Attached files
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
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For
the Quarter Ended September 30, 2009
¨
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Transition
Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934
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Commission
File Number: 814-00783
SPRING CREEK CAPITAL CORP. | ||
(Exact name of registrant as specified in its charter) | ||
Nevada
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98-0496750
|
|
(State or other jurisdiction
of
incorporation or organization)
|
(I.R.S. Employer
Identification No.)
|
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120
Wall Street
Suite
2401
New York, N.Y.
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10005
|
|
(Address of principal executive office)
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(Zip
Code)
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(646) 896-3050 | ||
(Registrant’s telephone number, including area code) |
Indicate
by check mark whether the registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months and (2) has been subject to such filing
requirements for the past 90 days. Yes x
No ¨
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding
12 months (or for such shorter period that the registrant was required to submit
and post such files). Yes ¨
No ¨
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of “accelerated
filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check
one):
Large accelerated filer ¨
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Accelerated filer ¨
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Non-accelerated filer x
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Smaller Reporting Company ¨
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Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes ¨ No x
The
number of shares of the registrant’s Common Stock, $.001 par value, outstanding
as of November 18, 2009 was 33,730,000.
1
SPRING
CREEK CAPITAL CORP.
FORM
10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 2009
TABLE
OF CONTENTS
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PAGE
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||||
PART
I. FINANCIAL INFORMATION
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Item 1.
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FINANCIAL STATEMENTS
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3
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||
Statements of Assets and Liabilities as of
September 30, 2009 (unaudited) and December 31,
2008
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3
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|||
Schedule of Investments as of September 30,
2009 (unaudited)
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4 | ||||
Statements of Operations for the three and nine
months ended September 30, 2009 and 2008
(unaudited)
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5
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|||
Statements of Changes in Net Assets for the nine
months ended September 30, 2009(unaudited) and the year ended December 31,
2008
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6
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|||
Statements of Cash Flows for the nine months ended
September 30, 2009 and 2008 (unaudited)
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7
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|||
Notes to Financial
Statements
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8-13
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|||
Item 2.
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Management’s Discussion and Analysis of Financial
Condition and Results of Operations
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14 | ||
Item 3.
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Quantitative and Qualitative Disclosures About
Market Risk
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20 | ||
Item 4.
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Controls and Procedures
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20 | ||
PART II. OTHER
INFORMATION
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||||
Item 1.
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Legal Proceedings
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22 | ||
Item
1A.
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Risk Factors
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22 | ||
Item 2.
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Unregistered Sales of Equity Securities and Use of
Proceeds
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22 | ||
Item 3.
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Defaults upon Senior
Securities
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22 | ||
Item 4.
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Submission of Matters to a Vote of Security
Holders
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22 | ||
Item 5.
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Other Information
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22 | ||
Item 6.
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Exhibits
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23 | ||
Signatures
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24
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2
PART
I. FINANCIAL INFORMATION
.
Item 1.
|
Financial
Statements
|
SPRING
CREEK CAPITAL CORP.
STATEMENTS
OF ASSETS AND LIABILITIES
September 30,
2009
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December
31, 2008
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|||||||
(unaudited)
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||||||||
Assets
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||||||||
Investments
in portfolio companies
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||||||||
Non-controlled
investments, at fair value (cost
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$ | 127,625 | $ | - | ||||
Controlled
investments, at fair value ( cost
|
808,500 | - | ||||||
Cash
|
1,720 | - | ||||||
Accounts
receivable
|
12,920 | - | ||||||
Prepaid
finance costs and other assets
|
827,970 | - | ||||||
Total
assets
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$ | 1,778,735 | $ | - | ||||
Liabilities
|
||||||||
Accounts
payable and accrued expenses
|
10,649 | 500 | ||||||
Notes
and interest payable to related party - net of discount of
$94,078
|
90,540 | - | ||||||
Total
liabilities
|
101,189 | $ | 500 | |||||
Net
Assets
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$ | 1,677,546 | $ | (500 | ) | |||
Analysis
of Net Assets:
|
||||||||
Common
stock, par value $.001 per share, 75,000,000 shares authorized,
and 33,730,000 (2009) and 32,880,000 (2008) issued and
outstanding
|
$ | 33,730 | $ | 32,880 | ||||
Additional
paid-in capital
|
1,604,908 | 93,120 | ||||||
Retained
earnings/ <accumulated deficit>
|
38,908 | (126,500 | ) | |||||
Total Net
Assets
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$ | 1,677,546 | $ | (500 | ) | |||
Net
Asset Value Per Share
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$ | .05 | $ | - | ||||
See notes
to financial statements.
3
SPRING
CREEK CAPITAL CORP.
SCHEDULE
OF INVESTMENTS
September
30, 2009
(unaudited)
Industry
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Principal
Amount of Shares
|
Cost
|
Fair
Value (1)
|
||||||||
Investments in
Non-Controlled/Non-affiliated Portfolio Companies –
13.6%
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|||||||||||
Equity
interests – 10.7 %
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|||||||||||
BioCube,
Inc.
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Healthcare
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1,000,000
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$
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100
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$ |
100,000
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|||||
Stratis
Health Systems, Inc.
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Healthcare
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2,000,000
|
625
|
625
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|||||||
Corporate
Indebtedness – 2.9 %
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|||||||||||
Stratis
Health Systems, Inc.
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Healthcare
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$ |
27,000
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27,000
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27,000
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||||||
Total
investments in non-controlled/non-affiliated
companies
|
27,725
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127,625
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|||||||||
Investments
in Controlled Portfolio Companies – 86.4%
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|||||||||||
Equity
interests – 85.5 %
|
|||||||||||
Stem
Holdings, Inc.
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Healthcare
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100%
|
730
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800,000
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|||||||
Corporate
Indebtedness – 0.9 %
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|||||||||||
Stem
Holdings, Inc.
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Healthcare
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$ |
8,500
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8,500
|
8,500
|
||||||
Total
investments in controlled companies
|
9,230
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808,500
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|||||||||
Total – 100% | $ | 36,955 | $ | 936,125 | |||||||
(1)
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Fair
value is determined in good faith by or under the direction of the Board
of Directors of the Company (see Note
3).
|
See notes
to financial statements
4
SPRING
CREEK CAPITAL CORP.
STATEMENTS
OF OPERATIONS
(unaudited)
Three
months ended
September 30,
|
Nine
months ended
September 30,
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|||||||||||||||
2009
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2008
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2009
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2008
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|||||||||||||
Investment
income
|
||||||||||||||||
Interest
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$
|
420
|
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$
|
-
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$
|
420
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$ |
-
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|||||||
Other
income
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15,000
|
-
|
15,000
|
-
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||||||||||||
Total Investment Income |
15,420
|
-
|
15,420
|
-
|
||||||||||||
Expenses
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||||||||||||||||
Administrative
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66,635
|
-
|
139,823
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-
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||||||||||||
Professional
fees
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4,603
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-
|
13,640
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72,845
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||||||||||||
Interest
expense
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5,218
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-
|
7,829
|
-
|
||||||||||||
Amortization
of financing costs
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587,890
|
-
|
587,890
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-
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||||||||||||
Total
expenses
|
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664,346
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-
|
749,182
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72,845
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|||||||||||
Net investment
loss
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(648,926
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)
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-
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(733,762
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) |
(72,845
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)
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|||||||||
Unrealized
gains on investments
|
899,170
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-
|
899,170
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-
|
||||||||||||
Net
increase (decrease) in net assets resulting from
operations
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$ |
250,244
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$ |
-
|
$ |
165,408
|
$
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(72,845
|
)
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|||||||
|
|
|
|
|||||||||||||
Net
increase (decrease) in net assets resulting from operations per common
share –
|
||||||||||||||||
Basic | $ | .01 | $ | $ | .01 | $ | - | |||||||||
Dilutive | $ | .01 | $ | .01 | - | |||||||||||
Weighted
number of common shares outstanding –
basic dilutive
|
33,730,000
|
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32,880,000
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33,631,103
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31,135,182
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|||||||||||
35,343,495 |
32,880,000
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35,343,495 |
31,135,182
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See notes
to financial statements.
5
SPRING
CREEK CAPITAL CORP.
STATEMENTS
OF CHANGES IN NET ASSETS
Nine months ended
September 30,
2009
|
Year
ended
December 31, 2008
|
|||||||
(unaudited)
|
||||||||
Increase
(decrease) in net assets from operations:
|
||||||||
Net investment
(loss)
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$ | (733,762 | ) | $ | (72,845 | ) | ||
Net change in unrealized
gain on investments
|
899,170 | - | ||||||
Net
increase (decrease) in net assets resulting from
operations
|
165,408 | (72,845 | ) | |||||
Capital
share transactions:
|
||||||||
Warrants
issued in connection issuance of notes payable-related
party
|
1,509,363 | - | ||||||
Issuance
of common stock in settlement of payables
|
3,275 | - | ||||||
Proceeds from common stock
sold
|
- | 96,000 | ||||||
Net
increase in net assets from capital share
transactions
|
1,512,638 | 96,000 | ||||||
Total
increase in net assets
|
1,678,046 | 23,155 | ||||||
Net
assets at beginning of period
|
(500 | ) | (23,655 | ) | ||||
Net
assets at end of period
|
$ | 1,677,546 | $ | (500 | ) | |||
Capital
share activity
|
||||||||
Shares
issued in settlement of payables
|
850,000 | - | ||||||
Shares
sold
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- | 2,880,000 | ||||||
Net
increase in capital share activity
|
850,000 | 2,880,000 | ||||||
6
SPRING
CREEK CAPITAL CORP.
STATEMENTS
OF CASH FLOWS
Nine months ended September
30,
|
||||||||
2009
|
2008
|
|||||||
Cash
Flows Used in Operating Activities
|
||||||||
Net
increase/(decrease) in net assets from operations
|
$
|
165,408
|
$
|
(72,845
|
)
|
|||
Adjustments
to reconcile net decrease in net assets from operations to net cash used
in operating activities:
|
||||||||
Net
unrealized gain on investments
|
(899,170
|
) |
-
|
|||||
Amortization
of finance cost and bond discount
|
587,890
|
-
|
||||||
Accrued
interest payable
|
|
7,904
|
-
|
|||||
Changes
in operating assets and liabilities:
|
||||||||
Portfolio
investments
|
|
(36,955
|
)
|
-
|
||||
Accounts
receivable
|
(12,920
|
) |
(23,155
|
)
|
||||
Prepaid
assets
|
(730
|
) |
-
|
|||||
Accounts
payable and accrued expenses
|
13,624
|
-
|
||||||
Net
cash used in operating activities
|
|
(174,949
|
) |
|
(96,000
|
)
|
||
Cash
Flows from Financing Activities
|
||||||||
Borrowings
|
|
|
176,669
|
-
|
||||
Proceeds
from the issuance of common stock
|
-
|
96,000
|
||||||
Net
cash provided by financing activities
|
|
176,669
|
|
96,000
|
||||
NET
INCREASE IN CASH AND CASH EQUIVALENTS
|
|
1,720
|
|
-
|
||||
CASH
AND CASH EQUIVALENTS, BEGINNING OF PERIOD
|
|
-
|
-
|
|||||
CASH
AND CASH EQUIVALENTS, END OF PERIOD
|
$
|
1,720
|
$
|
-
|
||||
Non-cash
financing activities consist of the issuance of common stock to settle
accounts payable and warrants for services by a related party of $3,275
and$1,509,363 in 2009, respectively
|
||||||||
See notes
to financial statements
7
SPRING
CREEK CAPITAL CORP
NOTES
TO FINANCIAL STATEMENTS
(unaudited)
Note
1. Organization
Spring
Creek Capital Corp. (Spring Creek or the Company) is a closed-end investment
company which in April 2009 elected to be treated as a business development
company (BDC)
under the Investment Company Act of 1940, (the “1940 Act”). The
Company was originally formed in May 2006 to be engaged in the exploration of
mineral properties for copper and other metals; however, as a result of the
change in business plan, in 2009, such operations were
discontinued.
The
Company intends to invest principally in equity securities, including
convertible preferred securities and debt securities convertible into equity of
non-public American based
micro-cap companies. The Company will provide its portfolio companies
with management expertise as well as capital. Our investment
objective is to maximize our portfolio’s capital appreciation while generating
current income from our portfolio investments.
Note
2. Basis of Preparation
The
accompanying financial statements have been prepared in conformity with
generally accepted accounting principles, which contemplate the continuation of
the Company as a going concern. This basis of accounting contemplates the
recovery of the Company’s assets and the satisfaction of liabilities in the
normal course of business. The Company began its current operations as a BDC
during 2009 after discontinuing its former principal business activity which had
not generated any revenues. The Company has not as yet attained a level of
operations which allows it to meet its current overhead and may not attain
profitable operations within its first few business operating cycles, nor is
there any assurance that such an operating level can ever be achieved. The
Company is dependent upon obtaining additional financing adequate to fund its
commitments to its portfolio companies. While the Company has funded its initial
operations with private placements, became a publicly owned entity and secured
loans from a related party, there can be no assurance that adequate financing
will continue to be available to the Company and, if available, on terms that
are favorable to the Company. Our ability to continue as a going
concern is also dependent on many events outside of our direct control,
including, among other things, our portfolio companies’ ability to achieve their
business goals and objectives, as well as improvement in the economic
climate. The financial statements do not include any adjustments to
reflect the possible future effects on the recoverability and classification of
assets or the amounts and classification of liabilities that may result from the
outcome of this uncertainty.
Interim
financial statements are prepared in accordance with GAAP for interim financial
information and pursuant to the requirements for BDC reporting on Form 10-Q and
Article 6 or 10 of Regulation S-X, as appropriate. In the opinion of management,
all adjustments, which are of a normal recurring nature, considered necessary
for the fair presentation of financial statements for the interim period, have
been included.
Operating
results for the interim periods presented are not necessarily indicative of the
results to be expected for a full year.
The
condensed consolidated balance sheet at December 31, 2008 has been derived from
the audited consolidated financial statements at that date but does not include
all the information and footnotes required by generally accepted accounting
principles for complete financial statements.
These
interim financial statements should be read in conjunction with the Company’s
audited financial statements and notes for the period ended December 31, 2008
filed with the Securities and Exchange Commission on Form 10-K on March 27,
2009.
In
January 2009 the Company undertook a 3-for-1 stock split of the common stock
outstanding in the form of a stock dividend. All amounts of common stock and per
share data have been retroactively restated throughout these consolidated
financial statements to give effect to the 3 for 1 split.
Note
3. Significant Accounting Policies
Consolidation
Under the
1940 Act rules and the regulations pursuant to Article 6 of Regulation S-X, the
Company is precluded from consolidating any entity other than another investment
company or an operating company that provides substantially all of its services
and benefits to the Company. As of September 30, 2009, the Company has no
consolidated subsidiaries.
Use
of Estimates
The
preparation of financial statements in conformity with GAAP requires the
Company’s management to make estimates and assumptions that affect the reported
amounts of assets and liabilities at the date of the financial statements and
the reported amounts of income and expenses during the reported period. Changes
in the economic environment, financial markets, creditworthiness of the
portfolio companies the Company chooses to invest in and any other parameters
used in determining these estimates could cause actual results to
differ.
8
Security
Valuation
The 1940
Act requires periodic valuation of each investment in the Company’s portfolio in
order to determine the Company’s net asset value. Under the 1940 Act,
unrestricted securities with readily available market quotations are to be
valued at the current market value; all other assets must be valued at fair
value as determined in good faith by or under the direction of the Board of
Directors.
Financial
Accounting Standards Board (“FASB”) Accounting Standard Codification (“ASC”)
Topic 820, Fair Value
Measurements and Disclosures (“ASC 820”), defines fair value, establishes
a framework for measuring fair value and requires enhanced disclosures about
fair value measurements. ASC 820 specifically defines fair value as
the price that would be received to sell an asset or paid to transfer a
liability in an orderly transaction between market participants at the
measurement date. ASC 820 also establishes a three-tier fair value hierarchy,
which prioritizes the inputs used in measuring fair value. These tiers include:
Level 1, defined as observable inputs such as quoted prices in active markets;
Level 2, which includes inputs such as quoted prices for similar securities in
active markets and quoted prices for identical securities where there is little
or no activity in the market; and Level 3, defined as unobservable inputs for
which little or no market data exists, therefore requiring an entity to develop
its own assumptions.
Debt
Investments
The
Company will determine the fair value of debt investments by reference to the
market in which it sources and executes such debt investments. Market
participants generally have a strategic premise for these investments, and
anticipate the sale of the company, recapitalization or initial public offering
as the realization/liquidity event. The fair value, or exit price, for a debt
instrument would be the hypothetical price that a market participant would pay
for the instrument, using a set of assumptions that are aligned with the
criteria that the Company would use in originating a debt investment in such a
market, including credit quality, interest rate, maturity date, conversion ratio
and overall yield, and considering the prevailing returns available in such a
market. In general, the Company considers enterprise value an important element
in the determination of fair value, because it represents a metric that may
support the recorded value, or which, conversely, would indicate if a
credit-related markdown is appropriate. The Company also considers the specific
covenants and provisions of each investment that may enable the Company to
preserve or improve the value of the investment. In addition, the trends of the
portfolio company’s basic financial metrics from the time of the original
investment until the measurement date are analyzed; material deterioration of
these metrics may indicate that a discount should be applied to the debt
investment, or a premium may be warranted in the event that metrics improve
substantially and the return is higher than anticipated for such a profile under
current market conditions.
Equity
Investments
Equity
investments for which market quotations are readily available will generally be
valued at the most recently available closing market prices.
The fair
value of the Company’s equity investments for which market quotations are not
readily available will be determined based on various factors, including the
enterprise value remaining for equity holders after the repayment of the
portfolio company’s debt and other preference capital, and other pertinent
factors such as recent offers to purchase a portfolio company, recent
transactions involving the purchase or sale of the portfolio company’s equity
securities, or other liquidity events. The determined equity values are
generally discounted when the Company has a minority position, when there are
restrictions on resale, when there are specific concerns about the receptiveness
of the capital markets to a specific company at a certain time, or other
factors.
Enterprise
value means the entire value of the company to a potential buyer, including the
sum of the values of debt and equity securities used to capitalize the
enterprise at a point in time. There is no one methodology to determine
enterprise value and, in fact, for any one portfolio company, enterprise value
is best expressed as a range of fair values, from which the Company derives a
single estimate of enterprise value. To determine the enterprise value of a
portfolio company, the Company will analyze the portfolio company’s historical
and projected financial results, as well as the nature and value of collateral,
if any. The Company will also use industry valuation benchmarks and
public market comparables. The Company will also consider other
events, including private mergers and acquisitions, a purchase transaction,
public offering or subsequent debt or equity sale or restructuring, and include
these events in the enterprise valuation process. The Company may
require portfolio companies to provide annual audited and quarterly unaudited
financial statements, as well as annual projections for the upcoming fiscal
year.
The
following is a description of the steps the Company will take each quarter to
determine the value of the Company’s portfolio investments. Investments for
which market quotations are readily available will be recorded in the Company’s
financial statements at such market quotations. With respect to investments for
which market quotations are not readily available, the Company’s Board of
Directors will undertake a multi-step valuation process each quarter, as
described below:
(1)
|
The
quarterly valuation process begins with each portfolio company or
investment being initially valued by the Company’s key person responsible
for the portfolio investment;
|
(2)
|
Preliminary
valuation conclusions are then documented and discussed with the
investment committee of the board of
directors;
|
9
(3)
|
Independent
valuation firms may be engaged by our investment committee of the board of
directors to conduct independent appraisals and review our key person’s
preliminary valuations and make their own independent
assessment;
|
(4)
|
The
audit committee of the board of directors reviews the preliminary
valuation of our investment committee and that of the independent
valuation firm, if applicable, and responds to the valuation
recommendation of the independent valuation firm to reflect any comments;
and
|
(5)
|
The
board of directors discusses valuations and ratifies the fair value of
each investment in our portfolio in good faith based on the input of our
investment adviser, the respective independent valuation firm, if
applicable, and the audit
committee.
|
Portfolio
Investment Classification
The
Company classifies its portfolio investments in accordance with the requirements
of the 1940 Act. Under the 1940 Act, “Control Investments” are defined as
investments in which the Company owns more than 25% of the voting securities or
has rights to maintain greater than 50% of the board representation. Under the
1940 Act, “Affiliate Investments” are defined as investments in which the
Company owns between 5% and 25% of the voting securities. Under the 1940 Act,
“Non-Control/Non-Affiliate Investments” are defined as investments that are
neither Control Investments nor Affiliate Investments.
Cash
and Cash Equivalents
Cash and
cash equivalents include all highly-liquid instruments with an original maturity
of 90 days or less at the date of purchase. Investments in money market mutual
funds and certificates of deposit, which may have original maturities of 90 days
or less, are separately classified as short-term investments.
Concentration
of Credit Risk
The
Company may place its cash and cash equivalents with various financial
institutions and, at times, cash held in depository accounts at such
institutions may exceed the Federal Deposit Insurance Corporation insured
limit.
Securities
Transactions
Securities
transactions are accounted for on the date the transaction for the purchase or
sale of the securities is entered into by the Company (i.e., trade
date).
Interest,
Dividend and Other Income
Interest
income from debt investments in portfolio companies, adjusted for amortization
of premium and accretion of discount, is recorded on an accrual basis to the
extent such amounts are expected to be collected.
Origination,
closing and/or commitment fees associated with debt investments in portfolio
companies are accreted into interest income over the respective terms of the
applicable loans. Upon the prepayment of a loan or debt security, the
Company will records any prepayment penalties and unamortized loan origination,
closing and commitment fees as part of interest income.
Debt
investments will be placed on non-accrual status when principal or interest
payments are past due 60 days or more or when there is reasonable doubt that
principal or interest will be collected. Accrued interest will be reversed when
a loan is placed on non-accrual status. Non-accrual debt investments
will be restored to accrual status when past due principal and interest is paid
and, in management’s judgment, is likely to remain current.
Dividend
income from equity investments in portfolio companies is recorded on the
ex-dividend date.
Fee
income includes fees, if any, for due diligence, structuring, transaction
services, consulting services and management services rendered to portfolio
companies and other third parties. Due diligence, structuring, transaction
service, consulting and management service fees generally are recognized as
other income when services are rendered.
Federal
and State Income Taxes
The
Company is currently taxable as a "C" corporation and uses the liability method
of accounting for income taxes. Deferred tax assets and liabilities are recorded
for temporary differences between the tax basis of assets and liabilities and
their reported amounts in the financial statements, using statutory tax rates in
effect for the year in which the temporary differences are expected to reverse.
A valuation allowance is provided against deferred tax assets when it is more
likely than not that some portion or all of the deferred tax assets will not be
realized.
The
Company intends to elect to be treated for U.S. federal income tax purposes, and
intends to qualify, as a RIC under Subchapter M of the Internal Revenue
Code. If the Company does not meet the criteria to qualify as a RIC
after the election is initially made, it will continue to be taxed as a regular
corporation under Subchapter C of the Internal Revenue Code (a “C"
corporation”). As a RIC, the Company generally will not have to pay
corporate-level federal income taxes on any ordinary income or capital gains
that the Company distributes to its stockholders from its tax earnings and
profits. To obtain and maintain its RIC tax treatment, the Company must meet
specified source-of-income and asset diversification requirements and distribute
annually at least 90% of its ordinary income and realized net capital gains in
excess of realized net capital losses, if any. In order to avoid certain excise
taxes imposed on RICs, the Company currently intends to distribute during each
calendar year an amount at least equal to the sum of: (i) 98% of its
ordinary income for the calendar year, (ii) 98% of its capital gains in
excess of capital losses for the one-year period ending on October 31 of
the calendar year, and (iii) any ordinary income and net capital gains for
preceding years that were not distributed during such years.
As of December 31, 2008, the Company has approximately $103,000 of
net operating loss carry-forwards available to affect future taxable income and
has established a valuation allowance equal to the tax benefit of the net
operating loss carry-forwards and temporary differences as realization of the
asset is not assured.
10
Uncertain
tax positions
The
Company evaluates its tax positions taken or expected to be taken in the course
of preparing the Company’s tax returns to determine whether the tax positions
are ‘‘more-likely-than-not’’ of being sustained by the applicable tax authority.
Tax positions not deemed to meet the “more-likely-than-not” threshold are
recorded as an expense in the applicable year. As of September 30, 2009 and for
the period then ended, the Company did not have a liability for any unrecognized
tax benefits. Management’s evaluation of uncertain tax positions may be subject
to review and adjustment at a later date based upon factors including, but not
limited to, an on-going analysis of tax laws, regulations and interpretations
thereof.
Dividends
and Distributions
Dividends
and distributions to common stockholders will be recorded on the ex-dividend
date. Net realized capital gains, if any, will be distributed at least
annually. No dividends or distributions were declared or paid to
common stockholders since inception.
Per
Share Information
Net
changes in net assets resulting from operations per common share, or basic
earnings per share, are calculated using the weighted average number of common
shares outstanding for the period presented. The weighted average number of
shares outstanding for the dilutive computation for the three and nine months
ended September 30, 2009 includes 1,613,495 and 898,552 shares, respectively,
for warrants outstanding based upon the treasury method.
Recently
Issued Accounting Pronouncements
From time
to time, new accounting pronouncements are issued by the FASB or other standards
setting bodies that are adopted by the Company as of the specified effective
date. Unless otherwise discussed, the Company believes that the impact of
recently issued standards that are not yet effective will not have a material
impact on its financial statements upon adoption.
In
June 2009, the FASB issued the FASB Accounting Standards Codification™ and
the Hierarchy of Generally Accepted Accounting Principles (the “Codification”).
The Codification became the single official source of authoritative,
nongovernmental U.S. generally accepted accounting principles (“GAAP”). The
Codification did not change GAAP but reorganizes the literature. The
Codification is effective for interim and annual periods ending after
September 15, 2009.
In
August 2009, the FASB issued authoritative guidance regarding accounting
and disclosures related to the fair value measurement of liabilities. The
new guidance establishes valuation techniques in circumstances in which a quoted
price in an active market for the identical liability is not available.
Additionally, it clarifies appropriate valuation techniques when restrictions
exist that prevent the transfer of liabilities measured at fair value.
Finally, it provides further guidance on the classification of liabilities
measured at fair value within the fair value hierarchy. The new guidance
is effective for interim periods ending after August 26, 2009. The
adoption of the guidance did not have a material impact on the Company’s results
of operations or financial position.
In
May 2009, the FASB issued authoritative guidance on subsequent events. This
guidance establishes general standards of accounting for and disclosures of
events that occur after the balance sheet date but before financial statements
are issued or are available to be issued. This guidance is effective for interim
or annual financial periods ending after June 15, 2009. The adoption of the
guidance did not have an impact on the Company’s results of operations or
financial position.
In
April 2009, the FASB issued guidance regarding the determination of fair
value when the volume and level of activity for an asset or liability have
significantly decreased and identifying transactions that are not orderly.
The new guidance provides for estimating fair value when the volume and level of
activity for an asset or liability have significantly decreased in relation to
normal market activity. Additionally, the new guidance identifies
circumstances that indicate a transaction is not orderly. The new guidance
requires interim disclosures of the inputs and valuation techniques used to
measure fair value reflecting changes in the valuation techniques and related
inputs. The guidance is effective for interim and annual reporting
periods ending after June 15, 2009, and is to be applied
prospectively. The adoption of the guidance did not have a material impact
on the Company’s results of operations or financial position.
In
April 2009, the FASB issued guidance requiring companies to disclose
information about fair value of financial instruments not measured on the
balance sheet at fair value in interim financial statements as well as in annual
financial statements. Prior to this guidance, fair value for these assets
and liabilities was only disclosed annually. The guidance requires
all entities to disclose the methods and significant assumptions used to
estimate the fair value of financial instruments. The new guidance is
effective for interim periods ending after June 15, 2009. In periods
after initial adoption, the guidance requires comparative disclosures only for
periods ending after initial adoption. The adoption of the new
guidance did not have a material impact on the Company’s results of operations
or financial position.
11
In
September 2009, the FASB issued Accounting Standards Update No. 2009-12,
Investments in Certain Entities That Calculate Net Asset Value
per Share (or Its Equivalent) (“ASU 2009-12”), which provides
amendments to ASC Subtopic 820-10, for the fair value measurement of investments
in certain entities that calculate net asset value per share (or its
equivalent). ASU 2009-12 permits a reporting entity to measure the
fair value of an investment that is within its scope on the basis of the net
asset value per share of the investment (or its equivalent) if the net asset
value of the investment (or its equivalent) is calculated in a manner consistent
with the measurement principles of ASC 820. ASU 2009-12 is effective
for interim and annual periods ending after December 15, 2009, and its adoption
is not expected to impact Company’s financial condition, results of operations
or cash flows.
Note
4. Portfolio Investments
In June
2009, the Company entered into an agreement with BioCube, Inc., a Nevada
corporation engaged in the biotechnology development market, to provide (i)
management consulting for $5,000 per month payable $2,500 in cash and $2,500 in
common stock and (ii) financing up to $600,000 over an 18 month period in
tranches of $25,000, in the form of promissory notes with interest at 10 % per
annum, each with a term of 18 months from the date of issue. In connection with
the commitment, the Company was issued 1 million shares of the common stock of
BioCube, representing 20 percent of its then outstanding stock which the
Company..
Also in
June 2009, the Company entered into a agreement with Stratis Healthcare, Inc., a
Nevada corporation engaged in the healthcare logistics and distribution, to
provide (i) management consulting for $5,000 per month payable $2,500 in cash
and $2,500 in common stock and (ii) financing up to $450,000 over an 18 month
period in tranches of $25,000, in the form of promissory notes at ten percent
interest, each with a term of 18 months from the date of issue. In connection
with the commitment, the Company was issued 2 million shares of the common stock
of Stratis, representing 20 percent of its then outstanding stock of Stratis
Healthcare, Inc.
In July
2009, the Company formed Stem Holdings, Inc., a Nevada corporation after
completing successful negotiations with veteran stem cell industry pioneer
Dwight C Brunoehler to prepare and execute a novel forward looking business plan
in the stem cell sector. The mission of the new company will be to provide
education and affordable stem cell storage services to all individuals seeking
them. In addition, the company will be working with scientists to advance
knowledge and uses for stem cells particularly as they relate to personalized
medicine. Stem is currently wholly-own by the Company.
At
September 31, 2009, the fair value measurement of all the Company’s investments
were determined using Level 3 inputs and the components of the change in our
investments categorized as Level 3, for the nine months ended September 30,
2009 were as follows:
|
Fair
Value Measurements Using Significant Unobservable Inputs
(Level
3)
|
|||||||||||
|
Equity
|
Corporate
Debt
|
Total
|
|||||||||
Beginning
Balance, December 31, 2008
|
|
$
|
-
|
|
$
|
-
|
|
|
$
|
-
|
||
Additions
|
|
1,455
|
35,500
|
|
|
35,955
|
||||||
Unrealized
gains included in earnings
|
|
899,170
|
-
|
|
|
899,170
|
||||||
|
||||||||||||
Ending
Balance, September 30, 2009
|
|
$
|
900,625
|
|
$
|
35,500
|
|
|
$
|
936,125
|
||
|
||||||||||||
Note
5. Notes and interest payable related party
During
the nine months ended September 30, 2009, the Company borrowed an aggregate of
$176,669
from LeadDog Capital LP through issuances of notes payable for periods of 6 to
27 months with interest payable at 16% per year. In connection with
the issuance of these notes the Company granted the lender warrants to 1,050,000
shares of the Company’s common stock at $.001. In addition, the
Company issued warrants to purchase 950,000 shares of the Company’s common stock
at $.001 to LeadDog Capital Markets LLC (the general partner) for due diligence
services. LeadDog Capital LP and its affiliates are shareholders and warrant
holders however the group is restricted from becoming a beneficially owner (as
such term is defined under Section 13(d) and Rule 13d-3 of the Securities
Exchange Act of 1934, as amended, (the 1934 Act)), of the Company’s common stock
which would exceed 9.5% of the number of shares of common stock
outstanding.
The
proceeds from issuance of the promissory notes were allocated to the notes and
the warrants based upon their relative fair values. This allocation resulted in
allocating $41,161 to the notes and $135,508 to the warrants. The warrants
issued for services were recorded as prepaid financing fees of $1,355,000 and
will be amortized to interest expense over the related loan
periods. During the nine months ended September 30, 2009, the Company
recorded $569,691 as additional interest expense related to the amortization of
the debt discount and prepaid financing fees. The fair value of the
warrants was determined using the Black-Scholes option pricing model using the
following weighted-average assumptions: volatility of 141%; risk-free interest
rate of 1.34% to 1.625; expected life of 3 years and estimated dividend yield of
0%.
12
Notes and
interest payable – related party as of September 30, 2009 includes accrued
interest of $7,704.
Note
6. Investment Advisory Fees
In June
2009, the Company entered into an advisory agreement with Carlton Wealth
Management, LLC, a registered investment adviser. Under the terms of
the agreement, the advisor will, among other matters assist in the
identification, evaluation and negotiation of the structure of the investments,
including performing due diligence on prospective portfolio companies as well as
advise and assist in the quarterly and annual valuation of portfolio company
investments. Compensation provided under the agreement includes:
(a)
|
Base
Management Fee of $1,500; and
|
(b)
|
Bonus
Fee equal to three percent (3%) of the total investment value of each
portfolio company investment made by the Corporation during the term
of this Agreement, payable at the closing of such
investment.
|
The
Company and the Investment Advisor agreed to terminate the agreement effective
September 1, 2009. Total advisory fees of $1,500 were paid for the
quarter ended September 30, 2009.
Note
7. Subsequent Events
In
September, 2009, Eco-Blends, Inc., a wholly-own subsidiary of the company,
entered into an agreement to acquire all of the business and intellectual
property of Lewey’s Eco-Blends, Inc. in exchange for 700,000 shares of stock of
Eco-Blends’ common stock (representing a 70% equity
interest). Eco-Blends will manufacture and distribute DEET-free
insecticide and insect repellant products which are designed to meet the ever
increasing environmental concerns of consumers who are turning to homeopathic
alternatives as well as stricter environmental guidelines which narrow the range
of solutions to control pests and pathogens for agricultural needs. The Company
also agreed to provide management consulting services for $5,000 per month
($2,500 per month deferred) and to provide financing up to $250,000 in tranches
of $25,000 to $50,000, in the form of promissory notes at 12percent interest,
each with a term of 18 months from the date of issue. The acquisition
closed on October 7, 2009.
Subsequent
to September 30, 2009, the Company borrowed $42,500 from LeadDog
Capital LP with interest payable at 16% per year and due one
year from the dates of the borrowings. In connection with the
borrowings the Company issued to the lender and to the lender’s general partner
212,500 warrants each to purchase shares of the Company’s common stock at
$.001 per share. In addition the Company borrowed $50,000 from LeadDog Capital
LP in the form of convertible debentures with interest payable at 14% per year.
The debenture provides for conversion at 75% of the lowest closing price ten
days prior to the conversion date.
The
Company has no other material events to report subsequent to the measurement
date of these financial statements through the date that such were issued on
November 23, 2009.
13
Item 2.
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations.
|
FORWARD-LOOKING
STATEMENTS
Some of
the statements in this quarterly report on Form 10-Q constitute forward-looking
statements because they relate to future events or our future performance or
financial condition. These forward-looking statements are not historical facts,
but rather are based on current expectations, estimates and projections about
us, our prospective portfolio investments, our industry, our beliefs, and our
assumptions. The forward-looking statements contained in this
quarterly report on Form 10-Q may include statements as to:
•
|
Our
future operating results;
|
•
|
Our
business prospects and the prospects of our portfolio
companies;
|
•
|
The
impact of the investments that we expect to
make;
|
•
|
The
ability of our portfolio companies to achieve their
objectives;
|
•
|
Our
expected financings and
investments;
|
•
|
The
adequacy of our cash resources and working
capital; and
|
•
|
The
timing of cash flows, if any, from the operations of our portfolio
companies.
|
In
addition, words such as “anticipate,” “believe,” “expect” and “intend” indicate
a forward-looking statement, although not all forward-looking statements include
these words. The forward-looking statements contained in this quarterly report
on Form 10-Q involve risks and uncertainties. Our actual results could differ
materially from those implied or expressed in the forward-looking statements for
any reason, including the factors set forth in “Risk Factors” and elsewhere in
this quarterly report on Form 10-Q or incorporated by reference herein. Other
factors that could cause actual results to differ materially
include:
|
•
|
An
economic downturn, such as the one we are currently experiencing, could
likely impair the ability of
any portfolio company
that
we may acquire an interest in to continue to operate, which could
lead to the loss of some or all of our investments in such
portfolio
companies;
|
|
•
|
An
economic downturn, such as the one we are currently experiencing, could
disproportionately impact the public ready growth
companies
which we target for investment, potentially causing us to suffer losses in
our portfolio and experience diminished
demand
for capital from these companies;
|
•
|
An
inability to access the capital markets could impair our
investment activities.
|
We have
based the forward-looking statements included in this quarterly report on Form
10-Q on information available to us at the time we filed this quarterly report
on Form 10-Q with the SEC, and we assume no obligation to update any such
forward-looking statements. Except as required by the federal securities laws,
we undertake no obligation to revise or update any forward-looking statements,
whether as a result of new information, future events or otherwise. You are
advised to consult any additional disclosures that we may make directly to you
or through reports that we in the future may file with the SEC, including annual
reports on Form 10-K, quarterly reports on Form 10-Q and current
reports on Form 8-K. The forward-looking statements and projections
contained in this quarterly report on Form 10-Q are excluded from the safe
harbor protection provided by Section 27E of the Securities Exchange Act of
1934, as amended (the “Exchange Act”).
MANAGEMENT’S DISCUSSION AND
ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The
following Management’s Discussion and Analysis of Financial Condition and
Results of Operations should be read in conjunction with our financial
statements and the related notes and schedules thereto.
Overview
The
Company is a closed-end investment company which in April 2009 elected to be
treated as a business development company (BDC) under the Investment Company Act
of 1940, (the 1940 Act). The Company was originally formed in May
2006 to be engaged in the exploration of mineral properties for copper and other
metals; however, as a result of the change in business plan, in 2009, such
operations were discontinued.
14
We intend
to invest principally in equity securities, including convertible preferred
securities and debt securities convertible into equity securities, of primarily
non-public U.S.-based companies. The Company will provide its portfolio
companies with management expertise as well as capital. Our investment objective
is to maximize our portfolio’s capital appreciation while generating current
income from our portfolio investments. In accordance with our
investment objective, we intend to provide capital principally to U.S.-based,
private companies with an equity value of less than $250 million, which we refer
to as “micro-cap companies.” Our primary emphasis will be to attempt
to generate capital gains through our equity investments in micro-cap companies,
including through the conversion of the convertible debt or convertible
preferred securities we will seek to acquire in such
companies.
We may
also make investments on an opportunistic basis in U.S.-based publicly-traded
companies with market capitalizations of less than $250 million, as well as
foreign companies that otherwise meet our investment criteria, subject to
certain limitations imposed under the 1940 Act. At the present time, we do not
expect our investments in foreign companies to exceed more than 10% of our total
investment portfolio on a cost basis, however.
Any
subsequent follow-on investment will be contingent upon the portfolio company
satisfying pre-established milestones towards the filing of a registration
statement under the Securities Act of 1933, as amended (“Securities Act”) or the
Exchange Act. Where appropriate, we may also negotiate to receive
warrants, either as part of our initial or follow-on investments in our
portfolio companies.
As an
integral part of our initial investment, we intend to partner with and help
prepare our portfolio companies to become public and meet the governance and
eligibility requirements for a Nasdaq Capital Market
listing. We intend to invest in micro-cap companies that we
believe will be able to file a registration statement with the U.S. Securities
and Exchange Commission (“SEC”) within approximately three to twelve months
after our initial investment.
We intend
to maximize our potential for capital appreciation by taking advantage of the
premium we believe is generally associated with having a more liquid asset, such
as a publicly traded security. Specifically, we believe that a
“going-public”, will generally provide our portfolio companies with greater
visibility, marketability, and liquidity than they would otherwise be able to
achieve. Since we intend to be more patient investors, we believe
that our portfolio companies may have an even greater potential for capital
appreciation if they are able to demonstrate sustained earnings growth and are
correspondingly rewarded by the public markets with a price-to-earnings (P/E)
multiple appropriately linked to earnings performance. We can provide
no assurance, however, that the micro-cap companies in which we may invest will
be able to achieve such sustained earnings growth necessary, or that the public
markets will recognize such growth, if any, with an appropriate market
premium.
The
convertible debt instruments we expect to receive in connection with our initial
investments will likely be unsecured or subordinated debt securities.
These convertible debt instruments will in nearly all cases not be rated by a
national rating agency. If such debt securities were rated, however,
we would expect them to fall below investment grade, which are sometimes
referred to as “junk bonds,” meaning that they are more speculative in nature
with respect to the issuer’s capacity to pay interest and repay principal, and
are therefore subject to greater risk of default than other debt securities that
qualify as investment grade. The equity investments we expect to receive in
connection with our follow-on investments will typically be non-controlling
investments, meaning we will not be in a position to control the management,
operation and strategic decision-making of the companies in which we
invest. In the near term, we expect that our total initial and
follow-on investments in each portfolio company will typically range from
$250,000 to $600,000, although we may invest more than this threshold in certain
opportunistic situations. We expect the size of our individual
investments to increase if and to the extent our capital base increases in the
future.
We expect
that our capital will primarily be used by our portfolio companies to finance
organic growth. To a lesser extent, our capital may be used to
finance acquisitions and recapitalizations. Our investment decisions will be
based on an analysis of potential portfolio companies’ management teams and
business operations supported by industry and competitive research, an
understanding of the quality of their revenues and cash flow, variability of
costs and the inherent value of their assets, including proprietary intangible
assets and intellectual property. We will also assess each potential
portfolio company as to its appeal in the public markets and its suitability for
achieving and maintaining public company status.
As a
business development company, we are required to comply with certain regulatory
requirements. For example, to the extent provided by the 1940 Act, we are
required to invest at least 70% of our total assets in eligible portfolio
companies.
Research
shows that publically traded companies are potentially valued higher than
comparable private company peers because market participants may pay a premium
for liquidity. Investors willing to accept illiquidity in the form of
a private, pre-IPO investment can attempt to capture this potential valuation
differential once a company becomes publicly traded.
We intend
to provide an opportunity to participate in the potential increase in value that
can occur as portfolio companies transition from private to public status and
potential accelerated earnings growth following an infusion of capital. We
believe that this process could result in risk-adjusted excess returns that have
the potential to generate capital gains on each investment over an average
3-year anticipated holding period. We intend to distribute current
income from our portfolio to investors in the form of quarterly dividends, to
the extent available.
15
Current
Economic Environment
The U.S.
economy is currently in a recession, which could be long-term. Consumer
confidence continued to deteriorate and unemployment figures continued to
increase during the first half of 2009. However, in recent months,
certain economic indicators have shown modest improvements. The generally
deteriorating economic situation, together with the limited availability of debt
and equity capital, including through bank financing, will likely have a
disproportionate impact on the micro-cap companies we intend to target for
investment. As a result, we may experience a reduction in attractive
investment opportunities in prospective portfolio companies that fit our
investment criteria. In addition, micro-cap companies in which we
ultimately invest may be unable to pay us the interest or dividends on their
convertible securities or repay their debt obligations to us, and the common
stock which we may receive upon conversion of the convertible securities may
have little or no value, resulting in the loss of all or substantially all of
our investment in such micro-cap companies.
Going
Concern
Our
financial statements have been prepared in conformity with generally accepted
accounting principles, which contemplate the continuation of the Company as a
going concern. This basis of accounting contemplates the recovery of the
Company’s assets and the satisfaction of liabilities in the normal course of
business. Company began its current operations as a BDC during 2009 after
discontinuing its former principal business activity which had not generated any
revenues. We have not yet attained a level of operations which allows it to meet
its current overhead and may not attain profitable operations within next few
business operating cycles, nor is there any assurance that such an operating
level can ever be achieved. The Company is dependent upon obtaining additional
financing adequate to fund its commitments to its portfolio companies. The
report of our auditors on our financial statements as of and for the year
ended December 31, 2008, included a reference to going concern
risks. While the Company has funded its initial operations with
private placements, became a publicly owned entity and secured loans from a
related party, there can be no assurance that adequate financing will continue
to be available to the Company and, if available, on terms that are favorable to
the Company. Our ability to continue as a going concern is also
dependent on many events outside of our direct control, including, among other
things, our portfolio companies’ ability to achieve their business goals and
objectives, as well as improvement in the economic climate. The
financial statements do not include any adjustments to reflect the possible
future effects on the recoverability and classification of assets or the amounts
and classification of liabilities that may result from the outcome of this
uncertainty.
Investment
Portfolio and Activities
During
the three and nine months ended September 30, 2009, we made initial investments
in our portfolio companies both through equity and debt
transactions. Each of our portfolio companies are in the healthcare
industry and each entity is being incubated by us. We have
principally funded these start-ups through loans from LeadDog Capital LP, a
related party. Healthcare is the targeted industry group for the
Company.
The
Company’s management and Board of Directors in their quarterly review of the
portfolio companies, as of September 30, 2009, also recognized that the fair
value of our equity interests required recording unrealized gains as a result of
the progress these entities were making in pursuing their business
plans. As a result the Company recorded an unrealized gain of
$899,000 in the quarter ended September 30, 2009.
It is the
intention of the management to review more investment opportunities that meet
the Company’s investment criteria while at the same time develop funding
sources, principally equity, if available on terms that are favorable to the
Company, in addition to the Company’s present lender. The
consummation of each investment will depend upon satisfactory completion of our
due diligence investigation of the prospective portfolio company, our
confirmation and acceptance of the investment terms, structure and financial
covenants, the execution and delivery of final binding agreements in form
mutually satisfactory to the parties, the absence of any material adverse change
and the receipt of any necessary consents. We can provide no
assurance that we will be able to both find appropriate candidates for
investment and if found, conclude a transaction as well as to find adequate
financing for our operations including amounts necessary to fund the operations
of our portfolio companies.
16
Results
of Operations
The
Company was originally formed in May 2006 to be engaged in the exploration of
mineral properties for copper and other metals; however, as a result of the
change in business plan, in April 2009, such operations were
discontinued. Set forth
below are the results of operations for the three and nine months ended
September 30, 2009 and 2008.
Investment
income We
currently have limited investment income and amounts accrued in accordance
with the terms of the related loans have not been received. Our
equity investments are not expected to pay dividends. We have also generated
revenue in the form of fees for providing significant managerial assistance and
may in future receive fees for commitment, origination, structuring or diligence
fees as well as consulting fees. Any such fees will be generated in connection
with our investments and recognized as earned. In all likelihood we will be
required to make future expenditures in connection with our due diligence
efforts along with general and administrative expenses before we will earn any
material investment income.
Expenses. Our
primary operating expenses include the payment of: (i) consulting fees
under arrangements to fund costs related to personnel, advisors and other
administrative obligations for identifying, evaluating, negotiating, closing,
monitoring and servicing our investments; (ii) interest on borrowings; and (ii)
professional services including legal, accounting and transfer
agent.
Net
change in unrealized gain. During
the three month and nine month periods ended September 30, 2009, the Company
recognized unrealized gain on its investments of $899,000 as a result of the
matters discussed above concerning its investments.
Financial
Condition, Liquidity and Capital Resources
As of
September 30, 2009, the Company had a negative working capital of
$86,000. Since implementing the BDC business plan, we generated
net cash proceeds of $126,000 from equity placements and borrowed $177,000 from
a related party. During this period we invested $37,000. The Company has not as
yet attained a level of operations which allows it to meet its current overhead
and may not attain profitable operations within next few business operating
cycles, nor is there any assurance that such an operating level can ever be
achieved. The Company is dependent upon obtaining additional financing adequate
to fund its commitments to its portfolio companies. The report of our auditors
on our financial statements as of and for the year
ended December 31, 2008, included a reference to going concern
risks. While the Company has funded its initial operations with
private placements, became a publicly owned entity and secured loans from a
related party, there can be no assurance that adequate financing will continue
to be available to the Company and, if available, on terms that are favorable to
the Company. Our ability to continue as a going concern is also
dependent on many events outside of our direct control, including, among other
things, our portfolio companies’ ability to achieve their business goals and
objectives, as well as improvement in the economic climate. The
financial statements do not include any adjustments to reflect the possible
future effects on the recoverability and classification of assets or the amounts
and classification of liabilities that may result from the outcome of this
uncertainty.
Our
primary use of funds will be investments in portfolio companies, cash
distributions to holders of our common stock, and the payment of operating
expenses.
As of September 30, 2009,
we had net assets of $1.7 million and, based on 33.7 million shares of
common stock outstanding, a net asset value per common share of approximately
$.05.
Distribution
Policy
We have
not paid any dividends or distributions since our inception. Our
Board of Directors will determine the payment of any distributions in the
future. We will pay these distributions to our stockholders out of assets
legally available for distribution. We cannot assure you that we will achieve
investment results that will allow us to make a targeted level of cash
distributions or year-to-year increases in cash distributions. Any
dividends to our stockholders will be declared out of assets legally available
for distribution.
Although
our primary emphasis will be to generate capital gains through the common stock
we expect to receive upon conversion of the convertible debt and convertible
preferred securities issued to us in the initial and follow-on investments in
our portfolio companies, we also expect to generate current income from the
interest and preferred dividends on the debt and convertible preferred
securities, respectively, prior to their conversion.
The
timing of any capital gains generated from the appreciation and sale of common
stock we expect to receive in our portfolio companies upon conversion of the
convertible debt and convertible preferred equity securities cannot be
predicted. Although we expect to be able to pay dividends from the
interest and preferred dividends we receive from our initial and follow-on
investments prior to our conversion thereof, we do not expect to generate
capital gains from the sale of our portfolio investments on a level or uniform
basis from quarter to quarter. This may result in substantial
fluctuations in our quarterly dividend payments to stockholders. In
addition, since we expect to have an average holding period for our portfolio
company investments of two to three years, it is unlikely we will generate any
capital gains during our initial years of operations and thus we are likely to
pay dividends in our initial years of operation principally from interest and
preferred dividends we receive from our initial and follow-on investments prior
to our conversion thereof. However, our ability to pay dividends in
our initial years of operation will be based on our ability to invest our
capital in suitable portfolio companies in a timely manner.
17
In
addition, although we currently intend to distribute realized net capital gains,
if any, at least annually, we may in the future decide to retain such capital
gains for investment and elect to treat such gains as deemed distributions to
our stockholders. If this happens, our stockholders will be treated as if they
had received an actual distribution of the capital gains we retain and
reinvested the net after-tax proceeds in us. In this situation, our stockholders
would be eligible to claim a tax credit (or, in certain circumstances, a tax
refund) equal to their allocable share of the tax we paid on the capital gains
deemed distributed to them. We can offer no assurance that we will
achieve results that will permit the payment of any cash distributions and, to
the extent that we issue senior securities, we will be prohibited from making
distributions if doing so causes us to fail to maintain the asset coverage
ratios stipulated by the 1940 Act or if distributions are limited by the terms
of any of our borrowings.
We intend
to elect to be treated, and intend to qualify annually thereafter, as a RIC
under Subchapter M of the Code. To obtain and maintain RIC tax treatment, we
must, among other things, distribute at least 90% of our ordinary income and
realized net capital gains in excess of realized net capital losses, if any. 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:
(i) 98% of our ordinary income for the calendar year, (ii) 98% of our
capital gains in excess of capital losses for the one-year period ending on
October 31 of the calendar year, and (iii) any ordinary income and net
capital gains for preceding years that were not distributed during such years.
We can offer no assurance that we will achieve results that will permit the
payment of any cash distributions and, if we issue senior securities, we will be
prohibited from making distributions if doing so causes us to fail to maintain
the asset coverage ratios stipulated by the 1940 Act or if distributions are
limited by the terms of any of our borrowings.
All
distributions will be paid at the discretion of our Board of Directors and will
depend on our earnings, our financial condition, maintenance of our RIC status,
compliance with applicable business development company regulations and such
other factors as our Board of Directors may deem relevant from time to time. We
cannot assure that we will pay distributions to our stockholders in the future.
In the event that we encounter delays in locating suitable investment
opportunities, we may pay all or a substantial portion of our distributions from
the proceeds of the sales of our common stock in anticipation of future cash
flow, which may constitute a return of our stockholders’ capital. Distributions
from the proceeds of the sales of our common stock also could reduce the amount
of capital we ultimately invest in interests of portfolio
companies. Our distributions may exceed our earnings, especially
during the period before we have substantially invested the proceeds from the
sale of our common stock.
Contractual
Obligations
As of
September 30, 2009, our investment agreements with our portfolio companies
provide if the portfolio companies attain certain benchmarks we are
to provide financing of up to $1.8 Million.
Off-Balance
Sheet Arrangements
As of
September 30, 2009, we have no off-balance sheet arrangements.
Related
Parties
Information
concerning related party transactions is included in the financial statements
and related notes, appearing elsewhere in this quarterly report on Form
10-Q.
In
addition, we have adopted a formal Code of Ethics that governs the conduct of
our officers and directors. Our officers and directors also remain subject to
the fiduciary obligations imposed by both the 1940 Act and applicable state
corporate law.
Critical
Accounting Policies
The
preparation of financial statements and related disclosures in conformity with
generally accepted accounting principles in the United States requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities, disclosure of contingent assets and liabilities at the
date of the financial statements, and revenues and expenses during the periods
reported. Actual results could materially differ from those estimates. We have
identified the following items as critical accounting policies.
Valuation of
Portfolio Investments. We will determine the
net asset value per share of our common stock quarterly, or more frequently to
the extent circumstances together with our obligations under the 1940 Act
require us to do so. The net asset value per share is equal to the value of our
total assets minus liabilities and any preferred stock outstanding divided by
the total number of shares of common stock outstanding. At present, we do not
have any preferred stock authorized or outstanding.
Fair
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 is as
determined in good faith by our Board of Directors.
18
Determining
fair value requires that judgment be applied to the specific facts and
circumstances of each portfolio investment while employing a consistently
applied valuation process for the types of investments we make. We are required
to specifically value each individual investment on a quarterly basis We will
determine the fair value of our debt investments by reference to the market in
which we source and execute these debt investments. Market participants
generally have a strategic premise for these investments, and anticipate the
sale of the company, recapitalization or initial public offering as the
realization/liquidity event. The fair value, or exit price, for a debt
instrument would be the hypothetical price that a market participant would pay
for the instrument, using a set of assumptions that are aligned with the
criteria that we would use in originating a debt investment in this market,
including credit quality, interest rate, maturity date, conversion ratio and
overall yield, and considering the prevailing returns available in this market.
In general, we consider enterprise value an important element in the
determination of fair value, because it represents a metric that may support the
recorded value, or which, conversely, would indicate if a credit-related
markdown is appropriate. We also consider the specific covenants and provisions
of each investment which may enable us to preserve or improve the value of the
investment. In addition, the trends of the portfolio company’s basic financial
metrics from the time of the original investment until the measurement date are
also analyzed; material deterioration of these metrics may indicate that a
discount should be applied to the debt investment, or a premium may be warranted
in the event that metrics improve substantially and the return is higher than
required for such a profile under current market conditions.
The fair
value of our equity investments for which market quotations are not readily
available will be determined based on various factors, including the enterprise
value remaining for equity holders after the repayment of the portfolio
company’s debt and other preference capital, and other pertinent factors such as
recent offers to purchase a portfolio company, recent transactions involving the
purchase or sale of the portfolio company’s equity securities, or other
liquidity events. The determined equity values will generally be discounted when
we have a minority position, restrictions on resale, specific concerns about the
receptivity of the capital markets to a specific company at a certain time, or
other factors. Equity investments for which market quotations are
readily available will generally be valued at the most recently available
closing market price.
Enterprise
value means the entire value of the company to a potential buyer, including the
sum of the values of debt and equity securities used to capitalize the
enterprise at a point in time. There is no one methodology to determine
enterprise value and, in fact, for any one portfolio company, enterprise value
is best expressed as a range of fair values, from which we derive a single
estimate of enterprise value. To determine the enterprise value of a portfolio
company, we will analyze its historical and projected financial results, as well
as the nature and value of collateral, if any. We will also use industry
valuation benchmarks and public market comparables. We will also
consider other events, including private mergers and acquisitions, a purchase
transaction, public offering or subsequent debt or equity sale or restructuring,
and include these events in the enterprise valuation process. We will generally
require portfolio companies to provide annual audited and quarterly unaudited
financial statements, as well as annual projections for the upcoming fiscal
year.
The
following is a description of the steps the Company will take each quarter to
determine the value of the Company’s portfolio investments. Investments for
which market quotations are readily available will be recorded in the Company’s
financial statements at such market quotations. With respect to investments for
which market quotations are not readily available, the Company’s Board of
Directors will undertake a multi-step valuation process each quarter, as
described below:
(1) The
quarterly valuation process begins with each portfolio company or investment
being initially valued by the Company’s key person responsible for the portfolio
investment;
(2)
Preliminary valuation conclusions are then documented and discussed with the
investment committee of the board of directors;
(3)
Independent valuation firms may be engaged by our investment committee of the
board of directors to conduct independent appraisals and review our key person’s
preliminary valuations and make their own independent assessment;
(4) The
audit committee of the board of directors reviews the preliminary valuation of
our investment committee and that of the independent valuation firm,
if applicable, and responds to the valuation recommendation of the independent
valuation firm to reflect any comments; and
(5) The
board of directors discusses valuations and ratifies the fair value of each
investment in our portfolio in good faith based on the input of our investment
adviser, the respective independent valuation firm, if applicable, and the audit
committee. Determination of fair values involves subjective judgments and
estimates. Accordingly, this critical accounting policy expresses the
uncertainty with respect to the possible effect of such valuations, and any
change in such valuations, on our financial statements.
Revenue
Recognition. We calculate gains or
losses on the sale of investments by using the specific identification method.
We record interest income, adjusted for amortization of premium and accretion of
discount, on an accrual basis to the extent such amounts are expected to be
collected.
19
Origination,
closing and/or commitment fees associated with debt investments in portfolio
companies are accreted into interest income over the respective terms of the
applicable loans. Upon the prepayment of a loan or debt security, we
record any prepayment penalties and unamortized loan origination, closing and
commitment fees part of interest income.
We place
loans on non-accrual status when principal or interest payments are past due 60
days or more or when there is reasonable doubt that principal or interest will
be collected. Accrued interest is generally reversed when a loan is placed on
non-accrual status. We may recognize as income or apply to principal, interest
payments received on non-accrual loans, depending upon management’s judgment. We
restore non-accrual loans to accrual status when past due principal and interest
is paid and, in management’s judgment, are likely to remain
current.
Other
Income.
Other income includes closing fees, or origination fees, associated with equity
investments in portfolio companies. Such fees are normally paid at closing of
our investments, are fully earned and non-refundable, and are generally
non-recurring.
The 1940
Act requires that a business development company offer managerial assistance to
its portfolio companies. We offer and provide managerial assistance to our
portfolio companies in connection with our investments and may receive fees for
our services. These fees are typically included in other income.
Federal Income
Taxes. We
intend to elect to be treated, and intend to qualify annually thereafter, as a
RIC under Subchapter M of the Code. If we do not meet the criteria to
qualify as a RIC for our 2009 taxable year, we will be taxed as a regular
corporation under Subchapter C of the Code. We intend to operate so as to
qualify to be taxed as a RIC under Subchapter M of the Code and, as such, to not
be subject to federal income tax on the portion of our taxable income and gains
distributed to stockholders. To qualify for RIC tax treatment, we are required
to distribute at least 90% of our investment company taxable income, as defined
by the Code.
Because
federal income tax regulations differ from accounting principles generally
accepted in the United States, distributions in accordance with tax regulations
may differ from net investment income and realized gains recognized for
financial reporting purposes. Differences may be permanent or temporary.
Permanent differences are reclassified among capital accounts in the financial
statements to reflect their tax character. Temporary differences arise when
certain items of income, expense, gain or loss are recognized at some time in
the future. Differences in classification may also result from the treatment of
short-term gains as ordinary income for tax purposes.
Item 3
|
Quantitative
and Qualitative Disclosures about Market
Risk.
|
We are
subject to financial market risks, including changes in interest rates. During
the three and nine months ended September 30, 2009 our portfolio loans
had fixed rates. As such, a change in interest rates may have a material effect
on our net investment income. However, we may hedge against interest rate
fluctuations from time-to-time by using standard hedging instruments such as
futures, options and forward contracts subject to the requirements of the 1940
Act. While hedging activities may insulate us against adverse changes in
interest rates, they may also limit our ability to participate in the benefits
of lower interest rates with respect to our portfolio of investments. During the
three and nine months ended September 30, 2009, we did not engage in
interest rate hedging.
Item
4.
|
CONTROLS
AND PROCEDURES
|
Evaluation
of Disclosure Controls and Procedures
The
Company is in the process of implementing disclosure controls and procedures (as
defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of
1934 (the ‘‘Exchange Act’’), that are designed to ensure that information
required to be disclosed in the Company’s Exchange Act reports are recorded,
processed, summarized, and reported within the time periods specified in rules
and forms of the Securities and Exchange Commission, and that such information
is accumulated and communicated to our Chief Executive Officer to allow timely
decisions regarding required disclosure.
As of
September 30, 2009, the Chief Executive Officer and Chief Financial Officer
carried out an assessment, of the effectiveness of the design and operation
of our disclosure controls and procedures pursuant to Exchange Act
Rules 13a-15(b) and 15d-15(b). As of the date of this assessment, the Chief
Executive Officer and Chief Financial Officer concluded that the Company’s
disclosure controls and procedures were not effective as of September 30, 2009,
because of the material weakness described below.
The Chief
Executive Officer and Chief Financial Officer performed additional accounting
and financial analyses and other post-closing procedures including detailed
validation work with regard to balance sheet account balances, additional
analysis on income statement amounts and managerial review of all significant
account balances and disclosures in the Quarterly Report on Form 10-Q, to ensure
that the Company’s Quarterly Report and the financial statements forming part
thereof are in accordance with accounting principles generally accepted in the
United States of America. Accordingly, management believes that the financial
statements included in this Quarterly Report fairly present, in all material
respects, the Company’s financial condition, results of operations, and cash
flows for the periods presented.
20
Management’s
Report on Internal Control over Financial Reporting
Management
of the Company is responsible for establishing and maintaining adequate internal
control over financial reporting, as such term is defined in
Rules 13a-15(f) and 15d-15(f) under the Exchange Act. The Company’s
internal control over financial reporting is a process designed to provide
reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external reporting purposes in
accordance with accounting principles generally accepted in the United States of
America. Internal control over financial reporting includes those policies and
procedures that (i) pertain to the maintenance of records that, in reasonable
detail, accurately and fairly reflect the transactions and dispositions of the
assets of the Company; (ii) provide reasonable assurance that transactions
are recorded as necessary to permit preparation of financial statements in
accordance with generally accepted accounting principles, and that receipts and
expenditures of the Company are being made only in accordance with
authorizations of management and directors of the Company; and
(iii) provide reasonable assurance regarding prevention or timely detection
of unauthorized acquisition, use, or disposition of the Company’s assets that
could have a material effect on the interim or annual financial
statements.
Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with policies or procedures may deteriorate.
The Chief
Executive Officer and Chief Financial Officer assessed the effectiveness of the
Company’s internal control over financial reporting as of September 30, 2009. In
performing its assessment of the effectiveness of the Company’s internal control
over financial reporting, management applied the criteria described in the
Internal Control-Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (‘‘COSO’’).
A
material weakness is a deficiency, or a combination of deficiencies, in internal
control over financial reporting, such that there is a reasonable possibility
that a material misstatement of the Company’s annual or interim financial
statements will not be prevented or detected on a timely basis.
The
material weakness identified during management's assessment was the lack of
sufficient resources with SEC, generally accepted accounting principles (GAAP)
and tax accounting expertise. This control deficiency did not result in
adjustments to the Company’s interim financial statements. However, this control
deficiency could result in a material misstatement of significant accounts or
disclosures that would result in a material misstatement to the Company’s
interim or annual financial statements that would not be prevented or detected.
Accordingly, management has determined that this control deficiency constitutes
a material weakness.
Because
of the material weakness, management concluded that the Company did not maintain
effective internal control over financial reporting as of July 31, 2009, based
on the criteria in Internal Control-Integrated Framework issued by
COSO.
Changes
in Internal Control over Financial Reporting
The
Company is in the process of correcting the internal control deficiency which
began with the employment of our new Chief Financial Officer.
21
PART
II. OTHER INFORMATION
Item 1.
|
Legal
Proceedings
|
We are
not currently subject to any material pending legal proceedings.
Item 1A.
|
Risk
Factors
|
In
addition to the other information set forth in this report, you should carefully
consider the factors discussed in Part I “Item 1A. Risk Factors” in our
Annual Report on Form 10-K for the fiscal year ended December 31,
2008, which could materially affect our business, financial condition and/or
operating results. The risks described in our Annual Report on Form 10-K
are not the only risks facing our Company. Additional risks and uncertainties
not currently known to us or that we currently deem to be immaterial also may
materially and adversely affect our business, financial condition and/or
operating results.
Item 2.
|
Unregistered
Sales of Equity Securities and Use of
Proceeds
|
None.
Item 3.
|
Defaults
Upon Senior Securities
|
None.
Item 4.
|
Submission
of Matters to a Vote of Security
Holders
|
None.
Item 5.
|
Other
Information
|
On
November 20, 2009 our Board appointed Jan E. Chason as Chief Financial Officer
and Alan I. Levine as Chief Compliance Officer, effective
immediately. Following is information concerning Mr. Chason and Mr.
Levine.
Mr.
Chason is the Chief Financial Officer of United EcoEnergy Corp. and Alliance
Network Communications Holdings, Inc. since October 7, 2009 and September 16,
2009, respectively, and has served as the Chief Financial Officer of several
other publicly-owned companies including Halcyon Jets Holdings,
Inc. (August 2007 to August 2009), Ckrush Inc. (February 2006 to September
2008), Majesco Entertainment Company (January 2003 to January 2006) , The Marque
Group, Inc. (June 1997 to March 1999) and Triathlon Broadcasting Company (June
1997 to March 1999). Mr. Chason also served in senior financial positions
at SFX Entertainment and Clear Channel Entertainment and provided interim
accounting services through JEC Consulting Associates LLC to privately-owned
entrepreneurial companies and non-for-profit companies prior to and/or during
these periods. Mr. Chason was a partner at Ernst & Young LLP from
October 1982 through September 1994. Mr. Chason, 63, is a certified public
accountant and has
a Bachelor of Business Administration from City College
of New York.
Mr. Levine has been engaged in the practice of public accounting
since 1967, initially with several accounting firms and his own practice since
1986. Mr. Levine, 64, holds a Bachelor of Arts degree from the University of
Denver.
22
Item 6.
|
Exhibits
|
(a)
Exhibits
31.1*
|
Certification
of Chief Executive Officer Pursuant to Rule 13a-14(a) under the Securities
Exchange Act of 1934.
|
|
31.2*
|
Certification
of Chief Financial Officer Pursuant to Rule 13a-14(a) under the Securities
Exchange Act of 1934.
|
|
32.1*
|
Certification
of Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002 (18 U.S.C. 1350).
|
|
32.2*
|
Certification
of Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002 (18 U.S.C. 1350).
|
*
|
Filed
herewith.
|
23
SIGNATURES
Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act
of 1934, the Registrant has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized on November 23, 2009.
SPRING
CREEK CAPITAL CORP.
|
||
By:
|
/s/ Kelly
T. Hickel
|
|
Kelly
T. Hickel
|
||
Chief
Executive Officer
|
||
By:
|
/s/ Jan
E. Chason
|
|
Jan
E. Chason
|
||
Chief
Financial Officer
|
24