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 January 31, 2006
[ ] 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 33-0967353
------------------------ ------------
(STATE OR JURISDICTION OF (IRS EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
400 Hampton View Court, Alpharetta, Georgia 30004
- ------------------------------------------- ----------
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICE) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (770) 777-6795
--------------
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 a large accelerated
filer, an accelerated filer, or a non-accelerated filer (as defined in Rule
12b-2 of the Exchange Act).
Large accelerated filer[ ] Accelerated filer[ ] Non-Accelerated filer[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 March 14, 2006, there were approximately 22,813,254 shares
of common stock, $0.001 par value, issued and outstanding.
Nortia Capital Partners, Inc.
Form 10-Q Index
January 31, 2006
Page
----
Part I-Financial Information
Item 1. Financial Statements 2
Balance Sheet at January 31, 2006 (Unaudited) 3
Statement of Operations for the Three and Nine Months
Ended January 31, 2006 and the One Month Ended January
31, 2005 and the Two and Eight Months Ended December
31, 2004 and the period from May 1, 2003 (inception of
development stage) to January 31, 2006 (Unaudited) 4
Statement of Cash Flows for the Nine Months Ended
January 31, 2006 and the One Month Ended January 31,
2005 and the Eight Month period Ended December 31,
2004 and for the period from May 1, 2003 (inception
of development stage) to January 31, 2006 (Unaudited) 5
Schedule of Changes in Net Assets for the Nine
Months ended January 31, 2006 (Unaudited) 6
Schedule of Investments at January 31, 2006 (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 January 31, 2006
Balance Sheet
(Unaudited)
ASSETS
------
Current Assets
Cash $ 17,491
-----------
Total Current Assets 17,491
Other Assets
Note receivable 52,500
-----------
Total Other Assets 52,500
Total Assets 69,991
===========
LIABILITIES
-----------
Current Liabilities
Accounts payable 111,717
Accrued expenses 4,397
Stock subscription deposit 39,600
-----------
Total Current Liabilities 155,714
===========
Net Assets $ (85,723)
===========
STOCKHOLDERS' DEFICIT
Common stock, $0.001 par value, 50,000,000
shares authorized 22,813,254 shares issued
and outstanding 22,813
Common stock issuable, 4,375,355 shares 4,375
Additional paid in capital 5,946,277
Accumulated deficit (12,398)
Deficit accumulated during development stage (6,046,790)
-----------
Total Stockholders' Deficit (85,723)
===========
Total Liabilities and Stockholders' Deficit $ 69,991
===========
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 One Two Nine One Eight (Inception of
Months Month Months Months Month Months Development
Ended Ended Ended Ended Ended Ended Stage) to Jan. 31,
Jan. 31, Jan. 31, Dec. 31, Jan. 31, Jan. 31, Dec. 31, 2006
2006 2005 2004 2006 2005 2004
------------------------------------------------------------------------------------------
Revenues $ - $ - $ - $ - $ - $ 153,699 $ 300,000
Operating Expenses
General and administrative 53,533 35,996 39,299 257,476 35,996 94,223 529,388
Bad debt - - - - - - 1,625
Rent 1,611 3,884 7,516 14,906 3,884 23,072 53,905
Consulting 33,118 7,490 66,427 141,698 7,490 82,342 783,540
Compensation 116,435 30,385 198,765 449,605 30,385 245,465 1,009,395
Debenture penalty - 9,225 - - 9,225 2,175 11,400
Directors fees - - 224,100 - - 225,150 237,150
Interest expense 160 12,615 - 160 12,615 15,054 53,304
Impairment of investments - 45,331 - - 45,331 3,250 48,581
Professional 167,853 15,284 26,253 413,158 15,284 109,892 620,778
------------------------------------------------------------------------------------------
Total Operating Expenses 372,710 160,210 562,360 1,277,003 160,210 800,623 3,349,065
------------------------------------------------------------------------------------------
Loss from Operations (372,710) (160,210) (562,360) (1,277,003) (160,210) (646,924) (3,049,065)
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 - - - - - (195,000) (195,000)
Other income - 4 36 - 4 4,536 4,568
Interest income 52 - (35) 390 - 8 401
------------------------------------------------------------------------------------------
Total Other Income (Expense) 52 4 1 390 4 (255,194) (2,993,328)
------------------------------------------------------------------------------------------
Net Loss Before Income Taxes $ (372,658) $ (160,205) $ (562,359) $(1,276,613) $ (160,205) $ (902,119) $(6,042,393)
==========================================================================================
Income tax expense - - - - - - (4,397)
------------------------------------------------------------------------------------------
Net Loss $ (372,658) $(160,205) $ (562,359) $(1,276,613) $ (160,205) $ (902,119) $(6,046,790)
==========================================================================================
Net Loss Per Share -
Basic and Diluted $ (0.01) $ (0.01) $ (0.03) $ (0.05) $ (0.01) $ (0.07) $ (0.40)
==========================================================================================
Weighted Average Shares 27,085,220 21,757,254 19,842,584 26,482,720 21,757,254 13,522,418 15,054,964
==========================================================================================
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
Nine One Eight (Inception of
Months Month Months Development
Ended Ended Ended Stage) to
Jan. 31, Jan. 31, Dec. 31, Jan. 31,
2006 2005 2004 2006
----------------------------------------------------------
Cash Flows From Operating Activities:
Net loss $(1,276,613) $ (160,205) $ (902,119) $(6,046,790)
Adjustments to reconcile net 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 - 45,331 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
Common stock issued for compensation - - 196,000 356,000
Common stock issued for directors fees - - 225,150 237,150
Common stock issued for consulting services - 15,000 4,065 128,565
Common stock issued for legal services - - 10,000 10,000
Amortization of deferred consulting 86,700 - 58,917 585,400
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 - - (26,932) -
Increase (decrease) in accounts payable 24,546 (6,500) 6,501 48,387
Decrease in due to related party - - (1,113) -
Increase (decrease) in accrued expenses (49,765) 14,492 69,837 63,411
----------------------------------------------------------
Net Cash Used In Operating Activities (1,210,732) (91,882) (247,805) (1,854,835)
----------------------------------------------------------
Cash Flows From Investing Activities:
Purchase of available for sale securities - - - (49,948)
Issuance of note receivable (52,500) - - (52,500)
Proceeds from sale of available for sale
securities - - 14,405 14,405
Net Cash Provided By (Used In) Investing ----------------------------------------------------------
Activities (52,500) - 14,405 (88,043)
----------------------------------------------------------
Cash Flows From Financing Activities:
Proceeds from issuance of promissory notes - 86,000 75,000 188,000
Proceeds from issuance of stock subscription
deposit 39,600 - - 39,600
Proceeds from sale of common stock 1,229,420 - - 1,315,770
Proceeds from issuance of debentures - 50,000 197,000 417,000
----------------------------------------------------------
Net Cash Provided By Financing Activities 1,269,020 136,000 272,000 1,960,370
----------------------------------------------------------
Net Increase in Cash 5,788 44,118 38,600 17,491
Cash at Beginning of Period 11,703 47,364 8,764 -
----------------------------------------------------------
Cash at End of Period $ 17,491 $ 91,482 $ 47,364 $ 17,491
==========================================================
Supplemental Disclosure of Cash Flow Information:
Cash paid for interest $ - $ - $ - $ -
==========================================================
Cash paid for taxes $ - $ - $ - $ -
==========================================================
Supplemental Disclosure of Non-Cash Investing
and Financing
Transactions:
Debenture issued for available-for-sale
securities $ - $ - $ - $ 75,000
Recapitalization of accounts payable - 63,330 - 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 cancellation of
services 84 - - 84
Common stock issued for conversion of
preferred stock 300 300 - 300
See accompanying notes to financial statements
5
Nortia Capital Partners, Inc.
(A Development Stage Company)
Statement of Changes in Net Assets
Nine
Months Ended
Jan. 31, 2006
-------------
Decrease in net assets from operations:
Net operating losses $ (1,276,613)
------------------
Net decrease in net assets from operations (1,276,613)
Common Stock transactions 1,229,420
Common stock expense for officer not being paid 4,400
Amortization of deferred consulting 86,700
------------------
Total increase in Net Assets 43,907
Net Assets:
Beginning of Period (129,629)
------------------
End of period $ (85,723)
==================
See accompanying notes to financial statements
6
Nortia Capital Partners, Inc.
(A Development Stage Company)
Schedule of Investments
At January 31, 2006
(Unaudited)
Percentage of
Title of Class Held on
Portfolio Securities Held a Fully Diluted At Jan. 31, 2006
Company Industry By The Company Basis Cost Fair Value
- ----------------------------------------------------------------------------------------------------------------
Investments - (1) (2)
- ----------------------------------------------------------------------------------------------------------------
Avix Technologies, Inc. (3) Telecom Common Stock 11% $ 43,706 $ -
- ----------------------------------------------------------------------------------------------------------------
BF Acquisition Group V, Inc. (3) Shell Common Stock 10% 1,625 -
- ----------------------------------------------------------------------------------------------------------------
Total Investments - Minority Owned Other
Non-Controlled Affiliates 45,331 -
- ----------------------------------------------------------------------------------------------------------------
Universal Capital Management, Inc. (3) Investments Common Stock 1% 1,625 -
- ----------------------------------------------------------------------------------------------------------------
BF Acquisition Group III, Inc. (3) Shell Common Stock 3% 1,625 -
- ----------------------------------------------------------------------------------------------------------------
Total Investments - Unaffiliated Issuers 3,250 -
- ----------------------------------------------------------------------------------------------------------------
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 non-controlled 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
January 31, 2006
(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 - Nature of Operations and Summary of
Significant Accounting Policies and Note 12 - Subsequent Events).
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 nine months ended January 31,
2006 and the one month ended January 31, 2005 reflect the
Company's results subsequent to our election to be treated as a
BDC. The results of operations for the eight months ended
December 31, 2004 reflect our results prior to operating as a
BDC. Accounting principles used in the preparation of the
financial statements for nine months ended January 31, 2006 and
the one month ended January 31, 2005 are different from the eight
months ended December 31, 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.
8
Nortia Capital Partners, Inc.
(A Development Stage Company)
Notes to Financial Statements
January 31, 2006
(Unaudited)
Note 2. Nature of Operations and Summary of Significant
Accounting Policies
- ---------------------------------------------------------
Nature of Operations
The Company is an Atlanta-based business development company
("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 complimentary add-on acquisitions, or industry consolidations.
(See Note 12 - Subsequent Events).
On January 4, 2005, we filed a Form N-54A with the SEC and
elected to be treated as a BDC under the Investment Company Act
of 1940 (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 period 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.
9
Nortia Capital Partners, Inc.
(A Development Stage Company)
Notes to Financial Statements
January 31, 2006
(Unaudited)
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 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 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. (See
Note 12 - Subsequent Events).
The Company currently expects to invest in emerging and
development-stage micro-cap companies that intend to be listed on
U.S. 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
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
10
Nortia Capital Partners, Inc.
(A Development Stage Company)
Notes to Financial Statements
January 31, 2006
(Unaudited)
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 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 January 31, 2006.
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," ("ABP 25") 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 earnings (loss) per
share disclosures for employee stock option grants as if the fair
value based method defined in SFAS 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.
Investments
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) 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.
Investments in securities or other than securities of privately
held entities are initially recorded at their original cost as of
the date the Company obtained an enforceable right to demand the
securities or other investment purchased and incurred an enforceable
obligation to pay the investment price.
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 our statement of operations during the period
11
Nortia Capital Partners, Inc.
(A Development Stage Company)
Notes to Financial Statements
January 31, 2006
(Unaudited)
incurred.
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 January 31, 2006, 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. (See Note 12 - Subsequent
Events).
12
Nortia Capital Partners, Inc.
(A Development Stage Company)
Notes to Financial Statements
January 31, 2006
(Unaudited)
Income (Loss) per Share of Common Stock
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.
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 January 31, 2006, there were warrants to purchase 1,196,155
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 $1,276,613 and net cash used in
operations of $1,210,732 for the nine months ended January 31,
2006. Additionally, the Company has an accumulated deficit of
$12,398 and a deficit accumulated during the development stage of
$6,046,790 and stockholders' deficit of $85,723 at January 31,
2006.
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.
(See Note 12 - Subsequent Events). 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.
13
Nortia Capital Partners, Inc.
(A Development Stage Company)
Notes to Financial Statements
January 31, 2006
(Unaudited)
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.
We are planning on obtaining additional cash proceeds in the next
twelve months from the issuance of additional securities to be
determined.
Note 4. Note Receivable and 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
14
Nortia Capital Partners, Inc.
(A Development Stage Company)
Notes to Financial Statements
January 31, 2006
(Unaudited)
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, 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
15
Nortia Capital Partners, Inc.
(A Development Stage Company)
Notes to Financial Statements
January 31, 2006
(Unaudited)
interest in Holley Communications Investment, Inc., a British
Virgin Islands company ("Holley Communications"), to the
Investment Sub. As of the date of these financial statements,
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.
In December 2005, the Company signed a letter of intent to
provide funding to All American Pet, Inc., ("AAPC"), a New York
corporation, with its principal office in Encino, California.
AAPC produces; markets and sells super premium dog food primarily
through supermarkets and grocery stores and has secured
commitments to distribute its products through approximately
6,000 supermarkets and grocery stores. The commitment made by
the Company is for a total funding of $100,000 and at January 31,
2006, the Company has funded $52,500 of the $100,000 commitment
and has been recorded as a Note Receivable in the accompanying
Financial Statements.
The following represents information about securities held with
loss positions as of January 31, 2006:
Securities in
loss positions Aggregate
less than 12 Unrealized Aggregate
months: Losses Fair 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).
16
Nortia Capital Partners, Inc.
(A Development Stage Company)
Notes to Financial Statements
January 31, 2006
(Unaudited)
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, a 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 note terms are interest at ten percent
(10%) per annum, payable in 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
17
Nortia Capital Partners, Inc.
(A Development Stage Company)
Notes to Financial Statements
January 31, 2006
(Unaudited)
shareholders of Global (See Note 7 - Stockholders' 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
January 31, 2006, 3,300,021 of these shares had been returned and
cancelled by the Company's transfer agent.
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 22,813,254 were
issued and outstanding at January 31, 2006. 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 4,375,355 shares that are issuable at January 31, 2006.
Including issuable shares, we have 27,188,609 shares outstanding
and issuable as of January 31, 2006.
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 January 31, 2006, 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.
18
Nortia Capital Partners, Inc.
(A Development Stage Company)
Notes to Financial Statements
January 31, 2006
(Unaudited)
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 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 January 31, 2006 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
19
Nortia Capital Partners, Inc.
(A Development Stage Company)
Notes to Financial Statements
January 31, 2006
(Unaudited)
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. As a result
of the termination, in January 2006, the consulting group
returned 84,000 of the shares previously issued and these have
been cancelled by the transfer agent as of January 31, 2006.
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 $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 January 31, 2006, the entire $122,400 of deferred
consulting has been expensed and recorded as consulting expense
in the accompanying Statement of Operations. The shares have not
been issued as of January 31, 2006 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
20
Nortia Capital Partners, Inc.
(A Development Stage Company)
Notes to Financial Statements
January 31, 2006
(Unaudited)
the fiscal 2005 financial statements. Additionally, the 150,000
shares had not been issued as of January 31, 2006 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. The offering included an option for an
over-allotment of up to 200,000 units or a maximum issuance of
1,200,000 units. Effective January 16, 2005, the offering was
terminated and in total, the Company received $1,315,770 of
proceeds from the issuance of the Units, representing 1,196,155
shares of common stock and 1,196,155 two-year warrants to
purchase common stock at $2.00 per share.
In January 2006, the Company was in the process of initiating a
new private placement offering for the issuance of up to
1,000,000 units at an offering price of $1.10 per share ("Unit").
Although the offering was not finalized, the Company received
$39,600 of proceeds without signed subscription agreements as of
January 31, 2006. The Company anticipates that the formal
offering will be finalized and signed subscription agreements
received before March 31, 2006. As a result of there being no
signed subscription agreements, the $39,600 of proceeds discussed
above have been recorded as a liability in the accompanying
Financial Statements under the caption Stock Subscription
Deposit. (See Note 12 - Subsequent Events).
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 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.
21
Nortia Capital Partners, Inc.
(A Development Stage Company)
Notes to Financial Statements
January 31, 2006
(Unaudited)
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 January 31,
2006, 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. The offering
included an option for an over-allotment of up to 200,000 units
or a maximum issuance of 1,200,000 units. Effective January 16,
2005, the offering was terminated and in total, the Company
received $1,315,770 of proceeds from the issuance of the Units,
representing 1,196,155 shares of common stock and 1,196,155 two-
year warrants to purchase common stock at $2.00 per share.
In January 2006, the Company was in the process of initiating a
new private placement offering for the issuance of up to
1,000,000 units at an offering price of $1.10 per share ("Unit").
Although the offering was not finalized, the Company received
$39,600 of proceeds without signed subscription agreements as of
January 31, 2006. The Company anticipates that the formal
offering will be finalized and signed subscription agreements
received before March 31, 2006. As a result of there being no
signed subscription agreements, the $39,600 of proceeds discussed
above have been recorded as a liability in the accompanying
Financial Statements under the caption Stock Subscription
Deposit. (See Note 12 - Subsequent Events).
For the private placement offering discussed above, the warrants
become exercisable at the closing date of the private placement
offering.
The following table summarizes activity related to warrants
during the nine months ended January 31, 2006:
Weighted
Number of Average
Shares Exercise Price
---------- --------------
Balance at April 30, 2005 78,500 $ 2.00
Granted 1,117,655 2.00
Exercised - -
Forfeited - -
--------- ----------
Balance at January 31, 2006 1,196,155 $ 2.00
========= ==========
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.
22
Nortia Capital Partners, Inc.
(A Development Stage Company)
Notes to Financial Statements
January 31, 2006
(Unaudited)
The terms of warrants to purchase our common stock are summarized
below:
Weighted
Weighted Average Weighted Number Weighted
Range of Number Remaining Average Exercisable Average
Exercise Outstanding Contractual Exercise at Exercise
Prices Jan. 31, 2006 Life Price Jan. 31, 2006 Price
------------------------------------------------------------------------------
<c>
$2.00 1,196,155 2.00 years $2.00 1,196,155 $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.
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
23
Nortia Capital Partners, Inc.
(A Development Stage Company)
Notes to Financial Statements
January 31, 2006
(Unaudited)
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 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.
24
Nortia Capital Partners, Inc.
(A Development Stage Company)
Notes to Financial Statements
January 31, 2006
(Unaudited)
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 January 31, 2006, 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).
25
Nortia Capital Partners, Inc.
(A Development Stage Company)
Notes to Financial Statements
January 31, 2006
(Unaudited)
Note 10. Financial Information
- --------------------------------
Following is a schedule of financial highlights for the nine
months ended January 31, 2006, during which period the Company
operated as a BDC:
Nine
Months Ended
January 31, 2006
----------------
Per Share Data:
- --------------
Net Asset Value at Beginning of Period (1) $ (0.01)
Net Loss (2) (0.05)
Common Stock Transactions (2) 0.05
Compensation expense for officer not being paid 0.00
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 $ 1.99
Total Return (2) (3) 37%
Common Stock Outstanding and Issuable
at End of Period 27,188,609
Ratio/Supplemental Data:
- -----------------------
Net Assets at End of Period $ (85,723)
Ratio of Operating Expenses to Net Assets 1,490%
Ratio of Net Operating Loss to Net Assets 1,490%
- ----------------------------------------------------------------------
(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.
26
Nortia Capital Partners, Inc.
(A Development Stage Company)
Notes to Financial Statements
January 31, 2006
(Unaudited)
Note 12. Subsequent Events
- ----------------------------
As discussed previously, the Company was in the process of
initiating a new private placement offering for the issuance of
up to 1,000,000 units at an offering price of $1.10 per share
("Unit"). Although the offering was not finalized, the Company
received $39,600 of proceeds without signed subscription
agreements as of January 31, 2006. As a result of there being no
signed subscription agreements, the $39,600 of proceeds is
recorded as a liability in the accompanying Financial Statements
under the caption Stock Subscription Deposit.
Subsequent to January 31, 2006 and through March 1, 2006, the
Company received an additional $109,900 of proceeds without
signed subscription agreements. The Company anticipates that the
formal offering will be finalized and signed subscription
agreements received before March 31, 2006 and the proceeds will
be recorded as common stock.
In January 2006, Bruce A. Hall was appointed the Chief Financial
Officer of the Company. As a result of the appointment, Rob
Hunziker resigned as the Chief Financial Officer of the Company.
On February 10, 2006, the Board of Directors unanimously approved
a proposal to authorize the Board to withdraw the Company's
election to be treated as a BDC as soon as practicable so that
it may begin conducting business as an operating company rather
than an investment company subject to the 1940 Act. When the
Company elected to become a BDC, it was its intention to provide
debt and equity capital to companies that it believed presented
opportunities for superior performance through liquidity events,
recapitalizations, internal growth, product or geographic
expansion, the completion of complementary add-on acquisitions,
or industry consolidations. The Company generally expected to
invest in emerging and development-stage micro-cap companies that
intended to be listed on U.S. equity markets, including the OTC
Bulletin Board, but which otherwise lacked the necessary capital
and depth of management to expand their businesses.
During 2005, the Company conducted a review of its compliance
with the 1940 Act, and determined that it was not in compliance
with several important provisions of the 1940 Act, including the
capital structure requirements. There is a risk that the SEC
could take enforcement action against the Company if the SEC
determines that the Company has not been operating in compliance
with the 1940 Act.
The Company's significant compliance and remediation costs, in
terms of both time and dollars, have operated as a drag on the
Company's resources and in many respects have diverted the
effective utilization of capital previously raised by the Company
to effectuate its overall investment business plan. Further,
since the Company commenced operating as a BDC, the business,
regulatory and financial climates have changed, making operations
as a BDC more challenging and difficult.
Accordingly, based on the foregoing, and after careful
consideration of the 1940 Act requirements applicable to BDCs, an
evaluation of the Company's ability to operate as a going concern
in an "investment company" regulatory environment, the cost of
1940 Act compliance needs, and other business considerations, the
Board determined that continuation as a BDC is not in the best
interests of the Company or its shareholders at the present time.
Thus, the Company is in the process of withdrawing its election
to be treated as a BDC by filing a Form N-54C with the SEC as
soon as practicable. In doing so, the Company will ensure that
it does not meet the definition of an investment company under
the 1940 Act and intends to file an information statement on
Schedule 14C in lieu of soliciting proxies, and will file that
27
Nortia Capital Partners, Inc.
(A Development Stage Company)
Notes to Financial Statements
January 31, 2006
(Unaudited)
information statement in preliminary form as soon as practicable
hereafter. Subsequent to the filing of our Form N-54C, we intend
to pursue a business model in which we would provide merchant
banking-type services for private companies seeking to, among
other things, become publicly traded. We would work with issuers
to position them for the registration of their securities, and
the practical implications and obligations of public-company
status. In pursuing this business model, we will seek to ensure
that we do not become an "investment company" within the meaning
of the 1940 Act.
28
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.
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
29
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").
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. On December 3, 2004, we were
merged with and into Global. Subsequent to the recapitalization,
Global changed its name to "Nortia Capital Partners, Inc."
Operations as a BDC
As a result of its current status as a BDC, the Company planned
to provide capital and advisory services for liquidity events,
management buyouts, recapitalizations, and the growth and capital
needs of emerging and other growth companies.
The Company would invest in emerging and development-stage micro-
cap companies that intend to be listed on U.S. equity markets,
including the OTC Bulletin Board, but which lack the necessary
capital and depth of management to expand their businesses.
As a BDC, 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.
As a BDC, we would make opportunistic investments in companies
across a variety of industries generally having annual revenues
of less than $50 million and/or a market capitalization of less
than $100 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
30
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.
Our investments would 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 the date of the accompanying financial
statements, 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.
Recent Developments
On February 10, 2006, the Board of Directors determined that it
is in the best interest of the Company and its shareholders to
withdraw its election to be regulated as a BDC under the 1940
Act. When the Company elected to become a BDC, it was its
intention to provide debt and equity capital to companies that it
believed presented opportunities for superior performance through
liquidity events, recapitalizations, internal growth, product, or
geographic expansion, the completion of complementary add-on
acquisitions, or industry consolidations. The Company generally
expected to invest in emerging and development-stage micro-cap
companies that intended to be listed on U.S. equity markets,
including the OTC Bulletin Board, but which otherwise lacked the
necessary capital and depth of management to expand their
businesses.
During 2005, the Company determined that it was not in compliance
with several important provisions of the 1940 Act, including, the
capital structure requirements. The Company's significant
compliance and remediation costs, in terms of both time and
dollars, have operated as a drag on the Company's resources and
31
in many respects have diverted the effective utilization of
capital previously raised by the Company to effectuate its
overall investment business plan.
Accordingly, based on the foregoing, and after careful
consideration of the 1940 Act requirements applicable to BDCs, an
evaluation of the Company's ability to operate as a going concern
in an investment company regulatory environment, the cost of 1940
Act compliance needs, and other business considerations, the
Board determined that continuation as a BDC is not in the best
interests of the Company or its shareholders at the present time.
Thus, the Company is in the process of withdrawing its election
to be regulated as a BDC under the 1940 Act as soon as
practicable. In doing so, the Company will ensure that it does
not meet the definition of an investment company under the 1940
Act and intends to file an information statement on Schedule 14C
in lieu of soliciting proxies, and will file that information
statement in preliminary form as soon as practicable hereafter.
Subsequent to the filing of our Form N-54C, we intend to pursue a
business model in which we would provide merchant banking-type
services for private companies seeking to, among other things,
become publicly traded. We would work with issuers to position
them for the registration of their securities, and the practical
implications and obligations of public-company status. In
pursuing this business model, we will seek to ensure that we do
not become an "investment company" within the meaning of the 1940
Act.
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.
* 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 $1,276,613 and net cash used in operations of $1,210,732
for the nine months ended January 31, 2006, and accumulated
deficit of $12,398, a deficit accumulated during the development
stage of $6,046,790 and stockholders' deficit of $85,723 at
January 31, 2006 - 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.
Our ability to continue as a going concern is dependent on the
ability further to implement our business plan, 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
32
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 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 January 31, 2006.
Investments
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) 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.
Investments in securities or other than securities of privately
held entities are initially recorded at their original cost as
of the date the Company obtained an enforceable right to demand
the securities or other investment purchased and incurred an
enforceable obligation to pay the investment price.
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 fair value of our investments 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
33
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.
34
Results of Operations
Financial Analysis of the Three and Nine Months Ended January 31,
2006 and 2005
- -----------------------------------------------------------------
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 One Two Nine One Eight
Months Month Months Months Month Months
Ended Ended Ended Ended Ended Ended
Jan. 31, Jan. 31, Dec. 31, Jan. 31, Jan.31, Dec. 31,
2006 2005 2004 2006 2005 2004
----------- ----------- ----------- ----------- ----------- -----------
Revenues $ - $ - $ - $ - $ - $ 153,699
Operating Expenses
General and administrative 53,533 35,996 39,299 257,475 35,996 94,223
Rent 1,611 3,884 7,516 14,906 3,884 23,072
Consulting 33,118 7,490 66,427 141,698 7,490 82,342
Compensation 116,435 30,385 198,765 449,605 30,385 245,465
Debenture penalty - 9,225 - - 9,225 2,175
Directors fees - - 224,100 - - 225,150
Interest expense 160 12,615 - 160 12,615 15,054
Impairment of investments - 45,331 - - 45,331 3,250
Professional 167,853 15,284 26,253 413,158 15,284 109,892
----------- ----------- ----------- ----------- ----------- -----------
Total Operating Expenses 372,710 160,210 562,360 1,277,003 160,210 800,623
----------- ----------- ----------- ----------- ----------- -----------
Loss from Operations (372,710) (160,210) (562,360) (1,277,003) (160,210) (646,924)
Other Income (Expense)
Loss on sale of available
for sale securities - - - - - (64,738)
Other than temporary loss on
for sale securities - - - - - (195,000)
Other income - 4 36 - 4 4,536
Interest income 52 - (35) 390 - 8
----------- ----------- ----------- ----------- ----------- -----------
Total Other Income (Expense) 52 4 1 390 4 (255,194)
----------- ----------- ----------- ----------- ----------- -----------
Net Loss Before Income Taxes $ (372,658) $ (160,205) $ (562,359) $(1,276,613) $ (160,205) $ (902,119)
=========== =========== =========== =========== =========== ===========
[Note: To help the reader better understand our 2006 results,
- --------------------------------------------------------------
all references below of 2006 represent the three and six months
- ---------------------------------------------------------------
ended January 31, 2006 as a BDC and all references to 2005
- ----------------------------------------------------------
represent the three and nine months ended January 31, 2005. The
- ----------------------------------------------------------------
three months ended January 31, 2005 is as a combination of the
- --------------------------------------------------------------
one month ended January 31, 2005 (operations as a BDC) and the
- --------------------------------------------------------------
two months ended December 31, 2004 (operations prior to becoming
- ----------------------------------------------------------------
a BDC). The nine months ended January 31, 2005 is as a
- -------------------------------------------------------
combination of the one month ended January 31, 2005 (operations
- ---------------------------------------------------------------
as a BDC) and the eight months ended December 31, 2004
- ------------------------------------------------------
(operations prior to becoming a BDC)]
35
Three Months Ended January 31, 2006 Compared with Three Months
- --------------------------------------------------------------
Ended January 31, 2005
- ----------------------
Revenues:
- ---------
There was no revenue for either 2006 or 2005.
Operating Expenses:
- -------------------
Operating expenses decreased $349,859, or 48%, to $372,711 for
2006 from $722,570 for 2005. The decrease was primarily the
result of a $224,100 decrease in director's fees, a $112,175
decrease in compensation, a $45,331 decrease in impairment of
investments and a $40,799 decrease in consulting. These were
offset by a $126,316 increase in professional expenses. The
decrease in director's fees, compensation and consulting was
primarily from the issuance of stock for services in 2005 with no
corresponding amount in 2006. The decrease in impairment of
investments was because there was no corresponding amount in
2006. 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.
Other Income (Expense):
- -----------------------
Other income increased $47 or 946% to $52 of income for 2006 from
$5 of income in 2005. The increase was due to an increase in
interest income.
Nine Months Ended January 31, 2006 Compared with Nine Months
- ------------------------------------------------------------
Ended January 31, 2005
- ----------------------
Revenues:
- ---------
Revenue decreased $153,699, or 100%, to zero for 2006 from
$153,699 for 2005. 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 nine months ended January 31,
2005, 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.
Operating Expenses:
- -------------------
Operating expenses increased $316,169, or 33%, to $1,277,003 for
2006 from $960,833 for 2005. The increase was primarily the
result of a $173,755 increase in compensation, a $287,982
increase in professional expenses and a $127,256 increase in
general and administrative expenses. The increase in
compensation was primarily from salaries paid to two officers in
2006 with no corresponding payment in 2005. 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.
36
Other Income (Expense):
- -----------------------
Other expense decreased $255,580 or 99% to $390 of income for
2006 from $255,190 of expense in 2005. The decrease in expense
was primarily due to the fact that in 2005, 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 to fund our operating activities for the next twelve months.
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 $17,491 at January 31, 2006 as compared to $11,703 at
April 30, 2005. The increase in cash was the result of
$1,229,420 of net proceeds from the sale of common stock, $39,600
of net proceeds from a stock subscription deposit, offset by
$1,210,732 of cash used in operations and $52,500 for the
issuance of a note receivable. The cash used in operations was
primarily the result of $1,276,613 of net loss for the nine
months ended January 31, 2006.
Net assets increased $43,906 from a net liability position of
$129,629 at April 30, 2005 to a net liability position of $85,723
at January 31, 2006.
Operating Activities: Cash used in operating activities was
- ---------------------
$1,210,732 for 2006 as compared to $339,687. The increase in
cash used resulted primarily from the increase in the net loss.
Investing Activities: Cash used in investing activities was
- ---------------------
$52,500 in 2006 as compared to cash provided by investing
activities of $14,405 in 2005. In 2006, $52,500 of cash was used
from the issuance of a note receivable. In 2004, $14,405 of cash
provided was proceeds from the sale of available for sale
securities.
Financing Activities: Cash flows provided by financing
- ---------------------
activities was $1,269,020 for 2006 as compared to $408,000 for
2005. The increase in cash provided by financing activities was
due to $1,229,420 of cash proceeds received by the Company from
the sale of common stock and $39,600 from the issuance of a stock
subscription deposit in 2006. In 2005, $247,000 of cash proceeds
were received from the issuance of debentures and $188,000 of
cash proceeds were received from the issuance of promissory
notes.
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.
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.
37
We obtained $1,229,420 of proceeds from the sale of common stock
and $39,600 from a stock subscription deposit in 2006 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 January 31, 2006.
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 ("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. The offering included an option for an
over-allotment of up to 200,000 units or a maximum issuance of
1,200,000 units. Effective January 16, 2005, the offering was
terminated and in total, the Company received $1,315,770 of
proceeds from the issuance of the Units, representing 1,196,155
shares of common stock and 1,196,155 two-year warrants to
purchase common stock at $2.00 per share.
In January 2006, the Company was in the process of initiating a
new private placement offering for the issuance of up to
1,000,000 units at an offering price of $1.10 per share ("Unit").
Although the offering was not finalized, the Company received
$39,600 of proceeds without signed subscription agreements as of
January 31, 2006. The Company anticipates that the formal
offering will be finalized and signed subscription agreements
received before March 31, 2006. As a result of there being no
signed subscription agreements, the $39,600 of proceeds discussed
above have been recorded as a liability in the accompanying
Financial Statements under the caption Stock Subscription
Deposit.
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 January 31,
2006.
Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements at January 31, 2006.
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
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.
38
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. 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.
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 have made every reasonable effort to comply
as soon as is practicable with the relevant sections of the 1940
Act and worked with our counsel to accomplish that compliance.
We have not yet sold or issued any shares under our proposed
offering and have voluntarily suspended the proposed offering.
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 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,
39
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.
On February 10, 2006, the Board of Directors determined that it
is in the best interest of the Company and its shareholders to
withdraw its election to be reflected as a BDC. When the Company
elected to become a BDC, it was its intention to provide debt and
equity capital to companies that it believed presented
opportunities for superior performance through liquidity events,
recapitalizations, internal growth, product, or geographic
expansion, the completion of complementary add-on acquisitions,
or industry consolidations. The Company generally expected to
invest in emerging and development-stage micro-cap companies that
intended to be listed on U.S. equity markets, including the OTC
Bulletin Board, but which otherwise lacked the necessary capital
and depth of management to expand their businesses.
During 2005, the Company determined that it was not in compliance
with several important provisions of the 1940 Act, including, the
capital structure requirements. The Company's significant
compliance and remediation costs, in terms of both time and
dollars, have operated as a drag on the Company's resources and
in many respects have diverted the effective utilization of
capital previously raised by the Company to effectuate its
overall investment business plan.
Accordingly, based on the foregoing, and after careful
consideration of the 1940 Act requirements applicable to BDCs, an
evaluation of the Company's ability to operate as a going concern
in an "investment company" regulatory environment, the cost of
1940 Act compliance needs, and other business considerations, the
Board determined that continuation as a BDC is not in the best
interests of the Company or its shareholders at the present time.
Thus, the Company is in the process of withdrawing its election
to be treated as a BDC as soon as practicable. In doing so, the
Company will ensure that it does not meet the definition of an
investment company under the 1940 Act and intends to file an
information statement on Schedule 14C in lieu of soliciting
proxies, and will file that information statement in preliminary
form as soon as practicable hereafter. Subsequent to the filing
of our Form N-54C, we intend to pursue a business model in which
we would provide merchant banking-type services for private
companies seeking to, among other things, become publicly traded.
We would work with issuers to position them for the registration
of their securities, and the practical implications and
obligations of public-company status. In pursuing this business
model, we will seek to ensure that we do not become an
"investment company" within the meaning of the 1940 Act.
Recent Accounting Developments
The Financial Accounting Standards Board ("FASB") has recently
issued several new accounting pronouncements, which may apply to
the Company.
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
40
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 January 31, 2006, 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
January 31, 2006 that have materially affected, or are reasonably
likely to materially affect, our internal control over financial
reporting.
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 judgment of default against the
Florida defendant. A motion to set aside the judgment against
the defendant was granted on August 30, 2005. A Motion to
41
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 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
- -------------------------------------------------------
42
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 nine months ended January 31, 2006 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 nine months of our current fiscal
year, our net loss was $1,276,613. 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 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 U.S. 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.
43
If we qualify for and elect to be treated as an RIC, we
-------------------------------------------------------
will lose substantially all of the benefits of our net operating
- ----------------------------------------------------------------
loss carry-forwards. We currently intend to qualify for and
- --------------------
elect to be treated as an RIC under Subchapter M of the Code. 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 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 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 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
44
any equity interests may not be sufficient to offset any other
losses we experience.
Economic recessions or downturns could impair our portfolio
-----------------------------------------------------------
companies and 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 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 January 31, 2006, 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 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 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 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.
45
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. 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;
* 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 ability to manage our business and may impair your
- -------------------------------------------------------------
ability to assess our 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
46
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 not receive distributions. We intend to
- ------------------------------------------------
make distributions to our stockholders following our 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. 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 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
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 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. Our business will
- ---------------------------------------
require a substantial amount of capital, which we may acquire
from the following sources:
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.
47
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. 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 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 referral relationships with venture capital, private
- -----------------------------------------------------------
equity fund sponsors and other investment banking and financial
- ---------------------------------------------------------------
institutions, and our inability to develop or maintain these
- ------------------------------------------------------------
relationships, or the failure of these relationships to generate
- ----------------------------------------------------------------
investment opportunities, could adversely affect our business.
- --------------------------------------------------------------
We expect that members of our management team will maintain 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.
48
Regulations governing our operations as a BDC affect our
--------------------------------------------------------
ability to 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 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
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;
49
* 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 could impair the value of our portfolio. Following an
- --------------------------------------------------
initial investment in a 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
subsequent financing; or (3) attempt to preserve or enhance the
value of our investment.
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 portfolio companies, we may not be in a position
- -----------------------------------------------------------------
to exercise control over our 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
50
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.
Withdrawal of the Company's election to be treated as a BDC
- --------------------------------------------------------------
may increase the risks to our shareholders, since the Company
- ---------------------------------------------------------------
would not be subject to many of the regulatory restrictions
- -----------------------------------------------------------
imposed by, or receive the financial reporting benefits, of the
- --------------------------------------------------------------
1940 Act.
- ---------
If the Company withdraws its election to be treated as a
BDC, the Company would no longer be subject to regulation under
the 1940 Act, which is designed to protect the interests of
investors in investment companies. As a non-BDC, the Company
will not be subject to many of the regulatory, financial
reporting and other requirements and restrictions imposed
by the 1940 Act including, but not necessarily limited to,
limitations on the amounts, types and prices at which securities
which may be issued, participation in related party
transactions, the payment of compensation to executives,
and the scope of eligible investments. The Company also would no
longer be bound by the 1940 Act requirement that a majority of
its Board of Directors be independent, nor would it be required
to maintain a minimum asset coverage ratio of 200% for its
borrowings.
In the event that the Company withdraws its election to be
treated as a BDC and becomes an operating company, the
fundamental nature of the Company's business will change.
Subsequent to the filing of our Form N-54C, we intend to pursue a
business model in which we would provide merchant banking-type
services for private companies seeking to, among other things,
become publicly traded. We would work with issuers to position
them for the registration of their securities, and the practical
implications and obligations of public-company status. In
pursuing this business model, we will seek to ensure that we do
not become an "investment company" within the meaning of the 1940
Act. No assurance can be given that our business strategy or
investment objectives will be achieved by withdrawing our
election to be treated as a BDC.
Further, the election to withdraw the Company as
a BDC under the 1940 Act will result in a significant change
in the Company's method of accounting. BDC financial
statement presentation and accounting utilizes the value method
of accounting used by investment companies, which allows BDCs
to recognize income and value their investments at market
value as opposed to historical cost. As an operating company,
the required financial statement presentation and accounting
for securities held will be either fair value or historical
cost methods of accounting, depending on the classification of
51
the investment and the Company's intent with respect to the
period of time it intends to hold the investment. A change in
the Company's method of accounting could reduce the market value
of its investments in privately held companies by eliminating the
Company's ability to report an increase in the value of its
holdings as they occur. Also, as an operating company, the
Company would have to consolidate its financial statements
with subsidiaries, thus eliminating the portfolio company
reporting benefits available to BDCs.
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
Item 5. Other Information
On February 10, 2006, the Board of Directors determined that it
is in the best interest of the Company and its shareholders to
withdraw its election to be reflected as a BDC. When the Company
elected to become a BDC, it was its intention to provide debt and
equity capital to companies that it believed presented
opportunities for superior performance through liquidity events,
recapitalizations, internal growth, product, or geographic
expansion, the completion of complementary add-on acquisitions,
or industry consolidations. The Company generally expected to
invest in emerging and development-stage micro-cap companies that
intended to be listed on U.S. equity markets, including the OTC
Bulletin Board, but which otherwise lacked the necessary capital
and depth of management to expand their businesses.
During 2005, the Company determined that it was not in compliance
with several important provisions of the 1940 Act, including, the
capital structure requirements. The Company's significant
compliance and remediation costs, in terms of both time and
dollars, have operated as a drag on the Company's resources and
in many respects have diverted the effective utilization of
capital previously raised by the Company to effectuate its
overall investment business plan.
Accordingly, based on the foregoing, and after careful
consideration of the 1940 Act requirements applicable to BDCs, an
evaluation of the Company's ability to operate as a going concern
in an "investment company" regulatory environment, the cost of
1940 Act compliance needs, and other business considerations, the
Board determined that continuation as a BDC is not in the best
interests of the Company or its shareholders at the present time.
Thus, the Company is in the process of withdrawing its election
to be treated as a BDC as soon as practicable. In doing so, the
Company will ensure that it does not meet the definition of an
investment company under the 1940 Act and intends to file an
information statement on Schedule 14C in lieu of soliciting
proxies, and will file that information statement in preliminary
form as soon as practicable hereafter.
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.
52
Exhibit Description of Exhibit
No.
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.*
* Filed herewith
53
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: March 17, 2006 /s/ William Bosso
----------------------------
William Bosso
Chief Executive Officer
Date: March 17, 2006 /s/ Bruce A. Hall
----------------------------
Bruce A. Hall
Chief Financial Officer
54