31-Jul-2007
Annual Report
Item 7.
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, 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:
| At and for the Year Ended |
At and for the Year Ended |
| |
April 30, 2007 |
April 30, 2006 |
| TOTAL ASSETS |
$6,353,346 |
$3,546,337 |
| NET ASSETS |
$4,379,464 |
$2,243,790 |
| NET ASSET VALUE PER SHARE |
$.81 |
$0.46 |
| NET UNREALIZED APPRECIATION/(DEPRECIATION) ON INVESTMENTS |
($58,953) |
($1,376,456) |
The changes in total assets, net assets and net asset value per share for the year ended April 30, 2007 were primarily attributable to:
†
The net unrealized (depreciation) on investments of ($58,953) mainly due to a decrease in the value of the shares of Third-Order Nanotechnologies, Inc., Theater Xtreme Entertainment Group, Inc., and Gelstat Corporation offset in part by an increase in the value of the shares of SIVOO Holdings, Inc. and Neptune Industries, Inc.
†
The increase of 400,000 shares in the Company's investment in SIVOO Holdings, Inc.
†
The net increase of 412,500 shares in the Company's investment in Third-Order Nanotechnologies, Inc. The Company sold 587,500 unrestricted shares of Third- Order, of which 495,000 were sold to allow Third-Order to establish an Investor Relations program and 92,500 shares were sold to enhance the Company's working capital. The Company acquired 1,000,000 restricted shares of Third-Order Nanotechnologies, Inc. as payment for management services to be provided, under contract, to Third-Order by the Company.
†
The Company's investment in 2,000,000 shares of Extreme Visual Technologies, Inc.
†
The Company's investment in 2,000,000 shares of Creative Energy Solutions, Inc.
†
The Company's sale and liquidation of its investment in 1,000,000 shares of Accelapure Corporation for $100.
†
The increase in accounts payable and accrued expenses of approximately $157,000.
†
The increase in current income taxes payable of $316,000.
†
The increase in notes payable of $425,000.
†
The advances from shareholder of $150,000.
†
The decrease in subscription payable of $100,000.
†
The decrease in deferred revenue of approximately $258,000 which is due mainly to an increase of deferred revenue for Extreme Visual Technologies, Inc. of $1,000,000 which the Company is to earn over a twelve month period beginning July 12, 2006, the increase in deferred revenue for Creative Energy Solutions, Inc. of $1,000,000 which the Company earned over a six month period beginning August 1, 2006 and the increase in deferred revenue for Third-Order Nanotechnologies, Inc. which the Company is to earn over a twelve month period beginning February 28, 2007 offset by a decrease in deferred revenue of approximately $2,006,000 ($1,000,000 for Creative Energy Solutions, Inc., $803,000 for Extreme Visual technologies, Inc. and $203,000 for Third-Order Nanotechnologies, Inc.) which was earned and $833,000 for Accelapure Corporation which shares were sold.
†
The decrease in deferred taxes of approximately $18,000.
†
The addition to Net Capital of $1,803,162 which consists of the following:
†
The sale of 520,640 of the Company's shares for proceeds of $1,041,280
†
Share-based compensation expense of $187,946
†
Stock options granted for operating expenses of $447,000
†
Officer's deferred compensation surrendered of $575,531
†
Dividend of portfolio stock - ($448,595)
The Company's unrealized appreciation (depreciation) varies significantly from year to year as a result of the wide fluctuation in the value of the Company's portfolio securities. For example, the Company enjoyed cumulative a unrealized gain of $557,861 on its holdings of SIVOO Holdings, Inc. for the year ended April 30, 2007 compared to a cumulative unrealized gain of $152,389 for the year ending April 30, 2006 as a result of an increase of $0.28 in the value of the portfolio shares during such time period and the addition of 400,000 shares of SIVOO Holdings, Inc. to the portfolio. By contrast the company suffered a cumulative unrealized loss of ($45,257) on its holdings of Theater Xtreme Entertainment Group, Inc. for the year ended April 30, 2007 compared to an unrealized gain of $373,750 for the year ended April30, 2006.
The Company had cumulative unrealized appreciation of $733,068 at April 30, 2007 compared to cumulative unrealized appreciation of $792,020 at April 30, 2006.
At April 30, 2007 and April 30, 2006, $6,011,882 or 94.6% and $3,331,620 or 93.9% of the Company's assets, respectively, consisted of investments, of which net unrealized gains before the income tax effect were $733,068 and $792,020, respectively. Deferred taxes have been estimated at approximately $50,000 and $68,000, respectively.
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 a Company's financial performance is the net increase in net assets. Net assets comprise (i) income from operations, (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 on investments.
Company expenses include salaries and wages (but salaries did not accrue until November 15, 2004), professional fees, office expenses and supplies, rent, travel, and other normal business expenses. General and administrative costs include rent, depreciation, office, investor relations and other overhead costs.
Year ended April 30, 2007 compared to the year ended April 30, 2006 and the period August 16, 2004 (date of inception) to April 30, 2005.
For the year ended April 30, 2007 the Company had revenue for services in the amount of $3,236,636 compared to $894,745 for the year ended April 30, 2006 and $211,250 for the period August 16, 2004 (date of inception) to April 30, 2005, 97% of the Company's revenue for services was received in the form of equity securities for the year ended April 30, 2007 compared to 99% for the year ended April 30, 2006 and 100% for the period August 16, 2004 (date of inception) to April 30, 2005.
Total operating expenses for the year ended April 30, 2007 were $2,246,753, the principal components of which were professional fees of $1,279,295, of which $447,000 represents option expense, approximately $330,000 investor relations expense, approximately $300,000 legal expense, approximately $97,000 consulting expense and approximately $62,000 auditing and accounting expense. Additionally, principal components of operating expenses include $706,934 for payroll which includes $187,946 of share based compensation expense, $68,410 of insurance expense and $48,337 of travel and entertainment expense, By comparison, total operating expenses for the year ended April 30, 2006 were $990,802, the principal components of which were payroll of $508,632, professional fees of $240,640, insurance of $73,124 and travel and entertainment of $60,437 and for the period August 16, 2004 (date of inception) to April 30, 2005 total operating expenses were $736,063, the principal components of which were payroll of $232,478, merger costs of $281,410 and professional fees of $139,271.
The Company realized a profit from operations of $989,883 for the year ended April 30, 2007 compared to a loss from operations of ($96,057) for the year ended April 30, 2006 and a loss from operations of ($524, 813) for the period August 16, 2004 (date of inception) to April 30, 2005.
The company had net cumulative unrealized appreciation of $733,067 at year end April 30, 2007 compared to cumulative unrealized appreciation of $792,020 at year end April 30, 2006 and $2,168,476 at the period ended August 16, 2004 (date of inception) to April 30, 2005.
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 $110,000 of cash at April 30, 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, from Noteholders and $150,000 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, 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.
Item 7A.
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