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27-Mar-2008
Quarterly Report
Management's Discussion and Analysis of Financial Condition and Results of Operations
Introduction
The following discussion contains forward-looking statements. The words "anticipate," "believe," "expect," "plan," "intend," "estimate," "project," "will," "could," "may" and similar expressions are intended to identify forward-looking statements. Such statements reflect the Company's current views with respect to future events and financial performance and involve risks and uncertainties. Should one or more risks or uncertainties occur, or should underlying assumptions prove incorrect, actual results may vary materially and adversely from those anticipated, believed, expected, planned, intended, estimated, projected or otherwise indicated. Readers should not place undue reliance on these forward-looking statements.
The following discussion is qualified by reference to, and should be read in conjunction with the Company's financial statements and the notes thereto.
The Company is a public venture capital company. Its primary business is to invest in emerging growth companies. The Company intends to assist these companies in strategic and financial planning, in market strategies and to assist them in trying to achieve prudent and profitable growth. Management is devoting most of its efforts to general business planning, raising capital, and seeking appropriate investments.
The Company's primary investment objective is to increase its net assets by adding value to the portfolio companies and thus, increasing stockholder value. Management believes that the Company will be able to achieve these objectives by concentrating on investments in companies which are most likely to benefit from management's expertise in finance, strategic planning, operations, and technology.
The income that the Company derives from investments in portfolio companies consists of management fees, interest income, and appreciation (net of depreciation) in the values of portfolio companies. At the time of disposition, the disposition proceeds of these portfolio securities will most likely make up most of the Company's cash revenues.
Consequently, the Company's success or failure will depend on investing in companies which appreciate in value more than other companies in which the Company invests depreciate in value. There is no assurance that the Company will be able to do so.
Pursuant to the requirements of the Investment Company Act of 1940, as amended ("1940 Act"), the Board of Directors is responsible for determining in good faith the fair value of the securities and assets held by the Company for which market quotations are not readily available. In making its determination, the Board of Directors may consider valuation appraisals provided by independent financial experts. The Company expects to pay a professional fee each time such a valuation is provided. With respect to private equity securities, each investment is valued using industry valuation benchmarks, and then the value may be assigned a discount reflecting the particular nature of the investment.
The Board of Directors bases its determination of value on, among other things, applicable quantitative and qualitative factors. These factors may include, but are not limited to, the type of securities, the nature of the business of the portfolio company, the marketability of the securities, the market price of unrestricted securities of the same issue (if any), comparative valuation of securities of publicly traded companies in the same or similar industries, current financial conditions and operating results of the portfolio company, sales and earnings growth of the portfolio company, operating revenues of the portfolio company, competitive conditions, and current and prospective conditions in the overall economy and the equity markets.
Without a readily recognized market value, the estimated value of some portfolio securities may differ significantly from the values that would be placed on the portfolio if there existed a ready market for such equity securities.
Financial Condition
The Company's total assets, net assets, net asset value per share, unrealized
appreciation or depreciation are set forth in the following table:
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At the Quarter Ended | At the Year Ended |
| | July 31, 2007 | April 30, 2007 |
| TOTAL ASSETS | $ $5,557,301 | $6,736,345 |
| NET ASSETS | $2,667,599 | $4,097,464 |
| NET ASSET VALUE PER SHARE | $0.49 | $0.75 |
| NET UNREALIZED APPRECIATION/(DEPRECIATION) ON INVESTMENTS | ($1,473,463) | ($406,953)
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The changes in total assets, net assets and net asset value per share for the three months ended July 31, 2007 were primarily attributable to:
SIVOO Holdings, Inc. ("SIVOO") average valuation on restricted and unrestricted shares decreased from $0.79 per share to $0.27 per share during the three months ended July 31, 2007. The Company's investment in SIVOO common stock had a net unrealized depreciation of $708,997 for the three months ended July 31, 2007.
The Company's investment in SIVOO warrants were valued at $126,000 at July 31, 2007 compared to $308,000 at April 30, 2007 for a net unrealized depreciation of $182,000 for the three months ended July 31, 2007.
Theater Xtreme Entertainment Group, Inc. ("TXEG") average valuation on restricted and unrestricted shares decreased from $0.61 per share to $0.26 per share during the three months ended July 31, 2007. During the three months ended July 31, 2007, the Company sold 500,000 shares a sales price of $324,000 with a cost of $344,290 resulting in a realized loss of $20,290. A warrant was received in July 2007 with an initial value of $277,000 for services and had a value of $156,000 at July 31, 2007 for a net unrealized depreciation of $121,000. During July 2007, 650,000 shares of common stock were acquired for a services valued at $396,500. The Company's investment in TXEG common stock had a net unrealized depreciation of $165,281 for the three months ended July 31, 2007.
Third-Order Nanotechnologies, Inc. ("TDON") average valuation on restricted and unrestricted shares decreased from $0.68 per share to $0.56 per share during the three months ended July 31, 2007. The Company's investment in TDON common stock had a net unrealized depreciation of $144,000 for the three months ended July 31, 2007. The Company's investment in TDON warrants were valued at $303,000 at July 31, 2007 compared to $348,000 at April 30, 2007, for a net unrealized depreciation of $45,000 for the three months ended July 31, 2007.
Neptune Industries ("NPDI") average valuation on restricted and unrestricted shares increased from $0.43 to $0.45 per share during the three months ended July 31, 2007. The Company's investment in NPDI common stock has a net unrealized depreciation of $953 for the three months ended July 31, 2007.
Gelstat Corporation ("GSAC") average valuation on restricted and unrestricted shares increased from $0.07 to $0.12 per share during the three months ended July 31, 2007. The Company's investment in GSAC common stock has a net unrealized appreciation of $11,071 for the three months ended July 31, 2007.
The decrease in cash of $108,190.
The increase in accounts payable and accrued expenses of $27,174.
The increase in deferred tax asset of $51,000.
The advances from shareholder of $88,000.
The increase in deferred revenue of approximately $189,000, which is due mainly to a decrease in deferred revenue of approximately $485,000 ($56,000 for Theater Xtreme Entertainment Group, Inc., $197,000 for Extreme Visual Technologies, Inc. and $232,000 for Third-Order Nanotechnologies, Inc.) which was earned, offset by an increase of deferred revenue for Theater Xtreme Entertainment Group, Inc. of approximately $674,000 which the Company is to earn over a twelve month period beginning July 1, 2007.
The decrease in current income taxes payable of approximately $31,000.
The subtraction from Net Capital of ($23,966) which consists of an adjustment for FIN 48 of ($26,300) offset by $2,334 of share-based compensation expense.
The Company's unrealized appreciation (depreciation) varies significantly from period to period as a result of the wide fluctuation in the value of the Company's portfolio securities. For example, the Company suffered an unrealized loss of ($890,996) on its holdings of SIVOO Holdings, Inc. for the three months ended July 31, 2007 as a result of a decline in the value of the portfolio shares from $1,391,961 to $500,965 during such time period. By contrast the Company enjoyed an unrealized gain of $557,861 on its holdings of SIVOO Holdings, Inc. for the year ended April 30, 2007.
The Company had unrealized appreciation (depreciation) of ($1,473,463) at July 31, 2007 compared to unrealized appreciation (depreciation) of ($444,222) at July 31, 2006 and unrealized appreciation (depreciation) of ($406,953) at April 30, 2007.
The Company's financial condition is dependent on a number of factors including the ability of each portfolio company to effectuate its respective strategies with the Company's help. The Company has invested a substantial portion of its assets in development stage or start-up companies. These businesses are frequently thinly capitalized, unproven, small companies that may lack management depth, and may be dependent on new or commercially unproven technologies, and may have no operating history.
At July 31, 2007, $4,867,630 or 88% of the Company's assets consisted of investments, of which net unrealized losses before the income tax effect were ($1,473,463). A deferred tax benefit on account of unrealized losses has been estimated at approximately ($428,000). At July 31, 2007, the Company's holdings of Extreme Visual Technologies, Inc., Creative Energy Solutions, Inc., and Third-Order Nanotechnologies, Inc. were valued at $2,000,000, $1,000,000 and $975,000 respectively, which represented in the aggregate approximately 80% of the total Company portfolio at that date.
Because the portfolio companies tend to be at early stages of their business development, and because there are no markets for the securities of some portfolio companies, the Company may find it difficult to liquidate any of its investments in the near future. See "Liquidity and Capital Resources" below.
Results of Operations
The Company's financial statements have been prepared in conformity with the United States generally accepted accounting principles. On this basis, the principal measure of an investment company's financial performance during a time period is the net change in net assets during such period. Such change results from (i) income from operations, net of operating expenses, (ii) net realized gain or loss on investment, which is the difference between the proceeds received from dispositions of portfolio securities and their stated cost, and
(iii) increase (decrease) in unrealized appreciation or depreciation on investments.
Company expenses include salaries and wages, professional fees, office expenses and supplies, rent, travel, and other normal business expenses. General and administrative costs include depreciation, investor relations and other overhead costs.
Three months ended July 31, 2007 compared to the three months ended July 31, 2006
For the three months ended July 31, 2007 the Company had revenue for services in the amount of $508,934 compared to $592,422 for the three months ended July 31, 2006. During the three months ended July 31, 2007 95% of the Company's revenue for services was received in the form of equity securities compared to 99% for the three months ended July 31, 2006.
Total operating expenses for the three months ended July 31, 2007 were $496,505, the principal components of which were professional fees of $420,269, consisting primarily of $376,000 investor relations expense and approximately $40,000 legal expense, payroll of $23,732 (which includes $2,334 of share based compensation expense), $23,255 of insurance expense and $10,826 of interest expense. By comparison, total operating expenses for the three months ended July 31, 2006 were $886,691, the principal components of which were payroll of $308,014, professional fees of $519,648, insurance of $19,199 and travel and entertainment of $22,090.
The Company realized a gain from operations of $12,429 for the three months ended July 31, 2007 compared to a loss from operations of $294,269 for the three months ended July 31, 2006.
Liquidity and Capital Resources
From inception, the Company has relied for liquidity on the infusion of capital through capital share transactions. The Company only had about $2,500 of cash at July 31, 2007. Consequently, payment of operating expenses and cash with which to make investments will have to come similarly from equity capital to be raised from investors or from borrowed funds. The Company has borrowed $425,000, on a short term basis, and has received $238,000 in advances from a shareholder. There is no assurance that the Company will be successful in raising such additional equity capital or additional borrowings or if it can, that it can do so at a price that management believes to be appropriate. Under the Investment Company Act of 1940, as amended ("1940 Act"), the Company may not sell shares of common stock at less than its net asset value except in certain limited circumstances.
At this time, the Company does not plan to dispose of any of its current portfolio securities to meet operational needs. However, despite its plans, the Company may be forced to dispose of a portion of these securities if it ever becomes short of cash. Any such dispositions may have to be made at inopportune times, which may have a material adverse effect on the proceeds received from such dispositions.
Critical Accounting Estimates
Valuation
The 1940 Act requires periodic valuation of each investment in the Company's portfolio to determine the Company's net asset value. Under the 1940 Act, unrestricted securities with readily available market quotations are to be valued at the current market value; all other assets must be valued at "fair value" as determined in good faith by or under the direction of the Board of Directors.
The Board of Directors is responsible for (1) determining overall valuation guidelines and (2) ensuring the valuation of investments within the prescribed guidelines.
Fair value is generally defined as the amount for which an investment could be sold in an orderly disposition over a reasonable time. Generally, to increase objectivity in valuing assets, external measures of value, such as public markets or third-party transactions, are used whenever possible. Valuation is not based on long-term work-out value, nor immediate liquidation value, nor incremental value for potential changes that may take place in the future. The values assigned to Company investments are based on available information and do not necessarily represent amounts that might ultimately be realized, as such amounts depend on future circumstances and cannot reasonably be determined until the individual investments are actually liquidated.
The Company's valuation policy and methodology with respect to its portfolio companies are as follows:
A.
Cost: The cost method is based on the Company's original cost. This method is generally used in the early stages of a portfolio company's development until significant events occur subsequent to the date of the original investment that dictate a change to another valuation method. Some examples of these events are:
(1) a major recapitalization; (2) a major refinancing; (3) a significant third-party transaction; (4) the development of a meaningful public market for such company's common stock; and (5) significant changes in such company's business.
B.
Private Market: The private market method uses actual, executed, historical transactions in a company's securities by responsible third parties as a basis for valuation. The private market method may also use, where applicable, unconditional firm offers by responsible third parties as a basis for valuation.
C.
Public Market: The public market method is used when there is an established public market for the class of the portfolio company's securities held by the Company and the shares held by the Company bear no legal or contractual restrictions. Securities for which market quotations are readily available are carried at market value as of the time of valuation. Market value for securities traded on securities exchanges is the last reported sales price on the day of valuation. For other securities traded in the over-the-counter market and listed securities for which no sale was reported on a day, market value is the last quoted bid price on such day.
D.
Public Market/Restricted Securities: When the Company holds securities which are publicly traded but under significant legal or contractual restrictions, the Board of Directors starts with the public market value of the shares as set forth in (C) above and applies an appropriate discount based on the nature and remaining duration of the restrictions.
Analytical Method: The analytical method is generally used to value an investment position when there is no established public or private market in the company's securities or when the factual information available to the Company dictates that an investment should no longer be valued under either the cost or private market method. This valuation method is inherently imprecise and, ultimately, the result of reconciling the judgments of our directors based on the data available to them. The resulting valuation, although stated as a precise number, is necessarily within a range of values that vary depending upon the significance attributed to the various factors being considered. Some of the factors considered may include the financial condition and operating results of the portfolio company, the long-term potential of the business of the company, the values of similar securities issued by companies in similar businesses, the proportion of the portfolio company's securities owned by the Company and the nature of any rights to require the portfolio company to register restricted securities under applicable securities laws.
Item 3
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