UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended October 31, 2005
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________ to _________
Commission File number: 0-26843
Nortia Capital Partners, Inc.
----------------------------------------------------
(Exact name of registrant as specified in its charter)
Nevada 65-0913582
------------------------------ -------------------------------
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
400 Hampton View Court, Alpharetta, Georgia 30004
------------------------------------------- --------
(Address of principal executive offices) (Zip Code)
(770) 777-6795
--------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
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 an accelerated
filer (as defined in Rule 12b-2 of the Exchange Act).
Yes [ ] No [X]
Indicate by check mark whether the registrant is a shell company
(as defined in Rule 12b-2 of the Exchange Act).
Yes [ ] No [X]
As of December 10, 2005, there were approximately 24,951,639 shares
of common stock, $0.001 par value, issued and outstanding.
Nortia Capital Partners, Inc.
Form 10-Q Index
October 31, 2005
Page
----
Part I-Financial Information
Item 1. Financial Statements 2
Balance Sheet at October 31, 2005 (Unaudited) 3
Statement of Operations for the Three and Six Months Ended
October 31, 2005 and 2004 and for the period from
May 1, 2003 (inception of development stage) to
October 31, 2005 (Unaudited) 4
Statement of Cash Flows for the Six Months Ended
October 31, 2005 and 2004 and for the period from
May 1, 2003 (inception of development stage) to
October 31, 2005 (Unaudited) 5
Schedule of Changes in Net Assets for the Six
Months ended October 31, 2005 (Unaudited) 6
Schedule of Investments at October 31, 2005 (Unaudited) 7
Notes to Financial Statements (Unaudited) 8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 26
Item 3. Quantitative and Qualitative Disclosures About
Market Risk 37
Item 4. Controls and Procedures 37
Part II-Other Information
Item 1. Legal Proceedings 38
Item 1A. Risk Factors 38
Item 2. Unregistered Sales of Equity Securities and Use
of Proceeds 47
Item 3. Defaults upon Senior Securities 47
Item 4. Submission of Matters to a Vote of Security Holders 47
Item 5. Other Information 48
Item 6. Exhibits 48
Signatures 49
1
PART I
FINANCIAL INFORMATION
Item 1-Financial Statements
2
Nortia Capital Partners, Inc.
(A Development Stage Company)
At October 31, 2005
Balance Sheet
(Unaudited)
ASSETS
------
Current Assets
Cash $ 18,615
-----------
Total Current Assets 18,615
===========
Total Assets 18,615
-----------
LIABILITIES
-----------
Current Liabilities
Accounts payable 25,014
Accrued expenses 84,665
-----------
Total Current Liabilities 109,679
===========
Net Assets $ (91,064)
===========
STOCKHOLDERS' EQUITY (DEFICIT)
------------------------------
Common stock, $0.001 par value, 50,000,000 shares
authorized 22,897,254 shares issued and outstanding 22,897
Common stock issuable, 4,054,900 shares 4,054
Additional paid in capital 5,594,014
Accumulated deficit (12,398)
Deficit accumulated during development stage (5,674,131)
-----------
(65,564)
Less: Deferred consulting (25,500)
-----------
Total Stockholders' Equity (Deficit) (91,064)
===========
Total Liabilities and Stockholders' Equity (Deficit) $ 18,615
===========
Net Asset Value Per Share $ (0.01)
===========
See accompanying notes to financial statements.
3
Nortia Capital Partners, Inc.
(A Development Stage Company)
Statement of Operations
(Unaudited)
Post Election Pre Election Post Election Pre Election
as a Business as a Business as a Business as a Business
Development Development Development Development Period from
Company Company Company Company May 1, 2003
-----------------------------------------------------------------
Three Three Six Six (Inception of
Months Ended Months Ended Months Ended Months Ended Development Stage) to
Oct. 31, Oct. 31, Oct. 31, Oct. 31, Oct. 31,
2005 2004 2005 2004 2005
--------------------------------------------------------------------------------------
Revenues $ - $ 93,699 $ - $ 153,699 $ 300,000
Operating Expenses
General and administrative 109,845 19,035 203,941 54,924 475,853
Provision for accounts
receivable - - - - -
Bad debt - - - - 1,625
Rent 1,218 15,557 13,295 15,557 52,295
Consulting 71,724 9,765 108,580 15,915 750,422
Compensation 203,411 45,700 333,171 46,700 892,960
Debenture penalty - 2,175 - 2,175 11,400
Directors fees - 900 - 1,050 237,150
Interest expense (17,500) 8,752 - 15,054 53,144
Impairment of investments - 3,250 - 3,250 48,581
Professional 157,807 83,140 245,305 83,640 452,924
------------------------------------------------------------------------------
Total Operating Expenses 526,505 188,274 904,292 238,265 2,976,354
------------------------------------------------------------------------------
Loss from Operations (526,505) (94,575) (904,292) (84,566) (2,676,354)
Other Income (Expense)
Loss on sale of available for
sale securities - - - (64,738) (64,738)
Loss on conversion of debt - - - - (2,738,559)
Other than temporary loss on
for sale securities - (96,699) - (195,000) (195,000)
Other income - 4,500 - 4,500 4,568
Interest income 127 1 338 42 349
------------------------------------------------------------------------------
Total Other Income (Expense) 127 (92,198) 338 (255,196) (2,993,380)
------------------------------------------------------------------------------
Net Loss Before Income Taxes $ (526,378) $ (186,773) $ (903,954) $ (339,762) $(5,669,734)
==============================================================================
Income tax expense - - - - (4,397)
Net Loss $ (526,378) $ (186,773) $ (903,954) $ (339,762) $(5,674,131)
==============================================================================
Comprehensive Loss
Unrealized loss on available
for sale securities - - - (182,758) -
------------------------------------------------------------------------------
Total Comprehensive Loss $ (526,378) $ (186,773) $ (903,954) $ (522,520) $(5,674,131)
==============================================================================
Net Loss Per Share - Basic
and Diluted $ (0.02) $ (0.01) $ (0.04) $ (0.03) $ (0.41)
==============================================================================
Weighted Average Shares 26,560,812 12,713,044 26,181,470 11,404,120 13,843,817
==============================================================================
See accompanying notes to financial statements
4
Nortia Capital Partners, Inc.
(A Development Stage Company)
Statement of Cash Flows
(Unaudited)
Post Election Pre Election
---- ---
as a Business as a Business
Development Development Period from
Company Company May 1, 2003
---------------------------------
Six Six (Inception of
Months Ended Months Ended Development Stage) to
Oct. 31, Oct. 31, Oct. 31,
2005 2004 2005
--------------------------------- -----------------------
Cash Flows From Operating Activities:
Net loss $ (903,954) $ (339,762) $(5,674,131)
Adjustments to reconcile net income (loss)
to net cash used in operations:
Debenture issued for legal services - - 5,000
Contributed services expense 4,400 - 4,400
Bad debt expense - - 1,625
Impairment of investments - 3,250 48,581
Debenture issued for consulting services - 7,000 7,000
Loss on sale of available for sale securities - 64,738 64,738
Other than temporary loss on available for
sale securities - 195,000 195,000
Compensation related to conversion of debt - - 2,000
Loss on conversion of debt - - 2,738,559
Transfer of available for sale securities
for consulting services - 2,100 2,100
Provision for accounts receivable - - -
Common stock issued for compensation - 2,950 356,000
Common stock issued for directors fees - 1,050 237,150
Common stock issued for consulting services - 4,065 128,565
Common stock issued for legal services - 100 10,000
Amortization of deferred consulting 61,200 - 559,900
Common stock based revenue - (153,699) (300,000)
Changes in operating assets and liabilities:
Decrease in prepaid expenses - - 540
Increase in other receivable - (6,500) (6,500)
Increase in employee receivable - (8,128) -
Increase (decrease) in accounts payable (62,157) 6,500 (38,315)
Increase in due to related party - 2,500 -
Increase in accrued expenses 30,503 25,899 143,679
--------------------------------- -----------------------
Net Cash Used In Operating Activities (870,008) (192,937) (1,514,112)
--------------------------------- -----------------------
Cash Flows From Investing Activities:
Purchase of available for sale securities - - (49,948)
Proceeds from sale of available for sale securities - 14,405 14,405
--------------------------------- -----------------------
Net Cash Provided By (Used In) Investing Activities - 14,405 (35,543)
--------------------------------- -----------------------
Cash Flows From Financing Activities:
Proceeds from issuance of promissory notes - - 188,000
Proceeds from sale of common stock 876,920 - 963,270
Proceeds from issuance of debentures - 197,000 417,000
--------------------------------- -----------------------
Net Cash Provided By Financing Activities 876,920 197,000 1,568,270
--------------------------------- -----------------------
Net Increase in Cash 6,912 18,468 18,615
--------------------------------- -----------------------
Cash at Beginning of Period 11,703 8,764 -
--------------------------------- -----------------------
Cash at End of Period $ 18,615 $ 27,232 $ 18,615
================================= =======================
Supplemental Disclosure of Cash Flow Information:
- -------------------------------------------------
Cash paid during the period for:
Interest $ - - $ -
================================= =======================
Taxes $ - - $ -
================================= =======================
Supplemental Disclosure of Non-Cash Investing
- -----------------------------------------------
and Financing Transactions:
- ---------------------------
Debenture issued for available-for-sale securities $ - $ - $ 75,000
Unrealized losses on available-for-sale securities - (182,758) -
Recapitalization of accounts payable - - 63,330
Common stock issuable for conversion of
debentures and accrued interest - - 552,235
Common stock issuable for conversion of promissory
notes and accrued interest - - 192,927
Common stock issued for conversion of
preferred stock 300 - 300
See accompanying notes to financial statements
5
Nortia Capital Partners, Inc.
(A Development Stage Company)
Statement of Changes in Net Assets
Six
Month Ended
Oct. 31, 2005
-------------
Decrease in net assets from operations:
Net operating losses $ (903,954)
----------------
Net decrease in net assets from operations (903,954)
Common Stock transactions 876,920
Common stock expense for officer not being paid 4,400
Amortization of deferred consulting 61,200
----------------
Total increase in Net Assets 38,566
Net Assets:
Beginning of Period (129,629)
----------------
End of period $ (91,064)
================
See accompanying notes to financial statements
6
Nortia Capital Partners, Inc.
(A Development Stage Company)
Schedule of Investments
At October 31, 2005
(Unaudited)
Percentage of
Title of Class Held on At Oct. 31, 2005
Portfolio Securities Held a Fully Diluted ----------------
Company Industry By The Basis Cost Fair Value
Company
- -------------------------------------------------------------------------------------------------------------------
Investments - (1) (2)
- -------------------------------------------------------------------------------------------------------------------
Avix Technologies, Inc. (3) Telecom Common Stock 11% $ 43,706 $ -
- -------------------------------------------------------------------------------------------------------------------
Universal Capital Management, Inc. (3) Business Development Common Stock 1% 1,625 -
Company
- -------------------------------------------------------------------------------------------------------------------
BF Acquisition Group V, Inc. (3) Shell Common Stock 10% 1,625 -
- -------------------------------------------------------------------------------------------------------------------
Total Investments - Minority Owned
Other Non-Controlled Affiliates 46,956 -
- -------------------------------------------------------------------------------------------------------------------
BF Acquisition Group III, Inc. (3) Shell Common Stock 3% 1,625 -
- -------------------------------------------------------------------------------------------------------------------
Total Investments - Unaffiliated Issuers 1,625
- -------------------------------------------------------------------------------------------------------------------
- -
- -------------------------------------------------------------------------------------------------------------------
Total Investments $ 48,581 $ -
- -------------------------------------------------------------------------------------------------------------------
Total Investments 48,581 -
Unearned Income - -
Total Investments, net of Unearned Income $ 48,581 $ -
(1) Minority owned investments are generally defined under the Investment
Company Act of 1940 as companies in which we own less than 50% of the voting
securities of the company. If we own between 25% and 50% of the issuer, it
is presented as minority-owned controlled companies, if between 5% and 25%,
it is presented as minority-owned other affiliates.
(2) All common stock is in inactive or non-income producing and restricted
at the period end.
(3) Public company.
See accompanying notes to financial statements
7
Nortia Capital Partners, Inc.
(A Development Stage Company)
Notes to Financial Statements
At October 31, 2005
(Unaudited)
Note 1. Basis of Presentation
- --------------------------------
The accompanying unaudited financial statements have been prepared in
accordance with accounting principles generally accepted in the United States
of America and the rules and regulations of the United States of America
Securities and Exchange Commission ("SEC") for interim financial information.
Accordingly, they do not include all the information and footnotes necessary
for a comprehensive presentation of financial position and results of
operations.
It is management's opinion, however, that all material adjustments
(consisting of normal recurring adjustments and certain non-recurring
adjustments) have been made which are necessary for a fair financial
statement presentation. The results for the interim period are not
necessarily indicative of the results to be expected for the year.
These unaudited financial statements should be read in conjunction with
Nortia Capital Partners, Inc.'s ("Nortia", "we", "us", "our", or the
"Company") audited financial statements and notes thereto for the year ending
April 30, 2005 included in the Company's Form 10-K filed with the SEC on
November 23, 2005.
The accompanying financial statements are prepared in accordance with the
guidance in the AICPA's Audit and Accounting Guide, "Audits of Investment
Companies" because the Company elected to be regulated as a business
development company (a "BDC") under the Investment Company Act of 1940 (the
"1940 Act"), effective January 4, 2005 (see Note 2).
In accordance with Article 6 of Regulation S-X under the Securities Act of
1933, as amended (the "Securities Act") and the Securities Exchange Act of
1934, as amended (the "Exchange Act"), the Company does not consolidate
portfolio company investments, including those in which it has a controlling
interest. Portfolio investments are held for purposes of deriving investment
income and/or future capital gains.
The results of operations for the six months ended October 31, 2005 reflect
the Company's results subsequent to our election to be treated as a BDC. The
results of operations for the six months ended October 31, 2004 reflect our
results prior to operating as a BDC. Accounting principles used in the
preparation of the financial statements for 2005 are different from 2004 and,
therefore, the financial position and results of operations of this period is
not directly comparable. The Company utilizes the cumulative effect method
to reflect the effects of conversion to a BDC. There was no cumulative
effect adjustment from the conversion to a BDC in January 2005. The primary
differences in accounting principles relate to the carrying value of
investments and accounting for income taxes. See Notes to the financial
statements included elsewhere in this Form 10-Q.
On February 17, 2005, the Company announced that its Board of Directors had
approved a two-for-one stock split of its common shares. The record date for
the split was February 28, 2005 and the pay date was March 3, 2005. In
accordance with Statement of Financial Accounting Standards No. 128 ("SFAS
128"), the Company has retroactively presented the effect of the stock split
for all periods presented in the accompanying financial statements for all
share and per share data.
Investments in securities of unaffiliated issuers represent holdings of less
than 5% of the issuer's voting common stock. Investments in and advances to
affiliates are presented as (i) majority-owned, if holdings, directly or
indirectly, represent over 50% of the issuer's voting common stock, (ii)
8
Nortia Capital Partners, Inc.
(A Development Stage Company)
Notes to Financial Statements
At October 31, 2005
(Unaudited)
minority owned other controlled affiliates if the holdings, directly or
indirectly, represent over 25% and up to 50% of the issuer's voting common
stock and (iii) minority owned other non-controlled affiliates if the
holdings, directly or indirectly, represent 5% to 25% of the issuer's voting
common stock. Investments - other than securities represent all investments
other than in securities of the issuer.
Note 2. Nature of Operations and Summary of Significant Accounting Policies
- -----------------------------------------------------------------------------
Nature of Operations
The Company is an Atlanta-based BDC that provides debt and equity investment
capital to companies in a variety of industries which it believes present
opportunities for superior performance through liquidity events, internal
growth, product, or geographic expansion, the completion of complementary
add-on acquisitions, or industry consolidations.
On January 4, 2005, we filed a Form N-54A with the SEC and elected to be
treated as a BDC under the 1940 Act. Prior to our BDC election, we were in
the start-up phase of operations and generally had a dormant operating
history.
We have generally operated as a development stage company during the periods
covered by this report since we have not generated significant revenue from
our business plan.
We currently intend, as soon as practicable after qualification, to elect to
be treated for federal income tax purposes as a regulated investment company
("RIC"), under Subchapter M of the Internal Revenue Code of 1986 (the
"Code"), although in order to make an effective election, we must, among
other things, distribute most of our net income and meet certain income and
diversification of investment assets requirements. No assurance can be
provided that the Company will meet the requirements for election as a RIC in
the near future or ever. If we were to qualify for, and elect to be treated
as a RIC, we would lose the tax benefit of our net operating loss carry-
forwards for our RIC taxable years, except as offsets to certain recognized
built-in gains.
Pre-BDC Organizational History
We were formerly organized as BF Acquisition Group I, Inc. under the laws of
the State of Florida on April 15, 1999, as a "shell" company with plans to
seek opportunistic business partners or acquisition candidates. Due to
capital constraints, however, we were unable to continue with our business
plan. In March 2001, we ultimately ceased our business activities and became
dormant through May 2003, whereby we incurred only minimal administrative
expenses.
During June 2003, we engaged present management, began to raise additional
capital, and initiated activities to re-establish our business. During our
fiscal quarterly period ending July 31, 2003, we re-entered the development
stage, raised additional capital and recommenced preparations to implement
our business plan.
Effective August 2, 2004, we changed our name to Nortia Capital Partners, Inc.
On October 15, 2004, we entered into a Definitive Share Exchange Agreement
(the "Exchange Agreement") with Global Life Sciences, Inc., a publicly traded
Nevada corporation ("Global"), whereby it was contemplated that we would
become a wholly owned subsidiary of Global. On December 2, 2004, the Exchange
9
Nortia Capital Partners, Inc.
(A Development Stage Company)
Notes to Financial Statements
At October 31, 2005
(Unaudited)
Agreement was consummated and, pursuant to its terms, we became a wholly
owned subsidiary of Global in a transaction accounted for as a
recapitalization of the Company (See Note 6 - Recapitalization). On December
3, 2004, we were merged with and into Global. Subsequent to the
recapitalization, Global changed its name to "Nortia Capital Partners, Inc."
Post-BDC Operations
On January 4, 2005, the Board of Directors of the Company determined that it
was in the best interest of the Company and its shareholders to file an
election to be treated as a BDC under the 1940 Act. As a result of its new
status as a BDC, the Company plans to provide capital and advisory services
for liquidity events, management buyouts, recapitalizations, and the growth
and capital needs of emerging and growth companies.
The Company currently expects to invest in emerging and development-stage
micro-cap companies that intend to be listed on US equity markets, including
the OTC Bulletin Board, but which lack the necessary capital and depth of
management to expand their businesses.
The Company's investment objective is to generate both capital appreciation
and, to a lesser extent, current income from its investments. In order to
achieve this objective, we currently intend to invest in public and private
companies in a wide array of industries, including manufacturing,
distribution, and service industries, throughout the United States. We may
also invest to a limited extent in selected foreign companies, to the extent
that such investments are consistent with the limitations on such investing by
BDCs under the 1940 Act. Furthermore, we plan to target emerging growth
companies that have an executable business plan for growth and a well-managed
infrastructure. Portfolio investments are held for purposes of deriving
investment income and future capital gains.
We also expect to provide diligence and structuring services on private
finance transactions, as well as provide structuring, transaction, management,
consulting and other services to portfolio companies in which we invest.
Significant Accounting Policies
Accounting Estimates
When preparing financial statements in conformity with U.S. GAAP, our
management must make estimates based on future events which affect the
reported amounts of assets and liabilities, the disclosure of contingent
assets and liabilities as of the date of the financial statements, and
revenues and expenses during the reporting period. Actual results could
differ from these estimates. Significant estimates in the accompanying
financial statements include the evaluation of a beneficial conversion
feature for debentures, valuation of the fair value of financial
instruments, valuation of common stock for services and the recognition
of deferred tax assets and liabilities.
Cash and Cash Equivalents
Cash and cash equivalents include all highly liquid investments with a
maturity date of three months or less when purchased.
Beneficial Conversion Feature in Debentures
In accordance with EITF Issue 98-5, as amended by EITF 00-27, we must
evaluate the potential effect of any beneficial conversion terms related to
convertible instruments such as convertible debt or convertible preferred
stock. If the Company issues convertible instruments, a beneficial
conversion may exist if the holder, upon conversion, may receive instruments
that exceed the value of the convertible instrument. Valuation of the
benefit is determined based upon various factors including the valuation of
equity instruments, such as warrants, that may have been issued with the
convertible instruments, conversion terms, value of the instruments to which
the convertible instrument is convertible, etc. Accordingly, the ultimate
value of the beneficial feature is considered an estimate due to the
partially subjective nature of valuation techniques.
10
Nortia Capital Partners, Inc.
(A Development Stage Company)
Notes to Financial Statements
At October 31, 2005
(Unaudited)
Fair Value of Financial Instruments
We define the fair value of a financial instrument as the amount at which
the instrument could be exchanged in a current transaction between willing
parties. The carrying value of accounts payable and accrued liabilities
approximates fair value because of the short maturity of those instruments.
The estimated fair value of our other obligations is estimated based on the
current rates offered to us for similar maturities. Based on prevailing
interest rates and the short-term maturity of all of our indebtedness,
management believes that the fair value of our obligations approximates book
value at October 31, 2005.
Stock-Based Compensation
Prior to its election as a BDC, the Company accounts for stock options issued
to employees in accordance with the provisions of Accounting Principles Board
("APB") Opinion No. 25, "Accounting for Stock Issued to Employees," and
related interpretations. As such, compensation cost is measured on the date
of grant as the excess of the current market price of the underlying stock
over the exercise price. Such compensation amounts are amortized over the
respective vesting periods of the option grant. The Company adopted the
disclosure provisions of Statement of Financial Accounting Standards No. 123
"Accounting for Stock-Based Compensation" ("SFAS 123") and Statement of
Financial Accounting Standards No. 148 "Accounting for Stock Based
Compensation - Transition and Disclosure" ("SFAS 148") which permits
entities to provide pro forma net income (loss) and pro forma earnings (loss)
per share disclosures for employee stock option grants as if the fair-valued
based method defined in SFAS No. 123 had been applied.
The Company accounts for stock options or warrants issued to non-employees in
exchange for goods or services in accordance with the fair value method of
SFAS 123. Under this method, the Company records an expense equal to the
fair value of the options or warrants issued. The fair value is computed
using an options pricing model.
Value of Investments
As a BDC, for financial statement purposes, investments are recorded at their
value in our financial statements. Value, as defined in Section 2(a)(41) of
the 1940 Act, is (i) the market price for those securities for which a market
quotation is readily available and (ii) for all other securities and assets,
fair value as determined in good faith by the board of directors. Because
there is typically no readily available market value for the investments in
our portfolio, we value substantially all of our investments at fair value as
determined in good faith by our board of directors pursuant to a valuation
policy and consistent valuation process. Due to the inherent uncertainty of
these valuations, the estimates may differ significantly from the values that
would have been used had a ready market for the investments existed and the
differences may be material. Our valuation methodology includes the
examination of, among other things, the underlying portfolio company
performance, financial condition and market changing events that impact
valuation. Realized gains (losses) from the sale of investments and
unrealized gains (losses) from the valuation of investments are reflected in
operations during the period incurred.
11
Nortia Capital Partners, Inc.
(A Development Stage Company)
Notes to Financial Statements
At October 31, 2005
(Unaudited)
Revenue Recognition
Prior to its election as a BDC, the Company recognized revenues in accordance
with the guidance in the SEC Staff Accounting Bulletin 104. Revenue is
recognized when persuasive evidence of an arrangement exists, as services are
provided over the term of a service contract, and when collection of the
fixed or determinable selling price is reasonably assured. The Company
followed EITF 00-8 "Accounting by a Grantee for an Equity Instrument to be
Received in Conjunction with Providing Goods or Services" when determining
the measurement date to value securities received for services.
Revenues from current and future activities as a BDC which may include
investment income such as interest income and dividends, and realized or
unrealized gains and losses on investments will be recognized in accordance
with the AICPA's Audit and Accounting Guide, "Audits of Investment Companies."
Fee income includes fees for services rendered by the Company to portfolio
companies and other third parties such as diligence, structuring, transaction
services, management and consulting services, and other services. Diligence,
structuring and transaction services fees are generally recognized as income
when services are rendered or when the related transactions are completed.
Management, consulting and other services fees are generally recognized as
income as the services are rendered.
Income Taxes
Income taxes are accounted for under the asset and liability method of
Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes ("SFAS 109")." Under SFAS 109, deferred tax assets and liabilities are
recognized for the future tax consequences attributable to differences
between the financial statement carrying amounts of existing assets and
liabilities and their respective tax bases. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. Under SFAS 109, the effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income in the period
that includes the enactment date.
As of October 31, 2005, the Company is currently treated as a corporation for
federal income tax purposes, and hence is subject to corporate level
taxation. However, we currently intend, as soon as practicable after
qualification, to elect to be treated for federal income tax purposes as a
regulated investment company ("RIC"), under Subchapter M of the Internal
Revenue Code of 1986 (the "Code"), although in order to make an effective
election, we must, among other things, distribute most of our net income and
meet certain income and diversification of investment assets requirements. No
assurance can be provided that the Company will meet the requirements for
election as a RIC in the near future or ever. If we were to qualify for, and
elect to be treated as a RIC, we would lose the tax benefit of our net
operating loss carry-forwards for our RIC taxable years, except as offsets to
certain recognized built-in gains.
Income (Loss) per Common Share
Basic earnings per share ("EPS") are computed only on the weighted average
number of common shares outstanding during the respective periods. There
were no additional common stock equivalents or other items to adjust the
numerator or denominator in the EPS computations.
12
Nortia Capital Partners, Inc.
(A Development Stage Company)
Notes to Financial Statements
At October 31, 2005
(Unaudited)
The Company previously announced that its Board of Directors had approved a
two-for-one stock split of its common shares. The record date for the split
was February 28, 2005 and the pay date was March 3, 2005. In accordance with
SFAS 128, the Company has retroactively presented the effect of the stock
split for all periods presented in the accompanying financial statements for
all share and per share data.
At October 31, 2005, there were warrants to purchase 875,700 shares of common
stock outstanding which may dilute future earnings per share.
Comprehensive Income (Loss)
Comprehensive income (loss) includes net income (loss) as currently reported
by the Company adjusted for other comprehensive gains (losses). Other
comprehensive gains (losses) for the Company consists of unrealized gains
(losses) related to the Company's equity securities accounted for as
available-for-sale with changes in fair value recorded through stockholders'
equity.
Note 3. Going Concern
- --------------------------
As reflected in the accompanying financial statements, the Company had a net
loss of $903,954 and net cash used in operations of $870,008 for the six
months ended October 31, 2005. Additionally, the Company has an accumulated
deficit of $12,398 and a deficit accumulated during the development stage of
$5,674,131 and stockholders' deficit of $91,064 at October 31, 2005.
The ability of the Company to continue as a going concern is dependent on the
Company's ability to further implement its business plan as a BDC, raise
capital, and generate revenues. The financial statements do not include any
adjustments that might be necessary if the Company is unable to continue as a
going concern.
We plan on generating future revenues as a BDC primarily through direct
investments in private companies and other start-up companies, as well as
through opportunities provided by turnaround companies and companies seeking
liquidity events. Additionally, we will provide fee based business expertise
through both in-house and contract consultants.
The time required for us to become profitable from operations is highly
uncertain, and we cannot assure you that we will achieve or sustain operating
profitability or generate sufficient cash flow to meet our planned capital
expenditures, working capital and debt service requirements. If required,
our ability to obtain additional financing from other sources also depends on
many factors beyond our control, including the state of the capital markets
and the prospects for our business. The necessary additional financing may
not be available to us or may be available only on terms that would result in
further dilution to the current owners of our common stock.
We cannot assure you that we will generate sufficient cash flow from
operations or obtain additional financing to meet scheduled debt payments and
financial covenants. If we fail to make any required payment under the
agreements and related documents governing our indebtedness or fail to comply
with the financial and operating covenants contained in them, we would be in
default. The financial statements do not include any adjustments to reflect
the possible effects on recoverability and classification of assets or the
amounts and classification of liabilities, which may result from the
inability of the Company to continue as a going concern.
13
Nortia Capital Partners, Inc.
(A Development Stage Company)
Notes to Financial Statements
At October 31, 2005
(Unaudited)
We are planning on obtaining additional cash proceeds in the next twelve
months from the issuance of additional securities to be determined.
Note 4. Investments
- ------------------------
In November 2003, we issued $75,000 of debentures in exchange for 100,000
shares of freely trading common stock in Global. In accordance with FAS 115
"Accounting for Certain Investments in Debt and Equity Securities", we
recorded the 100,000 shares of common stock as "available-for-sale"
securities, a current asset and the resulting $5,000 unrealized gain at April
30, 2004 was classified as a separate component of stockholders' equity -
accumulated other comprehensive income.
In April 2004, we purchased 5,000 shares of freely trading common stock for
$6,243 in Global. In accordance with FAS 115, we recorded the 5,000 shares of
common stock as "available-for-sale" securities, a current asset and the
resulting $2,243 unrealized loss at April 30, 2004 was classified as a
separate component of stockholders' equity - accumulated other comprehensive
income.
In May 2004, we transferred 7,500 of these shares to a third party for
payment of public relations services rendered to Global. The fair market
value of the stock on the transfer date was $0.28 per share or $2,100 and the
Company recorded this amount as a consulting expense and recorded a $3,525
loss on the disposal of the securities.
In June and July of 2004, we sold the remaining 97,500 shares and received
$14,405 of proceeds and recognized a $64,738 loss on the sale of the
securities. As a result of the transfer and sale of the above securities, we
have reversed the previously discussed $5,000 unrealized gain and $2,243
unrealized loss that were recorded at April 30, 2004.
In April and May 2004, we paid $6,500 for professional services for four
companies and recorded a $1,625 receivable from each company. In July 2004,
we agreed to receive 75,000 shares of common stock from one of these
companies instead of the cash due of $1,625. In September 2004, we agreed to
receive 100,000 shares of common stock from a second of these companies
instead of the cash due of $1,625. In November 2004, we agreed to receive
100,000 shares of common stock from a third of these companies instead of the
cash due of $1,625. The remaining $1,625 from the final company is not
collectible. All of these companies have a limited operating history and
have a stockholders' deficiency. Consequently, there is no practical way to
value the common stock and we recorded an impairment loss for the entire
$4,875 in our statement of operations for the year ended April 30, 2005.
Previously, the remaining $1,625 for the fourth and final company was
recorded as other receivable. However, we have determined that the
receivable is not collectible and recorded $1,625 of bad debt expense in our
statement of operations for the year ended April 30, 2005.
In September 2003, we entered into a consulting contract with Global (See
Note 5 - Indebtedness). We provided consulting services to Global under this
contract in exchange for $240,000 to be paid to us in the form of 1,200,000
restricted shares. In addition, we received an additional 300,000 free
trading shares of its common stock, valued at $0.20 per share, based on the
original agreement date. The term of the consulting agreement was for twelve
(12) months and the common stock was payable on a quarterly basis. In
January 2004, we received 300,000 shares and in July 2004, we received the
remaining 1,200,000 shares as compensation for services. For the twelve
months ended April 30, 2004, we recorded $146,301 of the consulting fees as
revenue and recorded $153,699 of consulting fees as revenue during the six
months ended October 31, 2004 and had earned a total of $300,000 or 100% of
the consulting fees from the inception of the contract as of October 31,
14
Nortia Capital Partners, Inc.
(A Development Stage Company)
Notes to Financial Statements
At October 31, 2005
(Unaudited)
2004. We recorded the fees as revenue, pro-rata over the contract term in
accordance with EITF 00-8 "Accounting by a Grantee for an Equity Instrument
to be received in conjunction with Providing Goods or Services" based on the
$0.20 fair value on the contract date. In accordance with FAS 115, we
recorded the restricted shares as "available-for-sale" securities, a non-
current asset and the resulting unrealized gain of $180,000 at April 30, 2004
was classified in a separate component of stockholders' equity - accumulated
other comprehensive income.
In accordance with EITF 03-01 "The Meaning of Other Than Temporary Impairment
and its Application to Certain Investments", we evaluated the underlying
securities that had an original cost of $0.20 and a fair market value of
$2.15 in January 2004, but the fair market value had been reduced to $0.07
per share as of October 31, 2004, or less than the $.20 cost. We also
evaluated Global, which was at that time a development stage company, had a
stockholders' deficiency and an accumulated deficit. As a result of our
analysis, the fair market value at October 31, 2004 was $105,000 and we
believed that the impairment is other than temporary and reversed the
$180,000 previously recorded unrealized gain discussed above and recorded a
$195,000 other than temporary impairment loss at October 31, 2004.
Additionally, in July 2004, our Chief Executive Officer and President were
elected officers and directors of Global. As a result, we classified the
securities as an Investment in Affiliate at October 31, 2004.
On October 15, 2004, the Company entered into an Exchange Agreement with
Global. On December 2, 2004, the Exchange Agreement was consummated and
pursuant to the terms of the Exchange Agreement, the Company became a wholly
owned subsidiary of Global in a transaction accounted for as a
recapitalization of the Company (See Note 6 - Recapitalization). As a result
of the transaction, the Board has retired the shares and the investment held
by the Company in Global has been eliminated.
In April 2004, we acquired 2,587,983 shares for a purchase price of $43,706
representing approximately 11% of Avix Technologies, Inc., a publicly held
company that emerged from bankruptcy under Chapter 11 of the federal
bankruptcy code. There is a minimal active trading market for the shares and
the company is in the process of developing its primary product to offer to
the market but has not achieved this progress as of the date of the
accompanying financial statements. Accordingly, we have recorded an
impairment loss in fiscal year 2004 for the entire $43,706, which is
classified as impairment of investments in the accompanying financial
statements.
In July 2005, the Company announced the execution of a definitive Share
Exchange Agreement by and among Holley Communications, Inc., a Delaware
corporation and wholly-owned subsidiary of the Company (the "Investment
Sub"), Holley Communications Canada, Inc., a Canadian Corporation ("Holley
Canada"), and us. Pursuant to the Share Exchange Agreement and subject to
certain closing conditions, the Investment Sub will issue 28,500,000 shares
of its common stock, equivalent to 95% of its then-issued and outstanding
common stock, to Holley Canada. In exchange, Holley Canada will transfer and
assign all of Holley Canada's equity interest in Holley Communications
Investment, Inc., a British Virgin Islands company ("Holley Communications"),
to the Investment Sub. As of October 31, 2005 this transaction had not yet
been consummated. Management anticipates that following the completion of
transactions contemplated by the Share Exchange Agreement, the Company will
register (or cause to be registered) and distribute as a special dividend to
the stockholders of the Company, substantially all of the Company's shares in
the Investment Sub. Holley Communications is a provider of wireless
communication technology application and integrated solutions in China.
Specifically, it is engaged in two segments of the mobile communications
business: a handset segment and a system integration segment. Its handset
segment focuses on research and development, operation, distribution and
retail and provides customers with handset solutions, reference design,
15
Nortia Capital Partners, Inc.
(A Development Stage Company)
Notes to Financial Statements
At October 31, 2005
(Unaudited)
module and handset. Its system segment focuses on voice quality enhancement
system application, integration, sales and engineering services.
The following represents information about securities held with loss
positions as of October 31, 2005 (there were no securities held with loss
positions as of October 31, 2004):
Securities in loss
- ------------------
positions less than Aggregate Aggregate Fair
- ------------------- --------- --------------
12 months: Unrealized Losses Value
---------- ----------------- -----
Equity securities $ 48,581 $ -
=========== =========
Note 5. Indebtedness
- -------------------------
From May 2003 through January of 2005, we received $417,000 of cash proceeds
from the issuance of debentures to several parties. The debenture terms were
interest at ten percent (10%) per annum, payable in twelve (12) months from
the date of the debenture and include a five percent (5%) penalty for any
event of default. Additionally, at the option of the Company, the debenture
holders were granted the option of exchanging the debenture into common stock
of the Company at an exchange rate of twenty-five cents ($0.25) per share.
We have evaluated the debenture to determine if a beneficial conversion
feature exists in accordance with EITF 98-5, as amended by EITF 00-27. We
have determined that the debentures are not a convertible instrument in that
the potential conversion feature outlined in the debentures was not binding
and solely at the option of the Company.
In November 2003, we issued $75,000 of debentures in exchange for 100,000
shares of freely trading common stock in Global (see Note 4 - Investments).
In January 2004, we issued a $5,000 debenture to a third party for legal
services and accounted for the issuance as legal expense.
In September 2004, we issued a $7,000 debenture to a third party for
consulting services and accounted for the issuance as consulting expense.
The amount represents a five percent (5%) fee for debenture proceeds obtained
by the Company in accordance with the consulting agreement.
At January 31, 2005, we had $504,000 of ten percent (10%) debentures
outstanding. Utilizing an effective date of April 15, 2005, the entire
$504,000 was exchanged for the Company's $0.001 par value common stock at an
exchange rate of $0.25 per share. Additionally, an amount equal to twenty
percent (20%) of the debenture principal exchange shares was granted in lieu
of accrued interest and penalties. As of January 31, 2005, $228,000 of the
Debentures were in default as the term was for one (1) year and the debenture
provisions included a penalty of five percent (5%) for any default that
occurs. As a result of the debenture exchange, we recorded 2,419,200 shares
of our common stock as issuable at April 30, 2005 and recorded a loss on
exchange of debt during fiscal 2005 in the amount of $2,104,285 in the
accompanying statement of operations. The loss on exchange of debt was
calculated utilizing a $1.10 per share fair market value for our common
stock, obtained from a recent private placement offering (See Note 7 -
Stockholders Deficiency).
From November 2004 through February of 2005, we received $188,000 of proceeds
from the issuance of promissory notes to several parties. The promissory
16
Nortia Capital Partners, Inc.
(A Development Stage Company)
Notes to Financial Statements
At October 31, 2005
(Unaudited)
note terms are interest at ten percent (10%) per annum, payable
ninety (90) days from the date of the promissory notes. Utilizing an
effective date of April 15, 2005, the entire $188,000 was exchanged for the
Company's $0.001 par value common stock at an exchange rate of $0.25 per
share. No exchange of accrued interest was offered in the exchange
documents. As a result of the promissory note exchange, we recorded 752,000
shares of our common stock as issuable at April 30, 2005 and recorded a loss
on exchange of debt during fiscal 2005 in the amount of $634,273 in the
accompanying statement of operations. The loss on exchange of debt was
calculated utilizing a $1.10 per share fair market value for our common
stock, obtained from a recent private placement offering (See Note 7 -
Stockholders Deficiency).
Note 6. Recapitalization
- ----------------------------
On October 15, 2004, we entered into an Exchange Agreement with Global,
whereby it was contemplated that we would become a wholly owned subsidiary
of Global. On December 2, 2004, the Exchange Agreement was consummated and,
pursuant to its terms, we became a wholly owned subsidiary of Global in a
transaction accounted for as a recapitalization of the Company. On December
3, 2004, we were merged with and into Global. Subsequent to the
recapitalization, Global changed its name to "Nortia Capital Partners, Inc."
Pursuant to the terms of the Exchange Agreement, the shareholders of the
Company received an aggregate of 17,350,000 newly issued shares of Global
common stock, which represented a one-for-one share exchange of the Company's
stock for Global stock (the "Transaction"). Immediately after giving effect
to the Transaction, there were 20,777,344 shares of common stock outstanding,
approximately 84% of which are held by the Company's current shareholders.
Accordingly, since the Company's shareholders obtained voting and management
control, this transaction was treated as a recapitalization of the Company.
The Company also assumed net liabilities of Global, which was a legal
obligation in the amount of $63,330, which was recorded as accounts payable
and subsequently paid.
As a result of the recapitalization, the Company is deemed to have issued
3,427,254 shares of common stock to the original shareholders of Global (See
Note 7 - Stockholders' Equity (Deficiency)). The net effect of the
transaction is a credit to common stock of $3,427, credit to preferred stock
of $300 and a debit to additional paid in capital for $172,057, which in
total consists of the $63,330 assumed liability discussed previously and
$105,000 for the cancellation of common stock held by the Company in Global.
The financial statements after the closing of the Agreement include the
Balance Sheet of both companies at historical cost and the historical
operations of the Company and the operations of Global from the Transaction
Date.
Previously in September 2004, a prior asset purchase and sale agreement
between Global and another unrelated entity was rescinded making Global an
inactive public shell. All liabilities and obligations of Global except the
$63,330 of accounts payable discussed above were assigned to a prior officer
of Global, pursuant to a mutual rescission agreement.
At April 30, 2005, there were 5,104,406 common shares previously issued by
the Company's transfer agent that were returnable to the Company under the
mutual rescission agreement. These shares have been restricted as to
transfer by the transfer agent and are not included in outstanding shares at
July 31, 2005. As of October 31, 2005, 3,300,021 of these shares had been
returned and cancelled by the Company's transfer agent.
17
Nortia Capital Partners, Inc.
(A Development Stage Company)
Notes to Financial Statements
At October 31, 2005
(Unaudited)
Note 7. Stockholders' Deficiency
- ------------------------------------
Capital Structure
We are authorized to issue up to 50,000,000 shares of our common stock,
$0.001 par value per share, of which 22,897,254 were issued and outstanding
at October 31, 2005. The holders of the common stock do not have any
preemptive right to subscribe for, or purchase, any shares of any class of
stock. Additionally, we have 4,054,900 shares that are issuable at October
31, 2005. Including issuable shares, we have 26,952,154 shares outstanding
and issuable as of October 31, 2005.
We were previously authorized to issue up to 5,000,000 shares of preferred
stock, $0.001 par value per share, of which 300,000, designated as Series A,
were authorized, issued and outstanding at July 31, 2005. In September 2005,
such shares were converted into an aggregate of 600,000 post-split Common
Shares and the authorization for Series A Preferred Stock has been cancelled.
Accordingly, at October 31, 2005, the Company had no preferred stock
outstanding.
Common Stock
- ------------
In March 2004, we granted 4,300,000 shares of our common stock for
compensation and board fees to two individuals. At the time of grant, there
was no active trading market for the Company's common stock and we analyzed
several methodologies to determine the value per share for the stock
issuance. As a result of our research, we determined that the appropriate
methodology was to utilize the net asset value of the Company immediately
preceding the issuance of the shares and determined that the valuation was
$0.04 per share, valued on the grant date and expensed immediately as
$160,000 of compensation expense and $12,000 of directors fees as there was
no formal employment agreement or stated term. At July 31, 2004, the shares
were not issued and were recorded as Common Stock Issuable. In September
2004, the shares were issued and have been reclassed from Common Stock
Issuable to Common Stock.
In May 2004, we entered into a consulting agreement with a third party
whereby the consultant will provide corporate business development and
consulting services for us. The term of the agreement is twelve (12) months
and the consultant will receive a total of 480,000 shares of the Common Stock
of the Company. Two hundred forty thousand (240,000) shares were granted and
vested upon the execution of the agreement and the remaining shares will be
earned at the rate of 20,000 shares monthly and issued on a quarterly basis.
As of July 31, 2004, 270,000 shares were vested and were issued by the
Company. From August 1, 2004 through January 31, 2005, an additional 60,000
shares were granted and vested, thus making the total shares granted and
vested 330,000 at January 31, 2005. Of the 270,000 shares that were issued
as of July 31, 2004 as discussed above, at the time of the issuance, there
was no active trading market for the Company's common stock and we analyzed
several methodologies to determine the value per share for the stock
issuance. As a result of our research, we determined that the appropriate
methodology was to utilize the net asset value of the Company immediately
preceding the issuance of the shares and determined that the valuation was
$0.015 per share, thus the 270,000 shares issued as of July 31, 2004 were
valued on the issuance date at $4,050. Due to the immaterial amount of the
valuation, the Company elected to expense the entire $4,050 in the
accompanying statement of operations rather than recognize the amount evenly
over the agreement term. Of the additional 60,000 shares issued between
August 1, 2004 and January 31, 2005 as discussed above, 30,000 shares were
issued during the three months ended October 31, 2004 and valued at a nominal
value of $0.0005 per share because the net asset value of the Company
immediately preceding the issuance of the shares was negative and could not
18
Nortia Capital Partners, Inc.
(A Development Stage Company)
Notes to Financial Statements
At October 31, 2005
(Unaudited)
be used. The other 30,000 shares vested during the three months ended
January 31, 2005 were valued based upon the measurement date of December 31,
2004 at a value of $0.505 per share and the Company has recorded $30,000 of
consulting expense in the statement of operations for the three months ended
January 31, 2005. These 30,000 shares were issuable as of January 31, 2005
and were issued by the Company's transfer agent in March 2005. In February,
the remaining 150,000 shares were issued and valued at $0.73 per share, the
fair market value on the grant date of February 11, 2005 and the Company has
recorded $109,500 of consulting expense in the accompanying Statement of
Operations. These 150,000 shares were not issued as of October 31, 2005 and
have been recorded as Common Stock Issuable.
In June 2004, we granted 2,300,000 shares of our common stock for
compensation and board fees to our new President. At the time of grant,
there was no active trading market for the Company's common stock and we
analyzed several methodologies to determine the value per share for the stock
issuance. As a result of our research, we determined that the appropriate
methodology was to utilize the net asset value of the Company immediately
preceding the issuance of the shares. However, based upon this analysis, the
net asset value was a negative number and could not be utilized. The Company
determined that a nominal value should be utilized and the valuation is
$0.0005 per share, valued on the grant date and expensed immediately as
$1,000 of compensation expense and $150 of directors fees as there was no
formal employment agreement or stated term.
In October 2004, we granted 3,900,000 shares to our executive officers as
compensation, comprised of 1,500,000 to our Chief Executive Officer,
1,200,000 to our President and 1,200,000 to our Chief Financial Officer. At
the time of grant, there was no active trading market for the Company's
common stock and we analyzed several methodologies to determine the value per
share for the stock issuance. As a result of our research, we determined
that the appropriate methodology was to utilize $0.05 per share, the
valuation utilized for preferred shares issued for director services on the
same date (see Issuances of Preferred Stock below). As a result, the Company
has expensed immediately $195,000 of compensation.
In October 2004, we granted 1,000,000 shares to our Board of Directors as
fees for their services, comprised of 200,000 share issuances to five
individuals. At the time of grant, there was no active trading market for
the Company's common stock and we analyzed several methodologies to determine
the value per share for the stock issuance. As a result of our research, we
determined that the appropriate methodology was to utilize $0.05 per share,
the valuation utilized for preferred shares issued for director services on
the same date (see Issuances of Preferred Stock below). As a result, the
Company has expensed immediately $50,000 of director fees.
In October 2004, we granted 800,000 shares to our Advisory Board members as
fees for their services, comprised of 200,000 share issuances to four
individuals. At the time of grant, there was no active trading market for
the Company's common stock and we analyzed several methodologies to determine
the value per share for the stock issuance. As a result of our research, we
determined that the appropriate methodology was to utilize $0.05 per share,
the valuation utilized for preferred shares issued for director services on
the same date (see Issuances of Preferred Stock below). As a result, the
Company has expensed immediately $40,000 of director fees.
In November 2004, we granted 250,000 shares of our common stock to a group
for consulting services. The shares were valued at $0.505 per share, the
closing stock price on the grant date of November 1, 2004, and we recorded
$126,250 of deferred consulting, as the term of the consulting agreement was
one (1) year. Subsequently, the agreement was terminated and we have
recorded the entire $126,250 of deferred consulting as consulting expense in
the accompanying Statement of Operations.
In November 2004, we granted 450,000 shares of our common stock to a group
for consulting services. The shares were valued at $0.505 per share, the
closing stock price on the grant date of November 1, 2004, and we recorded
19
Nortia Capital Partners, Inc.
(A Development Stage Company)
Notes to Financial Statements
At October 31, 2005
(Unaudited)
$227,025 of deferred consulting, as the term of the consulting agreement was
one year. Subsequently, the agreement was terminated and we have recorded
the entire $227,025 of deferred consulting as consulting expense in the
accompanying Statement of Operations. The 450,000 shares had been recorded
common stock issuable at January 31, 2005 were subsequently issued by the
Company's transfer agent in March 2005.
In December 2004, we granted 250,000 vested shares of our common stock to a
new member of our Board of Directors as a fee for their service. The shares
were valued at $0.54 per share, the closing price on the grant date of
December 6, 2004, and we expensed immediately $135,000 of director fees.
As a result of the recapitalization discussed previously, the Company
recorded 3,427,254 shares of common stock as a deemed issuance to the
original shareholders of Global (See Note 6 - Recapitalization).
In January 2005, we granted 240,000 shares of our common stock to an
individual for consulting services. The shares were valued at $0.51 per
share, the closing stock price on the grant date of January 19, 2005, and we
recorded $122,400 of deferred consulting, as the term of the consulting
agreement was one year. As of October 31, 2005, we recorded $61,200 of
amortization expense related to the deferred consulting resulting in an
unamortized deferred consulting balance of $56,100. The shares have not been
issued as of October 31, 2005 and have been recorded as Common Stock Issuable
in the accompanying financial statements.
In February 2005, we granted 150,000 shares of our common stock to a group
for consulting services. The shares were valued at $0.73 per share, the
closing stock price on the grant date of February 11, 2005, and we recorded
$109,500 of deferred consulting, as the term of the consulting agreement was
one year. The consulting agreement specified that up to 450,000 shares would
be issued for services provided, based upon the fair market value of $0.73
per share on February 11, 2005. Subsequently, the Company and the consultant
agreed to terminate the contract and no additional shares will be issued to
the consultant. As a result of the agreement termination, the entire
$109,500 of deferred consulting has been recorded as amortization expense in
the fiscal 2005 financial statements. Additionally, the 150,000 shares had
not been issued as of October 31, 2005 and have been recorded as Common Stock
Issuable in the accompanying financial statements.
In April 2005, the Company initiated a private placement offering for the
issuance of up to 1,000,000 units at an offering price of $1.10 per share
("Unit"). Each Unit consisted of one share of the Company's $0.001 par value
common stock and one two-year warrant to purchase the Company's common stock
at an exercise price of $2.00 per share. Through October 31, 2005, the
Company had received $963,270 of proceeds from the issuance of the Units,
representing 875,700 shares of common stock and 875,700 two-year warrants to
purchase common stock at $2.00 per share. Of these amounts, during the six
months ended October 31, 2005, the Company received $876,920 of net proceeds
from the issuance of the Units, representing 797,200 shares of common stock
and 797,200 two-year warrants to purchase common stock at $2.00 per share.
The shares have not been issued and have been recorded as issuable in the
accompanying financial statements as of October 31, 2005.
The Company had 30,000 common shares held as treasury stock at April 30, 2005
which had an original cost basis of zero. These shares were retired in May
2005.
In June 2005, the Company filed a registration statement on Form S-8 with the
SEC for the registration of 250,000 shares of the Company's $0.001 par value
common stock at an issuance price of $1.00 per share. In July 2005, 125,000
20
Nortia Capital Partners, Inc.
(A Development Stage Company)
Notes to Financial Statements
At October 31, 2005
(Unaudited)
of these shares were issued as compensation for services to our Chief
Executive Officer and 125,000 shares were issued for services to our
President. In August 2005, it was determined that these shares may not have
been validly granted per the requirements of the 1940 Act. Accordingly, the
Company is in the process of rescinding these shares.
In September 2005, the Company issued 600,000 post-split shares of common
stock from the conversion of 300,000 shares of Series A Preferred Stock.
Preferred Stock
- ---------------
In relation to the recapitalization discussed previously, each newly
appointed officer of the Company received 100,000 shares of convertible
Preferred A stock upon their appointment, which occurred approximately 10
days prior to the December 2, 2004 effective date. Each share of this
preferred stock is convertible into two (2) shares of common stock at the
option of its holder at any time, except that such shares shall convert
automatically on the date that is two years from the preferred stock's date
of issuance (the "Mandatory Conversion Date"). Each Preferred A Share has
voting rights equivalent to ten (10) times the number of shares of common
stock into which each such Preferred A Share shall convert, and are entitled
to a dividend on a pari passu basis with the holders of Common Shares and
other classes of preferred shares of the Company. Each Preferred A Share has
a liquidation preference equal to $.10.
As a result of the recapitalization, the Company issued 300,000 shares of
Series A Preferred Stock. In September 2005, the Company issued 600,000
post-split shares of common stock from the conversion of the 300,000 shares
of Series A Preferred Stock discussed above. Additionally, the authorization
for Series A Preferred Stock has been cancelled. Accordingly, at October 31,
2005, the Company had no preferred stock outstanding.
Warrants
- --------
As discussed previously, in April 2005, the Company initiated a Private
Placement Offering for the issuance of up to 1,000,000 units at an offering
price of $1.10 per share. Each unit consists of one share of the Company's
$0.001 par value common stock and one two-year warrant to purchase the
Company's common stock at an exercise price of $2.00 per share. Through
October 31, 2005, the Company had received $963,270 of proceeds from the
issuance of the units, representing 875,700 shares of common stock and
875,700 two-year warrants to purchase common stock at $2.00 per share. Of
these amounts, during the six months ended October 31, 2005, the Company
received $876,920 of net proceeds from the issuance of the units,
representing 797,200 shares of common stock and 797,200 two-year warrants to
purchase common stock at $2.00 per share. The warrants become exercisable at
the closing date of the private placement offering which has not occurred as
of the date of this report.
The following table summarize activity related to warrants during the six
months ended October 31, 2005:
Number of Shares Weighted Average
---------------- ----------------
Exercise Price
--------------
Balance at April 30, 2005 78,500 $ 2.00
Granted 797,200 2.00
Exercised - -
Forfeited - -
---------- ----------
Balance at October 31, 2005 875,700 $ 2.00
========== ==========
21
Nortia Capital Partners, Inc.
(A Development Stage Company)
Notes to Financial Statements
At October 31, 2005
(Unaudited)
All warrants to purchase our common stock were issued with exercise prices
equal to or greater than fair market value on the date of issuance.
The terms of warrants to purchase our common stock are summarized below:
- --------------------Warrants Outstanding---------Warrants Exercisable-----
Weighted
Average Weighted Weighted
Number Remaining Average Number Average
Range of Exercise Outstanding at Contratual Exercise Exerciseable at Exercise
Prices Oct. 31, 2005 Life Price Oct .31, 2005
- -------------------------------------------------------------------------------------
$2.00 875,700 2.00 years 2.00 0 $2.00
Note 8. Commitments and Contingencies
- -----------------------------------------
From time to time we may become subject to proceedings, lawsuits and other
claims in the ordinary course of business including proceedings related to
environmental and other matters. Such matters are subject to many
uncertainties, and outcomes are not predictable with assurance.
The matters below may result in certain contingent liabilities to the Company
as a result of potential actions by the SEC or others against the Company.
Such contingent liabilities could not be estimated by management as of the
date of this Quarterly Report. The outcome of the matters below could have a
significant impact on our ability to continue as a going concern.
We currently do not have a lease and we are not paying rent for our office
space. It is being provided to the Company by an officer/director free of
charge (See Note 9 - Related Party Transactions). Usage of this office space
and the related value is de minimis. Therefore, no expense has been recorded
in the accompanying financial statements. We expect we will have to lease
more substantial office space in the near future and that the cost of the
space may be material to our operations.
The Company has not filed required payroll tax reports with applicable state
and federal authorities as required. Accordingly, the Company may be subject
to penalties and fines and no adjustment has been made in the accompanying
financial statements for this uncertainty. However, $84,665 has been accrued
as payroll taxes payable. The Company is currently completing these reports
and anticipates that they will be finalized in the near future.
We currently intend, as soon as practicable after qualification, to elect to
be treated for federal income tax purposes as a regulated investment company,
or RIC, under Subchapter M of the Code, although in order to make an
effective election, we must, among other things, distribute most of our net
income and meet certain income and diversification of investment assets
requirements. If we qualify and do elect RIC treatment, in order to maintain
status as an RIC and obtain the federal income tax benefits of such status,
we must distribute at least 90% of our ordinary income and realized net
short-term capital gains in excess of realized net long-term capital losses,
if any, out of the assets legally available for distribution.
In order to avoid certain excise taxes imposed on RICs, we currently intend
to distribute during each calendar year an amount at least equal to the sum
of (1) 98% of our ordinary income for the calendar year, (2) 98% of our
capital gains in excess of capital losses for the one-year period ending on
October 31st and (3) any ordinary income and net capital gains for preceding
years that were not distributed during such years.
22
Nortia Capital Partners, Inc.
(A Development Stage Company)
Notes to Financial Statements
At October 31, 2005
(Unaudited)
In addition, although we currently intend to distribute realized net capital
gains (i.e., net long-term capital gains in excess of short-term capital
losses), if any, at least annually, out of the assets legally available for
such distributions, we may in the future decide to retain such capital gains
for investment.
We may not be able to achieve operating results that will allow us to make
distributions at a specific level or to increase the amount of these
distributions from time to time. In addition, we may be limited in our
ability to make distributions due to the asset coverage test for borrowings
applicable to us as a business development company under the Investment
Company Act of 1940. Accordingly, our ability to elect RIC treatment may be
delayed indefinitely. No assurance can be provided that the Company will meet
the requirements for election of RIC treatment in the near future or ever.
Additionally, if we were to elect and meet such requirements for RIC
treatment, we would lose the tax benefit of our net operating loss carry-
forwards for our RIC taxable years, except as offsets to certain recognized
built-in gains.
In June 2005, we determined to commence an offering of shares of our common
stock as a BDC in accordance with the exemption from the registration
requirements of the Securities Act of 1933 as provided by Regulation E. In
connection with that prospective offer, we filed a Form 1-E with the SEC,
which was reviewed in the ordinary course and a comment letter was issued.
As a result, we currently understand that we may be out of compliance with
certain of the rules and regulations governing the business and affairs,
financial status, and financial reporting items required of BDCs. We are
making every effort to comply as soon as is practicable with the relevant
sections of the 1940 Act and are working with our counsel to accomplish that
compliance. We have not yet sold or issued any shares under our proposed
offering and, until the completion of this process; we have voluntarily
suspended the proposed offering. While we are seeking to comply with the
1940 Act, we cannot provide any specific time frame for full compliance. We
cannot predict with certainty what, if any, regulatory or financial
consequences may result from the foregoing.
The Company granted and issued common stock for consulting services to third
parties both before and after its election as a BDC on January 4, 2005.
Certain of these consulting arrangements may not be in compliance with
provisions of the 1940 Act applicable to BDCs. Management is taking action
to remedy any such potential violations which may exist including termination
of certain consulting agreements and the attempt to reacquire and cancel
shares issued pursuant to such agreements. As the result of such action, the
Company may incur liabilities to the consultants which management could not
estimate as of the date of this Form 10-Q. The outcome of the above matters
could have a significant impact on our ability to continue as a going
concern.
Prior to October 8, 2004, we had not filed in a timely manner our required
reports with the SEC for the quarterly periods ended July 31, 2003, October
31, 2003, January 31, 2004, July 31, 2004 and the annual report on Form 10-
KSB for the period ended April 30, 2004. On October 8, 2004, all of these
reports were filed. No provision has been recorded in the accompanying
financial statements for the cost of actions, if any, that may be taken by
the SEC against us for our non-compliance during this period.
Prior to November, 2005, we had not filed with the SEC in a timely manner our
required annual report with the SEC for the on Form 10-K for the year ended
April 30, 2005. In November, 2005, this report was filed. No provision has
23
Nortia Capital Partners, Inc.
(A Development Stage Company)
Notes to Financial Statements
At October 31, 2005
(Unaudited)
been recorded in the accompanying financial statements for the cost of
actions, if any, that may be taken by the SEC against us for our non-
compliance during this period.
On September 1, 2005, we filed a Complaint against Mirador in the Circuit
Court of the Fifteenth Judicial Circuit in and for Palm Beach County,
Florida. The case is styled Nortia Capital Partners, Inc., a Nevada
corporation v. Mirador Consulting, Inc., a Florida corporation, Case No. 50
2005 CA 008373 XXXX MB AN. The case seeks a Declaratory Judgment from the
Court declaring that Mirador is not entitled to retain any of its shares in
us, and that those shares should be cancelled of record.
On November 1, 2005, Mirador filed its Answer and Affirmative Defenses to the
Complaint, as well as a Counterclaim and Third Party Complaint. The essence
of these pleadings is Mirador's allegation that it performed the required
services under the Consulting Agreement, and that it is, therefore, entitled
to retain its shares in us and to receive $10,000.00 due to it under the
Consulting Agreement. Mirador also claims other unspecified damages due to
our refusal to issue Mirador an original stock certificate for additional
shares resulting from our stock split on or about February 28, 2005. In its
Third Party Complaint, Mirador also named our President, among others, and
alleged causes of action for tortuous interference with contractual rights
and conspiracy with the Company in respect of such shares. Our charter and
bylaws provide indemnification rights to our executive officers and
directors.
We believe that all named third-party defendants have meritorious defenses to
Mirador's Counterclaims, for the reasons set forth in our Complaint.
Note 9. Related Party Transactions
- ---------------------------------------
At April 30, 2003, we had an accounts payable in the amount of $3,113 to a
shareholder/director who directly paid certain expenses of the Company and
these were non-interest bearing and do not have any repayment terms. During
the twelve months ended April 30, 2004, we repaid $2,000 of these advances
resulting in a balance due of $1,113 at April 30, 2004. During the three
months ended July 31, 2004, we repaid $500 of these advances and during the
three months ended January 31, 2004, we repaid the remaining $613. At
October 31, 2005, the balance outstanding is zero.
In June and August 2004, we received advances totaling $3,000 from a company
controlled by the wife of our Chief Executive Officer and was classified in
Due to Related Party. During the three months ended January 31, 2005, the
$3,000 was repaid and at October 31, 2005, the balance is zero.
At January 31, 2005, we had a $26,932 receivable classified as due from
related party recorded in the financial statements. This amount represented
employee payroll taxes paid by the Company but not withheld from two
employees, the Chief Executive Officer and the President. Subsequently,
these amounts were resolved and the due from related party is zero.
We currently do not have a lease and we are not paying rent on our space. It
is being provided to the Company by an officer/director free of charge - (See
Note 8 - Commitments and Contingencies).
24
Nortia Capital Partners, Inc.
(A Development Stage Company)
Notes to Financial Statements
At October 31, 2005
(Unaudited)
Note 10. Financial Information
- ----------------------------------
Following is a schedule of financial highlights for the six months ended
October 31, 2005, during which period the Company operated as a BDC:
Six
Months Ended
October 31, 2005
Per Share Data: ----------------
Net Asset Value at Beginning of Period (1) $ (0.01)
Net Loss (2) (0.03)
Common Stock Transactions (2) 0.03
Amortization of Deferred Consulting (2) 0.00
----------------
Net increase in Stockholders Deficiency 0.00
----------------
Net Asset Value at End of Period $ (0.01)
================
Per Share Market Value at End of Period $ 2.04
Total Return (2) (3) 41%
Common Stock Outstanding and Issuable at
End of Period 26,952,154
Ratio/Supplemental Data:
Net Assets at End of Period $ (91,064)
Ratio of Operating Expenses to Net Assets 988%
Ratio of Net Operating Loss to Net Assets 988%
- --------------------------------------------------------------------------
(1) Based on Total Shares Outstanding and Issuable at beginning of period.
(2) Based on Total Shares Outstanding and Issuable at end of period
(3) Total return equals the increase of the ending market value over the
April 30, 2005 price of $1.45 per share, divided by the beginning price.
Note 11. Concentration of Risk
- ----------------------------------
Our financial instruments that are potentially exposed to credit risk consist
primarily of cash. At certain times during the year our demand deposits held
in banks exceeded the federally insured limit of $100,000.
During fiscal year 2005 and 2004, all revenues received by the Company prior
to its election as a BDC were derived from one customer. As a result, the
Company was subject to significant risks resulting from its reliance on
revenues from a single source. To the extent that the Company relies on a
single customer, or only a few customers in the future, its operations and
financial results of the Company could be materially impacted by the loss of
one, or more of such customers.
25
Nortia Capital Partners, Inc.
(A Development Stage Company)
Notes to Financial Statements
At October 31, 2005
(Unaudited)
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
The following analysis of our financial condition and results of operations
contained in this section should be read in conjunction with our financial
statements and related notes and schedules thereto appearing elsewhere in this
Quarterly Report, as well as the sections entitled "Selected Financial Data"
and "Management's Discussion and Analysis of Financial Condition and Results
of Operations" and the financial statements and related notes and schedules
thereto included in our annual report on Form 10-K for the year ended April
30, 2005.
This Quarterly Report, including the Management's Discussion and Analysis of
Financial Condition and Results of Operations, contains forward-looking
statements that involve substantial risks and uncertainties. These forward-
looking statements are not historical facts, but rather are based on current
expectations, estimates and projections about our industry, our beliefs, and
our assumptions. Words such as "anticipates", "expects", "intends", "plans",
"believes", "seeks", and "estimates" and variations of these words and similar
expressions are intended to identify forward-looking statements. These
statements are not guarantees of future performance and are subject to risks,
uncertainties, and other factors, some of which are beyond our control and
difficult to predict and could cause actual results to differ materially from
those expressed or forecasted in the forward-looking statements, including
without limitation:
* economic downturns or recessions may impair our portfolio companies'
performance;
* a contraction of available credit and/or an inability to access the
equity markets could impair our lending and investment activities;
* the risks associated with the possible disruption in the Company's
operations due to terrorism;
* future changes in laws or regulations and conditions in our operating
areas; and
* the risks, uncertainties and other factors we identify from time to
time in our filings with the Securities and Exchange Commission,
including our Form 10-Ks, Form 10-Qs and Form 8-Ks.
Although we believe that the assumptions on which these forward-looking
statements are based are reasonable, any of those assumptions could prove to
be inaccurate, and as a result, the forward-looking statements based on those
assumptions also could be inaccurate. In light of these and other
uncertainties, the inclusion of a projection or forward-looking statement in
this Quarterly Report should not be regarded as a representation by us that
our plans and objectives will be achieved. You should not place undue reliance
on these forward-looking statements, which apply only as of the date of this
Quarterly Report. We undertake no obligation to update such statements to
reflect subsequent events.
26
Overview
Nortia Capital Partners, Inc. ("Nortia", "we", "us", "our", or the "Company")
is an Atlanta-based finance company that provides debt and equity investment
capital to companies in a variety of industries which it believes present
opportunities for superior performance through liquidity events, internal
growth, product, or geographic expansion, the completion of complementary
add-on acquisitions, or industry consolidations. On January 4, 2005, we
filed our election to be treated as business development company ("BDC")
under the Investment Company Act of 1940 (the "1940 Act").
We currently intend, as soon as practicable after qualification, to elect to
be treated for federal income tax purposes as a RIC, although in order to make
an effective election, we must, among other things, distribute most of our net
income and meet certain income and diversification of investment assets
requirements. No assurance can be provided that the Company will meet the
requirements for election of RIC treatment in the near future or ever.
Prior to our election as a BDC, we were formerly organized as BF Acquisition
Group I, Inc. under the laws of the State of Florida on April 15, 1999, as a
"shell" company with plans to seek opportunistic business partners or
acquisition candidates. Due to capital constraints, however, we were unable
to continue with our business plan. In March 2001, we ultimately ceased our
business activities and became dormant through May 2003, whereby we incurred
only minimal administrative expenses.
During June 2003, we engaged present management, began to raise additional
capital, and initiated activities to re-establish our business. During our
fiscal quarterly period ending July 31, 2003, we re-entered the development
stage, raised additional capital and recommenced preparations to implement
our business plan.
On October 15, 2004, we entered into a Definitive Share Exchange Agreement
(the "Exchange Agreement") with Global Life Sciences, Inc. ("Global"), a
publicly traded Nevada corporation whereby it was contemplated that we would
become a wholly owned subsidiary of Global. On December 2, 2004, the Exchange
Agreement was consummated and, pursuant to its terms, we became a wholly
owned subsidiary of Global in a transaction accounted for as a
recapitalization of the Company (See Note 6 - Recapitalization). On December
3, 2004, we were merged with and into Global. Subsequent to the
recapitalization, Global changed its name to "Nortia Capital Partners, Inc."
As a result of our new status, the Company planed to provide capital and
advisory services for liquidity events, management buyouts,
recapitalizations, and the growth and capital needs of emerging and other
growth companies.
Plan of Intended Operations
The Company currently expects to invest in emerging and development-stage
micro-cap companies that intend to be listed on US equity markets, including
the OTC Bulletin Board, but which lack the necessary capital and depth of
management to expand their businesses.
The Company's investment objective is to generate both capital appreciation,
and to a lesser extent, and current income from its investments. In order to
achieve this objective, we currently intend to invest in public and private
companies in a wide array of industries, including manufacturing,
distribution, and service industries, throughout the United States. We may
also invest to a limited extent in selected foreign companies, to the extent
that such investments are consistent with the limitations on such investing
by BDCs under the 1940 Act. Furthermore, we plan to target emerging growth
companies that have an executable business plan for growth and a well-managed
infrastructure.
27
We intend to make opportunistic investments in companies across a variety of
industries generally having annual revenues of less than $100 million and/or a
market capitalization of less than $250 million, though we may make other
investments from time to time outside of these parameters. While the
structure of our investments will vary, we intend to invest primarily in
equity and other convertible securities of portfolio companies. We seek to
invest in entities that, as a general matter, have been operating for at
least one year prior to the date of our investment and that will, at the time
of our investment, have employees and revenues. Generally, these companies
will be undercapitalized and in need of short term bridge financing and other
financial backing provided by private equity or venture capital funds or
other similar financial sponsors like Nortia in order to unlock growth in
their businesses. We expect that our investment capital will generally be
used by our portfolio companies to finance initial public offerings,
recapitalizations, management buyouts and sales, organic growth and working
capital.
We expect that our investments will generally range between $25,000 and $1
million, although the investment size may vary depending on the nature of the
investment, market factors, the capital needs of the company, the capital base
available to the Company at the time, and other factors.
Prior to making an investment, we typically enter into a non-binding term
sheet with the potential portfolio company. These term sheets are generally
subject to a number of conditions, including but not limited to the
satisfactory completion of our due diligence investigations of the company's
business and legal documentation for the investment.
In addition, as a BDC under the 1940 Act, we are required to make available
significant managerial assistance, for which we may receive fees, from our
portfolio companies. These fees would be generally non-recurring, however in
some instances they may have a recurring component. We have received no fee
income for managerial assistance to date.
In July 2005, the Company announced the execution of a definitive Share
Exchange Agreement by and among Holley Communications, Inc., a Delaware
corporation and wholly-owned subsidiary of the Company (the "Investment Sub"),
Holley Communications Canada, Inc., a Canadian Corporation ("Holley Canada"),
and us. Pursuant to the Share Exchange Agreement and subject to certain
closing conditions, the Investment Sub will issue 28,500,000 shares of its
common stock, equivalent to 95% of its then-issued and outstanding common
stock, to Holley Canada. In exchange, Holley Canada will transfer and assign
all of Holley Canada's equity interest in Holley Communications Investment,
Inc., a British Virgin Islands company ("Holley Communications"), to the
Investment Sub. As of October 31, 2005 this transaction had not yet been
consummated. Management anticipates that following the completion of
transactions contemplated by the Share Exchange Agreement, the Company will
register (or cause to be registered) and distribute as a special dividend to
the stockholders of the Company, substantially all of the Company's shares in
the Investment Sub. Holley Communications is a provider of wireless
communication technology application and integrated solutions in China.
Specifically, it is engaged in two segments of the mobile communications
business: a handset segment and a system integration segment. Its handset
segment focuses on research and development, operation, distribution and
retail and provides customers with handset solutions, reference design, module
and handset. Its system segment focuses on voice quality enhancement system
application, integration, sales and engineering services.
Going Concern
Our long-term viability as a going concern is dependent on certain key
factors, as follows:
* The ability to continue to obtain sources of outside financing to
support near term operations and to allow us to continue to make
investments.
28
* The ability to increase profitability and sustain a cash flow level
that will ensure support for continuing operations.
As discussed in Note 3 to our financial statements contained herein, the
Company's recurring losses from operations - a net loss of $903,954 and net
cash used in operations of $870,008 for the six months ended October 31,
2005, and accumulated deficit of $12,398, a deficit accumulated during the
development stage of $5,674,131 and stockholders' deficit of $91,064 at
October 31, 2005 - raise substantial doubt about our ability to continue as a
going concern.
Our financial statements do not include any adjustments to reflect the
possible effects on recoverability and classification of assets or the
amounts and classification of liabilities that may result from our inability
to continue as a going concern.
In April 2005, the Company initiated a private placement offering for the
issuance of up to 1,000,000 units at an offering price of $1.10 per share
("Units"). Each Unit consisted of one share of the Company's common stock
and one two-year warrant to purchase the Company's common stock at an
exercise price of $2.00 per share. Through October 31, 2005, the Company had
received $963,270 of gross proceeds before costs of $429 from the issuance of
the Units, representing 875,700 shares of common stock and 875,700 two-year
warrants to purchase common stock at $2.00 per share. We have used these
funds to cover our current operating expenses.
Our ability to continue as a going concern is dependent on the ability
further to implement our business plan as a BDC, raise capital, and generate
revenues. We presently do not have sufficient revenues to cover our incurred
expenses. Our management recognizes that we must generate additional
resources to enable us to pay our obligations as they come due and that we
must ultimately successfully implement our BDC business plan and achieve
profitable operations. We cannot assure you that we will be successful in
any of these activities. Should any of these events not occur, our financial
condition will be materially adversely affected.
Critical Accounting Estimates and Policies
The methods, estimates and judgment we use in applying our most critical
accounting policies have a significant impact on the results we report in our
financial statements. The SEC has defined the most critical accounting
policies as the ones that are most important to the portrayal of our
financial condition and results, and require us to make our most difficult
and subjective judgments, often as a result of the need to make estimates of
matters that are inherently uncertain. Based upon this definition, our most
critical estimates include the evaluation of any beneficial conversion
feature for our debentures, valuation of our financial instruments, valuation
of common stock for services, valuation of our investments and the valuation
allowance for deferred tax assets. We also have other key accounting
estimates and policies, but we believe that these other policies either do
not generally require us to make estimates and judgments that are as
difficult or as subjective, or it is less likely that they would have a
material impact on our reported results of operations for a given period.
For additional information, see Note 2 "Summary of Significant Accounting
Policies" in the notes to our financial statements contained in this
Quarterly Report. Although we believe that our estimates and assumptions are
reasonable, they are based upon information presently available. Actual
results may differ significantly from these estimates.
Evaluation of Beneficial Conversion Feature in Debentures
In accordance with EITF Issue 98-5, as amended by EITF 00-27, we must
evaluate the potential effect of any beneficial conversion terms related to
convertible instruments such as convertible debt or convertible preferred
stock. The Company has issued several debentures and a beneficial conversion
29
may exist if the holder, upon conversion, may receive instruments that exceed
the value of the convertible instrument. Valuation of the benefit is
determined based upon various factors including the valuation of equity
instruments, such as warrants, that may have been issued with the convertible
instruments, conversion terms, value of the instruments to which the
convertible instrument is convertible, etc. Accordingly, the ultimate value
of the beneficial feature is considered an estimate due to the partially
subjective nature of valuation techniques.
Fair Value of Financial Instruments
We define the fair value of a financial instrument as the amount at which the
instrument could be exchanged in a current transaction between willing
parties. The carrying value of accounts receivable, accounts payable and
accrued liabilities approximates fair value because of the short maturity of
those instruments. The estimated fair value of our other obligations is
estimated based on the current rates offered to us for similar maturities.
Based on prevailing interest rates and the short-term maturity of all of our
indebtedness, management believes that the fair value of our obligations
approximates book value at October 31, 2005.
Valuation of Investments
As a BDC, for financial statement purposes, investments are recorded at their
value in our financial statements. Value, as defined in Section 2(a)(41) of
the 1940 Act, is (i) the market price for those securities for which a market
quotation is readily available and (ii) for all other securities and assets,
fair value as determined in good faith by the board of directors. Because
there is typically no readily available market value for the investments in
our portfolio, we value substantially all of our investments at fair value as
determined in good faith by our board of directors pursuant to a valuation
policy and consistent valuation process. Due to the inherent uncertainty of
these valuations, the estimates may differ significantly from the values that
would have been used had a ready market for the investments existed and the
differences may be material. Our valuation methodology includes the
examination of, among other things, the underlying portfolio company
performance, financial condition and market changing events that impact
valuation. Realized gains (losses) from the sale of investments and
unrealized gains (losses) from the valuation of investments are reflected in
operations during the period incurred.
Valuation Allowance For Deferred Tax Assets And Liabilities
In assessing the recoverability of deferred tax assets and liabilities,
management considers whether it is more likely than not that some portion or
all of the deferred tax assets and liabilities will be realized.
30
Results of Operations
Financial Analysis of the Three and Six Months Ended October 31, 2005 and 2004
- ------------------------------------------------------------------------------
Post Election Pre Election Post Election Pre Election
---- --- ---- ---
as a Business as a Business as a Business as a Business
Development Development Development Development
Company Company Company Company
----------------------------------------------------------------
Three Three Six Six
Months Ended Months Ended Months Ended Months Ended
Oct. 31, Oct. 31, Oct. 31, Oct. 31,
2005 2004 2005 2004
----------------------------------------------------------------
Revenues $ - $ 93,699 $ - $ 153,699
Operating Expenses
General and administrative 109,845 19,035 203,941 54,925
Provision for accounts
receivable - - - -
Bad debt - - - -
Rent 1,218 15,557 13,295 15,557
Consulting 71,724 9,765 108,580 15,915
Compensation 203,411 45,700 333,171 46,700
Debenture penalty - 2,175 - 2,175
Directors fees - 900 - 1,050
Interest expense (17,500) 8,752 - 15,054
Impairment of investments - 3,250 - 3,250
Professional 157,807 83,140 245,305 83,640
----------------------------------------------------------------
Total Operating Expenses 526,505 188,274 904,292 238,265
----------------------------------------------------------------
Loss from Operations (526,505) (94,575) (904,292) (84,566)
Other Income (Expense)
Loss on sale of available for
sale securities - - - (64,738)
Loss on conversion of debt - - - -
Other than temporary loss on
for sale securities - (96,699) - (195,000)
Other income - 4,500 - 4,500
Interest income 127 1 338 42
----------------------------------------------------------------
Total Other Income (Expense) 127 (92,198) 338 (255,196)
----------------------------------------------------------------
Net Loss $ (526,378) $ (186,773) $ (903,954) $ (339,762)
================================================================
Note: All references to 2005 represent operations for the three and six
months ended October 31, 2005 as a BDC and all references to 2004 represent
the operations for the three and six months ended October 31, 2004 prior to
becoming a BDC.
31
Three Months Ended October 31, 2005 Compared with Three Months Ended October
- ----------------------------------------------------------------------------
31, 2004
- --------
Revenues:
- ---------
Revenue decreased $93,699, or 100%, to zero for 2005 from $93,699 for 2004.
In September 2003, we entered into a consulting contract with Global Life
Sciences, Inc. ("Global"), a publicly traded company. We provided consulting
services to Global under this contract in exchange for $240,000 to be paid to
us in the form of 1,200,000 restricted shares. In addition, we received an
additional 300,000 free trading shares of their common stock, valued at $0.20
per share, based on the original agreement date. The term of the consulting
agreement was for twelve (12) months and the common stock was payable on a
quarterly basis. In January 2004, we received 300,000 shares and in July
2004, we received the remaining 1,200,000 shares as compensation for
services. For the three months ended October 31, 2004, we recorded $93,699
of the consulting fees as revenue. We recorded the fees as revenue, pro-rata
over the contract term in accordance with EITF 00-8 "Accounting by a Grantee
for an Equity Instrument to be received in conjunction with Providing Goods
or Services" based on the $0.20 fair value on the contract date.
Operating Expenses:
- -------------------
Operating expenses increased $338,231, or 180%, to $526,505 for 2005 from
$188,274 for 2004. The increase was primarily the result of a $157,711
increase in compensation expense, a $74,667 increase in professional expenses
and a $90,810 increase in general and administrative expenses. The increase
in compensation expenses was primarily from salaries paid to two officers in
2005 with no corresponding payment in 2004. The increase in professional
expenses was primarily from an increase in accounting and legal as a result
of the Company becoming a BDC and the resulting increased requirements for
professional services. The increase in general and administrative expenses
was primarily from increased costs associated with operating as a BDC under
the 1940 Act.
Other Income (Expense):
- -----------------------
Other expense decreased $92,325 or 99% to $127 of income for 2005 from
$92,198 of expense in 2004. The decrease in expense was primarily due to the
fact that in 2004, we had a $96,699 other than temporary loss on available
for sale securities.
Six Months Ended October 31, 2005 Compared with Six Months Ended October 31,
- ----------------------------------------------------------------------------
2004
- ----
Revenues:
- ---------
Revenue decreased $153,699, or 100%, to zero for 2005 from $153,699 for 2004.
In September 2003, we entered into a consulting contract with Global Life
Sciences, Inc. ("Global"), a publicly traded company. We provided consulting
services to Global under this contract in exchange for $240,000 to be paid to
us in the form of 1,200,000 restricted shares. In addition, we received an
additional 300,000 free trading shares of their common stock, valued at $0.20
per share, based on the original agreement date. The term of the consulting
agreement was for twelve (12) months and the common stock was payable on a
quarterly basis. In January 2004, we received 300,000 shares and in July
2004, we received the remaining 1,200,000 shares as compensation for
services. For the six months ended October 31, 2004, we recorded $153,699 of
the consulting fees as revenue. We recorded the fees as revenue, pro-rata
over the contract term in accordance with EITF 00-8 "Accounting by a Grantee
for an Equity Instrument to be received in conjunction with Providing Goods
or Services" based on the $0.20 fair value on the contract date.
32
Operating Expenses:
- -------------------
Operating expenses increased $666,026, or 280%, to $904,292 for 2005 from
$238,265 for 2004. The increase was primarily the result of a $286,471
increase in compensation expense, a $161,665 increase in professional
expenses and a $149,016 increase in general and administrative expenses. The
increase in compensation expense was primarily from salaries paid to two
officers in 2005 with no corresponding payment in 2004. The increase in
professional expenses was primarily from an increase in accounting and legal
as a result of the Company becoming a BDC and the resulting increased
requirements for professional services. The increase in general and
administrative expenses was primarily from increased costs associated with
operating as a BDC under the 1940 Act.
Other Income (Expense):
- -----------------------
Other expense decreased $255,533 or 99% to $338 of income for 2005 from
$255,196 of expense in 2004. The decrease in expense was primarily due to
the fact that in 2004, we had a $64,738 loss on available for sale securities
and $195,000 other than temporary loss on available for sale securities.
Liquidity and Capital Resources
To continue with our business plan, we will require additional short-term
working capital and we have not generated sufficient cash from our planned
BDC operations to fund our operating activities through the end of fiscal
2005. Presently, our only source of cash is from external financing in the
form of debt or the issuance of our common stock. We cannot assure you that
that we will obtain sufficient proceeds, if any, or that borrowings under any
interim financing we are able to secure will be sufficient to meet our
projected cash flow needs.
Cash was $18,615 at October 31, 2005 as compared to $11,703 at April 30,
2005. The increase in cash was the result of $876,920 of net proceeds from
the sale of common stock, offset by $870,008 of cash used in operations. The
cash used in operations was primarily the result of $903,954 of net loss for
the six months ended October 31, 2005.
Net assets decreased $38,566 from a net liability position of $129,629 at
April 30, 2005 to a net liability position of $91,064 at October 31, 2005.
Operating Activities: Cash used in operating activities was $870,008 for
- ---------------------
2005 as compared to $192,937 2004. The increase in cash used resulted
primarily from the increase in the net loss.
Investing Activities: There were no investing activities for 2005 as
- ---------------------
compared to cash provided by investing activities of $14,405 in 2004. In
2004, the $14,405 was proceeds from the sale of available for sale
securities.
Financing Activities: Cash flows provided by financing activities was
- ---------------------
$876,920 for 2005 compared to $197,000 for 2004. The increase in cash
provided by financing activities was due to $876,920 of cash proceeds
received by the Company from the sale of common stock in 2005 as compared to
$197,000 of proceeds from the issuance of debentures in 2004.
Our principal uses of cash to date have been for operating activities and we
have funded our operations since entering a new development stage on May 1,
2003 by incurring indebtedness from the issuance of debentures, promissory
notes and the sale of our common stock.
33
The ability to implement our business plan successfully will be heavily
dependent on securing additional capital from the issuance of our common
stock or through debt. There is no assurance that additional equity or debt
financing will be available on terms acceptable to our management. Our
ability to obtain additional financing depends on many factors beyond our
control, including the state of the capital markets, the implied market value
of our common stock, and the prospects for our business. The necessary
additional financing may not be available to us or may be available only on
terms that would result in further dilution to the current owners of our
common stock. Failure to obtain commitments for financing would have a
material adverse effect on our business, results of operations and financial
condition. If the financing we require to sustain our working capital needs
is unavailable or insufficient or we do not receive the necessary financing,
we may be unable to continue as a going concern.
We obtained $876,920 of proceeds from the sale of common stock in 2005 and we
have utilized these funds to meet our current obligations. We are planning
on obtaining additional cash proceeds in the next twelve months from the
issuance of common stock.
Debt
We had no debt outstanding at October 31, 2005.
Equity Financing
In April 2005, the Company initiated a private placement offering for the
issuance of up to 1,000,000 Units at an offering price of $1.10 per share.
Each Unit consists of one share of the Company's $0.001 par value common
stock and one two-year warrant to purchase the Company's common stock at an
exercise price of $2.00 per share. Through October 31, 2005, the Company had
received $963,270 of net proceeds from the issuance of the Units,
representing 875,700 shares of common stock and 875,700 two-year warrants to
purchase common stock at $2.00 per share. Of these amounts, during the six
months ended October 31, 2005, the Company received $876,920 of net proceeds
from the issuance of the Units, representing 797,200 shares of common stock
and 797,200 two-year warrants to purchase common stock at $2.00 per share.
The shares have not been issued and have been recorded as issuable in the
accompanying financial statements as of October 31, 2005.
In June 2005, the Company filed Form 1-E with the SEC of the Company's intent
to offer up to 600,000 shares of common stock at $0.25 per share to holders
of the Company's promissory notes in exchange therefore. As of the date of
this filing, no shares have been issued under the 1-E in exchange for the
promissory notes.
Contractual Obligations and Commitments
We have no contractual obligations and commitments at October 31, 2005.
Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements at October 31, 2005.
Contingent Liabilities
From time to time we may become subject to proceedings, lawsuits and other
claims in the ordinary course of business including proceedings related to
environmental and other matters. Such matters are subject to many
uncertainties, and outcomes are not predictable with assurance. The matters
below may result in certain contingent liabilities to the Company as a result
of potential actions by the SEC or others against the Company. Such
34
contingent liabilities could not be estimated by management as of the date of
this Quarterly Report. The outcome of the matters below could have a
significant impact on our ability to continue as a going concern.
We currently do not have a lease and we are not paying rent for our office
space. It is being provided to the Company by an officer/director free of
charge (See Note 9 - Related Party Transactions). Usage of this office space
and the related value is de minimis. Therefore, no expense has been recorded
in the accompanying financial statements. We expect we will have to lease
more substantial office space in the near future and that the cost of the
space may be material to our operations.
The Company has not filed required payroll tax reports with applicable state
and federal authorities as required. Accordingly, the Company may be subject
to penalties and fines and no adjustment has been made in the accompanying
financial statements for this uncertainty. However, $84,665 has been accrued
as payroll taxes payable. The Company is currently completing these reports
and anticipates that they will be finalized in the near future.
We currently intend, as soon as practicable after qualification, to elect to
be treated for federal income tax purposes as a regulated investment company,
or RIC, under Subchapter M of the Code, although in order to make an
effective election, we must, among other things, distribute most of our net
income and meet certain income and diversification of investment assets
requirements. If we qualify and do elect RIC treatment, in order to maintain
status as an RIC and obtain the federal income tax benefits of such status,
we must distribute at least 90% of our ordinary income and realized net
short-term capital gains in excess of realized net long-term capital losses,
if any, out of the assets legally available for distribution.
In order to avoid certain excise taxes imposed on RICs, we currently intend
to distribute during each calendar year an amount at least equal to the sum
of (1) 98% of our ordinary income for the calendar year, (2) 98% of our
capital gains in excess of capital losses for the one-year period ending on
October 31st and (3) any ordinary income and net capital gains for preceding
years that were not distributed during such years.
In addition, although we currently intend to distribute realized net capital
gains (i.e., net long-term capital gains in excess of short-term capital
losses), if any, at least annually, out of the assets legally available for
such distributions, we may in the future decide to retain such capital gains
for investment.
We may not be able to achieve operating results that will allow us to make
distributions at a specific level or to increase the amount of these
distributions from time to time. In addition, we may be limited in our
ability to make distributions due to the asset coverage test for borrowings
applicable to us as a business development company under the Investment
Company Act of 1940. Accordingly, our ability to elect RIC treatment may be
delayed indefinitely. No assurance can be provided that the Company will meet
the requirements for election of RIC treatment in the near future or ever.
Additionally, if we were to elect and meet such requirements for RIC
treatment, we would lose the tax benefit of our net operating loss carry-
forwards for our RIC taxable years, except as offsets to certain recognized
built-in gains.
In June 2005, we determined to commence an offering of shares of our common
stock as a BDC in accordance with the exemption from the registration
requirements of the Securities Act of 1933 as provided by Regulation E. In
connection with that prospective offer, we filed a Form 1-E with the SEC,
which was reviewed in the ordinary course and a comment letter was issued.
As a result, we currently understand that we may be out of compliance with
certain of the rules and regulations governing the business and affairs,
financial status, and financial reporting items required of BDCs. We are
making every effort to comply as soon as is practicable with the relevant
sections of the 1940 Act and are working with our counsel to accomplish that
compliance. We have not yet sold or issued any shares under our proposed
offering and, until the completion of this process; we have voluntarily
suspended the proposed offering. While we are seeking to comply with the
35
1940 Act, we cannot provide any specific time frame for full compliance. We
cannot predict with certainty what, if any, regulatory or financial
consequences may result from the foregoing.
The Company granted and issued common stock for consulting services to third
parties both before and after its election as a BDC on January 4, 2005.
Certain of these consulting arrangements may not be in compliance with
provisions of the 1940 Act applicable to BDCs. Management is taking action
to remedy any such potential violations which may exist including termination
of certain consulting agreements and the attempt to reacquire and cancel
shares issued pursuant to such agreements. As the result of such action, the
Company may incur liabilities to the consultants which management could not
estimate as of the date of this Form 10-Q. The outcome of the above matters
could have a significant impact on our ability to continue as a going
concern.
Prior to October 8, 2004, we had not filed in a timely manner our required
reports with the SEC for the quarterly periods ended July 31, 2003, October
31, 2003, January 31, 2004, July 31, 2004 and the annual report on Form 10-
KSB for the period ended April 30, 2004. On October 8, 2004, all of these
reports were filed. No provision has been recorded in the accompanying
financial statements for the cost of actions, if any, that may be taken by
the SEC against us for our non-compliance during this period.
Prior to November, 2005, we had not filed with the SEC in a timely manner our
required annual report with the SEC for the on Form 10-K for the year ended
April 30, 2005. In November, 2005, this report was filed. No provision has
been recorded in the accompanying financial statements for the cost of
actions, if any, that may be taken by the SEC against us for our non-
compliance during this period.
On September 1, 2005, we filed a Complaint against Mirador in the Circuit
Court of the Fifteenth Judicial Circuit in and for Palm Beach County,
Florida. The case is styled Nortia Capital Partners, Inc., a Nevada
corporation v. Mirador Consulting, Inc., a Florida corporation, Case No. 50
2005 CA 008373 XXXX MB AN. The case seeks a Declaratory Judgment from the
Court declaring that Mirador is not entitled to retain any of its shares in
us, and that those shares should be cancelled of record.
On November 1, 2005, Mirador filed its Answer and Affirmative Defenses to the
Complaint, as well as a Counterclaim and Third Party Complaint. The essence
of these pleadings is Mirador's allegation that it performed the required
services under the Consulting Agreement, and that it is, therefore, entitled
to retain its shares in us and to receive $10,000.00 due to it under the
Consulting Agreement. Mirador also claims other unspecified damages due to
our refusal to issue Mirador an original stock certificate for additional
shares resulting from our stock split on or about February 28, 2005. In its
Third Party Complaint, Mirador also named our President, among others, and
alleged causes of action for tortuous interference with contractual rights
and conspiracy with the Company in respect of such shares. Our charter and
bylaws provide indemnification rights to our executive officers and
directors.
We believe that all named third-party defendants have meritorious defenses to
Mirador's Counterclaims, for the reasons set forth in our Complaint.
Recent Accounting Developments
The Financial Accounting Standards Board ("FASB") has recently issued several
new accounting pronouncements, which may apply, to the Company.
36
In December 2004, the FASB issued SFAS No. 153, entitled Exchanges of Non-
monetary Assets - An Amendment of APB Opinion No.29. SFAS No. 153 amends
Opinion 29 to eliminate the exception for non-monetary exchanges of non-
monetary assets that do not have commercial substance. A non-monetary
exchange has commercial substance if the future cash flows of the entity are
expected to change significantly as a result of the exchange. The adoption of
SFAS 153 did not impact the financial statements.
In December 2004, the FASB issued SFAS No. 123 (Revised), entitled Share-
Based Payment. This revised Statement eliminates the alternative to use APB
Opinion No. 25's intrinsic value method of accounting that was provided in
SFAS No. 123 as originally issued. Under Opinion 25, issuing stock options
to employees generally resulted in recognition of no compensation cost. This
Statement requires entities to recognize the cost of employee services
received in exchange for awards of equity instruments based on the grant-date
fair value of those awards. For public companies that file as a small
business issuer, this Statement is effective as of the beginning of the first
interim or annual reporting period that begins after December 15, 2005. The
adoption of SFAS 123 (Revised) will have an impact the financial statements
if the Company issues stock options to the employees in the future.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
There has been no material change in our quantitative or qualitative
disclosures about market risk since April 30, 2005.
Item 4. Controls and Procedures
As of October 31, 2005, we, including our Chief Executive Officer and Chief
Financial Officer, evaluated the effectiveness of the design and operation of
our disclosure controls and procedures (as defined in Rule 13a-15(e) under the
Securities Exchange Act of 1934). Based on that evaluation, our management,
including the Chief Executive Officer and Chief Financial Officer, concluded
that our disclosure controls and procedures were effective in timely alerting
management, including the Chief Executive Officer and Chief Financial Officer,
of material information about us required to be included in periodic SEC
filings. However, in evaluating the disclosure controls and procedures,
management recognized that any controls and procedures, no matter how well
designed and operated, can provide only reasonable assurance of achieving the
desired control objectives, and management necessarily was required to apply
its judgment in evaluating the cost-benefit relationship of possible controls
and procedures.
There have been no changes in our internal control over financial reporting
(as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934) that
occurred during the quarter ended October 31, 2005 that have materially
affected, or are reasonably likely to materially affect, our internal control
over financial reporting.
37
PART II
OTHER INFORMATION
Item 1. Legal Proceedings
On April 21, 2005, Mirador Consulting, Inc., filed a Complaint against Nortia
Capital Partners, a Florida corporation, in the County Court in and for Palm
Beach County, Florida, styled as Mirador Consulting, Inc., a Florida
corporation, Plaintiff, vs. Nortia Capital Partners, Inc., a Florida
corporation, Defendant, Case No. 502005CC004932XXXXSB DIV RD. Mirador
alleged causes of action for Breach of Contract and Unjust Enrichment/Quantum
Meruit and sought $10,000.00 in damages for payments allegedly due to Mirador
pursuant to a Consulting Agreement between Mirador and us dated December 22,
2004. Pursuant to the terms of that Agreement, Mirador received shares in
our Company.
On December 6, 2004, 16 days prior to the execution of the Consulting
Agreement, the defendant (the Florida corporation) was merged with and into
us and, as a result, ceased to exist.
In June 2005, the court entered a default against the Florida defendant. A
motion to set aside the default against the defendant was granted on August
30, 2005. A Motion to Dismiss the Complaint With Prejudice was filed on
September 16, 2005, and remains pending. We believe that both the Florida
defendant and we have meritorious defenses to the Complaint.
On September 1, 2005, we filed a Complaint against Mirador in the Circuit
Court of the Fifteenth Judicial Circuit in and for Palm Beach County,
Florida. The case is styled Nortia Capital Partners, Inc., a Nevada
corporation v. Mirador Consulting, Inc., a Florida corporation, Case No. 50
2005 CA 008373 XXXX MB AN. The case seeks a Declaratory Judgment from the
Court declaring that Mirador is not entitled to retain any of its shares in
our Company, and that those shares should be cancelled of record.
On November 1, 2005, Mirador filed its Answer and Affirmative Defenses to the
Complaint, as well as a Counterclaim and Third Party Complaint. The essence
of these pleadings is Mirador's allegation that it performed the required
services under the Consulting Agreement, and that it is, therefore, entitled
to retain its shares in our Company and to receive $10,000.00 due to it under
the Consulting Agreement. Mirador also claims other unspecified damages due
to our Company's refusal to issue Mirador an original stock certificate for
additional shares resulting from our Company's stock split on or about
February 28, 2005. In its Third Party Complaint, Mirador also named our
President, among others, and alleged causes of action for tortuous
interference with contractual rights and conspiracy with the Company in
respect of such shares. Our charter and bylaws provide indemnification
rights to our executive officers and directors.
We believe that all named third-party defendants have meritorious defenses to
Mirador's Counterclaims, for the reasons set forth in our Complaint.
Item 1A. Risk Factors
Risk Factors
An investment in our common stock is highly speculative, involves a high
degree of risk, and should be considered only by those persons who are able
to bear the economic risk of their investment for an indefinite period. The
risks set forth below are not the only risks we face, and we face other risks
which we have not yet identified, which we do not currently deem material or
which are not yet predictable. If any of the following risks occur, our
38
business, financial condition and results of operations could be materially
adversely affected. In such case, our net asset value and the trading price
of our common stock could decline, and you may lose all or part of your
investment. The following specific risks, not listed in any particular order
of priority, should be considered carefully in evaluating the Company, its
business, and its common stock.
We are highly dependent upon management, none of whom has significant
---------------------------------------------------------------------
experience in managing a BDC. The Company's future success depends on the
- -----------------------------
continued contribution of key management, some of whom would be difficult to
replace. The Company's growth and profitability depend on its ability to
attract and retain skilled employees and on the ability of its officers and
key personnel to manage the assets successfully and to provide management
assistance to the Company's investee companies. If the services of these
individuals would be unavailable to the Company for any reason, the Company
would be required to obtain other executive personnel to manage and operate
the Company and to provide management assistance to the Company's investee
companies. In such event, there can be no assurance that the Company would
be able to employ qualified persons on terms favorable to the Company.
Further, although certain of our directors or executive officers have
experience in corporate finance and mergers and acquisitions transactions,
none of them has any significant operational BDC experience.
Our financial condition and results of operations will depend on our
--------------------------------------------------------------------
ability to manage our future growth effectively. Nortia only recently
- ------------------------------------------------
recommenced its business operations as a development stage company and elected
to be treated as a BDC. As such, with a limited operating history, the Company
is subject to the business risks and uncertainties associated with any new
business enterprise, including the lack of experience in managing or operating
a business development company. Our ability to achieve our investment
objective will depend on our ability to grow, which will depend, in turn, on
our management's ability to identify, analyze, invest in and finance companies
that meet our investment criteria. Accomplishing this result on a cost-
effective basis is largely a function of our business plan, management's
ability to effectively structure investments, its ability to provide
competent, attentive and efficient services and our access to financing on
acceptable terms. Failure to manage our future growth effectively could have a
material adverse effect on our business, financial condition and results of
operations.
Any failure on our part to maintain our status as a business development
------------------------------------------------------------------------
company would reduce our operating flexibility. If we do not remain a BDC,
- -----------------------------------------------
we might be regulated as a closed-end investment company under the 1940 Act,
which would subject us to substantially more regulatory restrictions under the
1940 Act and correspondingly decrease our operating flexibility.
This is a highly speculative investment. Ownership of our common
----------------------------------------
stock is extremely speculative and involves a high degree of economic risk,
which may result in a complete loss of investment. Only persons who have no
need for liquidity and who are able to withstand a loss of all or
substantially all of their investment should purchase our common stock.
We suffered a significant operating loss in our 2005 fiscal year and
--------------------------------------------------------------------
during the second quarter of our 2006 fiscal year. During the year ended
- --------------------------------------------------
April 30, 2005, our net loss for the four month period ending April 30, 2005
in which we operated as a BDC was $3,704,595, including a loss of $2,738,559
for the exchange of debt securities to shares of our common stock. During
the first six months of our current fiscal year, our net loss was $903,954.
There can be no assurance that we have sufficient economic resources or that
such resources will be available to us on terms and at times that are
necessary or acceptable, if at all. There is no assurance that future
revenues of the Company will ever be significant or that the Company's
operations will ever be profitable.
Risk involved in new, developing businesses in which the Company will
---------------------------------------------------------------------
invest. The Company's initial investment portfolio is expected to consist
- -------
39
primarily of high-risk investments in new and developing companies.
Successful achievement of the investment objectives of the Company is
dependent upon the growth in value of the securities of these unseasoned
companies. Whether this appreciation in value will occur depends upon
numerous factors outside the control of the Company. The Company anticipates
that it may take significant investment positions in companies that are
listed or to be listed on US equity markets, and the OTC Bulletin Board.
Moreover, the Company's task of identifying and helping to build successful
new and emerging enterprises is difficult. In light of the Company's lack of
operating history as a BDC, the likelihood of the future success of the
Company must be evaluated in light of the problems, expenses, difficulties,
risks, and complications frequently encountered in connection with similarly
situated companies. There can be no assurance that the Company will be
successful in identifying and developing these ventures.
Current management controls our outstanding Common Stock. Our
---------------------------------------------------------
officers and directors own in excess of approximately 48% of the issued and
outstanding Common Stock. It can be expected that the officers and
directors, by virtue of their percentage share ownership, will be able to
continue to control the Company's Board of Directors and its policies.
You may be diluted if we issue additional Common Stock. From time to
-------------------------------------------------------
time, the Company may issue additional equity securities. There can be no
assurance that the pricing of any such additional securities will not be
lower than the price at which you purchased your securities in the open
market.
If we qualify for and elect to be treated as a RIC, we will lose
-----------------------------------------------------------------
substantially all of the benefits of our net operating loss carry-forwards.
- ---------------------------------------------------------------------------
We intend to elect to be treated as a RIC under Subchapter M of the Code
as soon as we qualify for such treatment. To qualify, we must meet
certain source of income, distribution, and asset diversification
requirements. In any year in which we so qualify, we generally will not
be subject to federal income tax on income and capital gains distributed
(or deemed distributed to our stockholders). Upon such election and
qualification, however, we will lose the tax benefit of our net operating
loss carry-forwards (except for use against recognition of built-in gains,
as described below). Such loss of NOL's could have an adverse effect on
our financial condition.
If we qualify for and elect to be treated as an RIC, but do not
---------------------------------------------------------------
distribute substantially all of our capital gain net income or ordinary
- -----------------------------------------------------------------------
income, we will be subject to additional taxes. In addition, if we did not
- -----------------------------------------------
distribute in a timely manner (or treat as deemed distributed) 98% of our
capital gain net income for each one-year period ending on October 31, or
distribute 98% of our ordinary income for each calendar year (as well as any
income not distributed in prior years), we will be subject to the 4%
nondeductible federal excise tax on certain undistributed income of RICs.
Even if we qualify as an RIC, we generally will be subject to a corporate-
level income tax on the income we do not distribute. In addition, we will be
subject to corporate-level tax on the amount of any net built-in gains in our
assets (determined as of the first day of our first taxable year as a RIC) we
recognize within ten years of the effective date of our RIC election (offset
by any available net operating loss carry-forwards).
We May Have Difficulty Satisfying the RIC Income Requirements. Among
--------------------------------------------------------------
the RIC requirements is the requirement that an RIC derive at least 90% of
its gross income from dividends, interest, gains from the sale of securities
and other specified types of income. In order to comply with this
requirement, we will need to ensure each year that we do not receive an
excessive amount of income that falls outside of these permissible categories
(e.g., fee or service income). That restriction may adversely affect our
business plan or limit our ability to undertake certain transactions or
business arrangements.
Management has discretionary use of Company assets. We are not
---------------------------------------------------
currently engaged in any substantive business activities other than
activities that relate to our first project (the July 2005 agreement to
acquire a minority equity interest in Holley Communications Investment,
Inc.). We continue to look for and investigate other business opportunities
that are consistent with our business plan. Accordingly, management has
40
broad discretion with respect to the investments. Although management
intends to apply any proceeds it may receive through the future issuance of
stock or debt to a suitable acquired business, it will have broad discretion
in allocating these funds. There can be no assurance that the management's
use or allocation of such proceeds will allow it to achieve its business
objectives.
We expect that each of our investments initially will be illiquid. We
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expect that we will generally acquire our investments directly from the
issuer in privately negotiated transactions. We expect that the majority of
the investments in our portfolio will typically have no established trading
market. We expect that we will exit much of each of our investments when the
portfolio company has a liquidity event, such as a public offering of the
portfolio company. The illiquidity of our investments may adversely affect
our ability, to dispose of equity securities of our portfolio companies at
times when it may be otherwise advantageous for us to liquidate such
securities. In addition, if we were forced to liquidate some or all of the
investments immediately, the proceeds of such liquidations could be
significantly less than otherwise.
We may not realize gains from our equity investments. When we invest in
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debt securities, we generally expect to acquire warrants or other equity
securities as well. However, the equity interests we receive may not
appreciate in value and, in fact, may decline in value. Similarly, to the
extent that we receive shares of common stock in companies which are subject
to a registration right, any delays in the registration, or subsequent
declines in the market value of such stock after registration, may result in
a decline in the overall value of the investment. Accordingly, we may not be
able to realize gains from our equity interests, and any gains that we do
realize on the disposition of any equity interests may not be sufficient to
offset any other losses we experience.
Economic recessions or downturns could impair our portfolio companies and
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harm our operating results. Many of the companies in which we might make
- ---------------------------
investments may be susceptible to economic slowdowns or recessions. An
economic slowdown may affect the ability of a company to engage in a
meaningful liquidity event, such as a public offering. The value of our
portfolio is likely to decrease during these periods. These conditions could
lead to financial losses in our portfolio and a decrease in our revenues, net
income, and assets.
We may not borrow money unless we maintain asset coverage for
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indebtedness of at least 200%, which may affect returns to stockholders. We
- ------------------------------------------------------------------------
must maintain asset coverage for total borrowings of at least 200%. Our
ability to achieve our investment objective may depend in part on our
continued ability to maintain a leveraged capital structure by borrowing
funds from various sources on favorable terms. Although we have no
borrowings as of October 31, 2005, there can be no assurance that we will not
borrow funds in an amount, which, when compared to the aggregate value of our
assets, will permit us to maintain such leverage. The Company may not be in
compliance with the 1940 Act asset coverage requirements for a BDC. If we do
not maintain such minimum 200% asset coverage ratio and our asset coverage
declines to less than 200%, we may be required to sell a portion of our
investments when it is disadvantageous to do so.
We operate in a competitive market for investment opportunities. We
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compete for investments with a large number of private equity funds and
mezzanine funds, other business development companies, investment banks,
other equity and non-equity based investment funds, and other sources of
financing, including specialty finance companies and traditional financial
services companies such as commercial banks. Some of our competitors may
have greater resources than we do. Increased competition would make it more
difficult for us to purchase or originate investments at attractive prices.
As a result of this competition, sometimes we may be precluded from making
otherwise attractive investments.
Changes in the law or regulations that govern us could have a material
----------------------------------------------------------------------
impact on us or our operations. We are regulated by the SEC and other
- -------------------------------
41
federal and state regulatory agencies. In addition, changes in the laws or
regulations that govern business development companies and regulated
investment companies may significantly affect our business. Any change in
the law or regulations that govern our business could have a material impact
on us or our operations. Laws and regulations may be changed from time to
time, and the interpretations of the relevant laws and regulations also are
subject to change, which may have a material effect on our operations.
Our ability to invest in private companies may be limited in certain
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circumstances. If we are to maintain our status as a business development
- --------------
company, we must not acquire any assets other than "qualifying assets"
unless, at the time of and after giving effect to such acquisition, at least
70% of our total assets are qualifying assets. If we acquire debt or equity
securities from an issuer that has outstanding marginable securities at the
time we make an investment, these acquired assets cannot be treated as
qualifying assets. This result is dictated by the definition of "eligible
portfolio company" under the 1940 Act, which in part looks to whether a
company has outstanding marginable securities.
Amendments promulgated in 1998 by the Federal Reserve expanded the
definition of a marginable security under the Federal Reserve's margin rules
to include any non-equity security. Thus, any debt securities issued by any
entity are marginable securities under the Federal Reserve's current margin
rules. As a result, the staff of the SEC has raised the question as to
whether a private company that has outstanding debt securities would qualify
as an "eligible portfolio company" under the 1940 Act.
Until the question raised by the staff of the SEC pertaining to the
Federal Reserve's 1998 change to its margin rules has been addressed by
legislative, administrative or judicial action, we intend to treat as
qualifying assets only those debt and equity securities that are issued by a
private company that has no marginable securities outstanding at the time we
purchase such securities or those that otherwise qualify as an "eligible
portfolio company" under the 1940 Act.
The SEC in November 2004 issued proposed rules to correct the
unintended consequence of the Federal Reserve's 1998 margin rule amendments
of apparently limiting the investment opportunities of business development
companies. In general, the SEC's proposed rules would define an eligible
portfolio company as any company that does not have securities listed on a
national securities exchange or association. We do not believe that these
proposed rules, to the extent such rules are subsequently approved by the
SEC, will have a material adverse effect on our operations.
Results may fluctuate and may not be indicative of future performance.
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Our operating results may fluctuate and, therefore, you should not rely on
current or historical period results to be indicative of our performance in
future reporting periods. Factors that could cause operating results to
fluctuate include, but are not limited to, variations in the investment
origination volume and fee income earned, variation in timing of prepayments,
variations in and the timing of the recognition of net realized gains or
losses and changes in unrealized appreciation or depreciation, the degree to
which we encounter competition in our markets, and general economic
conditions.
Our common stock price may be volatile. The trading price of our
---------------------------------------
common stock may fluctuate substantially. The price of the common stock may
be higher or lower than the price you pay for your shares, depending on many
factors, some of which are beyond our control and may not be directly related
to our operating performance. These factors include, but are not limited to,
the following:
* price and volume fluctuations in the overall stock market from time
to time;
* significant volatility in the market price and trading volume of
securities of business development companies or other financial
services companies;
42
* volatility resulting from trading in derivative securities related
to our common stock including puts, calls, long-term equity anticipation
securities, or LEAPs, or short trading positions;
* changes in regulatory policies or tax guidelines with respect to
business development companies or regulated investment companies;
* actual or anticipated changes in our earnings or fluctuations in our
operating results or changes in the expectations of securities
analysts;
* general economic conditions and trends;
* loss of a major funding source; or
* departures of key personnel.
We have a limited operating history as a BDC, which may affect our
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ability to manage our business and may impair your ability to assess our
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prospects. We were incorporated in April 1999 but only commenced business
- ----------
and investment operations as a BDC in mid-January 2005. We are subject to
all of the business risks and uncertainties associated with any new business
enterprise, including the risk that we will not achieve our investment
objective and that the value of our common stock or other securities could
decline substantially. We have limited operating history as a BDC. As a
result, we have few operating results under these regulatory frameworks that
can demonstrate either their effect on the business or our ability to manage
the business within these frameworks. If we fail to maintain our status as a
BDC, our operating flexibility would be significantly reduced.
If our investments do not meet our performance expectations, you may
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not receive distributions. We intend to make distributions to our
- --------------------------
stockholders following our qualification and election to be treated
as a RIC under the Code. We may not be able to achieve operating
results that will allow us to make distributions at a specific level
or to increase the amount of these distributions from time to time.
In addition, due to the asset coverage test applicable to us as a BDC,
we may be limited in our ability to make distributions. In addition,
restrictions and provisions in any future credit facilities may limit
our ability to make distributions. If we do not distribute a certain
percentage of our income annually, we will suffer adverse tax consequences,
including failure to obtain, or possible loss of, the federal income tax
benefits allowable to RICs should we qualify for such treatment. We
cannot assure you that you will receive distributions at a particular
level or at all.
Because we intend to distribute substantially all of our income to our
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stockholders upon our election to be treated as a RIC, we will continue to
- --------------------------------------------------------------------------
need additional capital to finance our growth. If additional funds are
- ----------------------------------------------
unavailable or not available on favorable terms, our ability to grow will be
impaired. In order to satisfy the requirements applicable to a RIC, to avoid
payment of excise taxes, and to minimize or avoid payment of income taxes, we
intend to distribute to our stockholders substantially all of our ordinary
income and realized net capital gains except for certain net long-term
capital gains recognized after we become a RIC, which we intend to retain,
pay applicable income taxes with respect thereto, and elect to treat as
deemed distributions to our stockholders. As a BDC, we generally are
required to meet a coverage ratio of total assets to total senior securities,
which includes all of our borrowings and any preferred stock that we may
issue in the future, of at least 200%. This requirement limits the amount
that we may borrow. Because we will continue to need capital to grow our
investment portfolio, this limitation may prevent us from incurring debt and
require us to raise additional equity at a time when it may be
disadvantageous to do so. While we expect to be able to borrow and to issue
additional debt and equity securities, we cannot assure you that debt and
equity financing will be available to us on favorable terms, or at all, and
debt financings may be restricted by the terms of any of our outstanding
borrowings. In addition, as a BDC, we generally are not permitted to issue
43
equity securities priced below net asset value without stockholder approval.
If additional funds are not available to us, we could be forced to curtail or
cease new lending and investment activities, and our net asset value could
decline.
Regulations governing our operation as a business development company
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affect our ability to, and the way in which we raise additional capital, which
- ------------------------------------------------------------------------------
may expose us to risks, including the typical risks associated with leverage.
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Our business will require a substantial amount of capital, which we may
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acquire from the following sources:
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Senior Securities and Other Indebtedness
We may issue debt securities or preferred stock and/or borrow money from
banks or other financial institutions, which we refer to collectively as
"senior securities," up to the maximum amount permitted by the 1940 Act. Under
the provisions of the 1940 Act, we are permitted, as a business development
company, to issue senior securities in amounts such that our asset coverage
ratio, as defined in the 1940 Act, equals at least 200% of gross assets less
all liabilities and indebtedness not represented by senior securities, after
each issuance of senior securities. If we issue senior securities, including
preferred stock and debt securities, we will be exposed to typical risks
associated with leverage, including an increased risk of loss. If we incur
leverage to make investments, a decrease in the value of our investments would
have a greater negative impact on the value of our common stock. If we issue
debt securities or preferred stock, it is likely that such securities will be
governed by an indenture or other instrument containing covenants restricting
our operating flexibility. In addition, such securities may be rated by rating
agencies, and in obtaining a rating for such securities, we may be required to
abide by operating and investment guidelines that could further restrict our
operating flexibility.
Our ability to pay dividends or issue additional senior securities would
be restricted if our asset coverage ratio was not at least 200%. If the value
of our assets declines, we may be unable to satisfy this test. If that
happens, we may be required to sell a portion of our investments and,
depending on the nature of our leverage, repay a portion of our indebtedness
at a time when such sales may be disadvantageous. Furthermore, any amounts
that we use to service our indebtedness would not be available for
distributions to our common stockholders.
Common Stock
We are not generally able to issue and sell our common stock at a price
below net asset value per share. We may, however, sell our common stock, or
warrants, options or rights to acquire our common stock, at a price below the
then-current net asset value of our common stock if our Board of Directors
determines that such sale is in the best interests of Nortia and its
stockholders, and our stockholders approve such sale. In certain limited
circumstances, pursuant to an SEC staff interpretation, we may also issue
shares at a price below net asset value in connection with a transferable
rights offering so long as: (1) the offer does not discriminate among
shareholders; (2) we use our best efforts to ensure an adequate trading market
exists for the rights; and (3) the ratio of the offering does not exceed one
new share for each three rights held. If we raise additional funds by issuing
more common stock or senior securities convertible into, or exchangeable for,
our common stock, the percentage ownership of our stockholders at that time
would decrease and they may experience dilution. Moreover, we can offer no
assurance that we will be able to issue and sell additional equity securities
in the future, on favorable terms or at all.
If we fail to qualify for and elect to be treated as a RIC, then we will
be subject to corporate-level income tax, which would adversely affect our
results of operations and financial condition. If we fail to qualify for the
federal income tax benefits allowable to RICs for any reason and remain or
become subject to a corporate-level income tax, the resulting taxes could
substantially reduce our net assets, the amount of income available for
distribution to our stockholders, and the actual amount of our distributions.
44
Such a failure would have a material adverse effect on us, the net asset
value of our common stock, and the total return, if any, obtainable from your
investment in our common stock.
There is a risk that you may not receive dividends or that our dividends
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may not grow over time. We cannot assure you that we will achieve
- -----------------------
investment results or maintain a tax status that will allow or require any
specified level of cash distributions or year-to-year increases in cash
distributions.
Our business model depends to a significant extent upon strong
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referral relationships with venture capital, private equity fund sponsors and
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other investment banking and financial institutions, and our inability to
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develop or maintain these relationships, or the failure of these
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relationships to generate investment opportunities, could adversely affect
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our business. We expect that members of our management team will maintain
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their relationships with venture capital, private equity firms, and
investment banking and financial institutions, and we will rely to a
significant extent upon these relationships to provide us with our deal flow.
If we fail to maintain our existing relationships or to develop new
relationships with other firms or sources of investment opportunities, then
we will not be able to grow our investment portfolio. In addition, persons
with whom members of our management team have relationships are not obligated
to provide us with investment opportunities, and, therefore, there is no
assurance that such relationships will lead to the origination of equity or
debt investments.
Regulations governing our operations as a BDC affect our ability to
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and the manner in which we raise additional capital, which may expose us to
- ---------------------------------------------------------------------------
risks. Our business will require a substantial amount of capital. We may
- ------
acquire additional capital from the issuance of senior securities, including
borrowings or other indebtedness, or the issuance of additional shares of our
common stock. However, we may not be able to raise additional capital in the
future on favorable terms or at all. We may issue debt securities, other
evidences of indebtedness, or preferred stock, and we may borrow money from
banks or other financial institutions (collectively "senior securities") up
to the maximum amount permitted by the 1940 Act. The 1940 Act permits us to
issue senior securities in amounts such that our asset coverage, as defined
in the 1940 Act, equals at least 200% after each issuance of senior
securities. Our ability to pay dividends or issue additional senior
securities would be restricted if our asset coverage ratio were not at least
200%. If the value of our assets declines, we may be unable to satisfy this
test. If that happens, we may be required to liquidate a portion of our
investments and repay a portion of our indebtedness at a time when such sales
may be disadvantageous.
As a result of issuing senior securities, we would also be exposed to
typical risks associated with leverage, including an increased risk of loss.
If we issue preferred stock, the stock would rank "senior" to common stock in
our capital structure, preferred stockholders would have separate voting
rights and might have rights, preferences, or privileges more favorable than
those of our common stockholders, and the issuance of preferred stock could
have the effect of delaying, deferring, or preventing a transaction or a
change of control that might involve a premium price for holders of our
common stock or otherwise be in your best interest.
To the extent that we are constrained in our ability to issue debt or
other senior securities, we will depend on issuances of common stock to
finance operations. As a BDC, we are generally not able to issue our common
stock at a price below net asset value without first obtaining required
approvals from stockholders and independent directors. If we raise
additional funds by issuing more common stock or senior securities
convertible into, or exchangeable for, our common stock, then the percentage
ownership of our stockholders at that time would decrease and you might
experience dilution.
Our investments in the companies that we are targeting may be extremely
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risky and we could lose all or part of our investments. Although a
- -------------------------------------------------------
prospective portfolio company's assets are one component of our analysis when
determining whether to provide debt or equity investment capital, we generally
do not base an investment decision primarily on the liquidation value of a
45
company's balance sheet assets. Instead, given the nature of the companies
that we invest in, we also review the company's historical and projected cash
flows, equity capital and "soft" assets, including intellectual property
(patented and non-patented), databases, business relationships (both
contractual and non-contractual) and the like. Accordingly, considerably
higher levels of overall risk will likely be associated with Nortia's
portfolio compared with that of a traditional asset-based lender whose
security consists primarily of receivables, inventories, equipment and other
tangible assets. Interest rates payable by our portfolio companies may not
compensate for these additional risks.
Specifically, investments in the companies that we are targeting involves
a number of significant risks, including:
* these companies may have limited financial resources and may be
unable to meet their obligations under their debt securities that we
hold, which may be accompanied by a deterioration in the value of
any collateral and a reduction in the likelihood of us realizing any
value from the liquidation of such collateral;
* they typically have limited operating histories, narrower product
lines and smaller market shares than larger businesses, which tend
to render them more vulnerable to competitors' actions and market
conditions, as well as general economic downturns;
* because they tend to be privately owned, there is generally little
publicly available information about these businesses; therefore,
although Nortia's agents will perform "due diligence" investigations
on these portfolio companies, their operations and their prospects,
we may not learn all of the material information we need to know
regarding these businesses;
* they are more likely to depend on the management talents and efforts
of a small group of persons; therefore, the death, disability,
resignation or termination of one or more of these persons could
have a material adverse impact on our portfolio company and, in
turn, on us; and
* they generally have less predictable operating results, may from
time to time be parties to litigation, may be engaged in rapidly
changing businesses with products subject to a substantial risk of
obsolescence, and may require substantial additional capital to
support their operations, finance expansion or maintain their
competitive position.
A portfolio company's failure to satisfy financial or operating covenants
imposed by us or other lenders could lead to defaults and, potentially,
termination of its loans and foreclosure on its assets, which could trigger
cross-defaults under other agreements and jeopardize our portfolio company's
ability to meet its obligations under the debt securities that we hold. We may
incur expenses to the extent necessary to seek recovery upon default or to
negotiate new terms with a defaulting portfolio company. In addition, if a
portfolio company goes bankrupt, even though we may have structured our
interest as senior debt, depending on the facts and circumstances, including
the extent to which we actually provided significant "managerial assistance"
to that portfolio company, a bankruptcy court might re-characterize our debt
holding and subordinate all or a portion of our claim to that of other
creditors.
Our failure to make follow-on investments in our portfolio companies
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could impair the value of our portfolio. Following an initial investment in a
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portfolio company, we may make additional investments in that portfolio
company as "follow-on" investments, in order to: (1) increase or maintain in
whole or in part our equity ownership percentage; (2) exercise warrants,
options or convertible securities that were acquired in the original or
46
subsequent financing; or (3) attempt to preserve or enhance the value of our
investment.
In some cases, however, we may elect not to make follow-on investments or
otherwise lack sufficient funds to make those investments. We have the
discretion to make any follow-on investments, subject to the availability
of capital resources. The failure to make follow-on investments may,
in some circumstances, jeopardize the continued viability of a
portfolio company and our initial investment, or
may result in a missed opportunity for us to increase our participation in a
successful operation. Even if we have sufficient capital to make a desired
follow-on investment, we may elect not to make a follow-on investment because
we may not want to increase our concentration of risk, because we prefer other
opportunities, or because we are inhibited by compliance with business
development company requirements or the desire to maintain our tax status.
Because we generally do not hold controlling equity interests in our
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portfolio companies, we may not be in a position to exercise control over our
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portfolio companies or to prevent decisions by management of our portfolio
- --------------------------------------------------------------------------
companies that could decrease the value of our investments. Although we may
- -----------------------------------------------------------
do so in the future, to date we have not taken controlling equity positions in
our portfolio companies. As a result, we are subject to the risk that a
portfolio company may make business decisions with which we disagree, and the
stockholders and management of a portfolio company may take risks or otherwise
act in ways that are adverse to our interests. Due to the lack of liquidity
for the debt and equity investments that we typically hold in our portfolio
companies, we may not be able to dispose of our investments in the event we
disagree with the actions of a portfolio company, and may therefore suffer a
decrease in the value of our investments.
Future offerings of debt securities, which would be senior to our
common stock upon liquidation, or equity securities, which could dilute our
existing stockholders and be senior to our common stock for he purposes of
distributions, may have an adverse effect on the value of our common stock.
In the future, we may attempt to increase our capital resources by making
additional offerings of equity or debt securities, including medium-term
notes, senior or subordinated notes and classes of preferred stock or common
stock. Upon our liquidation, holders of our debt securities, if any, and
shares of preferred stock, if any, and lenders with respect to other
borrowings, if any, will receive a distribution of our available assets prior
to the holders of our common stock. Additional equity offerings by us may
dilute the holdings of our existing stockholders or reduce the value of our
common stock, or both. Any preferred stock we may issue would have a
preference on distributions that could limit our ability to make
distributions to the holders of our common stock. Because our decision to
issue securities in any future offering will depend on market conditions and
other factors beyond our control, we cannot predict or estimate the amount,
timing or nature of our future offerings. Thus, our stockholders bear the
risk of our future offerings reducing the market price of our common stock
and diluting their stock holdings in us.
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
Not Applicable
47
Item 5. Other Information
None.
Item 6. Exhibits
The following exhibits are filed with this report or are incorporated herein
by reference to a prior filing, in accordance with Rule 12b-32 under the
Securities Exchange Act of 1934.
Exhibit No. Description of Exhibit
31.1* Certification of Chief Executive Officer pursuant to Rule 13a-14 of
the Securities Exchange Act of 1934, as amended.
31.2* Certification of Chief Financial Officer pursuant to Rule 13a-14 of
the Securities Exchange Act of 1934, as amended.
32.1* Certification of Chief Executive Officer pursuant to section 906 of
The Sarbanes-Oxley Act of 2002.
32.2* Certification of Chief Financial Officer pursuant to section 906 of
The Sarbanes-Oxley Act of 2002.
48
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
NORTIA CAPITAL PARTNERS, INC.
-----------------------------
(Registrant)
Date: December 14, 2005 /s/ William Bosso
----------------------------
William Bosso
Chief Executive Officer
Date: December 14, 2005 /s/ Robert Hunziker
----------------------------
Robert Hunziker
Chief Financial Officer
49