Silo Pharma, Inc. - Quarter Report: 2018 September (Form 10-Q)

POINT CAPITAL, INC. AND SUBSIDIARY

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2018

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 its reporting and filing obligations under the Exchange Act. The Company did not file its annual report for the year ended December 31, 2015 and its quarterly reports for the period ended March 31, 2016 and June 30, 2016, in a timely manner. The Company is currently not in breach of its agreement to remain current. The purchase agreement does not provide for any immediate consequence or default provision such as a reduction in the conversion price of the Series A Preferred, immediate redemption or the like.

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

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

On March 31, 2017, the Board approved the amendment and restatement of the original Certificate of Designation in order to expressly ensure that holders of the Company’s Preferred Stock have the right to elect at least two directors at all times, have complete priority over any other class as to distribution of assets and payments of dividends, and have equal voting rights with every other outstanding voting stock. On May 11, 2017, the Company filed the amendment and restatement with the State of Delaware.

NOTE 8 – SHAREHOLDERS’ EQUITY

Common stock issued for acquisition

Pursuant to the terms of the APA (See Note 3), the Company issued 2,000,000 shares of common capital stock of the Company in exchange for 100% of the NFID assets. The shares were valued at $300,000, or $0.15 per share, the fair value of the Company’s common stock based on the quoted bid price of the Company’s common stock on the Closing Date.

NOTE 9 - CONCENTRATIONS AND CREDIT RISKS

Financial instruments that subjected the Company to concentrations of market risk consisted principally of equity investments and debt instruments (other than cash equivalents), which collectively represented approximately 28.2% and 80.4% of the Company’s total assets at September 30, 2018 and December 31, 2017, respectively. These investments consisted 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, at September 30, 2018, 100% of the fair value of the Company’s equity investment portfolio is concentrated in one company in the biometric technology industry which gives rise to a risk of significant loss should the performance or financial condition of this company or industry deteriorate.

NOTE 10 - COMMITMENT

In connection with the APA, the Company entered into a one-year Brand Ambassador Agreement (See Note 3) with MAX. Pursuant to this agreement, the Company shall pay MAX a seven percent (7%) royalty on net sales of the product effective November 1, 2018 with a minimum royalty payment of $35,000 during the agreement term. The royalty shall be calculated on a quarterly basis. Pursuant to the Brand Ambassador Agreement, $17,500 was paid prior to the Closing Date. The remaining $17,500 is due on January 27, 2019.

NOTE 11 – SUBSEQUENT EVENTS

In October 2018, the Company advanced Seller the remaining $100,000 balance of the promissory note receivable agreement executed on September 28, 2018 (See Note 5).

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

Through September 28, 2018, we were a closed-end, non-diversified investment company that had 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 were required to comply with certain regulatory requirements.  For instance, we generally had 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.

On September 29, 2018, we filed Form N-54C, Notification of Withdrawal of election to be Subject to Section 55 through 65 of the Investment Company Act of 1940, whereas we have changed the nature of our business so as to cease to be a business development company. Accordingly, as of the September 30, 2018, the accompanying unaudited condensed consolidated financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States of America (the “U.S. GAAP”) for interim financial information and with the instructions Article 8-03 of Regulation S-X. For the period from September 29, 2018 to September 30, 2018, there was no activity and therefore, the Company only presented condensed consolidated statements of operations for Investment Company Accounting.

In accordance with FASB Accounting Standards Codification (ASC) Topic 946 – Financial Services – Investment Company, we are making this change to our financial reporting prospectively, and not restating or revising periods prior to our change in status to a non-investment company effective September 29, 2018. Accordingly, in this report, we refer to both accounting in accordance with US generally accepted accounting principles (GAAP) applicable to corporations (Corporation Accounting), which applies commencing September 29, 2018, and to that applicable to investment companies under the 1940 Act (Investment Company Accounting), which applies to prior periods.

In order to maintain its status as a non-investment company, the Company will now operate so as to fall outside the definition of an “investment company” or within an applicable exception. The Company expects to continue to operate outside the definition of an “investment company” as a company primarily engaged in the business of developing and selling footwear and apparel products.

Through March 31, 2017, we elected to be treated as a RIC under Subchapter M of the Code and operated in a manner so as to qualify for the tax treatment applicable to RICs. At March 31, 2017, we failed this diversification test since our investment in IPSIDY INC. (formerly ID Global Solutions Corporation) (“IDTY”) accounted for over 25% of our total assets. We did not cure our failure to retain our status as a RIC and we will not seek to obtain RIC status again. Accordingly, beginning in 2017, we are subject to income taxes at corporate tax rates. The loss of the Company’s status as a RIC did not have any impact on our financial position or results of operations.

Currently, we are not making any new equity investments.

On September 29, 2018, we entered into an Asset Purchase Agreement (“APA”) with Blind Faith Concepts Holdings, Inc. a Nevada corporation (the “Seller”) whereby we completed the acquisition of 100% of the assets of “NFID” from the Seller which consisted of three trademarks related to the NFID brand, the NFID website, shoe designs and samples, and the assumption of a one-year Brand Ambassador Agreement in exchange for 2,000,000 shares of common capital stock of the Company. NFID is a recently developed unisex footwear brand. We plan on continuing product development to fully launch the product. Our acquisition of the NFID assets gives us access to the growing market for unisex products. 

Pursuant to the terms of the APA, the Company agreed to issue 2,000,000 shares of common capital stock of the Company in exchange for 100% of the NFID assets. The shares were valued at $300,000, or $0.15 per share, the fair value of the Company’s common stock based on the quoted bid price of the Company’s common stock on the Closing Date. 

Equity Investments

At September 30, 2018, equity investments of $12,767, comprised mainly of nonmarketable stock, loans and stock warrants, are recorded at cost, as adjusted for other than temporary impairment write-downs and are evaluated for impairment periodically.

As of September 30, 2018, the fair value of equity investments held by us amounted to $391,698 which consisted of one investment, Ipsidy Inc. (“IDTY”), with a fair value of $391,698, or 100% of the total investment portfolio.

IDTY 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. At September 30, 2018, we owned 2,165,275 common shares of IDTY with a fair value of $391,698. We are actively selling these shares and plan on using the proceeds from the sale of IDTY for working capital purposes, for NFID product development, or future acquisitions.

Results of Operations

For the three and nine months ended September 30, 2018 and 2017, 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.

Interest Income:  For the three months ended September 30, 2018 and 2017, we earned interest income of $18 and $6,540, and for the nine months ended September 30, 2018 and 2017, we earned interest income of $44 and $20,478, respectively, primarily resulting from interest earned on convertible debt and other debt, and on bank deposits. The decrease was attributable to a decrease in income-earning investments.

Operating Expenses: For the three and nine months ended September 30, 2018 and 2017, total operating expenses consisted of the following:

Compensation expense: For the three and nine months ended September 30, 2018 and 2017, compensation expense decreased by $15,000 and $20,000, respectively due to the resignation of the Company’s CFO.

Professional fees: For the three months ended September 30, 2018, professional fees decreased by $870, or 2.4%, as compared to the three months ended September 30, 2017. For the nine months ended September 30, 2018, professional fees increased by $1,173, or .91%, as compared to the nine months ended September 30, 2017.

Insurance expense: For the three months ended September 30, 2018, insurance expense decreased by $127, or 1.4%, as compared to the three months ended September 30, 2017. For the nine months ended September 30, 2018, insurance expense decreased by $378, or 1.4%, as compared to the nine months ended September 30, 2017.

Bad debt recovery (expense): For the three months ended September 30, 2018 and 2017, we did not record any bad debt expense or recovery. For the nine months ended September 30, 2018, we recorded a bad debt recovery of $5,000 as compared to bad debt expense of $6,750 for the nine months ended September 30, 2017. During the 2017 period, we wrote off interest receivable of $6,750 deemed uncollectable.

General and administrative expenses: General and administrative expenses consist of transfer agent fees, custodian fees, bank service charges, and other fees and expenses. For the three months ended September 30, 2018, general and administrative expenses decreased by $980, or 13.3%, as compared to the three months ended September 30, 2017. For the nine months ended September 30, 2018, general and administrative expenses increased by $1,567, or 6.7%, as compared to the nine months ended September 30, 2017.

Loss from Operations: For the three months ended September 30, 2018 and 2017, loss from operations amounted to $81,182 and $98,159, respectively. For the nine months ended September 30, 2018 and 2017, loss from operations amounted to $292,145 and $321,533, respectively.

Other (Expenses) Income:

Net Realized And Unrealized (Loss) Gain On Investments:

Net Realized Gain on Investments: During the three months ended September 30, 2018 and 2017, we disposed of or permanently impaired certain equity investments recognizing a net realized loss of $623,188 and $80,913, respectively. During the three months ended September 30, 2018, we recognized a net realized loss of $54,001 which consisted of gains of $32,973 from the sale of Ipsidy, Inc. offset by a realized loss of $86,974 from the expiration or write off of certain debentures and warrants. Additionally, we recorded a realized loss of $569,187 related to the permanent write down of nonmarketable equity securities. During the nine months ended September 30, 2018 and 2017, we disposed of or permanently impaired certain equity investments recognizing a net realized loss of $101,715 and $79,879, respectively. During the nine months ended September 30, 2018, we recognized a net realized gain of $467,472 which consisted of realized gains of $648,715 from the sale of Ipsidy, Inc. offset by a realized loss of $32,730 from the sale of our investment in Orbital Tracking Corp. and a realized loss of $148,513 due to the expiration or write off of certain debentures and warrants. Additionally, we recorded a realized loss of $569,187 related to the permanent write down of nonmarketable equity securities.

Net Change in Unrealized (Loss) Gain on investments: At September 30, 2018 and December 31, 2017, we had a cost basis in our portfolio companies of $45,538 and $876,358, respectively, with a fair market value of $391,698 and $1,320,229, respectively. The net change in unrealized gain (loss) on investments for the three months ended September 30, 2018 and 2017 was $506,190 and $(346,575), respectively. During the three months ended September 30, 2018, based on our analysis of the fair value of our investments in Ipsidy, Inc. coupled with the reversal of unrealized gains upon sales of Ipsidy common shares we recorded an unrealized loss of approximately $63,000. Additionally, due to the permanent write down of nonmarketable securities, we reversed previously recorded unrealized losses amounting $569,187 and we and accordingly, recorded an unrealized gain of $569,187. During the three months ended September 30, 2017, based on our analysis of the fair value of our investments in Ipsidy, Inc., we recorded an unrealized loss of approximately $347,000. The net change in unrealized gain (loss) on investments for the nine months ended September 30, 2018 and 2017 was $(671,898) and $530,586, respectively. During the nine months ended September 30, 2018, based on our analysis of the fair value of our investments in Ipsidy, Inc., the reversal of unrealized gains upon sales of Ipsidy common shares, and the reversal of unrealized losses on expired warrants and debentures, we recorded an unrealized loss of approximately $672,000. Additionally, due to the permanent write down of nonmarketable securities, we reversed previously recorded unrealized losses amounting $569,187 and we and accordingly, recorded an unrealized gain of $569,187. During the nine months ended September 30, 2017, based on our analysis of the fair value of our investments in Ipsidy, Inc., we recorded an unrealized gain of approximately $531,000.

 Net (Loss) Income: For the three months ended September 30, 2018 and 2017, we had a net loss of $(198,162) and $(519,143), respectively. For the nine months ended September 30, 2018 and 2017, we had a net loss of $(496,527) and net income of $149,652, respectively.

Liquidity and Capital Resources

As of September 30, 2018, we had $626,115 in cash and cash equivalents, compared to $294,591 as of December 31, 2017, an increase of $331,524. Our primary uses of cash have been for salaries, fees paid to third parties for professional services, and general and administrative expenses. The following trends are reasonably likely to result in changes in our liquidity over the near to long term:

On September 28, 2018, we and the Seller executed a two year promissory note receivable agreement with a principal balance of $200,000 of which $100,000 was funded to the Seller in September 2018. The terms of the promissory note include an interest rate of six percent (6%) and we shall be repaid in interest only payments on a quarterly basis, until the maturity date of September 27, 2020, at which time the full principal and any interest payments will be due to the Company. At the time the promissory note receivable agreement was executed, we also executed a Security Interest and Pledge Agreement with the borrower. Pursuant to the Security Interest and Pledge Agreement, the borrower has pledged all of the assets of its company as security for the performance of the note obligations. As of September 30, 2018, we have recorded a note receivable of $100,000 related to the promissory note receivable agreement. Subsequent to September 30, 2018, we funded the remaining $100,000 (see Note 11).

We believe that our existing available cash will enable us to meet the working capital requirements for at least 12 months from the date of this report.

Although we believe that our existing available cash will enable us to meet our working capital requirements for at least 12 months from the date of this report, we may need to raise additional funds to for the development and marketing of our recently acquitted NFID product line. If we are unable to raise capital, we may be required to reduce the scope of our product development and marketing activities, which could harm our business plans, financial condition and operating results, cease our operations entirely, in which case, you will lose all of your investment.

Management cannot provide assurance that we will ultimately achieve profitable operations or become cash flow positive, or raise additional debt and/or equity capital. We will seek to raise capital through additional debt and/or equity financings to fund operations, for product development and for marketing in the future. If we are unable to raise capital or secure lending in the near future, management expects that the Company may need to curtail its operations. 

Until such time as we generate substantial product revenue to offset operational expenses, we expect to finance our cash needs through a combination of public and private equity offerings and debt financing. We may be unable to raise capital or enter into such other arrangements when needed or on favorable terms or at all. Our failure to raise capital or enter into such other arrangements as and when needed would have a negative impact on our financial condition. We have no agreements or arrangements to raise capital.

We currently have no material commitments 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”) and include the consolidated financial statements of the Company and its wholly-owned subsidiary, Hemp Funding, Inc., through its date of dissolution in 2017. All intercompany transactions and balances have been eliminated.

Effective September 29, 2018, following authorization by our shareholders, we withdrew our previous election to be regulated as a BDC under the Investment Company Act of 1940, as amended, or the 1940 Act. Prior to such time, we were a closed-end, non-diversified management investment company that had elected to be treated as a BDC under the 1940 Act.

As a result of this change in status, commencing September 29, 2018, we shall now report as a corporation for accounting purposes under Regulation S-X. For the period from September 29, 2018 to September 30, 2018, there was no activity and therefore, the Company only presented condensed consolidated statements of operations for Investment Company Accounting.

In accordance with FASB Accounting Standards Codification (ASC) Topic 946 – Financial Services – Investment Company, we are making this change to our financial reporting prospectively, and not restating or revising periods prior to the Company’s change in status to a non-investment company effective September 29, 2018. Accordingly, in this report, we refer to both accounting in accordance with US generally accepted accounting principles (GAAP) applicable to corporations (Corporation Accounting), which applies commencing September 29, 2018, and to that applicable to investment companies under the 1940 Act (Investment Company Accounting), which applies to prior periods.

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.

Intangible Assets and Goodwill

Intangible assets are carried at cost less accumulated amortization, computed using the straight-line method over the estimated useful lives. The brand ambassador agreement is being amortized over a period of 1 year. Trademarks are recorded at cost, have an indefinite useful life and are not amortized.

The Company records goodwill as the excess of the purchase price over the fair values assigned to the net assets acquired in business acquisitions. ASC 350, “Intangibles — Goodwill and Other” requires that intangible assets with indefinite lives, including goodwill, be evaluated on an annual basis for impairment or more frequently if an event occurs or circumstances change that could potentially result in impairment. If the fair value of goodwill or other intangible asset with an indefinite life is determined to be less than the book value, then goodwill or other intangible asset is reduced to its implied fair value and the amount of the write-down is charged to operations. We are required to test our goodwill and intangible assets with indefinite lives for impairment at least annually.

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.

Equity Investments (Corporation Accounting)

Equity investments of $12,767 at September 30, 2018, comprised mainly of nonmarketable stock, loans and stock warrants, are recorded at cost, as adjusted for other than temporary impairment write-downs and are evaluated for impairment periodically. Prior to September 29, 2018, equity investments were recorded at fair value, represented as cost, plus or minus unrealized appreciation or depreciation. The fair value of equity investments that had no ready market were determined in good faith by the Board of Directors, based upon the financial condition and operating performance of the underlying investee companies as well as general market trends for businesses in the same industry. Included in the equity investments, at fair value were non-marketable securities of $464,446 at December 31, 2017.

Net Realized Gains or Losses and Net Change in Unrealized Gains or Losses on Investments

Realized gain or loss is recognized when an investment is disposed of and is computed as the difference between the Company's cost basis and the net proceeds received from such disposition. Net change in unrealized gains or losses is computed as the difference between the fair value of the investment and the cost basis of such investment.

Valuation of Investments

Through September 29, 2018, our investments consisted of loans and securities issued by public and privately-held companies, including convertible debt, loans, equity warrants and preferred and common equity securities.

We applied 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 considered 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:

Through September 29, 2018, on a quarterly basis, the Board of Directors (the “Board”) of the Company, in good faith, determined the fair value of investments in the following manner:

Equity securities which are listed on a recognized stock exchange are valued at the closing trade price on the last trading day of the valuation period. For equity securities that carry a restriction inherent to the security, a restriction discount is applied, as appropriate. Investments in warrants are valued at fair value using the Black-Scholes option pricing model based on inputs such as stock volatility, risk-free interest rates, holding period and dividend yield. Investments in securities which are convertible at a date in the future are valued assuming a full conversion into common shares and valued based on the methodology for equity securities described above, or at the respective investment’s face value, whichever is a better indicator of fair value. Investments in unlisted securities are valued using a market approach net of the appropriate discount for lack of marketability.

Investments without a readily determined market value were 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 valued 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 differed 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.

Subsequent to September 29, 2018, we categorize our investment in marketable equity instruments as a trading security since there is an active market in such equity investment. Trading securities are carried at fair value with unrealized gains or losses included in income (expense). Realized gains and losses are determined on a specific identification basis and are included in other income (expense). We review equity investments for impairment whenever circumstances and situations change such that there is an indication that the carrying amounts may not be recovered.

Revenue Recognition

Effective on January 1, 2018, the Company adopted Accounting Standards Update (“ASU”) 2014-09 and ASC Topic 606, Revenue from Contracts with Customers (“ASC 606”). ASU 2014-09, as amended by subsequent ASUs on the topic, establishes a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most of the existing revenue recognition guidance. This standard requires an entity to recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services and also requires certain additional disclosures. The Company adopted this standard using the modified retrospective approach, which requires applying the new standard to all existing contracts not yet completed as of the effective date and recording a cumulative-effect adjustment to retained earnings as of the beginning of the fiscal year of adoption. The adoption of ASU 2014-09 did not have any impact on the process for, timing of, and presentation and disclosure of revenue recognition from contracts.

We record interest and dividend income on an accrual basis to the extent that we expect to collect such amounts. We do not accrue as a receivable interest on debt or dividend of preferred shares for accounting purposes if there is reason to doubt the ability to collect such interest.

Income Taxes

Through March 31, 2017, we elected to be treated as a regulated investment company (“RIC”) under Subchapter M of the Code and operated in a manner so as to qualify for the tax treatment applicable to RICs.

In order to qualify for favorable tax treatment as a RIC, we were required to distribute annually to our stockholders at least 90% of our investment company taxable income, as defined by the Code. To avoid federal excise taxes, we must have distributed annually at least 98% of our ordinary income and 98.2% of net capital gains from the current year and any undistributed ordinary income and net capital gains from the preceding years. The Company, at its discretion, may carry forward taxable income in excess of calendar year distributions and pay a 4% excise tax on this income. If we chose to do so, all other things being equal, this would have increased expenses and reduce the amount available to be distributed to stockholders. We were required to accrue excise tax on estimated undistributed taxable income as required. Additionally, if more than 25% of our total assets is invested in the securities of one entity, we would not meet the diversification tests in order to qualify as a RIC for federal income tax purposes.

Since March 31, 2017, we failed this diversification test since our investment in IPSIDY INC. (formerly ID Global Solutions Corporation) (“IDTY”) accounted for over 25% of our total assets (approximately 27.3% of total assets at September 30, 2018). As of the September 30, 2018 and as of the date of this report, we had not cured the failure to retain our status as a RIC and we do not intend to retain our RIC status. Accordingly, beginning in 2017, we are subject to income taxes at corporate tax rates. The loss of our status as a RIC is not expected to have any impact on our financial position or results of operations. 

We did not have any distributable income as of September 30, 2018.

Effective in 2017, we account for income taxes pursuant to ASC 740 “Accounting for Income Taxes” that requires the recognition of deferred tax assets and liabilities for the differences between the financial statements and the tax basis of assets and liabilities, and for the expected future tax benefit to be derived from tax losses and tax credit carry forwards. Additionally, the accounting standards require the establishment of a valuation allowance to reflect the likelihood of realization of deferred tax assets. Realization of deferred tax assets, including those related to the net operating loss carry forwards for income tax purposes as compared to financial statement purposes, are dependent upon future taxable income and timing of reversals of future taxable differences along with any other positive and negative evidence during the periods in which those temporary differences become deductible or are utilized.

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 September 30, 2018. 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. 

Management determined that the deficiencies, evaluated in the aggregate, could potentially result in a material misstatement of the consolidated financial statements in a future annual or interim period that would not be prevented or detected. Therefore the deficiencies constitute material weaknesses in internal control. Based on that evaluation, management determined that our internal controls over financial reporting were not effective as of September 30, 2018.

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

Changes in Internal Controls over Financial Reporting

Other than the resignation of our chief financial officer, 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. Our former chief financial officer is now a consultant to the Company providing us with accounting and financial reporting services and his resignation did not materially change our internal control over financial reporting.    

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 

Other than discussed below, there have been no material changes to our risk factors as previously disclosed in our most recent 10-K filing. 

We are subject to corporate-level income tax since we lost our status as to be taxed as a RIC as of March 31, 2017.

Beginning in 2017, we are subject to corporate-level income tax since we were unable to qualify as a RIC under Subchapter M of the Code or to satisfy RIC distribution requirements. Since March 31, 2017, we failed the RIC diversification test since one of our investments accounted for over 25% of the Company’s total assets. As of the date of this report, we had not cured our failure to retain our status as a RIC and we do not intend to retain our RIC status. Accordingly, beginning in 2017, we are subject to income taxes at corporate tax rates.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds. 

Pursuant to the terms of an asset purchase agreement, we issued 2,000,000 shares of common stock in exchange for 100% of the certain assets. The shares were valued at $300,000, or $0.15 per share, the fair value of the Company’s common stock based on the quoted bid price of the Company’s common stock on the Closing Date.

The above securities were issued in reliance upon the exemptions provided by Section 4(a)(2) under the Securities Act of 1933, as amended.

Item 3. Defaults Upon Senior Securities. 

None. 

Item 4. Mine Safety Disclosures. 

Not applicable. 

Item 5. Other Information. 

On September 29, 2018, we filed Form N-54C, Notification of Withdrawal of election to be Subject to Section 55 through 65 of the Investment Company Act of 1940, whereas the Company has changed the nature of its business so as to cease to be a business development company.

Item 6. Exhibits

* Filed herewith.

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.