Organizational
History
Waterside
Capital Corporation (the “Company”) was incorporated in the Commonwealth of Virginia on July 13, 1993 and was
a closed-end investment company licensed by the Small Business Administration (the “SBA”) as a Small Business Investment
Corporation (“SBIC”). The Company previously made equity investments in, and provided loans to, small businesses to
finance their growth, expansion, and development. Under applicable SBA regulations, the Company was restricted to investing only
in qualified small businesses as contemplated by the Small Business Investment Act of 1958. As a registered investment company
under the Investment Company Act of 1940, as amended (the “Investment Company Act”), the Company’s investment
objective was to provide its shareholders with a high level of income, with capital appreciation as a secondary objective. The
Company made its first investment in a small business in October 1996.
On
March 30, 2010, the SBA notified the Company that its account had been transferred to liquidation status and that the outstanding
debentures of $16.1 million plus accrued interest (the “
Debentures
”) were due and payable within fifteen
days of the date of the letter. The Company did not possess adequate liquid assets to make this payment. The Company negotiated
terms of a settlement agreement with the SBA effective September 1, 2010, which allowed the Company’s management
to liquidate the portfolio so long as there are no events of default. The Debentures were repurchased by the SBA in September
2010, represented by a Note Agreement between the SBA and the Company. The Note Agreement had a maturity of March 31, 2013.
In the event of a default, the SBA had the ability to seek receivership.
On
May 24, 2012 the SBA delivered to the Company a notice of an event of default for failure to meet the principal repayment
schedule under the Note Agreement (the “
Notice
”). Under the terms of the Notice and the Note Agreement the
SBA maintained a continuing right to terminate the Note Agreement and appoint a receiver to manage the Company’s assets.
On
November 20, 2013 the SBA filed a complaint in the United States District Court for the Eastern District of Virginia seeking,
among other things, receivership for the Company and a judgment in the amount outstanding under the Note Agreement plus continuing
interest. The complaint alleged that as of October 31, 2013 there remained an outstanding balance of $11,762,634.58 under
the Note Agreement, including interest, which continued to accrue at the rate of $2,021.93 per day. The SBA, in filing the complaint,
requested that the court take exclusive jurisdiction of the Company and all of its assets wherever located and appoint the SBA
as permanent receiver of the Company for the purpose of liquidating all of the Company’s assets and satisfying the claims
of its creditors in the order of priority as determined by the court.
The
Company initially took steps to contest the legal action initiated by the SBA and to oppose the receivership action. On April
29, 2014 the Board of Directors of the Company, as then constituted (the “
Board
”), met to reconsider
the decision to contest the SBA’s legal action. In light of developments occurring since December of 2013, including projections
of its portfolio companies and discussions with the SBA, the Board determined, after consultation with and advice of its counsel,
that it was not in the best interests of the Company and its shareholders to continue to contest the legal action. The SBA was
informed of this determination. The Board also decided to consent to the receivership process.
On
May 28, 2014, with the Company’s consent, the court having jurisdiction over the action filed by the SBA (the “
Court
”)
entered a Consent Order and Judgment Dismissing Counterclaim, Appointing Receiver, Granting Permanent Injunctive Relief and Granting
Money Judgment (the “
Order
”). The Order appointed the SBA receiver of the Company for the purpose of marshaling
and liquidating in an orderly manner all of the Company’s assets and entered judgment in favor of the United States of America,
on behalf of the SBA, against the Company in the amount of $11,770,722.31. Such amount represents $11,700,000 in principal and
$70,722.31 in accrued interest. The Court assumed jurisdiction over the Company and the SBA was appointed receiver effective May
28, 2014.
Receivership
The
Company effectively stopped conducting an active business upon the appointment of the SBA as receiver and the commencement of
the court ordered receivership (the “
Receivership
”). Over the course of the Receivership the activity of the
Company was limited to the liquidation of the Company’s assets by the receiver and the payment of the proceeds therefrom
to the SBA and for the expenses of the Receivership.
The
SBIC license granted to the Company by the SBA was revoked by the SBA effective March 20, 2017, in conjunction with the
entry by the court of the Order Approving the Procedures for Winding Up and Terminating the Receivership Estate. On June 28,
2017 the Receivership was terminated with the entry of a Final Order by the Court (the “
Final Order
”).
The Final Order specifically stated that “Control of Waterside shall be unconditionally transferred and returned to its
shareholders c/o Roran Capital, LLC (“Roran”) upon notification of entry of this Order”. At that time the
Company had, and continues to have, effectively zero (0) assets, and a liability owed to the SBA in an amount exceeding $10,000,000.
Termination
of Receivership
Upon
termination of the Receivership, Roran took possession of all books and records made available to it by the SBA, and Roran expended,
and has continued to expend, its own funds to maintain the viability of the Company. The termination of the Receivership
also caused a new board of directors to be appointed (the “
New Board
”). The New Board considered
a variety of options for the Company, including bankruptcy. The New Board determined that such action made scant sense as the
Receivership had the same basic result as bankruptcy. Another option was to merely liquidate and legally dissolve the Company,
which would result in the complete loss of investment by all shareholders. Roran provided assurances that it would fund reasonable
expenses of the Company so long as progress was being made to reorganize the Company and to identify either (i) a new business
to undertake; or, (ii) an existing business with which to merge or otherwise acquire. The New Board has continued to work toward
achieving that goal. With no assets and no SBIC license from the SBA, no income, and liabilities in excess of $10,000,000,
the New Board concluded that continuing to operate as a registered investment company was impossible.
Since
the entry of the Final Order (June 28, 2017) and the termination of the Receivership the Company has been maintained for
the benefit of its shareholders and pursuant to the Final Order. The Company has no assets of any value, and the Company no longer
has the SBIC license from the SBA. The Company is no longer operating as a registered investment company under the Investment
Company Act. While it would have been easy for the Company to merely dissolve, the Company has instead decided to reconstitute
itself as a viable business. The Company has engaged, and intends to continue to engage, qualified professionals and personnel
in order to bring the Company current in its SEC filings and audits. Roran paid for the Company to file all delinquent SEC filings
as a registered investment company. The Company believes that as of June 28, 2017 it ceased to be a registered investment
company under the Investment Company Act so it did not file as a registered investment company for the period ended June 30,
2017. Instead, the Company is filing this Form 10-K for that period. Prior to the filing of this 10-K, the Company filed with
the SEC an Application pursuant to Section 8(f) of the Investment Company Act for an order declaring that the Company has ceased
to be a registered investment company.
The
current status of the Company is consistent with the Company’s pronounced intention of converting from a registered investment
company to an operating company. Although the Company may historically have operated as a registered investment company, the result
of the Receivership is that the Company can no longer operate as a registered investment company. The only chance for the
shareholders of the Company to recognize any value from their investment in the Company is to allow the Company to change the
nature of its business such that it should no longer be a registered investment company under the Investment Company Act.
Current
Business Strategy and Operations
The
Company will now seek to either (i) enter into a new business; or, (ii) merge with, or otherwise acquire, an active business which
would benefit from operating as a public entity. The New Board has undertaken a search to identify the best possible candidate(s)
in order to provide value to the shareholders of the Company. The Company believes that it no longer qualifies as an “investment
company” within the meaning of the Investment Company Act, and has engaged in a strategy to convert from a registered investment
company to an operating company. The Company will file to register under the Securities Exchange Act of 1934, as amended (the
“Exchange Act”), thereby becoming a mandatory filer under the Exchange Act. It will continue to list its common stock
on the Pink OTC Markets for the benefit of its shareholders. As a result of these efforts, the Company is and holds itself out
as being engaged primarily in the business of seeking either (i) a new business to enter into; or, (ii) merger or acquisition
candidates which would benefit from being public.
Our
Business
We
are a shell company as that term is defined under federal securities laws. Our business plan is to seek (i) a new business to
enter into; or, (ii) acquire assets or shares of an entity actively engaged in business that generates revenues in exchange for
our securities. We will not restrict our search to any specific business, industry, or geographical location and we may participate
in a business venture of virtually any kind or nature. This discussion of our new business is purposefully general and is not
meant to be restrictive of our virtually unlimited discretion to search for and enter potential business opportunities. Management
anticipates that it may be able to participate in only one potential business venture because we have nominal assets and limited
financial resources. This lack of diversification should be considered a substantial risk to our shareholders because it will
not permit us to offset potential losses from one venture against gains from another.
Plan
of Operations
We
currently plan to investigate and, if such investigation warrants, either (i) enter into a new business; or, (ii) acquire assets
or shares of an entity actively engaged in business and which is seeking the perceived advantages of being a publicly held corporation.
Our principal business objective for the next 12-months and beyond will be to achieve long-term growth potential through either
entry into a new business or a combination with an existing business, rather than immediate, short-term earnings. We will not
restrict our search for potential candidate target companies to any specific business, industry or geographical location and,
thus, may acquire, or enter into, any type of business.
The
analysis of new business opportunities will be undertaken by or under the supervision of the New Board. We have not had any material
conversations with potential merger or acquisition targets nor have we entered into any definitive agreement with any party. In
our efforts to analyze and evaluate a prospective target business, we will consider several factors, including, without limitation,
the following:
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experience
and skill of management and availability of additional personnel of the target business;
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costs
associated with effecting the business combination;
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equity
interest retained by our shareholders in the merged entity;
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growth
potential of the target business;
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capital
requirements of the target business;
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capital
available to the target business;
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stage
of development of the target business;
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proprietary
features and degree of intellectual property or other protection of the target business;
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the
financial statements of the target business; and
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the
regulatory environment in which the target business operates.
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The
foregoing criteria are not intended to be exhaustive and any evaluation relating to the merits of a particular target business
will be based, to the extent relevant, on the above factors, as well as other considerations we deem relevant. In connection with
our evaluation of a prospective target business, we anticipate that we will conduct a due diligence review which will encompass,
among other things, meeting with incumbent management as well as a review of financial, legal and other information.
The
time and costs required to select and evaluate a target business (including conducting a due diligence review) and to structure
and consummate the business combination (including negotiating and documenting relevant agreements and preparing requisite documents
for filing pursuant to applicable corporate and securities laws) cannot be determined at this time. Our sole officer and director
intends to devote only a very small portion of his time to our affairs, and, accordingly, the consummation of a business combination
may require a longer time than if he devoted his full time to our affairs. However, he will devote such time as he deems reasonably
necessary to carry out our business and affairs. The amount of time devoted to our business and affairs may vary significantly
depending upon, among other things, whether we have identified a target business or are engaged in active negotiation of a business
combination.
We
anticipate that various prospective target businesses will be brought to our attention from various sources, including securities
broker-dealers, investment bankers, venture capitalists, bankers and other members of the financial community, including, possibly,
Roran.
Various
impediments to a business combination or an entry into a new business may arise, such as appraisal rights afforded the shareholders
of a target business under the laws of its state of organization. This may prove to be deterrent to a particular combination.
The
way we participate in an opportunity will depend upon the nature of the opportunity, our respective needs and desires as well
as those of the promoters of the opportunity, and the relative negotiating strength of ourselves and such promoters.
It
is likely that we will acquire our participation in a business opportunity through the issuance of common stock or other securities.
Although the terms of any such transaction cannot be predicted, it should be noted that in certain circumstances the criteria
for determining whether or not an acquisition is a so-called “tax free” reorganization under Section 368(a)(1) of
the Internal Revenue Code of 1986, as amended (the “Code”), depends upon the issuance to the shareholders of the acquired
company of at least 80% of the common stock of the combined entities immediately following the reorganization. If a transaction
were structured to take advantage of these provisions rather than other “tax free” provisions provided under the Code,
all prior shareholders would in such circumstances retain 20% or less of the total issued and outstanding shares. Under other
circumstances, depending upon the relative negotiating strength of the parties, prior shareholders may retain substantially less
than 10% of the total issued and outstanding shares. This could result in substantial additional dilution to the equity of those
who were our shareholders prior to such reorganization.
Our
present shareholders will likely not have control of a majority of our voting shares following a reorganization transaction. As
part of such a transaction, our current director may resign and new directors may be appointed without any vote by shareholders.
In
the case of an acquisition, the transaction may be accomplished upon the sole determination of our management without any vote
or approval by shareholders. In the case of a statutory merger or consolidation directly involving our Company, it will
likely be necessary to call a shareholders’ meeting and obtain the approval of the holders of a majority of the outstanding
shares. The necessity to obtain such stockholder approval may result in delay and additional expense in the consummation of any
proposed transaction and will also give rise to certain appraisal rights to dissenting shareholders. Most likely, management will
seek to structure any such transaction so as not to require stockholder approval, if possible.
It
is anticipated that the investigation of specific business opportunities and the negotiation, drafting and execution of relevant
agreements, disclosure documents and other instruments will require substantial management time and attention and substantial
cost for accountants, attorneys and others. If a decision is made not to participate in a specific business opportunity, the costs
theretofore incurred in the related investigation would not be recoverable. Furthermore, even if an agreement is reached for the
participation in a specific business opportunity, the failure to consummate that transaction may result in our loss of the related
costs incurred.
During
the year ended June 30, 2017, and the interim fiscal quarters since that time, we have essentially been dormant. We do
not currently engage in any business activities that provide us with positive cash flows. As such, the costs of investigating
and analyzing business combinations for the next 12-months and beyond will be paid with funds raised through other sources, which
may not be available on favorable terms, if at all. The Company, at this time, does not intend to obtain funds in one or more
private placements to finance the operation of any acquired business opportunity until such time as the Company has successfully
consummated such a merger or acquisition or entered into a new business. Rather, the Company intends to borrow money from Roran
to finance ongoing operations.
Government
Regulations
Since
the Company intends to no longer operate as a registered investment company though remain as a public company, it will be subject
to the reporting requirements of the Exchange Act, which includes the preparation and filing of periodic, quarterly and annual
reports on Forms 8-K, 10-Q and 10-K. The Exchange Act specifically requires that any merger or acquisition candidate comply with
all applicable reporting requirements, which include providing audited financial statements to be included within the numerous
filings relevant to complying with the Exchange Act.
The
Company’s common stock is a “penny stock,” as defined in Rule 3a51-1 under the Exchange Act. The penny stock
rules require a broker-dealer, prior to a transaction in a penny stock not otherwise exempt from the rules, to deliver a standardized
risk disclosure document that provides information about penny stocks and the nature and level of risks in the penny stock market.
The broker-dealer also must provide the customer with current bid and offer quotations for the penny stock, the compensation of
the broker-dealer and its sales person in the transaction, and monthly account statements showing the market value of each penny
stock held in the customer’s account. In addition, the penny stock rules require that the broker-dealer, not otherwise exempt
from such rules, must make a special written determination that the penny stock is suitable for the purchaser and receive the
purchaser’s written agreement to the transaction. These disclosure rules have the effect of reducing the level of trading
activity in the secondary market for a stock that becomes subject to the penny stock rules. So long as the Company’s common
stock is subject to the penny stock rules, it may be more difficult to sell our common stock.
Patents,
Trademarks, Franchises, Royalty Agreements or Labor Contracts
We
have no current plans for any registrations such as patents, trademarks, copyrights, franchises, concessions, royalty agreements
or labor contracts. We will assess the need for any copyright, trademark or patent applications on an ongoing basis.
Need
for Government Approval of Products or Services
We
are not required to apply for or have any government approval for our products or services.
Research
and Development Costs During the Last Two Years
We
have not expended funds for research and development costs since inception.
Competition
The
Company will remain an insignificant participant among the firms which engage in the acquisition of business opportunities. There
are many established venture capital and financial concerns which have significantly greater financial and personnel resources
and technical expertise than the Company. In view of the Company’s extremely limited financial resources and limited management
availability, the Company will continue to be at a significant competitive disadvantage compared to the Company’s competitors.
Employees
The
Company currently has no employees. The business of the Company will be managed by its sole officer and director and such officer
and director may join the Company as an employee in the future. The Company does not anticipate a need to engage any full-time
employees at this time.
Available
Information
The
Company expects to file annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K, proxy
statements and other information with the SEC. Any materials filed by the Company with the SEC may be read and copied at the SEC’s
Public Reference Room at 100 F Street, NE, Washington, D.C. 20549. Information on the operation of the SEC’s Public Reference
Room is available by calling the SEC at 1-800-SEC-0330. The SEC maintains a website that contains annual, quarterly and current
reports, proxy statements and other information that issuers (including the Company) file electronically with the SEC. The Internet
address of the SEC’s website is
http://www.sec.gov
.
At some point in the near future we intend to make
our reports, amendments thereto, and other information available, free of charge, on a website for the Company. At this time,
the Company does not maintain a website and there is no estimate for when such a website will be maintained by the Company. Our
corporate offices are located at 140 West 31
st
Street, Second Floor, New York, New York, 10001. Our telephone
number is 212-686-1515.
You
should carefully consider the risks described below together with the other information set forth in this report, which could
materially affect our business, financial condition, and future results. The risks described below are not the only risks facing
our Company. Risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially
adversely affect our business, financial condition, and operating results.
Risks
Related to Our Business
We
have no recent operating history or basis for evaluating prospects.
We
currently have no operating business or immediate plans to develop one. We are seeking to enter into a merger or business combination
with another operating company, or to enter into a new business. To date, our efforts have been limited to meeting our regulatory
filing requirements and searching for a business target.
We
have limited resources and no revenues from operations, and will need additional financing in order to execute any business plan.
We
have limited resources, no revenues from operations to date and our cash on hand will not be sufficient to satisfy our cash requirements
during the next twelve months. In addition, we will not achieve any revenues (other than insignificant investment income) until,
at the earliest, the consummation of a merger or similar business combination and we cannot ascertain our capital requirements
until such time. There can be no assurance that determinations ultimately made by us will permit us to achieve our business objectives.
Our
business will have no revenues unless and until we merge with or acquire or start an operating business.
We
are an early stage company and have had no revenues from operations. We may not realize any revenues unless and until we successfully
merge with or acquire an operating business or start our own operations.
Since
the Company has no assets and no present source of revenues, we are dependent upon the financial support of Roran.
At
present, our business activities are limited to seeking potential business opportunities. Due to our limited financial and personnel
resources, there is only a limited basis upon which to evaluate our prospects for achieving our intended business objectives.
We have no assets and have no operating income, revenues or cash flow from operations. Roran is providing us with funding, on
an as needed basis, under a loan arrangement, with amounts advanced limited to enabling us to continue our corporate existence
and our business objective to seek new business opportunities, as well as funding the costs, including professional accounting
and legal fees, of registering our securities under the Exchange Act and continuing to be a reporting company under the Exchange
Act. The amount to be loaned by Roran in the interim financing arrangement is limited to $150,000.
We
will be able to effect at most one merger or similar business combination, or enter into just one new business, and thus may not
have a diversified business.
Our
resources are limited and we will most likely have the ability to effect only a single merger or similar business combination,
or enter into a single new business. This probable lack of diversification will subject us to numerous economic, competitive and
regulatory developments, any or all of which may have a material adverse impact upon the particular industry in which we may operate
subsequent to the consummation of a merger. We will become dependent upon the development or market acceptance of a single or
limited number of products, processes or services.
We
depend substantially upon our chief executive officer to make all management decisions.
Our
ability to effect a merger or similar business combination or enter into a new business will be dependent upon the efforts of
our sole director and officer, Zindel Zelmanovitch. Notwithstanding the importance of Mr. Zelmanovitch, we have not entered into
any employment agreement or other understanding with Mr. Zelmanovitch concerning compensation or obtained any “key man”
life insurance on any of his life. The loss of the services of Mr. Zelmanovitch will have a material adverse effect on achieving
our business objectives and success. We will rely upon the expertise of Mr. Zelmanovitch and do not anticipate that we will hire
additional personnel.
There
is competition for those private companies suitable for a business combination of the type contemplated by management.
We
are in a highly competitive market for a small number of business opportunities which could reduce the likelihood of consummating
a successful business combination. We are and will continue to be an insignificant participant in the business of seeking mergers
with, joint ventures with and acquisitions of small private and public entities. A large number of established and well-financed
entities, including small public companies and venture capital firms, are active in mergers and acquisitions of companies that
may be desirable target candidates for us. Nearly all these entities have significantly greater financial resources, technical
expertise and managerial capabilities than we do; consequently, we will be at a competitive disadvantage in identifying possible
business opportunities and successfully completing a business combination. These competitive factors may reduce the likelihood
of our identifying and consummating a successful business combination.
Future
success is highly dependent on the ability of management to locate and attract a suitable target business opportunity.
The
nature of our operations is highly speculative. The success of our plan of operation will depend to a great extent on the operations,
financial condition and management of the identified business opportunity. While management intends to seek business combination(s)
with entities having established operating histories, we cannot assure you that we will be successful in locating candidates meeting
that criterion. In the event we complete a business combination, the success of our operations may be dependent upon management
of the successor firm or venture partner firm and numerous other factors beyond our control.
We
have no agreement for a business combination or other transaction.
We
have no definitive agreement with respect to engaging in a merger with, joint venture with or acquisition of, a private or public
entity, or to enter into a new business. No assurances can be given that we will successfully identify and evaluate suitable business
opportunities or that we will conclude a business combination. We cannot guarantee that we will be able to negotiate a business
combination on favorable terms, and there is consequently a risk that funds allocated to the purchase of our shares will not be
invested in a company with active business operations.
Management
will change upon the consummation of a business combination.
After
the closing of a merger or business combination, it is likely our current management will not retain any control or managerial
responsibilities. Upon such event, Mr. Zelmanovitch intends to resign from his positions with us.
Current
shareholders will be immediately and substantially diluted upon a merger or business combination.
Our
Articles of Incorporation authorized the issuance of (i) twenty five thousand (25,000) shares of preferred stock, with a par value
of $1.00 per share, of which none are issued; and, (ii) ten million (10,000,000) shares of common stock, with a par value of $1.00
per share, of which a total of 1,915,548 shares have been issued. To the extent that additional shares of common stock are authorized
and issued in connection with a merger or business combination, our shareholders could experience significant dilution of their
respective ownership interests. Furthermore, the issuance of a substantial number of shares of common stock may adversely affect
prevailing market prices, if any, for the common stock and could impair our ability to raise additional capital through the sale
of equity securities.
There
are relatively low barriers to becoming a blank check company or shell company, thereby increasing the competition for a small
number of business opportunities.
There
are relatively low barriers to becoming a blank check or shell company. A newly incorporated company with a single stockholder
and sole officer and director may become a blank check company or shell company by voluntarily subjecting itself to the SEC reporting
requirements by filing and seeking effectiveness of a Form 10, thereby registering its common stock pursuant to Section 12(g)
of the Securities and Exchange Act of 1934 with the SEC. Assuming no comments to the Form 10 have been received from the SEC,
that registration statement is automatically deemed effective 60 days after filing the Form 10 with the SEC. The relative
ease and low cost with which a company can become a reporting blank check or shell company can increase the number of public
companies seeking a business combination, thereby adding further competition to an already highly competitive market for a
limited number of businesses that will consummate a successful business combination.
Our
management will only be able to devote a limited amount of time to seeking a target company or new business which may adversely
impact our ability to identify a suitable acquisition candidate.
While
seeking a business combination or developing our own business plan, management anticipates devoting only a limited amount of time
to the Company’s affairs in total. Our sole director and officer, Zindel Zelmanovitch, has not entered into a written employment
agreement with us and is not expected to do so in the foreseeable future. This limited commitment may adversely impact our ability
to identify and consummate a successful business combination. If we pursue a business combination or develop our own plan of operations,
we will need to have increased management involvement. There is no assurance that we will be able to expand our management resources
to implement a business combination or business plan.
We
will be subject to the periodic reporting requirements of the Securities Exchange Act of 1934, which will require us to incur
audit fees and legal fees in connection with the preparation of such reports. These costs could reduce or eliminate our ability
to earn a profit.
We
will be required to file periodic reports with the SEC pursuant to the Securities Exchange Act and the rules and regulations promulgated
thereunder. In order to comply with these regulations, our independent registered public accounting firm must review our financial
statements on a quarterly basis and audit our financial statements on an annual basis. Moreover, our legal counsel has to review
and assist in the preparation of such reports. The costs charged by these professionals for such services cannot be accurately
predicted at this time because of factors such as the number and type of transactions that we engage in and the complexity of
our reports cannot be determined at this time and will have a major effect on the amount of time to be spent by our auditors and
attorneys. However, the incurrence of such costs will obviously be an expense to our future operations and could have a negative
effect on our ability to meet our overhead requirements and earn a profit. If we cannot provide reliable financial reports or
prevent fraud, our business and operating results could be harmed, investors could lose confidence in our reported financial information
and the trading price of our common stock could drop significantly.
The
time and cost of preparing a private company to become a public reporting company may preclude us from entering into a merger
or acquisition with the most attractive private companies.
Target
companies that fail to comply with SEC reporting requirements may delay or preclude acquisition. Sections 13 and 15(d) of the
Exchange Act require reporting companies to provide certain information about significant acquisitions, including audited
financial statements for the company acquired, covering one, two, or three years, depending on the relative size of the acquisition.
The time and additional costs that may be incurred by some target entities to prepare these statements may significantly delay
or essentially preclude consummation of an acquisition. Otherwise suitable acquisition prospects that do not have or are unable
to obtain the required audited statements may be inappropriate for acquisition so long as the reporting requirements of the Exchange
Act are applicable.
We
may be subject to further government regulation which would adversely affect our operations.
Although
we will be subject to the reporting requirements under the Exchange Act, management believes we will no longer be subject to regulation
under the Investment Company Act since we will not be engaged in the business of investing or trading in securities. If we engage
in business combinations which result in our holding passive investment interests in a number of entities, we could be subject
to regulation under the Investment Company Act. If so, we would be required to register as an investment company and could be
expected to incur significant registration and compliance costs. We have submitted to the SEC an Application pursuant to Section
8(f) of the Investment Company Act for an order declaring that the Company is no longer a registered investment company. We have
received no formal determination from the SEC as to our status under the Investment Company Act and, consequently, violation of
the Investment Company Act could subject us to material adverse consequences.
Any
potential acquisition or merger with a foreign company may subject us to additional risks.
If
we enter into a business combination with a foreign concern, we will be subject to risks inherent in business operations outside
of the United States. These risks include, for example, currency fluctuations, regulatory problems, punitive tariffs, unstable
local tax policies, trade embargoes, risks related to shipment of raw materials and finished goods across national borders and
cultural and language differences. Foreign economies may differ favorably or unfavorably from the United States economy in growth
of gross national product, rate of inflation, market development, rate of savings, and capital investment, resource self-sufficiency
and balance of payments positions, and in other respects.
The
Company may be subject to certain tax consequences in our business, which may increase our cost of doing business.
We
may not be able to structure an acquisition to result in tax-free treatment for the companies or their shareholders, which could
deter third parties from entering into certain business combinations with us or result in being taxed on consideration received
in a transaction. Currently, a transaction may be structured so as to result in tax-free treatment to both companies, as prescribed
by various federal and state tax provisions. We intend to structure any business combination so as to minimize the federal and
state tax consequences to both us and the target entity; however, we cannot guarantee that the business combination will meet
the statutory requirements of a tax-free reorganization or that the parties will obtain the intended tax-free treatment upon a
transfer of stock or assets. A non-qualifying reorganization could result in the imposition of both federal and state taxes that
may have an adverse effect on both parties to the transaction.
As
a blank check company, any registered offering of our securities will have to comply with Rule 419 under the Securities Act of
1933, which could impact our ability to raise equity funds from investors.
In
the event we register an offering of our securities with the SEC while we are a blank check company, we will have to comply with
Rule 419 under the Securities Act of 1933. Rule 419 is a cumbersome rule applicable to blank check companies selling penny stocks
in a registered offering. Rule 419 requires that the gross proceeds raised in such an offering be deposited into an escrow account
with a financial institution insured by the FDIC or in a separate bank account established by a registered broker or dealer in
which the broker or dealer acts as trustee for the persons having the beneficial interests in the account. Furthermore, Rule 419
requires the securities issued to investors in the blank check offering be issued in the name of such investors but certificates
representing such securities must be deposited into the escrow account instead of being delivered directly to investors, and the
records of the escrow agent, maintained in good faith and in the regular course of business, must show the name and interest of
each party to the account. The initial registration statement for the blank check offering shall disclose the specific terms of
the offering, including, but not limited to, (i) the terms and provisions of the escrow or trust agreement and the effect thereof
upon the company’s right to receive funds and the effect of the escrow or trust agreement upon the investor’s funds
and securities required to be deposited into the escrow or trust account, including, if applicable, any material risk of non-insurance
of investors’ funds resulting from deposits in excess of the insured amounts; and, (ii) the obligation of the company to
provide, and the right of the purchaser to receive, information regarding an acquisition, including the requirement that pursuant
to Rule 419, investors confirm in writing their investment in the Company’s securities. Rule 419 imposes certain additional
disclosure obligations on companies making blank check offerings. Due to the requirements of Rule 419 and the fact that investors
investing in blank check offerings have no idea if or when an acquisition or merger transaction will occur, or if the acquisition
or merger target is worthy of the investors’ money or risks, it may be difficult for the company to successfully complete
a blank check offering and even if the company is successful in raising funds in such an offering, it may not be able to find
an attractive acquisition or merger candidate. Therefore, investors in a blank check offering will have their funds at risk for
a prolonged period of time and they may not be happy with the results of an acquisition or merger, if one were to occur.
Risks
Related to Ownership of Our Common Stock
Our
common stock is a “penny stock” which may restrict the ability of shareholders to sell our common stock in the secondary
market.
The
SEC has adopted regulations which generally define “penny stock” to be an equity security that has a market price,
as defined, of less than $5.00 per share, or an exercise price of less than $5.00 per share, subject to certain exceptions, including
an exception of an equity security that is quoted on a national securities exchange. Our Common Stock is not quoted on a national
exchange but is traded on the OTC Marketplace Pink Sheets (the “Pink Sheets”). Thus, they are subject to rules that
impose additional sales practice requirements on broker-dealers who sell these securities. For example, the broker-dealer must
make a special suitability determination for the purchaser of such securities and have received the purchaser’s written
consent to the transactions prior to the purchase. Additionally, the rules require the delivery, prior to the transaction, of
a disclosure schedule prepared by the SEC relating to the penny stock market. The broker-dealer also must disclose the commissions
payable to both the broker-dealer and the registered underwriter, and current quotations for the securities, and, if the broker-dealer
is the sole market maker, the broker-dealer must disclose this fact and the broker-dealer’s presumed control over the market.
Finally, among other requirements, monthly statements must be sent disclosing recent price information for the penny stock held
in the account and information on the limited market in penny stocks. The “penny stock” rules, may restrict the ability
of our shareholders to sell our common stock in the secondary market.
Trading
in our securities could be subject to extreme price fluctuations that could adversely affect your investment.
Historically
speaking, the market prices for securities of small publicly traded companies have been highly volatile. Publicized events and
announcements may have a significant impact on the market price of our common stock. In addition, the stock market from time to
time experiences extreme price and volume fluctuations that particularly affect the market prices for small publicly traded companies
and which are often unrelated to the operating performance of the affected companies.
Because
we may seek to complete a business combination through a “reverse merger,” we may not be able to attract the attention
of major brokerage firms following such a transaction.
Additional
risks may exist since we may assist a privately held business to become public through a “reverse merger”. Securities
analysts of major brokerage firms may not provide coverage of our Company since there is no incentive to brokerage firms to recommend
the purchase of our common stock. No assurance can be given that brokerage firms will want to conduct any secondary offerings
on behalf of our post-merger Company in the future.
We
cannot assure you that following a business combination with an operating business or business start-up, our common stock will
be listed on any securities exchange higher than the Pink Sheets.
Although,
our common stock is currently quoted on the Pink Sheet, securities quoted on this trading platform often lack liquidity and analyst
coverage, which may result in lower prices for our common stock than might be obtained in a larger, more established stock exchanges
and may also result in a larger spread between the bid and asked price for our common stock. Following a business combination
or business start-up, we may seek the listing of our common stock on NASDAQ or any other exchange which represents a higher listing
than the Pink Sheets. However, we cannot assure you that we will be able to meet the initial listing standards of any of those,
or that we will be able to maintain a listing of our common stock on any stock exchange other than the Pink Sheets. Until our
common stock is listed on the NASDAQ or another stock exchange, we expect that our common stock would be eligible to continue
to trade on the Pink Sheets, where our shareholders may find it more difficult to dispose of shares or obtain accurate quotations
as to the market value of our common stock. If a market for our common stock does not develop or is not sustained, it may be difficult
for our shareholders to sell their shares of common stock at an attractive price or at all. In the absence of an active trading
market for our common stock, shareholders may not be able to sell their common stock at or above the price at which they acquired
the shares or at the time that they would like to sell. We cannot predict the prices at which our common stock will trade. In
addition, we cannot assure you that we will be able to meet the initial listing standards of any national securities exchange,
or, if we do meet such initial qualitative listing standards, that we will be able to maintain any such listing. In addition,
we would be subject to an SEC rule that, if it failed to meet the criteria set forth in such rule, imposes various practice requirements
on broker-dealers who sell securities governed by the rule to persons other than established customers and accredited investors.
Consequently, such rule may deter broker-dealers from recommending or selling our common stock, which may further affect its liquidity.
This would also make it more difficult for us to raise additional capital following a business combination.
Liquidity
is limited, and we may be unable to obtain listing of our common stock on a more liquid market.
Our
common stock is quoted on the Pink Sheets, which provides significantly less liquidity than a securities exchange (such as the
American or New York Stock Exchange) or an automated quotation system (such as the Nasdaq Global Market or Capital Market). There
is uncertainty that we will ever be accepted for a listing on an automated quotation system or national securities exchange.
Substantial
sales of our common stock may impact the market price of our common stock.
Future
sales of substantial amounts of our common stock, including shares that we may issue upon exercise of options and warrants, and
the resale of shares by investors who have registration rights, could adversely affect the market price of our common stock. Furthermore,
if we raise additional funds through the issuance of common stock or securities convertible into our common stock, the percentage
ownership of our shareholders will be reduced and the price of our common stock may fall.
We
do not expect to pay dividends for the foreseeable future and investors must look solely to stock appreciation for a return on
their investment in us.
We
have no plans to pay, and we do not anticipate paying, any cash dividends on our common stock in the foreseeable future. We currently
intend to retain all future earnings to fund the development and growth of our business. Any payment of future dividends will
be at the discretion of our board of directors and will depend on, among other things, our earnings, financial condition, capital
requirements, level of indebtedness, statutory and contractual restrictions applying to the payment of dividends and other considerations
that the board of directors deems relevant. Investors may need to rely on sales of their common stock after price appreciation,
which may never occur, as the only way to realize a return on their investment. Investors seeking cash dividends should not purchase
our common stock.
FINRA
sales practice requirements may also limit a shareholder’s ability to buy and sell our stock.
In
addition to the “penny stock” rules described above, FINRA has adopted rules that require that in recommending an
investment to a customer, broker-dealer must have reasonable grounds for believing that the investment is suitable for that customer.
Prior to recommending speculative low-priced securities to their non-institutional customers, broker-dealers must make reasonable
efforts to obtain information about the customer’s financial status, tax status, investment objectives and other information.
Under interpretations of these rules, FINRA believes that there is a high probability that speculative low priced securities will
not be suitable for at least some customers. The FINRA requirements make it more difficult for broker-dealers to recommend that
their customers buy our common stock, which may limit your ability to buy and sell our stock and have an adverse effect on the
market for our shares.
Our
publicly-filed reports are reviewed from time to time by the SEC, and any significant changes or amendments required as a result
of any such review may result in material liability to us and may have a material adverse impact on the trading price of our common
stock.
The
reports and other securities filings of publicly-traded companies are subject to review by the SEC from time to time for the purpose
of assisting companies in complying with applicable disclosure requirements. The SEC is required, pursuant to the Sarbanes-Oxley
Act of 2002, to undertake a comprehensive review of a company’s reports at least once every three years, although an SEC
review may be initiated at any time. While we believe that our previously filed SEC reports comply, and we intend that all future
reports will comply, in all material respects with the published rules and regulations of the SEC, we could be required to modify,
amend, or reformulate information contained in our filings as a result of any SEC review. Any modification, amendment, or reformulation
of information contained in such reports could be significant and result in material liability to us and have a material adverse
impact on the trading price of our common stock.
We
may invest or spend our cash in ways with which you may not agree or in ways which may not yield a significant return.
Our
management has considerable discretion in the use of our cash. Our cash may be used for purposes that do not increase our operating
results or market value. Until the cash is used, it may be placed in investments that do not produce significant income or that
may lose value. The failure of our management to invest or spend our cash effectively could result in unfavorable returns and
uncertainty about our prospects, each of which could cause the price of our common stock to decline.