Order Nanotechnologies, Inc. (LWLG), PSI-TEC Holdings, Inc (PSI-TEC) and Universal Capital Management (UCM) are each a Defendant.
Ronald R. Genova (Genova) served as a consultant and then as the interim chief executive officer of LWLG. LWLG terminated Genova effective February 28, 2007. On March 26, 2007 LWLG paid Genova $9,806, which LWLG determined was the full amount LWLG owed Genova. Genova sued, claiming he was owed an additional $84,650 plus interest for unpaid consulting fees in the amount of $32,516, a performance bonus in the amount of $50,000, and an expense reimbursement in the amount of $2,135. Pursuant to the complaint, Genova is alleging breach of contract, fraud and promissory estoppel in an amount in excess of $180,000, in addition to the right to exercise his options, that expired on May 30, 2007, until February 13, 2016 or a judgment in an additional amount equal to the monetary value of such options plus punitive damages, interest and costs.
Genova included the UCM as a co-defendant because he believes that the UCM is a venture partner of LWLG and PSI-TEC, provides management advisory services to LWLG and PSI-TEC and exercises control over financial decisions made by LWLG and PSI-TEC. UCM does provide management advisory services to TDON, but is neither a venture partner nor exercises control over financial decisions to either LWLG or PSI-TEC.
The Company has filed a motion to dismiss the charges and is waiting for a response from the courts.
NOTE 11 FINANCIAL HIGHLIGHTS
|
| January 31, |
| |
|
|
|
|
|
|
|
|
|
|
Per Share Operating Performance |
|
|
|
|
Net asset value, beginning of period |
| $ | 0.75 |
|
|
|
|
|
|
Income from operations, net of taxes |
|
| 0.04 |
|
Unrealized depreciation on investment, net of taxes |
|
| (0.11 | ) |
Gain on property dividend, net of taxes |
|
| |
|
Loss on sale of stock |
|
| (0.04 | ) |
|
|
| 0.64 |
|
Add capital share transactions |
|
| 0.03 |
|
|
|
|
|
|
Net asset value, end of period |
| $ | 0.57 |
|
|
|
|
|
|
|
|
|
|
|
Total Return |
|
| -55.86 | % |
|
|
|
|
|
Average Net Assets as a percentage of: |
|
|
|
|
Expenses |
|
| 35.56 | % |
Management income |
|
| 49.58 | % |
- 15 -
Item 2
Managements Discussion and Analysis of Financial Condition and Results of Operations
Introduction
The following discussion contains forward-looking statements. The words anticipate, believe, expect, plan, intend, estimate, project, will, could, may and similar expressions are intended to identify forward-looking statements. Such statements reflect the Companys current views with respect to future events and financial performance and involve risks and uncertainties. Should one or more risks or uncertainties occur, or should underlying assumptions prove incorrect, actual results may vary materially and adversely from those anticipated, believed, expected, planned, intended, estimated, projected or otherwise indicated. Readers should not place undue reliance on these forward-looking statements.
The following discussion is qualified by reference to, and should be read in conjunction with the Companys financial statements and the notes thereto.
The Company is a public venture capital company. Its primary business is to invest in emerging growth companies. The Company intends to assist these companies in strategic and financial planning, in market strategies and to assist them in trying to achieve prudent and profitable growth. Management is devoting most of its efforts to general business planning, raising capital, and seeking appropriate investments.
The Companys primary investment objective is to increase its net assets by adding value to the portfolio companies and thus, increasing stockholder value. Management believes that the Company will be able to achieve these objectives by concentrating on investments in companies which are most likely to benefit from management's expertise in finance, strategic planning, operations, and technology.
The income that the Company derives from investments in portfolio companies consists of management fees, interest income, and appreciation (net of depreciation) in the values of portfolio companies. At the time of disposition, the disposition proceeds of these portfolio securities will most likely make up most of the Companys cash revenues.
Consequently, the Companys success or failure will depend on investing in companies which appreciate in value more than other companies in which the Company invests depreciate in value. There is no assurance that the Company will be able to do so.
Pursuant to the requirements of the Investment Company Act of 1940, as amended (1940 Act), the Board of Directors is responsible for determining in good faith the fair value of the securities and assets held by the Company for which market quotations are not readily available. In making its determination, the Board of Directors may consider valuation appraisals provided by independent financial experts. The Company expects to pay a professional fee each time such a valuation is provided. With respect to private equity securities, each investment is valued using industry valuation benchmarks, and then the value may be assigned a discount reflecting the particular nature of the investment.
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The Board of Directors bases its determination of value on, among other things, applicable quantitative and qualitative factors. These factors may include, but are not limited to, the type of securities, the nature of the business of the portfolio company, the marketability of the securities, the market price of unrestricted securities of the same issue (if any), comparative valuation of securities of publicly traded companies in the same or similar industries, current financial conditions and operating results of the portfolio company, sales and earnings growth of the portfolio company, operating revenues of the portfolio company, competitive conditions, and current and prospective conditions in the overall economy and the equity markets.
Without a readily recognized market value, the estimated value of some portfolio securities may differ significantly from the values that would be placed on the portfolio if there existed a ready market for such equity securities.
Financial Condition
The Companys total assets, net assets, net asset value per share, unrealized appreciation or depreciation are set forth in the following table:
|
| At the Quarter |
| At the Year |
| ||
TOTAL ASSETS |
| $ | 7,426,001 |
| $ | 6,736,345 |
|
NET ASSETS |
| $ | 3,217,402 |
| $ | 4,097,464 |
|
NET ASSET VALUE PER SHARE |
| $ | 0.57 |
| $ | 0.75 |
|
NET UNREALIZED APPRECIATION/(DEPRECIATION) |
| $ | (1,073,305 | ) | $ | (406,953 | ) |
The changes in total assets, net assets and net asset value per share for the nine months ended January 31, 2008 were primarily attributable to:
·
SIVOO Holdings, Inc. (SIVOO) average valuation on restricted and unrestricted shares decreased from $0.79 to $0.34 per share during the nine months ended January 31, 2008. The Company sold 260,000 shares of SIVOO for a sales price of $99,400 with a cost of $72,500 for a realized gain of $26,900. The Companys investment in SIVOO common stock had a net unrealized depreciation of $706,201 for the nine months ended January 31, 2008. The Companys investment in SIVOO warrants were valued at $139,000 at January 31, 2008 compared to $308,000 at April 30, 2007 for a net unrealized depreciation of $169,000 for the nine months ended January 31, 2008.
·
Theater Xtreme Entertainment Group, Inc. (TXEG) average valuation on restricted and unrestricted shares decreased from $0.61 to $0.05 per share during the nine months ended January 31, 2008. During the nine months ended January 31, 2008, the Company sold 500,000 shares a sales price of $324,000 with a cost of $344,290 resulting in a realized loss of $20,290. A warrant was received in July 2007 and had a value of $40,000 at January 31, 2008 compared to $277,000 at the time of issuance for a net unrealized depreciation of $237,000. During July 2007, 650,000 shares of common stock were acquired for a services valued at $396,500. The Companys investment in TXEG common stock had a net unrealized depreciation of $315,570 for the nine months ended January 31, 2008.
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·
Lightwave Logic, Inc. (LWLG), formerly Third-Order Nanotechnologies, Inc., average valuation on restricted and unrestricted shares decreased from $0.68 to $0.63 per share during the nine months ended January 31, 2008. During the nine months ended January 31, 2008, The Company sold 187,088 shares for a sales price of $144,010 with a cost of $546,297 for a realized loss of $402,287. The Companys investment in LWLG common stock had a net unrealized depreciation of $173,800 for the nine months ended January 31, 2008. The Companys investment in LWLG warrants were valued at $393,000 at January 31, 2008 compared to $415,000 at April 30, 2007, for a net unrealized depreciation of $22,000 for the nine months ended January 31, 2008.
·
The Company entered into a management contract with a new portfolio company, Vystar Corporation on January 31, 2008. In exchange for management services, the Company received 1,000,000 shares of Vystar Corporation common stock for a value of $2,000,000. In addition, the Company received a warrant to purchase 500,000 shares of Vystar common stock for a value of $285,000.
·
Gelstat Corporation (GSAC) average valuation on restricted and unrestricted shares decreased from $0.07 to $0.035 per share during the nine months ended January 31, 2008. The Companys investment in GSAC common stock has a net unrealized depreciation of $7,750 for the nine months ended January 31, 2008.
·
Neptune Industries (NPDI) average valuation on restricted and unrestricted shares decreased from $0.43 to $0.25 per share during the nine months ended January 31, 2008. The Companys investment in NPDI common stock has a net unrealized depreciation of $8,571 for the nine months ended January 31, 2008
·
The decrease in cash of $104,770.
·
The increase in accounts payable and accrued expenses of $26,576.
·
The decrease in deferred tax asset of $122,000.
·
The advances from shareholders of $146,000.
·
The increase in deferred revenue of approximately $1,672,370, which is due mainly to an increase in deferred revenue of $2,958,500 ($2,285,000 for Vystar Corporation, which the Company is to earn over a twelve month period beginning February 1, 2008 and $673,500 for Theater Xtreme Entertainment Group, Inc., which the Company is to earn over a twelve month period beginning July 1, 2007) offset by $1,286,130 ($696,000 for Third-Order Nanotechnologies, Inc., $392,875 for Theater Xtreme Entertainment Group, Inc. and $197,255 for Extreme Visual Technologies, Inc.) which was earned.
·
The decrease in current income taxes payable of approximately $206,000.
·
The addition to Net Capital of $145,846 which consists of conversion of notes payable in the amount of $165,144 and share-based compensation expense of $7,002, offset by an adjustment for FIN 48 of ($26,300).
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The Companys unrealized appreciation (depreciation) varies significantly from period to period as a result of the wide fluctuation in the value of the Companys portfolio securities, as well as the acquisition and sale of shares during the period. For example, the Company suffered an unrealized loss of ($706,200) on its common stock holdings of SIVOO Holdings, Inc. for the nine months ended January 31, 2008 as a result of a decline in the value of the portfolio shares from $0.79 to $0.34 per share during such time period and the sale of 260,000 shares of common stock. By contrast the Company enjoyed an unrealized gain of $557,861 on its holdings of SIVOO Holdings, Inc. for the year ended April 30, 2007 due to an increase in the value of the portfolio shares from $0.39 to $0.79 per share during such time period.
The Company had unrealized depreciation of $1,073,305 at January 31, 2008 compared to unrealized depreciation of $476,570 at January 31, 2007 and unrealized depreciation of $406,953 at April 30, 2007.
The Companys financial condition is dependent on a number of factors including the ability of each portfolio company to effectuate its respective strategies with the Companys help. The Company has invested a substantial portion of its assets in development stage or start-up companies. These businesses are frequently thinly capitalized, unproven, small companies that may lack management depth, and may be dependent on new or commercially unproven technologies, and may have no operating history.
At January 31, 2008, $6,933,991 or 93.4% of the Company's assets consisted of investments, of which net unrealized losses before the income tax effect were $688,237. A deferred tax asset on account of unrealized losses has been estimated at approximately $269,400. At January 31, 2008, the Companys holdings of Vystar Corporation, Extreme Visual Technologies, Inc., Creative Energy Solutions, Inc., and Third-Order Nanotechnologies, Inc. were valued at $2,000,000, $2,000,000, $1,000,000 and $1,035,200 respectively, which represented in the aggregate approximately 87% of the total Company portfolio at that date.
Because the portfolio companies tend to be at early stages of their business development, and because there are no markets for the securities of some portfolio companies, the Company may find it difficult to liquidate any of its investments in the near future. See Liquidity and Capital Resources below.
Results of Operations
The Companys financial statements have been prepared in conformity with the United States generally accepted accounting principles. On this basis, the principal measure of an investment company's financial performance during a time period is the net change in net assets during such period. Such change results from (i) income from operations, net of operating expenses, (ii) net realized gain or loss on investment, which is the difference between the proceeds received from dispositions of portfolio securities and their stated cost, and (iii) increase (decrease) in unrealized appreciation or depreciation on investments.
Company expenses include salaries and wages, professional fees, office expenses and supplies, rent, travel, and other normal business expenses. General and administrative costs include depreciation, investor relations and other overhead costs.
Nine months ended January 31, 2008 compared to the nine months ended January 31, 2007
For the three months ended January 31, 2008 the Company had revenue for services in the amount of $412,305 compared to $898,971 for the three months ended January 31, 2007. During the three months ended January 31, 2008 97.1% of the Companys revenue for services was received in the form of equity securities compared to 97.6% for the three months ended January 31, 2007.
Total operating expenses for the three months ended January 31, 2008 were $210,539, the principal components of which were professional fees of $132,625, consisting primarily of $52,000 investor relations expense, approximately $59,000 legal expense and approximately $16,700 audit fees, payroll of $28,416 (which includes $2,334 of share based compensation expense), $16,104 of insurance
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expense and $8,059 of interest expense. By comparison, total operating expenses for the three months ended January 31, 2007 were $361,814, the principal components of which were payroll of $159,908, professional fees of $152,271, insurance of $17,794, interest of $9,045 and marketing of $8,190.
The Company realized a gain from operations of $201,766 for the three months ended January 31, 2008 compared to a gain from operations of $537,157 for the three months ended January 31, 2007.
Nine months ended January 31, 2008 compared to the nine months ended January 31, 2007
For the nine months ended January 31, 2008 the Company had revenue for services in the amount of $1,335,709 compared to $2,410,261 for the nine months ended January 31, 2007. During the nine months ended January 31, 2008 96.3% of the Companys revenue for services was received in the form of equity securities compared to 97.1% for the nine months ended January 31, 2007.
Total operating expenses for the nine months ended January 31, 2008 were $957,910, the principal components of which were professional fees of $726,618, consisting primarily of $509,472 investor relations expense, approximately $150,988 legal expense and approximately $45,755 audit fees and accounting fees, payroll of $80,450 (which includes $7,002 of share based compensation expense), $56,480 of insurance expense and $28,411 of interest expense. By comparison, total operating expenses for the nine months ended January 31, 2007 were $1,605,533, the principal components of which were payroll of $581,732, professional fees of $849,017, insurance of $55,306 and travel and entertainment of $32,030.
The Company realized a gain from operations of $377,799 for the nine months ended January 31, 2008 compared to a gain from operations of $804,728 for the nine months ended January 31, 2007.
Liquidity and Capital Resources
From inception, the Company has relied for liquidity on the infusion of capital through capital share transactions. The Company only had approximately $6,000 of cash at January 31, 2008. Consequently, payment of operating expenses and cash with which to make investments will have to come similarly from equity capital to be raised from investors or from borrowed funds. The Company issued $425,000 in 8.25% promissory notes, of which $150,000 has been converted by the note holders to equity, and it has also received $296,000 in advances from a shareholder. There is no assurance that the Company will be successful in raising such additional equity capital or additional borrowings or if it can, that it can do so at a price that management believes to be appropriate. Under the Investment Company Act of 1940, as amended (1940 Act), the Company may not sell shares of common stock at less than its net asset value except in certain limited circumstances.
On October 31, 2007, we authorized a $487,500 private offering of our common stock. Pursuant to the terms of this offering, a total of 650,000 shares of common stock were offered at $0.75 per share. The shares were offered for cash, except that holders of outstanding Company promissory notes could have elected to receive shares in this offering in conversion of the principal balance and accrued interest under such promissory notes. The $150,000 in promissory notes described above were converted pursuant to this offering. This offering has since been closed.
The Company may be forced to dispose of a portion of its current portfolio securities if it ever becomes short of cash. Any such dispositions may have to be made at inopportune times, which may have a material adverse effect on the proceeds received from such dispositions.
Critical Accounting Estimates
Valuation
The 1940 Act requires periodic valuation of each investment in the Companys portfolio to determine the Companys net asset value. Under the 1940 Act, unrestricted securities with readily
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available market quotations are to be valued at the current market value; all other assets must be valued at fair value as determined in good faith by or under the direction of the Board of Directors.
The Board of Directors is responsible for (1) determining overall valuation guidelines and (2) ensuring the valuation of investments within the prescribed guidelines. Fair value is generally defined as the amount for which an investment could be sold in an orderly disposition over a reasonable time. Generally, to increase objectivity in valuing assets, external measures of value, such as public markets or third-party transactions, are used whenever possible. Valuation is not based on long-term work-out value, nor immediate liquidation value, nor incremental value for potential changes that may take place in the future. The values assigned to Company investments are based on available information and do not necessarily represent amounts that might ultimately be realized, as such amounts depend on future circumstances and cannot reasonably be determined until the individual investments are actually liquidated.
The Companys valuation policy and methodology with respect to its portfolio companies are as follows:
Cost: The cost method is based on the Companys original cost. This method is generally used in the early stages of a portfolio companys development until significant events occur subsequent to the date of the original investment that dictate a change to another valuation method. Some examples of these events are: (1) a major recapitalization; (2) a major refinancing; (3) a significant third-party transaction; (4) the development of a meaningful public market for such companys common stock; and (5) significant changes in such companys business.
Private Market: The private market method uses actual, executed, historical transactions in a companys securities by responsible third parties as a basis for valuation. The private market method may also use, where applicable, unconditional firm offers by responsible third parties as a basis for valuation.
Public Market: The public market method is used when there is an established public market for the class of the portfolio companys securities held by the Company and the shares held by the Company bear no legal or contractual restrictions. Securities for which market quotations are readily available are carried at market value as of the time of valuation. Market value for securities traded on securities exchanges is the last reported sales price on the day of valuation. For other securities traded in the over-the-counter market and listed securities for which no sale was reported on a day, market value is the last quoted bid price on such day.
Public Market/Restricted Securities: When the Company holds securities which are publicly traded but under significant legal or contractual restrictions, the Board of Directors starts with the public market value of the shares as set forth in (C) above and applies an appropriate discount based on the nature and remaining duration of the restrictions.
Analytical Method: The analytical method is generally used to value an investment position when there is no established public or private market in the companys securities or when the factual information available to the Company dictates that an investment should no longer be valued under either the cost or private market method. This valuation method is inherently imprecise and, ultimately, the result of reconciling the judgments of our directors based on the data available to them. The resulting valuation, although stated as a precise number, is necessarily within a range of values that vary depending upon the significance attributed to the various factors being considered. Some of the factors considered may include the financial condition and operating results of the portfolio company, the long-term potential of the business of the company, the values of similar securities issued by companies in similar businesses, the proportion of the portfolio companys securities owned by the Company and the nature of any rights to require the portfolio company to register restricted securities under applicable securities laws.
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Item 3
Quantitative and Qualitative Disclosures About Market Risk
There have been no material changes in the Companys quantitative and qualitative disclosures about market risk since the Companys Annual Report on Form 10-K filed for the fiscal year ended April 30, 2007.
Item 4
Controls and Procedures.
As of the end on the period covered by this Quarterly Report on Form 10-Q, an evaluation was performed under the supervision and with the participation of the Companys principal executive officer and principal financial officer of the effectiveness of the design and operation of the Companys disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934). Based on that evaluation, our principal executive officer and our principal financial officer have determined that our disclosure controls and procedures were effective as of the end of the period covered by this Form 10-Q.
There were no changes that occurred during the fiscal quarter ended October 31, 2007 that materially affected, or are reasonably likely to material affect, the Companys internal control over financial reporting.
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PART II OTHER INFORMATION
Item 2.
Unregistered Sale of Equity Securities and Use of Proceeds.
During the third and fourth calendar quarters of 2006, the Company issued $425,000 in 8.25% promissory notes to eight accredited investors. During the period covered by this report, the Company offered the promissory note holders the opportunity to convert the promissory notes to shares of Company common stock, whereby $150,000 of the promissory notes, plus accrued interest thereon, was converted into _________ shares of our common stock at the conversion price of $0.75 per share. The Company relied on Section 4(2) of the Securities Act for these transactions. No underwriters were utilized and no commissions or fees were paid with respect to any of the above transactions.
Item 6
Exhibits.
The following exhibits are included herein:
31.1
Certification pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended, executed by the Principal Executive Officer of the Company.
31.2
Certification pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended, executed by the Principal Financial Officer of the Company.
32.1
Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, executed by the Principal Executive Officer of the Company.
32.2
Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, executed by the Principal Financial Officer of the Company.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| Universal Capital Management, Inc. | |
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March 24, 2008 | By: | /s/ Michael D. Queen |
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| Michael D. Queen, President |
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March 24, 2008 | By: | /s/ Joseph T. Drennan |
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| Joseph T. Drennan, Treasurer |
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| (Principal Financial Officer) |
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