NOTES
TO UNAUDITED FINANCIAL STATEMENTS
September
30, 2017
NOTE
1 – ORGANIZATION AND OPERATIONS
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
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. The Court assumed jurisdiction over the Company and the
SBA was appointed receiver effective May 28, 2014.
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. On June 28, 2017 the Receivership was terminated with the entry of a Final
Order by the Court. 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”.
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
Company has no assets of any value, and the Company no longer has the SBIC license from the SBA. The Company is clearly no longer
operating as a registered investment company under the Investment Company Act. 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,
and has undertaken a search to identify the best possible candidate(s) in order to provide value to the shareholders of the Company.
Going
Concern
The
accompanying financial statements of our Company have been prepared in accordance with accounting principles generally accepted
in the United States. The Company effectively ceased operations and it has net losses through the date of these financial statements.
Our financial statements have been presented on the basis that our business is a going concern, which contemplates the realization
of assets and the satisfaction of liabilities in the normal course of business. We are subject to the risks and uncertainties
associated with a business with no operating business or assets and no revenue, as well as limitations on our operating capital
resources. We have incurred operating losses and negative operating cash flows since the Receivership, and we expect to continue
to incur operating losses and negative operating cash flows at least through the near future. Roran Capital LLC (“Roran”),
which is a related party to the Company, has agreed to advance our Company funding in order to partially meet our most critical
cash requirements and to assist the Company in its efforts to become a current SEC reporting company. For further discussion
of the advances made by Roran, see the section titled “Notes Payable”.
As
a result of the aforementioned factors, management has concluded that there is substantial doubt about our ability to continue
as a going concern. Our independent registered public accounting firm, in its report on our 2017 financial statements, raised
substantial doubt about our ability to continue as a going concern. Our unaudited financial statements as of and for the three
months ended September 30, 2017 do not contain any adjustments for this uncertainty. In response to our Company’s cash needs,
we raised funding as described in our notes that follow. Any additional amounts raised will be used for our future investing and
operating cash flow needs. However, there can be no assurance that we will be successful in raising additional amounts of financing.
WATERSIDE
CAPITAL CORPORATION
NOTES
TO UNAUDITED FINANCIAL STATEMENTS
September
30, 2017
NOTE
2 - SIGNIFICANT ACCOUNTING POLICIES
Significant
Accounting Policies
There
have been no material changes in the Company’s significant accounting policies to those previously disclosed in the 2017
Annual Report.
Fiscal
Year-End
The
Company elected June 30 as its fiscal year-end date.
Use
of Estimates and Assumptions and Critical Accounting Estimates and Assumptions
The
preparation of financial statements in conformity with accounting principles generally accepted in the United States of America
(“GAAP”) 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 dates of the financial statements and the reported amounts
of revenues and expenses during the reporting periods.
These
significant accounting estimates or assumptions bear the risk of change due to the fact that there are uncertainties attached
to these estimates or assumptions, and certain estimates or assumptions are difficult to measure or value.
Management
bases its estimates on historical experience and on various assumptions that are believed to be reasonable in relation to the
financial statements taken as a whole under the circumstances, the results of which form the basis for making judgments about
the carrying values of assets and liabilities that are not readily apparent from other sources.
Management
regularly evaluates the key factors and assumptions used to develop the estimates utilizing currently available information, changes
in facts and circumstances, historical experience and reasonable assumptions. After such evaluations, if deemed appropriate, those
estimates are adjusted accordingly.
Actual
results could differ from those estimates.
Related
Parties
The
Company follows subtopic 850-10 of the FASB Accounting Standards Codification for the identification of related parties and disclosure
of related party transactions.
Pursuant
to section 850-10-20 the related parties include (a) affiliates (“Affiliate” means, with respect to any specified
Person, any other Person that, directly or indirectly through one or more intermediaries, controls, is controlled by or is under
common control with such Person, as such terms are used in and construed under Rule 405 under the Securities Act) of the Company;
(b) entities for which investments in their equity securities would be required, absent the election of the fair value option
under the Fair Value Option Subsection of section 825–10–15, to be accounted for by the equity method by the investing
entity; (c) trusts for the benefit of employees, such as pension and profit-sharing trusts that are managed by or under the trusteeship
of management; (d) principal owners of the Company; e) management of the Company; (f) other parties with which the Company may
deal if one party controls or can significantly influence the management or operating policies of the other to an extent that
one of the transacting parties might be prevented from fully pursuing its own separate interests; and (g) other parties that can
significantly influence the management or operating policies of the transacting parties or that have an ownership interest in
one of the transacting parties and can significantly influence the other to an extent that one or more of the transacting parties
might be prevented from fully pursuing its own separate interests.
The
financial statements shall include disclosures of material related party transactions, other than compensation arrangements, expense
allowances, and other similar items in the ordinary course of business. However, disclosure of transactions that are eliminated
in the preparation of consolidated or combined financial statements is not required in those statements. The disclosures shall
include: (a) the nature of the relationship(s) involved; (b) a description of the transactions, including transactions to which
no amounts or nominal amounts were ascribed, for each of the periods for which income statements are presented, and such other
information deemed necessary to an understanding of the effects of the transactions on the financial statements; (c) the dollar
amounts of transactions for each of the periods for which income statements are presented and the effects of any change in the
method of establishing the terms from that used in the preceding period; and, (d) amounts due from or to related parties as of
the date of each balance sheet presented and, if not otherwise apparent, the terms and manner of settlement.
Commitments
and Contingencies
The
Company follows subtopic 450-20 of the FASB Accounting Standards Codification to report accounting for contingencies. Certain
conditions may exist as of the date the financial statements are issued, which may result in a loss to the Company, but which
will only be resolved when one or more future events occur or fail to occur. The Company assesses such contingent liabilities,
and such assessment inherently involves an exercise of judgment. In assessing loss contingencies related to legal proceedings
that are pending against the Company or un-asserted claims that may result in such proceedings, the Company evaluates the perceived
merits of any legal proceedings or un-asserted claims as well as the perceived merits of the amount of relief sought or expected
to be sought therein.
WATERSIDE
CAPITAL CORPORATION
NOTES
TO UNAUDITED FINANCIAL STATEMENTS
September
30, 2017
If
the assessment of a contingency indicates that it is probable that a material loss has been incurred and the amount of the liability
can be estimated, then the estimated liability would be accrued in the Company’s financial statements. If the assessment
indicates that a potentially material loss contingency is not probable but is reasonably possible, or is probable but cannot be
estimated, then the nature of the contingent liability, and an estimate of the range of possible losses, if determinable and material,
would be disclosed.
Loss
contingencies considered remote are generally not disclosed unless they involve guarantees, in which case the guarantees would
be disclosed.
Deferred
Tax Assets and Income Taxes Provision
The
Company adopted the provisions of paragraph 740-10-25-13 of the FASB Accounting Standards Codification. Paragraph 740-10-25-13
which addresses the determination of whether tax benefits claimed or expected to be claimed on a tax return should be recorded
in the financial statements. Under paragraph 740-10-25-13, the Company may recognize the tax benefit from an uncertain tax position
only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on
the technical merits of the position. The tax benefits recognized in the financial statements from such a position should be measured
based on the largest benefit that has a greater than fifty percent (50%) likelihood of being realized upon ultimate settlement.
Paragraph 740-10-25-13 also provides guidance on de-recognition, classification, interest and penalties on income taxes, accounting
in interim periods and requires increased disclosures. The Company had no material adjustments to its liabilities for unrecognized
income tax benefits according to the provisions of paragraph 740-10-25-13.
The
estimated future tax effects of temporary differences between the tax basis of assets and liabilities are reported in the accompanying
balance sheets, as well as tax credit carry-backs and carry-forwards. The Company periodically reviews the recoverability of deferred
tax assets recorded on its balance sheets and provides valuation allowances as management deems necessary.
Management
makes judgments as to the interpretation of the tax laws that might be challenged upon an audit and cause changes to previous
estimates of tax liability. In addition, the Company operates within multiple taxing jurisdictions and is subject to audit in
these jurisdictions. In management’s opinion, adequate provisions for income taxes have been made for all years. If actual
taxable income by tax jurisdiction varies from estimates, additional allowances or reversals of reserves may be necessary.
Tax
years that remain subject to examination by major tax jurisdictions are generally the prior three (3) years for federal purposes,
and the prior four (4) years for state purposes; however, as a result of the Company’s operating losses, all tax years remain
subject to examination by tax authorities.
Net
Loss Per Common Share
The
Company computes net income or loss per share in accordance with ASC 260 Earnings Per Share. Under the provisions of the Earnings
per Share Topic ASC, basic net loss per share is computed by dividing the net loss available to common stockholders for the period
by the weighted average number of shares of common stock outstanding during the period. The calculation of diluted net loss per
share gives effect to common stock equivalents; however, potential common shares are excluded if their effect is anti-dilutive.
Subsequent
Events
The
Company follows the guidance in Section 855-10-50 of the FASB Accounting Standards Codification for the disclosure of subsequent
events. The Company will evaluate subsequent events through the date when the financial statements are issued. Pursuant to ASU
2010-09 of the FASB Accounting Standards Codification, the Company, as an SEC filer, considers its financial statements issued
when they are widely distributed to users, such as through filing them on EDGAR.
Recently
Issued Accounting Pronouncements
From
time to time, new accounting pronouncements are issued by the FASB or other standard setting bodies that are adopted by the Company
as of the specified effective date. Unless otherwise discussed, we believe that the impact of recently issued standards that are
not yet effective will not have a material impact on our financial position or results of operations upon adoption.
WATERSIDE
CAPITAL CORPORATION
NOTES
TO UNAUDITED FINANCIAL STATEMENTS
September
30, 2017
Convertible
Financial Instruments
The
Company bifurcates conversion options from their host instruments and accounts for them as free standing derivative financial
instruments if certain criteria are met. The criteria include circumstances in which (a) the economic characteristics and risks
of the embedded derivative instrument are not clearly and closely related to the economic characteristics and risks of the host
contract, (b) the hybrid instrument that embodies both the embedded derivative instrument and the host contract is not re-measured
at fair value under otherwise applicable generally accepted accounting principles with changes in fair value reported in earnings
as they occur and (c) a separate instrument with the same terms as the embedded derivative instrument would be considered a derivative
instrument. An exception to this rule is when the host instrument is deemed to be conventional, as that term is described under
applicable GAAP.
When
the Company has determined that the embedded conversion options should not be bifurcated from their host instruments, discounts
are recorded for the intrinsic value of conversion options embedded in the instruments based upon the differences between the
fair value of the underlying common stock at the commitment date of the transaction and the effective conversion price embedded
in the instrument.
Beneficial
conversion feature –
The issuance of the convertible debt described in Note 4, generated a beneficial conversion
feature (“BCF”), which arises when a debt or equity security is issued with an embedded conversion option that is
beneficial to the investor or in the money at inception because the conversion option has an effective strike price that is less
than the market price of the underlying stock at the commitment date. The Company recognized the BCF by allocating the intrinsic
value of the conversion option, which is the number of shares of common stock available upon conversion multiplied by the difference
between the effective conversion price per share and the fair value of common stock per share on the commitment date, resulting
in a discount on the convertible debt (recorded as a component of additional paid in capital).
NOTE
4 – NOTES PAYABLE
On
March 30, 2010, the SBA notified the Company that its account had been transferred to liquidation status and that the then 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 under the Note
Agreement, including interest, which continued to accrue at the rate of $2,021 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. Such amount represents $11,700,000 in principal and $70,722
in accrued interest. The Court assumed jurisdiction over the Company and the SBA was appointed receiver effective May 28, 2014.
On
June 28, 2017, the Receivership was terminated and a final order entered by the Court provided Roran with control of the Company.
As of September 30, 2017, the Company’s outstanding judgment payable totaled $10,427,300, and interest payable totaled $147,569.
The
Company’s outstanding judgment payable owed to the SBA was purchased by Roran from the SBA in July, 2017. As such, all amounts
due under the outstanding judgment payable are now owed to Roran rather than the SBA.
WATERSIDE
CAPITAL CORPORATION
NOTES
TO UNAUDITED FINANCIAL STATEMENTS
September
30, 2017
On
September 19, 2017, the Company entered into a Convertible Loan Agreement with Roran (the “Loan Agreement”).
Pursuant to the Loan Agreement, Roran agreed to loan to the Company an amount not to exceed a total of $150,000 in principal over
18-months. Each advance under the Loan Agreement will be documented under a Convertible Promissory Note issued by the Company
in favor Roran (the “Note”). The Note bears interest at the rate of 12% per annum and is due in 18-months. Roran has
the right to convert all or any portion of the Note into shares of the Company’s common stock at a conversion price equal
to 60% of the share price.
As
a result of the advance made pursuant to the Loan Agreement, the Company has incurred total obligations of $21,916 as of September
30, 2017. The Company recorded a BCF due the conversion option of $14,611. The amount was netted against the note payable
balance as a debt discount with the corresponding entry to additional paid-in capital. The debt discount has been amortized
as interest expense through the maturity date in March 2019.
NOTE
5 - INVESTMENTS AND NOTES RECEIVABLE
The
Company’s legacy assets primarily consisted of prior investments that were composed of equity and debt securities. During
the Receivership, the investments were either in default or distressed in nature. The Receiver liquidated the assets through negotiations
and the investments were written down to their estimated net realizable value through recognizing other-than-temporary impairment
losses. During the period ended September 30, 2016, the Receiver liquidated the remaining investment assets and recognized a loss
of $100,425.
As
part of a settlement on an investment, during the year ended June 30, 2016, the Receiver exchanged part of an investment
for two $75,000 notes receivable with consecutive 1 year terms. The first note receivable was repaid during the period ended September
30, 2016. The other $75,000 note receivable was transferred to the SBA to settle part of the accrued interest outstanding on the
SBA judgment later in the 2017 fiscal year.
NOTE
6 - RELATED PARTY TRANSACTIONS
The
following individuals and entities have been identified as related parties based on their family affiliation with our Chairman
of the Board:
Yitzhak
Zelamanovitch
Roran
Capital LLC
The
following amounts were owed to related parties, affiliated with the CEO and Chairman of the Board, at the dates indicated:
|
|
September
30, 2017
|
|
|
|
|
|
Convertible
Note Payable
|
|
$
|
21,916
|
|
|
|
|
|
|
Accrued
Interest
|
|
|
601
|
|
|
|
$
|
22,517
|
|