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Silo Pharma, Inc. - Annual Report: 2016 (Form 10-K)

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-K

 

(Mark One)

☒ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the fiscal year ended December 31, 2016 

 

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: 814-01038

 

POINT CAPITAL, INC.
(Name of Registrant as Specified in Its Charter)

 

Delaware   27-3046338
(State or Other Jurisdiction of
Incorporation or Organization)
  (I.R.S. Employer
Identification No.)

 

285 Grand Avenue, Building 5, Englewood, New Jersey   07631
(Address of Principal Executive Offices)   (Zip Code)

 

Registrant's telephone number, including area code (201) 408-5126

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class   Name of each exchange on which registered
None    

 

Securities registered pursuant to Section 12(g) of the Act:

 

Common Shares, $0.0001 value 
(Title of class)

 

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

 

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

 

Indicate by check mark whether the registrant (1) has filed all reports required 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 ☒ No ☐

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). ☐ Yes ☐ No

 

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

 

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 Smaller reporting company
(Do not check if a smaller reporting company)    

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No ☒

 

The aggregate market value of the registrant’s common stock held by non-affiliates based upon the closing price of $1.00 per share of common stock as of June 30, 2016 was $22,482,085.

 

As of March 22, 2017, there were 50,082,441 shares of common stock, par value $0.0001 per share, outstanding.

 

 

 

 

 

 

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

 

This Annual Report on Form 10-K (“Annual Report”) contains forward-looking statements that involve risks and uncertainties. Many of the forward-looking statements are located in “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” Forward-looking statements provide current expectations of future events based on certain assumptions and include any statement that does not directly relate to any historical or current fact. Forward-looking statements can also be identified by words such as “anticipates,” “believes,” “estimates,” “expects,” “intends,” “plans,” “predicts,” and similar terms. Forward-looking statements are not guarantees of future performance and the Company’s actual results may differ significantly from the results discussed in the forward-looking statements. Forward-looking statements are only predictions based on our current expectations and projections, or those of third parties, about future events and involve risks and uncertainties. We assume no obligation to revise or update any forward-looking statements for any reason, except as required by law. All forward-looking statements attributable to us, or persons acting on our behalf, are expressly qualified in their entirety by the cautionary statements included in this Annual Report.

 

 

 

 

PART I

 

Unless the context provides otherwise, when we refer to the “Company,” “we,” “our,” or “us” in this Form 10-K, we are referring to Point Capital, Inc.

 

ITEM 1. BUSINESS

 

Corporate Background

 

Point Capital, Inc. was incorporated under its original name Gold Swap Inc. under the laws of the State of New York on July 13, 2010.  On December 11, 2012, shareholders holding 25,519,700 (representing 83.3%) of the issued and outstanding shares of Common Stock executed and delivered to the Company their written consent to change the Company’s state of incorporation from New York to Delaware by the merger of Gold Swap with and into its wholly-owned subsidiary, Point Capital, Inc., and to change the name of the Company from “Gold Swap Inc.” to “Point Capital, Inc.” The Definitive Information Statement pursuant to Section 14(c) of the Securities Exchange Act of 1934 was mailed to shareholders on or about December 31, 2012. The merger was effective on January 24, 2013.

 

We are a closed-end, non-diversified investment company that is 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. For 2016, 2015 and 2014, we are 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”).  

 

The address of our principal executive office is c/o Point Capital, Inc., 285 Grand Avenue, Building 5, Englewood, NJ 07631. Our telephone number is 201-408-5126. Our internet website is www.pointcapitalinc.com.

 

We have entered into agreements with U.S. Bank, NA to be the custodian of our portfolio securities.

 

Our transfer agent is Manhattan Transfer Registrar Company, 57 Eastwood Road, Miller Place, NY 11764. Their telephone number is (877) 645-8691.

 

Investment Objective

 

Our investment objective is to provide current income and capital appreciation. We intend to accomplish our objective by investing in the common stock, preferred stock, warrants and convertible notes of small and mid-cap companies. Our investments are made principally through direct investments in prospective portfolio companies.  However, we may also purchase securities in private secondary transactions. The Company will also consider investing in private companies that meet its investment objectives.

 

Competition

 

A large number of entities compete with us to make the types of investments that we target as part of our business strategy.  We compete for such investments with a large number of venture capital funds, other equity and non-equity based investment funds, investment banks and other sources of financing, including traditional financial services companies such as commercial banks and specialty finance companies.  Many of our competitors are substantially larger than us and have considerably greater financial, technical and marketing resources than we do. In addition, some of our competitors may require less information than we do and/or have higher risk tolerances or different risk assessments, which could allow them to consider a wider variety of investments and establish more relationships than we can.  Furthermore, many of our competitors are not subject to the regulatory restrictions that the 1940 Act imposes on us as a business development company and, as a result, such companies may be more successful in completing their investments.  There can be no assurance that the competitive pressures we face will not have a material adverse effect on our business, financial condition, and results of operations.  Also, as a result of this competition, we may not be able to take advantage of attractive investment opportunities from time to time, and we can offer no assurance that we will be able to identify and make investments that are consistent with our investment objective.  

 

Governance

 

Our Board of Directors monitors and performs an oversight role with respect to our business and affairs, including with respect to investment practices and performance, compliance with regulatory requirements and the services, expenses and performance of our service providers.  Among other things, our Board of Directors approves the appointment of our officers, reviews and monitors the services and activities performed by our officers, and provides overall risk management oversight.  

 

 1 

 

 

Section 56(a) of the 1940 Act requires that at least a majority of the Company’s Board of Directors be composed of independent Directors. To be considered independent, a Director may not be (i) an officer or employee of the Company, (ii) a direct or indirect beneficial owner of 5% or more of the Company’s voting shares, (iii) an immediate family member of an affiliate of the Company, (iv) any interested person of an investment adviser or principal underwriter to the Company, (v) legal counsel to the Company (or acted as such at any time during the preceding two completed fiscal years) or (vi) a person that has had a material business relationship with the Company at any time during the last two fiscal years. Our current Board of Directors consists of four members, three of whom we consider independent.

 

Our Board of Directors has established an Audit Committee to assist the Board of Directors in fulfilling its oversight responsibilities. The Audit Committee is composed of Van Parker, Committee Chairman, Joel Stone, and Leonard Schiller. The Audit Committee’s responsibilities include overseeing our accounting and financial reporting processes, our systems of internal controls over financial reporting, and audits of our consolidated financial statements, and approval of the engagement, and reviews the performance of, our independent registered public accounting firm

 

Intellectual Property

 

We do not own any intellectual property rights except for our internet websites at the following URLs: www.pointcapitalinc.com and www.hempfundinginc.com.

 

Employees

 

We currently have no employees and our Chief Executive Officer, Chief Financial Officer and Chief Compliance Officer provide service on a part-time basis. Our chief executive office is also a director.  All functions including development, strategy, negotiations and administration are currently being provided by our executive officers or outsourced to service providers. Our officers and directors do not work exclusively for us and do not devote all of their time to our operations.  Their other activities prevent them from devoting their full-time to our operations.

 

Material U.S. Federal Income Tax Considerations

 

From incorporation through December 31, 2013, we were treated as a corporation under the Internal Revenue Code of 1986, as amended (the "Code"). Effective January 1, 2014, we elected to be treated for tax purposes as a regulated investment company, or RIC, under the Code. As explained below, we have made no provision for income taxes as of December 31, 2016, 2015 and 2014. Our continued qualification as a RIC requires that we comply with certain requirements contained in Subchapter M of the Code that may affect our ability to pursue additional business opportunities or strategies that, if we were to determine we should pursue, could diminish the desirability of qualifying, or impede our ability to qualify, as a RIC. For example, a RIC must meet certain requirements, including source of income and asset diversification requirements (as described below) and distributing annually at least 90% of its investment company taxable income (the “Annual Distribution Requirement”). 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.

 

A RIC generally will not have to pay corporate-level federal income taxes on any investment company taxable income (which is generally our net ordinary income plus the excess, if any, of realized net short-term capital gains over realized net long-term capital losses) or any realized net capital gains (which is generally net realized long-term capital gains in excess of net realized short-term capital losses) that we distribute to our stockholders. We will be subject to United States federal income tax at the regular corporate rates on any investment company taxable income or capital gain not distributed (or deemed distributed) to our stockholders.

 

In order to qualify and continue to qualify as a RIC for federal income tax purposes and obtain the tax benefits accorded to a RIC, in addition to satisfying the Annual Distribution Requirement, we must, among other things:

 

  Have in effect at all times during each taxable year an election to be regulated as a business development company under the 1940 Act;

 

  Derive in each taxable year at least 90% of our gross income from (i) dividends, interest, payments with respect to certain securities loans, gains from the sale of stock or other securities, or other income derived with respect to our business of investing in such stock or securities and (ii) net income derived from an interest in a “qualified publicly traded limited partnership” (the “90% Income Test”); and

 

  Diversify our holdings so that at the end of each quarter of the taxable year:

 

  at least 50% of the value of our assets consists of cash, cash equivalents, U.S. government securities, securities of other RICs, and other securities if such other securities of any one issuer do not represent more than 5% of the value of our assets or more than 10% of the outstanding voting securities of such issuer; and

 

  no more than 25% of the value of our assets is invested in (i) securities (other than U.S. government securities or securities of other RICs) of one issuer, (ii) securities of two or more issuers that are controlled, as determined under applicable tax rules, by us and that are engaged in the same or similar or related trades or businesses, or (iii) securities of one or more “qualified publicly traded partnerships” (the “Diversification Tests”).

 

 2 

 

 

Provided that we satisfy the Diversification Tests as of the close of any quarter, we will not fail the Diversification Tests as of the close of a subsequent quarter as a consequence of a discrepancy between the value of our assets and the requirements of the Diversification Tests that is attributable solely to fluctuations in the value of our assets. Rather, we will fail the Diversification Tests as of the end of a subsequent quarter only if such a discrepancy existed immediately after our acquisition of any asset and was wholly or partly the result of that acquisition. In addition, if we fail the Diversification Tests as of the end of any quarter, we will not lose our status as a RIC if we eliminate the discrepancy within thirty days of the end of such quarter and, if we eliminate the discrepancy within that thirty-day period, we will be treated as having satisfied the Diversification Tests as of the end of such quarter.

 

We satisfied the above RIC requirements during each of the taxable years since our election to be treated as a RIC for tax purposes. Since we did not generate investment company taxable income in any of these taxable years, we were not required to make any distributions to satisfy the Annual Distribution Requirement. We did not generate any realized net capital gains in 2016, 2015 and 2014 and, as a result, we were not required to make any distributions to satisfy the Excise Tax Avoidance Requirement, as described below. As such, we have not made any provision for federal income or excise taxes as of December 31, 2016, 2015 and 2014.

 

Assuming we continue to qualify as a RIC, our corporate-level federal income tax should be substantially reduced or eliminated to the extent that we distribute any investment company taxable income or realized net capital gains to our stockholders. However, we will pay corporate-level federal income tax on any amount of realized net capital gain that we elect to retain. In the event we retain some or all of our realized net capital gains, we may designate the retained amount as a deemed distribution to stockholders. In such case, among other consequences, we will pay corporate-level tax on the retained amount, each U.S. stockholder will be required to include its share of the deemed distribution in income as if it had been actually distributed to the U.S. stockholder, and the U.S. stockholder will be entitled to claim a credit or refund equal to its allocable share of the corporate-level tax we pay on the retained realized net capital gain. The amount of the deemed distribution (net of such tax credit or refund) will be added to each U.S. stockholder's cost basis for its common stock. In order to utilize the deemed distribution approach, we must provide written notice to our stockholders prior to the expiration of 60 days after the close of the relevant taxable year. We cannot treat any of our investment company taxable income as a “deemed distribution.”

 

As a RIC, we are also subject to a 4% nondeductible federal excise tax on certain undistributed income unless we distribute in a timely manner an amount at least equal to the sum of (i) 98% of our ordinary income for each calendar year, (ii) 98.2% of our capital gains in excess of capital losses for the one-year period ending December 31 in that calendar year, and (iii) any ordinary income and realized net capital gains for preceding years that were not distributed during such years (the “Excise Tax Avoidance Requirement”). We will not be subject to this excise tax on amounts on which we are required to pay corporate income tax (such as retained realized net capital gains which we designate as "undistributed capital gain" or a deemed distribution). We currently intend to make sufficient distributions (including deemed distributions of retained realized net capital gains) each taxable year to avoid the payment of this excise tax.

 

A RIC is limited in its ability to deduct expenses in excess of its investment company taxable income. If our expenses in a given year exceed investment company taxable income (which is likely to occur since our operating expenses are expected to exceed the amount of interest or dividend income we receive on our current portfolio company investments), we would experience a net operating loss for that year. However, a RIC is not permitted to carry forward net operating losses to subsequent years. We may for tax purposes have aggregate taxable income for several years that we are required to distribute and that is taxable to our stockholders even if such income is greater than the aggregate net income we actually earned during those years. Such required distributions may be made from our cash assets or by liquidation of investments, if necessary. We may realize gains or losses from such liquidations. In the event we realize net capital gains from such transactions, our stockholders may receive a larger capital gain distribution than they would have received in the absence of such transactions.

 

If we are unable to continue to qualify for treatment as a RIC, we would be subject to tax on all of our taxable income at regular corporate rates. We would not be able to deduct distributions to stockholders, nor would distributions be required to be made. Such distributions would be taxable to our stockholders. Subject to certain limitations under the Code, corporate distributees would be eligible for the dividends received deduction. Distributions in excess of our current and accumulated earnings and profits would be treated first as a return of capital to the extent of the stockholder’s tax basis, and any remaining distributions would be treated as a capital gain.

 

 3 

 

 

If we fail to qualify as a RIC in any taxable year, we would be required to satisfy the RIC qualification requirements in order to requalify as a RIC and dispose of any earnings and profits from any year in which we failed to qualify as a RIC. Subject to a limited exception applicable to RICs that qualified as such under Subchapter M of the Code for at least one year prior to disqualification and that requalify as a RIC no later than the second year following the non-qualifying year, we could be subject to tax on any unrealized net built-in gains in the assets held by us during the period in which we failed to qualify as a RIC that were recognized within the subsequent 10 years, unless we made a special election to pay corporate-level tax on such built-in gain at the time of our requalification as a RIC. If we fail to satisfy the 90% Income Test or the Diversification Test described above, however, we may be able to avoid losing our status as a RIC by timely providing notice of such failure to the IRS, curing such failure and possibly paying an additional tax.

 

Regulation as a BDC

 

We have elected to be regulated as a BDC under the 1940 Act. The 1940 Act requires that a majority of our directors be persons other than "interested persons," as that term is defined in the 1940 Act. In addition, the 1940 Act provides that we may not change the nature of our business so as to cease to be, or to withdraw our election as, a BDC without the approval of a "majority of our outstanding voting securities," within the meaning of the 1940 Act.

 

Other

 

We may also be prohibited under the 1940 Act from knowingly participating in certain transactions with our affiliates without the prior approval of our Board of Directors who are not interested persons and, in some cases, prior approval by the SEC.

 

We expect to be periodically examined by the SEC for compliance with the 1940 Act.

 

We are required to provide and maintain a bond issued by a reputable fidelity insurance company to protect us against larceny and embezzlement.  Furthermore, as a BDC, we are prohibited from protecting any director or officer against any liability to us or our stockholders arising from willful misfeasance, bad faith, gross negligence or reckless disregard of the duties involved in the conduct of such person’s office.

 

ITEM 1A. RISK FACTORS

‘ 

Risks Relating to Our Business and Structure

 

We could lose our status as a business development company or be precluded from investing according to our current business plan.

 

As a business development company, we must continue to comply with numerous rules and regulations under the 1940 Act, including without limitation, maintaining at least 70% of our total assets as "qualifying assets", having a majority of non-interested directors on our board and maintaining our securities under specific regulations. Currently we are in compliance. However, if we lose our status as a business a business development company, this would have a material adverse effect on our ability to invest, on our operating results, financial condition and ability to pay dividends, and on the value of our common stock. Such a ruling or decision also may require that we dispose of investments that we made. Such dispositions could have a material adverse effect on us and our stockholders. We may need to dispose of such investments quickly, which would make it difficult to dispose of such investments on favorable terms. In addition, because these types of investments will generally be illiquid, we may have difficulty in finding a buyer and, even if we do find a buyer, we may have to sell the investments at a substantial loss.

 

Our ability to achieve our investment objectives depends on our ability to manage and support our investment process. If we were to lose Mr. Weisblum as part of our management team, our ability to achieve our investment objectives could be significantly harmed.

 

We will depend on the investment expertise, skill and network of business contacts of our professional staff who will evaluate, negotiate, structure, execute, monitor and service our investments. Mr. Weisblum is not currently subject to an employment contract or agreement. The departure of Mr. Weisblum could have a material adverse effect on our ability to achieve our investment objectives. 

 

Our ability to achieve our investment objectives depends on our ability to identify, analyze, invest in, finance and monitor companies that meet our investment criteria. Our capabilities in structuring the investment process, providing competent, attentive and efficient services to us, and facilitating access to financing on acceptable terms depend on the employment of investment professionals in an adequate number and of sufficient sophistication to match the corresponding flow of transactions. To achieve our investment objectives, we may need to hire, train, supervise and manage new investment professionals to participate in our investment selection and monitoring process. We may not be able to find investment professionals in a timely manner or at all. Failure to support our investment process could have a material adverse effect on our business, financial condition and results of operations.

 

 4 

 

 

Because our business model depends to a significant extent upon relationships with commercial banks, investment banks and private equity sponsors, our inability to maintain or develop these relationships, or the failure of these relationships to generate investment opportunities, could adversely affect our business.

 

We expect to depend on the relationships of our investment team with private equity sponsors, investment banks and commercial banks, and we will rely to a significant extent upon these relationships to provide us with potential investment opportunities. If we fail to maintain those existing relationships or develop new relationships with other sponsors or sources of investment opportunities, we will not be able to grow our investment portfolio. In addition, individuals with whom our investment team has relationships are not obligated to provide us with investment opportunities, and, therefore, there is no assurance that such relationships will generate investment opportunities for us.

 

We may face increasing competition for investment opportunities, which could delay deployment of our capital, reduce returns and result in losses.

 

We compete for investments with other business development companies and investment funds (including private equity funds, mezzanine funds), as well as traditional financial services companies such as commercial banks and other sources of funding. Moreover, alternative investment vehicles, such as hedge funds, have begun to invest in areas in which they have not traditionally invested, including making investments in small- to mid-sized private, U.S. companies. Competition for investment opportunities in small and middle market, U.S. companies may intensify. Many of our competitors are substantially larger and have considerably greater financial, technical and marketing resources than we do. For example, some competitors may have a lower cost of capital and access to funding sources that are not available to us. In addition, some of our competitors may have higher risk tolerances or different risk assessments than we have. These characteristics could allow our competitors to consider a wider variety of investments, establish more relationships and offer better pricing and more flexible structuring than we are able to do. We may lose investment opportunities if we do not match our competitors’ pricing, terms and structure. If we are forced to match our competitors’ pricing, terms and structure, we may not be able to achieve acceptable returns on our investments or may bear substantial risk of capital loss. A significant part of our competitive advantage stems from the fact that the market for investments in small and middle market, U.S. companies is underserved by traditional commercial banks and other financial sources. A significant increase in the number and/or the size of our competitors in this target market could force us to accept less attractive investment terms. Furthermore, many of our competitors have greater experience operating under, or are not subject to, the regulatory restrictions that the 1940 Act will impose on us as a business development company.

 

A significant portion of our investment portfolio will be recorded at fair value as determined in good faith by our board of directors and, as a result, there is and will be uncertainty as to the value of our portfolio investments.

 

Under the 1940 Act, we are required to carry our portfolio investments at market value or, if there is no readily available market value, at fair value as determined by our board of directors. Typically, there is not a public market for the securities of the privately held companies in which we intend to invest. As a result, we will value these securities quarterly at fair value as determined in good faith by our board of directors. Decreases in the market values or fair values of our investments will be recorded as unrealized depreciation. The ongoing financial crisis in Europe has continued to affect corporate debt markets and has resulted in significant net unrealized depreciation in the portfolios of many existing BDCs, reducing their net asset value. Stressed companies may need to be written down even if current on principal and interest payments to us if valuations for similar companies have declined in the general markets. Depending on market conditions, we may face similar losses, which could reduce our net asset value and have a material adverse impact on our business, financial condition and results of operations.

 

Certain factors that may be considered in determining the fair value of our investments include dealer quotes for securities traded on the secondary market for institutional investors, the nature and realizable value of any collateral, the portfolio company’s earnings, cash flow and its ability to make payments on its indebtedness, the markets in which the portfolio company does business, comparison to comparable publicly-traded companies, discounted cash flow and other relevant factors. Because such valuations, and particularly valuations of private securities and private companies, are inherently uncertain, may fluctuate over short periods of time and may be based on estimates, our determinations of fair value may differ materially from the values that would have been used if a ready market for these securities existed. Due to this uncertainty, our fair value determinations may cause our net asset value on a given date to materially understate or overstate the value that we may ultimately realize upon the sale of one or more of our investments.

 

 5 

 

 

The amount of any distributions we may make is uncertain. We may not be able to pay you distributions, and our distributions may not grow over time.

 

We hope to be able to pay distributions to our stockholders out of assets legally available for distribution. We cannot assure you that we will achieve investment results that will allow us to make a specified level of cash distributions or year-to-year increases in cash distributions. Our ability to pay distributions might be adversely affected by, among other things, the impact of one or more of the risk factors described herein. In addition, the inability to satisfy the asset coverage test applicable to us as a business development company can limit our ability to pay distributions. All distributions will be paid at the discretion of our board of directors and will depend on our earnings, our financial condition, maintenance of our future status as a regulated investment company, compliance with applicable business development company regulations and such other factors as our board of directors may deem relevant from time to time. We cannot assure you that we will pay distributions to our stockholders in the future. Distributions from the proceeds of securities offerings or from borrowings also could reduce the amount of capital we ultimately invest in interests of portfolio companies.

 

Our board of directors may change our operating policies and strategies without prior notice or stockholder approval, the effects of which may be adverse.

 

Our board of directors has the authority to modify or waive our current operating policies, investment criteria and strategies without prior notice and without stockholder approval (except as required by the 1940 Act). However, absent stockholder approval, we may not change the nature of our business so as to cease to be, or withdraw our election as, a business development company. We cannot predict the effect any changes to our current operating policies, investment criteria and strategies would have on our business, net asset value, operating results and value of our stock. Nevertheless, the effects might be adverse, which could negatively impact our ability to pay you distributions and cause you to lose all or part of your investment. Moreover, we will have significant flexibility in investing our capital and may use net proceeds in ways with which stockholders may not agree.

 

Changes in laws or regulations governing our operations may adversely affect our business or cause us to alter our business strategy.

 

We and our future portfolio companies will be subject to regulation at the local, state and federal level. New legislation may be enacted or new interpretations, rulings or regulations could be adopted, including those governing the types of investments we are permitted to make, any of which could harm us and our stockholders, potentially with retroactive effect.

 

Additionally, any changes to the laws and regulations governing our operations relating to permitted investments may cause us to alter our investment strategy to avail ourselves of new or different opportunities. Such changes could result in material differences to our strategies and may result in our investment focus shifting from our areas of expertise to other types of investments in which we may have less expertise or little or no experience. Thus, any such changes, if they occur, could have a material adverse effect on our results of operations and the value of your investment.

 

Efforts to comply with the Sarbanes-Oxley Act will involve significant expenditures, and non-compliance with the Sarbanes-Oxley Act may adversely affect us. Additionally, if we fail to maintain adequate internal controls, our ability to provide accurate financial statements could be impaired.

 

We are subject to the Sarbanes-Oxley Act of 2002, or the “Sarbanes-Oxley Act” or “SOX”, and the related rules and regulations promulgated by the SEC. Monitoring compliance with the existing rules and implementing changes required by these rules is expensive and may increase our legal and financial compliance costs, divert management attention from operations and strategic opportunities, and make legal, accounting and administrative activities more time-consuming. We have evaluated our internal control systems in order to allow us to report on our internal controls, as required by Section 404 of the SOX. See Item 9A included herein where we reported that we have material weaknesses in our internal controls. As a small company with limited capital and human resources, we may need to divert management's time and attention away from our business in order to ensure continued compliance with these regulatory requirements. We may require new information technologies systems, the auditing of our internal controls, and compliance training for our directors, officers and personnel. Such efforts may entail a significant expense. Any failure to maintain the adequacy of our internal controls could have an adverse effect on timely and accurate financial reporting and the trading price of our common stock.

 

We may experience fluctuations in our quarterly results.

 

We could experience fluctuations in our quarterly operating results due to a number of factors, including our ability or inability to make investments in companies that meet our investment criteria, the interest rates payable on the debt securities we acquire, the level of our expenses, variations in and the timing of the recognition of realized and unrealized gains or losses, the degree to which we encounter competition in our markets and general economic conditions. As a result of these factors, results for any period should not be relied upon as being indicative of performance in future periods.

 

 6 

 

  

Our portfolio may be concentrated in a limited number of portfolio companies and industries, which will subject us to a risk of significant loss if any of these companies defaults on its obligations under any of its debt instruments or if there is a downturn in a particular industry.

 

Our portfolio may be concentrated in a limited number of portfolio companies and industries. Beyond the asset diversification requirements associated with our future qualification as a RIC under Subchapter M of the Code, we will not have fixed guidelines for diversification, and while we will not target any specific industries, our investments may be concentrated in relatively few industries. As a result, the aggregate returns we will realize may be significantly adversely affected if a small number of investments perform poorly or if we need to write down the value of any one investment. Additionally, a downturn in any particular industry in which we are invested could also significantly impact the aggregate returns we realize. A “RIC” is a regulated investment company under Subchapter M of the Code. A RIC generally does not have to pay corporate level federal income taxes on any income that it distributes to its stockholders from its tax earnings and profits. To qualify as a RIC, a company must, among other things, meet certain source-of-income and asset diversification requirements. In addition, in order to obtain RIC tax treatment, a company must distribute to its stockholders, for each taxable year, at least 90% of its “investment company taxable income,” which is generally its net ordinary income plus the excess, if any, of realized net short-term capital gains over realized net long-term capital losses. 

 

We have limited prior experience managing business development companies and regulated investment companies, or RIC.

 

While Mr. Weisblum, our chief executive officer, has experience in management positions with BDCs and RICs, other members of the management of Point Capital do not. The investment philosophy and techniques we will use by may differ from those investments with which some of our investment professionals have experience. Accordingly, the results we may achieve may differ substantially from those of previously managed funds. The 1940 Act and the Code impose numerous constraints on the operations of business development companies and RICs that do not apply to some of the other types of investment vehicles previously managed by our management team. For example, under the 1940 Act, business development companies are required to invest at least 70% of their total assets primarily in securities of qualifying U.S. private companies or U.S. public companies with market valuations less than $250 million. Moreover, qualification for RIC tax treatment under subchapter M of the Code requires satisfaction of source-of-income, diversification and other requirements. The failure to comply with these provisions in a timely manner could prevent us from qualifying as a business development company or RIC, or could force us to pay unexpected taxes and penalties, which could be material. We have limited prior experience managing a business development company or RIC. Its lack of experience in managing a portfolio of assets under such constraints may hinder its ability to take advantage of attractive investment opportunities and, as a result, achieve our investment objectives.

 

We may be obligated to make distributions to shareholders with respect to recognized non-cash income.

 

For federal income tax purposes, we may be required to recognize taxable income (such as deferred interest that is accrued as original issue discount) in circumstances in which we do not receive a corresponding payment in cash and to make distributions with respect to such income to maintain our status as a RIC even though we will not have received any corresponding cash amount. Under such circumstances, we may have difficulty meeting the annual distribution requirement necessary to obtain and maintain RIC tax treatment under the Code. This difficulty in making the required distribution may be amplified to the extent that we are required to pay an incentive fee with respect to such accrued income for which we have not received a corresponding cash payment. If this occurs, we may have to sell some of our future investments at times and/or at prices we would not consider advantageous, raise additional debt or equity capital or forgo new investment opportunities for this purpose. If we are not able to obtain cash from other sources, we may fail to qualify for RIC tax treatment and thus become subject to corporate-level income tax.

 

The time and resources that individuals we employ may be diverted and we may face additional competition due to the fact that individuals we employ are not prohibited from raising money for or managing another entity that makes the same types of investments that we target.

 

Our personnel are not prohibited by an agreement with us from raising money for and managing another investment entity that makes the same types of investments as those we may target. As a result, the time and resources that these individuals may devote to us may be diverted. In addition, we may compete with any such investment entity for the same investors and investment opportunities. We do not intend to invest in portfolio companies in which the other funds managed by our professionals are investing or are invested. We do not intend to seek exemptive relief from the SEC.

 

There are significant potential conflicts of interest which could impact our investment returns.

 

Our executive officers may serve as officers, directors or principals of entities that operate in the same or a related line of business as we do. Accordingly, certain of our officers may have obligations to investors in other entities managed by their affiliates, the fulfillment of which obligations might not be in the best interests of us or our stockholders. In addition, we note that any affiliated investment vehicle currently existing, or formed in the future, and managed by our investment adviser or any of its affiliates may, notwithstanding different stated investment objectives, have overlapping investment objectives with our own and, accordingly, may invest in asset classes similar to those targeted by us. 

 

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We incur significant costs as a result of being a public company.

 

As a public company, we incur legal, accounting and other expenses, including costs associated with the periodic reporting requirements applicable to a company whose securities are registered under the Exchange Act, as well as additional corporate governance requirements, including requirements under the Sarbanes-Oxley Act, and other rules implemented by the SEC.

 

Risks Related to Business Development Companies

 

Failure to invest a sufficient portion of our assets in qualifying assets could preclude us from investing in accordance with our current business strategy and maintaining our status as a business development company.

 

As a business development company, we may not acquire any assets other than “qualifying assets” unless, at the time of and after giving effect to such acquisition, at least 70% of our total assets are qualifying assets. Therefore, we may be precluded from investing in what we believe are attractive investments if such investments are not qualifying assets, or we could lose our status as a BDC, which would have a material adverse effect on our business, financial condition and result of operations. Similarly, these rules could prevent us from making additional investments in existing portfolio companies, which could result in the dilution of our position, or could require us to dispose of investments at an inopportune time to comply with the 1940 Act. If we were forced to sell non-qualifying investments in the portfolio for compliance purposes, the proceeds from such sale could be significantly less than the current value of such investments.

 

Failure to maintain our status as a business development company would reduce our operating flexibility.

 

If we do not remain a business development company, we might be regulated as a closed-end investment company under the 1940 Act, which would subject us to substantially more regulatory restrictions under the 1940 Act and correspondingly decrease our operating flexibility.

 

Regulations governing our operation as a business development company and RIC will affect our ability to raise, and the way in which we raise, additional capital or borrow for investment purposes, which may have a negative effect on our growth.

 

As a result of the annual distribution requirement to qualify as a RIC, we may need to periodically access the capital markets to raise cash to fund new investments. We may issue “senior securities,” including borrowing money from banks or other financial institutions only in amounts such that our asset coverage, as defined in the 1940 Act, equals at least 200% after such incurrence or issuance. Our ability to issue different types of securities is also limited. Compliance with these requirements may unfavorably limit our investment opportunities and reduce our ability in comparison to other companies to profit from favorable spreads between the rates at which we can borrow and the rates at which we can lend. As a business development company, therefore, we intend to continuously issue equity at a rate more frequent than our privately owned competitors, which may lead to greater stockholder dilution. 

 

We may issue debt securities or preferred stock and/or borrow money from banks or other financial institutions for investment purposes, which we refer to collectively as “senior securities,” up to the maximum amount permitted by the 1940 Act. Under the provisions of the 1940 Act, we will be permitted, as a BDC, to issue senior securities in amounts such that our asset coverage ratio, as defined in the 1940 Act, equals at least 200% of gross assets less all liabilities and indebtedness not represented by senior securities, after each issuance of senior securities. If the value of our assets declines, we may be unable to satisfy this test. If that happens, we may be required to sell a portion of our investments and, depending on the nature of our leverage, repay a portion of our indebtedness at a time when such sales may be disadvantageous. Also, any amounts that we use to service our indebtedness would not be available for distributions to our common stockholders. Furthermore, as a result of issuing senior securities, we would also be exposed to typical risks associated with leverage, including an increased risk of loss.

 

Under the 1940 Act, we generally are prohibited from issuing or selling our common stock at a price below net asset value per share, which may be a disadvantage as compared with other public companies. We may, however, sell our common stock, or warrants, options or rights to acquire our common stock, at a price below the current net asset value of the common stock if our board of directors and independent directors determine that such sale is in our best interests and the best interests of our stockholders, and our stockholders as well as those stockholders that are not affiliated with us approve such sale. In any such case, the price at which our securities are to be issued and sold may not be less than a price that, in the determination of our board of directors, closely approximates the fair value of such securities.

 

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Our ability to enter into transactions with our affiliates will be restricted.

 

We will be prohibited under the 1940 Act from participating in certain transactions with certain of our affiliates without the prior approval of a majority of the independent members of our board of directors and, in some cases, the SEC. Any person that owns, directly or indirectly, 5% or more of our outstanding voting securities will be our affiliate for purposes of the 1940 Act and we will generally be prohibited from buying or selling any securities from or to such affiliate absent the prior approval of our board of directors. The 1940 Act also prohibits certain “joint” transactions with certain of our affiliates, which could include investments in the same portfolio company (whether at the same or different times), without prior approval of our board of directors and, in some cases, the SEC. If a person acquires more than 25.0% of our voting securities, we will be prohibited from buying or selling any security from or to such person or certain of that person’s affiliates, or entering into prohibited joint transactions with such persons, absent the prior approval of the SEC. Similar restrictions limit our ability to transact business with our officers or directors or their affiliates. As a result of these restrictions, we may be prohibited from buying or selling any security from or to any portfolio company of a private equity fund managed by an affiliate without the prior approval of the SEC, which may limit the scope of investment opportunities that would otherwise be available to us.

 

We are uncertain of our sources for funding our future capital needs; if we cannot obtain debt or equity financing on acceptable terms, our ability to acquire investments and to expand our operations will be adversely affected.

 

In the event that we develop a need for additional capital in the future for investments or for any other reason, sources of funding may not be available to us. Consequently, if we cannot obtain debt or equity financing on acceptable terms, our ability to acquire investments and to expand our operations will be adversely affected. As a result, we would be less able to achieve portfolio diversification and our investment objectives, which may negatively impact our results of operations and reduce our ability to make distributions to our stockholders.

 

Risks Related to Our Current and Future Investments

 

There will be uncertainty as to the value of our portfolio investments.

 

As of December 31, 2016, approximately 78% of the fair value of our portfolio investments were in the form of securities that are not publicly traded. The fair value of securities and other investments that are not publicly traded may not be readily determinable. We expect to value these securities on a quarterly basis in accordance with our valuation policy, which is at all times consistent with GAAP. Our Board of Directors will discuss valuations and determine the fair value in good faith based on the input of our management. The factors that may be considered in fair value pricing our investments include the nature and realizable value of any collateral, the portfolio company’s ability to make payments and its earnings, the markets in which the portfolio company does business, comparisons to publicly traded companies, discounted cash flow and other relevant factors. Because such valuations, and particularly valuations of private securities and private companies, are inherently uncertain, may fluctuate over short periods of time and may be based on estimates, our determinations of fair value may differ materially from the values that would have been used if a ready market for these securities existed. Our net asset value could be adversely affected if our determinations regarding the fair value of our investments were materially higher or lower than the amounts that we ultimately realize upon the disposal of such securities.

 

Our investments in prospective portfolio companies may be risky, and we could lose all or part of our investment.

 

We intend to invest primarily in selected equity investments issued by small and middle market companies, and non-public companies, senior secured term loans, second lien secured loans, mezzanine debt, and subordinated debt.

 

Equity Investments. We have made equity investments in instruments such as preferred stock, common stock and related warrants. In addition, when we invest in first and second lien senior loans or mezzanine debt, we may acquire warrants to purchase equity securities. Our goal is ultimately to dispose of these equity interests and realize gains upon our disposition of such interests. However, the equity interests we receive may not appreciate in value and, in fact, may decline in value. Accordingly, we may not be able to realize gains from our equity interests, and any gains that we do realize on the disposition of any equity interests may not be sufficient to offset any other losses we experience.

 

In addition, investing in small and middle market companies and non-public companies involves a number of significant risks, including that they:

 

  may have limited financial resources and may be unable to meet their obligations under their debt securities that we hold, which may be accompanied by a deterioration in the value of any collateral and a reduction in the likelihood of us realizing any guarantees we may have obtained in connection with our investment;
     
  may have shorter operating histories, narrower product lines and smaller market shares than larger businesses, which tend to render them more vulnerable to competitors’ actions and changing market conditions, as well as general economic downturns;

 

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  are more likely to depend on the management talents and efforts of a small group of persons; therefore, the death, disability, resignation or termination of one or more of these persons could have a material adverse impact on our portfolio company and, in turn, on us;

 

  generally have less predictable operating results, may from time to time be parties to litigation, may be engaged in rapidly changing businesses with products subject to a substantial risk of obsolescence, and may require substantial additional capital to support their operations, finance expansion or maintain their competitive position. In addition, our executive officers and directors may, in the ordinary course of business, be named as defendants in litigation arising from our investments in the portfolio companies; and

 

  may have difficulty accessing the capital markets to meet future capital needs, which may limit their ability to grow or to repay their outstanding indebtedness upon maturity.

 

Senior Secured Loans and Second Lien Loans. When we extend senior secured term loans and second lien loans, we expect to generally take a security interest in the available assets of these portfolio companies, including the equity interests of their subsidiaries. Additionally, these loans are generally convertible into equity instruments of these portfolio companies, including common stock and preferred stock. We expect this security interest to help mitigate the risk that we will not be repaid. However, there is a risk that the collateral securing our loans may decrease in value over time or lose its entire value, may be difficult to sell in a timely manner, may be difficult to appraise and may fluctuate in value based upon the success of the business and market conditions, including as a result of the inability of the portfolio company to raise additional capital. Also, in some circumstances, our lien could be subordinated to claims of other creditors. In addition, deterioration in a portfolio company’s financial condition and prospects, including its inability to raise additional capital, may be accompanied by deterioration in the value of the collateral for the loan. Consequently, the fact that a loan is secured does not guarantee that we will receive principal and interest payments according to the loan’s terms, or at all, or that we will be able to collect on the loan should we be forced to enforce our remedies. If we are able to convert the loan to an equity instrument, there is no assurances that we will be able to liquidate such equity instrument, there are may not be an active market to sell such equity instrument, and the value of these equity instruments may be less than the face value of the loan.

 

Mezzanine and Subordinated Debt. Our mezzanine and subordinated debt investments will generally be subordinated to senior loans and will generally be unsecured. This may result in a heightened level of risk and volatility or a loss of principal which could lead to the loss of the entire investment.

 

These investments may involve additional risks that could adversely affect our investment returns. To the extent interest payments associated with such debt are deferred, such debt may be subject to greater fluctuations in valuations, and such debt could subject us and our stockholders to non-cash income. Since we will not receive any principal repayments prior to the maturity of some of our mezzanine debt investments, such investments will be of greater risk than amortizing loans.

  

Our future portfolio companies may incur debt that ranks equally with, or senior to, our investments in such companies.

 

We expect to invest primarily in first lien, second lien, mezzanine debt and, to a lesser extent, subordinated debt issued by small and middle market U.S. companies. Our future portfolio companies may have, or may be permitted to incur, other debt that ranks equally with, or senior to, the debt in which we invest. By their terms, such debt instruments may entitle the holders to receive payment of interest or principal on or before the dates on which we are entitled to receive payments with respect to the debt instruments in which we invest. Also, in the event of insolvency, liquidation, dissolution, reorganization or bankruptcy of a portfolio company, holders of debt instruments ranking senior to our investment in that portfolio company would typically be entitled to receive payment in full before we receive any distribution. After repaying such senior creditors, such portfolio company may not have any remaining assets to use for repaying its obligation to us. In the case of debt ranking equally with debt instruments in which we invest, we would have to share on an equal basis any distributions with other creditors holding such debt in the event of an insolvency, liquidation, dissolution, reorganization or bankruptcy of the relevant portfolio company.

 

There may be circumstances where our debt investments could be subordinated to claims of other creditors or we could be subject to lender liability claims.

 

Even though we intend to generally structure certain of our investments as senior loans, if one of our portfolio companies were to go bankrupt, depending on the facts and circumstances, including the extent to which we actually provided managerial assistance to that portfolio company, a bankruptcy court might recharacterize our debt investment and subordinate all or a portion of our claim to that of other creditors. We may also be subject to lender liability claims for actions taken by us with respect to a borrower’s business or instances where we exercise control over the borrower. It is possible that we could become subject to a lender’s liability claim, including as a result of actions taken in rendering significant managerial assistance.

 

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Second priority liens on collateral securing loans that we expect to make to our future portfolio companies may be subject to control by senior creditors with first priority liens. If there is a default, the value of the collateral may not be sufficient to repay in full both the first priority creditors and us.

 

Certain loans that we expect to make to our future portfolio companies will be secured on a second priority basis by the same collateral securing senior secured debt of such companies. The first priority liens on the collateral will secure the portfolio company’s obligations under any outstanding senior debt and may secure certain other future debt that may be permitted to be incurred by the company under the agreements governing the loans. The holders of obligations secured by the first priority liens on the collateral will generally control the liquidation of and be entitled to receive proceeds from any realization of the collateral to repay their obligations in full before us. In addition, the value of the collateral in the event of liquidation will depend on market and economic conditions, the availability of buyers and other factors. There can be no assurance that the proceeds, if any, from the sale or sales of all of the collateral would be sufficient to satisfy the loan obligations secured by the second priority liens after payment in full of all obligations secured by the first priority liens on the collateral. If such proceeds are not sufficient to repay amounts outstanding under the loan obligations secured by the second priority liens, then we, to the extent not repaid from the proceeds of the sale of the collateral, will only have an unsecured claim against the company’s remaining assets, if any.

 

The rights we may have with respect to the collateral securing the loans we make to our portfolio companies with senior debt outstanding may also be limited pursuant to the terms of one or more inter-creditor agreements that we enter into with the holders of senior debt. Under such an inter-creditor agreement, at any time that obligations that have the benefit of the first priority liens are outstanding, any of the following actions that may be taken in respect of the collateral will be at the direction of the holders of the obligations secured by the first priority liens: the ability to cause the commencement of enforcement proceedings against the collateral; the ability to control the conduct of such proceedings; the approval of amendments to collateral documents; releases of liens on the collateral; and waivers of past defaults under collateral documents. We may not have the ability to control or direct such actions, even if our rights are adversely affected.

 

We generally will not control our future portfolio companies.

 

We do not expect to control most of our future portfolio companies, even though we may have board representation or board observation rights, and our debt agreements may contain certain restrictive covenants. As a result, we will be subject to the risk that a portfolio company in which we invest may make business decisions with which we disagree and the management of such company, as representatives of the holders of their common equity, may take risks or otherwise act in ways that do not serve our interests as debt investors. Due to expected lack of liquidity for our future investments in non-traded companies, we may not be able to dispose of our interests in our portfolio companies as readily as we would like or at an appropriate valuation. As a result, a portfolio company may make decisions that could decrease the value of our portfolio holdings.

 

Most of our portfolio companies will need additional capital, which may not be readily available.

 

Most of the portfolio companies may have limited financial resources and typically require substantial additional financing to satisfy their continuing working capital and other capital requirements. We cannot predict the circumstances or market conditions under which these portfolio companies will seek additional capital. Each round of institutional equity financing is typically intended to provide a company with only enough capital to reach the next stage of development. It is possible that one or more of our portfolio companies will not be able to raise additional financing or may be able to do so only at a price or on terms that are unfavorable to the portfolio company, either of which would negatively impact our investment returns. Some of these companies may be unable to obtain sufficient financing from any provider of capital under any terms, thereby requiring these companies to cease or curtail business operations. Accordingly, investments in these types of companies generally entails a higher risk of loss than investments in companies that do not have significant incremental capital raising requirements.

 

We will be exposed to risks associated with changes in interest rates.

 

We will be subject to financial market risks, including changes in interest rates. To the extent that we invest in fixed-rate loans or securities rather than floating-rate debt instruments, general interest rate fluctuations may have a substantial negative impact on our investments and investment opportunities and, accordingly have a material adverse effect on our investment objectives and our rate of return on invested capital. In addition, an increase in interest rates would make it more expensive to use debt for our financing needs, if any.

 

Economic recessions or downturns could impair our future portfolio companies and harm our operating results.

 

We expect that some of our future portfolio companies may be susceptible to economic slowdowns or recessions and may be unable to repay our debt investments during these periods. Therefore, we may have non-performing assets, and the value of our portfolio could to decrease during these periods. Adverse economic conditions also may decrease the value of collateral securing some of our future debt investments and the value of our future equity investments. Economic slowdowns or recessions could lead to financial losses in our future portfolio and a decrease in our expected revenues, net income and asset values. Unfavorable economic conditions also could increase our funding costs, limit our access to the capital markets or result in a decision by lenders not to extend credit to us on terms we deem acceptable. These events could prevent us from increasing future investments and harm our operating results. 

 

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Defaults by our current and future portfolio companies will harm our operating results.

 

A current or future portfolio company’s failure to satisfy financial or operating covenants imposed by us or other lenders could lead to defaults and, potentially, termination of its loans and foreclosure on its secured assets, which could trigger cross-defaults under other agreements and jeopardize a portfolio company’s ability to meet its obligations under the debt or equity securities that we may hold. We may incur expenses to the extent necessary to seek recovery upon default or to negotiate new terms, which may include the waiver of certain financial covenants, with a defaulting future portfolio company.

 

We may not realize gains from our current or future equity investments.

 

Certain investments that we may make could include warrants or other equity securities. In addition, we may make direct equity investments in companies. Our goal is ultimately to realize gains upon our disposition of such equity interests. However, the equity interests we may receive may not appreciate in value and, in fact, may decline in value. Accordingly, we may not be able to realize gains from our future equity interests, and any gains that we do realize on the disposition of any equity interests may not be sufficient to offset any other losses we experience. We also may be unable to realize any value if a future portfolio company does not have a liquidity event, such as a sale of the business, recapitalization or public offering, which would allow us to sell the underlying equity interests. We intend to seek puts or similar rights to give us the right to sell our equity securities back to the portfolio company issuer. We may be unable to exercise these puts rights for the consideration provided in our investment documents if the issuer is in financial distress.

 

An investment strategy including privately held companies presents certain challenges, including the lack of available information about these companies.

 

We may invest in privately held companies. Investments in private companies pose certain incremental risks as compared to investments in public companies. First, private companies have reduced access to the capital markets, resulting in diminished capital resources and ability to withstand financial distress. Second, the investments themselves tend to be less liquid. As such, we may have difficulty exiting an investment promptly or at a desired price prior to maturity or outside of a normal amortization schedule. Finally, less public information generally exists about private companies. Further, these companies may not have third-party debt ratings or audited financial statements. We will be required therefore to rely on our ability to obtain adequate information through due diligence to evaluate the creditworthiness and potential returns from investing in these companies. These companies and their financial information will generally not be subject to the Sarbanes-Oxley Act and other rules that govern public companies. If we are unable to uncover all material information about these companies, we may not make a fully informed investment decision, and we may lose money on our investments. As a result, the relative lack of liquidity and the potential diminished capital resources of our target portfolio companies may affect our investment returns.

 

The lack of liquidity in our investments may adversely affect our business.

 

We intend to invest in companies whose securities are not publicly traded, and whose securities will be subject to legal and other restrictions on resale or will otherwise be less liquid than publicly traded securities. The illiquidity of these investments may make it difficult for us to sell these investments when desired. In addition, if we are required to liquidate all or a portion of our portfolio quickly, we may realize significantly less than the value at which we had previously recorded these investments. As a result, we do not expect to achieve liquidity in our future investments in the near-term. We expect that our future investments will generally be subject to contractual or legal restrictions on resale or are otherwise illiquid because there is usually no established trading market for such investments. The illiquidity of most of our current and future investments may make it difficult for us to dispose of them at a favorable price, and, as a result, we may suffer losses.

 

We may not have the funds or ability to make additional investments in our current or future portfolio companies.

 

We may not have the funds or ability to make additional investments in our current and future portfolio companies. After our initial investment in a portfolio company, we may be called upon from time to time to provide additional funds to such company or have the opportunity to increase our investment through the exercise of a warrant to purchase common stock. There is no assurance that we will make, or will have sufficient funds to make, follow-on investments. Any decisions not to make a follow-on investment or any inability on our part to make such an investment may have a negative impact on a portfolio company in need of such an investment, may result in a missed opportunity for us to increase our participation in a successful operation or may reduce the expected return on the investment.

 

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We may choose to waive or defer enforcement of covenants in the debt investments held in our portfolio, which may cause us to lose all or part of our investment in these companies.

 

Certain of the debt investments in our portfolio companies may include business and financial covenants placing affirmative and negative obligations on the operation of the company’s business and its financial condition. The purpose of these provisions is to require our portfolio companies to act, or refrain from acting, in a manner that we believe will best protect the capital we have invested. However, the financial condition and results of operations of our portfolio companies may cause us to determine that it would be in our stockholders’ and portfolio companies’ best interest to waive or defer enforcement of these provisions. As a result, we may offer a flexible payment and covenant enforcement structure to our portfolio companies. Accordingly, determination to waive or defer enforcement of some or all of these covenants may not provide us with the same level of protection as more restrictive conditions that traditional lenders typically impose on borrowers. In certain situations, we may even elect to waive breaches of these covenants, including our right to payment, or waive or defer enforcement of remedies, such as acceleration of obligations or foreclosure on collateral, depending upon the financial condition and prospects of the particular portfolio company, including situations where we believe that one or more financial sponsors intend to, express their intent to, or provide subject to milestones or contingencies, continued support, assistance or financial commitment to the borrower. We may also modify or waive a provision or term of our existing debt securities which we would otherwise be entitled to enforce. The terms of any such modification or waiver may not be as favorable to us in the short term as we could have required, or had the right to require, and we may choose to enforce less vigorously our rights and remedies under our debt securities than traditional lenders due to our investment philosophy to provide the portfolio company with the time and flexibility needed to enable it to comply with the terms of the covenant. These actions may reduce the likelihood in the short term of our receiving the full amount of future payments of interest or principal and be accompanied by a deterioration in the value of the underlying collateral as many of these companies may have limited financial resources, may be unable to meet future obligations and may go bankrupt. These events could harm our financial condition and operating results.

 

Risks Relating to Debt Financing

 

If we borrow money, the potential for gain or loss on amounts invested in us will be magnified and may increase the risk of investing in us.

 

The use of borrowings, also known as leverage, increases the volatility of investments by magnifying the potential for gain or loss on invested equity capital. If we use leverage to partially finance our future investments, through borrowing from banks and other lenders, you will experience increased risks of investing in our shares. If the value of our future assets increases, leveraging would cause the net asset value attributable to our common stock to increase more sharply than it would have had we not leveraged. Conversely, if the value of our assets decreases, leveraging would cause net asset value to decline more sharply than it otherwise would have had we not leveraged. Similarly, any increase in our income in excess of interest payable on the borrowed funds would cause our net income to increase more than it would without the leverage, while any decrease in our income would cause net income to decline more sharply than it would have had we not borrowed. Such a decline could negatively affect our ability to make common stock distribution payments. Leverage is generally considered a speculative investment technique.

 

Changes in interest rates may affect our cost of capital and net investment income.

 

Since we intend to use debt to finance investments, our future net investment income will depend, in part, upon the difference between the rate at which we borrow funds and the rate at which we invest those funds. As a result, we can offer no assurance that a significant change in market interest rates will not have a material adverse effect on our future net investment income. In periods of rising interest rates when we have debt outstanding, our cost of funds will increase, which could reduce our future net investment income. We expect that our long-term fixed-rate investments will be financed primarily with equity and long-term debt. We may use interest rate risk management techniques in an effort to limit our exposure to interest rate fluctuations. These techniques may include various interest rate hedging activities to the extent permitted by the 1940 Act. These activities may limit our ability to participate in the benefits of lower interest rates with respect to the hedged portfolio. Adverse developments resulting from changes in interest rates or hedging transactions could have a material adverse effect on our business, financial condition and results of operations. Also, we have limited experience in entering into hedging transactions, and we will initially have to purchase or develop such expertise. You should also be aware that a rise in the general level of interest rates can be expected to lead to higher interest rates applicable to our debt investments.

 

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Federal Income Tax Risks

 

We will be subject to corporate-level income tax if we are unable to qualify as a RIC under Subchapter M of the Code or to satisfy RIC distribution requirements.

 

To obtain and maintain RIC tax treatment under the Code, we must meet the following annual distribution, income source and asset diversification requirements.

 

  The annual distribution requirement for a RIC will be satisfied if we distribute to our stockholders on an annual basis at least 90.0% of our net ordinary income and realized net short-term capital gains in excess of realized net long-term capital losses, if any. We will be subject to a 4.0% nondeductible federal excise tax, however, to the extent that we do not satisfy certain additional minimum distribution requirements on a calendar-year basis. Because we may use debt financing, we are subject to an asset coverage ratio requirement under the 1940 Act and may in the future become subject to certain financial covenants under loan and credit agreements that could, under certain circumstances, restrict us from making distributions necessary to satisfy the distribution requirement. If we are unable to obtain cash from other sources, we could fail to qualify for RIC tax treatment and thus become subject to corporate-level income tax.

  

  The income source requirement will be satisfied if we obtain at least 90.0% of our income for each year from dividends, interest, gains from the sale of stock or securities or similar sources.

 

  The asset diversification requirement will be satisfied if we meet certain asset diversification requirements at the end of each quarter of our taxable year. To satisfy this requirement, at least 50.0% of the value of our assets must consist of cash, cash equivalents, U.S. government securities, securities of other RICs, and other acceptable securities; and no more than 25.0% of the value of our assets can be invested in the securities, other than U.S. government securities or securities of other RICs, of one issuer, of two or more issuers that are controlled, as determined under applicable Code rules, by us and that are engaged in the same or similar or related trades or businesses or of certain “qualified publicly traded partnerships.” Failure to meet these requirements may result in our having to dispose of certain investments quickly in order to prevent the loss of RIC status. Because we expect that most of our investments will be in private companies, and therefore will be relatively illiquid, any such dispositions could be made at disadvantageous prices and could result in substantial losses.

  

If we fail to qualify for or maintain RIC tax treatment for any reason and are subject to corporate income tax, the resulting corporate taxes could substantially reduce our future net assets, the amount of future income available for distribution and the amount of our future distributions.

 

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

 

For federal income tax purposes, we may be required to recognize taxable income in circumstances in which we do not receive a corresponding payment in cash. For example, if we hold debt obligations that are treated under applicable tax rules as having original issue discount (such as debt instruments with payment-in-kind interest or, in certain cases, increasing interest rates or issued with warrants), we must include in income each year a portion of the original issue discount that accrues over the life of the obligation, regardless of whether cash representing such income is received by us in the same taxable year. We may also have to include in income other amounts that we have not yet received in cash, such as deferred loan origination fees that are paid after origination of the loan or are paid in non-cash compensation such as warrants or stock. We anticipate that a portion of our income may constitute original issue discount or other income required to be included in taxable income prior to receipt of cash.

 

Because any original issue discount or other amounts accrued will be included in our investment company taxable income for the year of the accrual, we may be required to make a distribution to our stockholders in order to satisfy the annual distribution requirement, even though we will not have received any corresponding cash amount. As a result, we may have difficulty meeting the annual distribution requirement necessary to obtain and maintain RIC tax treatment under the Code. We may have to sell some of our investments at times and/or at prices we would not consider advantageous, raise additional debt or equity capital or forgo new investment opportunities for this purpose. If we are not able to obtain cash from other sources, we may fail to qualify for RIC tax treatment and thus become subject to corporate-level income tax.

 

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Risks Relating to Our Common Stock

 

The holder of Series A Convertible Preferred Stock has rights senior to those of the holders of common shares.

 

In connection with the issuance of 4,000 shares of Series A Convertible Preferred Stock for an aggregate purchase price of $400,000, the holder of the preferred stock has certain rights and preferences. These rights include the right to elect a majority of the board if so entitled to do so under the 1940 Act, the right to approve the Company ceasing to be a business development company and veto rights over certain actions by the Company. Each share of Series A Convertible Preferred Stock is convertible to 500 shares of common stock, subject to customary anti-dilution provisions as well as upon subsequent equity sales, subsequent rights offerings, pro rata distributions and fundamental transactions, all as more fully described in the Certificate of Designation of Preferences, Rights and Limitations. However, the holder of the Series A Convertible Preferred Stock agreed to waive the anti-dilution provision with respect to issuances by the Company at an effective price less than $0.20 per share. The Company also agreed with the holder of the shares of Series A Convertible Preferred Stock that, subject to certain exceptions, it will not issue any convertible securities or equity.

  

The market price of our shares of common stock may be adversely affected if we are unable to implement our investment strategy.

 

Many of our operating expenses as a public company are fixed and independent of the size of our net assets. Also, declining net assets and/or an increasing operating expense ratio may diminish the marketability of our common stock, which in turn may lead to diminished (or no) institutional ownership of our stock and the corresponding risk of a stock price that trades at a sustained discount to net asset value, which discount may be large.

 

Our investments also involve a high degree of risk and, as a result, we may incur losses in the value of our investment portfolio. Portfolio company investments are highly speculative and, therefore, an investor in our common stock may lose his entire investment. Unrealized depreciation of the debt and equity securities of our portfolio companies will always be a by-product and risk of our business, and there can be no assurance that we will be successful in executing our investment strategy. The market price of our shares of common stock may be adversely affected if we are unable to successfully implement our investment strategy, and an investment in our common stock would not be suitable for investors with lower risk tolerance.

 

“Penny Stock” rules may make buying or selling our securities difficult.

 

Trading in our securities is subject to the SEC’s “penny stock” rules and it is anticipated that trading in our securities will continue to be subject to the penny stock rules for the foreseeable future. The SEC has adopted regulations that generally define a penny stock to be any equity security that has a market price of less than $5.00 per share, subject to certain exceptions. These rules require that any broker-dealer who recommends our securities to persons other than prior customers and accredited investors must, prior to the sale, make a special written suitability determination for the purchaser and receive the purchaser’s written agreement to execute the transaction. Unless an exception is available, the regulations require the delivery, prior to any transaction involving a penny stock, of a disclosure schedule explaining the penny stock market and the risks associated with trading in the penny stock market. In addition, broker-dealers must disclose commissions payable to both the broker-dealer and the registered representative and current quotations for the securities they offer. The additional burdens imposed upon broker- dealers by such requirements may discourage broker-dealers from recommending transactions in our securities, which could limit the liquidity and adversely affect the market price for our common stock.

 

Our securities are quoted on the OTCQB, which may not provide us much liquidity for our investors as an exchange, such as the NASDAQ Stock Market or other national or regional exchanges.

 

Our securities are quoted on the OTCQB. The OTCQB level of the OTC Markets is an electronic quotation system that provide significantly less liquidity than the NASDAQ Stock Market or other national or regional exchanges. Securities quoted on the OTCQB are usually thinly traded, highly volatile, have fewer market makers and are not followed by analysts. The SEC’s order handling rules, which apply to NASDAQ-listed securities, do not apply to securities quoted on the OTCQB. Quotes for stocks included on the OTC markets are not listed in newspapers. Therefore, prices for securities traded solely on the OTCQB may be difficult to obtain and holders of our securities may be unable to resell their securities at or near their original acquisition price, or at any price. We cannot assure you a public trading market will develop. As a result you may not receive a return of all of your invested capital.

 

You may not be able to sell your shares for more than what you paid.

 

The market price of our common stock could fluctuate in the future in response to various factors, including, but not limited to: quarterly variations in operating results; our ability to control costs and improve cash flow; announcements of technological innovations or new products by us or by our competitors; changes in investor perceptions; and new products or product enhancements by us or our competitors.

 

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The stock market in general has continued to experience volatility which may further affect our stock price.

 

Our articles of incorporation and bylaws could discourage acquisition proposals, delay a change in control or prevent other transactions.

 

Provisions of our articles of incorporation and bylaws, as well as provisions of Delaware General Corporation Law, may discourage, delay or prevent a change in control of our company or other transactions that you as a shareholder may consider favorable and may be in your best interest. Our articles of incorporation and bylaws contain provisions that: authorize the issuance of shares of “blank check” preferred stock that could be issued by our board of directors to increase the number of outstanding shares and discourage a takeover attempt; limit who may call special meetings of shareholders; and require advance notice for business to be conducted at shareholder meetings.

 

Our directors have the authority to issue common and preferred shares without shareholder approval, and preferred shares can be issued with such rights, preferences, and limitations as may be determined by our board of directors. The rights of the holders of common stock will be subject to, and may be adversely affected by, the rights of any holders of preferred stock that may be issued in the future. We presently have no commitments or contracts to issue any other shares of preferred stock. Authorized and unissued preferred stock could delay, discourage, hinder or preclude an unsolicited acquisition of our company, could make it less likely that shareholders receive a premium for their shares as a result of any such attempt, and could adversely affect the market prices of, and the voting and other rights, of the holders of outstanding shares of our common stock.

 

Your interest in the Company will be diluted if we issue additional shares, which could reduce the overall value of your investment.

 

Stockholders in our Company do not have preemptive rights to any shares of common stock we issue in the future. Our charter authorizes us to issue 100,000,000 shares of common stock. Subject to applicable limitations and restrictions we granted to the holders of our Series A Convertible Preferred Stock, our board may elect to sell additional shares of our securities in future private or public offerings, issue equity interests in private offerings or issue share-based awards to our independent directors or employees. To the extent we issue additional equity interests, your percentage ownership interest in us will be diluted. In addition, depending upon the terms and pricing of any additional offerings and the value of our investments, you may also experience dilution in the book value and fair value of your shares in the Company.

 

Certain provisions of our charter and bylaws as well as provisions of the Delaware General Corporation Law could deter takeover attempts and have an adverse impact on the value of our common stock.

 

Our charter and bylaws, as well as certain statutory and regulatory requirements, contain certain provisions that may have the effect of discouraging a third party from attempting to acquire us. Under the Delaware General Corporation Law, “control shares” acquired in a “control share acquisition” have no voting rights except to the extent approved by a vote of two-thirds of the votes entitled to be cast on the matter, excluding shares owned by the acquirer, by officers or by directors who are employees of the corporation. Our bylaws contain a provision exempting from the Control Share Acquisition Act under the Delaware General Corporation Law any and all acquisitions by any person of our shares of stock. Our board may amend the bylaws to remove that exemption in whole or in part without stockholder approval. The Control Share Acquisition Act (if we amend our bylaws to be subject to that act) may discourage others from trying to acquire control of us and increase the difficulty of consummating any offer. Under the Delaware General Corporation Law, specified “business combinations,” including certain mergers, consolidations, issuances of equity securities and other transactions, between a Delaware corporation and any person who owns 10.0% or more of the voting power of the corporation’s outstanding shares, and certain other parties (each an “interested stockholder”), or an affiliate of the interested stockholder, are prohibited for five years after the most recent date on which the interested stockholder becomes an interested stockholder. Thereafter any of the specified business combinations must be approved by a super majority vote of the stockholders unless, among other conditions, the corporation’s common stockholders receive a minimum price for their shares. We are subject to the Delaware Business Combination Act.

 

Under the Delaware General Corporation Law, certain statutory provisions permit a corporation that is subject to the Securities Exchange Act of 1934, as amended (the “Exchange Act”) and that has at least three outside directors to be subject to certain corporate governance provisions that may be inconsistent with the corporation’s charter and bylaws. Among other provisions, a board of directors may classify itself without the vote of stockholders. Further, the board of directors, by electing into certain statutory provisions and notwithstanding the charter or bylaws, may (i) provide that a special meeting of stockholders will be called only at the request of stockholders entitled to cast at least a majority of the votes entitled to be cast at the meeting, (ii) reserve for itself the right to fix the number of directors, and (iii) retain for itself sole authority to fill vacancies created by the death, removal or resignation of a director. A corporation may be prohibited by its charter or by resolution of its board of directors from electing any of the provisions of the statute. We are not prohibited from implementing any or all of the statute.

 

Additionally, our board of directors may, without stockholder action, authorize the issuance of shares of stock in one or more classes or series, including preferred stock; and our board of directors may, without stockholder action, amend our charter to increase the number of shares of stock of any class or series that we have authority to issue. These anti-takeover provisions may inhibit a change of control in circumstances that could give the holders of our common stock the opportunity to realize a premium over the value of our common stock.

 

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The market price of our shares of common stock may be adversely affected by the sale of shares by our management or large stockholders.

 

Sales of our shares of common stock by large stockholders could adversely and unpredictably affect the price of those securities.  Additionally, the price of our shares of common stock could be affected even by the potential for sales by these persons.  We cannot predict the effect that any future sales of our common stock, or the potential for those sales, will have on our share price.  Furthermore, due to relatively low trading volume of our stock, should one or more large stockholders seek to sell a significant portion of its stock in a short period of time, the price of our stock may decline.

 

ITEM 1B. UNRESOLVED STAFF COMMENTS

 

Through May 2016, the Securities and Exchange Commission conducted an examination of our Company which evaluated compliance with certain provisions of the federal securities laws or other applicable rules and regulations (together, "federal securities laws"). The examination identified certain deficiencies and weaknesses in controls (together, "findings") which we believe were resolved. We were required to respond in writing to each of the matters described by June 3, 2016. We are currently preparing our written response and expect to respond in writing by April 30, 2017. 

 

ITEM 2. PROPERTIES

 

Our principal executive offices are located at 285 Grand Avenue, Building 5, Englewood, NJ 07631. We are not paying any rent for such space and we believe that our current office space will be adequate for the foreseeable future.

 

ITEM 3. LEGAL PROCEEDINGS.

 

There are no pending legal proceedings to which we are a party or in which any of our directors, officers or affiliates, any owner of record or beneficially of more than 5% of any class of voting securities of our company, or security holder is a party adverse to us or has a material interest adverse to us. Our property is not the subject of any pending legal proceedings.

 

ITEM 4. MINE SAFETY DISCLOSURES

 

Not applicable.

 

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PART II

 

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

 

Market Information

 

Our common stock is quoted on the OTCPink under the symbol “PTCI”, formerly “GDSW.” Our common stock was listed on January 5, 2012. The following table sets forth the range of high and low sales prices of our common stock as reported on the OTCPink Market for 2016 and 2015.

 

Quarter Ended  High   Low 
December 31, 2016  $1.00   $0.25 
September 30, 2016  $1.00   $1.00 
June 30, 2016  $1.00   $1.00 
March 31, 2016  $1.10   $1.00 
December 31, 2015  $1.10   $1.10 
September 30, 2015  $1.82   $1.69 
June 30, 2015  $1.85   $1.30 
March 31, 2015  $1.55   $0.80 

 

Security Holders

 

As of March 22, 2017, there were 50,082,441 shares of common stock issued and outstanding, which were held by approximately 92 stockholders of record.

  

We are authorized to issue 100,000,000 shares of common stock and 5,000,000 shares of blank check preferred stock, of which 1,000,000 are designated as Series A Convertible Preferred Stock.

 

On April 24, 2013, the Company executed and delivered a Stock Purchase Agreement with Alpha Capital Anstalt (the “Purchaser”) to purchase 4,000 shares of Series A Convertible Preferred Stock (the “Preferred Stock”) at a purchase price of $100.00 per share, or $400,000. In connection with the purchase of the Preferred Stock, the Company agreed not to enter into or exercise any equity line of credit or similar agreement, issue or agree to issue any floating or variable priced equity linked instruments or any equity with price reset rights. The Company also agreed, subject to certain exceptions, not to issue any equity, convertible debt or other securities convertible into common stock or equity of the Company without the prior written consent of the Purchaser.

 

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Each share of Preferred Stock is convertible by the holder at any time into 500 shares of common stock, as adjusted. The Certificate of Designation of the Preferred Stock provides for full ratchet anti-dilution provisions, other than with respect to certain securities issuances. In addition, if the Company issues equity or options, warrants or other convertible securities to the common stockholders, the holder of the Preferred Stock shall be entitled to receive such securities pro rata as if the Preferred Stock was convertible. The holders of the Preferred Stock vote with the holders of the common stock on an as converted basis. If the holder of the Preferred Stock shall be entitled under the Investment Company Act of 1940 to elect a majority of the Board of Directors of the Company, the number of directors constituting the board of directors shall automatically be increased by the smallest number so that, when added to the two directors elected exclusively by the holders of the Preferred Stock, such number would constitute a majority of the board. In the event of any liquidation, dissolution or winding up of the Company, either voluntarily or involuntarily, the holders of Preferred Stock shall have preference to any distribution of the assets of the Company to the holders of common stock of the Company.

 

The Company has the right to force conversion of all or a part of the issued and outstanding shares of Preferred Stock (i) if there is an effective registration statement which includes the resale of the common stock underlying the Preferred Stock, or such stock is freely resellable under Rule 144; (ii) the volume weighted average price exceeds $0.40 per share; and (iii) the average daily volume of the common stock exceeds $25,000. The Company also has the right under certain conditions to redeem all or some of the outstanding shares of Preferred Stock for $100 per share.

 

As a business development company under the Investment Company Act of 1940, if the Company’s asset coverage is less than 200% as of the end of each quarter, the Company shall redeem a sufficient number of shares of Preferred Stock to enable it to meet said requirements. The mandatory redemption price is the liquidation preference of the Preferred Stock which is $100 per share, plus any unpaid dividends.

 

The Purchaser agreed to restrict its ability to convert the Preferred Stock and receive shares of the Company if the number of shares of common stock beneficially held by the Purchaser and its affiliates in the aggregate after such conversion exceeds 9.99% of the then outstanding shares of common stock.

 

Dividend Policy

 

We have not declared or paid dividends on our common stock since our formation. Declaration or payment of dividends, if any, in the future, will be at the discretion of our Board of Directors and will depend on our then current financial condition, results of operations, capital requirements and other factors deemed relevant by the board of directors. There are no contractual restrictions on our ability to declare or pay dividends.

 

Recent Sales of Unregistered Securities

 

In January 2016, the Board of Directors of the Company, by unanimous written consent, canceled 500,000 shares that had been issued to a consultant in 2014. In connection with this cancellation, the consultant and the Company agreed to a mutual release whereby the consultant released the Company from any future obligations and the Company released the consultant from any future performance obligations.

 

Equity Compensation Plans

 

Previously, we entered into an agreement with our independent directors to issue each independent director of the board 112,500 options for the first quarter of 2015 and 37,500 on the first day of each quarter going forward at a strike price equal to the then fair market value. On January 1, 2015, each independent director of the Company’s board was issued 112,500 five year non-qualified options to purchase shares of the Company’s common stock at $0.30 for an aggregate of 337,500 options. Additionally, on April 1, 2015 and July 1, 2015, each independent director of the Company’s board was issued 37,500 five year non-qualified options to purchase shares of the Company’s common stock at $0.30 per share, the fair value of the Company’s common stock on the date of grant, expiring five years from the date of issuance for an aggregate of 225,000 options. In December 2015, we determined that, pursuant to the Investment Act of 1940, these stock options should not have been granted and accordingly, the stock options were canceled, all previously recorded compensation recognized of $62,758 was reversed, and our independent directors agreed to be compensated in cash at a rate of $10,000 per year of prior services to December 31, 2015 for an aggregate amount of $70,000, which has been reflected as an accrued expense at December 31, 2015 on the accompanying consolidated statements of assets and liabilities. As of December 31, 2016 and 2015, there are no options outstanding. Currently, we do not have any equity compensation plans.

 

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ITEM 6. SELECTED FINANCIAL DATA.

 

The following selected financial data for the years ended December 31, 2016, 2015 and 2014 is derived from our consolidated financial statements which have been audited. The data should be read in conjunction with our financial statements and related notes thereto and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included elsewhere in this annual report.

 

   For the Years Ended December 31, 
   2016   2015   2014 
Statement of Operations Data:            
Total investment income  $49,836   $47,141   $20,565 
Total operating expenses   443,494    264,313    269,435 
Net investment loss   (393,658)   (217,172)   (248,870)
Net unrealized appreciation (depreciation) on investments   (316,552)   8,142    (219,956)
Net realized (loss) gain on investments   (402,764)   (200,468)   92,277 
Net decrease in net assets resulting from operations  $(1,112,974)  $(409,498)  $(376,549)
                
Per Share Data:               
Net asset value per common share  $0.02   $0.04   $0.05 
Net investment loss (1)   (0.01)   (0.01)   (0.01)
Net decrease in net assets resulting from operations (1)   (0.02)   (0.01)   (0.01)
Distributions declared   -    -    - 

 

  (1) Per share amounts are calculated using weighted average shares outstanding during the period.      

 

   At December 31, 
   2016   2015 
Balance Sheet Data at Period End:        
Investments at fair value  $634,873   $1,691,518 
Cash  $579,209   $722,764 
Total assets  $1,299,604   $2,450,236 
Total liabilities and redeemable convertible preferred stock  $453,098   $490,756 
Net assets  $846,506   $1,959,480 
Common shares outstanding   50,082,441    50,582,441 
Preferred shares outstanding   4,000    4,000 

 

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

  

Certain statements contained in this Annual Report, including statements regarding the anticipated development and expansion of our business, our intent, belief or current expectations, primarily with respect to our future operating performance and the products we expect to offer and other statements contained herein regarding matters that are not historical facts, are "forward-looking" statements. Future filings with the SEC, future press releases and future oral or written statements made by us or with our approval, which are not statements of historical fact, may contain forward-looking statements, because such statements include risks and uncertainties, actual results may differ materially from those expressed or implied by such forward-looking statements.

 

All forward-looking statements speak only as of the date on which they are made and reflect our plans, estimates and beliefs. Our actual results could differ materially from those anticipated in these forward-looking statements. See “Special Note Regarding Forward-Looking Statements” elsewhere in this Annual Report. 

We undertake no obligation to update such statements to reflect events that occur or circumstances that exist after the date on which they are made.

 

The following discussion and analysis should be read in conjunction with the audited financial statements and notes thereto included elsewhere in this Annual Report.

 

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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. We are 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”), and intends to qualify thereafter.  

  

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:

 

  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.

 

  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.

 

  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.

 

  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.  

 

  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.

 

  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.

 

  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.

 

  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.”

 

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 December 31, 2016, we held nineteen portfolio companies. All are non-controlled and non-affiliated investments.

 

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Accelerize, Inc. (ACLZ) - On August 17, 2015, we completed an investment of $100,000 in 100,000 shares of common stock and 60,000 warrants of Accelerize Inc., an OTCQB listed company. In November 2015, we acquired an additional 21,879 common shares of ACLZ for $9,465 and in March 2016, we acquired an additional 15,000 shares for $4,347. 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) - On February 6, 2015, we completed a $190,100 investment in 43,000 shares of common stock and 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. During 2016 and 2015, we sold all 43,000 common shares. As of December 31, 2016, we own 29,250 warrants of ATNM.

 

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 termination 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.

 

Aytu Bioscience, Inc. (AYTU) - On May 6, 2016, we completed an investment of $85,000 in 17,709 shares of common stock and 17,709 warrants (adjusted to reflect 1 for 12 reverse split effective June 30, 2016) of Aytu Bioscience, Inc., an OTCQX listed company. AYTU is a commercial-stage specialty healthcare company focused on acquiring, developing and commercializing novel products in the field of urology. AYTU has multiple urology-focused products on the market, and it seek to build a portfolio of novel therapeutics that serve large medical needs in the field of urology. During June and July 2016, we sold all 17,709 common shares of AYTU. Additionally, during November 2016, we acquired 50,000 warrants of AYTU for $500.

 

Cesca Therapeutics, Inc. (KOOL) - As of December 31, 2016, 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.

 

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 have 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 $.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. ID Global Solution Corp. 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.

 

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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 December 31, 2016, 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 expire on October 6, 2017 and are exercisable at $11.10 per common share. 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 December 31, 2016, our investment in MMPW is valued at zero.

   

Optex Systems Holdings, Inc. (OPXS) - On November 17, 2014, we completed a $100,000 investment in a 12% convertible debenture of Optex Systems Holdings, Inc., an OTCQB listed company that manufactures optical sighting systems and assemblies primarily for Department of Defense (DOD) applications. OPXS also manufactures and delivers numerous periscope configurations, rifle and surveillance sights and night vision optical assemblies. On March 26, 2015, $100,000 of principal and $4,432 of interest of the convertible debt converted into 64.10 shares of Series B Convertible Preferred Stock. In August 2016, we redeemed the preferred stock and we received cash of $104,433.

 

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 December 31, 2016, we own 23,449 Series D preferred shares which are convertible into 468,980 shares of common stock, and 531,020 common shares.

 

Pershing Gold Corp. (PGLC) - As of December 31, 2016, we own 6,838 warrants in Pershing Gold Corp., a NASDAQ listed company. Each warrant expires on April 10, 2017 and is exercisable at an exercise price of $7.92. PGLC operates as a gold exploration company that seeks out and develops gold exploration and development properties in the state of Nevada.

 

PhaseRX, Inc. - PhaseRX, Inc. - PhaseRx is a preclinical biopharmaceutical company dedicated to developing products for the treatment of inherited enzyme deficiencies in the liver using intracellular enzyme replacement therapy (i-ERT). This i-ERT approach is enabled by its proprietary Hybrid mRNA TechnologyTM platform. On December 23, 2015, we completed a $100,000 in a 5% convertible debenture of Phase Rx, Inc., a company that was recently listed on NASDAQ. We were entitled to convert the unpaid face amount of this debenture and interest, any time following a closing date, at 80% of the pricing of PhaseRx’s next round of financing. Subject to the other terms and provisions contained in the agreement, upon the closing of the qualified offering, and compliance by borrower with all components comprising the qualified offering and provided that all conversion shares to be issued hereunder are registered for resale pursuant to an effective registration statement on Form S-1, the entire outstanding principal amount of the debt together with all accrued and unpaid interest thereon shall automatically convert, without any action on our part, into shares of common stock of PhaseRx, Inc. as are issued in the qualified offering at a conversion price equal to 80% of the qualified offering price or $5.00. In May 2016, PhaseRx, Inc. completed an initial public offering and the convertible debenture and all outstanding interest was converted into 25,538 shares of common stock of Phase Rx. During 2016, we sold all of our Phase Rx 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.

 

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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.

 

Pulmatrix Inc. (PULM) - On March 21, 2014, we completed a $150,003 investment in 8,276 shares of common stock and 8,276 warrants of Pulmatrix, Inc. a NASDAQ listed company. These warrants expired on March 21, 2016. Additionally, on February 13, 2015, we completed a $100,000 investment in a 5% convertible debenture of Pulmatrix, Inc. On June 30, 2015, $100,000 of principal and $1,529 of interest of this 5% convertible debenture was converted into 14,768 shares of common stock. During 2016 and 2015, we sold 23,029 and 15 shares of PULM common stock, respectively. Pulmatrix focuses on the discovery, development, and commercialization of pharmaceutical-grade hypochlorous acid based therapeutics to prevent and treat infection in invasive applications.

 

 Rennova Health, Inc. (RNVA) - Rennova Health, Inc. is a vertically integrated provider of healthcare related products and services. RNVA’s principal lines of business are (i) clinical laboratory operations, (ii) supportive software solutions, which includes Electronic Health Records (“EHR”), Medical Billing Services and Laboratory Information Services (“LIS”) and (iii) decision support and informatics operations. In July 2016, we completed a $72,000 investments in 160,000 common shares and 160,000 warrants of RNVA. In August 2016, we sold all 160,000 common shares. We currently hold 160,000 warrants that expire on June 30, 2021.

 

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) - On August 1, 2014, we completed a $131,248 investment in 23,026 shares of common stock and 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. During 2015, we sold 23,026 shares of XTNT. We currently hold 11,513 warrants.

 

Results of Operations

 

For the years ended December 31, 2016, 2015 and 2014, 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 years ended December 31, 2016, 2015 and 2014, we earned interest and dividend income of $49,836, $47,141 and $20,565, respectively, primarily resulting from interest earned on convertible debt and other debt, and dividend income earned on convertible preferred stock. The increase was attributable to an increase in income-earning investments.

 

Operating Expenses: For the year ended December 31, 2016, 2015 and 2014, total operating expenses consisted of the following:

 

   For the Year Ended December 31, 
   2016   2015   2014 
Compensation expense  $142,500   $96,613   $- 
Professional fees   234,588    94,742    54,721 
Filing fees   3,419    7,869    6,744 
Consulting fees   -    -    174,000 
Insurance expense   32,812    33,496    15,910 
General and administrative expenses   30,175    31,593    18,060 
                
     Total operating expenses  $443,494   $264,313   $269,435 

 

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Compensation expense: For the year ended December 31, 2016, we incurred compensation expense of $142,500 consisting of directors fees of $30,000, fees incurred for services performed by our outsourced chief financial officer of $60,000, and $27,500 in fees incurred for services performed by our outsourced chief compliance officer, and $25,000 incurred for services of our chief executive officer. For the year ended December 31, 2015, we incurred compensation expense of $96,613 consisting directors fees of $70,000 and fees incurred from services performed by our outsourced chief financial officer of $26,613. We did not incur any compensation expense during the year ended December 31, 2014.

 

Professional fees: For the year ended December 31, 2016, professional fees increased by $139,846 or 147.6% as compared to the year ended December 31, 2015. These increases was attributable to an increase in accounting fees of $64,002 related to an increase in audit and review fees, an increase in legal fees of $69,844 related to our Investment Act matters, and an increase in consulting fees of $6,000. For the year ended December 31, 2015, professional fees increased by $40,021 or 73.1% as compared to the year ended December 31, 2014. This increase was attributable to an increase in accounting fees of $32,066 and an increase in legal fees of $7,955.

 

Filing fees: Filing fees consist consists of fees incurred to file reports with the Securities and Exchange Commission, and other miscellaneous filing fees. For the year ended December 31, 2016, filing fees decreased by $4,450 or 56.6% as compared to the year ended December 31, 2015. For the year ended December 31, 2015, filing fees increased by $1,125 or 16.7% as compared to the year ended December 31, 2014.

 

Consulting fees: For the year ended December 31, 2014, we incurred consulting fees of $174,000. In July 2014, pursuant to a consulting agreement, we issued 500,000 shares of our common stock for business development services rendered. These shares were valued at their fair value of $150,000 using the most recent offering price of the common stock on the dates of grant of $0.30 per common share and we recorded stock-based consulting fees of $150,000. Additionally, we paid cash of $24,000 to this consultant. We did not incur any consulting expense during the years ended December 31, 2016 and 2015.

 

Insurance expense: For the year ended December 31, 2016, insurance expense decreased by $684 or 2.0% as compared to the year ended December 31, 2015. For the year ended December 31, 2015, insurance expense increased by $17,586 or 110.5% as compared to the year ended December 31, 2014. In 2014, we began incurring fees related to our director’s and officer’s insurance policy in May 2014. In 2016 and 2015, this policy was in place for the entire year.

 

General and administrative expenses: General and administrative expenses consist of transfer agent fees, custodian fees, bank service charges, bad debt expense listing fees, and other fees and expenses. For the year ended December 31, 2016, general and administrative expenses decreased by $1,418 or 4.5% as compared to the year ended December 31, 2015. For the year ended December 31, 2015, general and administrative expenses increased by $13,533 or 74.9% as compared to the year ended December 31, 2014. This increase was primarily attributable to an increase in bad debt expense of $6,800 from the write off of dividends receivable from an investment deemed uncollectible and an increase in listing fees and other miscellaneous charges.

 

Net Investment loss: For the years ended December 31, 2016, 2015 and 2014, net investment loss amount to $393,658, $217,172 and $248,870, respectively.

 

Net Realized And Unrealized (Loss) Gain On Investments:

 

Net Realized Gain (Loss) on Investments: During the years ended December 31, 2016, 2015 and 2014, we disposed of certain positions recognizing a net realized (loss) gain of $(402,764), $(200,468), and $92,277, respectively. During the year ended December 31, 2016, we recognized a net realized loss of $402,764 which primarily consisted of losses from the sale investments in Orbital Tracking Corp. of $34,200, Pulmatrix, Inc. of approximately $236,200, PhaseRX, Inc. of $42,800, and Actinium Pharmaceuticals Inc. of approximately $88,000. At December 31, 2015, we determined that the fair value of our investment of $100,000 in Arista Power, Inc. to be zero and we included this loss of $100,000 in net realized loss on investments.

 

Net Change in Unrealized (Loss) Gain on investments: For the years ended December 31, 2016, 2015 and 2014, we had a cost basis in our portfolio companies of $1,098,096, $1,838,189 and $1,163,250 with a fair market value of $634,873, $1,691,518 and $1,008,437, respectively. The net change in unrealized gain (loss) on investments for the years ended December 31, 2016, 2015 and 2014 was $(316,552), $8,142 and $(219,956), respectively.

 

Net Decrease in Net Assets Resulting from Operations For the years ended December 31, 2016, 2015 and 2014, the net decrease in net assets resulting from operations was $1,112,974, $409,498 and $376,549, respectively.

 

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Liquidity and Capital Resources

 

As of December 31, 2016, we had $579,209 in cash and cash equivalents, compared to $722,764 as of December 31, 2015, a decrease of $143,555. We primarily used operating cash to pay professional fees and compensation expense.

 

As of December 31, 2015, we had $722,764 in cash and cash equivalents, compared to $1,739,520 as of December 31, 2014, a decrease of $1,016,756. This decrease was primarily attributable to the purchase of investments of $1,309,178 offset by net proceeds from the sale of investments of $433,771.

  

The Company believes that our existing available cash will enable the Company to meet the working capital requirements for at least 12 months from December 31, 2016.

 

The Company has no agreements or arrangements to raise capital. In 2013 and through March 2014, we raised funds from the sale of our common stock of approximately $2,604,000 (net of direct offering costs paid in cash were $231,190) in accordance with the terms of a 2013 placement agency agreement. The placement agent was also entitled to 6,126,240 shares of the Company’s common stock which was issued on March 25, 2014. These shares have a fair value of $1,225,248, based upon the cash offering price of $0.20 per share, which represented the best evidence of fair value at the date of issuance.

 

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 from December 31, 2016, 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.

 

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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:

 

  Level 1 - Valuations based on unadjusted quoted market prices in active markets for identical assets or liabilities.
     
  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.
     
  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.

   

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.

 

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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

 

We are treated for federal income tax purposes as a RIC under Subchapter M of the Code. Generally, a RIC is exempt from federal income taxes if it distributes at least 90% of ‘‘Investment Company Taxable Income,’’ as defined in the Code, each year. Dividends paid up to one year after the current tax year can be carried back to the prior tax year for determining the dividends paid in such tax year. We intend to distribute sufficient dividends to maintain its RIC status each year. We are also subject to nondeductible federal excise taxes if we do not distribute at least 98% of net ordinary income each calendar year, 98.2% of capital gain net income for the one year period ending on October 31 of such calendar year, if any, and any recognized and undistributed income from prior years for which we paid no federal income taxes. We will generally endeavor each year to avoid any federal excise taxes.

  

We account for income taxes in accordance with accounting guidance FASB ASC Topic 740, “Income Taxes,” which requires that the Company recognize deferred tax liabilities and assets based on the differences between the financial statement carrying amounts and the tax basis of assets and liabilities, using enacted tax rates in effect in the years the differences are expected to reverse. Deferred income tax benefit (expense) results from the change in net deferred tax assets or deferred tax liabilities. A valuation allowance is recorded when it is more likely than not that some or all deferred tax assets will not be realized.

 

We did not have any distributable income as of December 31, 2016, 2015 and 2014.

 

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

 

During the normal course of its business, the Company trades various financial instruments and enters into various financial transactions where the risk of potential loss due to market risk, credit risk and other risks can equal or exceed the related amounts recorded. The success of any investment activity, liquidity risk influenced by general economic conditions that may affect the level and volatility of equity prices, interest rates and the extent and timing of investor participation in the markets for both equity and interest rate sensitive investments. Unexpected volatility or illiquidity in the markets in which the Company directly or indirectly holds positions could impair its ability to carry out its business and could cause losses to be incurred.

 

Market risk represents the potential loss that can be caused by increases or decreases in the fair value of investments resulting from market fluctuations.

 

Credit risk represents the potential loss that would occur if counterparties fail to perform pursuant to the terms of their obligations. In addition to its investments, the Company is subject to credit risk to the extent a custodian or broker with whom it conducts business is unable to fulfill contractual obligations.

 

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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

 

 

 

 

 

 

 

POINT CAPITAL, INC. AND SUBSIDIARY

CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2016

 

 

 

 

 

 

 

 

 

 

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POINT CAPITAL, INC. AND SUBSIDIARY

CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2016

 

CONTENTS

 

  Page(s)
Report of Independent Registered Public Accounting Firms F-2 – F-3
   
Consolidated Statements of Assets and Liabilities – December 31, 2016 and 2015 F-4
   
Consolidated Statements of Operations – Years ended December 31, 2016, 2015 and 2014 F-5
   
Consolidated Statement of Changes in Net Assets – Years ended December 31, 2016, 2015 and 2014 F-6
   
Consolidated Statements of Cash Flows – Years ended December 31, 2016, 2015 and 2014 F-7
   
Consolidated Schedule of Investments as of December 31, 2016 F-8
   
Consolidated Schedule of Investments as of December 31, 2015 F-9
   
Consolidated Schedule of Investments by Industry - as of December 31, 2016 and 2015 F-10
   
Notes to Consolidated Financial Statements F-11 - F-21

 

 F-1 

 

 

 

 

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM 

To the Board of Directors and
Stockholders of Point Capital, Inc.

We have audited the accompanying consolidated statement of assets and liabilities of Point Capital, Inc. and subsidiary (the “Company”) as of December 31, 2016, and the related consolidated statements of operations, changes in net assets (stockholders’ equity), and cash flows for the year ended December 31, 2016. Point Capital, Inc.’s management is responsible for these financial statements. Our responsibility is to express an opinion on these consolidated financial statements based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above are present fairly, in all material respects, the financial position of Point Capital, Inc. as of December 31, 2016, and the results of its operations, change in its net assets (stockholder’s equity) and its cash flows for the year ended December 31, 2016 in conformity with accounting principles generally accepted in the United States of America. 

 

/s/ Friedman LLP

 

East Hanover, New Jersey

March 31, 2017

 

 

 F-2 

 

   

EisnerAmper LLP

750 Third Avenue

New York, NY 10017-2703

T 212.949.8700

F 212.891.4100

 

    www.eisneramper.com

 

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

The Board of Directors and Stockholders of
Point Capital, Inc.

 

We have audited the accompanying consolidated statements of assets and liabilities of Point Capital, Inc. and subsidiary (the "Company"), including the consolidated schedule of investments as of December 31, 2015, and the related consolidated statements of operations, changes in net assets (stockholders' equity), and cash flows for each of the years in the two-year period ended December 31, 2015. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. 

 

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. Our procedures included confirmation of securities owned as of December 31, 2015, by correspondence with the custodians. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. 

 

ln our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Point Capital, Inc. and subsidiary as of December 31, 2015, and the results of their operations, changes in their net assets (stockholders' equity), and their cash flows, for each of the years in the two-year period ended December 31, 2015, in conformity with accounting principles generally accepted in the United States of America. 

 

EisnerAmper LLP 

 

/s/ EisnerAmper LLP

New York, New York

June 14, 2016 

 

 F-3 

 

 

POINT CAPITAL, INC. AND SUBSIDIARY

Consolidated Statements of Assets and Liabilities

 

   December 31,
2016
   December 31,
2015
 
         
ASSETS        
Investments at fair value        
Non-controlled/Non-affiliated investments (cost of $1,098,096 and $1,838,189 at December 31, 2016 and 2015, respectively)  $634,873   $1,691,518 
Cash and cash equivalents   579,209    722,764 
Interest receivable   58,549    15,924 
Prepaid expenses   26,973    20,030 
           
Total Assets  $1,299,604   $2,450,236 
           
LIABILITIES          
Accounts payable and accrued expenses  $53,098   $90,756 
           
Total Liabilities   53,098    90,756 
           
Redeemable Series A, Convertible Preferred stock, $0.0001 par value, 5,000,000 shares authorized, 1,000,000 shares designated; 4,000 shares issued and outstanding ($100 per share redemption value)   400,000    400,000 
           
NET ASSETS          
Common stock, $0.0001 par value, 100,000,000 shares authorized; 50,082,441 and 50,582,441 shares issued and outstanding at December 31, 2016 and 2015, respectively   5,009    5,059 
Additional paid-in capital   1,871,080    2,318,842 
Accumulated net investment loss   -    - 
Accumulated undistributed net realized loss on investments   (566,360)   (217,750)
Unrealized depreciation on investments   (463,223)   (146,671)
           
Total Net Assets   846,506    1,959,480 
           
Total Liabilities and Net Assets  $1,299,604   $2,450,236 
           
Net Asset Value per Common Share  $0.02   $0.04 

 

See accompanying notes to consolidated financial statements.

 

 F-4 

 

 

POINT CAPITAL, INC. AND SUBSIDIARY

Consolidated Statements of Operations

 

   For the Years Ended December 31, 
   2016   2015   2014 
             
INVESTMENT INCOME:            
Non-controlled/Non-affiliated investments:            
Interest income  $49,836   $40,341   $13,815 
Dividend income   -    6,800    6,750 
                
Total investment income   49,836    47,141    20,565 
                
OPERATING EXPENSES:               
Compensation expense   142,500    96,613    - 
Professional fees   234,588    94,742    54,721 
Filing fees   3,419    7,869    6,744 
Consulting fees   -    -    174,000 
Insurance expense   32,812    33,496    15,910 
General and administrative expenses   30,175    31,593    18,060 
                
Total operating expenses   443,494    264,313    269,435 
                
NET INVESTMENT LOSS   (393,658)   (217,172)   (248,870)
                
NET REALIZED AND UNREALIZED (LOSS) GAIN ON INVESTMENTS:               
Net realized gain (loss) on investments               
Non-controlled/Non-affiliated investments   (402,764)   (200,468)   92,277 
Net change in unrealized (loss) gain on investments               
Non-controlled/Non-affiliated investments   (316,552)   8,142    (219,956)
                
Net realized and unrealized (loss) gain on investments   (719,316)   (192,326)   (127,679)
                
NET DECREASE IN NET ASSETS RESULTING FROM OPERATIONS  $(1,112,974)  $(409,498)  $(376,549)

 

See accompanying notes to consolidated financial statements.

 

 F-5 

 

 

POINT CAPITAL, INC. AND SUBSIDIARY

Consolidated Statements of Changes in Net Assets

For the Years Ended December 31, 2016, 2015 and 2014

 

   Common Stock, $0.0001 Par Value   Additional
Paid In
   Accumulated
Net Investment
   Accumulated
Undistributed Net
Realized Gain (Loss) on
   Unrealized Appreciation
(Depreciation) on
   Total 
   Shares   Amount   Capital   Loss   Investments   Investments   Net Assets 
Balance - December 31, 2013   40,606,200   $4,061   $1,751,695   $(71,986)  $39,754   $65,143   $1,788,667 
                                    
Common stock issued ($0.20/share)   1,650,000    165    329,835    -    -    -    330,000 
                                    
Common stock issued ($0.30/share)   1,700,001    170    509,830    -    -    -    510,000 
                                    
Shares issued for services   6,626,240    663    1,374,585    -    -    -    1,375,248 
                                    
Offering costs   -    -    (1,258,388)   -    -    -    (1,258,388)
                                    
Net increase (decrease) in net assets resulting from operations   -    -    -    (248,870)   92,277    (219,956)   (376,549)
                                    
Tax reclassification of stockholders' equity   -    -    (188,825)   320,856    (132,031)   -    - 
                                    
Balance - December 31, 2014   50,582,441    5,059    2,518,732    -    -    (154,813)   2,368,978 
                                    
Net decrease in net assets resulting from operations   -    -    -    (217,172)   (200,468)   8,142    (409,498)
                                    
Tax reclassification of stockholders' equity   -    -    (199,890)   217,172    (17,282)   -    - 
                                    
Balance - December 31, 2015   50,582,441    5,059    2,318,842    -    (217,750)   (146,671)   1,959,480 
                                    
Cancellation of shares   (500,000)   (50)   50    -    -    -    - 
                                    
Net (decrease) increase in net assets resulting from operations   -    -    -    (393,658)   (402,764)   (316,552)   (1,112,974)
                                    
Tax reclassification of stockholders' equity   -    -    (447,812)   393,658    54,154    -    - 
                                    
Balance - December 31, 2016   50,082,441   $5,009   $1,871,080   $-   $(566,360)  $(463,223)  $846,506 

 

See accompanying notes to consolidated financial statements.

 

 F-6 

 

 

POINT CAPITAL, INC. AND SUBSIDIARY

Consolidated Statements of Cash Flows

 

   For the Years Ended December 31, 
   2016   2015   2014 
             
CASH FLOWS FROM OPERATING ACTIVITIES:            
Net decrease in net assets resulting from operations  $(1,112,974)  $(409,498)  $(376,549)
Adjustments to reconcile net decrease in net assets resulting from operations to net cash used in operating activities:               
Purchases of investments   (330,727)   (1,309,178)   (1,466,546)
Net realized loss (gain) on investments   402,764    200,468    (92,277)
Net change in unrealized loss (gain) of investments   316,552    (8,142)   219,956 
Proceeds from sale of investments   675,208    433,771    526,594 
Stock issued for services   -    -    150,000 
Non-cash interest income   (5,000)   -    - 
Increase in interest receivable   (44,777)   (13,544)   (1,779)
Decrease (increase) in dividend receivable   -    2,250    (2,250)
Increase in prepaid expenses   (6,943)   (1,085)   (18,945)
(Decrease) increase in accounts payable and accrued expenses   (37,658)   88,202    (1,164)
                
Net Cash Used In Operating Activities   (143,555)   (1,016,756)   (1,062,960)
                
CASH FLOWS FROM FINANCING ACTIVITIES:               
Repayment of notes payable   -    -    (15,000)
Proceeds from issuance of common stock   -    -    840,000 
Offering costs   -    -    (33,140)
                
Net Cash Provided By Financing Activities   -    -    791,860 
                
Net decrease in cash and cash equivalents   (143,555)   (1,016,756)   (271,100)
                
Cash and Cash Equivalents - Beginning of Year   722,764    1,739,520    2,010,620 
                
Cash and Cash Equivalents - End of Year  $579,209   $722,764    1,739,520 
                
Supplemental Disclosure of Cash Flow Information:               
Interest paid  $-   $-    1,726 
Taxes paid  $250   $1,750    915 
                
Non-cash investing and financing activities:               
Interest receivable converted into investments  $2,152   $-   $- 
Offering costs paid  $-   $-   $(1,225,248)
Issuance of common stock for services  $-   $-   $1,375,248 

 

See accompanying notes to consolidated financial statements.

 

 F-7 

 

 

POINT CAPITAL, INC. AND SUBSIDIARY
CONSOLIDATED SCHEDULE OF INVESTMENTS
December 31, 2016

 

United States (U.S.) Company  Industry  Type of Investment  Principal/Shares   Cost   Fair
Value
   % of
Net Assets
 
Non-controlled/Non-affiliated investments                      
Accelerize, Inc. (2)  Application Software  Common Stock   136,879   $75,279   $71,177    8.41%
Accelerize, Inc. (2)  Application Software  Warrants   60,000    38,533    16,617    1.96%
Actinium Pharmaceuticals Inc. (2)  Biotechnology  Warrants   29,250    51,055    1,418    0.17%
Arista Power, Inc. (1) (2)  Electrical Components & Equipment  Series A Convertible Preferred Stock  $100,000    -    -    0.00%
Arista Power, Inc. (1) (2)  Electrical Components & Equipment  Warrants   750,000    -    -    0.00%
Aytu Bioscience, Inc. (1) (2)  Biotechnology  Warrants   67,709    2,625    20,005    2.36%
Cesca Therapeutics, Inc. (2)  Health Care Equipment  Warrants   825    14,159    1,044    0.12%
CombiMatrix Corp.(2)  Life Sciences Tools & Services  Warrants   2,589    31,021    41    0.00%
DatChat Inc. (1)(2)  Application Software  Common Stock   2,000,000    100,150    100,150    11.83%
DatChat Inc. (1)  Application Software  10% Debenture (Due 12/2016)  $35,000    35,000    35,000    4.13%
Home Bistro, Inc.(1)  Personal Services  15% Convertible Debenture (Due 11/2015)  $150,000    150,000    150,000    17.72%
Home Bistro, Inc. (1) (2)  Personal Services  Warrants   75,000    -    -    0.00%
ID Global Solutions Corporations (1)  Biometric Technology  10% Debenture (Due 7/2016)  $100,000    61,781    100,000    11.81%
ID Global Solutions Corporations (1)  Biometric Technology  Common Stock   20,000    9,190    1,000    0.12%
ID Global Solutions Corporations (1) (2)  Biometric Technology  Warrants   2,200,000    38,219    59,836    7.07%
iNeedMD Holdings, Inc. (1) (2)  Health Care Supplies  Common Stock   25,000    795    7,500    0.89%
MabVax Therapeutics Holdings Inc. (1) (2)  Biotechnology  Warrants   9,009    30,674    682    0.08%
MultiMedia Platforms, Inc.(1)  Multimedia Technology  9% Debenture (Due 7/2016)  $100,000    38,461    -    0.00%
MultiMedia Platforms, Inc. (1) (2)  Multimedia Technology  Common Stock   15,000    4,500    -    0.00%
MultiMedia Platforms, Inc. (1) (2)  Multimedia Technology  Warrants   333,334    61,539    -    0.00%
Orbital Tracking Corp. (1)(2)  Communications Equipment  Series D Convertible Preferred Stock   23,449    11,724    25,794    3.05%
Orbital Tracking Corp. (1)(2)  Communications Equipment  Common Stock   531,020    26,552    29,206    3.45%
Pershing Gold Corp.(2)  Mining Exploration  Warrants   6,838    9,965    -    0.00%
Pish Posh Baby, LLC.(1)(2)  Online Retail - Specialty Apparel  Membership Units   19,155    149,988    9,194    1.09%
Provectus BioPharmaceuticals Inc.(2)  Biotechnology  Common Stock   100,000    74,000    1,960    0.23%
Provectus BioPharmaceuticals Inc.(2)  Biotechnology  Warrants   100,000    1,000    110    0.01%
Rennova Health, Inc. (1)(2)  Biotechnology  Warrants   160,000    1,600    3,840    0.45%
Vapor Corp. (1)(2)(3)  Tobacco  Common Stock   0    -    -    0.00%
Vapor Corp. (1)(2)(3)  Tobacco  Warrants   0    48,513    -    0.00%
Xtant Medical Holdings, Inc.  Health Care Supplies  Warrants   11,513    31,773    299    0.04%
                           
Total Non-controlled/Non-affiliated investments             $1,098,096   $634,873    74.99%
                           
Net Assets at December 31, 2016                  $846,506      

 

(1) Securities are exempt from registration under Rule 144A promulgated under the Securities Act.

(2) Securities are not income producing.

(3) On June 1, 2016, Vapor Corp. effected a one-for-twenty thousand reverse stock split which reduced our common share and warrant quantities held to zero. 

 

See accompanying notes to consolidated financial statements.

 

 F-8 

 

 

POINT CAPITAL, INC. AND SUBSIDIARY

CONSOLIDATED SCHEDULE OF INVESTMENTS

December 31, 2015

 

United States (U.S.) Company  Industry  Type of Investment  Principal/Shares   Cost   Fair
Value
   % of
Net Assets
 
Non-controlled/Non-affiliated investments                      
Accelerize, Inc. (2)  Application Software  Common Stock   121,879   $70,932   $59,111    3.02%
Accelerize, Inc. (2)  Application Software  Warrants   60,000    38,533    19,012    0.97%
Actinium Pharmaceuticals Inc. (2)  Biotechnology  Common Stock   39,000    126,111    125,970    6.43%
Actinium Pharmaceuticals Inc. (2)  Biotechnology  Warrants   29,250    51,055    62,008    3.16%
Arista Power, Inc. (1) (2)  Electrical Components & Equipment  Series A Convertible Preferred Stock  $100,000    -    -    0.00%
Arista Power, Inc. (1) (2)  Electrical Components & Equipment  Warrants   750,000    -    -    0.00%
Cesca Therapeutics, Inc. (2)  Health Care Equipment  Warrants   16,500    14,159    600    0.03%
CombiMatrix Corp.(2)  Life Sciences Tools & Services  Warrants   38,835    31,021    24,597    1.26%
DatChat Inc. (1)(2)  Application Software  Common Stock   2,000,000    100,150    100,150    5.11%
DatChat Inc. (1)  Application Software  10% Debenture (Due 12/2016)  $30,000    30,000    30,000    1.53%
Home Bistro, Inc.(1)  Personal Services  15% Convertible Debenture (Due 11/2015)  $150,000    150,000    150,000    7.66%
Home Bistro, Inc. (1) (2)  Personal Services  Warrants   75,000    -    -    0.00%
ID Global Solutions Corporations (1)  Biometric Technology  10% Debenture (Due 7/2016)  $100,000    61,781    100,000    5.10%
ID Global Solutions Corporations (1) (2)  Biometric Technology  Warrants   2,200,000    38,219    165,077    8.42%
iNeedMD Holdings, Inc. (1) (2)  Health Care Supplies  Common Stock   25,000    795    795    0.04%
MabVax Therapeutics Holdings Inc. (2)  Biotechnology  Common Stock   133,333    69,326    91,333    4.66%
MabVax Therapeutics Holdings Inc. (1) (2)  Biotechnology  Warrants   66,667    30,674    20,076    1.02%
MultiMedia Platforms, Inc.(1)  Multimedia Technology  9% Debenture (Due 7/2016)  $100,000    38,461    52,377    2.67%
MultiMedia Platforms, Inc. (1) (2)  Multimedia Technology  Common Stock   15,000    4,500    2,850    0.15%
MultiMedia Platforms, Inc. (1) (2)  Multimedia Technology  Warrants   333,334    61,539    49,561    2.53%
Optex Systems Holdings Inc. (1) (2)  Aerospace & Defense  Series B Convertible Preferred Stock   64.10    104,432    146,201    7.46%
Orbital Tracking Corp. (1)(2)  Communications Equipment  Series C Convertible Preferred Stock   200,000    100,000    100,000    5.10%
Orbital Tracking Corp. (1)(2)  Communications Equipment  Series D Convertible Preferred Stock   100,000    50,000    50,000    2.55%
Pershing Gold Corp.(2)  Mining Exploration  Warrants   6,838    9,965    381    0.02%
Phase RX, Inc. (1)  Biotechnology  5% Convertible Debenture  $100,000    100,000    100,000    5.10%
Pish Posh Baby, LLC.(1)(2)  Online Retail - Specialty Apparel  Membership Units   19,155    149,988    9,194    0.47%
Provectus BioPharmaceuticals Inc.(2)  Biotechnology  Common Stock   100,000    74,000    39,000    1.99%
Provectus BioPharmaceuticals Inc.(2)  Biotechnology  Warrants   100,000    1,000    25,000    1.28%
Pulmatrix Inc. (1)(2)(3)  Biotechnology  Common Stock   23,029    251,055    96,722    4.94%
Pulmatrix Inc. (1)(2)  Biotechnology  Series A Warrants   8,276    207    2    0.00%
Vapor Corp. (1) (2)  Tobacco  Common Stock   21,428    -    11,571    0.59%
Vapor Corp. (1) (2)  Tobacco  Warrants   90,909    48,513    48,265    2.46%
Xtant Medical Holdings, Inc. (formerly Bacterin Holdings International Inc.)  Health Care Supplies  Warrants   11,513    31,773    11,665    0.60%
                           
Total Non-controlled/Non-affiliated investments             $1,838,189   $1,691,518    86.32%
                           
Net Assets at December 31, 2015                  $1,959,480      

 

(1) Securities are exempt from registration under Rule 144A promulgated under the Securities Act.

(2) Securities are not income producing.

(3) Converted $101,530 in principal and interest into common shares.

 

See accompanying notes to consolidated financial statements.

 

 F-9 

 

 

POINT CAPITAL, INC. AND SUBSIDIARY

CONSOLIDATED SCHEDULE OF INVESTMENTS BY INDUSTRY

December 31, 2016 and 2015

 

The following table shows the portfolio composition by industry grouping based on fair value at December 31, 2016 and 2015

 

   December 31, 2016   December 31, 2015 
Industry Classification  Investments
at Fair Value
   Percentage of
Total Portfolio
   Investments
at Fair Value
   Percentage of
Total Portfolio
 
Aerospace & Defense  $-    0.00%  $146,201    8.64%
Application Software   222,944    35.12%   208,273    12.31%
Biometric Technology   160,836    25.33%   265,077    15.67%
Biotechnology   28,015    4.41%   560,111    33.11%
Communications Equipment   55,000    8.66%   150,000    8.87%
Health Care Equipment   1,044    0.16%   600    0.04%
Health Care Supplies   7,799    1.23%   12,460    0.74%
Life Sciences Tools & Services   41    0.01%   24,597    1.45%
Mining Exploration   -    0.00%   381    0.02%
Multimedia Technology   -    0.00%   104,788    6.19%
Online Retail - Specialty Apparel   9,194    1.45%   9,194    0.54%
Personal Services   150,000    23.63%   150,000    8.87%
Tobacco   -    0.00%   59,836    3.54%
   $634,873    100.00%  $1,691,518    100.00%

 

See accompanying notes to consolidated financial statements

 

 F-10 

 

 

POINT CAPITAL, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2016

 

NOTE 1 - ORGANIZATION AND BUSINESS

 

Point Capital, Inc. (the “Company”) was incorporated in the State of New York on July 13, 2010. On January 24, 2013, the Company changed its state of incorporation from New York to Delaware.

 

On October 4, 2013, the Company filed a Form N-54A and elected to become a Business Development Company (“BDC”) under the Investment Company Act of 1940, as amended (the “1940 Act”). In addition, we have elected to be treated for federal income tax purpose, and intend to qualify annually, as a regulated investment company, or (“RIC”), under Subchapter M of the Internal Revenue Code of 1986, as amended, or (the “Code”).

 

The Company’s investment objective is to provide current income and capital appreciation. The Company intends to accomplish its objective by investing in the common stock, preferred stock, warrants and convertible notes of small and mid-cap companies. The Company’s investments are made principally through direct investments in prospective portfolio companies. However, the Company may also purchase securities in private secondary transactions. The Company to a lesser extent will also invest in private companies that meet its investment objectives. The Company meets the definition of an investment company in accordance with the guidance under Accounting Standards Codification Topic 946 “Financial Services – Investment Companies.”

 

On March 27, 2014, the Company 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 any investments to date.

 

Since November 27, 2015, the Company’s investment activities are managed by Eric Weisblum, the Company’s Chief Executive Officer. Prior to November 27, 2015, the Company’s investment activities were managed by Richard Brand, the Company’s former Chief Executive Officer.

 

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Basis of presentation and principles of consolidation

 

The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America, ("U.S. GAAP") and include the financial statements of the Company and its wholly-owned subsidiary, Hemp Funding, Inc. All intercompany transactions and balances have been eliminated.

 

Use of Estimates

 

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period.

 

Making estimates requires management to exercise significant judgment. It is at least reasonably possible that the estimate of the effect of a condition, situation or set of circumstances that existed at the date of the financial statements, which management considered in formulating its estimate could change in the near term due to one or more future confirming events. Accordingly, the actual results could differ significantly from estimates. Significant estimates in 2016 and 2015 include the valuation of the Company’s investments.

 

 F-11 

 

 

POINT CAPITAL, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2016

 

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

 

Cash and Cash Equivalents

 

The Company considers all highly liquid investments with a maturity of three months or less when acquired to be cash equivalents. The Company places its cash with high credit quality financial institutions. The Company’s accounts at these institutions are insured by the Federal Deposit Insurance Corporation (“FDIC”) up to $250,000 or by the Securities Investor Protection Corporation (“SIPC”) up to $250,000. During 2016 and 2015, the Company had cash balances that may have exceeded the FDIC and SIPC insurance limit on interest bearing accounts. To reduce its risk associated with the failure of such financial institutions, the Company evaluates at least annually the rating of the financial institutions in which it holds deposits. The carrying amounts reported in the consolidated balance sheets for cash and cash equivalents approximate their fair market value based on the short-term maturity of these instruments.

 

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. The Company records interest and dividend income on an accrual basis to the extent that the Company expects 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 Appreciation or Depreciation 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. Realized gains and losses on investment transactions are determined by specific identification. Net change in unrealized appreciation or depreciation is computed as the difference between the fair value of the investment and the cost basis of such investment, including any reversal of previously recorded unrealized appreciation/depreciation when gains or losses are realized.

 

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.

 

The Company applies 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, the Company considers 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:

 

  Level 1 - Valuations based on unadjusted quoted market prices in active markets for identical assets or liabilities.
     
  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.

 

 F-12 

 

 

POINT CAPITAL, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2016

 

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

 

Valuation of Investments (continued)

 

  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.

 

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. 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 the Company may take into account in fair value pricing the Company's 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, the Company values certain of its portfolio investments at fair value as determined in good faith by its 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 the Company's investments may fluctuate from period to period. Additionally, the fair value of the Company's 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 the Company 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 the Company was required to liquidate a portfolio investment in a forced or liquidation sale, the Company could realize significantly less than the value at which the Company has recorded it.

 

 F-13 

 

 

POINT CAPITAL, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2016

 

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

 

Portfolio Company Investment Classification

 

The Company classifies its portfolio company investments in accordance with the requirements of the 1940 Act. Under the 1940 Act, “Controlled Investments” are defined as investments in which the Company owns more than 25% of the voting securities or has rights to nominate greater than 50% of the board representation. Under the 1940 Act, “Affiliated Investments” are defined as investments in which the Company owns between 5% and 25% of the voting securities. Under the 1940 Act, “Non-Controlled/Non-Affiliated Investments” are defined as investments that are neither Controlled Investments nor Affiliated Investments. At December 31, 2016 and 2015, the Company did not have any Controlled or Affiliated investments.

 

Offering and Related Offering Costs

 

Offering costs include any costs associated with the offering of the Company’s shares. During the three months ended March 31, 2014, the Company issued 1,650,000 shares of common stock for gross proceeds of $330,000 through a private capital raise. In connection with such offering, the Company incurred $33,140 in offering expenses to a third party placement agent (“Agent”). In addition to the above offering costs, the Agent was issued 6,126,240 shares of common stock as additional compensation for a maximum raise of $2,000,000. Through March 31, 2014, the Agent raised $2,305,000 and was entitled to 6,126,240 shares which had a fair value (based on $0.20 per share price of the private placement transactions) of $1,225,248 upon final closing. The fair value of these shares was recorded as a reduction of offering proceeds upon issuance of the shares in March 2014. According, the Company incurred an aggregate of $1,258,388 in offering expenses during 2014 which has been reflected as a reduction of paid-in capital.

 

Revenue Recognition

 

The Company records interest and dividend income on an accrual basis to the extent that the Company expects to collect such amounts.

 

Income Taxes

 

The Company has elected to be treated as a RIC under Subchapter M of the Code and operates 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, the Company is required to distribute annually to its stockholders at least 90% of its investment company taxable income, as defined by the Code. To avoid federal excise taxes, the Company must distribute annually at least 98% of its 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 the Company chooses to do so, all other things being equal, this would increase expenses and reduce the amount available to be distributed to stockholders. The Company will accrue excise tax on estimated undistributed taxable income as required.

 

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 the Company’s annual RIC tax return.

 

 F-14 

 

 

POINT CAPITAL, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2016

 

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

 

New Accounting Pronouncements

 

In January 2016, FASB issued ASU No. 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities. ASU No. 2016-01 requires equity investments to be measured at fair value with changes in fair value recognized in net income; simplifies the impairment assessment of equity investments without readily determinable fair values by requiring a qualitative assessment to identify impairment; eliminates the requirement for public business entities to disclose the method(s) and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet; requires public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes; requires an entity to present separately in other comprehensive income the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk when the entity has elected to measure the liability at fair value in accordance with the fair value option for financial instruments; requires separate presentation of financial assets and financial liabilities by measurement category and form of financial assets on the balance sheet or the accompanying notes to the financial statements and clarifies that an entity should evaluate the need for a valuation allowance on a deferred tax asset related to available-for-sale securities in combination with the entity’s other deferred tax assets. ASU No. 2016-01 is effective for financial statements issued for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. The Company does not expect the impact of ASU No. 2016-01 will have any effect on its consolidated financial statements and related disclosures.

 

NOTE 3 - PORTFOLIO INVESTMENTS

 

The following are the Company’s investments owned by levels within the fair value hierarchy at December 31, 2016:

 

   Level 1   Level 2   Level 3   Total 
Common Stock  $110,843   $-   $100,150   $210,993 
LLC Membership   -    -    9,194    9,194 
Convertible Preferred Stock   -    25,794    -    25,794 
Convertible Debentures   -    -    250,000    250,000 
Debenture   -    -    35,000    35,000 
Warrants   23,846    -    80,046    103,892 
Total Investments  $134,689   $25,794   $474,390   $634,873 

 

The following are the Company’s investments owned by levels within the fair value hierarchy at December 31, 2015:

 

   Level 1   Level 2   Level 3   Total 
Common Stock  $426,557   $-   $100,945   $527,502 
Convertible Preferred Stock   -    146,201    159,194    305,395 
Convertible Debentures   -    -    402,377    402,377 
Debenture   -    -    30,000    30,000 
Warrants   -    211,606    214,638    426,244 
Total Investments  $426,557   $357,807   $907,154   $1,691,518 

 

 F-15 

 

 

POINT CAPITAL, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2016

 

NOTE 3 - PORTFOLIO INVESTMENTS (continued)

 

The following additional disclosures relate to the changes in fair value of the Company’s Level 3 investments during the years ended December 31, 2016, 2015 and 2014:

 

   Year Ended December 31, 
   2016   2015   2014 
Balance at beginning of year  $907,154   $549,043   $147,231 
Purchase of investments at cost   5,000    584,582    500,795 
Repayment of convertible debenture   -    (100,000)   - 
Net realized gain   -    48,501    - 
Net change in unrealized appreciation (depreciation) on investments   (328,603)   57,494    (98,983)
Net transfers in and/or out of Level 3 (1)   (109,161)   (232,466)   - 
Balance at end of year  $474,390   $907,154   $549,043 

 

   December 31,
2016
   December 31,
2015
 
Net unrealized appreciation (depreciation) for Level 3 investments at period end  $(368,928)  $57,494 

 

(1)

Transfers occurred due to the expiration of the restriction under Rule 144A of the Securities Act and to the development of an active market. A review of fair value hierarchy classifications is conducted on a quarterly basis.  Changes in the observability of valuation inputs may result in a reclassification for certain financial assets or liabilities.  Reclassifications impacting Level 3 of the fair value hierarchy are reported as transfers in/out of the Level3 category as of the beginning of the period in which the reclassifications occur.

 

At December 31, 2016 and 2015, level 3 investments consisted of the following:

 

Investment Type  Fair Value at
December 31,

2016
   Valuation Technique  Unobservable inputs  Input 
Common Stock  $100,150   Recent Transactions  N/A   N/A 
LLC Membership Units  $9,194   Recent Transactions  N/A   N/A 
Convertible Debentures  $250,000   Recent Transactions  N/A   N/A 
Debenture  $35,000   Recent Transaction  N/A   N/A 
Warrant  $80,046   Black-Scholes Option Pricing Model  Volatility   38.6% to 136.9%
   $474,390            

 

 Investment Type  Fair Value at
December 31,
2015
   Valuation Technique  Unobservable inputs  Input 
Common Stock  $100,150   Recent Transactions  N/A   N/A  
Common Stock  $795   Recent Transactions  N/A   N/A 
Convertible Preferred Stock  $150,000   Recent Transactions  N/A   N/A 
LLC Membership Units  $9,194   Recent Transactions  N/A   N/A 
Convertible Debentures  $350,000   Recent Transactions  N/A   N/A 
Convertible Debenture  $52,377   Comparable market value  Restriction discount   17.3%
Debenture  $30,000   Recent Transaction  N/A   N/A 
Warrants  $165,077   Black-Scholes Option Pricing Model  Volatility   82.1%
Warrant  $49,561   Black-Scholes Option Pricing Model  Restriction discount   17.3%
   $907,154            

 

If the price multiple or sales multiple were to increase or decrease, the fair value of the investments would increase or decrease, respectively. If the DLOM or restriction discount were to increase or decrease, the fair value of the investments would decrease or increase, respectively.

 

 F-16 

 

 

POINT CAPITAL, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2016

 

NOTE 4 - REDEEMABLE SERIES A CONVERTIBLE PREFERRED STOCK

 

In April 2013, pursuant to a Series A Preferred Stock Purchase Agreement (the “Preferred Stock Agreement”), the Company issued 4,000 shares of Series A, Convertible Preferred Stock (the “Preferred Stock”) for $400,000. Holders of Preferred Stock vote together with holders of Common Stock on an as-converted basis. Each share is currently convertible into 500 shares of common stock at the option of the holder (subject to a 9.99% beneficial ownership limitation) based on a conversion formula (the Stated Value, currently $100, divided by the Conversion Rate, currently $0.20.) The Conversion Rate may be adjusted upon the occurrence of stock dividends or stock splits or subsequent equity sales at a price lower than the current conversion rate. Each share has a $100 liquidation value. The holders of Preferred Stock are entitled to receive dividends on an as-converted basis if paid on Common Stock.

 

The Series A Convertible Preferred Stock is redeemable at the option of the holder upon the occurrence of certain “triggering events.” In case of a triggering event, the holder has the right to redeem each share held for cash (currently $100/share) or impose a dividend rate on all of the outstanding Preferred Stock at 6% per annum thereafter. A triggering event occurs if the Company fails to deliver certificates representing conversion shares, fails to pay the amount due pursuant to a Buy-In, fails to have available a sufficient number of authorized shares, fails to observe any covenant in the Certificate of Designation unless cured within 30 calendar days, shall be party to a Change in Control Transaction, sustains a bankruptcy event, fails to list or quote its common stock for more than 20 trading days in a twelve-month period, sustains any monetary judgment, writ or similar final process filed against the Company for more than $100,000 and such judgment writ or similar final process shall remain unvacated, unbonded or unstayed for a period of 45 calendar days, or fails to comply with the Asset Coverage requirement.

 

Because certain of these “triggering events” are outside the control of the Company, the Preferred Stock is classified within the temporary equity section of the statement of assets and liabilities.

 

Pursuant to the Preferred Stock Agreement, the Company agreed that as long as the purchasers of its Series A Preferred Stock are holding said shares, the Company would comply in all respects with our reporting and filing obligations under the Exchange Act. The Company did not file its annual report for the year ended December 31, 2015 and its quarterly reports for the period ended March 31, 2016 and June 30, 2016, in a timely manner. The Company is currently not in breach of its agreement to remain current. The purchase agreement does not provide for any immediate consequence or default provision such as a reduction in the conversion price of the Series A Preferred, immediate redemption or the like.

 

The Preferred Stock has forced conversion rights where the Company may force the conversion of the Preferred Stock if certain conditions are met. The Company may elect to redeem some or all of the outstanding Preferred Stock for the Stated Value (currently $100/share) provided that proper notice is provided to the holders and that a number of conditions (the “Equity Conditions”) have been met.

 

If any shares of Preferred Stock are outstanding and the Company is a Business Development Company, the Company shall have asset coverage of at least 200% as of the close of business on the last business day of a calendar quarter. If the Company fails to comply with this requirement and it is not cured on a timely basis, the Company shall, to the extent permitted by the 1940 Act and Delaware law, proceed to redeem a sufficient number of shares of Preferred Stock (at $100/share plus any unpaid dividends and distributions) to meet is asset coverage requirement.

 

The Company believes the carrying amount reported in the consolidated balance sheets for the Preferred Stock of $400,000 approximates the fair market value of such Preferred Stock based on the short-term maturity of these instruments which also equals the redemption value reflected as on the consolidated balance sheets.

 

On March 31, 2017, the Company’s board of directors approved the amendment and restatement of the original Certificate of Designation (See Note 11).

 

 F-17 

 

 

POINT CAPITAL, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2016

 

NOTE 5 - EQUITY TRANSACTIONS

 

Common stock issued for cash

 

During the three months ended March 31, 2014, the Company issued an aggregate of 3,350,001 shares of its common stock for proceeds of $840,000. In connection with such offering, the Company incurred $33,140 in offering expenses to Agent and the Agent was issued 6,126,240 shares of common stock as additional compensation (see Note 2). As of March 31, 2014, the Agent raised $2,305,000 and was entitled to 6,126,240 shares which had a fair value (based on $0.20 per share price of the private placement transactions) of $1,225,248 upon final closing. The fair value of these shares was recorded as a reduction of offering proceeds upon issuance of the shares in March 2014. Accordingly, the Company incurred an aggregate of $1,258,388 in offering expenses during 2014 which has been reflected as a reduction of paid-in capital.

 

Common stock issued for services

 

In July 2014, pursuant to a consulting agreement, the Company issued 500,000 shares of its common stock for business development services rendered. In accordance with FASB ASC 718, “Compensation – Stock Compensation”, the shares were valued at their fair value of $150,000 using the most recent offering price of the common stock on the dates of grant of $0.30 per common share and the Company recorded stock-based consulting fees of $150,000. In January 2016, upon determination that these shares were issued in contravention of Section 23(a) of the 1940 Act, the Board of Directors of the Company, by unanimous written consent, canceled the 500,000 shares that had been issued to the consultant. Additionally, the consultant and the Company agreed to a mutual release whereby the consultant released the Company from any future obligation and the Company released the consultant from any future obligation.

 

NOTE 6 - RELATED PARTY TRANSACTIONS

 

In January 2015, the Company entered into an agreement with its independent directors to issue each independent director of the board 112,500 options for the first quarter of 2015 and 37,500 on the first day of each quarter going forward at a strike price equal to the then fair market value. On January 1, 2015, each independent director of the Company’s board was issued 112,500 five year non-qualified options to purchase shares of the Company’s common stock at $0.30 for an aggregate of 337,500 options. Additionally, on April 1, 2015 and July 1, 2015, each independent director of the Company’s board was issued 37,500 five year non-qualified options to purchase shares of the Company’s common stock at $0.30 per share, the fair value of the Company’s common stock on the date of grant, expiring five years from the date of issuance for an aggregate of 225,000 options. In December 2015, the Company determined that, pursuant to 1940 Act, these stock options should not have been granted and accordingly, the stock options were canceled, all previously recorded compensation recognized of $62,758 was reversed, and the Company’s independent directors agreed to be compensated in cash at a rate of $10,000 per year of prior services to December 31, 2015 for an aggregate amount of $70,000, which has been reflected as an accrued expense at December 31, 2015 on the accompanying consolidated statements of assets and liabilities. As of December 31, 2016 and 2015, there are no options outstanding.

 

NOTE 7 - INCOME TAXES

 

The Company has elected to be treated as a RIC under the Internal Revenue Code. So long as the Company maintains its status as a RIC, it will generally not pay corporate-level U.S. federal income or excise taxes on any ordinary income or capital gains that it distributes at least annually to its common stockholders as distributions. As a result, any tax liability related to income earned and distributed by the Company represents obligations of the Company’s common stockholders and will not be reflected in the financial statements of the Company for the years in which it qualifies as a RIC. The Company has qualified as a RIC in 2016, 2015 and 2014 and was taxed as a C corporation (“C-Corp”) for 2013 and prior.

 

 F-18 

 

 

POINT CAPITAL, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2016

 

NOTE 7 - INCOME TAXES (continued)

 

The Company evaluates tax positions taken or expected to be taken in the course of preparing its tax returns to determine whether the tax positions are “more-likely-than-not” to be sustained by the applicable tax authority. Tax positions not deemed to meet the “more-likely-than-not” threshold are reversed and recorded as a tax benefit or expense in the current year. All penalties and interest associated with income taxes are included in income tax expense. Conclusions regarding tax positions are subject to review and may be adjusted at a later date based on factors including, but not limited to, on-going analyses of tax laws, regulations and interpretations thereof. As of December 31, 2016 and 2015, the Company had not recorded a liability for any unrecognized tax positions.

 

Taxable income generally differs from the change in net assets resulting from operations for financial reporting purposes due to temporary and permanent differences in the recognition of income and expenses, and generally excludes net unrealized appreciation or depreciation, as unrealized gains or losses are not included in taxable income until they are realized.

 

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. Differences in classification may also result from the treatment of short-term gains as ordinary income for tax purposes. To the extent these differences are permanent, they are charged or credited to paid-in-capital or accumulated net realized gain (loss), as appropriate, in the period that the differences arise as follows:

 

  

December 31,

2016

  

December 31,

2015

  

December 31,

2014

 
Reduction of additional paid-in capital  $(447,812)  $(199,890)  $(188,825)
Accumulated net investment loss  $393,658   $217,172   $320,856 
Accumulated net realized (gain) loss  $54,154   $(17,282)  $(132,031)

 

The following reconciles net decrease in net assets resulting from operations to taxable loss for the years ended December 31, 2016, 2015 and 2014:

 

  

December 31,

2016

  

December 31,

2015

  

December 31,

2014

 
Net decrease in net assets resulting from operations  $(1,112,974)  $(409,498)  $(376,549)
Net unrealized (appreciation) depreciation not taxable   316,552    (8,142)   219,956 
Dividend income (bad debt expense) not recognized on tax return   -    2,250    (2,250)
Realized loss on GAAP basis, not recognized on tax return   -    100,000    - 
Taxable loss  $(796,422)  $(315,390)  $(158,843)

 

At December 31, 2016, 2015 and 2014, the components of accumulated net losses on a tax basis and a reconciliation to accumulated net losses on a book basis were as follows:

 

  

December 31,

2016

  

December 31,

2015

  

December 31,

2014

 
Net unrealized depreciation  $(463,223)  $(146,671)  $(154,813)
Differences between book and tax loss on investments   (100,000)   (100,000)   - 
Capital loss carry forward   (466,360)   (117,750)   - 
Total accumulated losses—net, book basis  $(1,029,583)  $(364,421)  $(154,813)

 

 F-19 

 

 

POINT CAPITAL, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2016

 

NOTE 7 - INCOME TAXES (continued)

 

At December 31, 2016 and 2015, gross unrealized appreciation and gross unrealized depreciation based on cost for federal income tax purposes were as follows:

 

  

December 31,

2016

  

December 31,

2015

 
Tax cost  $1,098,096   $1,938,189 
Gross unrealized appreciation   102,885    289,294 
Gross unrealized depreciation   (566,108)   (535,965)
Total investments, at fair market value  $634,873   $1,691,518 

 

At December 31, 2016, the Company had a net capital loss carryforward of $466,360, which can be used to offset future capital gains.

 

NOTE 8 - FINANCIAL HIGHLIGHTS

 

The following is a schedule of financial highlights for the years ended December 31, 2016, 2015 and 2014:

 

Net asset value per common share data:  For the Year ended December 31, 
   2016   2015   2014 
Net asset value per common share, beginning of period  $0.04   $0.05    0.04 
Net investment loss   (0.01)   (0.01)   (0.01)
Net realized gain (loss) on investments   (0.005)   0.00    0.00 
Net change in unrealized appreciation (depreciation) on investments   (0.005)   0.00    0.00 
Net decrease in net assets resulting from operations   (0.02)   (0.01)   (0.01)
Capital stock transactions:               
Issuance of common stock   0.00    0.00    0.05 
Offering costs from issuance of common stock   0.00    0.00    (0.03)
Net increase in net assets from capital stock transactions   0.00    0.00    0.02 
Net asset value per common share, end of period  $0.02   $0.04   $0.05 
Ratios and supplemental data:               
Per share market price, end of period (1)  $0.25   $1.10   $2.00 
Total return (2)   (56.60)%   (17.29)%   (17.84)%
Common shares outstanding, end of period   50,082,441    50,582,441    50,582,441 
Weighted average common shares outstanding during period   50,195,829    50,582,441    47,914,895 
Net assets, end of period  $846,506   $1,959,480   $2,368,978 
Ratio of operating expenses to average net assets   (30.04)%   (11.81)%   (11.59)%
Ratio of net investment loss to average net assets   (26.66)%   (9.70)%   (10.70)%
Portfolio Turnover   26.35    32.13    60.84 

 

1.   The shares of the Company's common stock were listed in the OTC Market beginning January 5, 2012.  The Company’s shares were not actively traded during the years ended December 31, 2016, 2015 and 2014.
2.   Total return is based on the change in net asset value during the period, adjusted for the impact of capital stock transactions and related offering costs. Since the shares were not actively traded in 2016, 2015 or 2014, total return based on stock price has not been presented for the years ended December 31, 2016, 2015 and 2014.

 

 F-20 

 

 

POINT CAPITAL, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2016

 

NOTE 9 - CONCENTRATIONS AND CREDIT RISKS

 

Financial instruments that subjected the Company to concentrations of market risk consisted principally of equity investments and debt instruments (other than cash equivalents), which collectively represented approximately 48.9% and 69.0% of the Company’s total assets at December 31, 2016 and 2015, respectively. These investments consist of certain securities in companies with no readily determinable market values or in non-public companies, and as such are valued in accordance with the Company’s fair value policies and procedures. The Company’s investment strategy represents a high degree of business and financial risk due to the fact that certain of the Company’s portfolio investments (other than cash equivalents) are generally illiquid, in small and middle market companies, and include entities with little operating history or entities that possess operations in new or developing industries. Investments in non-public entities , should they become publicly traded, would generally be (i) subject to restrictions on resale, if they were acquired from the issuer in private placement transactions; and (ii) susceptible to market risk. Additionally, the Company is classified as a non-diversified investment company within the meaning of the 1940 Act, and therefore may invest a significant portion of our assets in a relatively small number of portfolio companies, which gives rise to a risk of significant loss should the performance or financial condition of one or more portfolio companies deteriorate.

 

NOTE 10 - SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)

 

   2016 
   Qtr 1   Qtr 2   Qtr 3   Qtr 4 
Investment income  $17,502   $12,031   $11,256   $9,047 
Operating expenses   126,633    147,888    93,097    75,876 
Net investment loss   (109,131)   (135,857)   (81,841)   (66,829)
Net realized gain (loss) on investments   (6,836)   30,105    131    (426,164)
Net change in unrealized appreciation (depreciation) on investments   11,841    (328,587)   (349,795)   349,989 
                     
Net decrease in net assets from operations  $(104,126)  $(434,339)  $(431,505)  $(143,004)
                     
Net asset value per share  $0.04   $0.03   $0.02   $0.02 

 

   2015 
   Qtr 1   Qtr 2   Qtr 3   Qtr 4 
Investment income  $7,656   $5,186   $11,606   $22,693 
Operating expenses   69,295    76,989    45,545    72,484 
Net investment loss   (61,639)   (71,803)   (33,939)   (49,791)
Net realized gain (loss) on investments   (95,945)   (17,790)   59,220    (145,953)
Net change in unrealized appreciation (depreciation) on investments   186,037    105,697    (486,125)   202,533 
                     
Net increase (decrease) in net assets from operations  $28,453   $16,104   $(460,844)  $6,789 
                     
Net asset value per share  $0.05   $0.05   $0.04   $0.04 

 

   2014 
   Qtr 1   Qtr 2   Qtr 3   Qtr 4 
Investment income  $3,003   $8,405   $4,510   $4,647 
Operating expenses   33,520    37,022    151,048    47,845 
Net investment loss   (30,517)   (28,617)   (146,538)   (43,198)
Net realized gain (loss) on investments   -    -    104,260    (11,983)
Net change in unrealized appreciation (depreciation) on investments   466,144    (401,343)   (293,023)   8,266 
                     
Net increase (decrease) in net assets from operations  $435,286   $(429,960)  $(335,301)  $(46,574)
                     
Net asset value per share  $0.05   $0.04   $0.05   $0.05 

 

NOTE 11 – SUBSEQUENT EVENT

 

On March 31, 2017, the Company’s board of directors approved the amendment and restatement of the original Certificate of Designation in order to expressly ensure that holders of the Company’s Preferred Stock have the right to elect at least two directors at all times, have complete priority over any other class as to distribution of assets and payments of dividends, and have equal voting rights with every other outstanding voting stock.

 

 

 F-21 

 

 

ITEM 9 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.

 

None

 

ITEM 9A. CONTROLS AND PROCEDURES

 

Evaluation of Disclosure Controls and Procedures

 

Under the supervision and with the participation of our management, who is also our principal executive officer and principal financial officer, we conducted an evaluation of our disclosure controls and procedures, as such term is defined under Rule 13a-15(e) and Rule 15d-15(e) promulgated under the Securities Exchange Act of 1934, as amended, as of December 31, 2016. Based on this evaluation, our principal executive officer and principal financial officer have concluded that our disclosure controls and procedures were ineffective at such time to ensure that information required to be disclosed by us in the reports filed or submitted under the Securities Exchange Act were recorded, processed, summarized, and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms. Our principal executive officer and principal financial officer also concluded that our disclosure controls, which are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Securities Exchange Act is accumulated and communicated to management, was inappropriate to allow timely decisions regarding required disclosure. Additionally, based on management’s assessment, the Company determined that there were material weaknesses in its internal control over financial reporting as of December 31, 2016.

 

Management's Annual Report on Internal Control Over Financial Reporting

 

Our management is responsible for establishing and maintaining adequate internal control over financial reporting. As defined in Exchange Act Rules 13a-15(f) and 15d-15(f), internal control over financial reporting is a process designed by, or under the supervision of, our principal executive and principal financial officers, or persons performing similar functions, and effected by our board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of consolidated financial statements for external purposes in accordance with GAAP.

 

During the assessment of the effectiveness of internal control over financial reporting as of December 31, 2016, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) (2013 framework)., Management identified the following deficiencies in its internal controls over financial reporting:

 

  our failure to timely recognize that we issued shares to a consultant in 2014 and stock options to directors in 2015 in contravention of Section 23(a) of the Investment Act of 1940,
     
  the lack of Investment Act experienced internal staff,
     
  a lack of segregation of duties within accounting functions.
     
  a lack of control over custodian of certain instruments.
     
  a lack of control over valuation of certain investments.

 

As of December 31, 2016, we concluded that such weaknesses continue to exist. Management determined that the deficiencies, evaluated in the aggregate, could potentially result in a material misstatement of the consolidated financial statements in a future annual or interim period that would not be prevented or detected. Therefore the deficiencies constitute material weaknesses in internal control. Based on that evaluation, management determined that our internal controls over financial reporting were not effective as of December 31, 2016

 

Because of its inherent limitations, a system of internal control over financial reporting can provide only reasonable assurance with respect to financial statement preparation and presentation and may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

 

Remediation Plans

 

We have initiated several steps and plan to continue to evaluate and implement measures designed to improve our internal control over financial reporting in order to remediate the control deficiencies noted above.

 

  In January 2016, we hired a Chief Compliance Officer to ensure that the Company remains in full compliance of the Investment Company Act of 1940 and administer the policies and procedures we created for the purpose of ensuring our compliance with federal securities laws (principally, the Securities Act of 1933, the Securities Exchange Act of 1934, and the Investment Act of 1940).

 

Due to our size and nature, segregation of all conflicting duties may not always be possible and may not be economically feasible. However, to the extent possible, we will implement procedures to assure that the initiation of transactions, the custody of assets and the recording of transactions will be performed by separate individuals.

 

Pursuant to rules established by the SEC, this annual report does not include an attestation report of our independent registered public accounting firm regarding internal control over financial reporting.

 

Changes in Internal Controls over Financial Reporting

 

There were no changes in the Company’s internal control over financial reporting that occurred during the Company’s last fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

ITEM 9B. OTHER INFORMATION

 

None.

 

 30 

 

 

PART III

 

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE.

 

Set forth below are the names, ages and present principal occupations or employment, and material occupations, positions, offices or employments for the past five years of our current directors and executive officers.

 

Name and Business Address   Age   Position
         
Eric Weisblum   46   Chairman, Chief Executive Officer, President and Director
Adam Wasserman   52   Chief Financial Officer
Van E. Parker   69   Director
Leonard Schiller   74   Director
Joel A. Stone   72   Director

 

Eric Weisblum, Chief Executive Officer, President, and Director, co-founded Whalehaven Capital in 2003. Mr. Weisblum is currently a Partner of Whalehaven Capital’s General Partner and Managing Member of JAWS Capital Partners, LLC.  From 2002 to 2003, Mr. Weisblum was a registered representative with Domestic Securities, a New Jersey-based broker dealer. While with Domestic Securities, Mr. Weisblum held the Series 7 - General Securities Representative, the Series 63 – Uniform Securities Agent State Law Examination, and the Series 55 – Registered Equity Trader securities registrations.  From 1993 to 2002, Mr. Weisblum originated, structured, traded, and placed structured financing transactions at M.H. Meyerson & Co. Inc., a publicly traded registered investment bank. Mr. Weisblum holds a Bachelor of Arts degree from the University of Hartford’s Barney Business School.  

  

Adam Wasserman, Chief Financial Officer - Mr. Wasserman has served as our Chief Financial Officer since August 2015. Mr. Wasserman has been a majority shareholder and chief executive officer of CFO Oncall, Inc. (“CFO Oncall”) since 1999. CFO Oncall provides chief financial officer services to a number of companies. Through CFO Oncall, Mr. Wasserman serves and has served as the chief financial officer of a number of private and publicly held companies. From June 1991 to November 1999 Mr. Wasserman was a Senior Audit Manager at American Express Tax and Business Services, in Fort Lauderdale, Florida where his responsibilities included supervising, training and evaluating senior accounting staff members, work paper review, auditing, maintaining client relations, preparation of tax returns and financial statements. From September 1986 to May 1991, Mr. Wasserman was employed by Deloitte & Touche, LLP where his assignments included public and private company audits and Securities and Exchange Commission reporting, tax preparation and planning, management consulting, systems design, staff instruction and recruiting. Mr. Wasserman is a member of the American Institute of Certified Public Accountants. Mr. Wasserman holds a Bachelor of Science Degree in Accounting from the State University of New York at Albany.

 

 31 

 

 

Van E. Parker, Director, has been a board member and Executive Director of the Mediation Center of Charlottesville, Inc. since August 2013 and is a Virginia Supreme Court certified mediator. He previously served as interim Executive Director of the City of Milford’s Milford Arts Council. From June 2010 through August 2012 he was the development director and financial advisor to the Transportation Association of Greenwich, Inc. Mr. Parker was a Managing Director and later a Senior Advisor to Centre Capital Advisors, LLC, of Greenwich, CT, a registered broker-dealer, from 2007 through February 2013. In 2009 through 2010 Mr. Parker was an advisor to the chief executive officer of the Institute for Advanced Science and Engineering. Mr. Parker was a board member and chairman of the audit committee of Prospect Capital Corp. from its start in 2004 through 2008. Previously, he served as senior credit officer for Xerox Credit, Inc. Mr. Parker earned a Bachelor of Arts degree in political science at Colgate University and a MBA from the Graduate School of Business at Columbia University. He is a graduate of the Xerox Advanced Management School. Mr. Parker has received FINRA Series 62, 63 and 79 securities licenses.​

 

Leonard Schiller, Director, is President and Managing Partner of the Chicago law firm of Schiller Klein PC and has been associated with the firm since 1977. Mr. Schiller also has served as the President of The Dearborn Group, a residential property management and real estate company with properties located in the Midwest. Mr. Schiller has also been involved in the ownership of residential properties and commercial properties throughout the country. Mr. Schiller has acted as a principal in numerous private loan transactions and has been responsible for the structure, and management of these transactions. Mr. Schiller has also served as a member of the Board of Directors of IMALL, an internet search engine company, which was acquired by Excite@Home. He also served as a member of the Board of AccuMed International, Inc., a company which manufactured and marketed medical diagnostic screening products, which was acquired by Molecular Diagnostics, Inc. He presently serves as a director of Milestone Scientific, Inc., a Delaware company. He also serves as a director of Gravitas Cayman Corp. and a Limited Partner of Gravitas Capital Partners LLC, a private hedge fund.

 

Joel A. Stone, Director, has been a real estate investor since 2005. In addition, since early the early 1990’s, Mr. Stone has been a principal in the Hostmark Hospitality Group, an Illinois company and in 2011, co-founded The Fin Branding Company, a manufacturer of electronic cigarettes. Although he remained a principal with the VanKampen Group (including serving as Financial Principal for VanKampen Merritt, Inc. from 1980 to 1982, and president of its holding companies from 1980 to 1985) until its sale in 1985, in 1980 he created and served as President from 1980 to 1990 and Chief Executive Officer of VMS Realty Partners, a real estate syndicator and owner/operator entity controlling almost $10 billion of assets until it started liquidating its assets in 1990. It took Mr. Stone approximately 15 years to dispose of the last of VMS's assets. Prior thereto, in 1971 Mr. Stone co-founded a Certified Public Accounting firm at which he specialized in tax matters. Mr. Stone's early employment includes work as Internal Revenue agent, controller of a life insurance company, a senior tax accountant with a large public accounting firm and an attorney specializing in tax matters. Mr. Stone graduated DePaul University in 1966 with a Bachelor of Science in Commerce majoring in accountancy. In 1966, he became a Certified Public Accountant. In 1970, he earned a Juris Doctor degree from Depaul College of Law. Mr. Stone has been Chairman of the Board for the Jewish Federation of Metropolitan Chicago and a National Trustee of the Foundation Fighting Blindness.

 

There are no familial relationships among any of our officers or directors.  None of our directors or officers, except for Leonard Schiller, is a director in any other reporting companies.  None of our directors or officers has been affiliated with any company that has filed for bankruptcy within the last ten years.  The Company is not aware of any proceedings to which any of the Company’s officers or directors, or any associate of any such officer or director, is a party adverse to the Company or has a material interest adverse to it.

 

There are no legal proceedings that have occurred within the past ten years concerning our directors, or control persons which involved a criminal conviction, a criminal proceeding, an administrative or civil proceeding limiting one's participation in the securities or banking industries, or a finding of securities or commodities law violations.

 

Each director of the Company serves for a term of one year or until the successor is elected at the Company's annual shareholders' meeting and is qualified, subject to removal by the Company's shareholders.  Each officer serves, at the pleasure of the board of directors, for a term of one year and until the successor is elected at the annual meeting of the board of directors and is qualified.

 

Audit Committee, Auditors, Financial Expert and Code of Ethics

 

The Board of Directors of the Company is required to establish an Audit Committee. Members of the Audit Committee must be independent members of the Company’s Board of Directors. When a BDC’s audit committee is comprised solely of independent Directors, the BDC is exempt from the requirement under Section 32(a) of the 1940 Act to have its independent public accountant submitted for ratification or rejection by shareholders so long as it has also adopted an audit committee charter, setting forth the committee’s structure, duties, powers and method of operation. The audit committee charter (and any modification thereto) must be maintained and preserved permanently in an easily accessible place.

 

 32 

 

 

The Board of Directors must determine whether the Audit Committee has at least one member who is a financial expert. In making this determination, the Board must consider whether the potential financial expert possesses five distinct attributes, which generally relate to that member’s experience with an understanding of financial statements, accounting policies and procedures, internal controls, and Audit Committee functions. The Board must also consider the manner in which the potential expert acquired these attributes. The expert should be an independent director and, other than in his or her capacity as a member of the Board of its Committees, must not accept, directly or indirectly, any consulting, advisory or other compensatory fee from the Company.

 

The Audit Committee is comprised of Messrs. Van Parker, Committee Chairman, Joel Stone, and Leonard Schiller. The Company considers Mr. Parker a financial expert and an independent director.

 

The Audit Committee of our Board has selected Friedman LLP as the Company’s independent registered public accounting firm to audit the Company’s financial statements for the fiscal year ending December 31, 2016. The Audit Committee, in its discretion and subject to approval by our Board in accordance with the 1940 Act, may direct the appointment of a different independent registered public accounting firm at any time during the year if it determines that such a change would be in the best interests of the Company and its stockholders.

 

We have adopted a Code of Business Ethics (the “Code”) that applies to all of our officers and directors. The Board reviews, approves and recommends any changes to the Code. It also reviews any violations of the Code. The Code is currently available on our website at www.pointcapital.com. If we make any substantive amendments to the Code or grant any waiver from a provision of the Code to any executive officer or director, we will promptly disclose the nature of the amendment.

 

Potential Conflicts of Interest

 

Since we do not have a compensation committee comprised of independent directors, the functions that would have been performed by such committees are performed by our directors.  Thus, there is a potential conflict of interest in that our directors and officers have the authority to determine issues concerning management compensation that may affect management decisions.  We are not aware of any other conflicts of interest with any of our executives or directors.

 

Section 16(a) Beneficial Ownership Reporting Compliance

 

Section 16(a) of the Securities Exchange Act of 1934, as amended, requires our reporting directors and executive officers, and persons who own more than ten percent of a registered class of our equity securities, to file initial reports of ownership and reports of changes in ownership of common stock and other equity securities of Point Capital, Inc. with the Securities and Exchange Commission, or the Commission. Officers, directors and stockholders holding more than 10% of the class of stock are required to furnish us with copies of all Section 16(a) forms they file with the Commission.

 

To our knowledge, based solely on review of the copies of such reports, we believe that during the fiscal year ended December 31, 2016 all applicable Section 16(a) filing requirements were complied with by our executive officers and directors.

 

 33 

 

 

ITEM 11. EXECUTIVE COMPENSATION.

 

The following table provides certain information regarding compensation awarded to, earned by or paid to persons serving as our principal executive officer and our principal financial officer as of the end of fiscal year ended 2016, 2015 and 2014 (each a “named executive officer”). There were no highly compensated officers who had total compensation exceeding $100,000 for fiscal 2016, 2015 or 2014.

 

Summary Compensation Table

 

Name and
Principal Position

   

Fiscal

Year

Ended

12/31

  

Salary

Paid

($)

   Bonus
($)
    

Stock Awards

($)

    

Option

Awards

($)

  

Non-Equity Incentive Plan Compensation

($)

   

Non- Qualified Deferred Compensation Earnings

($) 

  

Other Compensation

($)

   

Total

($)

 
                                        
Eric Weisblum,
Director and CEO (3)
   2016
2015
2014
        0
0
0
   

     0

0

0

    

     0

0

0

    

     0

0

0

        0
0
0
   

     0

0

0

   25,000
0
0
   

25,000

0

0

 
                                        
Adam Wasserman,
CFO (1)
   2016
2015
2014
   0
0
0
   

0

0

0

    

0

0

0

    

0

0

0

   0
0
0
   

0

0

0

   60,000
26,612
0
   

60,000

26,612

0

 
                                        
Richard Brand,
former CEO and
Director (2)
   2015
2014
   0
0
   

0

0

    

0

0

    

0

0

   0
0
   

0

0

   0
0
   

0

0

 
                                        
Vadim Mats,
former CFO (2)
   2015
2014
   0
0
   

0

0

    

0

0

    

0

0

   0
0
   

0

0

   0
0
   

0

0

 

   

(1) Fees paid to Mr. Wasserman were paid to CFO Oncall, Inc., a company majority owned by. Mr. Wasserman.
(2) Mr. Brand and Mr. Mats were officers of the Company during 2014 and through their respective resignation date in 2015.
(2) Represents fees paid to Eric Weisblum as an independent contractor.

 

Outstanding Equity Awards

 

Since our incorporation on July 13, 2010 through December 31, 2014, no stock options or stock appreciation rights were granted to any of our directors or executive officers. In 2015, we granted options to directors and these options were cancelled. None of our directors or executive officers exercised any stock options or stock appreciation rights, and none of them hold unexercised stock options. Currently, we have no long-term incentive plans.

 

Compensation of Directors

 

During 2016, our directors received or accrued compensation for services rendered in 2016 in their capacity as directors as follows:

 

Name  Fees Earned or Paid in Cash
($)
   Stock Awards
($)
   Option Awards
($)
   Non-Equity Incentive Compensation
($)
   Change in Pension Value and Nonqualified Deferred Compensation Earnings
($)
   All Other Compensation
($)
   Total
($)
 
Eric Weisblum   0                                                  0 
Van E. Parker   10,000                             10,000 
Leonard Schiller   10,000                             10,000 
Joel A. Stone   10,000                             10,000 

 

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDERS MATTERS.

 

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

 

The following table lists, as of March 22, 2017, the number of shares of common stock of our Company that are beneficially owned by (i) each person or entity known to our Company to be the beneficial owner of more than 5% of the outstanding common stock; (ii) each officer and director of our Company; and (iii) all officers and directors as a group. Information relating to beneficial ownership of common stock by our principal shareholders and management is based upon information furnished by each person using “beneficial ownership” concepts under the rules of the Securities and Exchange Commission. Under these rules, a person is deemed to be a beneficial owner of a security if that person has or shares voting power, which includes the power to vote or direct the voting of the security, or investment power, which includes the power to vote or direct the voting of the security. The person is also deemed to be a beneficial owner of any security of which that person has a right to acquire beneficial ownership within 60 days. Under the Securities and Exchange Commission rules, more than one person may be deemed to be a beneficial owner of the same securities, and a person may be deemed to be a beneficial owner of securities as to which he or she may not have any pecuniary beneficial interest. Except as noted below, each person has sole voting and investment power.

 

 34 

 

 

The percentages below are calculated based on 50,082,441 shares of our common stock issued and outstanding as of March 22, 2017.  We do not have any outstanding options or warrants exercisable for or convertible into shares of our common stock.  The following table does not include 2,000,000 shares of common stock based on the 4,000 shares of Series A Convertible Preferred Stock held by Alpha Capital, each share of which is convertible by the holder at any time into 500 shares of common stock. Unless otherwise indicated, the address of each person listed is c/o Point Capital, Inc., c/o Mr. Eric Weisblum, 285 Grand Avenue, Building 5, Englewood, NJ 07631.

 

Name of Beneficial Owner  Title of Class   Amount and Nature of Beneficial Ownership   Percent of Class 
             
Eric Weisblum, CEO and director   Common    0    0.0%
                
Van E. Parker, Director   Common    0    0.0%
                
Leonard Schiller, Director   Common    500,000    1.0%
                
Joel A. Stone, Director   Common    1,000,000    2.0%
                
Adam Wasserman, CFO   Common    0    0.0%
Directors and Officers as a group (5 persons)        1,500,000    3.0%
                
Whalehaven Capital Fund Limited (1)   Common    17,839,059    35.6%
                
Alpha Capital Anstalt (2)   Common    3,060,057(3)   6.1%
                
Vincent Labarbara   Common    2,600,620    5.2%
                
Mario Marsillo Jr.   Common    2,600,620    5.2%

 

(1) Michael Finkelstein has voting and dispositive power as to the shares held by Whalehaven Capital Fund Limited.
(2) Konrad Ackerman has voting and dispositive power as to the shares held by Alpha Capital Anstalt. The address of Alpha Capital is Pradafut 7 Furstentums 1490 Vaduz Liechtenstein C4 99999.
(3) Does not include 2,000,000 shares of common stock based on the 4,000 shares of Series A Convertible Preferred Stock held by Alpha Capital, each share of which is convertible by the holder at any time into 500 shares of common stock. The Certificate of Designations of the Series A held by Alpha Capital Anstalt contain provisions prohibiting the holder from acquiring more than 4.99% beneficial ownership of the Company’s common stock upon conversion of the Series A Preferred Stock. 

 

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE.

 

Our current office space is provided free of charge by our President.

  

ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES

 

Our board of directors reviews and pre-approves audit and permissible non-audit services performed by our independent registered public accounting firms, Friedman LLP (“Friedman”) for 2016 and EisnerAmper LLP (“EisnerAmper”)  for 2015 as well as the fees for such services to ensure that the provision of such services is compatible with maintaining independence.  

 

Pre-approval is generally provided for up to one year and any pre-approval is detailed as to the particular service or category of services and is generally subject to a specific budget. The independent auditors and management are required to periodically report to our board of directors regarding the extent of services provided by the independent auditors in accordance with this pre-approval, and the fees for the services performed to date. Our board of directors may also pre-approve particular services on a case-by-case basis. 

 

The following table shows the fees for services provided by Friedman LLP for the year ended December 31, 2016 and EisnerAmper for the year ended December 31, 2015:

 

   2016   2015 
Audit Fees (1)  $77,080   $116,059 
Audit Related Fees   -    - 
Tax Fees (tax-related services)   -    7,425 
All other fees   -    - 
Total Fees  $77,080   $123,484 

 

(1) Audit fees - these fees relate to the audit of our annual financial statements and the review of our interim quarterly financial statements.

 

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PART IV

 

ITEM 15. EXHIBITS

 

Exhibits     Description
     
3.1     Certificate of Incorporation of Gold Swap Inc.(1)
     
3.2     Amendment to Certificate of Incorporation(1)
     
3.3     Bylaws of Gold Swap Inc. (1)
     
3.4    Certificate of Incorporation of Point Capital, Inc. (2)
     
3.5    Bylaws of Point Capital, Inc. (2)
     
4.1     Form of Stock Certificate(1)
     
4.2   Certificate of Designation of the Series A Convertible Preferred Stock.(3)
     
10.1   Stock Purchase Agreement dated April 24, 2013 between Point Capital, Inc. and Alpha Capital Anstalt (3)
     
31.1   Rule 13a-14(a) / 15d-14(a) Certification of Chief Executive Officer
     
31.2   Rule 13a-14(a) / 15d-14(a) Certification of Chief Financial Officer
     
32.1    Section 1350 Certifications of Chief Executive Officer
     
32.2   Section 1350 Certification of Chief Financial Officer

 

(1)  Incorporated by reference to the corresponding exhibit filed with our Registration Statement on Form S-1 on March 30, 2011.
(2)  Incorporated by reference to the corresponding exhibit filed with the Information Statement on Schedule 14C filed with the Securities and Exchange Commission on December 28, 2012.
(3)  Incorporated by reference to the corresponding exhibit filed with our Current Report on Form 8-K dated April 24, 2013 as filed with the Securities and Exchange Commission on April 30, 2013.

 

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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.

 

  Point Capital, Inc.
     
Date: March 31, 2017  By:  /s/ Eric Weisblum
    Eric Weisblum
    Chairman and Chief Executive Officer
    (Principal Executive Officer)
     
 Date: March 31, 2017 By: /s/ Adam Wasserman
    Adam Wasserman
    Chief Financial Officer
    (Principal Financial and Accounting Officer)

 

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

 

Name   Title   Date
         
/s/ Eric Weisblum   Chairman, Chief Executive Officer, President and Director (Principal Executive Officer)   March 31, 2017
 Eric Weisblum        
         
/s/ Adam Wasserman   Chief Financial Officer   March 31, 2017
Adam Wasserman   (Principal Financial and Accounting Officer)    
         
/s/ Van E. Parker   Director   March 31, 2017
Van E. Parker        
         
/s/ Leonard Schiller   Director   March 31, 2017
Leonard Schiller        
         
/s/ Joel A. Stone   Director   March 31, 2017
Joel A. Stone        

 

 

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