NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2018 AND 2017
NOTE 1 -
ORGANIZATION AND BUSINESS
Point Capital, Inc. (the “Company”)
was incorporated in the State of New York on July 13, 2010. On January 24, 2013, the Company changed its state of incorporation
from New York to Delaware.
On October 4, 2013, the Company filed a
Form N-54A and elected to become a business development company (“BDC”) under the Investment Company Act of 1940, as
amended (the “1940 Act”). In addition, the Company previously elected to be treated for federal income tax purpose
as a regulated investment company, or (“RIC”), under Subchapter M of the Internal Revenue Code of 1986, as amended,
or (the “Code”). At March 31, 2017, the Company determined that it failed the RIC diversification test since one of
the Company’s investments accounted for approximately 78% of the Company’s total assets. To correct the failure, the
Company needed to dispose of the asset causing the failure within six months of the end of the quarter in which it identified the
failure and the Company would have had to pay an excise tax of $50,000. The Company did not cure its failure to retain its status
as a RIC and the Company will not seek to obtain RIC status again. Accordingly, the Company is subject to income taxes at corporate
tax rates.
The Company’s investment objective
was to provide current income and capital appreciation. The Company intended to accomplish its objective by investing in the common
stock, preferred stock, warrants and convertible notes of small and mid-cap companies.
The
Company’s investments were made principally through direct investments in prospective portfolio companies. However,
the Company also purchased securities in private secondary transactions. The Company to a lesser extent also invested in private
companies that met its investment objectives. Through September 29, 2018, the Company met the definition of an investment company
in accordance with the guidance under Accounting Standards Codification Topic 946 “
Financial Services – Investment
Companies
.”
On September 29, 2018, the Company filed
Form N-54C, Notification of Withdrawal of election to be Subject to Section 55 through 65 of the Investment Company Act of 1940,
whereas the Company has changed the nature of its business so as to cease to be a business development company (See Note 2 –
Basis of Presentation).
As a BDC, the Company’s investment
activities were managed by Eric Weisblum, the Company’s Chief Executive Officer.
On September 29, 2018 (the “Closing
Date”), the Company entered into an Asset Purchase Agreement (“APA”) with Blind Faith Concepts Holdings, Inc.
a Nevada corporation (the “Seller”) whereby the Company completed the acquisition of 100% of the assets of “NFID”
from the Seller (See Note 3). The Company plans to develop NFID as an exclusive brand of apparel consisting initially of sweatshirts,
hoodies, pants, t-shirts, and hats.
NOTE 2 -
SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
Basis of presentation
Effective September 29, 2018, following
authorization by its shareholders, the Company withdrew its previous election to be regulated as a BDC under the Investment Company
Act of 1940, as amended, or the 1940 Act. Prior to such time, the Company was a closed-end, non-diversified management
investment company that had elected to be treated as a BDC under the 1940 Act.
The Company shall discontinue applying
the guidance in FASB Accounting Standards Codification (ASC) Topic 946 - Financial Services – Investment Company and shall
account for the change in its status prospectively by accounting for its equity investments in accordance with ASC Topics 320 -
Investments—Debt and Equity Securities as of the date of the change in status. Additionally, the presentation of the financial
statements will be that of a commercial company rather than that of an investment company.
POINT CAPITAL, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2018 AND 2017
In accordance with ASC 946, the Company
is making this change to it financial reporting prospectively, and not restating periods prior to the Company’s change in
status to a non-investment company effective September 29, 2018. Accordingly, in this report, the Company refers to both accounting
in accordance with U.S. generally accepted accounting principles (GAAP) applicable to corporations (Corporation Accounting), which
applies commencing September 29, 2018 and to that applicable to investment companies under the 1940 Act (Investment Company Accounting)
which applies to prior periods. However, pursuant to ASC 205 – Presentation of Financial Statements, Section 205-10-50-1,
“Changes Affecting Comparability”, certain amounts in the 2017 financial statements have been reclassified to conform
to the 2018 presentation. These reclassifications primarily effect the presentation of revenues and expenses in the statements
of operations and presentation of assets in the balance sheet. Additionally, the schedules of investments are not presented for
2018 or 2017. The Company determined that there is no cumulative effect of the change from Investment Company Accounting to Corporation
Accounting on periods prior to those presented and that there is no effect on the Company’s financial position or results
of operations as a result of this change.
In order to maintain its status as a non-investment
company, the Company will now operate so as to fall outside the definition of an “investment company” or within an
applicable exception. The Company expects to continue to operate outside the definition of an “investment company”
as a company primarily engaged in the business of developing and selling apparel products.
Going Concern
These financial statements have been prepared
on a going concern basis, which contemplates the realization of assets and the settlement of liabilities and commitments in the
normal course of business. As reflected in the accompanying financial statements, the Company had a net loss of $969,463 for the
year ended December 31, 2018. Additionally, the Company had an accumulated deficit of $1,642,510 at December 31, 2018 and
has not generated any revenues under its new business plan. These factors raise substantial doubt about the Company’s ability
to continue as a going concern for a period of twelve months from the issuance date of this report. Management cannot provide assurance
that the Company will ultimately achieve profitable operations or become cash flow positive, or raise additional debt and/or equity
capital. The Company is seeking to raise capital through additional debt and/or equity financings to fund its operations in the
future. If the Company is unable to raise additional capital or secure additional lending in the near future to fund its business
plan, management expects that the Company will need to curtail its operations. These financial statements do not include any adjustments
related to the recoverability and classification of assets or the amounts and classification of liabilities that might be necessary
should the Company be unable to continue as a going concern.
Use of Estimates
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 date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Making estimates
requires management to exercise significant judgment. It is at least reasonably possible that the estimate of the effect of a condition,
situation or set of circumstances that existed at the date of the financial statements, which management considered in formulating
its estimate could change in the near term due to one or more future confirming events. Accordingly, the actual results could differ
significantly from estimates. Significant estimates during the years ended December 31, 2018 and 2017 include the collectability
of notes receivable, the valuation of the Company’s equity investments, amortization period and valuation of intangibles,
the estimates for obsolete inventory, the fair value of assets acquired, assumptions used in assessing impairment of long-term
assets, valuation allowances for deferred tax assets and the fair value of shares issued for assets acquired.
Cash and Cash Equivalents
The Company considers all highly liquid
investments with a maturity of three months or less when acquired to be cash equivalents. The Company places its cash with high
credit quality financial institutions. The Company’s accounts at these institutions are insured by the Federal Deposit Insurance
Corporation (“FDIC”) up to $250,000 or by the Securities Investor Protection Corporation (“SIPC”) up to
$250,000. During 2018 and 2017, the Company had cash balances exceeding the FDIC and SIPC insurance limit on interest bearing accounts.
To reduce its risk associated with the failure of such financial institutions, the Company evaluates at least annually the rating
of the financial institutions in which it holds deposits. The carrying amounts reported in the balance sheets for cash and cash
equivalents of $336,679 and $294,591 at December 31, 2018 and 2017, respectively, approximate their fair market value based on
the short-term maturity of these instruments. At December 31, 2018 and 2017, the Company had approximately $86,700 and $44,600,
respectively, of cash in excess of FDIC limits.
POINT CAPITAL, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2018 AND 2017
Notes Receivable
The Company recognizes an allowance for
losses on notes receivable in an amount equal to the estimated probable losses net of recoveries. The allowance is based on an
analysis of historical bad debt experience, current note receivable aging, and expected future write-offs, as well as an assessment
of specific identifiable accounts considered at risk or uncollectible. The expense associated with the allowance for doubtful accounts
is recognized as general and administrative expense.
Inventory
Inventory, consisting of finished goods,
are stated at the lower of cost and net realizable value utilizing the first-in, first-out (FIFO) method. A reserve is established
when management determines that certain inventories may not be saleable. If inventory costs exceed expected net realizable value
due to obsolescence or quantities in excess of expected demand, the Company will record reserves for the difference between the
cost and the net realizable value. These reserves shall be recorded based on estimates and included in cost of sales.
Intangible Assets
Intangible assets
are carried at cost less accumulated amortization, computed using the straight-line method over the estimated useful lives. Intangible
assets consist of a brand ambassador agreement which was being amortized over a period of one year and trademarks which are recorded
at cost and have an indefinite useful life and are not amortized.
For the year ended
December 31, 2018, the Company recorded an impairment loss of $87,745 related to the impairment of the brand ambassador agreement.
Impairment of Long-lived Assets
In accordance with ASC Topic 360, the Company
reviews long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets
may not be fully recoverable, or at least annually. The Company recognizes an impairment loss when the sum of expected undiscounted
future cash flows is less than the carrying amount of the asset. The amount of impairment is measured as the difference between
the asset’s estimated fair value and its book value. At December 31, 2018, based on management’s impairment analysis,
the Company wrote off the remaining unamortized carrying value of its intangible asset related to the brand ambassador agreement,
management determined that there was a significant adverse change in the extent or manner in which this long-lived asset was being
used.
Securities Transactions
Securities transactions
are recorded on a trade date basis. Securities transactions outside conventional channels, such as private transactions, are
recorded as of the date the Company obtains the right to demand the securities purchased or to collect the proceeds from a sale,
and incurs an obligation to pay for securities purchased or to deliver securities sold, respectively. The Company records
interest and dividend income on an accrual basis to the extent that the Company expects to collect such amounts. Commissions and
other costs associated with transactions involving securities, including legal costs, are included in the cost basis of purchases
and deducted from the proceeds of sales.
Equity Investments,
at Cost
Equity investments,
at cost of $12,766 at December 31, 2018, comprised mainly of non-marketable capital stock and stock warrants, are recorded at cost,
as adjusted for other than temporary impairment write-downs and are evaluated for impairment periodically. Prior to September 29,
2018, equity investments, at cost were recorded at fair value, represented as cost, plus or minus unrealized appreciation or depreciation.
The fair value of equity investments, at cost that had no ready market were determined in good faith by the Board of Directors,
based upon the financial condition and operating performance of the underlying investee companies as well as general market trends
for businesses in the same industry. Included in the equity investments, at fair value were non-marketable securities of $467,066
at December 31, 2017.
POINT CAPITAL, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2018 AND 2017
Equity Investments, at Fair Value
Through September
29, 2018, on a quarterly basis, the Board of Directors of the Company (the “Board”), in good faith, determined the
fair value of equity investments, at fair value in the following manner:
Equity securities which are listed on a
recognized stock exchange are valued at the adjusted closing trade price on the last trading day of the valuation period. For equity
securities that carry a restriction inherent to the security, a restriction discount is applied, as appropriate. Investments in
warrants are valued at fair value using the Black-Scholes option pricing model. Investments in securities which are convertible
at a date in the future are valued assuming a full conversion into common shares and valued based on the methodology for equity
securities described above, or at the respective investment’s face value, whichever is a better indicator of fair value.
Investments in unlisted securities are valued using a market approach net of the appropriate discount for lack of marketability.
Investments without a readily determined
market value were primarily valued using a market approach, an income approach, or both approaches, as appropriate. The market
approach uses prices and other relevant information generated by market transactions involving identical or comparable assets or
liabilities (including a business). The income approach uses valuation techniques to convert future amounts (for example, cash
flows or earnings) to a single present amount (discounted). The measurement is based on the value indicated by current market expectations
about those future amounts. In following these approaches, the types of factors that the Company may take into account in fair
value pricing the Company’s investments include, as relevant: available current market data, including relevant and applicable
market trading and transaction comparables, applicable market yields and multiples, security covenants, call protection provisions,
information rights, the nature and realizable value of any collateral, the portfolio company’s ability to make payments,
its earnings and discounted cash flows, the markets in which the portfolio company does business, comparisons of financial ratios
of peer companies that are public, M&A comparables, and enterprise values, among other factors.
Because there is not a readily available
market value for some of the investments in its portfolio, the Company valued certain of its portfolio investments at fair value
as determined in good faith by the Board, as described herein. Due to the inherent uncertainty of determining the fair value of
investments that do not have a readily available market value, the fair value of the Company’s investments may fluctuate
from period to period. Additionally, the fair value of the Company’s investments differed significantly from the values that
would have been used had a readily available market existed for such investments and may differ materially from the values that
the Company may ultimately realize. Further, such investments are generally subject to legal and other restrictions on resale or
otherwise are less liquid than publicly traded securities. If the Company was required to liquidate a portfolio investment in a
forced or liquidation sale, the Company could realize significantly less than the value at which the Company has recorded it.
Subsequent to September 29, 2018, pursuant
to ASC 320 – Investments – Debt and Equity Securities, the Company categorizes its equity investments, fair value as
an available for sale security since there is an active market in such equity investment. Available for sale securities are carried
at fair value with unrealized gains or losses included in income (expense). Realized gains and losses are determined on a
specific identification basis and are included in other income (expense). The Company reviews equity investments for impairment
whenever circumstances and situations change such that there is an indication that the carrying amounts may not be recovered.
Net Realized
Gain or Loss and Net Change in Unrealized Appreciation or Depreciation of Equity Investments, at Fair Value
Realized gain
or loss is recognized when an investment is disposed of and is computed as the difference between the Company’s cost basis
and the net proceeds received from such disposition. Realized gains and losses on investment transactions are determined
by specific identification. Net change in unrealized appreciation or depreciation is computed as the difference between the fair
value of the investment and the cost basis of such investment, including any reversal of previously recorded unrealized appreciation/depreciation
when gains or losses are realized.
POINT CAPITAL, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2018 AND 2017
Revenue Recognition
The Company applies Accounting Standards
Update (“ASU”) 2014-09 and ASC Topic 606,
Revenue from Contracts with Customers
(“ASC 606”). ASU
2014-09, as amended by subsequent ASUs on the topic, establishes a single comprehensive model for entities to use in accounting
for revenue arising from contracts with customers and supersedes most of the existing revenue recognition guidance. This standard
requires an entity to recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects
the consideration to which the entity expects to be entitled in exchange for those goods or services and also requires certain
additional disclosures. The Company adopted this standard using the modified retrospective approach, which requires applying the
new standard to all existing contracts not yet completed as of the effective date and recording a cumulative-effect adjustment
to retained earnings as of the date of adoption. The adoption of ASU 2014-09 did not have any impact on the process for, timing
of, and presentation and disclosure of revenue recognition from contracts and there was no cumulative effect adjustment.
The Company records interest and dividend
income on an accrual basis to the extent that the Company expects to collect such amounts.
Income Taxes
Through March 31, 2017, the Company elected
to be treated as a RIC under Subchapter M of the Code and operated in a manner so as to qualify for the tax treatment applicable
to RICs.
At March 31, 2017, the Company failed this
diversification test since the Company’s investment in IPSIDY INC. (formerly ID Global Solutions Corporation) (“IDTY”)
accounted for over 25% of the Company’s total assets. This discrepancy was not caused by the acquisition of any security.
The failure was not a result of willful neglect. The Company did not cure its failure to retain its status as a RIC and the Company
does not intend to seek to obtain RIC status again. Accordingly, beginning in 2017, the Company is subject to income taxes at corporate
tax rates. The loss of the Company’s status as a RIC did not have any impact on the Company’s financial position or
results of operations.
Distributions from net investment income
and net realized capital gains are determined in accordance with U.S. federal income tax regulations, which may differ from those
amounts determined in accordance with U.S. GAAP. These book/tax differences are either temporary or permanent in nature. To the
extent these differences are permanent, they are charged or credited to paid-in-capital in excess of par or accumulated net realized
loss, as appropriate, in the period that the differences arise. Temporary and permanent differences are primarily attributable
to differences in the tax characterization of income or loss and any non-deductible expenses. These differences are generally determined
in conjunction with the preparation of the Company’s annual tax returns.
Beginning in 2017, deferred income tax
assets and liabilities arise from temporary differences between the financial statements and tax basis of assets and liabilities,
as measured by the enacted tax rates, which are expected to be in effect when these differences reverse. Deferred tax assets and
liabilities are classified as current or non-current, depending upon the classification of the asset or liabilities to which they
relate. Deferred tax assets and liabilities not related to an asset or liability are classified as current or non-current depending
on the periods in which the temporary differences are expected to reverse. Valuation allowances are established when necessary
to reduce deferred tax assets to the amount expected to be realized.
On December 22, 2017, President Trump signed
into law the Tax Cuts and Jobs Act (the “Act”), a tax reform bill which, among other items, reduces the current federal
income tax rate to 21% from 34%. The rate reduction is effective January 1, 2018, and is permanent. The Act has caused the Company’s
deferred income taxes to be revalued. As changes in tax laws or rates are enacted, deferred tax assets and liabilities are adjusted
through income tax expense. Pursuant to the guidance within SEC Staff Accounting Bulletin No. 118 (“SAB 118”), as of
December 31, 2017, the Company recognized the provisional effects of the enactment of the Act for which measurement could be reasonably
estimated. Since the Company has provided a full valuation allowance against its deferred tax assets, the revaluation of the deferred
tax assets did not have a material impact on any period presented. The ultimate impact of the Act may differ from these estimates
due to the Company’s continued analysis or further regulatory guidance that may be issued as a result of the Act.
POINT CAPITAL, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2018 AND 2017
Net (Loss) Income per Common Share
Basic (loss) income per share is computed
by dividing net (loss) income available to common shareholders by the weighted average number of shares of common stock outstanding
during each period. Diluted earnings per share is computed by dividing net income available to common shareholders by the weighted
average number of shares of common stock, common stock equivalents and potentially dilutive securities outstanding during the period
using the as-if converted method. Potentially dilutive securities which included convertible preferred shares are excluded from
the computation of diluted shares outstanding if they would have an anti-dilutive impact on the Company’s net losses. The
following table presents a reconciliation of basic and diluted net (loss) income per share:
|
|
Year Ended December 31,
|
|
|
|
2018
|
|
|
2017
|
|
(Loss) Income per common share - basic:
|
|
|
|
|
|
|
Net (loss) income allocated to common stockholders
|
|
$
|
(969,463
|
)
|
|
$
|
356,536
|
|
Weighted average common shares outstanding - basic
|
|
|
49,101,419
|
|
|
|
50,082,441
|
|
Net (loss) income per common share - basic
|
|
$
|
(0.02
|
)
|
|
$
|
0.01
|
|
|
|
|
|
|
|
|
|
|
(Loss) Income per common share - diluted:
|
|
|
|
|
|
|
|
|
Net (loss) income allocated to common shareholders - basic
|
|
$
|
(969,463
|
)
|
|
$
|
356,536
|
|
Numerator for (loss) income per common share - diluted
|
|
$
|
(969,463
|
)
|
|
$
|
356,536
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding - basic
|
|
|
49,101,419
|
|
|
|
50,082,441
|
|
Effect of dilutive securities:
|
|
|
|
|
|
|
|
|
Convertible preferred stock
|
|
|
-
|
|
|
|
2,000,000
|
|
Weighted average common shares outstanding – diluted
|
|
|
49,101,419
|
|
|
|
52,082,441
|
|
Net (loss) income per common share - diluted
|
|
$
|
(0.02
|
)
|
|
$
|
0.01
|
|
The following potentially dilutive shares
have been excluded from the calculation of diluted net loss per share as their effect would be anti-dilutive for the year ended
December 31, 2018:
|
|
December 31,
2018
|
|
|
December 31,
2017
|
|
Convertible preferred stock
|
|
|
2,000,000
|
|
|
|
-
|
|
New Accounting Pronouncements
Accounting
standards that have been issued or proposed by FASB that do not require adoption until a future date are not expected to have a
material impact on the financial statements upon adoption. The Company does not discuss recent pronouncements that are not anticipated
to have an impact on or are unrelated to its financial condition, results of operations, cash flows or disclosures.
NOTE 3 –
ACQUISITION
On
September 29, 2018 (the “Closing Date”), the Company entered into an Asset Purchase Agreement (“APA”) with
Blind Faith Concepts Holdings, Inc. a Nevada Corporation (the “Seller”) whereby the Company completed the acquisition
of 100% of the assets of “NFID” from the Seller which consisted of three trademarks related to the NFID brand, the
NFID website, shoe designs and samples, and the assumption of a one-year Brand Ambassador Agreement in exchange for 2,000,000 shares
of common capital stock of the Company. NFID is a recently developed unisex apparel brand. The Company plans on continuing product
development to fully launch the product. The Company’s acquisition of the NFID assets gives the Company access to the growing
market for unisex products.
POINT CAPITAL, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2018 AND 2017
As a result of the APA, the Company has
elected to no longer be deemed a “Business Development Company” as defined by the Investment Company Act of 1940, as
amended from time to time (the “Act”). The withdrawal was generally approved by the shareholders of the Company on
April 11, 2017, as evidenced on the Definitive Information Statement pursuant to Section 14(c) of the Securities Exchange Act of
1934 filed on June 5, 2017. The Board, under authority granted by the shareholders, approved the withdrawal on September 27, 2018.
On September 28, 2018, the Company filed Form N-54C, officially withdrawing its election to be subject to sections 55 through 65
of the Act.
Pursuant to ASU 2017-01 and ASC 805, the
Company analyzed the ASA to determine if the Company acquired a business or acquired assets. Based on this analysis, it was determined
that the Company acquired assets. Pursuant to the terms of the APA, the Company issued 2,000,000 shares of common capital stock
of the Company in exchange for 100% of the NFID assets. The shares were valued at $152,235, or $0.08 per share, the fair value
of the Company’s common stock based on the fair value of assets acquired. No goodwill should be recorded since the APA was
accounted for as an asset purchase.
The
relative fair value of the assets acquired were based on management’s estimates of the fair values on September 29, 2018.
Based upon the purchase price allocation, the following table summarizes the estimated relative fair value of the assets acquired
at the date of acquisition:
Prepaid expenses
|
|
$
|
17,500
|
|
Intangible assets
|
|
|
134,735
|
|
Total assets acquired at fair value
|
|
|
152,235
|
|
Total purchase consideration
|
|
$
|
152,235
|
|
The Company valued the three trademarks
acquired at their historical cost of $29,440 which approximates fair market value. The Company valued the Brand Ambassador Agreement
at $105,295 using the estimated fair value of required social media posts by the artist/singer Max Schneider, known as Max (“MAX”).
MAX is considered a social media influencer with over 600,000 Instagram followers and over 1.5 million YouTube subscribers.
Pursuant to the Brand Ambassador Agreement,
the Company will incur a minimum cash payment of $35,000 related to a minimum royalty payment of which $17,500 was paid prior to
the Closing Date. The remaining $17,500 is due on January 27, 2019, the six month anniversary of the Effective Date of the Brand
Ambassador Agreement.
At December 31, 2018, based on management’s
impairment analysis, the Company recorded an impairment loss of $99,412 due to the write off the remaining unamortized carrying
value of its intangible asset of $87,745 and the remaining prepaid expense of $11,667 related to the brand ambassador agreements.
NOTE 4 –
FAIR VALUE OF FINANCIAL INSTRUMENTS AND
FAIR VALUE MEASUREMENTS
The Company uses the guidance of ASC Topic
820 for fair value measurements which clarifies the definition of fair value, prescribes methods for measuring fair value, and
establishes a fair value hierarchy to classify the inputs used in measuring fair value as follows:
Level 1-Inputs are unadjusted quoted prices
in active markets for identical assets or liabilities available at the measurement date.
Level 2-Inputs are unadjusted quoted prices
for similar assets and liabilities in active markets, quoted prices for identical or similar assets and liabilities in markets
that are not active, inputs other than quoted prices that are observable, and inputs derived from or corroborated by observable
market data.
Level 3-Inputs are unobservable inputs
which reflect the reporting entity’s own assumptions on what assumptions the market participants would use in pricing the
asset or liability based on the best available information.
The carrying amounts reported in the balance
sheets for cash, prepaid expenses and other current assets, and accounts payable and accrued expenses approximate their fair market
value based on the short-term maturity of these instruments.
POINT CAPITAL, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2018 AND 2017
Equity investments, at fair value
The Company accounted for certain equity
investments at fair value using level 1, level 2 and level 3 valuations. Assets and liabilities measured at fair value on a recurring
basis are as follows at December 31, 2018 and 2017:
|
|
At December 31, 2018
|
|
|
At December 31, 2017
|
|
Description
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
Equity investments, at fair value
|
|
$
|
215,528
|
|
|
|
—
|
|
|
|
—
|
|
|
$
|
853,163
|
|
|
|
2,600
|
|
|
|
464,466
|
|
ASC 825-10 “Financial Instruments”,
allows entities to voluntarily choose to measure certain financial assets and liabilities at fair value (fair value option). The
fair value option may be elected on an instrument-by-instrument basis and is irrevocable, unless a new election date occurs. If
the fair value option is elected for an instrument, unrealized gains and losses for that instrument should be reported in earnings
at each subsequent reporting date. The Company did not elect to apply the fair value option to any outstanding instruments.
At December 31, 2017, the Company’s
equity investments, at fair value, consisted of loans and equity instruments issued by public and privately-held companies, including
convertible debt, loans, equity warrants and preferred and common equity securities. At December 31, 2018, equity investments,
at fair value consisted of common equity securities of one entity.
Equity investments, at fair value are treated as available for sale securities and are carried at fair
value with unrealized gains or losses included in income (expense). Realized gains and losses are determined on a specific
identification basis and are included in other income (expense). The Company reviews equity investments, at fair value for impairment
whenever circumstances and situations change such that there is an indication that the carrying amounts may not be recovered.
The following are the Company’s equity
investments, at fair value owned by levels within the fair value hierarchy at December 31, 2018:
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
Common Stock
|
|
$
|
215,528
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
215,528
|
|
Total Investments
|
|
$
|
215,528
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
215,528
|
|
The following are the Company’s investments
owned by levels within the fair value hierarchy at December 31, 2017:
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
Common Stock
|
|
$
|
853,163
|
|
|
$
|
-
|
|
|
$
|
200
|
|
|
$
|
853,363
|
|
LLC Membership
|
|
|
-
|
|
|
|
-
|
|
|
|
9,194
|
|
|
|
9,194
|
|
Convertible Preferred Stock
|
|
|
-
|
|
|
|
2,600
|
|
|
|
-
|
|
|
|
2,600
|
|
Warrants
|
|
|
-
|
|
|
|
-
|
|
|
|
455,072
|
|
|
|
455,072
|
|
Total Investments
|
|
$
|
853,163
|
|
|
$
|
2,600
|
|
|
$
|
464,466
|
|
|
$
|
1,320,229
|
|
At December 31, 2018 and 2017, equity investments,
at fair value consisted of the following components:
|
|
December 31,
2018
|
|
|
December 31,
2017
|
|
Equity investments, at original cost
|
|
$
|
45,336
|
|
|
$
|
876,358
|
|
Gross unrealized appreciation
|
|
|
170,192
|
|
|
|
1,190,511
|
|
Gross unrealized depreciation
|
|
|
-
|
|
|
|
(746,640
|
)
|
Equity investments, at fair market value
|
|
$
|
215,528
|
|
|
$
|
1,320,229
|
|
POINT CAPITAL, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2018 AND 2017
The following additional disclosures relate
to the changes in fair value of the Company’s Level 3 investments during the years ended December 31, 2018 and 2017:
|
|
Years Ended
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
Balance at beginning of year
|
|
$
|
464,466
|
|
|
$
|
474,390
|
|
Interest receivable converted to common stock, at cost
|
|
|
-
|
|
|
|
16,000
|
|
Net change in unrealized (depreciation) appreciation on investments
|
|
|
(414,730
|
)
|
|
|
74,076
|
|
Net transfers out of Level 3 (1)
|
|
|
(49,736
|
)
|
|
|
(100,000
|
)
|
Balance at end of year
|
|
$
|
-
|
|
|
$
|
464,466
|
|
|
(1)
|
Transfers
occurred due to the development of an active market. A review of fair value hierarchy classifications is conducted on a quarterly
basis. Changes in the observability of valuation inputs may result in a reclassification for certain financial assets or
liabilities. Reclassifications impacting Level 3 of the fair value hierarchy are reported as transfers in/out of the Level
3 category as of the beginning of the period in which the reclassifications occur.
|
At December 31, 2018, the Company did not have any level 3 investments.
At December 31, 2017, level 3 investments consisted of the following:
Investment Type
|
|
Fair Value at
December 31, 2017
|
|
|
Valuation Technique
|
|
Unobservable inputs
|
|
Input
|
|
Common Stock
|
|
$
|
200
|
|
|
Recent Transactions
|
|
N/A
|
|
|
N/A
|
|
LLC Membership Units
|
|
$
|
9,194
|
|
|
Recent Transactions
|
|
N/A
|
|
|
N/A
|
|
Warrants
|
|
$
|
455,072
|
|
|
Black-Scholes Option Pricing Model
|
|
Volatility
|
|
|
72.8% to 120.4%
|
|
|
|
$
|
464,466
|
|
|
|
|
|
|
|
|
|
Equity investments, at cost
At December 31, 2018, equity investments,
at cost of $12,766, comprised mainly of non-marketable capital stock and stock warrants, are recorded at cost, as adjusted for
other than temporary impairment write-downs and are evaluated for impairment periodically.
NOTE 5 –
INVENTORY
At December 31, 2018, inventory consisted of leather footwear
finished goods amounting to $26,973. The Company did not have any inventory at December 31, 2017.
NOTE 6 –
NOTES RECEIVABLE
On September 28, 2018, the Company and
the Seller (See Note 3) executed a two year promissory note receivable agreement with a principal balance of $200,000 of which
$100,000 was funded to the Seller in September 2018 and the remaining $100,000 was funded in October 2018. The terms of the promissory
note include an interest rate of 6% and the Company shall be repaid in interest only payments on a quarterly basis, until the maturity
date of September 27, 2020, at which time the full principal and any interest payments will be due to the Company. At the time
the promissory note receivable agreement was executed, the Company also executed a Security Interest and Pledge Agreement with
the borrower. Pursuant to the Security Interest and Pledge Agreement, the borrower has pledged all of the assets of its company
as security for the performance of the note obligations. As of December 31, 2018, the Company has recorded a note receivable of
$200,000 related to the promissory note receivable agreement. These loans made are not related to the APA disclosed in Note 3.
On November 2, 2018, the Company and Seller
entered into a Promissory Note Agreement with a principal balance of $50,000. Pursuant to the Promissory Note, the $50,000 note
was a deposit and credit towards the acquisition of the assets of Lust for Life Group such as inventory, trademarks and logos.
Pursuant to this promissory note agreement, since the purchase did not close within 30 days from the note date, the note receivable
became immediately due. Through the date of default, the outstanding principal balance bore interest at an annual interest rate
of 10% payable on a monthly basis. Upon default, the interest rate increased to 15% per annum. As of December 31, 2018, the Company
determined that this note receivable was doubtful and accordingly, recorded an allowance for doubtful account and bad debt expense
of $50,000.
POINT CAPITAL, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2018 AND 2017
NOTE 7 –
INTANGIBLE ASSETS
In connection with an APA (See Note 3),
the Company valued the three trademarks acquired at their historical cost of $29,440 which approximated fair market value. The
Company valued the Brand Ambassador Agreement at $105,295 using the estimated fair value of required social media posts by the
artist/singer Max Schneider, known as Max (“MAX”).
At December 31, 2018, based on management’s
impairment analysis, the Company wrote off the remaining unamortized carrying value of its intangible asset related to the brand
ambassador agreement and recorded an impairment loss of $87,745. Management determined that there was a significant adverse change
in the extent or manner in which this long-lived asset was being used. For the year ended December 31, 2018, amortization of intangible
assets amounted to $17,550.
At December 31,
2018 and 2017, intangible assets consisted of the following:
|
|
Useful life
|
|
December 31,
2018
|
|
|
December 31,
2017
|
|
Trademarks
|
|
N/A
|
|
$
|
29,440
|
|
|
$
|
-
|
|
NOTE 8 -
REDEEMABLE SERIES A CONVERTIBLE PREFERRED STOCK
In April 2013, pursuant to a Series A Preferred
Stock Purchase Agreement (the “Preferred Stock Agreement”), the Company issued 4,000 shares of Series A Convertible
Preferred Stock (the “Preferred Stock”) for $400,000. Holders of Preferred Stock vote together with holders of Common
Stock on an as-converted basis. Each share of Preferred Stock is currently convertible into 500 shares of common stock at the option
of the holder (subject to a 9.99% beneficial ownership limitation) based on a conversion formula (the Stated Value, currently $100,
divided by the Conversion Rate, currently $0.20.) The Conversion Rate may be adjusted upon the occurrence of stock dividends or
stock splits or subsequent equity sales at a price lower than the current conversion rate. Each share has a $100 liquidation value.
The holders of Preferred Stock are entitled to receive dividends on an as-converted basis if paid on Common Stock.
The Series A Convertible Preferred Stock
is redeemable at the option of the holder upon the occurrence of certain “triggering events.” In case of a triggering
event, the holder has the right to redeem each share held for cash (currently $100/share) or impose a dividend rate on all of the
outstanding Preferred Stock at 6% per annum thereafter. A triggering event occurs if the Company fails to deliver certificates
representing conversion shares, fails to pay the amount due pursuant to a Buy-In, fails to have available a sufficient number of
authorized shares, fails to observe any covenant in the Certificate of Designation unless cured within 30 calendar days, shall
be party to a Change in Control Transaction, sustains a bankruptcy event, fails to list or quote its common stock for more than
20 trading days in a twelve-month period, sustains any monetary judgment, writ or similar final process filed against the Company
for more than $100,000 and such judgment writ or similar final process shall remain unvacated, unbonded or unstayed for a period
of 45 calendar days, or fails to comply with the Asset Coverage requirement.
Because certain of these “triggering
events” are outside the control of the Company, the Preferred Stock is classified within the temporary equity section of
the accompanying balance sheets.
Pursuant to the Preferred Stock Agreement,
the Company agreed that as long as the purchasers of its Series A Preferred Stock are holding said shares, the Company would comply
in all respects with its reporting and filing obligations under the Exchange Act. The Company did not file its annual report for
the year ended December 31, 2015 and its quarterly reports for the period ended March 31, 2016 and June 30, 2016, in a timely manner.
The Company is currently not in breach of its agreement to remain current. The purchase agreement does not provide for any immediate
consequence or default provision such as a reduction in the conversion price of the Series A Preferred, immediate redemption or
the like.
The Preferred Stock has forced conversion
rights where the Company may force the conversion of the Preferred Stock if certain conditions are met. The Company may elect to
redeem some or all of the outstanding Preferred Stock for the Stated Value (currently $100/share) provided that proper notice is
provided to the holders and that a number of conditions (the “Equity Conditions”) have been met.
POINT CAPITAL, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2018 AND 2017
If any shares of Preferred Stock are outstanding
and the Company is a BDC, the Company shall have asset coverage of at least 200% as of the close of business on the last business
day of a calendar quarter. If the Company fails to comply with this requirement and it is not cured on a timely basis, the Company
shall, to the extent permitted by the 1940 Act and Delaware law, proceed to redeem a sufficient number of shares of Preferred Stock
(at $100/share plus any unpaid dividends and distributions) to meet is asset coverage requirement.
The Company believes the carrying amount
reported in the balance sheets for the Preferred Stock of $400,000 approximates the fair market value of such Preferred Stock based
on the short-term maturity of these instruments which also equals the redemption value reflected as on the balance sheets.
On March 31, 2017, the Board approved the
amendment and restatement of the original Certificate of Designation in order to expressly ensure that holders of the Company’s
Preferred Stock have the right to elect at least two directors at all times, have complete priority over any other class as to
distribution of assets and payments of dividends, and have equal voting rights with every other outstanding voting stock. On May
11, 2017, the Company filed the amendment and restatement with the State of Delaware.
NOTE 9 –
STOCKHOLDERS’
EQUITY
Preferred stock
The Company has authorized the issuance of 5,000,000 shares
of preferred stock, $0.0001 par value. The Company’s board of directors is authorized at any time, and from time to time,
to provide for the issuance of shares of Preferred Stock in one or more series, and to determine the designations, preferences,
limitations and relative or other rights of the Preferred Stock or any series thereof. In April 2013, 1,000,000 shares were designated
as Series A Convertible Preferred Stock (See Note 8).
Common stock issued for asset acquisition
On September 29, 2018 (the “Closing
Date”), pursuant to an APA (See Note 3), the Company issued 2,000,000 shares of common stock of the Company.
Common stock issued for cash
On December 4, 2018, the Company issued 70,000 shares of its
common stock for cash proceeds of $24,500, or $0.35 per share.
Common stock redemption
In December 2018, the Company executed 14 separate
Return to Treasury Agreements, whereby certain shareholders holding an aggregate of 28,734,901 shares of common stock of the Company
agreed to return a portion of their respective holdings to treasury in exchange for cash payments aggregating $2,872. As a result,
the total issued and outstanding number of shares of common stock of the Company was reduced by 28,734,901.
NOTE 10 -
INCOME TAXES
Through March 31, 2017, the Company elected
to be treated as a RIC under Subchapter M of the Code and operated in a manner so as to qualify for the tax treatment applicable
to RICs.
In order to qualify for favorable tax treatment
as a RIC, the Company is required to distribute annually to its stockholders at least 90% of its investment company taxable income,
as defined by the Code. To avoid federal excise taxes, the Company must distribute annually at least 98% of its ordinary income
and 98.2% of net capital gains from the current year and any undistributed ordinary income and net capital gains from the preceding
years. The Company, at its discretion, may carry forward taxable income in excess of calendar year distributions and pay a 4% excise
tax on this income. Additionally, if more than 25% of the Company’s total assets is invested in the securities of one entity,
the Company would not meet the diversification tests in order to qualify as a RIC for federal income tax purposes.
Since March 31, 2017, the Company failed
this diversification test since the Company’s investment in IPSIDY INC. (“IDTY”) accounted for over 25% of the
Company’s total assets (approximately 78% of total assets at December 31, 2017). This discrepancy was not caused by the acquisition
of any security. The failure was not a result of willful neglect. If the Company were to correct the failure, the Company should
have disposed of the asset causing the failure within six months of the end of the quarter in which it identified the failure to
cure the failure unless the Company would otherwise be in compliance within the six month period and the Company would be required
to pay an excise tax of $50,000. As of the December 31, 2017, the Company had not cured its failure to retain its status as a RIC
and the Company does not intend to retain its RIC status. Accordingly, for 2018 and 2017, the Company did not qualify as a RIC.
In 2018 and 2017, the Company is subject to income taxes at corporate tax rates. The loss of the Company’s status as a RIC
did not have any impact on the Company’s financial position or results of operations.
POINT CAPITAL, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2018 AND 2017
The Company evaluates tax positions taken
or expected to be taken in the course of preparing its tax returns to determine whether the tax positions are “more-likely-than-not”
to be sustained by the applicable tax authority. Tax positions not deemed to meet the “more-likely-than-not” threshold
are reversed and recorded as a tax benefit or expense in the current year. All penalties and interest associated with income taxes
are included in income tax expense. Conclusions regarding tax positions are subject to review and may be adjusted at a later date
based on factors including, but not limited to, on-going analyses of tax laws, regulations and interpretations thereof. As of December
31, 2018 and 2017, the Company had not recorded a liability for any unrecognized tax positions.
Taxable income (loss) generally differs
from the change in net income (loss) for financial reporting purposes due to temporary and permanent differences in the recognition
of income and expenses, and generally excludes net unrealized appreciation or depreciation, as unrealized gains or losses are not
included in taxable income (loss) until they are realized.
The following reconciles net (loss) income
to taxable ordinary loss for the years ended December 31, 2018 and 2017:
|
|
December 31,
2018
|
|
|
December 31,
2017
|
|
Net (loss) income - book
|
|
$
|
(969,463
|
)
|
|
$
|
356,536
|
|
Net unrealized (appreciation) depreciation not taxable
|
|
|
278,680
|
|
|
|
(912,094
|
)
|
Taxable ordinary loss
|
|
$
|
(690,783
|
)
|
|
$
|
(555,558
|
)
|
At December 31, 2018 and 2017, the components
of accumulated net losses on a tax basis and a reconciliation to accumulated deficit at December 31, 2018 and accumulated net losses
on a book basis at December 31, 2017 was as follows:
|
|
December 31,
2018
|
|
|
December 31,
2017
|
|
Net unrealized appreciation (depreciation)
|
|
$
|
170,192
|
|
|
$
|
448,871
|
|
Net operating loss carry forward
|
|
|
(1,060,412
|
)
|
|
|
(470,388
|
)
|
Capital loss carry forward
|
|
|
(752,290
|
)
|
|
|
(651,530
|
)
|
Total accumulated losses—net, book basis
|
|
$
|
(1,642,510
|
)
|
|
$
|
(673,047
|
)
|
At December 31, 2018 and 2017, gross unrealized
appreciation and gross unrealized depreciation based on cost for federal income tax purposes were as follows:
|
|
December 31,
2018
|
|
|
December 31,
2017
|
|
Tax cost
|
|
$
|
45,336
|
|
|
$
|
876,358
|
|
Gross unrealized appreciation
|
|
|
170,192
|
|
|
|
1,190,511
|
|
Gross unrealized depreciation
|
|
|
-
|
|
|
|
(746,640
|
)
|
Total investments, at fair market value
|
|
$
|
215,528
|
|
|
$
|
1,320,229
|
|
Effective in 2017,
the Company accounts for income taxes pursuant to ASC 740 “Accounting for Income Taxes” that requires the recognition
of deferred tax assets and liabilities for the differences between the financial statements and the tax basis of assets and liabilities,
and for the expected future tax benefit to be derived from tax losses and tax credit carry forwards. Additionally, the accounting
standards require the establishment of a valuation allowance to reflect the likelihood of realization of deferred tax assets. Realization
of deferred tax assets, including those related to the net operating loss carry forwards for income tax purposes as compared to
financial statement purposes, are dependent upon future taxable income and timing of reversals of future taxable differences along
with any other positive and negative evidence during the periods in which those temporary differences become deductible or are
utilized. The deferred tax assets at December 31, 2017 consist of net operating and capital loss carryforwards. The net deferred
tax asset has been fully offset by a valuation allowance because of the uncertainty of the attainment of future taxable income
and capital gains.
POINT CAPITAL, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2018 AND 2017
On December 22, 2017, President Trump signed
into law the Tax Cuts and Jobs Act (the “Act”), a tax reform bill which, among other items, reduces the current federal
income tax rate to 21% from 34%. The rate reduction is effective January 1, 2018, and is permanent. The Act has caused the Company’s
deferred income taxes to be revalued. As changes in tax laws or rates are enacted, deferred tax assets and liabilities are adjusted
through income tax expense. Pursuant to the guidance within SEC Staff Accounting Bulletin No. 118 (“SAB 118”), as of
December 31, 2017, the Company recognized the provisional effects of the enactment of the Act for which measurement could be reasonably
estimated. Since the Company has provided a full valuation allowance against its deferred tax assets, the revaluation of the deferred
tax assets did not have a material impact on any period presented. The ultimate impact of the Act may differ from these estimates
due to the Company’s continued analysis or further regulatory guidance that may be issued as a result of the Act.
As a result of the reduction of the federal
corporate income tax rate, the Company reduced the value of its net deferred tax asset by $89,244 which was recorded as a corresponding
reduction to the valuation allowance during the fourth quarter of 2017.
The items accounting for the difference
between income taxes at the effective statutory rate and the provision for income taxes for the years ended December 31, 2018 and
2017 was as follows:
|
|
Year Ended
|
|
|
Year Ended
|
|
|
|
December 31,
2018
|
|
|
December 31,
2017
|
|
Income tax (benefit) provision at U.S. statutory rate
|
|
$
|
(203,587
|
)
|
|
$
|
(159,932
|
)
|
Income tax (benefit) provision – state
|
|
|
(63,015
|
)
|
|
|
(30,575
|
)
|
Effect of change in Federal effective rate
|
|
|
-
|
|
|
|
61,150
|
|
Permanent difference –unrealized loss on equity investments
|
|
|
76,637
|
|
|
|
-
|
|
Change in valuation allowance
|
|
|
189,965
|
|
|
|
129,357
|
|
Total provision for income tax
|
|
$
|
-
|
|
|
$
|
-
|
|
The Company’s approximate net deferred
tax asset as of December 31, 2018 and 2017 was as follows:
|
|
December 31,
2018
|
|
|
December 31,
2017
|
|
Deferred Tax Asset:
|
|
|
|
|
|
|
Net operating loss carryforward
|
|
$
|
291,614
|
|
|
$
|
129,357
|
|
Net capital loss carryforward
|
|
|
206,879
|
|
|
|
179,171
|
|
Total deferred tax asset before valuation allowance
|
|
|
498,493
|
|
|
|
308,528
|
|
Valuation allowance
|
|
|
(498,493
|
)
|
|
|
(308,528
|
)
|
Net deferred tax asset
|
|
$
|
-
|
|
|
$
|
-
|
|
At December 31,
2018, the Company had a net capital loss carryforward of approximately $752,289, which can be used to offset future capital gains
for a period of five years.
Due to the loss
of it RIC status in 2017, any net tax operating losses generated as a RIC cannot be used to offset any future taxable income.
As of December 31, 2018, the Company incurred an aggregate estimated net operating loss of approximately $1,060,000 for income
taxes, respectively. These net operating loss carries forwards may be available to reduce future years’ taxable income.
The 2017 carryforward will expire, if not utilized, through 2037. The 2018 carryforward shall be carried over indefinitely, subject
to annual usage limits.
Management believes
that it appears more likely than not that the Company will not realize these tax benefits due to the Company’s continuing
losses for income taxes purposes. Accordingly, the Company has provided a 100% valuation allowance on the deferred tax asset benefit
related to the U.S. net operating loss and capital loss carry forwards to reduce the asset to zero. Management will review this
valuation allowance periodically and make adjustments as necessary.
POINT CAPITAL, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2018 AND 2017
NOTE 11 –
CONCENTRATIONS AND CREDIT RISKS
Financial instruments that subjected the
Company to concentrations of market risk consisted principally of equity investments, at fair value, which collectively represented
approximately 21.4% and 80.4% of the Company’s total assets at December 31, 2018 and 2017, respectively. These investments
are valued in accordance with the Company’s fair value policies and procedures. At December 31, 2018, all of the fair
value of the Company’s equity investments, at fair value is concentrated in one entity in the biometric technology industry,
which gives rise to a risk of significant loss should the performance or financial condition of this industry or the portfolio
company deteriorates.
NOTE 12 –
SUBSEQUENT EVENTS
On January 22, 2019, the Company entered
into a consulting agreement with a consultant in connection with the Company’s marketing and branding of its NFID products.
The agreement ends on December 31, 2019 and may be cancelled by either party at any time with thirty day’s written notice.
For services rendered the Company shall pay the consultant an initial payment of $25,000. Additionally, beginning on April 1, 2019,
the Company shall pay the consultant $5,000 per month through December 2019. Additionally, the Company shall issue 100,000 shares
of common stock of the Company to the consultant on a quarterly basis in tranches of 25,000 shares per quarter, commencing on March
31, 2019, and continuing on to the last day of each subsequent quarter in the year 2019. These shares were valued on the January
22, 2019 grant date at $35,000, or $0.35 per common share, based on recent common share sales which shall be amortized over the
vesting period.