ITEM
1.
|
FINANCIAL
STATEMENTS
|
WATERSIDE
CAPITAL CORPORATION
BALANCE
SHEETS
As
of September 30, 2018 (Unaudited) and June 30, 2018
|
|
June
30, 2018
|
|
|
Sept
30, 2018
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
ASSETS
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
4,624
|
|
|
$
|
17,650
|
|
TOTAL
ASSETS
|
|
$
|
4,624
|
|
|
$
|
17,650
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
& EQUITY
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
Current
Liabilities
|
|
|
|
|
|
|
|
|
Accounts
Payable
|
|
$
|
6,595
|
|
|
$
|
2,845
|
|
Convertible
Note Payable - Roran, net of debt discount
|
|
|
63,055
|
|
|
|
86,639
|
|
Accrued
Interest Payable
|
|
|
163,261
|
|
|
|
169,174
|
|
Judgment
Payable
|
|
|
10,427,300
|
|
|
|
10,427,300
|
|
Total
Current Liabilities
|
|
|
10,660,211
|
|
|
|
10,685,958
|
|
|
|
|
|
|
|
|
|
|
Total
Liabilities
|
|
|
10,660,211
|
|
|
|
10,685,958
|
|
|
|
|
|
|
|
|
|
|
Equity
|
|
|
|
|
|
|
|
|
Common
Stock, par value $1.00, 10,000,000 shares authorized, 1,915,548 shares issued and outstanding
|
|
|
1,915,548
|
|
|
|
1,915,548
|
|
Additional
Paid-In Capital
|
|
|
15,539,813
|
|
|
|
15,556,480
|
|
Accumulated
Deficit
|
|
|
(28,110,948
|
)
|
|
|
(28,140,336
|
)
|
Total
Equity
|
|
|
(10,655,587
|
)
|
|
|
(10,688,308
|
)
|
TOTAL
LIABILITIES & EQUITY
|
|
$
|
4,624
|
|
|
$
|
17,650
|
|
See
the accompanying Notes, which are an integral part of these unaudited Financial Statements
WATERSIDE
CAPITAL CORPORATION
STATEMENTS
OF OPERATIONS
For
the Three Months Ended September 30, 2018 and 2017
(Unaudited)
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
Income
|
|
|
|
|
|
|
|
|
Interest
– Other
|
|
$
|
-
|
|
|
$
|
-
|
|
Total
Income
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Expense
|
|
|
|
|
|
|
|
|
Administrative
Expenses
|
|
|
8,223
|
|
|
|
24,761
|
|
Interest
Expense
|
|
|
21,165
|
|
|
|
601
|
|
Total
Expense
|
|
|
29,388
|
|
|
|
25,362
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
$
|
29,388
|
|
|
$
|
25,362
|
|
|
|
|
|
|
|
|
|
|
Weighted
Average Number of Common Shares Outstanding – Basic and Diluted
|
|
|
1,915,548
|
|
|
|
1,915,548
|
|
Net
Loss Per Share-Basic and Diluted
|
|
$
|
(0.02
|
)
|
|
$
|
(0.01
|
)
|
See
the accompanying Notes, which are an integral part of these unaudited Financial Statements
WATERSIDE
CAPITAL CORPORATION
STATEMENTS
OF CASH FLOWS
For
the Three Months Ended September 30, 2018 and 2017
(Unaudited)
|
|
2018
|
|
|
2017
|
|
OPERATING
ACTIVITIES
|
|
|
|
|
|
|
|
|
Net
Loss
|
|
$
|
(29,388
|
)
|
|
$
|
(25,362
|
)
|
Adjustments
to reconcile Net Loss to net cash used in operations:
|
|
|
|
|
|
|
|
|
Debt
Discount
|
|
|
15,251
|
|
|
|
-
|
|
Accounts
Payable
|
|
|
(3,750
|
)
|
|
|
2,845
|
|
Accrued
Interest Payable
|
|
|
5,913
|
|
|
|
601
|
|
Net
cash used by Operating Activities
|
|
|
(11,974
|
)
|
|
|
(21,916
|
)
|
FINANCING
ACTIVITIES
|
|
|
|
|
|
|
|
|
Proceeds
from convertible note payable- from Roran Capital
|
|
|
25,000
|
|
|
|
21,916
|
|
Net
cash provided by Financing Activities
|
|
|
25,000
|
|
|
|
21,916
|
|
Net
cash increase for period
|
|
|
13,026
|
|
|
|
-
|
|
Cash
at beginning of period
|
|
|
4,624
|
|
|
|
-
|
|
Cash
at end of period
|
|
$
|
17,650
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Supplemental
Non-Cash Investing and Financing Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intrinsic
value of embedded beneficial conversion option on convertible note payable
|
|
$
|
16,667
|
|
|
|
14,611
|
|
See
the accompanying Notes, which are an integral part of these unaudited Financial Statements
WATERSIDE
CAPITAL CORPORATION
NOTES
TO UNAUDITED FINANCIAL STATEMENTS
September
30, 2018
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 operating 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.
The
Company has filed with the SEC an Application pursuant to Section 8(f) of the Investment Company Act of 1940 for an order declaring
that the Company has ceased to be a registered investment company. In response to that filing, the SEC issued to the Company comments
in a letter dated May 16, 2018. The Company responded to those comments with the filing of an Amended Application on June 4, 2018.
On October 30, 2018, in response to verbal comments from the SEC, the Company filed a Second Amended Application. As of the date
of this Quarterly Statement, the Company has not received any response from the SEC in regard to the Second Amended Application.
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 continues to have 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, 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.
For further discussion of the advances made by Roran, see Notes 4 and 6.
WATERSIDE
CAPITAL CORPORATION
NOTES
TO UNAUDITED FINANCIAL STATEMENTS
September
30, 2018
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 Company’s
2018 Annual Report.
Fiscal
Year-End
The
Company elected June 30
th
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
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.
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.
WATERSIDE
CAPITAL CORPORATION
NOTES
TO UNAUDITED FINANCIAL STATEMENTS
September
30, 2018
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). The BCF is amortized into interest
expense over the life of the related debt.
Related
Parties
The
Company follows subtopic 850-10 of the FASB Accounting Standards Codification (“ASC”) for the identification of related
parties and disclosure of related party transactions.
Pursuant
to ASC 850-10-20 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 ASC 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 ASC 450-20 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. Management 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, management 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.
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.
WATERSIDE
CAPITAL CORPORATION
NOTES
TO UNAUDITED FINANCIAL STATEMENTS
September
30, 2018
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 ASC 740-10-25-13. ASC 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 ASC 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. ASC 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 ASC
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.
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, 2018
NOTE
3 – 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.
WATERSIDE
CAPITAL CORPORATION
NOTES
TO UNAUDITED FINANCIAL STATEMENTS
September
30, 2018
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 June 30, 2018, the Company’s outstanding judgment payable totaled $10,427,300, and interest payable totaled $156,933.
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. Upon purchase, the Company began to accrue
interest that was due under the original terms of the judgment payable. The statutory interest rate is 0.094%. The Company has
accrued $159,299 in interest on the judgment payable as of the period ended September 30, 2018.
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 of
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 advances made pursuant to the Loan Agreement, the Company has incurred total obligations of $124,338
as of September 30, 2018. The Company recorded a BCF due the conversion option of $76,800, and the unamortized balance
at September 30, 2018 is $37,699. The amount is 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
4 - 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 year ended June 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.
WATERSIDE
CAPITAL CORPORATION
NOTES
TO UNAUDITED FINANCIAL STATEMENTS
September
30, 2018
NOTE
5 - 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
Zelmanovitch
|
|
|
|
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, 2018
|
|
Judgment
Payable (acquired by Roran from SBA)
|
|
$
|
10,427,300
|
|
|
|
|
|
|
Interest
on Judgment Payable
|
|
$
|
159,299
|
|
|
|
|
|
|
Convertible
Note Payable (See Note 4)
|
|
$
|
124,338
|
|
|
|
|
|
|
Interest
on Convertible Note Payable
|
|
$
|
9,875
|
|
|
|
$
|
10,720,812
|
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NOTE
6 – SUBSEQUENT EVENTS
The
Company has evaluated all events that occurred after the balance sheet date through the date when the financial statements were
issued to determine if they must be reported.
ITEM
2.
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MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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Forward-Looking
Statements
This
Quarterly Report on Form 10-Q, including “Management’s Discussion and Analysis of Financial Condition and Results
of Operations” in Item 2 of Part I of this report, include forward-looking statements. Information in this report contains
“forward looking statements” which may be identified by the use of forward-looking terminology, such as “may”,
“shall”, “will”, “could”, “expect”, “estimate”, “anticipate”,
“predict”, “probable”, “possible”, “should”, “continue”, “believes”,
“estimates”, “projects”, “targets”, or similar terms, variations of those terms or the negative
of those terms. The forward-looking statements specified in the following information have been compiled by our management on
the basis of assumptions made by management and considered by management to be reasonable. Our future operating results, however,
are impossible to predict and no representation, guaranty, or warranty is to be inferred from those forward-looking statements.
Statements in this report concerning the following, without limitation, are forward looking statements:
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●
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future
financial and operating results;
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●
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our
ability to fund operations and business plans, and the timing of any funding or corporate development transactions we may
pursue;
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●
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our
ability 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;
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●
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current
and future economic and political conditions;
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●
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overall
industry and market trends;
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●
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management’s
goals and plans for future operations; and
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●
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other
assumptions described in this report underlying or relating to any forward-looking statements.
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All
references to “Waterside”, “we”, “our,” “us” and the “Company” in
this Item 2 refer to Waterside Capital Corporation.
The
discussion in this section contains forward-looking statements. These statements relate to future events or our future financial
performance. We have attempted to identify forward-looking statements by terminology such as “anticipate,” “believe,”
“can,” “continue,” “could,” “estimate,” “expect,” “intend,”
“may,” “plan,” “potential,” “predict,” “should,” “would”
or “will” or the negative of these terms or other comparable terminology, but their absence does not mean that a statement
is not forward-looking. These statements are only predictions and involve known and unknown risks, uncertainties and other factors,
which could cause our actual results to differ from those projected in any forward-looking statements we make. You should understand
that it is not possible to predict or identify all risks and uncertainties and you should not consider the risks and uncertainties
identified by us to be a complete set of all potential risks or uncertainties that could materially affect us. You should not
place undue reliance on the forward-looking statements we make herein because some or all of them may turn out to be wrong. We
undertake no obligation to update any of the forward-looking statements contained herein to reflect future events and developments,
except as required by law.
The
following discussion of the results of operations for the three months ended September 30, 2018 and 2017, respectively, should
be read in conjunction with our financial statements and the notes to those financial statements that are included elsewhere in
this Quarterly Report on Form 10-Q. Our discussion includes forward-looking statements based upon current expectations that involve
risks and uncertainties, such as our plans, objectives, expectations and intentions. Actual results and the timing of events could
differ materially from those anticipated in these forward-looking statements because of a number of factors. An investment in
our common stock involves a high degree of risk. Readers of this Quarterly Report on Form 10-Q should carefully consider the risks
set forth in the Risk Factors and Business sections of our Annual Report on Form 10-K for the year ended June 30, 2018, filed
with the SEC on September 5, 2018. The forward-looking statements specified in the following information have been compiled by
our management on the basis of assumptions made by management and considered by management to be reasonable. Our future operating
results, however, are impossible to predict and no representation, guaranty, or warranty is to be inferred from those forward-looking
statements.
The
assumptions used for purposes of the forward-looking statements specified in the following information represent estimates of
future events and are subject to uncertainty as to possible changes in economic, legislative, industry, and other circumstances.
As a result, the identification and interpretation of data and other information and their use in developing and selecting assumptions
from and among reasonable alternatives require the exercise of judgment. To the extent that the assumed events do not occur, the
outcome may vary substantially from anticipated or projected results, and, accordingly, no opinion is expressed on the achievability
of those forward-looking statements. No assurance can be given that any of the assumptions relating to the forward-looking statements
specified in the following information are accurate, and we assume no obligation to update any such forward-looking statements.
Overview
The
Company was formed in the Commonwealth of Virginia on July 13, 1993 and was a closed-end investment company licensed by the SBA
as a 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, 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.
In
May 2014 the Company effectively ceased operations. The Company consented to a court order appointing the SBA as receiver of the
Company for the purpose of marshaling and liquidating in an orderly manner all of the Company’s assets. That order also
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 SBA was appointed receiver effective May 28, 2014.
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. On June 28, 2017 the Receivership was terminated. 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 has
expended, and continues to expend, its own funds to maintain the viability of the Company. With no assets and no SBIC license
from the SBA, no income, and liabilities in excess of $10,000,000, it became clear to the Company that continuing to operate as
a registered investment company was impossible. Roran provided assurances that it would fund reasonable expenses of the Company
so long as progress was being made to reorganize the Company and seek a new business to undertake or to merge with an existing
business. The New Board has continued to work toward achieving that goal.
The
Company is no longer operating as a registered investment company under the Investment Company Act. 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 so it did not file as a registered investment company
for the period ended June 30, 2017. Instead, the Company filed a Form 10-K for that period. Prior to the filing of that 10-K,
on January 18, 2018 the Company filed with the SEC an Application pursuant to Section 8(f) of the Investment Company Act of 1940
for an order declaring that the Company has ceased to be a registered investment company. In response to that filing, the SEC
issued to the Company comments in a letter dated May 16, 2018. The Company responded to those comments with the filing of an Amended
Application on June 4, 2018. On October 30, 2018, in response to verbal comments from the SEC, the Company filed a Second Amended
Application. As of the date of this Quarterly Statement, the Company has not received any response from the SEC in regard to the
Second Amended Application.
From
time-to-time, new accounting pronouncements are issued by the Financial Accounting Standards Board (“FASB”), or other
standard setting bodies, relating to the treatment and recording of certain accounting transactions. Unless otherwise discussed
herein, management of the Company has determined that these recent accounting pronouncements will not have a material impact on
the financial position or results of operations of the Company.
Critical
Accounting Policies
Critical
Accounting Policies and Significant Judgments and Estimates
Our
management’s discussion and analysis of our financial condition and results of operations is based on our financial statements
which we have been prepared in accordance with U.S. generally accepted accounting principles. In preparing our financial statements,
we are required to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of
contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during
the reporting periods.
Critical
accounting estimates are estimates for which (a) the nature of the estimate is material due to the levels of subjectivity and
judgment necessary to account for highly uncertain matters or the susceptibility of such matters to change and (b) the impact
of the estimate on financial condition or operating performance is material.
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.
While
our significant accounting policies are described in more detail in Note 2 of our quarterly financial statements included in this
Quarterly Report, we believe the following accounting policies to be critical to the judgments and estimates used in the preparation
of our financial statements:
Assumption
as a Going Concern
Management
assumes that the Company will continue as a going concern, which contemplates continuity of operations, realization of assets,
and liquidation of liabilities in the normal course of business. However, given our current financial position and lack of liquidity,
there is substantial doubt about our ability to continue as a going concern.
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 issued by the Company (described in Note 3 to the Financial Statements) 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).
Fair
Value of Financial Instruments
The
Company follows paragraph 825-10-50-10 of the FASB Accounting Standards Codification for disclosures about fair value of its financial
instruments and has adopted paragraph 820-10-35-37 of the FASB Accounting Standards Codification (“Paragraph 820-10-35-37”)
to measure the fair value of its financial instruments. Paragraph 820-10-35-37 establishes a framework for measuring fair value
in accounting principles generally accepted in the United States of America (U.S. GAAP), and expands disclosures about fair value
measurements. To increase consistency and comparability in fair value measurements and related disclosures, Paragraph 820-10-35-37
establishes a fair value hierarchy which prioritizes the inputs to valuation techniques used to measure fair value into three
(3) broad levels. The three (3) levels of fair value hierarchy defined by Paragraph 820-10-35-37 are described below:
|
Level
1:
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Quoted
market prices available in active markets for identical assets or liabilities as of the reporting date.
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|
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Level
2:
|
Pricing
inputs other than quoted prices in active markets included in Level 1, which are either directly or indirectly observable
as of the reporting date.
|
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Level
3:
|
Pricing
inputs that are generally unobservable inputs and not corroborated by market data.
|
Financial
assets are considered Level 3 when their fair values are determined using pricing models, discounted cash flow methodologies or
similar techniques and at least one significant model assumption or input is unobservable.
The
fair value hierarchy gives the highest priority to quoted prices (unadjusted) in active markets for identical assets or liabilities
and the lowest priority to unobservable inputs. If the inputs used to measure the financial assets and liabilities fall within
more than one level described above, the categorization is based on the lowest level input that is significant to the fair value
measurement of the instrument.
Transactions
involving related parties cannot be presumed to be carried out on an arm’s-length basis, as the requisite conditions of
competitive, free-market dealings may not exist. Representations about transactions with related parties, if made, shall not imply
that the related party transactions were consummated on terms equivalent to those that prevail in arm’s-length transactions
unless such representations can be substantiated.
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.
Management
assumes that the realization of the Company’s net deferred tax assets resulting from its net operating loss (“NOL”)
carry–forwards for Federal income tax purposes that may be offset against future taxable income was not considered more
likely than not and accordingly, the potential tax benefits of the net loss carry-forwards are offset by a full valuation allowance.
Management made this assumption based on (a) the Company has incurred recurring losses and presently has no revenue-producing
business, (b) general economic conditions, and (c) its ability to raise additional funds to support its daily operations by way
of a public or private offering, among other factors.
Comparison
of Three Months Ended September 30, 2018 And 2017
During
the three months ended September 30, 2018 and September 30, 2017, respectively, the Company did not have any operations and therefore
there were no revenues. Expenses were limited to maintaining the Company in good standing and staying and becoming current, respectively,
in its filing obligations with the SEC.
Administrative
Expense
Professional
fees totaled $8,223 for the three months ended September 30, 2018 compared to $24,761 for the three months ended
September 30, 2017. The decrease of $16,538 was primarily due to less activity in the current period as the prior comparable
period required more work to bring the Company current in its SEC filings.
Interest
Expense
Interest
expense totaled $21,165 for the three months ended September 30, 2018 compared to $601 for the three months ended September 30,
2017. The increase of $20,564 was primarily due to an increase in borrowing under the convertible loan facility, as discussed
below.
Net
Loss
We
reported a net loss of $29,389 during the three months ended September 30, 2018 compared to a net loss of $25,363
in the comparable period of 2017. The increase was due to higher interest expenses.
Liquidity
and Capital Resources
We
have incurred recurring operating losses and negative operating cash flows in 2018 and through September 30, 2018, and we expect
to continue to incur operating losses and negative operating cash flows at least through the near future. We have obtained funding
through a convertible loan facility of up to $150,000 in order to partially meet our most critical cash requirements, and of this
amount, we have drawn approximately $125,000 as of September 30, 2018. Amounts due under the loan facility are payable
in March 2019.
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 2018 financial statements, raised
substantial doubt about our ability to continue as a going concern. Our financial statements as of and for the three months ended
September 30, 2018 do not contain any adjustments for this uncertainty. In response to our Company’s cash needs, we raised
funding as described in our financial statements. 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.
Management’s
Plans
Our
plan is to seek, investigate, and consummate a merger or other business combination, purchase of assets or other strategic transaction
(i.e. a merger) with a corporation, partnership, limited liability company or other operating business entity, or enter into a
new business (collectively, a “Business Target”) desiring the perceived advantages of becoming a publicly reporting
and publicly held corporation. We have no operating business, and conduct minimal operations necessary to meet regulatory requirements.
Our ability to commence any operations is contingent upon obtaining adequate financial resources.
We
are not currently engaged in any business activities that provide cash flow. The costs of investigating and analyzing business
combinations for the next 12 months and beyond such time will be paid with money borrowed from Roran.
During
the next twelve months, we anticipate incurring costs related to (i) filing of Exchange Act reports; and, (ii) identifying and
consummating a transaction with a Business Target. We believe we will be able to meet these costs through use of funds borrowed
from Roran, or other amounts to be loaned to or invested in us by other investors.
We
may consider a business which has recently commenced operations, is a developing company in need of additional funds for expansion
into new products or markets, is seeking to develop a new product or service, or is an established business which may be experiencing
financial or operating difficulties and is in need of additional capital. In the alternative, a business combination may involve
the acquisition of, or merger with, a company which does not need substantial additional capital, but which desires to establish
a public trading market for its shares, while avoiding, among other things, the time delays, significant expense, and loss of
voting control which may occur in a public offering.
Zindel
Zelmanovitch is our president, secretary and our chief financial officer. Mr. Zelmanovitch is only required to devote a small
portion of his time to our affairs on a part-time or as-needed basis. No compensation has been paid to Mr. Zelmanovitch
for his services as an officer and director. We do not anticipate hiring any full-time employees as long as we are seeking
and evaluating Business Targets.
At
September 30, 2018, we had only $17,650 cash on hand. Since we have no revenue or plans to generate any revenue, we will be dependent
upon loans to fund losses incurred in excess of our cash.
Off-Balance
Sheet Arrangements
There
are no off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition,
changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources
that are material to investors.