UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2008
Commission File Number: 814-00710
-----------------------------------
REGAL ONE CORPORATION
(Exact name of registrant as specified in its charter)
Florida 95-4158065
(State of incorporation) (I.R.S. Employer Identification No.)
11300 West Olympic Blvd, Suite 800, Los Angeles, CA 90064
(Address of principal executive offices) (Zip Code)
(Issuer's telephone number) (310) 312-6888
- ------------------------------------------------------------------------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No []
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
definitions of accelerated filer, large accelerated filer and smaller reporting
company in rule 12b-2 of the exchange act. (Check one.)
Large accelerated filer [] Accelerated filer []
Non Accelerated filer [X] Smaller Reporting Company []
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act) Yes [] No [X]
Indicate the number of shares outstanding of each of the Issuer's classes of
stock, as of the latest practical date.
As of August 27, 2008 there were 3,633,067 shares of common stock, $.001 par
value and 100,000 shares of Series B convertible preferred stock, issued and
outstanding. The outstanding Series B convertible preferred stock is
convertible into an aggregate of 10,000,000 shares of common stock.
- ------------------------------------------------------------------------------
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
PAGE
Item 1. Financial Statements ----
Balance Sheets F-2
Schedule of Investments F-3
Statements of Changes in Net Assets F-4
Statements of Operations F-5
Statements of Cash Flows F-6
Statements of Financial Highlights F-7
Notes to Financial Statements 9-22
Item 2. Management's Discussion and Analysis of Financial Condition and
Result of Operation 23
Item 3. Quantitative and Qualitative Disclosures about Market Risk 29
Item 4. Controls and Procedures 29
PART II OTHER INFORMATION
Item 1. Legal Proceedings 30
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 36
Item 3. Defaults upon Senior Securities 36
Item 4. Submission of Matters to a Vote of Security Holders 36
Item 5. Other Information 37
Item 6. Exhibits and Reports on Form 8-K 37
PART I FINANCIAL INFORMATION
<table> <caption>
REGAL ONE CORPORATION
BALANCE SHEETS
<c> <c>
June 30, 2008 December 31, 2007
(Unaudited) (Audited)
ASSETS -------------- -----------------
Assets:
Cash and cash equivalents $ 47,871 $ 64,262
Marketable securities - saleable 892,231 3,611,008
---------- -----------
Total Current Assets: 940,102 3,675,270
Investments:
Investments in non-affiliated portfolio companies 954,731 3,673,508
Less: marketable securities portion (892,231) (3,611,008)
--------- -----------
Total investments, net 62,500 62,500
--------- -----------
TOTAL ASSETS $ 1,002,602 $ 3,737,770
=========== ===========
LIABILITIES AND NET ASSETS
Current liabilities:
Due to stockholders and officers -- 195,964
Accounts payable and accrued liabilities 2,549 466,112
Margin Account loan 129 0
Note payable - officer/principal shareholder 153,371 650,794
------------ ---------
Total Current Liabilities 156,049 1,312,870
------------ ----------
Stockholders' Equity:
Preferred stock, no par value
Series A - Authorized 50,000 shares,
0 issued and outstanding at June 30, 2008 -- --
Series B - Authorized 500,000 shares,
100,000 issued and outstanding at June 30, 2008 500 500
Common stock, no par value,:
Authorized 50,000,000 shares; 3,633,067 shares
issued and outstanding at June 30, 2008 8,184,567 8,184,567
Additional paid-in capital 192,126 192,126
Accumulated deficit (7,530,640) (5,952,293)
----------- -----------
Total Net Assets 846,553 2,424,900
----------- -----------
TOTAL LIABILITIES AND NET ASSETS $ 1,002,602 $ 3,737,770
============ ===========
Net asset value per outstanding share $ 0.233 $ 0.667
F-2
See accompanying notes to the financial statements.
</Table>
<page>
<table> <caption>
REGAL ONE CORPORATION
SCHEDULE OF INVESTMENTS
June 30, 2008
(Unaudited)
<c> <c>
Equity Investments:
Description Percent Carrying Cost
Company of Business Ownership Investment Fair Value Affiliation
Neuralstem Biomedical company 3% $36,184 (1) $942,231 No
American Stem Cell Biomedical company 3% $ 0 (2) $ 12,500 No
---------- ----------
Total Investments $ 36,184 $ 954,731
(1) As of June 30, 2008, there were 843,000 Neuralstem shares held after the sale in this
quarter and first quarter of 430,814 shares. These remaining shares have been valued at a
discounted price from the 06/30/08 market price due to the current thinly traded market for
Neuralstem shares and all of these shares held at 06/30/08 have been recorded as a current
asset. Regal also has ten year Neuralstem warrants at an exercise price of $5 per share which
is significantly above the present fair market value of Neuralstem shares, therefore only a
$50,000 value has yet been assigned to these warrants, carried as an Investment along with the
American Stem Cell holding. In 2007, all portfolio companies were also reported on a fair
value basis.
(2) Refer to Note 7 Investments.
F-3
See accompanying notes to the financial statements.
</Table>
<page>
<table>
<caption>
REGAL ONE CORPORATION
STATEMENTS OF CHANGE IN NET ASSETS
<c> <c>
For the Six For the Six
Months Ended Months Ended
June 30, 2008 June 30, 2007
(Unaudited) (Unaudited)
OPERATIONS:
Net investment income (loss) from operations $ 80,145 $ (193,371)
Net realized gain on portfolio securities 1,064,768 (40,176)
Net change in unrealized appreciation
(depreciation) of portfolio securities (2,705,128) (194,510)
Interest income 30 --
Interest (expense) (18,162) --
------------ ------------
Net increase (decrease) in net assets resulting
from operations (1,578,347) (428,057)
SHAREHOLDER ACTIVITY:
Declared dividend -- 96,616
NET INCREASE (DECREASE) IN NET ASSETS (1,578,347) (331,441)
NET ASSETS:
Beginning of period 2,424,900 1,003,495
End of period 846,553 672,054
Average net assets 1,635,727 837,775
Ratios to average net assets:
Net expenses 97,428 203,371
Net investment gain (loss) (1,578,347) (428,057)
Per share ratio expenses 6.1% 24.3%
Per share ratio Net investment loss (96.5%) (51.1%)
F-4
See accompanying notes to the financial statements
</table>
<page>
<table>
<caption>
REGAL ONE CORPORATION.
STATEMENTS OF OPERATIONS
<c> <c> <c> <c> <c>
Three Months Three Months Six Months Six Months
Ended Ended Ended Ended
June 30 2008 June 30 2007 June 30, 2008 June 30,2007
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
------------- ------------- ------------- ----------
Investment income: $ -- $ -- $ -- $ --
Operating expenses:
Professional services 26,647 36,217 82,412 102,729
Litigation Settlement 45,000 45,000
Other selling, general and
administrative expenses 10,879 32,677 17,016 55,642
--------- --------- -------- --------
Total Operating expenses 37,526 113,894 99,428 203,371
--------- --------- -------- --------
Net Operating loss (37,526) (113,894) (99,428) (203,371)
Other income (expense):
Gain on payable settlements 23,250 10,000 180,373 10,000
--------- --------- -------- ---------
Net income (loss) before provision
for income taxes (14,276) (103,894) 80,945 (193,371)
Income tax expenses -- 800 (800) --
--------- ---------- --------- ----------
Net investment income (loss) (14,276) (103,094) 80,145 (193,371)
--------- ---------- ---------- ---------
Net realized gain on portfolio 245,768 -- 1,064,768 (40,176)
Net change in unrealized
(depreciation) appreciation in
portfolio companies (976,913) (343,300) (2,705,128) (194,510)
Interest (expense) (4,175) -- (18,162) --
Interest income 30 -- 30 --
--------- ---------- ---------- --------
Net increase (decrease) in net assets
resulting from operations $ (749,566) $ (446,394) (1,578,347) $ (428,057)
========== ========== =========== ==========
Weighted average number of
common shares 3,633,067 3,633,067 3,633,067 3,633,067
Basic EPS $ (0.206) $ (0.0123) $ (0.434) $ (0.0118)
Weighted average number of
fully diluted shares 13,633,067 13,633,067 13,633,067 13,633,067
Diluted EPS $ (0.055) $ (0.033) $ (0.116) $ (0.031)
========== ========== =========== ==========
See accompanying notes the financial statements.
</table>
Page F-5
<table>
<caption>
REGAL ONE CORPORATION
STATEMENTS OF CASH FLOWS
<c> <c> <c>
Six Months Ended Six Months Ended
June 30, 2008 June 30, 2007
(Unaudited) (Unaudited)
------------------ ------------------
Cash flows from operating activities:
Net increase(decrease) in net assets from operations $(1,578,347) $ (428,057)
Adjustments to reconcile net increase (decrease)
in net assets resulting from operating activities:
Unrealized decrease (increase) in investments
in portfolio companies 2,705,128 256,511
Realized gain on sale of marketable securities (1,064,768) 40,176
Gain on settlement of liabilities (180,373) (10,000)
Changes in operating assets and liabilities:
Decrease in due to stockholders and officers (113,500) --
Increase (decrease) in accounts payable/accrued
expenses (357,344) (10,204)
(Decrease) in Contingent Litigation Fees (250,000)
--------- --------
Net cash used in operating activities (589,204) (401,574)
Cash flows from investing activities:
Proceeds from sale of marketable securities 1,085,481 --
--------- --------
Net cash provided by investing activities 1,085,481 --
Cash Flows from financing activities:
Increase in margin loan 129 --
Increase (decrease) in stockholder loan (512,797) 413,509
--------- --------
Net cash provided by (used in) financing activities (512,668) 413,509
Net change in cash (16,391) 11,935
Cash at beginning of period 64,262 42
--------- --------
Cash at end of period$ $ 47,871 $ 11,977
============= ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest 87,203 --
Cash paid for income taxes -- 800
Non-Monetary Transactions:
Dividend payable on 465,430 portfolio company shares -- 653,948
--------- --------
Total non-monetary transactions$ $ 87,203 $ 654,748
=========== ===========
See accompanying notes to the financial statements
F-6
</table>
<page>
<table>
<caption>
REGAL ONE CORPORATION
STATEMENTS OF FINANCIAL HIGHLIGHTS
<c> <c> <c>
Six Months Ended Six Months Ended
June 30, 2008 June 30, 2007
(Unaudited) (Unaudited)
---------------- -------------
Per Unit Operating Performance
NET ASSET VALUE, BEGINNING OF PERIOD $ 0.667 $0.276
INCOME FROM INVESTMENT OPERATIONS:
Net investment gain (loss) 0.017 (0.053)
Net change in unrealized (depreciation)
appreciation of portfolio companies (0.751) (0.054)
Net realized gain on portfolio securities 0.300 (0.011)
--------- ---------
Total from investment operations (0.434) (0.118)
SHAREHOLDER ACTIVITY
Declared dividend .027
NET ASSET VALUE, END OF PERIOD $ 0.233 $0.185
========= =======
TOTAL NET ASSET VALUE RETURN (34.2)% 105.8%
======== =======
RATIOS AND SUPPLEMENTAL DATA:
Net assets, end of period $ 846,553 $ 672,054
========= =========
Ratios to average net assets:
Net expenses 6.0% 24.3%
Net investment gain (loss) (96.5)% (51.1)%
Portfolio turnover rate 0.58 --
See accompanying notes to the financial statements
Page F-7
</table>
REGAL ONE CORPORATION
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 - NATURE OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES
Business
Regal One Corporation (the "Company" or "Regal One") located in Los Angeles,
California, is a Florida corporation initially incorporated in 1959 as
Electro-Mechanical Services Inc., in the state of Florida. Since inception we
have been involved in a number of industries. In 1998 we changed our name to
Regal One Corporation. On March 7, 2005, our board of directors determined
that it was in our shareholders best interest to change the focus of the
company's operation to that of providing financial services through our
network of advisors and professionals, and to be treated as a business
development company ("BDC") under the Investment Company Act of 1940. On
September 16, 2005 we filed a Form N54A (Notification of Election by Business
Development Companies), with the Securities and Exchange Commission, which
transforms the Company into a Business Development Company (BDC) in accordance
with sections 55 through 65 of the Investment Company Act of 1940. The Company
began reporting as an operating BDC in the March 31, 2006 10Q-SB.
Basis of Presentation
On February 9, 2004, the Company acquired 100% of the stock of O2 Technology
by issuing 1,000,000 shares valued at $0.6495 per share for a $649,526
investment. During the course of 2004 the Company loaned O2 Technology
$518,490 for an aggregate investment of $1,168,016. Consolidated financial
statements were included in the 10Q filings with the SEC for March 31, June
30, and September 30, 2004. As set forth in various previous financial
reports and SEC filings, the Company sought a rescission of the O2 Technology
acquisition. The Company's management elected to fully reserve the $1,168,016
investment and seek redress through the courts. In May 2007, the Eco
Litigation was settled by the parties (see Note 10: "Contingencies").
Accordingly, Regal One has recovered and retired the 1,000,000 shares of Regal
One common stock that was provided in exchange for all O2 Technology stock.
Consequently, the accompanying financial statements are not consolidated.
In 2006, the Company began reporting as a BDC and the attached financial
statements for the quarter ended June 30, 2008 have been formatted in
conformity with the December 31, 2007 and 2006 financial statements, including
the BDC supplemental schedules, for comparative purposes. Although the nature
of the Company's operations and its reported financial position, results of
operations, and its cash flows are dissimilar for the periods prior to and
subsequent to its becoming an investment company, its financial position for
the quarter ended June 30, 2008 and the year ended December 31, 2007 and its
operating results, cash flows and changes in net assets for each of the
quarter ended June 30, 2008 and the year ended December 31, 2007 are presented
in the accompanying financial statements pursuant to Article 6 of Regulation
S-X. In addition, the accompanying footnotes, although different in nature as
to the required disclosures and information reported therein, is also
presented as they relate to each of the above referenced periods.
Accounting Policies
Management Estimates
<page>
The preparation of financial statements in conformity with generally accepted
accounting principles 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. Actual results could differ from those estimates.
Net Increase (Decrease) in Net Assets from Operations per Share
Basic net increase (decrease) in net assets from operations per share is
computed by dividing the net earnings (loss) amount adjusted for any
cumulative dividends on preferred stock (numerator) by the weighted average
number of common shares outstanding during the period (denominator). Diluted
net increase (decrease) in net assets from operations per share amounts
reflect the maximum dilution that would have resulted from the assumed
exercise of stock options and from the assumed conversion of the Series B
Convertible Preferred Stock. Diluted net increase (decrease) in net assets
from operations per share is computed by dividing the net earnings (loss)
amount adjusted for any cumulative dividends on preferred stock by the
weighted average number of common and potentially dilutive securities
outstanding during the period. For all periods presented that indicate a net
decrease in net assets from operations, the above potentially dilutive
securities are excluded from the computation as their effect is anti-dilutive.
Income Taxes
The Company has not elected to be a regulated investment company under
Subchapter M of the Internal Revenue Code of 1986, as amended. Accordingly,
the Company will be subject to U.S. federal income taxes on sales of
investments for which the fair values are in excess of their tax basis. Income
taxes are accounted for using an asset and liability approach for financial
reporting. The Company recognizes deferred tax liabilities and assets for the
expected future tax consequences of temporary differences between the
financial statement carrying amount and the tax basis of assets and
liabilities and net operating loss and tax credit carry forwards. Valuation
allowances are established when necessary to reduce deferred tax assets to the
amounts expected to be realized.
Cash and Cash Equivalents
For purposes of the statements of cash flows, the Company considers all
marketable securities to be cash equivalents (see Note 2: "Cash and Marketable
Securities"). None of the Company's cash is restricted.
Valuation of Investments (as an Investment Company)
As an investment company under the Investment Company Act of 1940, all of the
Company's investments must be carried at market value or fair value. The value
is determined by management for investments which do not have readily
determinable market values. In September 2006, the FASB issued SFAS No. 157
"Fair Value Measurements". SFAS No. 157 defines fair value, establishes a
framework for measuring fair value in generally accepted accounting principles
and expands disclosure about fair values. This statement is effective for
financial statements issued for fiscal years beginning after November 15,
2007, and interim periods within those fiscal years. Management has adopted
SFAS No. 157 and expects it will not have a material effect on the
consolidated financial results of the Company in future years.
<page>
Comprehensive Income
SFAS No. 130, Reporting Comprehensive Income, establishes standards for
reporting and display of comprehensive income and its components (revenues,
expenses, gains, and losses) in a full set of general purpose financial
statements. It requires that all items that are required to be recognized
under accounting standards as components of comprehensive income be reported
in a financial statement that is displayed with the same prominence as other
financial statements. SFAS No. 130 requires that an enterprise (a) classify
items of other comprehensive income by their nature in financial statements
and (b) display the accumulated balance of other comprehensive income
separately in the equity section of the balance sheet for all periods
presented.
The Company's comprehensive income (loss) does not differ from its reported
net income (loss). As an investment company, the Company must report changes
in the fair value of its investments outside of its operating income on its
statement of operations and reflect the accumulated appreciation or
depreciation in the fair value of its investments as a separate component of
its stockholders' deficit. This treatment is similar to the treatment required
by SFAS No. 130.
Accounting Changes and Error Corrections
In May 2005, the FASB issued SFAS No. 154, "Accounting Changes and Error
Corrections, a replacement of APB No. 20 and FASB Statement No. 3" ("SFAS No.
154"). SFAS No. 154 requires retrospective application to prior period
financial statements of a voluntary change in accounting principles unless it
is impracticable. APB Opinion No. 20 "Accounting Changes" previously required
that most voluntary changes in accounting principles be recognized by
including in net income of the period of the change the cumulative effect of
changing to the new accounting principle. This Statement was effective for the
Company as of January 1, 2006.
Stock Based Incentive Program
SFAS No. 123R, Share Based Payment, a revision to SFAS No. 123, Accounting for
Stock Based Compensation and superseding APB Opinion No. 25, Accounting for
Stock Issued to Employees, establishes standards for the accounting for
transactions in which an entity exchanges its equity instruments for goods or
services, including obtaining employee services in share based payment
transactions. SFAS No. 123R applies to all awards granted after the required
effective date and to awards modified, purchased, or canceled after that date.
The Company adopted SFAS No. 123R effective January 1, 2006.
Exchange of Non-monetary Assets
In December 2004, the FASB issued SFAS No. 153, "Exchanges of Non-monetary
Assets, an amendment of APB Opinion No. 29" ("SFAS No. 153"). SFAS No. 153 is
based on the principle that exchanges of non-monetary assets should be
measured based on the fair value of the assets exchanged. APB Opinion No. 29,
"Accounting for Non-monetary Transactions", provided an exception to its basic
measurement principle (fair value) for exchanges of similar productive assets.
Under APB Opinion No. 29, an exchange of a productive asset for a similar
productive asset was based on the recorded amount of the asset relinquished.
SFAS No. 153 eliminates this exception and replaces it with an exception of
exchanges of non-monetary assets that do not have commercial substance.
<page>
SFAS No. 153 became effective for the Company as of July 1, 2005. The Company
will apply the requirements of SFAS No. 153 to any future non-monetary
exchange transactions.
Certain Hybrid Financial Instruments
In February 2006, the FASB issued SFAS No. 155, "Accounting for Certain Hybrid
Financial Instruments; an amendment of FASB Statements No. 133 and 140", to
simplify and make more consistent the accounting for certain financial
instruments. SFAS No. 155 amends SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities" to permit fair value re-measurement for
any hybrid financial instrument with an embedded derivative that otherwise
would require bifurcation, provided that the whole instrument is accounted for
on a fair value basis. SFAS No. 155 amends SFAS No. 140, "Accounting for the
Impairment or Disposal of Long-Lived Assets" to allow a qualifying special-
purpose entity to hold a derivative financial instrument that pertains to
beneficial interest other than another derivative financial instrument.
NOTE 2 - CASH AND MARKETABLE SECURITIES
SFAS No. 155 applies to all financial instruments acquired or issued after the
beginning of an entity's first fiscal year that begins after September 15,
2006, with earlier application allowed. Regal adopted this standard effective
January 1, 2007 without any effect and this standard is not expected to have a
significant effect on the Company's future reported financial position or
results of operations.
Cash and Cash Equivalents
Cash and cash equivalents consist of cash balances and may include instruments
with maturities of three months or less at the time of purchase.
Marketable Securities
In 2005 Regal acquired approximately 1,800,000 shares of Neuralstem's common
stock and a warrant to purchase an additional 1,000,000 shares of common stock
in exchange for a variety of considerations supporting Neuralstem's transition
to a publicly traded operational entity, principally including fees and
assistance in connection with the filing of a registration statement on Form
SB-2 registration (see Note 7: "Investments"). During 2006, Neuralstem filed
the registration statement and it was declared effective on August 30, 2006.
In late December 2006, the shares began trading on the OTC: BB under the
ticker symbol NRLS.OB. On February 5, 2007, the Company distributed 500,473
Neuralstem shares to its shareholder of which 35,038 of these shares were
returned to the Company's ownership in connection with the settlement of the
Eco Litigation. On August 27, 2007, Neuralstem shares began trading on the
American Stock Exchange under the symbol CUR. As of June 30, 2008, Regal held
843,000 Neuralstem shares valued at a discounted price from the June 30, 2008
market price due to the current thinly traded market for Neuralstem shares. Of
the total shares held at June 30, 2008, all have been recorded as a current
asset. These shares constitute working capital available to Regal as of June
30, 2008. Regal also has ten year warrants, which contains certain anti-
dilution provisions, at an exercise price of $5 per share which is
significantly above the present fair market value of Neuralstem shares,
therefore only a $50,000 value has yet been assigned to these warrants, which
are carried as a long term investment. On December 31, 2006, Regal had
recorded a dividend payable balance in the Current Liabilities section of its
<page>
Balance Sheet. This distribution initially consisted of 500,473 Neuralstem
shares. The distribution was made in the first quarter of 2007 and resulted in
an adjustment to the Current Liabilities balance.
NOTE 3 - RECENT ACCOUNTING PRONOUNCEMENTS
There are several new accounting pronouncements issued by the Financial
Accounting Standards Board ("FASB") which are not yet effective. Each of these
pronouncements, as applicable, has been or will be adopted by the Company.
In June 2006, the Financial Accounting Standards Board (FASB) issued FASB
Interpretation No. 48, "Accounting for Uncertainty in Income Taxes - an
interpretation of FASB Statement No. 109" (FIN 48), which clarifies the
accounting for uncertainty in tax positions. This Interpretation requires that
we recognize in our financial statements the benefit of a tax position if that
position is more likely than not of being sustained on audit, based on the
technical merits of the position. The provisions of FIN 48 became effective as
of the beginning of our 2008 fiscal year, with no cumulative effect of the
change in accounting principle needing to be recorded as an adjustment to
opening retained earnings. We are currently evaluating the impact that FIN 48
will have on our financial statements.
In September 2006, the FASB issued Statement No. 158, "Employer's Accounting
for Defined Benefit Pension and Other Postretirement Plans - an amendment of
FASB Statements No. 87, 88, 106, and 132(R)" (FAS 158).
FAS 158 requires that employers recognize the funded status of their defined
benefit pension and other postretirement plans on the balance sheet and
recognize as a component of other comprehensive income, net of tax, the plan-
related gains or losses and prior service costs or credits that arise during
the period but are not recognized as components of net periodic benefit cost.
We prospectively adopted FAS 158 on April 30, 2007. However, the actual impact
of adopting FAS 158 is highly dependent on a number of factors, including the
discount rates in effect at the next measurement date, and the actual rate of
return on pension assets during fiscal 2007. These factors could significantly
increase or decrease the expected impact of adopting FAS 158.
In September 2006, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 108, "Considering the Effects of Prior Year
Misstatements when Quantifying Misstatements in Current Year Financial
Statements" (SAB 108), which addresses how to quantify the effect of financial
statement errors. The provisions of SAB 108 became effective as of the end of
our 2007 fiscal year. We do not expect the adoption of SAB 108 to have a
significant impact on our financial statements.
In February 2007, the FASB issued Statement No. 159, "The Fair Value Option
for Financial Assets and Financial Liabilities, including an amendment of FASB
Statement No. 115" (FAS 159). FAS 159 permits companies to choose to measure
many financial instruments and certain other items at fair value that are not
currently required to be measured at fair value and establishes presentation
and disclosure requirements designed to facilitate comparisons between
companies that choose different measurement attributes for similar types of
assets and liabilities. The provisions of FAS 159 become effective as of the
beginning of our 2009 fiscal year. We are currently evaluating the impact that
FAS 159 will have on our financial statements.
<page>
In December 2007, the FASB issued SFAS 160, Non-controlling Interests in
Consolidated Financial Statements, an amendment of ARB No. 51 which applies to
all entities that prepare consolidated financial statements, except not-for-
profit organizations, but will affect only those entities that have an
outstanding non-controlling interest in one or more subsidiaries or that
deconsolidate a subsidiary. The statement is effective for annual periods
beginning after December 15, 2008.
NOTE 4 - EQUITY TRANSACTIONS
During the quarter ended March 31, 2006, the Company raised $145,000 through
the sale of 362,500 shares of newly issued, unregistered common stock. Since
that date, there has been no other equity sales in the six months ended June
30, 2008 and years ended December 31, 2007 and December 31, 2006. In May 2007,
the Eco Litigation was settled by the parties (see Note 10: "Contingencies -
Eco Litigation"). Accordingly, Regal has recovered and retired the 1,000,000
shares of Regal One common stock that was provided in exchange for all O2
Technology stock. As a result, the Company's outstanding common share balance
as of the quarter ended June 30, 2008 and at December 31, 2007 are 3,633,067.
During the quarter ended March 31, 2006, the Company made four option grants
with the total grants amounting to 885,000 common shares of which 535,000 were
vested in the quarter. An expense of $136,555 was calculated under the Black-
Scholes Option-Pricing Model and was recognized in that quarter for the vested
options. All the options are exercisable at the price of $0.50 per share,
equal to or higher than the public share price on the dates of the grants and
as of the quarter ended June 30, 2008 and December 31, 2007, and option lives
ranged from 3 years to 10 years. During the quarter ended September 30, 2006,
no additional options were granted but 50,000 options vested in conjunction
with the effective date of the Neuralstem SB-2 registration, a contractual
milestone, and an additional option expense of $16,861 was realized.
In the quarter ended December 31, 2006, 50,000 options vested in conjunction
with a contractual milestone and an additional option expense of $12,539 was
realized. No additional options were granted or vested and no options were
exercised during the six months ended June 30, 2008 or in 2007 and 2006.
In connection with the secured loan received during the quarter ended
September 30, 2006 and paid in the quarter ended December 31, 2006, warrants
to purchase 75,000 shares of the Company's stock were issued to the lender as
a commitment fee. These warrants have been valued under the Black-Scholes
Pricing Model and $26,171 was recognized in the year as prepaid expense that
was fully amortized into expense on the payment date. The warrants are
exercisable for a period of five years at the price of $0.60 per share, which
was higher than the public share price on the date of the grant and as of the
quarter ended March 31, 2008 and the year ended December 31, 2007. None of
these warrants were exercised in the six months ended June 30, 2008 or in the
year ended December 31, 2007.
The stock options and warrants issued during 2006 were valued under the Black-
Scholes Option-Pricing Model using the following assumptions within the ranges
defined: market price of Regal stock at grant date; exercise price; one and
three year terms; volatility ranging from 188% to 350%; no dividends assumed;
and a discount rate - bond equivalent yield of 4.27%. As of December 31, 2006,
885,000 options, with 635,000 vested, and 75,000 vested warrants were
outstanding. The possibility that the options may be exercised in the future
represents potential dilution to existing shareholders. If all the outstanding
options and warrants had been exercised as of December 31, 2006, the impact on
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the fully diluted Earnings per Share as reflected in the Statement of
Operations for 2006 would be a reduction from $0.117 earnings per share to
$0.110 earnings per share. If all the outstanding options and warrants had
been exercised as of December 31, 2007, the impact on the fully diluted
Earnings per Share as reflected in the Statement of Operations for 2007 would
be a reduction from $0.095 earnings per share to $0.091 earnings per share. As
of the six months ended June 30, 2008, there would be no dilution impact since
a net loss was realized.
In conjunction with the Neuralstem registration, the contingency delaying the
Company's previously declared dividend in Neuralstem shares was removed and
Regal paid that dividend, amounting to 500,473 Neuralstem shares including
rounding, on February 5, 2007. Of this amount, 35,038 shares were returned to
Regal One as part of the O2 settlement. Since the record date for this
dividend occurred earlier in 2006, Regal One had recorded a payable for this
dividend in the quarter ended December 31, 2006 using the per share valuation
reflected in the portfolio balance at that date and also recorded that
valuation as a reduction in the equity section. As of the payment date, that
valuation was adjusted to the then existing fair market value of the
Neuralstem shares and the Neuralstem valuation in the Company's portfolio
balance was then reduced by that final dividend amount.
The authorized number of shares of preferred stock (Series A and B) is
550,000. The Company's Certificate of Incorporation allows for segregating
this preferred stock into separate series. As of the quarter ended June 30,
2008 and at December 31, 2007, the Company had authorized 50,000 shares of
Series A preferred stock and 500,000 shares of Series B convertible preferred
stock and there were no outstanding shares of Series A preferred stock and
100,000 shares of Series B preferred stock were outstanding.
Holders of Series A preferred stock shall be entitled to voting rights
equivalent to 1,000 shares of common stock for each share of preferred. The
Series A preferred stock has certain dividend and liquidation preferences over
common stockholders.
Holders of Series B preferred stock shall be entitled to voting rights
equivalent to 100 shares of common stock for each share of preferred. The
Series B preferred stock had been entitled to a non-cumulative dividend of
8.75% of revenues which exceed $5,000,000. In 2004, the Series B class
shareholders voted by a large majority to void the dividend preference. At the
option of the holder of Series B preferred stock, each share is convertible
into common stock at a rate of 100 shares of common for each share of
preferred. In connection with the acquisition of O2, Series B preferred as a
class was restricted to a cumulative conversion into no more than 10,000,000
common shares. This reduction was sought by the Company and was agreed to by
98.5% of the Series B class, effecting a compression of the outstanding Series
B preferred from 208,965 shares to the now outstanding 100,000 shares. As of
the six months ended June 30, 2008 and the year ended December 31, 2007, no
dividends have been declared on the Series A or Series B convertible preferred
stock.
As set forth in various previous financial reports and SEC filings, the
Company was seeking a rescission of the O2 Technology acquisition. In May
2007, this litigation was settled by the parties (see Note 10: "Contingencies
- - Eco Litigation"). Accordingly, Regal has recovered and retired the 1,000,000
shares of Regal One common stock that was provided in exchange for all O2
Technology stock.
<page>
The Company originally recorded the second quarter 2007 return of those Regal
One shares in the equity section of the balance sheet at the original recorded
value of $649,526. The Company has subsequently determined that the return of
its own shares should be recorded at a zero value and this revision was
reflected in the December 31, 2007 financials.
NOTE 5 - IMPAIRMENT OF ASSETS
As set forth in various previous financial reports and SEC filings, the
Company was seeking a rescission of the O2 Technology acquisition. The
immediate effect of these matters was to impair the assets acquired in the O2
acquisition. Accordingly, the Company had written-off in 2004 all of the
assets acquired from O2 and the advances made to O2 (see Note 1 - "Basis of
Presentation"). In May 2007, this litigation was settled by the parties (see
Note 10: "Contingencies - Eco Litigation").
NOTE 6 - STOCK OPTION PLAN
The Company's Stock Option Plan (Plan) provides a means to offer incentives to
its employees, directors, officers, consultants and advisors. On May 3, 1995,
the Company filed a registration statement on Form S-8 adopting a 3,000,000
common share Plan. Under the plan, the Board of Directors was authorized to
grant options to individuals who have contributed, or will contribute to the
well being of the Company. In 2004 and earlier years, the Plan was extended by
the Company's shareholders. On March 4, 2005, the Company's shareholders
approved another extension of time in which to exercise outstanding options to
purchase shares of the Company's common stock at the $0.8125 exercise price.
That extension ran from March 31, 2005 to September 30, 2005. (See the
Company's 14C filing dated March 23, 2005.) By the extended September 30, 2005
option expiration date, the then remaining outstanding options were not
further extended and as a result 1,147,140 unexercised options became null and
void. During the year ended December 31, 2005, 252,308 options respectively
were exercised and the Company realized $205,000 in working capital. As of
September 30, 2005, holders had exercised options to purchase 1,852,860 shares
of common stock. As of December 31, 2006 and December 31, 2007, all
outstanding options granted under our stock option plan had either been
exercised or expired. As of December 31, 2007 and June 30, 2008, there were no
changes and there were 980,986 shares available for future grants.
NOTE 7 - INVESTMENTS
On March 7, 2005, Regal's Board of Directors determined it was in our
shareholders best interest to change the focus of the company's business to
providing financial services through our network of advisors and
professionals, and to be treated as a business development company ("BDC")
under the Investment Company Act of 1940.
On September 16, 2005 we filed a Form N54A (Notification of Election by
Business Development Companies), with the Securities and Exchange Commission,
which transforms the Company into a Business Development Company (BDC) in
accordance with sections 55 through 65 of the Investment Company Act of 1940.
The Company began reporting as an operating BDC in the March 31, 2006 10Q-SB.
In 2005, Regal One signed an option agreement to acquire a significant equity
stake in SuperOxide Health Sciences, Inc. (SOHS), a privately owned
development stage company. As of December 31, 2005, Regal One had made a total
investment of $145,000 in SOHS as part of the agreement and in the quarter
ended March 31, 2006 made a valuation adjustment to reduce the carrying cost
<page>
of this investment to $72,500. In the quarter ended September 30, 2006, the
Company wrote off the remainder of the investment since SOHS advised that it
had no resources to continue operating and was being dissolved.
As of June 30, 2005, the Company entered into an agreement with American Stem
Cell (ASC), a private development stage company, to assist ASC in the
preparation and filing of an SB 2 registration statement.
Regal One acquired 3,000,000 shares of ASC's common stock in exchange for the
Company's investment via a variety of considerations that would support ASC's
transition from a private development-stage company to a publicly traded
operational entity. These considerations included the Company's assumption of
the liability for certain legal fees, principally including fees for an SB-2
registration, and access to the Company's network of advisors and other
related resources. Regal One valued these shares in its balance sheet at the
$34,087 of accrued legal fees that it had assumed. However, in 2006 the SB 2
registration was withdrawn and ASC undertook a restructuring of its various
securities holders. In the quarter ended December 31, 2006, the Company wrote
off its $34,087 investment in ASC. In December 2007, the Company sold
2,000,000 of the 3,000,000 common shares it holds back to American Stem Cell
for $25,000. Accordingly, the remaining 1,000,000 shares have been valued at
$12,500, the $0.0125 per share value implied in that transaction, as a long
term investment in the quarter ended June 30, 2008 and at December 31, 2007.
As of June 30, 2005, the Company had entered into a Letter of Intent with
Neuralstem, Inc., a private early stage company, to assist it in filing an SB-
2 registration statement. Effective September 15, 2005, those understandings
were memorialized and further defined in an "Equity Investment and Share
Purchase Agreement" between the parties. Regal One acquired approximately
1,800,000 shares of Neuralstem's common stock and a warrant, containing
certain anti-dilution provisions (value not yet determined) to purchase an
additional 1,000,000 shares of common stock in exchange for a variety of
considerations supporting Neuralstem's transition from a private, early stage,
research and development company to a publicly traded operational entity.
These considerations included the Company's assumption of the liability for
certain legal fees, principally including fees for an SB-2 registration, and
access to the Company's network of advisors and other related resources. Regal
One initially reflected these shares in its balance sheet as of December 31,
2005 based on its estimated $50,000 direct cost of the considerations it had
provided or planned to provide to Neuralstem. During 2006, Neuralstem filed an
SB-2 registration statement and in August 2006 it was declared effective. As
of December 31, 2006, Neuralstem shares were trading on the OTC: BB exchange.
Prior to effectiveness of the registration, 1,000,000 of Neuralstem shares
held by Regal were subject to forfeiture based on a contingency concerning the
initial submission date and effective date of Neuralstem's SB-2 registration;
51,000 of these shares were forfeited in the third quarter of 2006 and the
balance are no longer subject to forfeit. As of December 31, 2006, the
1,794,287 Neuralstem shares then held after the forfeit were valued as
indicated in the financial statements Balance Sheet of 2006. Of those shares,
800,000 shares were registered by Neuralstem, were readily salable and were
reclassified as Marketable Securities in the Current Assets section of the
Balance Sheet. Initially, 500,473 of those Neuralstem shares were reserved for
distribution to the Company's shareholders as a dividend, which distribution
was made on February 5, 2007. Of that amount, 35,038 shares were withheld from
distribution pending the outcome of the Eco Litigation. On May 7, 2007, the
Company reached a settlement in the Eco Litigation resulting in the release of
the 35,038 Neuralstem shares to the Company.
<page>
As of the quarter ended June 30, 2008, the 843,000 Neuralstem shares held were
classified as Marketable Securities in the Current Assets section of the
Balance Sheet. As of December 31, 2007, the 1,273,814 balance of the
Neuralstem shares are classified as Marketable Securities in the Current
Assets section of the Balance Sheet. Regal One also has ten year warrants at
an exercise price of $5 per share which is significantly above the present
fair market value of Neuralstem shares, therefore only a nominal $50,000 value
has been assigned to these warrants which are carried as a long term
investment in the Balance Sheet. As of December 31, 2007, all Neuralstem
shares held by the Company were reclassified from Investments in Non-
Affiliated Portfolio Companies to Marketable Securities in the Current Assets
section of the Balance Sheet. This reclassification was made because all
shares then held were either included in Neuralstem's original registration
statement and therefore were free-trading or were unregistered but then had
been held long enough to become free-trading under the provisions of Rule 144.
The Board of Directors is responsible for determining in good faith the fair
value of the securities and assets held by the Company.
In 2005, all portfolio companies were reported on a cost basis. For 2006, 2007
and the six months ended June 30, 2008, the Investment Committee of the Board
of Directors early adopted the provisions of FAS 157 for valuation of the
portfolio and bases its determination on, among other things, applicable
quantitative and qualitative factors. These factors may include, but are not
limited to, the type of securities, the nature of the business of the
portfolio company, the marketability of and the valuation of securities of
publicly traded companies in the same or similar industries, current financial
conditions and operating results of the portfolio company, sales and earnings
growth of the portfolio company, operating revenues of the portfolio company,
competitive conditions, and current and prospective conditions in the overall
stock market. Without a readily recognized market value, the estimated value
of some portfolio securities may differ significantly from the values that
would be placed on the portfolio if there was a ready market for such equity
securities.
NOTE 8 - INCOME TAXES
At December 31, 2007 and 2006, the Company had a federal operating loss carry
forward of $3,718,820 and $3,409,683, respectively. The valuation allowance
for deferred tax assets as of December 31, 2007 and 2006 was $1,264,399 and
$1,159,292, respectively. In assessing the recovery of the deferred tax
assets, management considers whether it is more likely than not that some
portion or all of the deferred tax assets will not be realized. The ultimate
realization of deferred tax assets is dependent upon the generation of future
taxable income in the periods in which those temporary differences become
deductible. Management considers the scheduled reversals of future deferred
tax assets, projected future taxable income, and tax planning strategies in
making this assessment. As a result, management determined it was more likely
than not the deferred tax assets would be realized as of December 31, 2007 and
2006. For the six months ended June 30, 2008 the Company realized a net loss
from operations of $1,578,347.
NOTE 9 - RELATED PARTY TRANSACTIONS
Indebtedness to a stockholder/officer was converted into a secured Note
Payable in the fourth quarter of 2006. In 2007, that stockholder/officer
continued to make cash advances to and on behalf of the Company and Regal
<page>
entered into modifications of the Note Payable to that party. The
modifications were entered into for purposes of increasing the Note Payable
amount as a result of additional advances made by the stockholder/officer to
Regal through September 30, 2007.
There were no new advances made by the stockholder /officer after May 31,
2007, but a correction was recorded in the quarter ended September 30, 2007.
It is not presently contemplated that the stockholder/officer will make
additional periodic advances to the Company. Advances under the Note have been
made to pay the Company's litigation expenses and settlement, and for working
capital. As a result of the increases in the outstanding loan balance, the
number of Neuralstem shares subject to the security agreement was increased to
600,000 shares on June 25, 2007. The $650,794 loan balance and related accrued
interest at 10% per annum of approximately $87,000 were not paid when they
became due and payable on December 8, 2007 and they are now payable upon
demand of the stockholder/officer. In February 2008, the stockholder/officer
and the Company agreed to certain terms regarding this matter and in March
2008 a payment of $600,000 towards principal and interest was made, leaving a
combined balance of principal and interest of $150,850 as of March 31, 2008.
During the quarter ended June 30, 2008 additional interest of $2,521was
accrued on the note. This note was fully settled in July 2008 for $153,371.
The combined amounts due to stockholders and officers and note payable to
officer, as of June 30, 2008, are $153,371 and at December 31, 2007 were
$993,961. Both amounts include the above secured Note Payable and the related
accrued interest. In the fourth quarter of 2007, annual compensation totaling
$85,000 was accrued for two independent directors and for consulting services
of a stockholder, and during the quarter ended March 31, 2008 this amount
increased by $15,000. In March 2008, a payment of $100,000 for total accrued
compensation was paid to the Company's President who resigned effective March
31, 2008. The total due to stockholders and officers that represent advances
and compensation which are non-interest bearing, unsecured and payable on
demand was $0 at June 30, 2008. Relative to the settlement and payment of
other payables and claims, the Board has resolved that the officers of Regal
shall negotiate and settle the Company's outstanding debts in exchange for
mutual releases, for debts in excess of $5,000, of all past and present monies
owed to any such creditors.
Through March 31, 2008, such settlements were reached with four service
providers and three stockholders whereby payments totaling $266,000 were
concurrently paid in full settlement of all amounts owed, along with release
of other claims and obligations between the parties. The Company realized a
gain on these settlements in the amount of $117,123 in the quarter ended March
31, 2008, of which $6,214 was realized from the shareholder settlements.
Additionally, as of March 31, 2008, Regal wrote off an old contingent debt of
$40,000 carried in the due to officers and directors account and payable
solely at the discretion of the Board of Directors, and Regal recognized a
$40,000 gain on this write off.
During the quarter ended June 30, 2008 a settlement was reached with a
shareholder due $6,750 resulting in a $3,250 gain recorded. Additionally a
$60,000 reduction in Accrued expense Liability for Director fees was achieved
by cash settlement payments totaling $40,000, resulting in a gain on
settlement expense of $20,000. Funds used to make all of the payments
described above were derived from the sale of some of the marketable
securities held by the Company at December 31, 2007.
Through December 31, 2004 the Company loaned $518,490 to its wholly-owned
<page>
subsidiary which was acquired in the 1st quarter of 2004. The loans were
subject to interest of 6% per year, were due and payable on December 31, 2004
and were secured by a pledge of all the shares of the wholly-owned subsidiary.
During litigation between the parties, the repayment did not occur and the
Company established an allowance for the potential un-collectability of this
amount. During the second half of 2006, management elected to establish a
reserve for costs that may arise in settling the suit. Accordingly, a
contingent liability and expense of $250,000 was recorded in 2006. The pending
litigation was settled by the parties in the second quarter ended June 30,
2007 and in accordance with the settlement these loans will not be recovered
and have been removed from Regal's books and records. (See Note 10:
"Contingencies - Eco Litigation" below). Accordingly, Regal has recovered and
retired the 1,000,000 shares of Regal common stock that was provided in
exchange for all O2 Technology stock. The Company originally recorded the
second quarter 2007 return of those Regal shares in the equity section of the
balance sheet at the original recorded value of $649,526. The Company has
subsequently determined that the return of its own shares should be recorded
at a zero value and this revision is reflected in the December 31, 2007
financials.
NOTE 10 - CONTINGENCIES
During 2005, Regal signed an option agreement to acquire a significant equity
stake in SuperOxide Health Sciences, Inc. (SOHS), a privately owned
development stage company. As of December 31, 2005, Regal One had made a total
investment of $145,000 in SOHS and in 2006 wrote-off that investment.
Principals of SOHS are also principal shareholders of Regal One.
Eco Litigation
The Company and certain of its officers and consultants were named as
defendants in a case filed on November 4, 2003, under the name "Eco Air
Technologies vs. Regal One Corporation, et. al" (California Superior Court,
County of Orange, Case No. 03CC13317). On April 7, 2005, the Company and
certain of its officers, stockholders and consultants were named as cross-
defendants in a cross-complaint filed by two of the former directors of O2.
The Company had been advised that such a filing added significantly to the fee
exposure of the Company.
During October 2005, the Company negotiated and executed a settlement
agreement with Eco Air Technologies and Alf Mauriston whereby the Company
relinquished any claims it may have to the technology in question, and
obtained certain marketing rights to the technology in several foreign
countries and in certain domestic market niches.
On May 10, 2007, the Company filed an 8-K to report that it and its officers
and associated representatives and consultants had entered into a
confidential, final and complete settlement on May 7 with O2 Technology, Inc.,
Ronald Hofer, Richard Allen Smith and Amber Le Bleu-Hofer, resolving their
differences which were detailed in the Orange County Superior court case, Eco
Air vs. Regal One et. al., and the various cross-complaints in that
litigation. The parties determined that their business transaction failed to
close through a mutual mistake of fact without fault by any party and,
consequently, they never had any rights in each other. All parties are
returned to their status as if the contemplated transaction never occurred and
no party admits or accepts any liability for events transpiring in the interim
as between and among the various persons and corporations involved. The
parties acknowledge that they have no interest or claim to each other's
<page>
securities and that there are no debts or obligations between them.
Accordingly, Regal has recovered and retired the 1,000,000 shares of Regal
common stock that was provided in exchange for all O2 Technology stock. The
Company originally recorded the second quarter 2007 return of those Regal
shares in the equity section of the balance sheet at the original recorded
value of $649,526. The Company has subsequently determined that the return of
its own shares should be recorded at a zero value and this revision is
reflected in the December 31, 2007 financials.
Operations
On March 7, 2005, Regal's Board of Directors determined that it was in our
shareholders best interest to change the focus of the company's operation to
that of providing financial services through our network of advisors and
professionals, and to be treated as a business development company ("BDC")
under the Investment Company Act of 1940. On September 16, 2005 we filed a
Form N54A (Notification of Election by Business Development Companies), with
the Securities and Exchange Commission, which transforms the Company into a
Business Development Company (BDC) in accordance with sections 55 through 65
of the Investment Company Act of 1940. The Company began reporting as an
operating BDC in the March 31, 2006 10Q-SB.
In 2005, the Company initiated equity investments or agreements for
investments with three biomedical companies. Under two of those agreements,
the Company agreed to assume certain legal fees that are reflected in the
financial statements for 2005 and discussed in Notes thereto. The obligations
to assume any other such expenses were terminated in 2006.
Additionally, the third agreement allows Regal to make additional cash
investments in the related entity, which Regal has not done and does not
expect to do.
On April 1, 2007, the Company and Equity Communications entered into a
settlement agreement regarding the value of services provided by Equity
Communications to the Company. The result of this settlement was that the
Company provided 20,000 Neuralstem shares to Equity Communications in full
settlement of the $72,000 that Equity had billed to the Company. The Company
recognized a $10,000 gain on this settlement.
Since the Company has historically incurred substantial debts in connection
with its operations, the Company has entered into negotiations and settlements
of most of its outstanding debts (see Note 12: "Subsequent Events"). In this
regard, contingent liability for $25,000 was included in the December 31, 2007
financial statements as an expense and payable relative to such matters. This
amount was disbursed in full settlement in the quarter ended March 31, 2008.
NOTE 11 - DISCLOSURES WITH REGARD TO CERTAIN OFFICERS AND DIRECTORS
Effective June 16, 2008, the Board of Directors of the Company agreed to
accept the resignation of Malcolm Currie from his position as the Company's
Chief Executive officer, Chief Financial Officer and Chairman of the Board of
Directors. Mr. Currie will, however, remain a director of the Company. The
Board also appointed Charles J. Newman to a vacant seat on the Board of
Directors and appointed Mr. Newman as the Company's new Chief Executive
Officer, Chief Financial Officer, and Chairman of the Board of Directors.
Effective March 31, 2008, Richard Hull resigned as the Company's President.
<page>
As of February 5, 2008, the Company's Board of Directors ratified a Unanimous
Written Consent concerning the negotiation and settlement of its outstanding
debts and the recognition and settlement of certain other compensation,
services and reimbursable expense matters, as follows:
The $650,794 loan balance and related accrued interest of approximately
$87,000 due to an officer/shareholder as of December 31, 2007 were not paid
when they became due and payable on December 8, 2007. In the quarter ended
March 31, 2008, the Company made a payment of $600,000 toward that principal
and interest and an additional $2,521 in interest was accrued in the second
quarter ended June 30, 2008 in leaving a combined balance of $155,371 still
due as of June 30, 2008.
That officer/shareholder and Regal's Board have agreed that:
1) The Note is now due and payable on demand,
2) interest will continue to accrue at the 10% per annum rate after December
8, 2007,
3) the officer/shareholder has requested that Regal pay the principal and
interest of the Note at the Company's earliest convenience,
4) the Board has determined that the amounts of principal and interest are
true, accurate and owing, and
5) the Board has Resolved that the principal and interest be paid upon Regal
obtaining sufficient capital from the sale of Regal's investment portfolio
and/or from loans made to Regal that are collateralized by such portfolio.
6) Pursuant to point immediately above, on March 7, 2008, Regal made a partial
payment to this officer/shareholder in the amount of $600,000. In connection
with that payment and for working capital needs, Regal borrowed $250,000 from
its stock investment account, collateralized by marketable securities held in
the Company's account at that brokerage. The June 30, 2008 balance owing to
the officer on that account was $153,371. See note 12 - Subsequent events for
the payment date of this loan.
Relative to the compensation of Regal's two independent directors for services
rendered in 2007, the Board resolved they each should be paid 10,000 shares of
Neuralstem stock, the total of which at year end was valued at $60,000 and was
included in the December 31, 2007 financial statements as an expense and
payable. These debts were settled in May by cash payments of $20,000 to each
director as payment in full. The difference of $20,000 was recorded as a
settlement gain during the quarter ended June 30, 2008.
NOTE 12 - SUBSEQUENT EVENTS
Relative to the ongoing settlement and payment of other payables and claims,
as resolved by the Board directing the officers of Regal to negotiate and
settle the Company's outstanding debts in exchange for mutual releases, for
debts in excess of $5,000, the Company settled the outstanding loan payable
and accrued interest to an officer/shareholder in the amount due of $153,371
by transferring 100,000 shares of Neuralstem common stock in Regal's portfolio
to the account of the officer on July 31, 2008.
<page>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
FORWARD LOOKING STATEMENTS
In this report we make a number of statements, referred to as "forward-looking
statements", which are intended to convey our expectations or predictions
regarding the occurrence of possible future events or the existence of trends
and factors that may impact our future plans and operating results. These
forward-looking statements are derived, in part, from various assumptions and
analyses we have made in the context of our current business plan and
information currently available to use and in light of our experience and
perceptions of historical trends, current conditions and expected future
developments and other factors we believe are appropriate in the
circumstances. You can generally identify forward looking statements through
words and phrases such as "believe", "expect", "seek", "estimate",
"anticipate", "intend", "plan", "budget", "project", "may likely result", "may
be", "may continue" and other similar expressions. When reading any forward-
looking statement you should remain mindful that actual results or
developments may vary substantially from those expected as expressed in or
implied by that statement for a number of reasons or factors, including but
not limited to:
The type and character of our future investments
Future sources of revenue and or income
Increases in operating expenses
Future trends with regard to net investment losses
How long cash on hand can sustain our operations as well as other
statements regarding our future operations, financial condition and
prospects and business strategies.
These forward-looking statements are subject to certain risks and
uncertainties that could cause our actual results to differ materially from
those reflected in the forward-looking statements. We undertake no obligation
to revise or publicly release the results of any revision to these forward-
looking statements. Given these risks and uncertainties, readers are cautioned
not to place undue reliance on such forward-looking statements.
DESCRIPTION OF BUSINESS
Overview
We are a financial services company which coaches and assists biomedical
companies, through our network of professionals, in listing their securities
on the over-the-counter market.
We were initially incorporated in 1959 as Electro-Mechanical Services Inc., in
the state of Florida. Since inception we have been involved in a number of
industries. In 1998 we changed our name to Regal One Corporation. On March 7,
2005, our Board of Directors determined it was in our shareholders best
interest to change the focus of the company's operation to providing financial
services through our network of advisors and professionals. Typically these
services are provided to early stage biomedical companies who can benefit from
our managerial skills, network of professions and other partners.
<page>
Our clients' are usually in the early stage of development, typically have
limited resources and compensate us for our services in capital stock.
Accordingly, although our primary business is to provide consulting services
and not to be engaged, directly or through wholly-owned subsidiaries, in the
business of investing, reinvesting, owning, holding or trading in securities,
we may nonetheless be considered an investment company as defined in the
Investment Company Act of 1940 (1940 Act). In order to lessen the regulatory
restrictions associated with the requirements of the 1940 Act, on June 16,
2005 we elected to be treated as a Business Development Company (BDC) in
accordance with sections 55 through 65 of the 1940 Act.
Pursuant to the requirements of the Investment Company Act of 1940, as
amended, the Board of Directors is responsible for determining in good faith
the fair value of the securities and assets held by the Company. The
Investment Committee of the Board of Directors bases its determination on,
among other things, applicable quantitative and qualitative factors. These
factors may include, but are not limited to, the type of securities, the
nature of the business of the portfolio company, the marketability of the
valuation of securities of publicly traded companies in the same or similar
industries, current financial conditions and operating results of the
portfolio company, sales and earnings growth of the portfolio company,
operating revenues of the portfolio company, competitive conditions, and
current and prospective conditions in the overall stock market. Without a
readily recognized market value, the estimated value of some portfolio
securities may differ significantly from the values that would be placed on
the portfolio should there be a ready market for such equity securities
currently in existence.
Strategy
We intend to focus our efforts on assisting private biomedical companies with
distinctive IP and well-defined, near-term applications that address
significant and quantifiable markets and that can benefit from our network of
business professionals. Our Investment Committee has adopted a charter wherein
these criteria will be weighed against other criteria including:
Strategic fit,
Management ability, and
Incremental value we can bring to the potential client.
The potential client must also be willing to comply with the Company's
requirement as a BDC to offer significant managerial oversight and guidance,
including the right of the Company to a seat on the client's board of
directors.
To date we have secured our clients through word of mouth or industry
referrals from lawyers, accountants and other professionals. In looking at
prospective clients, we do not focus on any particular geographic region and
would consider clients globally.
Portfolio Investments
During the six months ended June 30, 2008, we did not add any companies to our
portfolio. Our portfolio is as follows:
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Value of Investments
Name of Company Investment as of June 30, 2008
Neuralstem, Inc. (OTCBB: NRLS) Common Stock and Warrants $942,231
American Stem Cell ("ASC") Common Stock $12,500
SuperOxide Health Sciences, Inc. Common Stock $0
("SOHS")
Neuralstem, Inc.
Neuralstem, Inc. ("Neuralstem") is a life sciences company focused on the
development and commercialization of treatments based on transplanting human
neural stem cells. At present Neuralstem is pre-revenue and has not yet
undertaken any clinical trials with regard to their technology.
Neuralstem has developed and maintains a portfolio of patents and patent
applications that form the proprietary base for their research and development
efforts in the area of neural stem cell research. Neuralstem, Inc. has
ownership or exclusive licensing of four issued patents and 13 patent pending
applications in the field of regenerative medicine and related technologies.
The field in which Neuralstem focuses on is young and emerging. There can be
no assurances that their intellectual property portfolio will ultimately
produce viable commercialized products and processes. Even if they are able to
produce a commercially viable product, there are strong competitors in this
field and their product may not be able to successfully compete against them.
As of June 30, 2008, the Company holds 843,000 shares of Neuralstem, Inc.
common stock and warrants to purchase an additional 1,000,000 of common stock
at a price of $5.00 per share.
American Stem Cell
American Stem Cell ("ASC") is a private development stage company with plans
to acquire stem cell companies and technologies. In January of 2006, we were
notified that ASC's expected acquisition of its initial stem cell company had
failed. We understand that ASC is still searching for a business to acquire,
but has limited resources and no firm plans.
As of June 30, 2008, we hold 1,000,000 shares of ASC common stock. For purpose
of portfolio valuation, our investment committee has valued the investment at
$12,500.
SuperOxide Health Sciences, Inc.
SuperOxide Health Sciences, Inc. ("SOHS") is a privately owned development
stage company looking to commercialize medical applications of airborne
superoxide ions. In September 2006, we received notice from SOHS that due to
lack of working capital, the board of directors had decided to dissolve the
Company. To date we have yet to receive formal documentation or confirmation
of such dissolution. As a result of the forgoing, we believe the value of our
investment in SOHS is $0.00. Accordingly, upon receipt of confirmation as to
the dissolution, we will remove SOHS from our portfolio.
<page>
Employees
We have one part-time employee. We expect to use independent consultants,
attorneys, and accountants as necessary and we do not anticipate a need to
engage any additional full-time employees as long as business needs are being
identified and evaluated. The need for employees and their availability will
be addressed in connection with a decision concerning whether or not to
acquire or participate in a specific business venture.
Compliance with BDC Reporting Requirements
The Board of Directors of the Company, comprising a majority of Independent
Directors, adopted in March 2006 a number of resolutions, codes and charters
to complete compliance with BDC operating requirements prior to reporting as a
BDC. These include establishing Board committees for Audit, Nominating,
Compensation, Investment, and Corporate Governance, and adopting a Code of
Ethics, an Audit Committee Charter and an Investment Committee Charter.
Code of Ethics: The Code of Ethics in general prohibits any officer, director
or advisory person (collectively, "Access Person") of the Company from
acquiring any interest in any security which the Company (i) is considering a
purchase or sale thereof, (ii) is being purchased or sold by the Company, or
(iii) is being sold short by the Company. The Access Person is required to
advise the Company in writing of his or her acquisition or sale of any such
security. The Company's Code of Ethics is posted on our website at
www.regal1.com.
Audit Committee: The primary responsibility of the Audit Committee is to
oversee the Company's financial reporting process on behalf of the Company's
Board of Directors and report the result of its activities to the Board. Such
responsibilities shall include but not be limited to the selection, and if
necessary, the replacement of the Company's independent auditors; the review
and discussion with such independent auditors and the Company's internal audit
department of (i) the overall scope and plans for the audit, (ii) the adequacy
and effectiveness of the accounting and financial controls, including the
Company's system to monitor and manage business risks, and legal and ethical
programs, and (iii) the results of the annual audit, including the financial
statements to be included in the Company's annual report on Form 10-K.
The Company's Audit and Compensation Committee is comprised of one director.
We anticipate that additional board members will be admitted and will augment
the current audit committee. At present, we do not have a qualified financial
expert because we have not been able to identify and retain a qualified
candidate.
Investment Committee: The Investment Committee shall have oversight
responsibility with respect to reviewing and overseeing the Company's
contemplated investments and portfolio companies on behalf of the Board and
shall report the results of their activities to the Board. Such Investment
Committee shall (i) have the ultimate authority for and responsibility to
evaluate and recommend investments, and (ii) review and discuss with
management (a) the performance of portfolio companies, (b) the diversity and
risk of the Company's investment portfolio, and, where appropriate, make
recommendations respecting the role, divestiture or addition of portfolio
investments and (c) all solicited and unsolicited offers to purchase portfolio
company positions. The Company's Investment Committee Charter is filed as an
exhibit to this Form 10-K.
<page>
Compliance with the Sarbanes-Oxley Act of 2002
On July 30, 2002, President Bush signed into law the Sarbanes-Oxley Act of
2002 (the "Sarbanes-Oxley Act"). The Sarbanes-Oxley Act imposes a wide variety
of new regulatory requirements on publicly held companies and their insiders.
Many of these requirements will affect us. For example:
Our chief executive officer and chief financial officer must now certify
the accuracy of the financial statements contained in our periodic
reports;
Our periodic reports must disclose our conclusions about the effective-
ness of our controls and procedures;
Our periodic reports must disclose whether there were significant changes
in our internal controls or in other factors that could significantly
affect these controls subsequent to the date of their evaluation,
including any corrective actions with regard to significant deficiencies
and material weaknesses; and
We may not make any loan to any director or executive officer and we may
not materially modify any existing loans.
The Sarbanes-Oxley Act has required us to review our current policies and
procedures to determine whether we comply with the Sarbanes-Oxley Act and the
new regulations promulgated within the regulations stated in the SOX act of
2002. We will continue to monitor our compliance with all future regulations
that are adopted under the Sarbanes-Oxley Act and will take actions necessary
to ensure that we are in compliance therewith.
Financial Condition Overview
The Company's total assets were $1,002,602 and its net assets were $846,553 at
June 30, 2008, compared to $1,805,773 and $672,054, respectively, for the
comparable period in 2007. The Company's total assets were $3,737,770 and its
net assets were $2,424,900 for the year ending December 31, 2007.
The changes in total assets during the six months ended June 30, 2008 were
primarily attributable to a decrease in unrealized appreciation in marketable
securities of $2,705,128 offset by a realized gain of 1,064,768 and a gain of
80,145 on investment operations. The Company's unrealized appreciation
(depreciation) varies significantly from period to period as a result of the
wide fluctuations in value of the Company's portfolio securities and the
number of shares owned.
The changes in net assets during the six months ended June 30, 2008 were
attributable to the net operating gain from operations for the period of
$80,145, the changes in investment value arising from an $1,064,768 realized
gain on sale of investments and the $2,705,128 unrealized loss on the
portfolio valuation, interest expense of $18,162 and $30 interest income.
The Company's financial condition is dependent on a number of factors
including the ability of each portfolio company to effectuate its respective
strategies with the Company's help. These businesses are frequently thinly
<page>
capitalized, unproven, small companies that may lack management depth, and may
be dependent on new or commercially unproven technologies, and which may have
little or no operating history.
Result of Operations for the six month period ending June 30, 2008 vs. 2007.
Investment Income
For the six months ended June 30, 2008 Investment Income consisted of a Net
Realized Gain on the sale of portfolio securities of $1,064,768 compared to a
loss of $(40,176) for the comparable period in 2007.
Operating Expenses
For the six months ended June 30, 2008, operating expenses were $99,428
compared to $203,371 for the comparable period of 2007. The decrease for the
six month period ending June 30, 2008 compared to the comparable period of
2007 is primarily attributed to no Litigation Settlement expense ($45,000) and
decreased Professional Fees ($20,317) and Administrative Expenses ($40,465).
Net Investment Income/Loss
For the six months ending June 30, 2008, net investment income after taxes was
$80,145 compared to a loss of $193,371 for the comparable period ended June
30, 2007. The increased gain of $273,516 in the six month period ending June
30, 2008 as compared to the comparable period ended June 30, 2007 was
attributable to the factors discussed above and a $180,373 gain on settlements
of various payables.
Liquidity and Capital Resources
At June 30, 2008, we had approximately $940,102 in liquid and semi liquid
assets consisting of: (i) $47,871 in cash; and (ii) $892,321 in saleable
marketable securities.
For the six month period ended June 30, 2008, we primarily satisfied our
working capital needs from: (i) cash on hand at the beginning of the period,
(ii) the sale of marketable securities in the gross amount of $1,085,096,
(iii) loans from officers in the amount of $135,628 and (iv) borrowing from
our brokerage margin account loan. Working capital expenditures included: i)
a decrease in a note payable and interest due to one of our officers in the
amount of $600,000, (ii) payment of accounts payable/accrued expenses of
$357,344 and (iii) net payments due to other stockholders of $113,500. As of
June 30, 2007 the Company had a Net Asset Value of $1,596,120. The Company
established a collateralized margin loan account with a broker/dealer that as
of June 30, 2008 held 700,000 shares of Regal's Neuralstem stock. During the
six months ended June 30, 2008, Regal received loans in the amount of $450,000
under this margin account, and repaid $450,000 of that amount, with neither
amount reflecting small interest amounts.
As of June 30, 2008, the aggregate outstanding balance of principal and
interest under the officer loan is $153,372 Such loan is a demand loan and
secured by a pledge of 600,000 shares of Neuralstem ("Collateral Shares")
currently owned by the Company. In the event the note holder made a demand for
repayment, the Company's working capital would be insufficient for such
repayment. In such event, the Company would be required to either: (i) sell
shares of Neuralstem which it currently owns; or (ii) default on the
obligation whereby the note holder would have the right to receive the
<page>
Collateral Shares in order to satisfy the outstanding balance. The Company's
Board of Directors approved a resolution to settle this debt in exchange for
100,000 shares of Neuralstem stock however the stock transfer occurred after
June 30, 2008. See Subsequent Events note 12.
From inception, the Company has relied on the infusion of capital through
capital share transactions and loans. The Company plans to either: (i) dispose
of its current portfolio securities to meet operational needs; or (ii) borrow
against such securities via a traditional margin account or other such credit
facility. Any such dispositions may have to be made at inopportune times and
there is no assurance that, in light of the lack of liquidity in such shares,
they could be sold at all, or if sold, could bring values approximating the
estimates of fair value set forth in the Company financial statements.
Additionally, when the Company enters into a margin agreement loan using its
portfolio securities as collateral, a decrease in their market value may
result in a liquidation of such securities which could greatly depress the
value of such securities in the market. The Company's current monthly cash
operating expense is approximately $16,500. Because our revenues, if
generated, tend to be in the form of portfolio securities, such revenues are
not of a type capable of being used to satisfy the Company's ongoing monthly
expenses. Consequently, for us to be able to avoid having to defer expenses or
sell portfolio companies' securities to raise cash to pay operating expenses
we are constantly seeking to secure adequate funding under acceptable terms.
There is no assurance the Company will be able to do so. Further, if the
Company is unable to secure adequate funding under acceptable terms, there is
substantial doubt the Company can continue as a going concern.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Our business activities contain high elements of risk. The Company considers a
principal type of market risk to be a valuation risk. All assets are valued at
fair value as determined in good faith by or under the direction of the Board
of Directors (which is based, in part, on quoted market prices of similar
investments).
Market prices of common equity securities in general, are subject to
fluctuations which could cause the amount to be realized upon sale to differ
significantly from the current reported value. The fluctuations may result
from perceived changes in the underlying economic characteristics of the
Company's portfolio companies, the relative prices of alternative investments,
general market conditions and supply and demand imbalances for a particular
security.
Neither the Company's investments nor an investment in the Company is intended
to constitute a balanced investment program. The Company will be subject to
exposure in the public-market pricing and the risks inherent therein.
Item 4. Controls and Procedures
Evaluation of Controls and Procedures
The Company's management, under the supervision and with the participation of
various members of management, including our CEO and our CFO, has evaluated
the effectiveness of the design and operation of our disclosure controls and
procedures (as defined in Rule 13a-15(e) of the Exchange Act) as of the end of
the period covered by this quarterly report. Based upon that evaluation, our
CEO and CFO have concluded that our current disclosure controls and procedures
are effective as of the end of the period covered by this quarterly report.
Changes in Internal Controls
There have been no changes in the Company's internal control over financial
reporting (as defined in Rules 13a-15(f) and 15d-15(f) of the Securities
Exchange Act of 1934) that occurred during the six months ended June 30, 2008
that have materially affected, or are reasonably likely to materially affect,
the Company's internal control over financial reporting.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
None.
Item 1A. Risk Factors
The purchase of shares of capital stock of the Company involves many risks. A
prospective investor should carefully consider the following factors before
making a decision to purchase any such shares:
We Have Historically Lost Money and Losses May Continue in the Future:
Our net operating loss for the 2007 fiscal year was $445,596 and future losses
are likely to occur. Accordingly, we may experience significant liquidity and
cash flow problems if we are not able to raise additional capital as needed
and on acceptable terms. No assurances can be given we will be successful in
reaching or maintaining profitable operations.
We recently undertook our current business model and as a result, historical
results may not be relied upon with regard to our operating history:
In March 2005, we formally began implementing our current business model of
providing services to biotech companies. As a result of how we receive payment
for these services, we are technically considered an investment company under
the 1940 Investment Company Act. As such, we have presented our financial
results and accompanying notes in such fashion. Conversely, until 2005, our
operating results were presented in the format and style of an industrial
company. As a result, our financial performance and statements may not be
comparable between the years prior and up to 2004 and the results for 2005 and
after.
The Company's cash expenses are very large relative to its cash flow which
requires the Company continually to sell new shares. This could result in
substantial dilution to our shareholders or our ability to continue in
operations should additional capital not be raised:
For year ended December 31, 2007 the Company had no revenues and operating
expenses of $445,596. Consequently, the Company was required either to sell
new shares of Company common stock or issue promissory notes to raise the cash
necessary to pay ongoing expenses. During the first six months of 2008 the
Company sold or transferred 430,814 shares of inventory stock that along with
a declining stock value reduced the investment inventory value by $2,718,777.
This practice is likely to continue for the foreseeable future and could lead
to continuing dilution in the interest of existing Company stockholders.
<page>
Moreover, there is no assurance that the Company will be able to find
investors willing to purchase Company shares at a price and on terms
acceptable to the Company, in which case, the Company could deplete its cash
resources.
Regulations governing operations of a business development company will affect
the Company's ability to raise, and the way in which the Company raises
additional capital. This could result in the Company not being able to raise
additional capital and accordingly cease operations:
Under the provisions of the 1940 Act, the Company is permitted, as a business
development company, to issue senior securities only in amounts such that
asset coverage, as defined in the 1940 Act, equals at least 200% after each
issuance of senior securities. If the value of portfolio assets declines, the
Company may be unable to satisfy this test. If that happens, the Company may
be required to sell a portion of its investments and, depending on the nature
of the Company's leverage, repay a portion of its indebtedness at a time when
such sales may be disadvantageous and result in unfavorable prices. Applicable
law requires that business development companies may invest 70% of its assets
only in privately held U.S. companies, small, publicly traded U.S. companies,
certain high-quality debt, and cash. The Company is not generally able to
issue and sell common stock at a price below net asset value per share. The
Company may, however, sell common stock, or warrants, options or rights to
acquire common stock, at prices below the current net asset value of the
common stock if the Board of Directors determines that such sale is in the
best interests of the Company and its stockholders approve such sale. In any
such case, the price at which the Company's securities are to be issued and
sold may not be less than a price which, in the determination of the Board of
Directors, closely approximates the market value of such securities (less any
distributing commission or discount).
The success of the Company will depend in part on its size, and in part on
management's ability to make successful investments:
If the Company is unable to select profitable investments, the Company will
not achieve its objectives. Moreover, if the size of the Company remains
small, operating expenses will be higher as a percentage of invested capital
than would otherwise be the case, which increases the risk of loss (and
reduces the chance for gain) for investors.
The Company's investment activities are inherently risky:
The Company's investment activities involve a significant degree of risk. The
performance of any investment is subject to numerous factors which are neither
within the control of nor predictable by the Company. Such factors include a
wide range of economic, political, competitive and other conditions which may
affect investments in general or specific industries or companies.
The Company's equity investments may lose all or part of their value, causing
the Company to lose all or part of its investment in those companies:
The equity interests in which the Company invests may not appreciate in value
and may decline in value. Accordingly, the Company may not be able to realize
gains from its investments and any gains that are realized on the disposition
of any equity interests may not be sufficient to offset any losses
experienced. Moreover, the Company's primary objective is to invest in early
stage companies, the products or services of which will frequently not have
<page>
demonstrated market acceptance. Many portfolio companies lack depth of
management and have limited financial resources. All of these factors make
investments in the Company's portfolio companies particularly risky.
The Company's common stock has historically traded at a substantial premium to
net asset value:
Historically, the Company's common stock has traded at a substantial premium
to its net asset value. The following summarizes the Company's approximate net
asset value per common share and corresponding stock price:
As of December 31, 2007 2006 2005
Net Asset Value $ 0.67 $ 0.22 $ (0.07)
Stock Price* $ 0.06 $ 0.15 $ 0.30
*Stock Price is as of the last trading day in December of each corresponding
year.
Although at present it appears that the Company is trading at a discount to
Net Asset Value, there can be no assurance that this trend will continue.
Moreover, as the Company utilizes and monetizes its assets for its continuing
operating needs the Net Asset Value will decrease, potentially resulting in
further decreases in the price of the Company's common stock.
Our common stock is traded on the "Over-the-Counter Bulletin Board," which may
make it more difficult for investors to resell their shares due to suitability
requirements:
Our common stock is currently traded on the Over the Counter Bulletin Board
(OTCBB) where we expect it to remain in the foreseeable future. Broker-dealers
often decline to trade in OTCBB stocks given the markets for such securities
are
often limited, the stocks are more volatile, and the risk to investors is
greater. These factors may reduce the potential market for our common stock by
reducing the number of potential investors. This may make it more difficult
for investors in our common stock to sell shares to third parties or to
otherwise dispose of their shares. This could cause our stock price to
decline.
We could fail to retain or attract key personnel who are required in order for
us to fully carry out our business plan:
The Company's operations and ability to implement its business plan are
dependent upon the efforts of its key personnel, the loss of the services of
which could have a material adverse effect on the Company. The Company will
likely be required to hire additional personnel to implement its business
plan. Qualified employees and consultants are in great demand and are likely
to remain a limited resource for the foreseeable future. Competition for
skilled creative and technical talent is intense. There can be no assurance
that the Company will be successful in attracting and retaining such
personnel. Any failure by the Company to retain the services of existing
employees and consultants or to hire new employees when necessary could have a
material adverse effect upon the Company's business, financial condition and
results of operations.
<page>
The Company operates in a highly competitive market:
The Company faces competition from a number of sources, many of which have
longer operating histories, and significantly greater financial, management,
marketing and other resources than the Company. The Company's ability to
generate new portfolio clients depends to a significant degree on its
reputation among potential clients and partners, and its ability to reach
acceptable investment terms with potential clients relative to competitive
alternatives. In the event that the reputation of the Company is adversely
impacted, or that potential portfolio clients perceive competitive
alternatives to be superior, the business, financial condition and operating
results of the Company could be adversely affected.
Our officers and directors have the ability to exercise significant influence
over matters submitted for stockholder approval and their interests may differ
from other stockholders:
Our executive officers and directors have the ability to appoint a majority to
the Board of Directors. Accordingly, our directors and executive officers,
whether acting alone or together, may have significant influence in
determining the outcome of any corporate transaction or other matter submitted
to our Board for approval, including issuing common and preferred stock,
appointing officers, which could have a material impact on mergers,
acquisitions, consolidations and the sale of all or substantially all of our
assets, and the power to prevent or cause a change in control. The interests
of these board members may differ from the interests of the other
stockholders.
Our share ownership is concentrated:
The Company's officers, directors and principal stockholders, together with
their affiliates, beneficially own approximately 70% of the Company's voting
shares. As a result, these stockholders, if they act together, will exert
significant influence over all matters requiring stockholder approval,
including the election and removal of directors, any merger, consolidation or
sale of all or substantially all of assets, as well as any charter amendment
and other matters requiring stockholder approval. In addition, these
stockholders may dictate the day to day management of the business. This
concentration of ownership may delay or prevent a change in control and may
have a negative impact on the market price of the Company's common stock by
discouraging third party investors. In addition, the interests of these
stockholders may not always coincide with the interests of the Company's other
stockholders.
We may change our investment policies without further shareholder approval:
Although we are limited by the Investment Company Act of 1940 with respect to
the percentage of our assets that must be invested in qualified investment
companies, we are not limited with respect to the minimum standard that any
investment company must meet, neither are we limited to the industries in
which those investment companies must operate. We may make investments without
shareholder approval and such investments may deviate significantly from our
historic operations. Any change in our investment policy or selection of
investments could adversely affect our stock price, liquidity, and the ability
of our shareholders to sell their stock.
The Company's common stock may be subject to the penny stock rules which might
make it harder for stockholders to sell:
<page>
As a result of our stock price, our shares are subject to the penny stock
rules. Because a "penny stock" is, generally speaking, one selling for less
than $5.00 per share, the Company's common stock may be subject to the
foregoing rules. The application of the penny stock rules may affect
stockholders ability to sell their shares because some broker-dealers may not
be willing to make a market in the Company's common stock because of the
burdens imposed upon them by the penny stock rules which include but are not
limited to:
Section 15(g) of the Securities Exchange Act of 1934 and SEC Rules
15g-1 through 15g-6, which impose additional sales practice requirements
on broker-dealers who sell Company securities to persons other than
established customers and accredited investors.
Rule 15g-2 declares unlawful any broker-dealer transactions in penny
stocks unless the broker-dealer has first provided to the customer a
standardized disclosure document.
Rule 15g-3 provides that it is unlawful for a broker-dealer to engage
in a penny stock transaction unless the broker-dealer first discloses
and subsequently confirms to the customer the current quotation prices
or similar market information concerning the penny stock in question.
Rule 15g-4 prohibits broker-dealers from completing penny stock
transactions for a customer unless the broker-dealer first discloses to
the customer the amount of compensation or other remuneration received
as a result of the penny stock transaction.
Rule 15g-5 requires that a broker-dealer executing a penny stock
transaction, other than one exempt under Rule 15g-1, disclose to its
customer, at the time of or prior to the transaction, information about
the sales persons' compensation.
Potential shareholders of the Company should also be aware that, according to
SEC Release No. 34-29093, the market for penny stocks has suffered in recent
years from patterns of fraud and abuse. Such patterns include (i) control of
the market for the security by one or a few broker-dealers that are often
related to the promoter or issuer; (ii) manipulation of prices through
prearranged matching of purchases and sales and false and misleading press
releases; (iii) "boiler room" practices involving high-pressure sales tactics
and unrealistic price projections by inexperienced sales persons; (iv)
excessive and undisclosed bid-ask differential and markups by selling broker-
dealers; and (v) the wholesale dumping of the same securities by promoters and
broker dealers after prices have been manipulated to a desired level, along
with the resulting inevitable collapse of those prices and with consequent
investor losses.
Limited regulatory oversight may require potential investors to fend for
themselves:
The Company has elected to be treated as a business development company under
the 1940 Act which makes the Company exempt from some provisions of that
statute. The Company is not registered as a broker-dealer or investment
advisor because the nature of its proposed activities does not require it to
do so; moreover it is not registered as a commodity pool operator under the
Commodity Exchange Act, based on its intention not to trade commodities or
financial futures. However, the Company is a reporting company under the
Securities Exchange Act of 1934. As a result of this limited regulatory
<page>
oversight, the Company is not subject to certain operating limitations,
capital requirements, or reporting obligations that might otherwise apply and
investors may be left to fend for themselves.
The Company's concentration of portfolio company securities:
The Company will attempt to hold the securities of several different portfolio
companies. However, a significant amount of the Company's holdings could be
concentrated in the securities of only a few companies. This risk is
particularly acute during this time period of early Company's operations,
which could result in significant concentration with respect to a particular
issuer or industry. The concentration of the Company's portfolio in any one
issuer or industry would subject the Company to a greater degree of risk with
respect to the failure of one or a few issuers or with respect to economic
downturns in such industry than would be the case with a more diversified
portfolio. At December 31, 2007, 99.7% of the Company's asset value resulted
from a single portfolio holding.
The unlikelihood of cash distributions:
Although the Company has the corporate power to make cash distributions, such
distributions are not among the Company's objectives. Consequently, management
does not expect to make any cash distributions in the immediate future.
Moreover, even if cash distributions were made, they would depend on the size
of the Company, its performance, and the expenses incurred by the Company.
Because many of the Company's portfolio securities will be recorded at values
as determined in good faith by the Board of Directors, the prices at which the
Company is able to dispose of these holdings may differ from their respective
recorded values:
The Company values its portfolio securities at fair value as determined in
good faith by the Board of Directors. However, the Company may be required on
a more frequent basis to value the securities at fair value as determined in
good faith by the Board of Directors to the extent necessary to reflect
significant events affecting the value of such securities. For privately held
securities, and to a lesser extent, for publicly-traded securities, this
valuation is an art and not a science. The Board of Directors may retain an
independent valuation firm to aid it on a selective basis in making fair value
determinations. Factors that may be considered in fair value pricing of an
investment include the markets in which the portfolio company does business,
comparison of the portfolio company to (other) publicly traded companies,
discounted cash flow of the portfolio company, and other relevant factors.
Because such valuations are inherently uncertain, may fluctuate during short
periods of time, and may be based on estimates, determinations of fair value
may differ materially from the values that would have been used if a ready
market for these securities existed. As a result, the Company may not be able
to dispose of its holdings at a price equal to or greater than the determined
fair value. Net asset value could be adversely affected if the determination
regarding the fair value of Company investments is materially higher than the
values ultimately realized upon the disposal of such securities.
The lack of liquidity in the Company's portfolio securities would probably
prevent the Company from disposing of them at opportune times and prices,
which may cause a loss and/or reduce again:
<page>
The Company will frequently hold securities in privately held companies. Some
of these securities will be subject to legal and other restrictions on resale
or will otherwise be less liquid than publicly traded securities. The
illiquidity of such investments may make it difficult to sell such investments
at advantageous times and prices or in a timely manner. In addition, if the
Company is required to liquidate all or a portion of its portfolio quickly, it
may realize significantly less than the values recorded for such investments.
The Company may also face other restrictions on its ability to liquidate an
investment in a portfolio company to the extent that the Company has material
non-public information regarding such portfolio company. If the Company is
unable to sell its assets at opportune times, it might suffer a loss and/or
reduce a gain. Restrictions on resale and limited liquidity are both factors
the Board will consider in determining fair value of portfolio securities.
Moreover, even holdings in publicly-traded securities are likely to be
relatively illiquid because the market for companies of the type in which the
Company invests tend to be thin and usually cannot accommodate large volume
trades.
Holding securities of privately held companies may be riskier than holding
securities of publicly traded companies due to the lack of available public
information:
The Company will frequently hold securities in privately-held companies which
may be subject to higher risk than holdings in publicly traded companies.
Generally, little public information exists about privately held companies,
and the Company will be required to rely on the ability of management to
obtain adequate information to evaluate the potential risks and returns
involved in investing in these companies. If the Company is unable to uncover
all material information about these companies, it may not make a fully
informed investment decision, and it may lose some or all of the money it
invests in these companies. These factors could subject the Company to greater
risk than holding securities in publicly traded companies and negatively
affect investment returns.
The market values of publicly traded portfolio companies are likely to be
extremely volatile:
Our clients tend to be early stage biotech companies. As a result, their
operations and futures are highly dependent on their ability to develop a
product and on public perception. Unlike more seasoned companies with
historical financial projections that can be used to evaluate performance, our
clients typically do not possess such historical figures. Accordingly, shares
of our portfolio companies that are quoted for public trading will generally
be thinly traded and subject to wide and sometimes precipitous swings in
value.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None
Item 3. Defaults upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
<page>
Item 5. Other Information
None
Item 6. Exhibits and Form 8-K reports filed during the quarter
Exhibits
The following exhibits are included as part of this Report on Form 10-Q.
References to "the Company" in this Exhibit List mean Regal One Corporation, a
Florida corporation.
Exhibit Number Description
31.1 Certification of the Principal Executive Officer Pursuant to Section
302 of the Sarbanes-Oxley Act of 2002*
31.2 Certification of the Principal Financial Officer Pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002*
32.1 Certification of Principal Executive Officer Pursuant to 18 U.S.C
Section 1350*
32.2 Certification of Principal Financial Officer Pursuant to 18 U.S.C
Section 1350*
*Filed herewith
Form 8-K Reports filed during the quarter
Form 8-K filed on June 16, 2008 concerning Item 5.02, the departure of
Directors or Principal Officers and the election of a new Principal Officer is
incorporated by reference.
Form 8K/A filed on June 17, 2008 amending the filing on June 16, 2008
incorporated into this report by reference.
<page>
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Regal One Corporation
Dated: August 27, 2008
By:/S/ Charles J. Newman
Charles J. Newman
Chief Executive Officer
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS that each person whose signature appears below
constitutes and appoints Malcolm Currie, as his true and lawful attorneys-in-
fact and agents, with full power of substitution and resubstitution, for him
and in his name, place and stead, in any and all capacities, to sign any and
all amendments to this Quarterly Report on Form 10-Q, and to file the same
with all exhibits thereto, and other documents in connection therewith, with
the Securities and Exchange Commission, granting unto said attorneys- in-fact
and agents, and each of them, full power and authority to do and perform each
and every act and thing requisite and necessary to be done in and about the
premises, as fully to all intents and purposes as he might or could do in
person, hereby ratifying and confirming all that said attorneys-in-fact and
agents, or either of them, or their or his substitute or substitutes, may
lawfully do or cause to be done by virtue hereof.
OFFICERS AND DIRECTORS
Name Title Date
/s/ Charles J. Newman August 27, 2008
Charles J. Newman Chief Executive Officer,
Chief Financial Officer, and
Director (Principal executive officer)
/s/ Malcolm Currie August 27, 2008
Malcolm Currie Director
/s/ Carl Perry August 27, 2008
Carl Perry Director
/s/ Neil Williams August 27, 2008
Neil Williams Director
46