Silo Pharma, Inc. - Quarter Report: 2016 March (Form 10-Q)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
☒ QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarter ended March 31, 2016
☐ TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number: 333-173163
POINT CAPITAL, INC.
(Exact name of small business issuer as specified in its charter)
| Delaware | 27-3046338 | |
| (State of incorporation) | (IRS Employer ID Number) |
285 Grand Avenue
Building 5
Englewood, New Jersey 07631
(Address of principal executive offices)
(201) 408-5126
(Issuer's telephone number)
| (Former name, former address and former fiscal year, if changed since last report) |
Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 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 (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registration was required to submit and post such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” 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 Exchange Act). Yes ☐ No ☒
As of August 20, 2016, 50,082,441 shares of common stock, par value $0.0001 per share, were outstanding.
POINT CAPITAL, INC.
FORM 10-Q
March 31, 2016
TABLE OF CONTENTS
| Page | |
| PART I - FINANCIAL INFORMATION | |
| Item 1. Financial Statements | 1 |
| Consolidated Statements of Assets and Liabilities – As of March 31, 2016 (unaudited) and December 31, 2015 | 1 |
| Consolidated Statements of Operations (unaudited) – For the three months ended March 31, 2016 and 2015 | 2 |
| Consolidated Statement of Changes in Net Assets (unaudited) – For the three months ended March 31, 2016 and 2015 | 3 |
| Consolidated Statements of Cash Flows (unaudited) – For the three months ended March 31, 2016 and 2015 | 4 |
| Consolidated Schedule of Investments as of March 31, 2016 (unaudited) | 5 |
| Consolidated Schedule of Investments as of December 31, 2015 | 6 |
Consolidated Schedule of Investments by Industry as of March 31, 2016 (unaudited) and December 31, 2015 |
7 |
| Notes to Consolidated Financial Statements (unaudited) | 8 |
| Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations | 16 |
| Item 3. Quantitative and Qualitative Disclosures About Market Risk | 25 |
| Item 4. Controls and Procedures | 25 |
| PART II - OTHER INFORMATION | |
| Item 1. Legal Proceedings | 26 |
| Item 1A. Risk Factors | 26 |
| Item 2. Unregistered Sales of Equity Securities and Use of Proceeds | 26 |
| Item 3. Defaults Upon Senior Securities | 26 |
| Item 4. Mine Safety Disclosures | 26 |
| Item 5. Other Information | 26 |
| Item 6. Exhibits | 26 |
Item 1. Financial Statements.
Point Capital, Inc. and Subsidiary
Consolidated Statements of Assets and Liabilities
| March 31, 2016 | December 31, 2015 | |||||||
| (Unaudited) | ||||||||
| ASSETS | ||||||||
| Investments at fair value | ||||||||
| Non-controlled/Non-affiliated investments (cost of $1,856,708 and $1,838,189 at March 31, 2016 and December 31, 2015) | $ | 1,721,879 | $ | 1,691,518 | ||||
| Cash and cash equivalents | 532,392 | 722,764 | ||||||
| Interest receivable | 28,424 | 15,924 | ||||||
| Prepaid expenses | 9,965 | 20,030 | ||||||
| Total Assets | $ | 2,292,660 | $ | 2,450,236 | ||||
| LIABILITIES | ||||||||
| Accounts payable and accrued expenses | $ | 37,306 | $ | 90,756 | ||||
| Total Liabilities | 37,306 | 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 March 31, 2016 and December 31, 2015, respectively | 5,009 | 5,059 | ||||||
| Additional paid-in capital | 2,318,892 | 2,318,842 | ||||||
| Accumulated net investment loss | (109,131 | ) | - | |||||
| Accumulated undistributed net realized loss on investments | (224,586 | ) | (217,750 | ) | ||||
| Unrealized depreciation on investments | (134,830 | ) | (146,671 | ) | ||||
| Total Net Assets | 1,855,354 | 1,959,480 | ||||||
| Total Liabilities and Net Assets | $ | 2,292,660 | $ | 2,450,236 | ||||
| Net Asset Value per Common Share | $ | 0.04 | $ | 0.04 | ||||
See accompanying notes to unaudited consolidated financial statements.
| 1 |
Point Capital, Inc. and Subsidiary
Consolidated Statements of Operations
| For the Three Months Ended March 31, | ||||||||
| 2016 | 2015 | |||||||
| (Unaudited) | (Unaudited) | |||||||
| INVESTMENT INCOME: | ||||||||
| Non-controlled/Non-affiliated investments: | ||||||||
| Interest income | $ | 17,502 | $ | 5,406 | ||||
| Dividend income | - | 2,250 | ||||||
| Total investment income | 17,502 | 7,656 | ||||||
| OPERATING EXPENSES: | ||||||||
| Compensation expense | 27,500 | 37,650 | ||||||
| Professional fees | 84,783 | 15,500 | ||||||
| Filing fees | 708 | 4,965 | ||||||
| Insurance expense | 8,190 | 7,804 | ||||||
| General and administrative expenses | 5,452 | 3,376 | ||||||
| Total operating expenses | 126,633 | 69,295 | ||||||
| NET INVESTMENT LOSS | (109,131 | ) | (61,639 | ) | ||||
| NET REALIZED AND UNREALIZED (LOSS) GAIN ON INVESTMENTS: | ||||||||
| Net realized loss on investments | ||||||||
| Non-controlled/Non-affiliated investments | (6,836 | ) | (95,945 | ) | ||||
| Net change in unrealized appreciation on investments | ||||||||
| Non-controlled/Non-affiliated investments | 11,841 | 186,037 | ||||||
| Net realized and unrealized gain on investments | 5,005 | 90,092 | ||||||
| NET (DECREASE) INCREASE IN NET ASSETS RESULTING FROM OPERATIONS | $ | (104,126 | ) | $ | 28,453 | |||
See accompanying notes to unaudited consolidated financial statements.
| 2 |
Point Capital, Inc. and Subsidiary
Consolidated Statements of Changes in Net Assets
For the Three Months Ended March 31, 2016 and 2015
(Unaudited)
| 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, 2014 | 50,582,441 | $ | 5,059 | $ | 2,518,732 | $ | - | $ | - | $ | (154,813 | ) | $ | 2,368,978 | ||||||||||||||
| Net decrease in net assets resulting from operations | - | - | - | (61,639 | ) | (95,945 | ) | 186,037 | 28,453 | |||||||||||||||||||
| Stock-based compensation | - | - | 37,650 | - | - | - | 37,650 | |||||||||||||||||||||
| Balance - March 31, 2015 (Unaudited) | 50,582,441 | $ | 5,059 | $ | 2,556,382 | $ | (61,639 | ) | $ | (95,945 | ) | $ | 31,224 | $ | 2,435,081 | |||||||||||||
| 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 in net assets resulting from operations | - | - | - | (109,131 | ) | (6,836 | ) | 11,841 | (104,126 | ) | ||||||||||||||||||
| Balance - March 31, 2016 (Unaudited) | 50,082,441 | $ | 5,009 | $ | 2,318,892 | $ | (109,131 | ) | $ | (224,586 | ) | $ | (134,830 | ) | $ | 1,855,354 | ||||||||||||
See accompanying notes to unaudited consolidated financial statements.
| 3 |
Point Capital, Inc. and Subsidiary
Consolidated Statements of Cash Flows
| For the Three Months Ended March 31, | ||||||||
| 2016 | 2015 | |||||||
| (Unaudited) | (Unaudited) | |||||||
| CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||
| Net (decrease) increase in net assets resulting from operations | $ | (104,126 | ) | $ | 28,453 | |||
| Adjustments to reconcile net (decrease) increase in net assets resulting from operations to net cash used in operating activities: | ||||||||
| Purchases of investments | (98,727 | ) | (394,533 | ) | ||||
| Net realized loss on investments | 6,836 | 95,945 | ||||||
| Net change in unrealized (appreciation) of investments | (11,841 | ) | (186,037 | ) | ||||
| Proceeds from sale of investments | 78,371 | 134,906 | ||||||
| Non-cash interest income | (5,000 | ) | - | |||||
| Stock options issued for services | - | 37,650 | ||||||
| Increase in interest receivable | (12,500 | ) | (956 | ) | ||||
| Increase in investments in advance | - | (200,000 | ) | |||||
| Decrease in prepaid expenses | 10,065 | 9,679 | ||||||
| Decrease in accounts payable and accrued expenses | (53,450 | ) | (1,178 | ) | ||||
| Net Cash Used In Operating Activities | (190,372 | ) | (476,071 | ) | ||||
| Net decrease in cash and cash equivalents | (190,372 | ) | (476,071 | ) | ||||
| Cash and Cash Equivalents - Beginning of Period | 722,764 | 1,739,520 | ||||||
| Cash and Cash Equivalents - End of Period | $ | 532,392 | $ | 1,263,449 | ||||
| Supplemental Disclosure of Cash Flow Information: | ||||||||
| Interest paid | $ | - | $ | - | ||||
| Taxes paid | $ | - | $ | - | ||||
See accompanying notes to unaudited consolidated financial statements.
| 4 |
POINT CAPITAL, INC. AND SUBSIDIARY
CONSOLIDATED SCHEDULE OF INVESTMENTS
March 31, 2016
(Unaudited)
| Fair | % of | |||||||||||||||||||
| United States (U.S.) Company | Industry | Type of Investment | Principal/Shares | Cost | Value | Net Assets | ||||||||||||||
| Non-controlled/Non-affiliated investments | ||||||||||||||||||||
| Accelerize, Inc. (2) | Application Software | Common Stock | 136,879 | $ | 75,279 | $ | 65,017 | 3.50 | % | |||||||||||
| Accelerize, Inc. (2) | Application Software | Warrants | 60,000 | 38,533 | 18,734 | 1.01 | % | |||||||||||||
| Actinium Pharmaceuticals Inc. (2) | Biotechnology | Common Stock | 39,000 | 126,111 | 77,610 | 4.18 | % | |||||||||||||
| Actinium Pharmaceuticals Inc. (2) | Biotechnology | Warrants | 29,250 | 51,055 | 20,126 | 1.08 | % | |||||||||||||
| 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 | 1,399 | 0.08 | % | |||||||||||||
| CombiMatrix Corp.(2) | Life Sciences Tools & Services | Warrants | 38,835 | 31,021 | 264 | 0.01 | % | |||||||||||||
| DatChat Inc. (1)(2) | Application Software | Common Stock | 2,000,000 | 100,150 | 100,150 | 5.40 | % | |||||||||||||
| DatChat Inc. (1) | Application Software | 10% Debenture (Due 12/2016) | $ | 30,000 | 35,000 | 35,000 | 1.89 | % | ||||||||||||
| Home Bistro, Inc.(1) | Other | 15% Convertible Debenture (Due 11/2015) | $ | 150,000 | 150,000 | 150,000 | 8.08 | % | ||||||||||||
| Home Bistro, Inc. (1) (2) | Other | Warrants | 75,000 | - | - | 0.00 | % | |||||||||||||
| ID Global Solutions Corporations (1) | Biometric Technology | 10% Debenture (Due 7/2016) | $ | 100,000 | 61,781 | 100,000 | 5.39 | % | ||||||||||||
| ID Global Solutions Corporations (1) | Biometric Technology | Common Stock | 20,000 | 9,190 | 5,000 | 0.27 | % | |||||||||||||
| ID Global Solutions Corporations (1) (2) | Biometric Technology | Warrants | 2,200,000 | 38,219 | 162,356 | 8.75 | % | |||||||||||||
| iNeedMD Holdings, Inc. (1) (2) | Health Care Supplies | Common Stock | 25,000 | 795 | 22,500 | 1.21 | % | |||||||||||||
| Labstyle Innovation Corp. (1) (2) | Health Care Equipment | Warrants | 18,889 | 189 | 18,133 | 0.98 | % | |||||||||||||
| MabVax Therapeutics Holdings Inc. (2) | Biotechnology | Common Stock | 133,333 | 69,326 | 96,000 | 5.17 | % | |||||||||||||
| MabVax Therapeutics Holdings Inc. (1) (2) | Biotechnology | Warrants | 66,667 | 30,674 | 24,452 | 1.32 | % | |||||||||||||
| MultiMedia Platforms, Inc.(1) | Multimedia Technology | 9% Debenture (Due 7/2016) | $ | 100,000 | 38,461 | 9,667 | 0.52 | % | ||||||||||||
| MultiMedia Platforms, Inc. (1) (2) | Multimedia Technology | Common Stock | 15,000 | 4,500 | 435 | 0.02 | % | |||||||||||||
| MultiMedia Platforms, Inc. (1) (2) | Multimedia Technology | Warrants | 333,334 | 61,539 | 6,724 | 0.36 | % | |||||||||||||
| Optex Systems Holdings Inc. (1) (2) | Aerospace & Defense | Series B Convertible Preferred Stock | 64.10 | 104,432 | 91,898 | 4.95 | % | |||||||||||||
| Orbital Tracking Corp. (1)(2) | Communications Equipment | Series C Convertible Preferred Stock | 200,000 | 100,000 | 211,000 | 11.37 | % | |||||||||||||
| Orbital Tracking Corp. (1)(2) | Communications Equipment | Series D Convertible Preferred Stock | 100,000 | 50,000 | 211,000 | 11.37 | % | |||||||||||||
| Pershing Gold Corp.(2) | Mining Exploration | Warrants | 6,838 | 9,965 | 776 | 0.04 | % | |||||||||||||
| Phase RX, Inc. (1) | Biotechnology | 5% Convertible Debenture | $ | 100,000 | 100,000 | 100,000 | 5.39 | % | ||||||||||||
| Pish Posh Baby, LLC.(1)(2) | Online Retail - Specialty Apparel | Membership Units | 19,155 | 149,988 | 9,194 | 0.50 | % | |||||||||||||
| Provectus BioPharmaceuticals Inc.(2) | Biotechnology | Common Stock | 100,000 | 74,000 | 38,000 | 2.05 | % | |||||||||||||
| Provectus BioPharmaceuticals Inc.(2) | Biotechnology | Warrants | 100,000 | 1,000 | 20,000 | 1.08 | % | |||||||||||||
| Pulmatrix Inc. (1)(2)(3) | Biotechnology | Common Stock | 23,029 | 251,055 | 64,021 | 3.45 | % | |||||||||||||
| Vapor Corp. (1) (2) | Tobacco | Common Stock | 21,428 | - | 11,743 | 0.63 | % | |||||||||||||
| Vapor Corp. (1) (2) | Tobacco | Warrants | 90,909 | 48,513 | 40,473 | 2.18 | % | |||||||||||||
| Xtant Medical Holdings, Inc. (formerly Bacterin Holdings International Inc.) | Health Care Supplies | Warrants | 11,513 | 31,773 | 10,207 | 0.55 | % | |||||||||||||
| Total Non-controlled/Non-affiliated investments | $ | 1,856,708 | $ | 1,721,879 | 92.78 | % | ||||||||||||||
| Net Assets at March 31, 2016 | $ | 1,855,354 | ||||||||||||||||||
(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 unaudited consolidated financial statements.
| 5 |
POINT CAPITAL, INC. AND SUBSIDIARY
CONSOLIDATED SCHEDULE OF INVESTMENTS
December 31, 2015
| Fair | % of | |||||||||||||||||||
| United States (U.S.) Company | Industry | Type of Investment | Principal/Shares | Cost | Value | 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) | Other | 15% Convertible Debenture (Due 11/2015) | $ | 150,000 | 150,000 | 150,000 | 7.66 | % | ||||||||||||
| Home Bistro, Inc. (1) (2) | Other | 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 | % | ||||||||||||||
(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 unaudited consolidated financial statements.
| 6 |
POINT CAPITAL, INC.
CONSOLIDATED SCHEDULE OF INVESTMENTS BY INDUSTRY
March 31, 2016 (Unaudited) and December 31, 2015
The following table shows the portfolio composition by industry grouping based on fair value at March 31, 2016 and December 31, 2015
| March 31, 2016 (Unaudited) | December 31, 2015 | |||||||||||||||
| Industry Classification | Investments at Fair Value | Percentage of Total Portfolio | Investments at Fair Value | Percentage of Total Portfolio | ||||||||||||
| Aerospace & Defense | $ | 91,898 | 5.34 | % | $ | 146,201 | 8.64 | % | ||||||||
| Application Software | 218,901 | 12.71 | % | 208,273 | 12.31 | % | ||||||||||
| Biometric Technology | 267,356 | 15.53 | % | 265,077 | 15.67 | % | ||||||||||
| Biotechnology | 440,209 | 25.57 | % | 560,111 | 33.11 | % | ||||||||||
| Communications Equipment | 422,000 | 24.51 | % | 150,000 | 8.87 | % | ||||||||||
| Health Care Equipment | 19,532 | 1.13 | % | 600 | 0.04 | % | ||||||||||
| Health Care Supplies | 32,707 | 1.90 | % | 12,460 | 0.74 | % | ||||||||||
| Life Sciences Tools & Services | 264 | 0.02 | % | 24,597 | 1.45 | % | ||||||||||
| Mining Exploration | 776 | 0.05 | % | 381 | 0.02 | % | ||||||||||
| Multimedia Technology | 16,826 | 0.98 | % | 104,788 | 6.19 | % | ||||||||||
| Online Retail - Specialty Apparel | 9,194 | 0.53 | % | 9,194 | 0.54 | % | ||||||||||
| Other | 150,000 | 8.71 | % | 150,000 | 8.87 | % | ||||||||||
| Tobacco | 52,216 | 3.03 | % | 59,836 | 3.54 | % | ||||||||||
| $ | 1,721,879 | 100.00 | % | $ | 1,691,518 | 100.00 | % | |||||||||
See accompanying notes to unaudited consolidated financial statements.
| 7 |
POINT CAPITAL, INC. AND SUBSIDIARY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 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.
All adjustments (consisting of normal recurring items) necessary to present fairly the Company’s financial position as of March 31, 2016, and the results of operations and cash flows for the three months ended March 31, 2016 have been included. The results of operations for the three months ended March 31, 2016 are not necessarily indicative of the results to be expected for the full year. The accounting policies and procedures employed in the preparation of these consolidated financial statements have been derived from the audited financial statements of the Company for the fiscal year ended December 31, 2015, which are contained in the Company’s Form 10-K as filed with the Securities and Exchange Commission (“SEC”) on June 14, 2016. The consolidated balance sheet as of December 31, 2015, contained herein, was derived from those consolidated financial statements.
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. Management estimates expected term of share options and similar instruments, expected volatility of the Company’s common shares and the method used to estimate it, expected annual rate of quarterly dividends, and risk free rate(s) to value share options and similar instruments.
| 8 |
POINT CAPITAL, INC. AND SUBSIDIARY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 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. At March 31, 2016, the Company had cash balances exceeding 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.
Realized Gain or Loss and Net Change in Unrealized Appreciation or Depreciation of Portfolio 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. |
| 9 |
POINT CAPITAL, INC. AND SUBSIDIARY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 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.
| 10 |
POINT CAPITAL, INC. AND SUBSIDIARY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 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 March 31, 2016 and December 31, 2015, the Company did not have any Controlled or Affiliated investments.
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.
New Accounting Pronouncements
In February 2015, the FASB issued Accounting Standards Update 2015-2, which updated consolidation standards under ASC Topic 810, “Consolidation”. Under this update, a new consolidation analysis is required for variable interest entities (“VIEs”) and will limit the circumstances in which investment managers and similar entities are required to consolidate the entities that they manage. The FASB decided to eliminate some of the criteria under which their fees are considered a variable interest and limit the circumstances in which variable interests in a VIE held by related parties of a reporting enterprise require the reporting enterprise to consolidate the VIE. The guidance is effective for public business entities for annual and interim periods in fiscal years beginning after December 15, 2015. The adoption of ASU 2015-2 will not have any impact on the Company’s consolidated financial statements
Reclassification
A certain reclassification has been made in the prior year’s consolidated financial statements to conform to the current year’s financial presentation. This reclassification had no effect on net loss or cash flows as previously reported.
| 11 |
POINT CAPITAL, INC. AND SUBSIDIARY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2016
NOTE 3 – PORTFOLIO INVESTMENTS
The following are the Company’s investments owned by levels within the fair value hierarchy at March 31, 2016 (unaudited):
| Level 1 | Level 2 | Level 3 | Total | |||||||||||||
| Common Stock | $ | 357,825 | $ | - | $ | 122,650 | $ | 480,475 | ||||||||
| LLC Membership | - | - | 9,194 | 9,194 | ||||||||||||
| Convertible Preferred Stock | - | 513,898 | - | 513,898 | ||||||||||||
| Convertible Debentures | - | - | 359,667 | 359,667 | ||||||||||||
| Debenture | - | - | 35,000 | 35,000 | ||||||||||||
| Warrants | 18,133 | 136,432 | 169,080 | 323,645 | ||||||||||||
| Total Investments | $ | 375,958 | $ | 650,330 | $ | 695,591 | $ | 1,721,879 | ||||||||
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 | ||||||||
The following additional disclosures relate to the changes in fair value of the Company’s Level 3 investments during the three months ended March 31, 2016 and 2015:
| Three Months Ended March 31, | ||||||||
| 2016 | 2015 | |||||||
| Balance at beginning of year | $ | 907,154 | $ | 549,043 | ||||
| Purchase of investments at cost | 5,000 | 204,443 | ||||||
| Net realized gain | - | - | ||||||
| Net change in unrealized (depreciation) appreciation on investments | (66,563 | ) | 129,581 | |||||
| Net transfers in and/or out of Level 3 (1) | (150,000 | ) | - | |||||
| Balance at end of period | $ | 695,591 | $ | 883,067 | ||||
| At March 31, | At December 31, | |||||||
| 2016 | 2015 | |||||||
| Net unrealized appreciation (depreciation) for Level 3 investments at period end | $ | (40,343 | ) | $ | 26,221 | |||
| (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 Level 3 category as of the beginning of the period in which the reclassifications occur. |
| 12 |
POINT CAPITAL, INC. AND SUBSIDIARY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2016
NOTE 3 – PORTFOLIO INVESTMENTS (continued)
| Investment Type | Fair Value at March 31, 2016 (Unaudited) | Valuation Technique | Unobservable inputs | Input | ||||||||
| Common Stock | $ | 100,150 | Recent Transactions | N/A | N/A | |||||||
| Common Stock | $ | 22,500 | 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 | $ | 9,667 | Comparable market value | Restriction discount | N/A | |||||||
| Debenture | $ | 35,000 | Recent Transaction | N/A | N/A | |||||||
| Warrants | $ | 162,356 | Comparable market value | Volatility | 82.0 | % | ||||||
| Warrant | $ | 6,724 | Comparable market value | Volatility | 231.2 | % | ||||||
| $ | 695,591 | |||||||||||
| 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 | Comparable market value | Volatility | 82.1 | % | ||||||
| Warrant | $ | 49,561 | Comparable market value | 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.
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.
| 13 |
POINT CAPITAL, INC. AND SUBSIDIARY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2016
NOTE 4 - REDEEMABLE SERIES A CONVERTIBLE PREFERRED STOCK (continued)
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 in a timely manner, and the Company is currently delinquent in filing a Quarterly Report for the quarter ended March 31, 2016. Although the Company is currently 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.
NOTE 5 – 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 75.1% and 69.0% of the Company’s total assets at March 31, 2016 and December 31, 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.
| 14 |
POINT CAPITAL, INC. AND SUBSIDIARY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2016
NOTE 6 – EQUITY TRANSACTIONS
In January 2016, upon determination that certain common shares issued to a consultant pursuant to a consulting agreement to a consultant in 2014 were issued in contravention of Section 23(a) of the 1940 Act, the Board of Directors of the Company, by unanimous written consent, canceled such consulting contract. In March 2016, the consultant and the Company agreed to cancel the 500,000 shares that had been issued to a consultant in 2014 and agreed to a mutual release whereby the consultant released the Company from any future obligation and the Company released the consultant from any future performance obligation.
NOTE 7 - FINANCIAL HIGHLIGHTS
The following is a schedule of financial highlights for the three months ended March 31, 2016 and 2015:
| For the Three Months Ended March 31, | ||||||||
| 2016 | 2015 | |||||||
| Net asset value per common share data: | ||||||||
| Net asset value per common share, beginning of period | $ | 0.04 | $ | 0.05 | ||||
| Net investment gain (loss) | (0.00 | ) | (0.00 | ) | ||||
| Net realized (loss) gain on investments | (0.00 | ) | 0.00 | |||||
| Net change in unrealized appreciation (depreciation) on investments | 0.00 | (0.00 | ) | |||||
| Net increase (decrease) in net assets resulting from operations | (0.00 | ) | (0.00 | ) | ||||
| Net asset value per common share, end of period | $ | 0.04 | $ | 0.05 | ||||
| Ratios and supplemental data: | ||||||||
| Per share market price, end of period (1) | $ | 1.00 | $ | 1.25 | ||||
| Total return (2) | (5.32 | )% | 0.92 | % | ||||
| Common shares outstanding, end of period | 50,082,441 | 50,582,441 | ||||||
| Weighted average common shares outstanding during period | 50,538,485 | 50,582,441 | ||||||
| Net assets, end of period | $ | 1,855,354 | $ | 2,435,080 | ||||
| Ratio of operating expenses to average net assets | (6.60 | )% | (11.82 | )% | ||||
| Ratio of net investment loss to average net assets | (5.69 | )% | (10.51 | )% | ||||
| Portfolio Turnover | 6.65 | 11.45 | ||||||
| (1) | The shares of the Company's common stock were listed in the OTC Market beginning on January 5, 2012. The Company’s shares were not actively traded through March 31, 2016. |
| (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 during the period presented, total return based on stock price has not been presented for the three months ended March 31, 2016 and 2015. |
| NM | Not meaningful |
| 15 |
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
As used in this Form 10-Q, references to “Point Capital,” Company,” “we,” “our” or “us” refer to Point Capital, Inc. unless the context otherwise indicates.
Forward-Looking Statements
The following discussion should be read in conjunction with our financial statements, which are included elsewhere in this Form 10-Q (the “Report”). This Report contains forward-looking statements which relate to future events or our future financial performance. In some cases, you can identify forward-looking statements by terminology such as “may”, “should”, “expects”, “plans”, “anticipates”, “believes”, “estimates”, “predicts”, “potential”, or “continue” or the negative of these terms or other comparable terminology. These statements are only predictions and involve known and unknown risks, uncertainties, and other factors that may cause our or our industry’s actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by these forward-looking statements.
While these forward-looking statements, and any assumptions upon which they are based, are made in good faith and reflect our current judgment regarding the direction of our business, actual results will almost always vary, sometimes materially, from any estimates, predictions, projections, assumptions or other future performance suggested herein. Except as required by applicable law, including the securities laws of the United States, we do not intend to update any of the forward-looking statements to conform these statements to actual results.
Overview
We are a closed-end, non-diversified investment company that has elected to be regulated as a business development company under the Investment Company Act of 1940, as amended (the “1940 Act”). As a business development company, we are required to comply with certain regulatory requirements. For instance, we generally have to invest at least 70% of our total assets in “qualifying assets,” including securities of private U.S. companies, cash, cash equivalents, U.S. government securities and high-quality debt investments that mature in one year or less. 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. |
| 16 |
| ● | 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 March 31, 2016, we held twenty portfolio companies. All are non-controlled and non-affiliated investments.
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 OTCBB 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 common shares of ACLZ for $4,347. Each warrant expires on August 17, 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 6, 2019 and are exercisable at $6.50 per common share. On May 26, 2015, we sold 4,000 shares of this common stock.
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 terminate 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, in December 2015, we recorded a realized loss on investments of $100,000.
| 17 |
Cesca Therapeutics, Inc. On June 13, 2014, we completed an $82,501 investment in 55,000 shares of Common Stock as well as 16,500 warrants. Cesca Therapeutics, Inc., a Nasdaq-listed company, 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. In June 2015, we sold the 55,000 shares of common stock for net proceeds of $47,145. At March 31, 2016 and December 31, 2015 we own 16,500 warrants. Each warrant is exercisable at a price of $1.55 per share.
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. The warrants expire on December 19, 2018 and the exercise price of the warrants is $3.12 per common share. We currently hold 38,835 warrants of CombiMatrix.
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 OTC 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.
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 OTCBB listed company that manufactures medical devices that acquires and transmits health related data.
Labstyle Innovations Corp. (DRIO) - In March 2016, we purchased 18,889 common shares and 18,889 warrants of DRIO for $85,190. Each warrant expires on February 26, 2021. In March 2016, the Company sold the 18,889 shares of common stock.
MabVax Therapeutics Holdings Inc. (MBVX) - On April 6, 2015, we completed an investment of $100,000 in 133,333 shares of common stock and 66,667 warrants of MabVax Therapeutics Holdings Inc., an OTCQB listed company. Each warrants expire on October 6, 2017 and are exercisable at $1.50 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.
| 18 |
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 March 6, 2018 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.
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 which is convertible into 41,773 shares of OPXS common stock.
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 OTC BB 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. Each share of Series C Preferred converts into 10 shares of TRKK common stock for an aggregate of 2,000,000 common shares. Each share of Series D Preferred convert into 20 shares of TRKK common stock for an aggregate of 2,000,000 common shares.
Pershing Gold Corp. (PGLC) - On April 10, 2015, we completed an investment of $100,000 in 17,094 shares of common stock and 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. In November 2015, we sold the 17,094 shares of common stock for net proceeds of $67,585. 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 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 was converted into 25,538 shares of common stock of Phase Rx.
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.
| 19 |
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 2015, we sold 15 shares of PULM common stock. Pulmatrix focuses on the discovery, development, and commercialization of pharmaceutical-grade hypochlorous acid based therapeutics to prevent and treat infection in invasive applications.
Vapor Corp. (VPCO) - On November 14, 2014, we completed a $100,000 investment in a 7% convertible debenture and 90,909 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. The warrants expire on November 14, 2019 and the exercise price of the warrants is $2.00 per share. 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 21,428 common shares of VPCO.
Xtant Medical Holdings, Inc. (formerly Bacterin International 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 calcellous 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 three months ended March 31, 2016 and 2015, the principal measure of our financial performance was the net increase (decrease) in our net assets resulting from operations, which includes (i) net investment income (loss), (ii) net realized gain (loss) on investments, and (iii) net change in unrealized appreciation (depreciation) on investments. Net investment income (loss) is the difference between our income from interest, dividends, fees and other investment income and our operating expenses. Net realized gain (loss), if any, is the difference between the net proceeds from the disposition of portfolio company securities and their stated cost. Net unrealized appreciation (depreciation) from investments is the net change in the fair value of our investment portfolio.
Investment Income: For the three months ended March 31, 2016 and 2015, we earned interest and dividend income of $17,502 and $7,656, 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 and the recording of a $5,000 fee which was included in interest income in the 2016 period related to the extension of the due date of a debenture until December 2016.
| 20 |
Operating Expenses: For the three months ended March 31, 2016 and 2015, total operating expenses consisted of the following:
| For the Three Months Ended March 31, | ||||||||
| 2016 | 2015 | |||||||
| Compensation expense | $ | 27,500 | $ | 37,650 | ||||
| Professional fees | 84,783 | 15,500 | ||||||
| Filing fees | 708 | 4,965 | ||||||
| Insurance expense | 8,190 | 7,804 | ||||||
| General and administrative expenses | 5,452 | 3,376 | ||||||
| Total operating expenses | $ | 126,633 | $ | 69,295 | ||||
Compensation expense: For the three months ended March 31, 2016, we incurred compensation expense of $27,500 consisting of directors fees of $7,500, fees incurred for services performed by our outsourced chief financial officer of $15,000, and $5,000 in fees incurred for services performed by our outsourced chief compliance officer, as compared to directors fees of $37,650 incurred for the three months ended March 31, 2015.
Professional fees: For the three months ended March 31, 2016, professional fees increased by $69,283 or 447.0% as compared to the three months ended March 31, 2015. This increase was attributable to an increase in accounting fees of $9,500 related to our audit, an increase in legal fees of $53,783 related our Investment Act matters, and an increase in consulting fees of $6,000.
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 three months ended March 31, 2016, filing fees decreased by $4,257 or 85.7% as compared to the three months ended March 31, 2015.
Insurance expense: For the three months ended March 31, 2016, insurance expense increased by $386 or 4.9% as compared to the three months ended March 31, 2015.
General and administrative expenses: General and administrative expenses consist of transfer agent fees, custodian fees, bank service charges, listing fees, and other fees and expenses. For the three months ended March 31, 2016, general and administrative expenses increased by $2,076 or 61.5% as compared to the three months ended March 31, 2015. This increase was primarily attributable to an increase in custody fees of $2,500.
Net Investment loss: For the three months ended March 31, 2016 and 2015, net investment loss amount to $109,131 and $61,639, respectively.
Net Realized And Unrealized (Loss) Gain On Investments:
Net Realized Loss on Investments: During the three months ended March 31, 2016 and 2015, we disposed of certain investment positions and recognized a net realized loss of $6,836 and $95,945, respectively.
Net Change in Unrealized Appreciation on investments: At March 31, 2016 and December 31, 2015, we had a cost basis in our portfolio companies of $1,856,708 and $1,838,189 with a fair market value of $1,721,879 and $1,691,518, respectively. The net change in unrealized appreciation for the three months ended March 31, 2016 and 2015 was $11,841 and $186,037, respectively.
Net Increase (Decrease) in Net Assets Resulting from Operations For the three months ended March 31, 2016 and 2015, the net (decrease) increase in net assets resulting from operations was $(104,126) and $28,453, respectively.
| 21 |
Liquidity and Capital Resources
As of March 31, 2016, we had $532,392 in cash and cash equivalents, compared to $722,764 as of December 31, 2015, a decrease of $190,372. This decrease was primarily attributable to the use of cash for operating activities of $170,016 and for the purchase of investments of $98,727 offset by net proceeds from the sale of investments of $78,371.
The Company believes that our existing available cash will enable the Company to meet its working capital requirements for at least 12 months.
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.
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.
We agreed that as long as the purchasers of our Series A Preferred Stock are holding said shares, we would comply in all respects with our reporting and filing obligations under the Exchange Act. This Quarterly Report was not filed in a timely manner, and we are currently delinquent in filing a Quarterly Report for the quarter ended June 30, 2016. Although we are currently in breach of our 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.
Although we believe that our existing available cash will enable us to meet our working capital requirements for at least 12 months, we may need to raise additional funds to continue investing in portfolio companies. If we are unable to raise capital, we may be required to reduce the scope of our investment activities, which could harm our business plans, financial condition and operating results, or cease our operations entirely, in which case, you will lose all of your investment.
We currently have no commitments with any person for any capital expenditures.
Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements.
Critical Accounting Policies
Basis of Presentation
The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America, ("U.S. GAAP"). We formed a wholly-owned subsidiary, Hemp Funding, Inc., to invest in companies that are positioned for growth in the legal cannabis industry. The subsidiary has not made investments to date. The Company consolidates the subsidiary. All significant intercompany balances and transactions have been eliminated in consolidation.
Cash and Cash Equivalents
We consider all highly liquid instruments purchased with an original maturity of three months or less and money market accounts to be cash equivalents.
| 22 |
Securities Transactions
Securities transactions are recorded on a trade date basis. Securities transactions outside conventional channels, such as private transactions, are recorded as of the date the Company obtains the right to demand the securities purchased or to collect the proceeds from a sale, and incurs an obligation to pay for securities purchased or to deliver securities sold, respectively. We record interest and dividend income on an accrual basis beginning on the trade settlement date (the date on which a financial transaction is settled and monies from the transaction have occurred) or the ex-dividend date, respectively, to the extent that we expect to collect such amounts. Commissions and other costs associated with transactions involving securities, including legal costs, are included in the cost basis of purchases and deducted from the proceeds of sales.
Net Realized Gains or Losses and Net Change in Unrealized 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.
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:
| 23 |
Equity securities which are listed on a recognized stock exchange are valued at the closing trade price on the last trading day of the valuation period. For equity securities that carry a restriction inherent to the security, a restriction discount is applied, as appropriate. Investments in warrants are valued at fair value using the Black-Scholes option pricing model based on inputs such as stock volatility, risk-free interest rates, holding period and dividend yield. Investments in securities which are convertible at a date in the future are valued assuming a full conversion into common shares and valued based on the methodology for equity securities described above, or at the respective investment’s face value, whichever is a better indicator of fair value. Investments in unlisted securities are valued using a market approach net of the appropriate discount for lack of marketability.
Investments without a readily determined market value are primarily valued using a market approach, an income approach, or both approaches, as appropriate. The market approach uses prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities (including a business). The income approach uses valuation techniques to convert future amounts (for example, cash flows or earnings) to a single present amount (discounted). The measurement is based on the value indicated by current market expectations about those future amounts. In following these approaches, the types of factors that we may take into account in fair value pricing our investments include, as relevant: available current market data, including relevant and applicable market trading and transaction comparables, applicable market yields and multiples, security covenants, call protection provisions, information rights, the nature and realizable value of any collateral, the portfolio company's ability to make payments, its earnings and discounted cash flows, the markets in which the portfolio company does business, comparisons of financial ratios of peer companies that are public, M&A comparables, and enterprise values, among other factors.
Because there is not a readily available market value for some of the investments in its portfolio, we value substantially all of our portfolio investments at fair value as determined in good faith by our board of directors, as described herein. Due to the inherent uncertainty of determining the fair value of investments that do not have a readily available market value, the fair value of our investments may fluctuate from period to period. Additionally, the fair value of our investments may differ significantly from the values that would have been used had a readily available market existed for such investments and may differ materially from the values that we may ultimately realize. Further, such investments are generally subject to legal and other restrictions on resale or otherwise are less liquid than publicly traded securities. If we were required to liquidate a portfolio investment in a forced or liquidation sale, we could realize significantly less than the value at which we have recorded it.
Revenue Recognition
We record interest and dividend income on an accrual basis to the extent that we expect to collect such amounts. We do not accrue as a receivable interest on debt or dividend of preferred shares for accounting purposes if there is reason to doubt the ability to collect such interest.
Income Taxes
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 March 31, 2016 and December 31, 2015.
| 24 |
Item 3. 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 is 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.
Item 4. 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 March 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.
During the assessment of the effectiveness of internal control over financial reporting as of December 31, 2015, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”), 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 March 31, 2016, we concluded that such weaknesses continue to exist.
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, the Company 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.
In light of these material weaknesses, we performed additional analyses and procedures in order to conclude that our consolidated financial statements for the period ended March 31, 2016 included in this Quarterly Report on Form 10-Q were fairly stated in accordance with the U.S. GAAP. Accordingly, management believes that despite our material weaknesses, our consolidated financial statements for the period ended March 31, 2016 are fairly stated, in all material respects, in accordance with the U.S. GAAP.
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.
| 25 |
PART II
OTHER INFORMATION
Item 1. 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 1A. Risk Factors
There have been no material changes to our risk factors as previously disclosed in our most recent 10-K filing.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
None
Item 3. Defaults Upon Senior Securities.
We agreed that as long as the purchasers of our Series A Preferred Stock are holding said shares, we would comply in all respects with our reporting and filing obligations under the Exchange Act. This Quarterly Report was not filed in a timely manner, and we are currently delinquent in filing a Quarterly Report for the quarter ended June 30, 2016. Although we are currently in breach of our agreement to remain current, the purchase agreement does not provide for any immediate consequence or default.
Item 4. Mine Safety Disclosures.
Not applicable.
Item 5. Other Information.
None.
Item 6. Exhibits
| Exhibit No. |
Description | |
| 31.1 | Rule 13a-14(a)/15d14(a) Certifications of Principal Executive Officer* | |
| 31.2 | Rule 13a-14(a)/15d14(a) Certifications of Principal Financial Officer* | |
| 32.1 | Section 1350 Certifications of Principal Executive Officer* | |
| 32.2 | Section 1350 Certifications of Principal Financial Officer* |
* Filed herewith.
| 26 |
SIGNATURES
Pursuant to the requirements 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. | ||
| By: | /s/ Eric Weisblum | |
| Name: Eric Weisblum | ||
| Title: Chairman, Chief Executive Officer and Director (Principal Executive Officer) | ||
| Dated: August 30, 2016 | ||
| By: | /s/ Adam Wasserman | |
| Name: Adam Wasserman | ||
| Title: Chief Financial Officer (Principal Financial and Accounting Officer) | ||
Dated: August 30, 2016
27