Notes to Consolidated Financial Statements
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1.
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Description of activities
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The Company is a “shell
company”, as defined in Rule 405 of the Securities Act of 1933, as amended, or the Securities Act, and Rule 12b-2 of the
Securities Exchange Act of 1934, as amended, or the Exchange Act. As a shell company, its stockholders will be unable to utilize
Rule 144 of the Securities Act, or Rule 144 to sell “restricted stock” as defined in Rule 144 or otherwise use Rule
144 to sell stock of the Company, and the Company would be ineligible to utilize registration statements on Form S-3 or Form S-8
for so long as the Company remains a shell company and for 12 months thereafter. Among other things, as a consequence, the offering,
issuance and sale of its securities is likely to be more expensive and time consuming and may make the Company’s securities
less attractive to investors.
The Company is not engaged in
the business of investing, reinvesting, or trading in securities, and it does not hold itself out as being engaged in those activities.
However, under the Investment Company Act of 1940, as amended (the “Investment Company Act”), a company may fall within
the scope of being an “inadvertent investment company” under section 3(a)(1)(C) of such Act if the value of the Company’s
investment securities (as defined in the Investment Company Act) is more than 40% of the Company’s total assets (exclusive
of government securities and cash and certain cash equivalents).
The Company intends to evaluate
and explore all available strategic options. The Company will continue to work to maximize stockholder value. Such strategic options
may include acquisition of an investment advisory business, acquisition of a financial services business, creating partnerships
or joint ventures for those or other businesses and investing in other businesses that provide attractive opportunities for growth.
The directors will also consider alternatives for distributing some or all of the Company’s cash and cash equivalents. Until
such time as a decision is made as to how the liquid assets of the Company are so deployed, the Company intends to invest its liquid
assets in high-grade, short- term investments (such as cash and cash equivalents) consistent with the preservation of principal,
maintenance of liquidity and avoidance of speculation.
See “Risk Factors “The
Company may be classified as an inadvertent investment company if the Company acquires investment securities in excess of 40% of
its total assets” and “The Company is a shell company under the federal securities laws.” As of December 31,
2020, the Company is not considered an inadvertent investment company.
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2.
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Summary of significant accounting policies
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Principles of consolidation.
The consolidated financial statements include the accounts
of the Company and its wholly-owned subsidiaries, all of which are inactive. All significant intercompany accounts and transactions
have been eliminated in consolidation.
Use of estimates
The preparation of financial statements in conformity
with accounting principles generally accepted in the United States of America (“GAAP”), requires management to make
estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities
at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual
results could differ from these estimates.
Cash and cash equivalents
Cash equivalents represent short-term, highly liquid
investments, which are readily convertible to cash and have maturities of three months or less at time of purchase. Cash
equivalents, which are carried at fair value or amortized cost, as applicable, consist of holdings in a money market fund and in
treasury bills. Cash and cash equivalents amounted to approximately $6,469,000 and $7,336,000 at December 31, 2020 and 2019, respectively.
Investment Valuation
The Company carries its investments at
fair value. Fair value is an estimate of the exit price, representing the amount that would be received to sell an asset or paid
to transfer a liability in an orderly transaction between market participants (i.e., the exit price at the measurement date). Fair
value measurements are not adjusted for transaction costs. A fair value hierarchy provides for prioritizing inputs to valuation
techniques used to measure fair value into three levels:
Level 1
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Unadjusted quoted prices in active markets for identical assets or liabilities.
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Level 2
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Inputs other than quoted market prices that are observable, either directly or indirectly, and reasonably available. Observable inputs reflect the assumptions market participants would use in pricing the asset or liability and are developed based on market data obtained from sources independent of the Company.
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Level 3
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Unobservable inputs. Unobservable inputs reflect the assumptions that the Company develops based on available information about what market participants would use in valuing the asset or liability.
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An asset or liability's level within
the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. Availability
of observable inputs can vary and is affected by a variety of factors. The Company uses judgment in determining fair value of assets
and liabilities and Level 3 assets and liabilities involve greater judgment than Level 1 or Level 2 assets or liabilities.
As of December 31, 2020,
and 2019, the Company held $5,950,000 and $7,144,000 in U.S. government securities. U.S. government securities are valued using
a model that incorporates market observable data, such as reported sales of similar securities, broker quotes, yields, bids, offers,
and reference data. Certain securities are valued principally using dealer quotations. Money market funds are valued at the closing
price reported by the fund sponsor from an actively traded exchange. U.S. government securities are categorized in Level 2 of the
fair value hierarchy, depending on the inputs used and market activity levels for specific securities. The U.S. government securities,
which have maturities of three months or less at time of purchase, are reported as Cash and
cash equivalents on the balance sheet as of December 31, 2020 and 2019.
The following table presents the Company’s
financial instruments at fair value (in thousands):
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Fair Value Measurements
as of December 31, 2020
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12/31/2020
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Quoted Prices
in Active
Markets for
Identical
Assets
(Level 1)
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Significant
Other
Observable
Inputs
(Level 2)
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Significant
Unobservable
Inputs
(Level 3)
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Cash and cash equivalents
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$
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6,469
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$
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519
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$
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5,950
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-
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Fair Value Measurements
as of December 31, 2019
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12/31/2019
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Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)
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Significant
Other
Observable
Inputs
(Level 2)
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Significant
Unobservable
Inputs
(Level 3)
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Cash and cash equivalents
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$
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7,336
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$
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192
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$
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7,144
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-
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Investment in undeveloped land
The Company owns certain non-strategic assets, including
an investment in land and certain flowage rights in undeveloped property (the “properties”) primarily located Killingly,
Connecticut. The properties were fully impaired as of December 31, 2018.
Per share data
Basic and diluted loss per share for the years ended
December 31, 2020 and 2019, respectively, is calculated based on 19,977,927 and 19,736,479 weighted average outstanding shares
of common stock, including a weighted average 138,150 shares which are issuable at December 31, 2020.
Options for 100,000 and 550,000 shares of common
stock in 2020 and 2019, respectively, and stock awards for 66,667 and 100,000
shares of common stock in 2020 and 2019, respectively, were not included in the diluted computation as their effect
would be anti-dilutive since the Company incurred net operating losses for both years.
Stock-based compensation
Stock-based compensation cost for employees is measured
at the grant date based on the fair value of the award and is recognized as an expense on a straight-line basis over the requisite
service period, which is generally the vesting period. Stock-based compensation cost for consultants is initially measured at the
grant date based on the fair value of the award, remeasured each reporting date until the instrument vests, at which time the cost
is established. The cost is recognized as an expense on a straight-line basis, as adjusted each reporting period, over the requisite
service period, which is generally the vesting period. In accordance with ASU 2016-09, the
Company has made the accounting policy election to continue to estimate forfeitures based upon historical occurrences. See
Note 7 to the Consolidated Financial Statements for further information regarding the Company’s stock-based compensation
assumptions and expense.
Income taxes
Deferred tax assets and liabilities are recognized for
the estimated future tax consequences attributable to carryforwards and to differences between the financial statement carrying
amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using
enacted tax rates in effect for the year in which those temporary differences are expected to be recovered or settled. The effect
on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment
date.
The accounting for uncertain tax positions guidance
requires that the Company recognize the financial statement benefit of a tax position only after determining that the Company
would more likely than not sustain the position following an audit. For tax positions meeting the more-likely-than-not
threshold, the amount recognized in the financial statements is the largest benefit that has a greater than 50 percent
likelihood of being realized upon ultimate settlement with the relevant tax authority. The Company recognizes interest and
penalties on income taxes, including those related to uncertain tax positions as interest and other expenses, respectively. The Company had no income tax
uncertainties at December 31, 2020 and 2019.
Concentrations of credit risk
Financial instruments that potentially subject the Company
to significant concentrations of credit risk consist principally of cash investments. Investments in cash and money market funds
are insured up to $250,000 per depositor, per insured bank. Investments in treasury bills are insured up to $500,000. For the years
ended December 31, 2020 and 2019, a substantial portion of the Company's investments in cash and treasury bills are in excess of
these limits.
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3.
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Certain New Accounting guidance not yet adopted
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In June 2016, the Financial Accounting Standards Board
(FASB) issued Accounting Standards Update No. 2016-13 (ASU 2016-13) "Financial Instruments-Credit Losses (Topic 326): Measurement
of Credit Losses on Financial Instruments", which requires the measurement and recognition of expected credit losses for financial
assets held at amortized cost. ASU 2016-13 replaces the existing incurred loss impairment model with an expected loss model which
requires the use of forward-looking information to calculate credit loss estimates. It also eliminates the concept of other-than-temporary
impairment and requires credit losses related to available-for-sale debt securities to be recorded through an allowance for credit
losses rather than as a reduction in the amortized cost basis of the securities. These changes will result in earlier recognition
of credit losses. The standard, as amended, is effective for periods beginning after December 15, 2022 for both interim and annual
periods. Early adoption is permitted. The Company does not expect the adoption of ASU 2016-13 to have an impact on its consolidated
financial statements.
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4.
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Accounts payable and accrued expenses
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Accounts payable and accrued expenses consist of the
following (in thousands):
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Year Ended December 31,
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2020
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2019
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Accrued professional fees
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$
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42
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$
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127
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Other
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41
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63
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Total
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$
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83
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$
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190
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The components of income tax (benefit) expense are as follows (in
thousands):
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Year Ended December 31,
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2020
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2019
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Current
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Federal
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$
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(37
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)
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$
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(37
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)
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State and local
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(21
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)
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25
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Total current
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(58
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)
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(12
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Deferred
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Federal
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$
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37
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$
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37
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State and local
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-
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-
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Total deferred
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$
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37
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$
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37
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Total income tax (benefit) expense
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$
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(21
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)
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$
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25
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For the years ended December 31, 2020 and 2019, the current
income tax benefit related to operations represents a refundable alternative minimum tax credit net of adjustments to and accruals
of minimum state income taxes. For the years ended December 31, 2020 and 2019, deferred income tax expense represents the
utilization of the alternative minimum tax credit carryforward.
The difference between the benefit for income taxes computed
at the statutory rate and the reported amount of tax expense (benefit) from operations is as follows:
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Year ended December 31,
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2020
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2019
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Federal income tax rate
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(21.0
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)%
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(21.0
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)%
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State income tax (net of federal effect)
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55.5
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29.2
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Change in valuation allowance
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(38.5
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)
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(24.2
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)
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Deferred tax asset write-down
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-
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16.9
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Non-deductible expenses
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1.9
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0.4
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Effective tax rate
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(2.1
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)%
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1.3
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%
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The deferred tax assets and liabilities are summarized as follows (in thousands):
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December 31,
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2020
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2019
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Deferred tax assets:
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Net operating loss carryforwards
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$
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4,501
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$
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4,884
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Capital loss carryforwards
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703
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724
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Equity-based compensation
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132
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111
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Tax credit carryforwards
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-
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37
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Unrealized loss on investments
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98
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100
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Accrued liabilities & other
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-
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6
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Gross deferred tax assets
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5,434
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5,862
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Less: valuation allowance
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(5,434
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)
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(5,825
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)
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Deferred tax assets after valuation allowance
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-
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37
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Net Deferred tax assets
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$
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-
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37
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A valuation allowance is provided when it is more
likely than not that some portion of deferred tax assets will not be realized. The valuation allowance decreased by approximately
$391,000 and $476,000 respectively, during the years ended December 31, 2020 and 2019. The decreases in the valuation allowance
during the years ended December 31, 2020 and 2019 was mainly due to adjustments to the net operating loss carryforward.
The Company files a consolidated federal tax return with
its subsidiaries. As of December 31, 2020, the Company has a federal net operating loss carryforward of approximately $20,312,000,
of which $15,280,000 expires from 2031 through 2037, and $5,032,000 does not expire. The Company also has various state and local
net operating loss carryforwards totaling approximately $4,180,000, which expire between 2021 and 2040, and a capital loss carryforward
of approximately $2,690,000, which expires between 2021 and 2024. State net operating loss carryforwards were reduced during
the year ended December 31, 2020 by approximately $16,244,000 due to a change in State tax filings.
On May 1, 2020, the Company received $53,000 from Fieldpoint
Private Bank pursuant to the Paycheck Protection Program (the “PPP Loan”) of the Coronavirus Aid, Relief, and Economic
Security Act (the “CARES Act”). The PPP Loan matures on May 4, 2022 (the “Maturity Date”), accrues interest
at 1% per annum and may be prepaid in whole or in part without penalty. No principal or interest payments are due within the initial
six months of the PPP Loan. Thereafter, monthly payments of principal and interest are due. The interest accrued during the initial
six-month period is due and payable, together with the remaining principal, on the Maturity Date. The Company used all proceeds
from the PPP Loan to retain employees, maintain payroll and make operating expense payments to support business continuity throughout
the COVID-19 pandemic. The amounts were forgiven as of January 7, 2021 (see Note 10 to the Consolidated Financial Statements).
The Company’s Board of Directors, without any vote
or action by the holders of common stock, is authorized to issue preferred stock from time to time in one or more series and to
determine the number of shares and to fix the powers, designations, preferences and relative, participating, optional or other
special rights of any series of preferred stock.
The Board of Directors authorized the Company to repurchase
up to 5,000,000 outstanding shares of common stock from time to time either in open market or privately negotiated transactions.
At December 31, 2020 and 2019, the Company had repurchased 2,041,971 shares of its common stock and a total of 2,958,029 of the
authorization shares, remained available for repurchase at December 31, 2020.
During the year ended December 31, 2020, there were 193,827 shares of Company common stock to be issued to
the independent directors of the Company, in payment of quarterly directors’ fees due to them during 2020. During the year ended 2019, the Company issued
192,534 shares of Company common stock to the independent directors of the Company, in payment of quarterly directors’
fees due to them during 2019. The value of the shares of Company common stock to be issued and issued as of
December 31, 2020 and 2019, respectively was $80,000 each year. The equity compensation awards were issued pursuant to the
exemption from the registration requirements of Section 5 of the Securities Act of 1933 (“1933 Act”) provided by
Section 4(a)(2) of the 1933 Act.
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8.
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Incentive stock plans and stock-based compensation
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Stock awards
On February 13, 2019, 100,000 stock awards were issued
to a newly appointed director of the Company. The stock awards vest equally, annually, over 3 years. The stock awards are valued
based on the closing price of $0.42 of the Company’s common stock on February 13, 2019. At
December 31, 2020, 66,667 stock awards remained unvested and 33,333 shares are to be issued.
The Company recorded compensation expense of $12,500
and $10,000 for the years ended December 31, 2020 and 2019, respectively, related to those stock awards. The total unrecognized
compensation expense related to these unvested stock awards at December 31, 2020 is $15,600, which will be recognized over the
remaining vesting period of approximately 1.12 years.
Common stock options
The Company adopted a stock-based compensation plan for
employees and non-employee members of its Board of Directors in November 2003 (the “2003 Plan”), and the National Patent
Development Corporation 2007 Incentive Stock Plan in December 2007 (the “2007 NPDC Plan”). The periods during
which additional awards may be granted under the plans have expired and no further awards may be granted under any of these plans
after December 20, 2017. As a consequence, any equity compensation awards issued after that time will be on terms determined by
the Board of Directors or the Compensation Committee of the Board of Directors and pursuant to exemptions from the registration
requirements of the securities laws.
As of December 31, 2020, all options were vested
and there were outstanding options to acquire 100,000 common shares under the 2007 NPDC Plan. All 100,000 options were vested
and exercisable, having an exercise price of $1.29 per share, a remaining contractual term of 1 year and zero aggregate
intrinsic value. There were no grants, forfeitures or exercises of options during the year of 2020.
During 2020, 450,000 options with a weighted average exercise price of $1.36, a weighted average contractual term of 2 years,
and zero aggregate intrinsic value per share had expired.
As of December 31, 2019, all options were vested and there were
outstanding options to acquire 550,000 common shares under the 2007 NPDC Plan. All 550,000 options were vested and
exercisable, having a weighted average exercise price of $1.35 per share, a weighted average contractual term of 1.75 years
and zero aggregate intrinsic value. There were no grants, forfeitures or exercises of options during the year of 2019.
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9.
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Commitments, Contingencies, and Other
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a)
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The extent of the impact and effects of the outbreak of the coronavirus (COVID-19) on the operation
and financial performance of our Company are unknown. However, the Company does not expect that the outbreak will have a material
adverse effect or financial results at this time.
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b)
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In July 2019, the Company entered into a six-month lease for office space in a building located
in Mt. Kisco, NY. The lease commenced on September 1, 2019, expired on February 29, 2020, and is being renewed on a monthly basis
for $3,800 per month.
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c)
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The Company has interests in land and certain flowage rights in undeveloped property (the “properties”)
primarily located in Killingly, Connecticut. The properties were fully impaired as of December 31, 2018.
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On September 26, 2014, the
Connecticut Department of Energy and Environmental Protection (“DEEP”) issued two Orders requiring the investigation
and repair of two dams in which the Company and its subsidiaries have certain ownership interests. The first Order required that
the Company investigate and make specified repairs to the ACME Pond Dam located in Killingly, Connecticut. The second Order, as
subsequently revised by DEEP on October 10, 2014, required that the Company investigate and make specified repairs to the Killingly
Pond Dam located in Killingly, Connecticut. The Company administratively appealed and contested the allegations in both Orders.
On July 27, 2017, the Company entered into a Consent Order with the DEEP relative to Killingly Pond Dam. The Killingly Pond Consent
Order required the Company to continue to perform routine maintenance and administrative procedures consistent with DEEP’s
Dam Safety regulations, the cost of which was not material to the Company’s financial position or results of operations.
On July 27, 2017, the Company entered into
a Consent Order with the DEEP relative to Acme Pond Dam. The Acme Pond Dam Consent Order required the Company to investigate and
recommend repairs to Acme Pond Dam. Based up on the work performed by the Company’s retained consulting engineering firm,
the Company submitted its recommended Action Plan (the “Action Plan”) for Acme Pond Dam pursuant to the Consent Order
on November 30, 2017 and such recommended Action Plan was approved by DEEP as submitted on May 23, 2019. Total expenses for the
repair work conducted in accordance with the Action Plan during the year ending December 31, 2019 was approximately $150,000. All
repair work required for both the ACME Pond Dam and the Killingly Pond Dam was completed as of December 31, 2019. DEEP issued a
Certificate of Compliance for Consent Order for the ACME Pond Dam on February 7, 2020, and a Certificate of Compliance for Consent
Order for the Killingly Pond Dam was issued on May 22, 2020.
The Company and its representatives continue to discuss
a proposed ownership transfer with interested parties.
On January 7, 2021, the Small Business Administration
forgave the PPP loan in the amount of $53,000. As such the PPP loan was paid in full as of January 7, 2021.