Notes to Condensed Consolidated Financial
Statements
Three months ended June 30, 2020 and 2019
(unaudited)
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1.
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Basis of presentation and description of activities
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Basis of presentation
The accompanying interim financial statements
have been prepared in conformity with accounting principles generally accepted in the United States of America for interim financial
information and with the instructions to Form 10-Q and Article 8 of Regulation S-X. The information and note disclosures
normally included in complete financial statements have been condensed or omitted pursuant to such rules and regulations.
The Condensed Consolidated Balance Sheet as of December 31, 2019 has been derived from audited financial statements. These financial
statements should be read in conjunction with the audited consolidated financial statements and notes thereto for the year ended
December 31, 2019 as presented in our Annual Report on Form 10-K. In the opinion of management, this interim information includes
all material adjustments, which are of a normal and recurring nature, necessary for a fair presentation. The results for the 2020
interim period are not necessarily indicative of results to be expected for the entire year.
Description of activities
The Company has
no or nominal operations. As a result, 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 proceeds from the Sale and other liquid assets of the Company are so deployed,
the Company intends to invest the proceeds of the Sale and its other 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.
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2.
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Adoption of new accounting guidance
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In January 2017,
FASB issued ASU 2017-04, “Intangibles- Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment”,
which eliminates the second step of the previous FASB guidance for testing goodwill for impairment and is intended to reduce cost
and complexity of goodwill impairment testing. The Company has adopted this standard on January
1, 2020, which did not have an impact on the condensed consolidated financial statements.
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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 condensed consolidated financial statements.
Loss per share for the three months ended
June 30, 2020 and 2019 respectively, is calculated based on 19,873,110 and 19,744,321 weighted average outstanding shares of common
stock, including 33,333 shares which are issuable at June 30, 2020.
Loss per share for the six months ended
June 30, 2020 and 2019 respectively, is calculated based on 19,864,777 and 19,688,848 weighted average outstanding shares of common
stock, including 25,000 shares which are issuable, at June 30, 2020.
Options for 550,000 shares of common stock,
for each of the three and six months ended June 30, 2020 and 2019, and stock awards for 66,667
and 100,000 shares of common stock for each of the three and six months ended June 30, 2020 and 2019, respectively, were
not included in the diluted computation as their effect would be anti-dilutive since the Company incurred net losses for both
periods.
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:
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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 June 30, 2020, and December 31, 2019, the Company held $6,675,000 and $7,144,000 in U.S. government debt securities. U.S. government
securities are valued using a model that incorporates market observable data, such as reported sales of similar securities, broker
quotes, yields, bids, offers, and reference data. Certain securities are valued principally using dealer quotations. Money market
funds are valued at the closing price reported by the fund sponsor from an actively traded exchange. U.S. government debt securities
are categorized in Level 2 of the fair value hierarchy, depending on the inputs used and market activity levels for specific securities.
The U.S. government debt securities, which have maturities of three months or
less at time of purchase, are reported as Cash and cash equivalents, and those with longer maturities
are reported as investments, on the condensed consolidated balance sheets as of June 30, 2020 and December 31, 2019.
The
following table presents the Company’s financial instruments at fair value (in thousands):
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Fair
Value Measurements
as
of June 30, 2020
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6/30/2020
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Quoted Prices
in Active
Markets for
Identical
Assets
(Level 1)
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Significant
Other
Observable
Inputs
(Level 2)
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Significant
Unobservable
Inputs
(Level 3)
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Cash and cash equivalents
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$
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6,494
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$
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69
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$
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6,425
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$
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-
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Investments in U.S. Treasury Bills
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250
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-
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250
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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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-
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Income tax expense
represents minimum state taxes. No tax benefit has been recorded in relation to the pre-tax loss for the three and six months ended
June 30, 2020 and 2019, due to a full valuation allowance to offset any deferred tax asset related to net operating loss carry
forwards attributable to the losses.
On March 27, 2020,
the Coronavirus Aid, Relief, and Economic Security (CARES) Act was signed into law. The Act contains several new or changed income
tax provisions, including but not limited to the following: increased limitation threshold for determining deductible interest
expense; class life changes to qualified improvements and the ability to carry back net operating losses incurred from tax years
2018 through 2020 up to the five preceding tax years. The Company has evaluated the new tax provisions of the CARES Act and determined
the impact to be either immaterial or not applicable.
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. As
of June 30, 2020, short-term liability related to the loan payable was approximately $15,000 and the long-term liability was approximately
$38,000. The Company intends to use 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, which amounts are intended to be eligible for forgiveness,
subject to the provisions of the CARES Act and could be subject to claw back.
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. As of June 30, 2020, 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 as of June 30, 2020. No such shares were repurchased during any of
the three and six months ended June 30, 2020 and 2019.
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9.
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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 June 30, 2020, 66,667 stock awards remained unvested and 33,333 shares are to be issued.
The Company recorded
compensation expense of approximately $3,000 and $3,000 for the three months ended June 30, 2020 and 2019, respectively, and compensation
expense of approximately $6,000 and $4,000 for the six months ended June 30, 2020 and 2019, respectively, related to those stock
awards. The total unrecognized compensation expense related to these unvested stock awards at June 30, 2020 is $21,900, which will
be recognized over the remaining vesting period of approximately 2 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.
The Company recorded compensation expense
of $0 and $100, respectively, for the three and six months ended June 30, 2020 and 2019, respectively, under these plans.
The Company issued 100,000 options to a
consultant on March 28, 2016 which vest equally over 3 years and are subject to post vesting restrictions for sale for three years
with an exercise price of $1.29, which price was equal to the market value at the date of the grant.
As of June 30, 2020, 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 options exercised during the first and second quarters
of 2020.
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10.
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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 recent 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 on 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 and expired on February 29, 2020, after which it 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, 2018, 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. The estimated cost of work to be performed under the Action Plan was $90,000 and was accrued for at December 31, 2018. 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. On February 11, 2020, the Company and its representatives
met with the Town of Killingly Town Council to discuss a proposed ownership transfer of the properties to the Town of Killingly
or a group of interested parties. The proposal is currently under the review of the Town of Killingly Town Council, in conjunction
with the Town Manager.