Quarterly Report — Small Business — Form 10-QSB Filing Table of Contents
Document/ExhibitDescriptionPagesSize 1: 10QSB Quarterly Report -- Small Business HTML 284K
2: EX-31 Certification per Sarbanes-Oxley Act (Section 302) HTML 13K
3: EX-31.1 Certification per Sarbanes-Oxley Act (Section 302) HTML 13K
4: EX-32 Certification per Sarbanes-Oxley Act (Section 906) HTML 8K
5: EX-32.1 Certification per Sarbanes-Oxley Act (Section 906) HTML 8K
Kaiser
Himmel Imperiali, Inc., 777 S. Flagler Dr., Suite 800W., West Palm Beach, FL33139
(Former
Name or Former Address, if Changes Since Last Report)
Check
whether the issuer (1) has filed all reports required to be filed by Section
13
or 15(d) of the Securities Exchange Act of 1934 during the past 12 months (or
such shorter period that the registrant was required to file such reports),
and
(2) has been subject to such filing requirements for the past 90
days.
Yes
x
No o
Indicate
by check mark whether the registrant is a shell company (as defined
in Rule 12b-2 of the Exchange Act).
Yes
o
No
x
State
the
number of shares outstanding of each of the issuer’s classes of common
equity:
Common
stock; $.001 par value; authorized-
500,000,000
shares; As of July 21, 2008 48,200,986 shares issued and
outstanding
Transitional
Small Business Disclosure Format (check one):
Yes
o
No x
Our
disclosure and analysis in this Current Report on Form 10-QSB contains some
forward-looking statements. Certain of the matters discussed concerning our
operations, cash flows, financial position, economic performance and financial
condition, including, in particular, future sales, product demand, the market
for our products in the People’s Republic of China and elsewhere, competition,
exchange rate fluctuations and the effect of economic conditions include
forward-looking statements.
Statements
that are predictive in nature, that depend upon or refer to future events or
conditions or that include words such as "expects,""anticipates,""intends,""plans,""believes,""estimates" and similar expressions are forward-looking
statements. Although we believe that these statements are based upon reasonable
assumptions, including projections of orders, sales, operating margins,
earnings, cash flow, research and development costs, working capital, capital
expenditures and other projections, they are subject to several risks and
uncertainties.
Investors
are cautioned that our forward-looking statements are not guarantees of future
performance and the actual results or developments may differ materially from
the expectations expressed in the forward-looking statements.
As
for
the forward-looking statements that relate to future financial results and
other
projections, actual results will be different due to the inherent uncertainty
of
estimates, forecasts and projections may be better or worse than projected.
Given these uncertainties, you should not place any reliance on these
forward-looking statements. These forward-looking statements also represent
our
estimates and assumptions only as of the date that they were made. We expressly
disclaim a duty to provide updates to these forward-looking statements, and
the
estimates and assumptions associated with them, after the date of this filing
to
reflect events or changes in circumstances or changes in expectations or the
occurrence of anticipated events. You are advised, however, to consult any
additional disclosures we make in our reports on Form 10-KSB, Form 10-QSB,
Form
8-K, or their successors.
Companies
more than 25% owned (cost: 2007 - $3,500,000; 2008 - $-0-)
$
-0-
$
-0-
Companies
less than 5% owned (cost: 2007 – N/A; 2008- N/A)
Current
assets:
-0-
Cash
$
189,368
$
-0-
Prepaid
Expenses
$
9,765
$
-0-
Total
current assets
$
199,133
$
Note
receviable
$
-
$
15,000
Fixed
Assets
1,000
Investment
in subsidiary
680,000
Total
assets
$
199,133
$
696,000
LIABILITIES
AND STOCKHOLDERS' EQUITY
Current
liabilities:
Accounts
payable and other current liabilities
$
26,614
$
84,296
Note
payable-related party
300,000
Total
current liabilities
$
26,614
$
384,296
Stockholders'
equity:
Common
stock; $.001 par value; authorized - 500,000,000 shares; 48,200,986
and
38,200,986 shares issued and outstanding at May 31, 2008 and August31,2007 respectively
Full value of investments is not recognized on the Balance Sheet.
Investments
in I1 TV, I1 Publishing, I1 Political Advisory and I1 Education have been
eliminated from investment schedule as compared to prior filings. Elimination
of
investment was eliminated due to operations in companies no longer active and
all outstanding shares have been retired.
The
accompanying unaudited financial statements for nine months ended May 31, 2007
and 2008 have been prepared in accordance with the accounting principles
generally accepted in the United States of America for interim financial
information and with the instructions to Form 10-QSB and Item 310 of Regulation
S-B. Accordingly, they do not include all of the information and footnotes
required by accounting principles generally accepted in the United States of
America for annual financial statements. In the opinion of management, all
adjustments, consisting of normal recurring accruals considered necessary for
a
fair presentation, have been included. Operating results for the three and
nine
months ended May 31, 2008 are not necessarily indicative of the results that
may
be expected for the year ending August 31, 2008.
Note
1. Organization: General
Development of the Business
We
were
incorporated in Florida on September 27, 1994 by Daniel J. Imperato under the
name Automated Energy Security Inc.
From
September 1994 through March 1999, the Company provided energy management
services and intelligent security for residential dwellings, commercial
buildings and government facilities. In 1994, the Company purchased all of
the
patented technology, software and patents pending on the Wide Area Energy
Savings System known as “TESS” (Total Energy Security System) from Associated
Data Consultants, Inc. In 1998, after Bell Atlantic (one of our strategic
partners) withdrew from the development of TESS and engaged in litigation with
Associated Data, the Company abandoned our business operations related to
TESS.
In
March
1999, we changed our name to New Millennium Development Group, Inc. and our
business operations to media and telecommunications, focusing on connectivity
solutions, storage, fiber optic cable systems, security and the international
long distance market. Our plan was to spearhead a sub sea fiber optic cable
system connecting 70 countries around the globe. In furtherance of the plan
the
Company entered into Memoranda of Understanding with 30 countries, completed
landing party site and ocean surveys, arranged long-term financing and selected
vendors and subcontractors for fiber optic cable and equipment. During the
process, however, the price of cable systems skyrocketed, forcing us to
reconsider our business plans and projections. The Company retained the services
of an independent consultant who concluded that not only would increasing cable
prices decrease long-term gains, the rapid development of the internet and
Intellectual Property systems would render obsolete the market for fiber optic
cable. Accordingly, in mid 2001 we shifted our focus away from fiber optic
cable
systems and concentrated on Voice over Internet Protocol (VOIP) and related
services including high-speed wireless standard ISP and broadband services;
international calling cards; video conferencing and related IP
products.
Failed
corporate history, management infighting, the tragedy of September 11, 2001
and
the general economic downturn especially related to technology, led us to cease
business operations in mid-2002 until mid-2005. However, during this time,
Mr.
Imperato, the Company’s Chairman, at the time, and majority shareholder, worked
to maintain management relationships with previous businesses, associates and
professionals for the eventual resurrection of business operations.
In
November 2005, we changed our name to Imperiali, Inc. and commenced operations
as an investment company. To date, the activities of our principals have largely
been limited to organizational matters and fund raising. We have commenced
the
private placement of up to 10 million of the Company's common shares in an
offering (the "Offering") exempt from the registration requirements of the
Securities Act of 1933 ("1933 Act") pursuant to Section 4(2) thereof and
Regulation D ("Regulation D") thereunder. At August 31, 2007, the Company’s
total assets were $3,699,133 and its net asset value per share (“NAV”) was $.10.
Upon the closing of the Offering, the Company's common shares will be owned
by
numerous persons that are both "accredited investors," as that term is defined
in Regulation D, and "qualified clients" within the meaning of the Investment
Advisers Act of 1940 (the "1940 Act"),
On
May23, 2008the Company determined that the transaction with Kaiser Himmel
Corporation as described in below and in prior 8K and 10QSB filings needs to
be
reevaluated. As stated in the prior 8K filed November 15, 2007 and subsequent
10QSB for six months ended February 29, 2008 the conditions of the transaction
require the delivery of restricted Sprint Nextel
common stock along with power of attorney by October 2008. However recent events
have raised the possibility that those restrictions may not be able to be
met.
9
IMPERIALI,
INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Due
to
this uncertainty, the Company has determined that the 80,000,000 shares issued
for common stock for 13,600,000 shares of Sprint Nextel common shock should
not
be recorded by the Company until conditions of the restriction are satisfied
and
that those shares are transferred to the control of the Company.
As
a
result the total assets and total stockholders equity on the balance sheet
at
May 31, 2008 will be reduced by $80,982,900. Also, the unrealized loss in the
statement of operations for the nine months ended May 31, 2009 would be reduced
by $90,550,500. The basic and diluted earnings per share increased from the
previously reported loss of $1.045 to $0.000.
The
original agreements were pursuant to two agreements between the Company and
Kaiser Himmel, Inc., the two parties consisting of Kaiser Himmel Corporation
and
Imperiali, Inc. were to provide for, among other things, the
following:
Consideration
thereof for the agreement 80,000,000 shares of Imperiali Inc. common stock
shall
be issue to KHC in exchange the Company receipt shall consist of: 13.4 million
(thirteen million four hundred thousand) shares of Sprint Nextel Corp. Common
Stock (NYSE:S) which is held in the name of KHC at Bank of America of which
has
a restriction until October 2008.
Based
upon the purchase of these shares of the Company, KHC et al. was to advise
Bank
of America that upon the expiration of the Restriction Legend on the securities,
these 13.4 million shares will be directly transferred to Imperiali Inc.’s Stock
Brokerage Account. Furthermore, KHC agrees to notify Bank of America to
incorporate this subscription agreement within its custodial agreement with
Bank
of America for its equity holdings in Sprint Nextel Corp (NYSE:S). This payment
is non-cancellable, and Bank of America will be noticed that said transfer
is to
occur on October 2008. Account numbers and legal documents will be completed
pertaining to proof of funds.
Upon
signing the subscription agreement, the Company has loaned a total of $380,000
(three hundred and eighty thousand dollars) to KHC at the current prime interest
rate plus 1% (one percent) due and payable October 2008. $150,000 (one hundred
fifty thousand dollars) will be transferred upon both parties signing this
agreement and the balance within 30 days.
In
addition as part of the agreement the Company agrees to loan $3,000,000 to
KHC
at the current prime interest rate plus 1% (one percent) due and payable. This
loan was never transacted.
Upon
closing of both of these transactions KHC was to control 62.5% of the
Company.
Effective
with the agreement the Company had appointed Eric Skys as Chief Executive
Officer and Chairman of the board.
Also
effective with the agreement with Kaiser Himmel the Company has changed its
name
to Kaiser Himmel Imperali, Inc. Due to the rescission of the agreement the
Company changed its name back to Imperiali, Inc.
As
described above the Company determined that the transaction with Kaiser Himmel
Corporation described below (KHC) needs to be reevaluated. As stated in the
prior 8K filed November 15, 2007 and subsequent 10QSB for six
months
ended February 29, 2008 the conditions of the transaction require the delivery
of restricted Sprint Nextel common stock along with power of attorney by October
2008. As previously discussed recent events have raised the possibility that
those restrictions may not be able to be met.
On
May29, 2008 at meeting of the Company’s Board of Directors, the board approved in
exchange for the forgiveness of debt owed to the Company by Kaiser Himmel,
Kaiser Himmel will relinquish all assets of Kaiser Himmel including accounts
receivable, software, hardware, and work in process for all software projects.
Prototypes, websites, trademarks, vehicles and source code to Imperiali
Organization. The debt is to be assumed by Imperiali Organization and any prior
liens will be release.
10
IMPERIALI,
INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The
Company has been dormant since 2002 and was started up again in the fall of
2005
by Christ Investment Group, LLC, the Company’s business manager and a related
company, which is controlled by the Company’s major shareholder Mr. Daniel
Imperato. On November 18, 2005 the name of the company was changed to Imperiali,
Inc.
Nature
of
Business
Imperiali,
Inc. is
a team
of global expansion and business development company experts that are
strategically positioned around the globe to identify emerging companies that
wish to align with strategic partners to grow their businesses, and raise
capital for business development and telecommunications
infrastructure.
Imperiali
Inc. is a privately held Business Development Company (BDC) with over 475
shareholders (meets the minimum requirements to enter the public markets).
A BDC
is a special type of Investment Company designated by the Securities and
Exchange Commission (SEC). This network comprises Imperiali Inc.’s Global
Advisory Team. By being able to invest and/or loan capital and advise, Imperiali
Inc. is able to monitor and, in most cases, influence events utilizing the
tools
and leverage that this business model affords; thus endeavoring to mitigate
risk
and safeguard investments, with the idea of creating shareholder
value.
Inventory
Inventories
are stated at lower of cost or market, with cost generally determined on a
first-in, first-out basis. Currently the Company carries no
inventory.
Depreciation
Depreciation
is calculated using straight-line methods over the estimated useful life of
the
equipment, furniture and fixtures.
Income
Taxes
The
Company is recognized as a corporation under the Internal Revenue Code. As
such,
the corporation must report income and expenses properly on their tax return
and
pay all the related income taxes. As of May 31, 2008the Company has an
approximately $10,200,000 net operating loss carryover which can be used against
future income through 2018. No provisions for income taxes are provided in
these
financial.
Concentration
of Credit Risk
The
Company maintains cash accounts in commercial banks. Total cash deposits are
secured by the Federal Deposit Insurance Corporation (FDIC) up to a limit of
$100,000 per company. As of May 31, 2008, some of the Company’s cash equivalent
balances were deposited in accounts with a stock brokerage firm.
Use
of
Estimates
The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect certain reported amounts and disclosures.
Accordingly, actual results could differ from those estimates.
Cash
and Cash Equivalents
The
Organization considers all highly liquid investments with a maturity of three
months or less when acquired to be cash equivalents.
11
IMPERIALI,
INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
In
December 2007, the FASB issued SFAS No. 141(R),“Business
Combinations,”
which
replaces SFAS No. 141,“
Business Combinations,”
which,
among other things, establishes principles and requirements for how an acquirer
entity recognizes and measures in its financial statements the identifiable
assets acquired, the liabilities assumed (including intangibles) and any
noncontrolling interests in the acquired entity. SFAS No. 141(R) applies
prospectively to business combinations for which the acquisition date is on
or
after the beginning of the first annual reporting period beginning on or after
December 15, 2008. We are currently evaluating what impact our adoption of
SFAS No. 141(R) will have on our financial statements.
In
December 2007, the FASB issued SFAS No. 160, “Noncontrolling
Interests in Consolidated Financial Statements, an amendment of ARB
No. 51.”
SFAS
No. 160 amends ARB 51 to establish accounting and reporting standards for
the noncontrolling interest in a subsidiary and for the deconsolidation of
a
subsidiary. It also amends certain of ARB 51’s consolidation procedures for
consistency with the requirements of SFAS No. 141(R). SFAS No. 160 is
effective for fiscal years, and interim periods within those fiscal years,
beginning on or after December 15, 2008. We are currently evaluating what
impact our adoption of SFAS No. 160 will have on our financial
statements.
Other
accounting standards that have been issued or proposed by the FASB or other
standards-setting bodies that do not require adoption until a future date are
not expected to have a material impact on the consolidated financial statements
upon adoption.
Note
4. Investments:
Investments
are carried at Fair Market Value.
Valuation
Policies:
Valuation
of Portfolio Investments
As
a
Business Development Company, our business plan calls for us to invest primarily
in illiquid securities issued by private companies (“Private Investments”) (we
are required to invest at least an aggregate of 70% of our assets Private
Investments and in companies listed on the OTCBB). Private Investments are
generally subject to restrictions on resale and generally have no established
trading market. The Company values our Private Investments at fair value as
determined in good faith by our Board of Directors in accordance with our
valuation policy. That policy calls for the determination of fair value at
“the
amount for which an investment could be sold in an orderly disposition over
a
reasonable period of time between willing parties other than in a forced or
liquidation sale.” Our valuation policy may require subjective judgments. Our
determination of fair value may possibly differ materially from the value
realized on an actual sale. Our valuation policy is intended to provide a
consistent basis for establishing the fair value of the portfolio. The Company
will record unrealized depreciation on investments when we believe that an
asset
has been impaired and full collection for the loan or realization of an equity
security is doubtful. Conversely, the Company will record unrealized
appreciation if we have a clear indication that the underlying portfolio company
appreciates and, therefore, our security has appreciated. Under this valuation
policy, the Company sets valuations based on policies consistent with Section
2(a) of the 1940 Act. The value of investments in public securities is
determined using quoted market prices discounted for restrictions on
resale.
Equity
Securities
Equity
interests in portfolio companies for which there is no liquid public market
are
valued based on the enterprise value of the portfolio company, which is
determined using accepted accounting factors, including net cash flow from
operations of the portfolio company, and other pertinent factors such as recent
offers to purchase a portfolio company’s securities or other liquidation events.
The determined fair values are generally discounted to account for restrictions
on resale and minority control positions.
The
value
of our equity interests in public companies for which market quotations are
readily available is based upon the closing public market price for the last
day
up to and including the balance sheet date. Securities that carry certain
restrictions on sale are typically valued at a discount from the public market
value of the security.
12
IMPERIALI,
INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Dividend
income, if any, is recorded on cumulative preferred equity securities on an
accrual basis to the extent that such amounts are expected to be collected
and
on common equity, securities on the record date for private companies or on
the
ex-dividend date for publicly traded companies.
Loans
and Debt Securities
It
is our
loan policy to only invest in secured and properly collateralized
loans.
For
loans
and debt securities, to the extent that the Company invests in them, fair value
generally approximates cost unless the borrower’s condition or external factors
lead to a determination of fair value at a lower amount. When the Company
receives nominal cost warrants or free equity securities (“nominal cost
equity”), we allocate our cost basis in our investment between the debt
securities and the nominal cost equity at the time of origination. At that
time,
the original issue discount basis of the nominal cost equity is recorded by
increasing the cost basis in the equity and decreasing the cost basis in the
related debt securities.
Interest
income is recorded on an accrual basis to the extent that such amounts are
expected to be collected. For loans and debt securities with contractual
payment-in-kind interest, which represents contractual interest accrued and
added to the loan balance that generally becomes due at maturity, we will not
accrue payment-in-kind interest if the portfolio company valuation indicates
that the payment-in-kind interest is not collectible. Loan origination fees,
original issue discount, and market discount are capitalized and then amortized
into interest income using the effective interest method.
The
weighted average yield on loans and debt securities is computed as the (a)
annual stated interest rate earned plus the annual amortization of loan
origination fees, original issue discount and market discount earned on accruing
loans and debt securities, divided by (b) total loans and debt securities at
value. The weighted average yield is computed as of the balance sheet date.
Prepayment premiums are recorded on loans when received.
Portfolio
Valuation Process
Our
methodology includes the examination of, among other things, the underlying
investment performance, financial condition, and market-changing events that
affect valuation. Because of the type of investments that the Company makes
and
the nature of our business, this valuation process requires an analysis of
various factors consistent with the provisions of section (2) of the 1940
Act.
Our
process for determining the fair value for a private finance investment is
applied consistently across our portfolio. The process is as
follows.
·
First,
the Company determines the portfolio company’s enterprise value as if the
Company were to sell it in a “current sale.” In our valuation process, the
Company uses the AICPA’s definition of “current sale,” which means an
“orderly disposition over a reasonable period of time between willing
parties other than in a forced or liquidation
sale.”
·
The
Company then evaluates the amount of our debt and the position of
our debt
in the portfolio company’s capital
structure.
·
If
the enterprise value of the portfolio company is in excess of the
amount
of our last dollar of investment capital given our priority in the
capital
structure, the fair value of our investment will be considered to
be our
cost or perhaps, given the structure of our particular security,
greater
than cost if we are to share in equity
appreciation.
·
If
the enterprise value of the portfolio company is less than our last
dollar
of investment capital in the capital structure, then our investment
has
declined in value and the Company needs to reduce the fair value
of our
investment and incur a charge to our earnings by recognizing unrealized
depreciation.
Determining
the enterprise value of a portfolio company, as if that portfolio company were
to be sold in a “current sale,” is a very complex process, where we must analyze
the historical and projected financial results of the portfolio company and
analyze the public trading market and private merger and acquisition market
to
determine appropriate purchase price multiples. In addition, a reasonable
discount to the value of our securities must also be reflected when the Company
may have restrictions such as vesting periods for warrants or other factors.
We
also take into account the collectability of non-cash interest to determine
if
the Company will continue to accrue such interest.
13
IMPERIALI,
INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The
valuation of illiquid private securities is inherently subjective, and as a
result, the Company intends to exercise good judgment in our valuation process.
Specifically, we will exercise care to assure that the Company has considered
the position of the portfolio company today and the position of our security
today given the data we have available. We will also exercise care to assure
that the process is not too mechanical; however, there are some specific
considerations to be addressed in our valuation process. The ultimate goal
is a
reasonable estimate of fair value determined in good faith.
Typically,
in the private equity business, companies are bought and sold based upon
multiples of EBITDA, cash flow, revenues and in limited instances book value.
In
determining a multiple to use for valuation purposes, we will look to private
M&A statistics, reported public trading multiples and industry practices. In
determining the right multiple, we intend to consider not only the fact that
our
portfolio company may be private relative to a peer group, but also the size
and
scope of our portfolio company and its specific strengths and weaknesses. In
some cases, when a portfolio company is at EBITDA breakeven or slightly below
but has excellent future prospects, we believe the best valuation methodology
may be a discounted cash flow analysis based upon future projections. If a
portfolio company is distressed, we believe a liquidation analysis may provide
the best indication of enterprise value.
Discounts
on common equity securities.
When
determining the value of common equity securities or warrants to purchase such
securities, we intend to consider what type of discount to apply to the value
of
the security if the Company is in a minority position, has restrictions on
resale, has specific concerns about the receptivity of the M&A market to a
specific portfolio company at a certain time and other factors. Generally,
we
find that the Company should apply larger discounts when we are new to an
investment, and therefore, we have not yet developed an exit strategy. As an
investment in the portfolio matures, we intend to consider whether or not the
Company should begin to reduce discounts, especially if we are generally aware
that either we or a controlling shareholder group has begun to develop an exit
strategy.
When
we
have begun to develop an exit strategy of the Company is the controlling
shareholder, the discount imposed should generally be less than in the case
of a
minority position. We may still contemplate the need to discount for the current
state of the M&A market or restrictions imposed on us due to our
relationship with management of the portfolio company or other capital
providers.
Note
5. Portfolio
-
The
Board
of Directors at a meeting on May 15, 2006 adopted a resolution creating a series
of Five Million (5,000,000) shares of voting Preferred Stock designated as
Series B Preferred Stock issued to Daniel J. Imperato for past management
services. Each share of Series B preferred stock shall be convertible into
(3)
shares of Common Stock at the sole discretion of Daniel J. Imperato. This
agreement was executed May 30, 2006 and was effective June 26, 2006 the shares
were issued September 11, 2006.
As
part
of the past management services, Imperiali,
Inc. acquired
Imperiali Organization LLC assets as of February 15, 2006. Imperiali
Organization has one unit in the LLC, which represents 100% ownership. Through
the ownership of Imperiali Organization, LLC, Imperiali Inc. acquired all the
assets of Imperiali Organization, LLC, including an internet search engine
project and all the telecom projects associated with the previous New Millennium
Development Group projects.
On
the
September 11, 2006 management valued one project within Imperiali Organization
LLC - an internet search engine project called I1Connect for $3.5 million
dollars. Due to the uncertainty of the realization of this project, an
unrealized loss has been recognized as of August 31, 2007.
On
the
May 31, 2007 management revalued the I1Connect project. The internet search
engine was fully operational. Based on comparison of other comparable companies,
management revalued the I1Connect project at $40,000,000.
14
IMPERIALI,
INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Management
devised a plan to combine I1Connect and a global media public relations firm
which was acquired by Imperiali,
Inc. .
The
combined subsidiary was set up in July 2007 as I1Connect, Inc. Imperiali,
Inc.
owns
40,000,000 shares of I1Connect, Inc. The company has issued a Private Placement
Memorandum. The last share of I1connect sold at $1 per share under the private
placement or a $40,000,000 valuation.
Additionally,
Imperiali, Inc reentered the telecommunications business. The telecommunications
project is now a going concern. Imperiali,
Inc.
valued
the telecom project at $30,000,000 as of May 31, 2007. The asset included the
previous New Millennium Development Group assets that Bank of America had
valued, on a global basis, at approximately 5 billion dollars.
Imperiali,
Inc. subsequently
set up a company I1Telecommunications, Inc. for the purpose of acquiring some
of
the telecom projects of Imperiali Organization, LLC. Imperiali,
Inc.
owns 30
million shares of I1Telecommunications, Inc. Management has entered into a
partnership agreement with a South American telecommunications company and
has
entered into Memorandums of Understanding with other telecommunications
partners. Management now believes that the combined future potential of
Imperiali Telecom, Inc is at least 5% of the total value of the original
projects or $250,000,000. The projects must be funded to proceed forward with
the business plan to realize the $250,000,000 valuation.
Management
has subsequently formed a subsidiary company from the film project, entitled
I1Films, Inc. Imperiali,
Inc. owns
5,000,000 shares of I1Films. Management is in the process of obtaining an
independent valuation and has not established a value of I1Films,
Inc.
The
Company is also in the process of searching for a third party independent
valuation for both I1Connect and I1Telecom. As of the date of this audit, the
Company has not done a complete independent valuation.
Imperiali
Organization LLC has also been invited to participate in $70 billion of
infrastructure projects around the world. Imperiali management realized that
the
management portion did not fit the structure of the Business Development
Company, so the management portion of the agreement was sold for $220 million
to
a London company. This transaction was not booked because there is a high degree
of uncertainty if the note would be paid or converted to equity or if the
projects would be successful. The value of the contract was based on a
percentage of the projects anticipated to be constructed and a standard supply
management agreement.
On
May29, 2008 at meeting of the Company’s Board of Directors, the board approved in
exchange for the forgiveness of debt owed to the Company by Kaiser Himmel,
Kaiser Himmel will relinquish all assets of Kaiser Himmel including accounts
receivable, software, hardware, and work in process for all software projects.
Prototypes, websites, trademarks, vehicles and source code to Imperiali
Organization. The debt is to be assumed by Imperiali Organization and any prior
liens will be release.
Note
6. Debt–
As of
May 31, 2008the company has debt due of $300,000 to Daniel Imperato a member
of
the Board of Directors.
Note
7. Employee Compensation Plans–
The
Company has no Defined Benefit or Defined Contribution Pension
Plans.
Note
8. Stock Option Plans–
The
Company has no Stock Option Plans.
Note
9 Hedging Activities:
The
Company did not engage in Hedging Activity.
Note
10 Litigation:
The
Company has no lawsuits pending
15
ITEM
2.
MANAGEMENT’S
DISCUSSION and ANALYSIS or PLAN of
OPERATIONS.
The
following discussion should be read in conjunction with our unaudited financial
statements and notes thereto.
Forward-Looking
Statements
This
quarterly report contains forward-looking statements and information relating
to
us that are based on the beliefs of our management as well as assumptions made
by, and information currently available to, our management. When used in this
report, the words “anticipate”, “believe”, “estimate”, “expect”, “intend”,
“plan” and similar expressions, as they relate to us or our management, are
intended to identify forward-looking statements. These statements reflect
management’s current view of us concerning future events and are subject to
certain risks, uncertainties and assumptions, including among many others:
a
general economic downturn; a downturn in the securities markets; federal or
state laws or regulations having an adverse effect on proposed transactions
that
we desire to effect; Securities and Exchange Commission regulations which affect
trading in the securities of “penny stocks,”; and other risks and uncertainties.
Should any of these risks or uncertainties materialize, or should underlying
assumptions prove incorrect, actual results may vary materially from those
described in this report as anticipated, estimated or expected. All
forward-looking statements attributable to us are expressly qualified in their
entirety by the forgoing cautionary statement.
Overview
Our
investment objective is to generate both current income and capital appreciation
to deliver superior, risk adjusted returns to investors through investment
in
the debt and equity securities of privately and publicly held micro-cap
companies (market capitalization below $50 million) that are based in the U.S.
and that offer products and services that can be successfully expanded, marketed
and sold in commercially viable international markets. Our principals’
experience combines economic and financial analysis with expertise in business
strategy and planning, market and demand forecasting, policy analysis, and
technology development strategy. They have worked on a variety of matters,
such
as mergers and acquisitions, new product introductions, strategy and capital
investment decisions, the outcomes of which often have significant implications
or consequences for the parties involved. We will offer our portfolio companies
a wide array of services such as strategy development, performance improvement,
corporate portfolio analysis, market demand and new product strategies,
evaluation of intellectual property and other assets and competition analysis.
Matters such as these often require independent analysis, and as a result,
companies (such as our portfolio companies) must outsource this work to outside
experts. We expect that our portfolio companies will turn to us because we
can
provide qualified economic and financial experts to address a wide variety
of
matters.
Plan
of Operation
We
were
incorporated in Florida on September 27, 1994 by Daniel J. Imperato under the
name Automated Energy Security Inc.
From
September 1994 through March 1999, the Company provided energy management
services and intelligent security for residential dwellings, commercial
buildings and government facilities. In 1994, the Company purchased all of
the
patented technology, software and patents pending on the Wide Area Energy
Savings System known as “TESS” (Total Energy Security System) from Associated
Data Consultants, Inc. In 1998, after Bell Atlantic (one of our strategic
partners) withdrew from the development of TESS and engaged in litigation with
Associated Data, the Company abandoned our business operations related to
TESS.
In
March
1999, we changed our name to New Millennium Development Group, Inc. and our
business operations to media and telecommunications, focusing on connectivity
solutions, storage, fiber optic cable systems, security and the international
long distance market. Our plan was to spearhead a sub sea fiber optic cable
system connecting 70 countries around the globe. In furtherance of the plan
the
Company entered into Memoranda of Understanding with 30 countries, completed
landing party site and ocean surveys, arranged long-term financing and selected
vendors and subcontractors for fiber optic cable and equipment. During the
process, however, the price of cable systems skyrocketed, forcing us to
reconsider our business plans and projections. The Company retained the services
of an independent consultant who concluded that not only would increasing cable
prices decrease long-term gains, the rapid development of the internet and
Intellectual Property systems would render obsolete the market for fiber optic
cable. Accordingly, in mid 2001 we shifted our focus away from fiber optic
cable
systems and concentrated on Voice over Internet Protocol (VOIP) and related
services including high-speed wireless standard ISP and broadband services;
international calling cards; video conferencing and related IP products.
16
Failed
corporate history, management infighting, the tragedy of September 11, 2001
and
the general economic downturn especially related to technology, led us to cease
business operations in mid-2002 until mid-2005. However, during this time,
Mr.
Imperato, the Company’s Chairman, at the time, and majority shareholder, worked
to maintain management relationships with previous businesses, associates and
professionals for the eventual resurrection of business operations.
In
November 2005, we changed our name to Imperiali, Inc. and commenced operations
as an investment company. To date, the activities of our principals have largely
been limited to organizational matters and fund raising. We have commenced
the
private placement of up to 10 million of the Company's common shares in an
offering (the "Offering") exempt from the registration requirements of the
Securities Act of 1933 ("1933 Act") pursuant to Section 4(2) thereof and
Regulation D ("Regulation D") there under. At August 31, 2007, the Company’s
total assets were $3,699,133 and its net asset value per share (“NAV”) was $.10.
Upon the closing of the Offering, the Company's common shares will be owned
by
numerous persons that are both "accredited investors," as that term is defined
in Regulation D, and "qualified clients" within the meaning of the Investment
Advisers Act of 1940 (the "1940 Act"), In
addition to our internal Company resources, we believe that we will be able
to
provide such advice and assistance by using our extensive international network
of agents and affiliates, located in many countries and regions and spanning
more than five continents. This network, which we refer to as Imperiali Inc.’s
Global Advisory Team, is able to monitor and in some cases influence events,
prudently utilizing the tools and leverage that the portfolio company’s business
model affords, endeavoring to mitigate risks and safeguard investments, with
the
idea of protecting the Company’s shareholders’ interest.
We
have
filed an election with the Securities and Exchange Commission to be regulated
as
a business development company under the 1940 Act and expect that election
to
become effective after the effective date of this Registration Statement. As
a
business development company, we intend to focus primarilyon micro-cap companies
with sales of $25-$50 million and a strong domestic presence, with a key product
or service that is globally marketable. Micro-cap companies (market
capitalization below $50 million) are more likely than larger companies to
focus
on innovative products and services. Due to the high cost of competition on
a
global scale, these micro-caps are losing market share. They may not have the
advertising dollars to compete, may lack access to long-term debt financing
for
expansion and manufacturing and, more generally, they lack the experience and
contacts to access new global markets.
We
view
this problem for micro-cap companies to be an opportunity for us to assist
them
with the competitive edge they require, to expand and to grow top-line revenues.
Extending the assistance of Company management personnel by the use of our
Global Advisory Team, we can assist our portfolio companies expand globally,
identify capital and political resources, adapt to local customs and operating
requirements in international markets, access new consumers, new sources of
materials and remote manufacturing options, and generally make the best possible
business decisions.
We
favor
companies that present opportunities for superior performance through internal
growth, product or geographic expansion, the completion of complementary add-on
acquisitions, or industry consolidations. We would prefer to be a majority
investor, without a fixed time horizon for the liquidation of our investments.
We may continue to provide capital for add-on acquisitions that help build
value
after the initial closing.
Once
we
have identified a target portfolio company, we will conduct our due diligence,
and, as appropriate, determine whether to either (i) invest and advise or (ii)
merely advise the portfolio company for a fee. Once we have decided to advise
the portfolio company, we can distribute the portfolio company’s business plan
or other corporate literature to our agents and affiliates in over 70 countries.
Based upon the feedback from the various local agents and their local markets,
we will determine how to proceed to assist the portfolio company in pursuing
and
executing viable growth opportunities and strategies in the countries where
our
business contacts have indicated clear business interest and market viability.
Methods of expansion we may recommend to our portfolio companies include, but
are not limited to, strategic partnering, joint venture, licensing with royalty
agreement, regional distribution networks, regionalized manufacturing, and
entry
into the public markets.
In
addition to investing in and assisting portfolio companies, we will have
opportunities created through our relationship with the Imperiali Organization,
which has contractually agreed to serve as the development team for Imperiali
Inc. The Imperiali Organization has an ongoing series of projects which have
(or
may have) application to the global marketplace. Through an agreement between
Imperiali Organization and the Company, we will have the first right of refusal
on any and all projects created and developed by the Imperiali
Organization.
17
On
May29, 2008 at meeting of the Company’s Board of Directors, the board approved in
exchange for the forgiveness of debt owed to the Company by Kaiser Himmel,
Kaiser Himmel will relinquish all assets of Kaiser Himmel including accounts
receivable, software, hardware, and work in process for all software projects.
Prototypes, websites, trademarks, vehicles and source code to Imperiali
Organization. The debt is to be assumed by Imperiali Organization and any prior
liens will be release.
In
summary, as a business development company Imperiali Inc. looks to globalize
and
grow viable micro-cap companies by investing in them and/or advising them by
utilizing our international teams, residing in many international markets and
who have the intellectual, cultural, financial, political and operational
capabilities, combined with a global vision, to connect growing companies to
the
world’s markets.
This
plan
of operation has been adopted in order to attempt to create value for our
shareholders. For further information on our plan of operation and business,
see
Form 10 filed January 18, 2007.
Results
of Operations
Three
Months Ended May 31, 2008 as compared to three months ended May 31, 2007, we
incurred a net loss of $35,105 for the current period as compared to a loss
of
$437,552. The difference mainly is due to payments to consultants for services
in the prior year.
Nine
Months Ended May 31, 2008 as compared to nine months ended May 31, 2007, we
incurred a net loss of $18,575 for the current period as compared to a loss
of
$1,182,401. The difference mainly is due to payments to consultants for services
in the prior year.
.
General
and administrative expenses related primarily to rent, salaries, telephone,
other office costs and costs associated with being a reporting
company
Liquidity
and Capital Resources
We
had
cash on hand of $-0- at May 31, 2008 and had no other assets to meet ongoing
expenses or debts that may accumulate. The company to raise capital will
continue to rely on funding from its officers and private placement for sale
of
its stock.
We
have
no commitment for any capital expenditure and foresee none. However, we will
incur routine fees and expenses incident to our reporting duties as a reporting
company, and we will incur expenses in finding and investigating possible
acquisitions and other fees and expenses in the event we make an acquisition
or
attempt but are unable to complete an acquisition. Our cash requirements for
the
next twelve months are relatively modest, principally operational accounting
expenses and other expenses relating to making filings required under the
Securities Exchange Act of 1934 (the “Exchange Act”), which should not exceed
$2,500,000 in the fiscal year ending August 31, 2008. Any travel, lodging or
other expenses which may arise related to finding, investigating and attempting
to complete a combination with one or more potential acquisitions could also
amount to thousands of dollars.
We
will
only be able to pay our future debts and meet operating expenses by raising
additional funds, acquiring a profitable company or otherwise generating
positive cash flow. As a practical matter, we are unlikely to generate positive
cash flow by any means other than acquiring a company with such cash flow.
We
believe that management members or shareholders will loan funds to us as needed
for operations prior to completion of an acquisition. Management and the
shareholders are not obligated to provide funds to us, however, and it is not
certain they will always want or be financially able to do so. Our shareholders
and management members who advance money to us to cover operating expenses
will
expect to be reimbursed, either by us or by the company acquired, prior to
or at
the time of completing a combination. We have no intention of borrowing money
to
reimburse or pay salaries to any of our officers, directors or shareholders
or
their affiliates.
Should
existing management or shareholders refuse to advance needed funds, however,
we
would be forced to turn to outside parties to either loan money to us or buy
our
securities. There is no assurance whatsoever that we will be able to raise
necessary funds from outside sources. Such a lack of funds could result in
severe consequences to us, including among others:
18
•
failure
to make timely filings with the SEC as required by the Exchange Act,
which
also probably would result in suspension of trading or quotation
in our
stock and could result in fines and penalties to us under the Exchange
Act;
•
curtailing
or eliminating our ability to locate and perform suitable investigations
of potential acquisitions; or
•
inability
to complete a desirable acquisition due to lack of funds to pay legal
and
accounting fees and acquisition-related
expenses.
We
hope
to require potential candidate companies to deposit funds with us that we can
use to defray
professional
fees and travel, lodging and other due diligence expenses incurred by our
management related to finding and investigating a candidate company and
negotiating and consummating a business combination. There is no assurance
that
any potential candidate will agree to make such a deposit.
Critical
Accounting Policies
Financial
Reporting Release No. 60 of the SEC encourages all companies to include a
discussion of critical accounting policies or methods used in the preparation
of
the financial statements. There are no current business operations or revenue
generating activities that give rise to significant assumptions or
estimates.
Our
most
critical accounting policies relate to the accounting and disclosure of related
party transactions. Our financial statements filed as part of this report
include a summary of the significant accounting policies and methods used in
the
preparation of our financial statements.
Risk
Factors that May Affect Future Operating Results
You
should carefully consider the risks described below before making an investment
decision. The risks and uncertainties described below are not the only ones
facing our Company. Additional risks and uncertainties not presently known
to us
or what we currently deem immaterial may also impair our business operations.
If
any of the following risks actually occur, our business, financial condition,
or
results of operations could be materially adversely affected. In such case,
the
trading price of our common stock could decline and you could lose all or part
of your investment. You should also refer to the other information about us
contained in this Form 10, including our financial statements and related
notes.
We
have only a minimal operating history.
Our
operations are subject to all the risks inherent in any new business, including
the risk that the Company will not achieve its investment objective and that
its
net asset value could decline substantially. Although we have identified, on
a
preliminary basis, certain micro-cap companies in which we may be interested
in
investing, the Company anticipates that it will take up to 90 days after the
completion of the Offering to invest substantially all of the net proceeds
received by the Company from the Offering due to the time necessary to complete
our due diligence, evaluate, structure, negotiate, and close suitable
investments. In the interim, the Company will invest in temporary investments,
such as cash and cash equivalents, U.S. government securities and other high
quality debt investments that mature in one year or less from the date of
investment, which will earn yields substantially lower than the interest income
anticipated from investments in portfolio companies. If the expenses of the
Company exceed the return on the temporary investments, the equity capital
of
the Company will be eroded. Additionally, the Company may not be able to pay
any
dividends during this period or such dividends may be substantially lower than
the dividends the Company expects to pay when its portfolio is fully
invested.
Competition
could hurt our business.
Many
entities, including public and private funds, commercial and investment banks,
commercial financing companies, business development companies and insurance
companies will compete with the Company to make the types of investments that
it
plans to make in micro-cap companies. Many of these competitors are
substantially larger, have considerably greater financial, technical and
marketing resources than the Company will have and offer a wider array of
financial services. For example, some competitors may have a lower cost of
funds
and access to funding sources that are not available to the Company. In
addition, some competitors may have higher risk tolerances or different risk
assessments, which could allow them to consider a wider variety of investments
and establish more relationships. Many competitors are not subject to the
regulatory restrictions that the 1940 Act will impose on the Company as a
business development company or the restrictions that the Code will impose
on
the Company as a regulated investment company. Some competitors may make loans
with interest rates that are lower than the rates the Company wishes to offer.
The competitive pressures the Company faces may have a material adverse effect
on our business, financial condition and results of operations. Also, as a
result of this competition, the Company may not be able to take advantage of
attractive investment opportunities from time to time, and can offer no
assurance that it will be able to identify and make investments that are
consistent with our investment objective. We have not finally determined any
potential investments for the Company’s portfolio, although the Company’s
competitors are likely to have identified and begun to pursue potential
investments in which the Company may be interested.
19
Voting
control is centralized in our Board of Directors and
Officers.
Nearly
68% of the Company’s Common Stock is owned directly by our officers and
directors.
We
are dependent on a key person.
Daniel
J.
Imperato has principally conducted the development stage activities of the
Company. Although he is not an employee of the Company, the loss of his services
could negatively affect the Company. The Company has purchased “key man” life
insurance on the life of Mr. Imperato.
We
anticipate future capital needs but have no certain source of additional
financing.
Our
capital requirements will be significant. Management believes that the net
proceeds of the Offering should suffice to fund operations and our business
plan
for a period of 12 months if the maximum number of shares is sold. However,
no
assurance can be given that such proceeds will in fact be sufficient to fund
operations for such period. The Company has no commitments for long-term
financing. There can be no assurance that such financing will be available
on
favorable terms or at all.
We
may face leverage risk.
The
Company may borrow money or issue debt securities to leverage its capital
structure. If the Company does so:
•
The
Company’s common shares will be exposed to incremental risk of loss. In
these circumstances, a decrease in the value of the Company’s investments
would have a greater negative impact on the value of its common shares
than if it did not use leverage.
•
Adverse
changes in interest rates could reduce or eliminate the incremental
income
the Company expects to make with the proceeds of any
leverage.
•
The
Company’s ability to pay dividends on its common shares will be restricted
if its asset coverage ratio is not at least 200% and any amounts
used to
service indebtedness would not be available for such
dividends.
•
It
is likely that such securities will be governed by an indenture or
other
instrument containing covenants restricting the Company’s operating
flexibility.
•
The
Company, and indirectly its shareholders, will bear the cost of issuing
and paying interest on such
securities.
We
depend upon key employees to generate revenue.
We
are an
economic and business development firm that will apply analytic techniques
and
industry knowledge to various investments in a broad range of portfolio
companies. Accordingly, our success depends heavily on the efforts, abilities,
business generation capabilities, and project execution capabilities of our
employees. In particular, our employees’ personal relationships with our
portfolio companies are a critical element in obtaining and maintaining
portfolio companies’ investments. If the Company loses the services of any
employee or if our employees fail to generate business or otherwise fail to
perform effectively, that loss or failure could adversely affect our revenues
and results of operations.
Much
of our business plan depends on our non-employee experts.
The
Company depends on our relationships with members of our Global Advisory Teams
and our non-employee consultants to execute our business plan. We believe that
these people are highly regarded in their fields and locales and that each
offers a combination of knowledge, experience, and expertise that would be
very
difficult to replace. We also believe that the Company will be able to secure
some investments in portfolio companies and attract other professionals to
join
our team in part because the Company can offer the services of these experts.
Most of these experts can limit their relationships with us at any time for
any
or no reason.
20
Our
failure to manage growth successfully could adversely affect our revenues and
results of operations
We
anticipate that providing global services will require that we open additional
offices. Opening and managing new offices often requires extensive management
supervision and increases our overall selling, general, and administrative
expenses. Expansion creates new and increased management, investment, and
training responsibilities for our employees. Expansion also increases the
demands on our internal systems, procedures, and controls, and on our
managerial, administrative, financial, marketing, and other resources. Any
failure on our part to manage growth successfully could adversely affect our
revenues and results of operations.
Maintaining
our professional reputation is crucial to our future
success
Our
ability to secure new investments and hire qualified persons as employees
depends heavily on our overall reputation as well as the individual reputations
of our employees, the members of our Global Advisory Teams and our non-employee
consultants. Because we expect that in the future the Company will obtain a
majority of our new investments from existing portfolio companies or from
referrals by those portfolio companies, any portfolio company that is
dissatisfied with our performance on a single matter could seriously impair
our
ability to secure new investments. Given the frequently high-profile nature
of
the matters on which the Company will work, any factor that diminishes our
reputation or the reputations of any of our employees, the members of our Global
Advisory Teams and our non-employee consultants could make it substantially
more
difficult for us to compete successfully for both new investments and qualified
persons to hire as employees.
Our
investments may result in professional liability
Our
services will typically involve difficult analytical assignments and carry
risks
of professional and other liability. Many of our investments will involve
matters that could have a severe impact on a portfolio company’s business, cause
the portfolio company to lose significant amounts of money, or prevent the
portfolio company from pursuing desirable business opportunities. Accordingly,
if a portfolio company is dissatisfied with our performance, that company could
threaten or bring litigation in order to recover damages or to contest its
obligation to pay our fees. Litigation alleging that we performed negligently
or
otherwise breached our obligations to a portfolio company could expose us to
significant liabilities and tarnish our reputation.
Our
common stock has no prior trading market or liquidity, and the Company cannot
assure you that any trading market will develop.
Prior
to
the date of this Registration Statement, there has not been any established
trading market for our common stock. If the Company can qualify, we will attempt
to register our shares for trading on the American Stock Exchange, although
the
Company cannot assure you as to the timing of that application or the likelihood
of it being accepted. If the application is accepted, we cannot predict the
extent to which investor interest will lead to the development of an active,
liquid trading market. Active trading markets generally result in lower price
volatility and more efficient execution of buy and sell orders for
investors.
The
Company has filed a notice of intent to elect business development company
status that, once effective, will require us to comply with significant
regulatory requirements.
The
Company filed notice with the Securities and Exchange Commission of our intent
to elect in good faith, within 90 days from the date of such filing but after
the effective date of this Registration Statement, to be regulated as a Business
Development Company under the 1940 Act and be subject to Sections 54 through
65
of said Act. Being subject to the business development company provisions
requires us to meet significant numbers of regulatory and financial requirements
as discussed in Item 1(c) — Regulation of the Company. Compliance with these
regulations is expensive and may create financial problems for us in the future.
These laws and regulations, as well as their interpretation, may be changed
from
time to time. Accordingly, any change in these laws or regulations could have
a
material adverse effect on our business.
If
the
Company does not remain a business development company, the Company might be
regulated as a closed-end investment company under the 1940 Act, which would
decrease our operating flexibility. The Company cannot assure you that the
Company will successfully retain our business development company
status.
The
Company’s election to be and qualification to be treated as a regulated
investment company presents tax risks.
To
maintain its qualification as a regulated investment company under the Code,
which is required in order for the Company to distribute its income without
tax
at the Company level, the Company must meet certain income source, asset
diversification and annual distribution requirements. Satisfying these
requirements may require the Company to take actions it would not otherwise
take, such as selling investments at unattractive prices to satisfy
diversification, distribution or source of income requirements. In addition,
while the Company is authorized to borrow funds in order to make distributions,
under the 1940 Act it is not permitted to make distributions to shareholders
while its debt obligations and other senior securities are outstanding unless
certain “asset coverage” tests are met. If the Company fails to qualify as a
regulated investment company for any reason and becomes or remains subject
to
corporate income tax, the resulting corporate taxes could substantially reduce
its net assets, the amount of income available for distribution and the amount
of its distributions. Such a failure would have a material adverse effect on
the
Company and its shareholders.
21
For
U.S.
federal income tax purposes, the Company will include in income certain amounts
that it has not yet received in cash, such as original issue discount, which
may
arise if the Company invests in zero coupon securities, deferred interest
securities or certain other securities, or if the Company receives warrants
in
connection with the making of a loan or possibly in other circumstances. Such
original issue discount, which could but is not expected to be significant
relative to the Company’s overall investment activities, generally will be
included in income before the Company receives any corresponding cash payments.
The Company also may be required to include in income certain other amounts
that
the Company will not receive in cash.
Since
in
certain cases the Company may recognize income before or without receiving
cash
representing such income, it may have difficulty making distributions in the
amounts necessary to satisfy the requirements for maintaining regulated
investment company status and for avoiding income and excise taxes. Accordingly,
the Company may have to sell some of its investments at times we would not
consider advantageous, raise additional debt or equity capital or reduce new
investment originations to meet these distribution requirements. If the Company
is not able to obtain cash from other sources, the Company may fail to qualify
as a regulated investment company and thus be subject to corporate-level income
tax. Such a failure would have a material adverse effect on the Company and
its
shareholders.
BUSINESS
DEVELOPMENT COMPANY RISKS
Investing
in small and growth stage companies is inherently risky.
Investments
in micro-cap companies and growth stage companies offer the opportunity for
significant gains. However, each investment involves a high degree of business
and financial risk that can result in substantial losses,
including:
•
These
companies may have limited financial resources and may be unable
to meet
their obligations under their securities that the Company holds,
which may
be accompanied by a deterioration in the value of any
collateral.
•
They
typically have shorter operating histories, narrower product lines
and
smaller market shares than larger businesses, which tend to render
them
more vulnerable to competitors’ actions and market conditions, as well as
general economic downturns.
•
They
are more likely to depend on the management talents and efforts of
a small
group of persons; therefore, the death, disability, resignation or
termination of one or more of these persons could have a material
adverse
impact on the portfolio company and, in turn, on the
Company.
•
They
generally have less predictable operating results, may from time
to time
be parties to litigation, may be engaged in rapidly changing businesses
with products subject to a substantial risk of obsolescence, and
may
require substantial additional capital to support their operations,
finance expansion or maintain their competitive
position.
•
They
may cease to be treated as private companies for purposes of the
regulatory restrictions applicable to the Company, in which case
the
Company may not be able to invest additional amounts in
them.
•
Little
public information exists about these companies. The greater difficulty
in
making a fully informed investment decision raises the risk of misjudging
the credit quality of the company, and the Company may lose money
on its
investments.
Investing
in small and growth stage companies presents valuation
difficulties.
A
large
percentage of the Company’s portfolio investments will be in the form of
securities that are not publicly traded. The fair value of securities and other
investments that are not publicly traded may not be readily determinable. The
Company will value these securities at least quarterly at fair value as
determined in good faith by the Board of Directors, possibly with the assistance
of an independent valuation firm. However, because fair valuations, and
particularly fair valuations of private securities and private companies, are
inherently uncertain, may fluctuate over short periods of time and are often
based to a large extent on estimates, comparisons and qualitative evaluations
of
private information, the Company’s determinations of fair value may differ
materially from the values that would have been determined if a ready market
for
these securities existed. This could make it more difficult for investors to
accurately value the Company’s portfolio investments and could lead to
under-valuation or over-valuation of its common shares.
22
Portfolio
companies are likely to need additional funding.
The
Company expects that many portfolio companies will require additional financing
to satisfy their working capital requirements. The amount of additional
financing needed will depend upon the maturity and objectives of the particular
company. Each round of venture financing, whether from us or other investors,
is
typically intended to provide a portfolio company with enough capital to reach
the next major valuation milestone. If the funds provided are not sufficient,
a
portfolio company may have to raise additional capital at a price unfavorable
to
the existing investors. The availability of capital is generally a function
of
capital market conditions that are beyond the control of any portfolio company.
The Company cannot assure you that our management or the managements of
portfolio companies will be able to predict accurately the future capital
requirements necessary for success or those additional funds will be available
to portfolio companies from any source. If funding is not available, some
portfolio companies may be forced to cease operations.
Business
development companies’ investments are generally illiquid.
The
Company expects to make the majority of our investments in micro-cap companies
and growth stage companies. Substantially all of the securities of such
portfolio companies will be subject to legal and other restrictions on resale
or
will otherwise be less liquid than publicly traded securities. The illiquidity
of these investments may make it difficult for the Company to sell such
investments if the need arises. In addition, if the Company is required to
liquidate all or a portion of its portfolio quickly, it may realize
significantly less than the value at which it has previously recorded such
investments. In addition, the Company may face other restrictions on its ability
to liquidate an investment in a portfolio company to the extent that it has
material non-public information regarding such portfolio company.
Business
development companies generally require substantial amounts of time to realize
the benefits from investments.
The
Company anticipates that there will be a significant period of time ranging
from
one to three years before the Company has obtained funding and completed the
initial selection of portfolio companies for our first round of equity
investments. Venture capital investments typically take from four to eight
years
from the date of initial investment to reach a state of maturity at which
liquidation can be considered practical. In light of the foregoing, it is
unlikely that any significant distributions of the proceeds from the liquidation
of equity investments will be made for several years after inception, if at
all.
The
Company has not made any commitments to any prospective portfolio
companies.
Because
the Company has not made any commitments to any prospective portfolio company,
investors will not have an opportunity to carefully evaluate any of the
portfolio companies that the Company may eventually invest in and such
evaluation will be entirely dependent upon our management for selecting and
negotiating with these portfolio companies. The Company cannot assure you that
we will successfully negotiate a transaction with a portfolio
company.
Portfolio
companies may be more sensitive to economic recessions or
downturns.
Many
of
the Company’s portfolio companies may be susceptible to economic slowdowns or
recessions and may be unable to repay loans or pay dividends during these
periods. Therefore, the Company’s non-performing assets are likely to increase
and the value of its portfolio is likely to decrease during these periods.
Adverse economic conditions also may decrease the value of collateral securing
some of the Company’s loans and the value of its equity investments. Economic
slowdowns or recessions could lead to financial losses in its portfolio and
a
decrease in revenues, net income and assets. Unfavorable economic conditions
also could increase funding costs, limit access to the capital markets or result
in a decision by lenders not to extend credit to the Company. These events
could
prevent the Company from increasing investments and harm its operating
results.
A
portfolio company’s failure to satisfy financial or operating covenants could
lead to defaults and, potentially, termination of its loans and foreclosure
on
its secured assets, which could trigger cross-defaults under other agreements
and jeopardize the portfolio company’s ability to meet its obligations under the
debt or equity securities that the Company holds. The Company may need to incur
additional expenses to seek recovery upon default or to negotiate new terms
with
a defaulting portfolio company. In addition, if one of the Company’s portfolio
companies were to go bankrupt, even though the Company may have structured
its
interest as senior debt, depending on the facts and circumstances, including
the
extent to which the Company actually provided significant managerial assistance
to that portfolio company, a bankruptcy court might re-characterize the
Company’s debt holding and subordinate all or a portion of our claim to that of
other creditors.
23
Our
investment decisions may present industry, sector and issuer
risk.
The
Company may, from time to time, invest a substantial portion of its assets
in
the securities of issuers in any single industry or sector of the economy or
in
only a few issuers. The Company cannot predict the industries or sectors in
which its investment strategy may cause it to concentrate and cannot predict
the
level of its diversification among issuers, although over time the Company
anticipates investing in a minimum of 15 to 20 issuers to ensure it satisfies
diversification requirements for qualification as a regulated investment company
for U.S. federal income tax purposes. Concentration of the Company’s assets in
an industry or sector may present more risks than if it were broadly diversified
over numerous industries and sectors of the economy. A downturn in an industry
or sector in which the Company is concentrated would have a larger impact on
us
than on a company that does not concentrate in industry or sector. As a result
of investing a greater portion of the Company’s assets in the securities of a
smaller number of issuers, the Company would be classified as a non-diversified
company under the 1940 Act. The Company may be more vulnerable to events
affecting a single issuer or industry and therefore subject to greater
volatility than a company whose investments are more broadly diversified.
Accordingly, an investment in the Company may present greater risk than an
investment in a diversified company. Furthermore, we have not made and do not
intend to make any determination as to the allocation of assets among different
classes of securities. Consequently, at any point in time the Company may be
highly concentrated in a single type of asset and events which affect a
particular asset class disproportionately could have an equally disproportionate
effect on the Company.
There
may be changes in laws or regulations governing portfolio
companies.
The
Company’s portfolio companies will be subject to regulation by laws at the
local, state and federal level and, to the extent that we are successful in
expanding our portfolio companies’ operations globally, the laws of foreign
countries as well. These laws and regulations, as well as their interpretation,
may be changed from time to time. Any change in these laws or regulations,
or
any failure to comply with them by the Company’s portfolio companies, could have
a material adverse affect on the Company’s business.
ITEM
3.
CONTROLS
and PROCEDURES.
(a)
Evaluation of Disclosure Controls and Procedures. Our
management, with the participation of our President, evaluated the effectiveness
of our disclosure controls and procedures as of the end of the period covered
by
this report. Based on that evaluation, our President concluded that our
disclosure controls and procedures as of the end of the period covered by this
report were effective such that the information required to be disclosed by
us
in reports filed under the Securities Exchange Act of 1934 is (i) recorded,
processed, summarized and reported within the time periods specified in the
SEC’s rules and forms and (ii) accumulated and communicated to our
management, including our President, as appropriate to allow timely decisions
regarding disclosure. A controls system cannot provide absolute assurance,
however, that the objectives of the controls system are met, and no evaluation
of controls can provide absolute assurance that all control issues and instances
of fraud, if any, within a company have been detected.
Management’s
Report on Internal Control over Financial Reporting. Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting (as defined in Rule 13a-15(f) under the
Exchange Act). Our 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 purposes
in
accordance with accounting principles generally accepted in the United States.
Because
of its inherent limitations, internal control over financial reporting may
not
prevent or detect misstatements. Therefore, even those systems determined to
be
effective can provide only reasonable assurance of achieving their control
objectives. Furthermore, smaller reporting companies face additional
limitations. Smaller reporting companies employ fewer individuals and find
it difficult to properly segregate duties. Often, one or two individuals
control every aspect of the Company’s operation and are in a position to
override any system of internal control. Additionally, smaller reporting
companies tend to utilize general accounting software packages that lack a
rigorous set of software controls.
24
Within
45
days of the filing of this Form 10-QSB, an evaluation was carried out by Daniel
Imperato, our Interim Principle Executive Officer, of the effectiveness of
our
disclosure controls and procedures. Disclosure controls and procedures are
procedures that are designed with the objective of ensuring that information
required to be disclosed in our reports filed under the Securities Exchange
Act
of 1934, such as this Form 10-QSB, is recorded, processed, summarized and
reported within the time period specified in the Securities and Exchange
Commission’s rules and forms. In making this assessment, Daniel Imperato
used the criteria set forth by the Committee of Sponsoring Organizations of
the
Treadway Commission (COSO) in Internal Control — Integrated Framework.
Based on that evaluation, Mr. Imperato concluded that as of May 31, 2008,
and as of the date that the evaluation of the effectiveness of our disclosure
controls and procedures was completed, our disclosure controls and procedures
were effective to satisfy the objectives for which they are
intended.
(b)
Changes
in Internal Control over Financial Reporting. There
were no changes in our internal control over financial reporting, as defined
in
Rules 13a-15(f) and 15d-15(f) under the Exchange Act, during our most recently
completed fiscal quarter that have materially affected, or are reasonably likely
to materially affect, our internal control over financial
reporting.
ITEM
1. LEGAL PROCEEDINGS
We
are
currently not involved in any litigation that we believe could have a material
adverse effect on our financial condition or results of operations. There is
no
action, suit, proceeding, inquiry or investigation before or by any court,
public board, government agency, self-regulatory organization or body pending
or, to the knowledge of the executive officers of our company or any of our
subsidiaries, threatened against or affecting our company, our common stock,
any
of our subsidiaries or of our companies or our subsidiaries' officers or
directors in their capacities as such, in which an adverse decision could have
a
material adverse effect.
We
believe there are no changes that constitute material changes from the risk
factors previously disclosed in our filings with the Securities and Exchange
Commission.
ITEM
2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
SECURITIES
There
were no changes in securities and small business issuer purchase of equity
securities during the period ended May 31, 2008.
ITEM
3. DEFAULTS UPON SENIOR SECURITIES
There
were no defaults upon senior securities during the period ended May 31,2008.
ITEM
4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS
There
were no matters submitted to the vote of securities holders during the period
ended May 31, 2008.
ITEM
5. OTHER INFORMATION
None.
25
PART
II.OTHER
INFORMATION
ITEM
6.
EXHIBITS
(a)
EXHIBITS.
The following exhibits are filed as part of this
report.
31
Certification
of Interim Principle Executive Officer filed pursuant to Section
302 of
the Sarbanes-Oxley Act of 2002
31.1
Certification
of Interim Principle Accounting Officer filed pursuant to Section
302 of
the Sarbanes-Oxley Act of 2002
32
Certification
of Interim Principle Executive Officer, furnished pursuant to 18
U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act
of 2002
32.1
Certification
of Interim Principle Accounting Officer, furnished pursuant to 18
U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act
of 2002
26
SIGNATURES
In
accordance with the requirements of the Securities Exchange Act of 1934, the
registrant caused this Report on Form 10-QSB to be signed on its behalf by
the
undersigned, thereunto duly authorized.
