See accompanying notes to unaudited condensed
consolidated financial statements.
See accompanying notes to unaudited condensed
consolidated financial statements.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
SEPTEMBER 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 previously 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 met its investment objectives. Through September 29, 2018, the Company
met the definition of an investment company in accordance with the guidance under Accounting Standards Codification Topic 946
“
Financial Services – Investment Companies
.”
On
September 29, 2018, the Company 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 (See Note 2 – Basis of Presentation).
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.
On September 29, 2018 (the “Closing Date”),
the Company entered into an Asset Purchase Agreement (“APA”) with Blind Faith Concepts Holdings, Inc. a Nevada corporation
(the “Seller”) whereby the Company completed the acquisition of 100% of the assets of “NFID” from the Seller
(See Note 3).
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.
Effective
September 29, 2018, following authorization by our shareholders, the Company withdrew its 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, the Company was 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, the Company 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 and cash flows for
Investment Company Accounting.
In
accordance with FASB Accounting Standards Codification (ASC) Topic 946 – Financial Services – Investment Company,
the Company is making this change to its 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, the Company
refers 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.
POINT CAPITAL, INC. AND SUBSIDIARY
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
SEPTEMBER 30, 2018
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.
All
adjustments (consisting of normal recurring items) necessary to present fairly the Company’s financial position as of September
30, 2018, and the results of operations and cash flows for the periods ended September 30, 2018 and 2017 have been included. The
results of operations for the three and nine months ended September 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 nine months ended September 30, 2018 and 2017 include the valuation of the Company’s investments, the
fair value of assets acquired and the fair value of shares issued for the assets acquired.
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 $626,115 and $294,591 at September 30, 2018 and December
31, 2017, respectively, approximate their fair market value based on the short-term maturity of these instruments.
Note
Receivable
The
Company recognizes an allowance for losses on note receivable in an amount equal to the estimated probable losses net of recoveries.
The allowance is based on an analysis of historical bad debt experience, current note receivable aging, and expected future write-offs,
as well as an assessment of specific identifiable accounts considered at risk or uncollectible. The expense associated with the
allowance for doubtful accounts is recognized as general and administrative expense.
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.
POINT CAPITAL, INC. AND SUBSIDIARY
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
SEPTEMBER 30, 2018
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.
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 Gain or Loss and Net Change in Unrealized Appreciation or Depreciation of Equity Investments (Investment Company Accounting)
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 Equity Investments
Through
September 29, 2018, the Company’s equity 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.
The
Company 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, the Company 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:
|
●
|
Level
1 - Valuations based on unadjusted quoted market prices in active markets for identical assets or liabilities.
|
|
|
|
|
●
|
Level
2 - Valuations based on inputs other than quoted market prices that are observable, either directly or indirectly, such as
quoted prices in active markets for similar assets or liabilities, quoted prices for identical or similar assets or liabilities
in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially
the full term of the assets or liabilities.
|
|
●
|
Level
3 - Valuations based on inputs that are unobservable and where there is little, if any, market activity at the measurement
date. The inputs for the determination of fair value may require significant management judgment or estimation and is based
upon management’s assessment of the assumptions that market participants would use in pricing the assets or liabilities.
These investments include debt and equity investments in private companies or assets valued using the market or income approach
and may involve pricing models whose inputs require significant judgment or estimation because of the absence of any meaningful
current market data for identical or similar investments. The inputs in these valuations may include, but are not limited
to, capitalization and discount rates, earnings before interest, taxes, depreciation and amortization (“EBITDA”)
multiples, and discounts for lack of marketability.
|
Through
September 29, 2018, on a quarterly basis, the Board of Directors of the Company (the “Board”), 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 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.
POINT CAPITAL, INC. AND SUBSIDIARY
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
SEPTEMBER 30, 2018
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 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 valued 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 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 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.
Subsequent
to September 29, 2018, the Company categorizes its 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). The Company reviews 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.
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.
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 did not
have any impact on the Company’s financial position or results of operations.
POINT CAPITAL, INC. AND SUBSIDIARY
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
SEPTEMBER 30, 2018
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.
NOTE
3 –
ACQUISITION
On
September 29, 2018 (the “Closing Date”), the Company entered into an Asset Purchase Agreement (“APA”)
with Blind Faith Concepts Holdings, Inc. a Nevada Corporation (the “Seller”) whereby the Company 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. The Company plans on continuing
product development to fully launch the product. The Company’s acquisition of the NFID assets gives the Company access to
the growing market for unisex products.
POINT CAPITAL, INC. AND SUBSIDIARY
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
SEPTEMBER 30, 2018
As
a result of the APA, the Company has elected to no longer be deemed a “Business Development Company” as defined by
the Investment Company Act of 1940, as amended from time to time (the “Act”). The withdrawal was generally approved
by the shareholders of the Company on April 11, 2017, as evidenced on the Definitive Information Statement pursuant to Section
14(c) of the Securities Exchange Act of 1934 filed on June 5, 2017. The Board, under authority granted by the shareholders, approved
the withdrawal on September 27, 2018. On September 28, 2018, the Company filed Form N-54C, officially withdrawing its election
to be subject to sections 55 through 65 of the Act.
Pursuant
to the terms of the APA, 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.
The
fair value of the assets acquired and liabilities assumed were based on management’s initial estimates of the fair values
on September 29, 2018. Based upon the purchase price allocation, the following table summarizes the estimated fair value of the
assets acquired at the date of acquisition:
Prepaid expenses
|
|
$
|
17,500
|
|
Intangible assets
|
|
|
282,500
|
|
Total assets acquired at fair value
|
|
|
300,000
|
|
Total purchase consideration
|
|
$
|
300,000
|
|
The
assets acquired are recorded at their initial estimated fair values on the acquisition date with subsequent changes recognized
in earnings or loss. These estimates are inherently uncertain and are subject to refinement. Management develops estimates based
on assumptions as a part of the purchase price allocation process to value the assets acquired as of the asset acquisition date.
As a result, during the purchase price measurement period, which may be up to one year from the asset acquisition date, the Company
may record adjustments to the assets acquired, with the corresponding offset to goodwill. After the purchase price measurement
period, the Company will record adjustments to assets acquired in operating expenses in the period in which the adjustments were
determined.
The
purchase price exceeded the fair value of the assets acquired by $282,500 which was initially allocated as follows:
Brand ambassador agreement
|
|
$
|
105,295
|
|
Trademarks
|
|
|
29,440
|
|
Goodwill
|
|
|
147,765
|
|
Total intangible assets acquired
|
|
$
|
282,500
|
|
Goodwill
recorded is not expected to be deductible for U.S. income tax purposes.
The
Company valued the three trademarks acquired at their historical cost of $29,440 which approximates fair market value. The Company
valued the Brand Ambassador Agreement using the estimated fair value of required social media posts by the artist/singer Max Schneider,
known as Max (“MAX”). MAX is considered a social media influencer with over 600,000 Instagram followers and over 1.5
million YouTube subscribers.
Pursuant
to the Brand Ambassador Agreement, the Company will incur a minimum cash payment of $35,000 related to a minimum royalty payment
of which $17,500 was paid prior to the Closing Date. The remaining $17,500 is due on January 27, 2019, the six month anniversary
of the Effective Date of the Brand Ambassador Agreement.
NOTE
4 -
EQUITY INVESTMENTS
At
September 30, 2018, equity investments, at fair value, consisted of marketable equity instruments which are treated as a trading
security since there is an active market in such equity investment and the Company is actively selling this security. 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). The Company reviews equity investments,
at fair value for impairment whenever circumstances and situations change such that there is an indication that the carrying amounts
may not be recovered.
POINT CAPITAL, INC. AND SUBSIDIARY
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
SEPTEMBER 30, 2018
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.
The
following are the Company’s equity investments owned by levels within the fair value hierarchy at September 30, 2018:
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
Common Stock
|
|
$
|
391,698
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
391,698
|
|
LLC Membership
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Warrants
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Total Investments
|
|
$
|
391,698
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
391,698
|
|
The
following are the Company’s investments owned by levels within the fair value hierarchy at December 31, 2017:
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
Common Stock
|
|
$
|
853,163
|
|
|
$
|
-
|
|
|
$
|
200
|
|
|
$
|
853,363
|
|
LLC Membership
|
|
|
-
|
|
|
|
-
|
|
|
|
9,194
|
|
|
|
9,194
|
|
Convertible Preferred Stock
|
|
|
-
|
|
|
|
2,600
|
|
|
|
-
|
|
|
|
2,600
|
|
Warrants
|
|
|
-
|
|
|
|
-
|
|
|
|
455,072
|
|
|
|
455,072
|
|
Total Investments
|
|
$
|
853,163
|
|
|
$
|
2,600
|
|
|
$
|
464,466
|
|
|
$
|
1,320,229
|
|
The
following additional disclosures relate to the changes in fair value of the Company’s Level 3 investments during the nine
months ended September 30, 2018 and 2017 (Investment Company Accounting):
|
|
Nine Months Ended
September 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
Balance at beginning of year
|
|
$
|
464,466
|
|
|
$
|
474,390
|
|
Interest receivable converted to common stock, at cost
|
|
|
-
|
|
|
|
16,000
|
|
Net change in unrealized appreciation on investments
|
|
|
(414,730
|
)
|
|
|
115,810
|
|
Net transfers out of Level 3 (1)
|
|
|
(49,736
|
)
|
|
|
(100,000
|
)
|
Balance at end of period
|
|
$
|
-
|
|
|
$
|
506,200
|
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
(Unaudited)
|
|
|
|
|
Net unrealized depreciation for Level 3 investments at period end
|
|
$
|
-
|
|
|
$
|
(329,598
|
)
|
(1)
|
Transfers
occurred due to the expiration of the restriction under Rule 144A of the Securities Act and to the development of an active
market. A review of fair value hierarchy classifications is conducted on a quarterly basis. Changes in the observability
of valuation inputs may result in a reclassification for certain financial assets or liabilities. Reclassifications
impacting Level 3 of the fair value hierarchy are reported as transfers in/out of the Level 3 category as of the beginning
of the period in which the reclassifications occur.
|
At
December 31, 2017, level 3 investments consisted of the following:
Investment Type
|
|
Fair Value at
December 31,
2017
|
|
|
Valuation Technique
|
|
Unobservable
inputs
|
|
Input
|
Common Stock
|
|
$
|
200
|
|
|
Recent Transactions
|
|
N/A
|
|
N/A
|
LLC Membership Units
|
|
$
|
9,194
|
|
|
Recent Transactions
|
|
N/A
|
|
N/A
|
Warrants
|
|
$
|
455,072
|
|
|
Black-Scholes Option Pricing Model
|
|
Volatility
|
|
72.8% to 120.4%
|
|
|
$
|
464,466
|
|
|
|
|
|
|
|
POINT CAPITAL, INC. AND SUBSIDIARY
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
SEPTEMBER 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
5 –
NOTE RECEIVABLE
On
September 28, 2018, the Company 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 the Company 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, the Company 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, the Company has recorded a note receivable of
$100,000 related to the promissory note receivable agreement. Subsequent to September 30, 2018, the Company funded the remaining
$100,000 (see Note 11).
NOTE
6 –
INTANGIBLE ASSETS
At
September 30, 2018 and December 31, 2017, intangible assets consisted of the following:
|
|
Useful life
|
|
September 30,
2018
|
|
|
December 31,
2017
|
|
Trademarks
|
|
N/A
|
|
$
|
29,440
|
|
|
$
|
-
|
|
Brand ambassador agreement
|
|
1 year
|
|
|
105,295
|
|
|
|
-
|
|
Goodwill
|
|
N/A
|
|
|
147,765
|
|
|
|
-
|
|
|
|
|
|
|
282,500
|
|
|
|
-
|
|
Less: accumulated amortization
|
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
$
|
282,500
|
|
|
$
|
-
|
|
Amortization
of intangible assets attributable to future periods is as follows:
Year ending:
|
|
Amount
|
|
2018
|
|
$
|
26,324
|
|
2019
|
|
|
78,971
|
|
|
|
$
|
105,295
|
|
NOTE
7 -
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.
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).