Silo Pharma, Inc. - Quarter Report: 2018 June (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 June 30, 2018

☐   TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number: 814-01038

POINT CAPITAL, INC.

(Exact name of small business issuer as specified in its charter)

1086 Teaneck Road, Suite 3A

Teaneck, New Jersey 07666

(Address of principal executive offices)

(201) 408-5126

(Issuer’s telephone number)

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, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

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 13, 2018, 50,082,441 shares of common stock, par value $0.0001 per share, were outstanding.

POINT CAPITAL, INC.

FORM 10-Q

June 30, 2018

TABLE OF CONTENTS

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements.

POINT CAPITAL, INC. AND SUBSIDIARY

Condensed Consolidated Statements of Assets and Liabilities

See accompanying notes to unaudited condensed consolidated financial statements.

POINT CAPITAL, INC. AND SUBSIDIARY

Condensed Consolidated Statements of Operations

(Unaudited)

See accompanying notes to unaudited condensed consolidated financial statements.

POINT CAPITAL, INC. AND SUBSIDIARY

Condensed Consolidated Statements of Changes in Net Assets

For the Six Months Ended June 30, 2018 and 2017

(Unaudited)

See accompanying notes to unaudited condensed consolidated financial statements.

POINT CAPITAL, INC. AND SUBSIDIARY

Condensed Consolidated Statements of Cash Flows

(Unaudited)

See accompanying notes to unaudited condensed consolidated financial statements.

POINT CAPITAL, INC. AND SUBSIDIARY

SCHEDULE OF INVESTMENTS

June 30, 2018

(Unaudited)

See accompanying notes to unaudited condensed consolidated financial statements.

POINT CAPITAL, INC. AND SUBSIDIARY

SCHEDULE OF INVESTMENTS

December 31, 2017

See accompanying notes to unaudited condensed consolidated financial statements.

POINT CAPITAL, INC. AND SUBSIDIARY

SCHEDULE OF INVESTMENTS BY INDUSTRY

June 30, 2018 (Unaudited) and December 31, 2017

The following table shows the portfolio composition by industry grouping based on fair value at June 30, 2018 and December 31, 2017

See accompanying notes to unaudited condensed consolidated financial statements.

POINT CAPITAL, INC. AND SUBSIDIARY

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2018

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, the Company elected to be treated for federal income tax purpose as a regulated investment company, or (“RIC”), under Subchapter M of the Internal Revenue Code of 1986, as amended, or (the “Code”). At March 31, 2017, the Company determined that it failed the RIC diversification test since one of the Company’s investments accounted for approximately 78% of the Company’s total assets. To correct the failure, the Company needed to dispose of the asset causing the failure within six months of the end of the quarter in which it identified the failure and the Company would have had to pay an excise tax of $50,000. The Company did not cure its failure to retain its status as a RIC and the Company does not intend to seek to obtain RIC status again. Accordingly, the Company is subject to income taxes at corporate tax rates.

The Company’s investment objective was to provide current income and capital appreciation. The Company intended 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 were made principally through direct investments in prospective portfolio companies.  However, the Company also purchased securities in private secondary transactions. The Company to a lesser extent also invested 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.”

Recently, the Company has not made any new investments and is considering various options, including liquidation, merging with another BDC or registered investment company, merging with an operating company and withdrawing of its election to be regulated as a BDC.

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 never made any investments and during 2017, this subsidiary was dissolved.

The Company’s investment activities are managed by Eric Weisblum, the Company’s 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 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.

All adjustments (consisting of normal recurring items) necessary to present fairly the Company’s financial position as of June 30, 2018, and the results of operations and cash flows for the periods ended June 30, 2018 and 2017 have been included. The results of operations for the three and six months ended June 30, 2018 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 financial statements have been derived from the audited financial statements of the Company for the fiscal year ended December 31, 2017, which are contained in the Company’s Form 10-K as filed with the Securities and Exchange Commission (“SEC”) on April 2, 2018. The consolidated balance sheet and consolidated schedule of investments as of December 31, 2017, contained herein, were derived from those 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 condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Making estimates requires management to exercise significant judgment. It is at least reasonably possible that the estimate of the effect of a condition, situation or set of circumstances that existed at the date of the financial statements, which management considered in formulating its estimate could change in the near term due to one or more future confirming events. Accordingly, the actual results could differ significantly from estimates. Significant estimates during the six months ended June 30, 2018 and 2017 include the valuation of the Company’s investments. 

POINT CAPITAL, INC. AND SUBSIDIARY

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2018

Cash and Cash Equivalents

The Company considers all highly liquid investments with a maturity of three months or less when acquired to be cash equivalents. The Company places its cash with high credit quality financial institutions. The Company’s accounts at these institutions are insured by the Federal Deposit Insurance Corporation (“FDIC”) up to $250,000 or by the Securities Investor Protection Corporation (“SIPC”) up to $250,000. During the 2018 and 2017 periods, 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 of $776,208 and $294,591 at June 30, 2018 and December 31, 2017, respectively, approximate their fair market value based on the short-term maturity of these instruments.

Securities Transactions

Securities transactions are recorded on a trade date basis. Securities transactions outside conventional channels, such as private transactions, are recorded as of the date the Company obtains the right to demand the securities purchased or to collect the proceeds from a sale, and incurs an obligation to pay for securities purchased or to deliver securities sold, respectively. The Company records interest and dividend income on an accrual basis to the extent that the Company expects to collect such amounts. Commissions and other costs associated with transactions involving securities, including legal costs, are included in the cost basis of purchases and deducted from the proceeds of sales.

Net Realized 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

The Company’s 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:

POINT CAPITAL, INC. AND SUBSIDIARY

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2018

On a quarterly basis, the Board of Directors of the Company (the “Board”), 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 adjusted 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 the Board, 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.

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 June 30, 2018 and December 31, 2017, the Company did not have any Controlled or Affiliated Investments. 

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.

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

Income Taxes

Through March 31, 2017, the Company 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.

POINT CAPITAL, INC. AND SUBSIDIARY

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2018

At March 31, 2017, the Company failed this diversification test since the Company’s investment in IPSIDY INC. (formerly ID Global Solutions Corporation) (“IDTY”) accounted for over 25% of the Company’s total assets. This discrepancy was not caused by the acquisition of any security. The failure was not a result of willful neglect. The Company did not cure its failure to retain its status as a RIC and the Company does not intend to seek to obtain RIC status again. Accordingly, beginning in 2017, the Company is subject to income taxes at corporate tax rates. The loss of the Company’s status as a RIC is not expected to have any impact on the Company’s financial position or results of operations.

Distributions from net investment income and net realized capital gains are determined in accordance with U.S. federal income tax regulations, which may differ from those amounts determined in accordance with U.S. 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 tax returns.

Beginning in 2017, deferred income tax assets and liabilities arise from temporary differences between the financial statements and tax basis of assets and liabilities, as measured by the enacted tax rates, which are expected to be in effect when these differences reverse. Deferred tax assets and liabilities are classified as current or non-current, depending upon the classification of the asset or liabilities to which they relate. Deferred tax assets and liabilities not related to an asset or liability are classified as current or non-current depending on the periods in which the temporary differences are expected to reverse. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized. 

On December 22, 2017, President Trump signed into law the Tax Cuts and Jobs Act (the “Act”), a tax reform bill which, among other items, reduces the current federal income tax rate to 21% from 34%. The rate reduction is effective January 1, 2018, and is permanent. The Act has caused the Company’s deferred income taxes to be revalued. As changes in tax laws or rates are enacted, deferred tax assets and liabilities are adjusted through income tax expense. Pursuant to the guidance within SEC Staff Accounting Bulletin No. 118 (“SAB 118”), as of December 31, 2017, the Company recognized the provisional effects of the enactment of the Act for which measurement could be reasonably estimated. Since the Company has provided a full valuation allowance against its deferred tax assets, the revaluation of the deferred tax assets did not have a material impact on any period presented. The ultimate impact of the Act may differ from these estimates due to the Company’s continued analysis or further regulatory guidance that may be issued as a result of the Act.

New Accounting Pronouncements

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”) (See Revenue Recognition above).

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

Other accounting standards that have been issued or proposed by FASB that do not require adoption until a future date are not expected to have a material impact on the consolidated financial statements upon adoption. The Company does not discuss recent pronouncements that are not anticipated to have an impact on or are unrelated to its consolidated financial condition, results of operations, cash flows or disclosures.

POINT CAPITAL, INC. AND SUBSIDIARY

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2018

NOTE 3 - PORTFOLIO INVESTMENTS

The following are the Company’s investments owned by levels within the fair value hierarchy at June 30, 2018:

The following are the Company’s investments owned by levels within the fair value hierarchy at December 31, 2017:

The following additional disclosures relate to the changes in fair value of the Company’s Level 3 investments during the six months ended June 30, 2018 and 2017:

At June 30, 2018 and December 31, 2017, level 3 investments consisted of the following:

POINT CAPITAL, INC. AND SUBSIDIARY

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2018

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 discount for lack of marketability 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 of Preferred Stock is currently convertible into 500 shares of common stock at the option of the holder (subject to a 9.99% beneficial ownership limitation) based on a conversion formula (the Stated Value, currently $100, divided by the Conversion Rate, currently $0.20.) The Conversion Rate may be adjusted upon the occurrence of stock dividends or stock splits or subsequent equity sales at a price lower than the current conversion rate. Each share has a $100 liquidation value. The holders of Preferred Stock are entitled to receive dividends on an as-converted basis if paid on Common Stock. 

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

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

Pursuant to the Preferred Stock Agreement, the Company agreed that as long as the purchasers of its Series A Preferred Stock are holding said shares, the Company would comply in all respects with 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.

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

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

On March 31, 2017, the 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.

POINT CAPITAL, INC. AND SUBSIDIARY

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2018

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 41.3% and 80.4% of the Company’s total assets at June 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, 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 its 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. Additionally, at June 30, 2018, approximately 97% of the fair value of the Company’s investment portfolio is concentrated in one portfolio company in the biometric technology industry, which gives rise to a risk of significant loss should the performance or financial condition of this industry deteriorate.

NOTE 6 - FINANCIAL HIGHLIGHTS

The following is a schedule of financial highlights for the six months ended June 30, 2018 and 2017:

NOTE 7 - RISKS AND UNCERTAINTIES

As a BDC, the Company must continue to comply with numerous rules and regulations under the 1940 Act, including without limitation, maintaining at least 70% of its total assets as “qualifying assets”, having a majority of non-interested directors on its Board, maintaining its securities under specific regulations, and the Company must meet certain diversification tests. As of June 30, 2018, the Company is being treated as BDC. Currently, the Company is not making any new investments and is considering various options, including liquidation, merging with another BDC or registered investment company or merging with an operating company and withdrawing of its election to be regulated as a BDC.

If the Company loses its status or decides to revoke its status as a BDC, this would have a material adverse effect on the Company’s ability to invest, and may have an effect on the value of the Company’s common stock.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

As used in this Form 10-Q, references to “Point Capital”, “Company”, “we”, “our” or “us” refer to Point Capital, Inc. unless the context otherwise indicates.

Forward-Looking Statements

The following discussion should be read in conjunction with our financial statements, which are included elsewhere in this Form 10-Q (the “Report”). This Report contains forward-looking statements which relate to future events or our future financial performance. In some cases, you can identify forward-looking statements by terminology such as “may”, “should”, “expects”, “plans”, “anticipates”, “believes”, “estimates”, “predicts”, “potential”, or “continue” or the negative of these terms or other comparable terminology. These statements are only predictions and involve known and unknown risks, uncertainties, and other factors that may cause our or our industry’s actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by these forward-looking statements.

While these forward-looking statements, and any assumptions upon which they are based, are made in good faith and reflect our current judgment regarding the direction of our business, actual results will almost always vary, sometimes materially, from any estimates, predictions, projections, assumptions or other future performance suggested herein. Except as required by applicable law, including the securities laws of the United States, we do not intend to update any of the forward-looking statements to conform these statements to actual results.

Overview

We are a closed-end, non-diversified investment company that has elected to be regulated as a business development company under the Investment Company Act of 1940, as amended (the “1940 Act”).  As a business development company, we are required to comply with certain regulatory requirements.  For instance, we generally have to invest at least 70% of our total assets in “qualifying assets,” including securities of private U.S. companies, cash, cash equivalents, U.S. government securities and high-quality debt investments that mature in one year or less.

Through March 31, 2017, we 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 do not intend to 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 is not expected to have any impact on our financial position or results of operations.

Currently, we are not making any new investments and are considering various options, including liquidation, merging with another BDC or registered investment company or merging with an operating company and withdrawing of our election to be regulated as a BDC.

On May, 31, 2018, our chief financial officer resigned and became a consultant to the Company providing accounting and financial reporting services.

Portfolio Update

As of June 30, 2018, we held 13 portfolio companies. All are non-controlled and non-affiliated investments.

Accelerize Inc. (ACLZ) – As of June 30, 2018, we owned 60,000 warrants of Accelerize Inc., an OTCQB listed company. Each warrant expires on August 18, 2020 and is exercisable at an exercise price of $1.32 per common share. ACLZ owns and operates CAKE, a Software-as-a-Service, or SaaS, platform providing online tracking and analytics solutions for advertisers and online marketers. The Company provides software solutions for businesses interested in optimizing their digital advertising spend.  

Actinium Pharmaceuticals, Inc. (ATNM) - As of June 30, 2018, we owned 29,250 warrants of Actinium Pharmaceuticals Inc., a NYSE American listed company. ATNM operates as a biopharmaceutical company that develops alpha particle immunotherapeutic and other radiopharmaceuticals for select applications. The warrants expire on February 11, 2019 and are exercisable at $6.50 per common share.

Arista Power, Inc. (ASPW) - On March 31, 2014, we completed a $100,000 investment in 9% convertible preferred stock and 750,000 warrants of Arista Power, Inc., a company that develops and manufactures renewable power equipment. ASPW produces wind turbines, solar energy systems, and custom-designed power management systems. The Preferred Stock is convertible into shares of common stock at a conversion price equal to $0.20 per common share. The warrants expire on March 31, 2019 and the exercise price of the warrants is $0.25 per common share. In March 2015, ASPW filed a form with the Securities and Exchange Commission to termination its registration under Section 12(g) of the securities exchange act of 1934. On December 31, 2015, we determined that the fair value of ASPW was zero and accordingly, for the year ended December 31, 2015, we recorded a realized loss on investments of $100,000.

Cesca Therapeutics, Inc. (KOOL) - As of June 30, 2018, we owned 825 warrants of Cesca Therapeutics, Inc., a NASDAQ-listed company, who operates as a supplier of products targeting the worldwide adult stem cell market. The company offers automated and semi-automated devices and single-use processing disposables that enable the collection, processing and cryopreservation of stem cells and other cellular tissues from cord blood and bone marrow used in regenerative medicine. These warrants are exercisable at a price of $31.00 per share and expire on June 18, 2019.

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. During 2016, the principal amount of this debenture was increased by $10,000 in connection with an extension of the debenture due date to December 2016 and then to June 2018. At June 30, 2018, the principal balance due on this debenture was $40,000. DatChat is a private company. As of December 31, 2017, we wrote down our investment in Datchat to $200.

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 is a private company. As of December 31, 2017, we wrote down our investment in Home Bistro to zero and recorded an unrealized loss of $150,000.

IPSIDY INC. (IDTY) - On June 25, 2015, we completed an investment of $100,000 in a 10% convertible debenture and 2,200,000 warrants of Ipsidy Inc. (formerly ID Global Solution Corp.), an OTCQB listed company. We had the right to convert all or any portion of the then aggregate outstanding principal amount of this debenture, together with any accrued and unpaid interest thereon, into shares of common stock of IDTY at a conversion price of $0.03 per share. Each warrant expires on June 25, 2020 and was exercisable at an exercise price of $0.05. In January 2017, we converted the $100,000 10% convertible debt and accrued interest receivable of $16,000 into 3,866,667 share common shares of IDTY. On April 23, 2018, we received 1,802,601 common shares of Ipsidy, Inc. upon the cashless exercise of 2,200,000 warrants of Ipsidy, Inc. 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 June 30, 2018, we owned 2,348,075 common shares of IDTY.

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 OTCPK listed company that manufactures medical devices that acquires and transmits health related data.

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 OTCPK 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 $0.30 per share or at such price that equals 85% of the price of the MMPW’s common stock or common stock equivalent sold at the next equity or convertible debt financing with gross proceeds to MMPW of no less than $1,000,000. Each warrant expires on July 6, 2019 and is exercisable at an exercise price equal to the lesser of (i) $0.75 or (ii) 85% of the exercise price of the warrants issued at the next equity or convertible debt financing with gross proceeds to MMPW of no less than $1,000,000. In October 2015, we received 15,000 common shares of MMPW as payment of accrued interest receivable. MMPW is a multimedia technology and publishing company that integrates print media with social media, and related online platforms, to deliver information and advertising to niche markets. On October 4, 2016, MMPW filed a voluntary petition under Chapter 11 of Title 11 under the United States Code. The cases were filed in the United States Bankruptcy Court, Southern District of Florida. Accordingly, at June 30, 2018, our investment in MMPW is valued at zero.  

Pish Posh Baby LLC - On July 2, 2014, we made an investment of $150,000 in Convertible Preferred Stock of PishPosh, Inc., a private company that operates a commerce platform serving parents and grandparents of newborns, infants, and toddlers. Convertible Preferred Stock in the amounts of $100,000 was convertible at $1.00 and $50,000 was convertible at $0.2666. In January 2016, pursuant to an Asset Purchase Agreement, all holders of notes, shares of its common stock, Series A Preferred Stock and warrants to purchase common stock exchange their securities into 420,000 membership units (the “Units”) issued by Pish Posh Baby LLC, a Delaware limited liability company (“PPB”). Accordingly, we currently own 19,155 membership units in PPB. 

Provectus BioPharmaceuticals Inc. (PVCT) – As of June 30, 2018, we owned 100,000 warrants in Provectus BioPharmaceuticals Inc., an OTCQB 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.

Healthier Choices Management Corp. (HCMC) - On November 14, 2014, we completed a $100,000 investment in a 7% convertible debenture and warrants of Healthier Choices Management Corp. (formerly, Vapor Corp.), an OTCPK listed company that markets and distributes electronic cigarettes. HCMC distributes electronic devices that vaporize a liquid solution, which provides users an experience akin to smoking without actual combustion. On August 3, 2015, the Company collected the principal amount of $100,000 and all unpaid and accrued interest. Additionally, in September 2015, pursuant to certain anti-dilutive provisions in the convertible debt agreement, the Company received common shares of HCMC. In February 2016, HCMC effected a 1 for 70 reverse stock split and in June 2016, HCMC effected a 1 for 20,000 reverse stock split. All share and warrant information has been adjusted to reflect 1 for 70 and 1 for 20,000 reverse split, which adjusted our share and warrant amounts to zero.

Xtant Medical Holdings, Inc. (XTNT) - As of June 30, 2018, we owned 959 warrants, adjust for a one for 12 reverse split, of Xtant Medical Holdings, Inc., a NYSE American listed company that produces human tissue for orthopedic procedures. XTNT produces allografts of human cancellous bone which has been demineralized. XTNT also produces medical devices for orthopedic, plastic, and cardiovascular surgery; and antimicrobial coatings for medical devices. The warrants expire on August 1, 2019 and the exercise price of the warrants is $85.44 per share.

Results of Operations

For the three and six months ended June 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.

Investment Income:  For the three months ended June 30, 2018 and 2017, we earned interest income of $18 and $6,540, and for the six months ended June 30, 2018 and 2017, we earned interest income of $26 and $13,974, 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 six months ended June 30, 2018 and 2017, total operating expenses consisted of the following:

Compensation expense: For the three and six months ended June 30, 2018 and 2017, compensation expense decreased by $5,000 and $5,000, respectively.

Professional fees: For the three months ended June 30, 2018, professional fees increased by $3,453, or 22.9%, as compared to the three months ended June 30, 2017. For the six months ended June 30, 2018, professional fees increased by $2,043, or 2.2%, as compared to the six months ended June 30, 2017.

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 June 30, 2018, filing fees decreased by $1,030, or 63.4%, as compared to the three months ended June 30, 2017. For the six months ended June 30, 2018, filing fees decreased by $266, or 9.6%, as compared to the six months ended June 30, 2017.

Insurance expense: For the three months ended June 30, 2018, insurance expense decreased by $125, or 1.4%, as compared to the three months ended June 30, 2017. For the six months ended June 30, 2018, insurance expense decreased by $251, or 1.4%, as compared to the six months ended June 30, 2017.

Bad debt expense: For the three months ended June 30, 2018 and 2017, we did not record any bad debt expense or recovery. For the six months ended June 30, 2018, we recorded a bad debt recovery of $5,000 as compared to bad debt expense of $6,750 for the six months ended June 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 June 30, 2018, general and administrative expenses increased by $1,182, or 16.9%, as compared to the three months ended June 30, 2017. For the six months ended June 30, 2018, general and administrative expenses increased by $2,813, or 21.1%, as compared to the six months ended June 30, 2017.

Net Investment loss: For the three months ended June 30, 2018 and 2017, net investment loss amounted to $76,090 and $71,088, respectively. For the six months ended June 30, 2018 and 2017, net investment loss amounted to $210,937 and $209,400, respectively.

Net Realized And Unrealized (Loss) Gain On Investments:

Net Realized Gain on Investments: During the three months ended June 30, 2018 and 2017, we disposed of certain positions recognizing a net realized gain (loss) of $287,222 and $(11,282), respectively. During the three months ended June 30, 2018, we recognized a net realized gain of $287,222 which consisted of gains of $348,761 from the sale of Ipsidy, Inc. offset by a realized loss of $61,539 from the expiration of certain warrants. During the six months ended June 30, 2018 and 2017, we disposed of certain positions recognizing a net realized gain of $521,473 and $1,034, respectively. During the six months ended June 30, 2018, we recognized a net realized gain of $521,473 which consisted of realized gains of $615,742 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 $61,539 due to the expiration of certain warrants. 

Net Change in Unrealized (Loss) Gain on investments: At June 30, 2018 and December 31, 2017, we had a cost basis in our portfolio companies of $718,155 and $876,358, respectively, with a fair market value of $558,125 and $1,320,229, respectively. The net change in unrealized gain (loss) on investments for the three months ended June 30, 2018 and 2017 was $(527,046) and $6,336, respectively. During the three months ended June 30, 2018, based on our analysis of the fair value of our investments in Ipsidy, Inc. and due to the reversal of unrealized gains upon sales of Ipsidy common shares, we recorded an unrealized loss of approximately $586,518. During the three months ended June 30, 2017, based on our analysis of the fair value of our investments in Ipsidy, Inc., we recorded an unrealized gain of approximately $1,597. The net change in unrealized gain (loss) on investments for the six months ended June 30, 2018 and 2017 was $(608,901) and $877,161, respectively. During the six months ended June 30, 2018, based on our analysis of the fair value of our investments in Ipsidy, Inc. and due to the reversal of unrealized gains upon sales of Ipsidy common shares, we recorded an unrealized loss of approximately $654,656. During the six months ended June 30, 2017, based on our analysis of the fair value of our investments in Ipsidy, Inc., we recorded an unrealized gain of approximately $949,338.

Net Increase (Decrease) in Net Assets Resulting from Operations For the three months ended June 30, 2018 and 2017, the net decrease in net assets resulting from operations was $315,914 and $76,034, respectively. For the six months ended June 30, 2018 and 2017, the net increase (decrease) in net assets resulting from operations was $(298,365) and $668,795, respectively.

Liquidity and Capital Resources

As of June 30, 2018, we had $776,208 in cash and cash equivalents, compared to $294,591 as of December 31, 2017, an increase of $481,617. We primarily used operating cash to pay professional fees and compensation expense.

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

The Company has no agreements or arrangements to raise capital.

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 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, cease our operations entirely, in which case, you will lose all of your investment. Recently, we have not made any new investments and are considering various options, including liquidation, merger with another BDC or registered investment company, merger with an operating company, and the withdrawal of our election to be regulated as a BDC.

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”) 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.

Cash and Cash Equivalents

We consider all highly liquid instruments purchased with an original maturity of three months or less and money market accounts to be cash equivalents.

Securities Transactions

Securities transactions are recorded on a trade date basis. Securities transactions outside conventional channels, such as private transactions, are recorded as of the date the Company obtains the right to demand the securities purchased or to collect the proceeds from a sale, and incurs an obligation to pay for securities purchased or to deliver securities sold, respectively. We record interest and dividend income on an accrual basis beginning on the trade settlement date (the date on which a financial transaction is settled and monies from the transaction have occurred) or the ex-dividend date, respectively, to the extent that we expect to collect such amounts. Commissions and other costs associated with transactions involving securities, including legal costs, are included in the cost basis of purchases and deducted from the proceeds of sales.

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

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

Valuation of Investments

Our investments consist of loans and securities issued by public and privately-held companies, including convertible debt, loans, equity warrants and preferred and common equity securities.

We apply the accounting guidance of Accounting Standards Codification Topic 820, “Fair Value Measurement and Disclosures” (“ASC 820”).  This guidance defines fair value as the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.  When determining the fair value measurements for assets and liabilities required to be recorded at fair value, we consider the principal or most advantageous market in which it would transact business and considers assumptions that marketplace participants would use when pricing the asset or liability, such as inherent risk, transfer restrictions, and risk of nonperformance.

The guidance also establishes a fair value hierarchy for measurements of fair value as follows:

On a quarterly basis, the Board of Directors (the “Board”) of the Company, in good faith, determines the fair value of investments in the following manner:

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

Investments without a readily determined market value are primarily valued using a market approach, an income approach, or both approaches, as appropriate. The market approach uses prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities (including a business). The income approach uses valuation techniques to convert future amounts (for example, cash flows or earnings) to a single present amount (discounted). The measurement is based on the value indicated by current market expectations about those future amounts. In following these approaches, the types of factors that we may take into account in fair value pricing our investments include, as relevant: available current market data, including relevant and applicable market trading and transaction comparables, applicable market yields and multiples, security covenants, call protection provisions, information rights, the nature and realizable value of any collateral, the portfolio company's ability to make payments, its earnings and discounted cash flows, the markets in which the portfolio company does business, comparisons of financial ratios of peer companies that are public, M&A comparables, and enterprise values, among other factors.

Because there is not a readily available market value for some of the investments in its portfolio, we value substantially all of our portfolio investments at fair value as determined in good faith by our board of directors, as described herein. Due to the inherent uncertainty of determining the fair value of investments that do not have a readily available market value, the fair value of our investments may fluctuate from period to period. Additionally, the fair value of our investments may differ significantly from the values that would have been used had a readily available market existed for such investments and may differ materially from the values that we may ultimately realize. Further, such investments are generally subject to legal and other restrictions on resale or otherwise are less liquid than publicly traded securities. If we were required to liquidate a portfolio investment in a forced or liquidation sale, we could realize significantly less than the value at which we have recorded it.

Revenue Recognition

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

Since March 31, 2017, we failed this diversification test since our investment in IPSIDY INC. (formerly ID Global Solutions Corporation) (“IDTY”) accounted for over 25% of our total assets (approximately 40.0% of total assets at June 30, 2018). As of the June 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 June 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 June 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 June 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. Since September 2017 and 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 were subject to income taxes at corporate tax rates.

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

None.

Item 3. Defaults Upon Senior Securities. 

None. 

Item 4. Mine Safety Disclosures. 

Not applicable. 

Item 5. Other Information. 

On March 6, 2017, the Board unanimously approved the proposal to seek stockholder approval to authorize the withdrawal of the Company’s election to be regulated as a BDC under the 1940 Act, referred to herein as the “Corporate Action.” The Board approved the proposal because it believes that it is in the best interests of the Company and its stockholders to make this change for various reasons including increased investment opportunities and greater access to capital through flexible financing activities. 

On April 11, 2017, the Majority Stockholders adopted resolutions by Written Consent authorizing the Board to undertake the Corporate Action. This Corporate Action will become effective immediately upon the Company’s filing of Form N-54C—“Notification of Withdrawal of Election to be Subject to Sections 55 Through 65 of the Investment Company Act of 1940” with the SEC (the “Notice of Withdrawal”). This Notice of Withdrawal, when filed, will immediately terminate the Company’s status as a BDC under the 1940 Act. This approval does not, however, guarantee that the Company will file its Notice of Withdrawal. Rather, the Company intends to file its Notice of Withdrawal only if it identifies suitable business opportunities which would allow the Company to conduct its business as an operating company rather than as an investment company, as described in Section 3 of the 1940 Act.

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.

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