1

PART I – FINANCIAL INFORMATION

ITEM 1. Financial Statements

 

See Notes to Financial Statements

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Integrity Capital Income Fund, Inc.
SCHEDULE OF INVESTMENTS
AS OF APRIL 30, 2015
(unaudited)
Company	Portfolio Company Industry	Investment		Interest Rate			Senior/ Secondary		Cost				Fair Value			Unrealized Appreciation/ (Depreciation) on Investments				% of Net Assets
Debt Securities (United States)
Aequitas Commercial Finance, LLC	Financial Services	Promissory note ($500,000 par due 5/2016)			14.50%		Senior Secured		$	500,000			$	500,000			-				4.3%
Aequitas Peer-To-Peer Funding, LLC	Financial Services	Promissory note ($500,000 par due 5/2016)			14.50%		Senior Secured			500,000				500,000			-				4.3%
Aequitas Peer-To-Peer Funding, LLC	Financial Services	Promissory note ($75,000 par due 10/2016)			14.50%		Senior Secured			75,000				75,000			-				0.6%
Ajubeo, LLC	Technology	Promissory note ($375,000 par due 12/2017)		8% (PIK)			Secondary Secured			375,000				342,245			(32,755	)			2.9%
All Pro Funding II, LLC	Real Estate	Promissory note ($500,000 par due 12/2020)			11.00%		Senior Secured			500,000				500,000			-				4.3%
Brighton East Land, LLC	Real Estate	Promissory note ($1,800,000 par due 10/2015)			13.00%		Senior Secured			1,800,000				1,800,000			-				15.3%
Camel Parkwood, LLC	Real Estate	Promissory note ($2,457,500 par due 5/2017)			11.00%		Senior Secured			2,457,500				2,457,500			-				20.9%
TLC Fund 2012, LLC	Real Estate	Promissory note ($554,000 par due 5/2018)			11.50%		Secondary Secured			554,000				546,635			(7,365	)			4.7%
TVO Capital Management, LLC - Westport on the River	Real Estate	Promissory note ($787,000 par due at Final Close)			8.00%		Secondary Secured			787,000				787,000			-				6.7%
TVO Capital Management, LLC - Riverchase	Real Estate	Promissory note ($400,000 par due at Final Close)			8.00%		Secondary Secured			400,000				400,000			-				3.4%
Total debt securities									$	7,948,500			$	7,908,380		$	(40,120	)			67.4%
Equity Securities (United States)				Contracts
Ajubeo, LLC	Technology	Warrants			73,424				$	-				169,217			169,217				1.4%
Total equity securities									$	-			$	169,217		$	169,217				1.4%
Investments in Partnership interests (United States)				Ownership %
NCP 2014, LLC	Real Estate	Member Interest			40%				$	400,000				403,286			3,286				3.4%
NCPGM Georgia, LLC	Real Estate	Member Interest			40%					287,800				339,463			51,663				2.9%
Total equity securities									$	687,800			$	742,749		$	54,949				6.3%
Investment in other investment companies (United States)				Shares
Landmark Dividend Growth Fund - G LLC	Infrastructure	Member Interest			505,000				$	500,000				520,498			20,498				4.4%
Total other investment companies									$	500,000			$	520,498		$	20,498				4.4%
Total investments									$	9,136,300			$	9,340,844		$	204,544				79.6%

 

See Notes to Financial Statements

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Integrity Capital Income Fund, Inc.
SCHEDULE OF INVESTMENTS
AS OF OCTOBER 31, 2014
Company	Portfolio Company Industry	Investment		Interest Rate			Senior/ Secondary		Cost				Fair Value				% of Net Assets
Debt Securities (United States)
All Pro Funding II, LLC	Real Estate	Promissory note ($500,000 par due 12/2020)			11.00%		Senior Secured		$	500,000			$	500,000				7.1%
Camel Parkwood, LLC	Real Estate	Promissory note ($3,257,500 par due 5/2017)			11.00%		Senior Secured			3,257,500				3,257,500				46.2%
TLC Fund 2012, LLC		Promissory note ($239,000 par due 5/2018)			11.50%		Secondary Secured			239,000				239,000				3.4%
Brighton East Land, LLC	Real Estate	Promissory note ($1,800,000 par due 10/2015)			13.00%		Senior Secured			1,800,000				1,800,000				25.5%
Total debt securities									$	5,796,500			$	5,796,500				82.3%
Investment in other investment companies (United States)
				Shares
Aequitas WRFF I, LLC	Real Estate	Member Interest			500				$	465,116			$	465,116				6.6%
Total other investment companies									$	465,116			$	465,116				4.0%
Total investments									$	6,261,616			$	6,261,616				88.9%

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Integrity Capital Income Fund, Inc.

Notes to Financial Statements

Period Ended April 30, 2015

(unaudited)

1.	ORGANIZATION

Integrity Capital Income Fund, Inc. (the "Company"), an externally managed investment company was organized as a Colorado corporation on December 10, 2013 (Inception) and was initially funded on January 21, 2014 (commencement of operations). Effective November 1, 2014, the Company has elected to be regulated as a business development company ("BDC") under the Investment Company Act of 1940, as amended (the "1940 Act"). In addition, for U.S. federal income tax purposes, the Company has elected to be treated as a regulated investment company ("RIC") under Subchapter M of the Internal Revenue Code of 1986, as amended (the "Code").

The Company invests principally in debt, equity securities, including convertible preferred securities, limited liability companies, partnerships and other debt securities convertible into equity securities, of primarily non-public U.S.-based companies.  The investment objective is to maximize income and capital appreciation.  In accordance with the investment objective, the Company intends to provide capital principally to U.S.-based, private companies with an equity value of less than $250 million, which the Company refers to as "micro-cap companies."  The Company's primary emphasis is to identify companies with experienced management and positive cash flow from operations.

The Company is managed by Integrity Wealth Management, a division of Integrity Bank & Trust, a Colorado corporation (the "Adviser"), who also serves as the investment adviser and provides the Company with certain administrative services necessary to operate.

2.	SIGNIFICANT ACCOUNTING POLICIES

The accompanying interim financial statements of the Company and related financial information have been prepared in accordance with generally accepted accounting principles in the United States of America ("GAAP") and pursuant to the requirements for reporting on Form 10-Q and Articles 6 or 10 of Regulation S-X.  In the opinion of management, the financial statements reflect all adjustments and reclassifications that are necessary for the fair presentation of financial results as of and for the periods presented.

Financial statements prepared on a GAAP basis require management to make estimates and assumptions that affect the amounts and disclosures reported in the financial statements and accompanying notes.  Actual results could differ from those estimates.  Such estimates and assumptions could change in the future as more information becomes known, which could impact the amounts reported and disclosed herein.  Investment valuation represents a significant estimate within these financial statements.

Cash and cash equivalents are highly liquid investments with an original maturity of three months or less at the date of acquisition. The Company deposits its cash in financial institutions and, at times, such balances may be in excess of the Federal Deposit Insurance Corporation insurance limits.

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Investment transactions are accounted for on a trade-date basis. Realized gains or losses on investments are measured by the difference between the net proceeds from the disposition and the cost basis of investment, without regard to unrealized gains or losses previously recognized. The Company reports current period changes in fair value of investments that are measured at fair value as a component of the net change in unrealized appreciation (depreciation) on investments in the statement of operations.

As part of the valuation process, management may take into account the following types of factors, if relevant, in determining the fair value of the Company's investments: the enterprise value of a portfolio company (the entire value of the portfolio company to a market participant, including the sum of the values of debt and equity securities used to capitalize the enterprise at a point in time), the nature and realizable value of any collateral, the portfolio company's ability to make payments and its earnings and discounted cash flow, the markets in which the portfolio company does business, a comparison of the portfolio company's securities to any similar publicly traded securities, changes in the interest rate environment and the credit markets generally that may affect the price at which similar investments would trade in their principal markets and other relevant factors. When an external event such as a purchase transaction, public offering or subsequent equity sale occurs, management considers the pricing indicated by the external event to corroborate its valuation.

Because there is not a readily available market value for most of the investments in its portfolio, the Company values substantially all of its portfolio investments at fair value as determined in good faith by management, as described in Note 4. Due to the inherent uncertainty of determining the fair value of investments that do not have a readily available market value, the fair value of the Company's investments may fluctuate from period to period. Additionally, the fair value of the Company's investments may differ significantly from the values that would have been used had a ready market existed for such investments and may differ materially from the values that the Company may ultimately realize. Further, such investments are generally subject to legal and other restrictions on resale or otherwise are less liquid than publicly traded securities. If the Company was required to liquidate a portfolio investment in a forced or liquidation sale, the Company could realize significantly less than the value at which the Company has recorded it.

In addition, changes in the market environment and other events that may occur over the life of the investments may cause the gains or losses ultimately realized on these investments to be different than the unrealized gains or losses reflected in the valuations currently assigned.

Both debt securities in TVO Capital Management, LLC ("TVO") are interim loans to assist with pursuit costs and out-of-pocket due diligence expenses related to real estate transactions.  If the property acquisitions are unsuccessful, TVO shall repay such interim loan upon demand.  If the property acquisitions are successful, TVO shall repay such interim loan's interest and the principal will convert to GP equity upon Final Close of each respective transaction.

Offering costs are expenses such as legal fees pertaining to the Company's shares offered for sale.  The Company has accounted for offering costs in the current period as a deferred charge, Deferred Offering Costs on the Statements of Assets, Liabilities and Net Assets.  The deferred offering costs are being amortized to expense over 12 months on a straight-line basis beginning with the period after the Company's registration under the Securities and Exchange Act of 1934 was effective (November 1, 2014).

 

 

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Investments and related investment income:  Interest income is accrued based upon the outstanding principal amount and contractual interest terms of debt investments. For the three and six months ended April 30, 2015, the Company earned interest income of $222,828 and $426,914, respectively. As of April 30, 2015 and October 31, 2014, the Company had interest receivable of $101,491 and $41,730, respectively.

Loan origination fees, original issue discount and market discount or premium are capitalized, and the Company accretes or amortizes such amounts over the life of the loan. For the periods ended April 30, 2015 and October 31, 2014, the Company received loan origination fees of $36,000 and $97,500, respectively. These loan origination fees are capitalized and amortized over the life of the loan. For the three and six months ended April 30, 2015, total investment income included $24,625 and $35,750 of accretion of loan origination fees, respectively.

For investments with contractual payment-in-kind ("PIK") interest, which represents contractual interest accrued and added to the principal balance that generally becomes due at maturity, the Company will not accrue PIK interest if the portfolio company valuation indicates that the PIK interest is not collectible. For the period ended October 31, 2014, the Company did not hold any investments with contractual PIK interest. For the period ended April 30, 2015, the Company held one investment, Ajubeo, Inc., with contractual PIK interest. As of April 30, 2015 the balance of accrued PIK interest related to this investment was $11,250.

Dividend income from investments in other investment companies is recorded as dividend income on an accrual basis to the extent that such amounts are payable by the portfolio company and are expected to be collected. Each distribution received from limited liability company ("LLC") and limited partnership ("LP") investments is evaluated to determine if the distribution should be recorded as dividend income or a return of capital. Generally, the Company will not record distributions from equity investments in LLCs and LPs as dividend income unless there are sufficient accumulated tax-basis earnings and profits in the LLC or LP prior to the distribution. Distributions that are classified as a return of capital are recorded as a reduction in the cost basis of the investment. For the three and six months ended April 30, 2015, the Company recorded dividend income of $8,191 and $13,495, respectively.

Non-accrual loans:  A loan may be left on accrual status during the period the Company is pursuing repayment of the loan. Management reviews all loans that become 90 days or more past due on principal and interest, or when there is reasonable doubt that principal or interest will be collected, for possible placement on non-accrual status. When a loan is placed on non-accrual status, unpaid interest credited to income is reversed. Additionally, any original issue discount and market discount are no longer accreted to interest income as of the date the loan is placed on non-accrual status. Interest payments received on non-accrual loans may be recognized as income or applied to principal depending upon management's judgment. Non-accrual loans are restored to accrual status when past due principal and interest is paid and, in management's judgment, are likely to remain current. There were no non-accrual loans held as of April 30, 2015 or October 31, 2014.

Partial loan sales:  The Company follows the guidance in Financial Accounting Standards Board ("FASB") Accounting Standards Codification ("ASC") Topic 860 when accounting for loan participations and other partial loan sales. Such guidance requires a participation or other partial loan sale to meet the definition of a "participating interest", as defined in the guidance, in order for sale treatment to be allowed. Participations or other partial loan sales which do not meet the definition of a participating interest remain on the Company's statement of assets, liabilities and net assets and the proceeds are recorded as a secured borrowing until the definition is met. Secured borrowings are carried at fair value to correspond with the related investments, which are carried at fair value. For the three months ended April 30, 2015 there were no partial loan sales. For the six months ended April 30, 2015 there were partial loan sales which met the definition of a participating interest to an unrelated third party of $800,000 of the Company's interest in its $3,257,500 Promissory Note in Camel Parkwood, LLC, respectively. There was no gain or loss resulting from this partial loan sale.

 

 

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The Company has elected to be treated as a BDC under the 1940 Act.  The Company intends to elect to be treated as a RIC under the Internal Revenue Code beginning with the tax year ending October 31, 2015.  Such election will be made upon the filing of the Company's first federal tax return for RIC purposes.  In order to qualify as a RIC, among other things, the Company will be required to meet certain source of income and asset diversification requirements and timely distribute to its stockholders at least 90% of investment company taxable income, as defined by the Code, for each tax year. The Company intends to make the requisite distributions to its stockholders, which will generally relieve the Company from U.S. federal income taxes with respect to all income distributed to its stockholders. So long as the Company maintains its status as a RIC, it will generally not pay corporate-level U.S. federal income or excise taxes on any ordinary income or capital gains that is distributes at least annually to its stockholders as dividends. As a result, any tax liability related to income earned and distributed by the Company represents obligations of the Company's stockholders and will not be reflected in the financial statements of the Company.

As a RIC, the Company is subject to a 4% nondeductible federal excise tax on certain undistributed income unless the Company distributes in a timely manner an amount at least equal to the sum of (i) 98.2% of ordinary income for each calendar year, (ii) 98% of capital gain net income for the one-year period ending October 31 in that calendar year, and (iii) any income realized, but not distributed, in the preceding year (the "Excise Tax Avoidance Requirement").  The Company will not be subject to excise taxes on amounts on which the Company is required to pay corporate income tax (such as retained net capital gains). The Company currently intends to make sufficient distributions each taxable year to satisfy the Excise Tax Avoidance Requirement.

The Company evaluates tax positions taken or expected to be taken in the course of preparing its financial statements to determine whether the positions are "more-likely-than-not" to be sustained by the applicable tax authority.  Tax positions not deemed to meet the "more-likely-than-not" threshold are reversed and recorded as a tax benefit or expense in the current year. All penalties and interest associated with income taxes are included in income tax expense. Conclusions regarding tax positions are subject to review and may be adjusted at a later date based on factors including, but not limited to, on-going analyses of tax laws, regulations and interpretations thereof.

The Company accounts for income taxes under the asset and liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements. Under this method, deferred tax assets and liabilities are determined on the basis of the differences between the financial statement and tax basis of assets and liabilities using tax rates in effect for the year in which the differences are expected to reverse.  The Company recognizes deferred tax assets to the extent that they are more likely than not to be realized. In making such a determination, the Company considers all available positive and negative evidence, including future reversals of existing taxable temporary differences, projected future taxable income, tax-planning strategies, and results of recent operations.  If the Company determines that it would be able to realize our deferred tax assets in the future in excess of their net recorded amount, the Company would make an adjustment to the deferred tax asset valuation allowance, which would reduce the provision for income taxes.  As the Company has elected to be treated as a RIC beginning on November 1, 2014, there is no benefit to any deferred tax assets and thus a full valuation allowance was recorded as of October 31, 2014.  As a RIC, the Company was not a taxable entity for the period ended April 30, 2015 and thus no income tax expense (benefit) was recorded.

 

 

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Income tax expense (benefit) consists of the following for the periods ended April 30, 2014:

The total provision for income taxes differs from the amount computed by applying the applicable statutory rates primarily due to state taxes and other differences as follows for the periods ended April 30, 2014:

The Company classifies estimated interest and penalties associated with uncertain tax positions, if any, as a component of tax expense.  There were no such interest and penalties estimated at April 30, 2014.

The Company currently has no unrecognized tax benefit.  There was no interest or penalties accrued at April 30, 2014.

The Company files federal and Colorado income tax returns.  All tax years since inception remain open to examination.

Dividends and distributions to common stockholders are recorded on the record date. The amount to be paid out as a dividend or distribution is determined by the Board each quarter and is generally based upon the earnings estimated by management. Net realized capital gains, if any, are distributed at least annually, although the Company may decide to retain such capital gains for investment.

In May 2014, FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606), which supersedes the revenue recognition requirements in Topic 605, Revenue Recognition. Under the new guidance, an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. This guidance is effective for annual and interim reporting periods beginning after December 15, 2016, and early application is not permitted. The Company is currently evaluating the impact this ASU will have on its financial statements.

 

 

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In August 2014, FASB issued ASU 2014-13, Consolidation (Topic 810): Measuring the Financial Assets and Financial Liabilities of a Consolidated Collateralized Financing Entity, containing new guidance for fair valuing the financial assets and financial liabilities of a consolidate collateralized financing entity. This guidance is effective for annual and interim periods beginning after December 15, 2015. The Company is currently evaluating the impact this ASU will have on its financial statements.

In May 2015, the Financial Accounting Standard's Board ("FASB") accepted FASB update 2015-07 "Fair Value Measurement (Topic 820) – Disclosures for Investments in Certain Entities that Calculate Net Asset Value per Share (or Its Equivalent)." This new guidance no longer requires investments for which NAV is determined based on practical expedient reliance to be reported utilizing the fair value hierarchy. Although FASB update 2015-07 ("the amendment") is scheduled to go into effect in December 2015, early adoption is permitted for fiscal periods ending prior to that date.

3.	RELATED PARTY AND AGREEMENTS

The Company pays the Adviser a fee for its investment advisory services under the Investment Advisory Agreement consisting of two components - a base management fee and an incentive fee. The cost of both the base management fee and any incentive fees earned by the Adviser is ultimately borne by the common shareholders.

The base management fee (the "Base Fee") is calculated at an annual rate of 1.5% of gross assets, which includes the use of leverage, if any. The Base Fee is payable quarterly in arrears, and is calculated based on the value of gross assets at the end of the most recently completed fiscal quarter, and appropriately adjusted for any equity capital raises or repurchases during the current fiscal quarter. The Base Fee for any partial month or quarter will be appropriately prorated.

The Incentive Fee is determined and payable in arrears as of the end of each fiscal year (or upon termination of the Investment Advisory Agreement, as of the termination date), commencing with the calendar year beginning November 1, 2014, and equals 20% of "Net Investment Income" above 7.5% for the year. "Net Investment Income" is defined as all income accrued during the year minus operating expenses, Base Management Fee and expenses paid under the Investment Advisory Agreement. Net Investment Income includes, in the case of investments with a deferred interest feature (such as original issue discount debt instruments with payable-in-kind interest and zero coupon securities) accrued income not yet received in cash. Net Investment Income does include any realized capital gains, realized capital losses, or unrealized capital depreciation. It does not include unrealized capital appreciation.

For the three and six months ended April 30, 2015, the Adviser earned $41,286 and $72,538, respectively, in base management fees.  For the three months ended April 30, 2014 and the period December 10, 2013 through April 30, 2014, the Advisor earned $9,307 in base management fees.  There was no Incentive Fee for the six months ended April 30, 2015 and April 30, 2014.

 

 

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As compensation for the Adviser's services related to the Custody Agreement the Company has agreed to pay an annual fee of 0.15% of the Custodial Property defined as all investments and cash equivalents held by the Adviser.  The Adviser invoices the Company on a quarterly basis for the pro-rata portion of the annual amount, calculated as of the last business day of each quarter.  The property originally delivered to the Adviser, and earnings there from, together with any additional property delivered to the Adviser, and earnings there from, shall constitute the "Custodial Property." For the three month and six months ended April 30, 2015, the Adviser earned $5,125 and $8,706, respectively, in custody fees.  There were no custody fees incurred for the three months ended April 30, 2014 and the period December 10, 2013 through April 31, 2014.

Pursuant to the Advisory Agreement, the Adviser furnishes the Company with equipment and clerical, bookkeeping and record-keeping services, as well as certain administrative services, which include being responsible for the financial records which the Company is required to maintain and preparing reports to shareholders and reports filed with the SEC.  In addition, the Adviser assists the Company in monitoring portfolio accounting and bookkeeping, managing portfolio collections and reporting, performing internal audit services, determining and publishing the net asset value, overseeing the preparation and filing of tax returns and the printing and dissemination of reports to shareholders, providing support for risk management efforts and generally overseeing the payment of expenses and the performance of administrative and professional services rendered to the Company by others.  The Company reimburses the Adviser for the allocable portion of overhead and other expenses incurred in performing its administrative obligations under the Advisory Agreement. The Adviser prepares and delivers statements documenting its expenses which are subject to reimbursement.

The Adviser has entered into an Operating Expense Limitation Agreement ("OELA") with the Company effective January 2, 2014, to limit the total operating expenses of the Company to 2.34%.  Effective September 1, 2014, the OELA was amended to 2.95%, whereby any expenses in excess of the OELA will not be immediately reimbursed to the Adviser.  However, the Adviser will be able to recoup from the Company these expenses in excess of the limit over a period not to exceed three years.  The total amount of organization and operating expenses incurred by the Company which exceeded the limit and were reimbursed by the Adviser for the quarter ended April 30, 2015 was $49,943.  Such expenses reimbursed by the Adviser each quarter will be subject to collection by the Adviser over a period not to exceed three years, if the Company's expense ratio is less than the 2.95% limit. The OELA remains in effect until terminated by the Company and Adviser.  The following table presents the amounts reimbursed and the expiration date for recoupment.

The Company calculated a reimbursed amount of $128,119 for the period December 10, 2013 through April 30, 2014 for comparative purposes but this amount does not impact the actual amount and date of the original reimbursed amount that occurred on June 30, 2014 as noted above. Through the normal course of business, the Adviser or an affiliate of the Adviser processes payments on behalf of the Company and then is reimbursed for expenses paid on behalf of the Company.  As of April 30, 2015, $62,769 is due to the Adviser for such reimbursements, net of the current operating expense deferral of $49,943.  As of October 31, 2014, $76,257 was due to the Adviser for such reimbursements, net of $9,307 of management fees waived and $93,072 of operating expenses reimbursed.

 

 

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4.	FAIR VALUE OF FINANCIAL INSTRUMENTS

The Company's fair value accounting policies adhere to the provisions of FASB ASC Topic 820, Fair Value Measurements and Disclosures.  Topic ASC 820 establishes a fair value hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available.  Observable inputs are those that market participants would use in pricing the asset or liability based on market data obtained from sources independent of the Company.  Unobservable inputs reflect the Company's assumption about the inputs market participants would use in pricing the asset or liability developed based on the best information available in the circumstances.  The fair value hierarchy is categorized into three levels based on the inputs as follows:

Level 1 -Valuations based on unadjusted quoted prices in active markets for identical assets or liabilities that the Company has the ability to access.  Valuation adjustments and block discounts are not applied to Level 1 securities.  Since valuations are based on quoted prices that are readily and regularly available in an active market, valuation of these securities does not entail a significant degree of judgment.

Level 2 -Valuations based on quoted prices in markets that are not active or for which all significant inputs are observable, either directly or indirectly.

Level 3 -Valuations based on inputs that are unobservable and significant to the overall fair value measurement.

To the extent that the valuation is based on models or inputs that are less observable or unobservable in the market, the determination of fair value requires more judgment.  Those estimated values do not necessarily represent the amounts that may be ultimately realized due to the occurrence of future circumstances that cannot be reasonably determined.

Because of the inherent uncertainty of valuation, those estimated values may be materially higher or lower than the values that would have been used had a ready market for the securities existed.  Accordingly, the degree of judgment exercised by the Company in determining fair value is greatest for securities categorized in Level 3.  In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy.  In such cases, for disclosure purposes, the level in the fair value hierarchy within which the fair value measurement falls in its entirety is determined by the lowest level input that is significant to the fair value measurement.

Fair value is a market-based measure considered from the perspective of a market participant rather than an entity-specific measure.  Therefore, even when market assumptions are not readily available, the Company's own assumptions are set to reflect those that market participants would use in pricing the asset or liability at the measurement date.

 

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The Company invests in direct debt and equity securities that are not traded on a public market.  These securities are recorded at fair value as determined by the Company using the framework of Topic ASC 820.  In addition, the Company has adopted written guidelines for determining the fair value of its investments for reporting in the accompanying financial statements.  Under these guidelines, investment valuations are reviewed on a quarterly basis and investments without readily available market values are valued at fair value as determined by the Company.  In the absence of readily ascertainable market values, the Company uses valuation techniques consistent with the market, income and cost approaches, as prescribed by Topic ASC 820, in order to estimate the fair value of investments.  In all cases, the Company evaluates whether the valuation techniques used and the resultant fair value estimate is representative of what the most likely buyers of the company would also pay upon exit, and therefore, whether the value is deemed to be the price expected in an orderly transaction between market participants at the measurement date.

Under Topic ASC 820, fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (i.e., the "exit price") in an orderly transaction between market participants at the measurement date.  ASC 820 permits the Company, as a practical expedient, to estimate the fair value of investments in other investment companies based on the net asset value (NAV) per share, or its equivalent, if the NAV of such investments is calculated in a manner consistent with the measurement principles of ASC 946, Financial Services — Investment Companies. As such the Company's estimate of fair value for its investments in other investment companies is generally based on the NAV provided to the Company by each Investee Fund, supported by the independently audited financial statements of the Investee Fund, when available.

The transaction price is typically the Company's best estimate of fair value at inception of the investment.  When evidence supports a change to the carrying value from the transaction price, adjustments are made to reflect expected exit values.  Ongoing reviews by the Company are based on an assessment of significant assumptions related to each underlying investment including incorporating valuations that consider the evaluation of financing and sale transactions with third parties, the financial condition and operating results of the portfolio company, achievement of technical milestones, and expected cash flows.  All investments at April 30, 2015 and October 31, 2014 had no readily available market value and are included in Level 3 of the fair value hierarchy.

The following tables present information about the Company's assets measured at fair value on a recurring basis at April 30, 2015 and October 31, 2014.  The Company assesses the levels for the investments at each measurement date, and transfers between levels are recognized on the actual date of the event or change in circumstances that caused the transfer in accordance with the Company's accounting policy regarding the recognitions of transfers between levels of the fair value hierarchy.  For the periods ended April 30, 2015 and October 31, 2014, there were no transfers in or out of Level 1, 2, and 3.

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Assets Measured at Fair Value on a Recurring Basis at April 30, 2015

		Quoted Prices in Active Markets for Identical Assets				Significant Other Observable Inputs				Significant Unobservable Inputs				Balance at April 30,
		(Level 1)				(Level 2)				(Level 3)				2015
Investments:
Debt Securities		$	-			$	-			$	7,908,380			$	7,908,380
Equity Securities			-				-				169,217				169,217
Investments in Partnership Interests			-				-				742,749				742,749
Investment in Other
Investment Companies			-				-				520,498				520,498
Total		$	-			$	-			$	9,340,844			$	9,340,844

 

The Company estimates that it will receive liquidating distributions from its Other Investment Companies over a period consistent with the investee company's estimated life plus available extension periods, which is 3 years from the Effective Date with two additional 12-month extensions available at the discretion of the GP.  For the investment in other investment companies, the Company will pay the management of such investment company a monthly management fee based on the product of $65 and the number of Portfolio Assets then held by the investment company. The investment company specializes in the acquisition of real property rights to ground leases and easements primarily under infrastructure assets. The Company has fully funded its capital commitment to the investment company. The Company's investment in other investment companies is stated at fair value based on the underlying NAV as a practical expedient. Accordingly, the investment in Other Investment Companies is classified as Level 3 in the ASC 820 fair value hierarchy.

 

 

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		Debt Securities				Equity Securities				Investments in Partnership Interests				Investment in Other Investment Companies				Total
Balance at December 10, 2013		$	-			$	-			$	-			$	-			$	-
Purchases of investments			5,796,500				-				-				465,116				6,261,616
Balance at October 31, 2014			5,796,500				-				-				465,116				6,261,616
Purchase of investments			2,952,000				-				687,800				500,000				4,139,800
Sales of investments			(800,000	)			-				-				(465,116	)			(1,265,116	)
Net unrealized gains/(losses)			(40,120	)			169,217				54,949				20,498				204,544
Balance at April 30, 2015		$	7,908,380			$	169,217			$	742,749			$	520,498			$	9,340,844

Below is a table summarizing the valuation techniques, the unobservable inputs used in the valuation, along with ranges used to determine the fair value of certain Level 3 investments held at April 30, 2015 and October 31, 2014.

 

April 30, 2015
Type of Security		Fair Value			Valuation Technique		Unobservable Input		Range (Wtd Avg)
Debt Securities		$	7,908,380		Yield Analysis		Market Yield			8.0 - 14.5% (11.6%)
Equity Securities		$	169,217		Earnings Multiple		Market Comparables		$	169,217
Investments in Partnership Interests		$	742,749		Income Approach		Capitalization Rate			8.4 - 8.8% (8.6%)
Investment in Other Investment Companies		$	520,498		Pro-rata share of net assets		Underlying NAV		$	520,498
October 31, 2014
Type of Security		Fair Value			Valuation Technique		Unobservable Input		Range (Wtd Avg)
Debt Securities		$	5,796,500		Yield Analysis		Market Yield			11.0 - 13.0% (11.6%)
Investment in Other Investment Companies		$	465,116		Subsequent Market Transaction		Redemption Agreement		$	465,116

 

The above tables are not intended to be all-inclusive but rather to provide information on significant unobservable inputs and valuation techniques used by the Company. The significant unobservable input used in the fair value measurement of the Company's debt investments is market interest rates. The Company uses market interest rates for loans to determine if the effective yield on a loan is commensurate with the market yields for that type of loan. If a loan's effective yield is significantly less than the market yield for a similar loan with a similar credit profile, then the resulting fair value of the loan may be lower.  The Company valued its Investment in Other Investment Companies as of October 31, 2014 based on a subsequent market transaction that occurred effective December 31, 2014 and settled in cash on January 30, 2015.

 

 

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6.	EARNINGS PER SHARE

The following information sets forth the computation of basic net increase in net assets per share (earnings per share) resulting from operations for the three and six month periods ended April 30, 2015 and 2014.

7.	Dividends and Distributions

The Company's dividends and distributions are recorded on the date declared (record date). The following table summarizes the Company's dividend declarations and distributions during the six months ended April 30, 2015:

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8.	FINANCIAL HIGHLIGHTS

(1)	The ratios have been annualized except for those expenses that are not recurring, such as organizational costs.

(2)	Calculated using the weighted average shares outstanding during the respective period.

(3)	Amounts are balancing amounts necessary to reconcile the change in net asset value per unit to the per unit information.

(4)

Total return based on market value is calculated assuming a purchase of common shares at the market value on the first day and a sale at the market value on the last day of the periods reported. Distributions, if any, are assumed for purposes of this calculation to be reinvested at prices obtained under the Company's dividend reinvestment plan. Total return based on market value does not reflect brokerage commissions. Return calculations are not annualized.

These financial highlights may not be indicative of the future performance of the Company.

 

 

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9.	RISKS AND UNCERTAINTIES

The Company in the normal course of business makes investments in financial instruments where the risk of potential loss exists due to changes in the market (market risk), or failure or inability of the counterparty to a transaction to perform (credit and counterparty risk). See below for a detailed description of select principal risks.

Market Risk

Market risk is the company's investments in financial instruments and derivatives that expose it to various risks such as, but not limited to, interest rate, foreign currency, and equity. Interest rate risk is the risk that a fixed income investment's value will change due to a change in the absolute level of interest rates, in the spread between two rates, in the shape of the yield curve or in any other interest rate relationship. Such changes usually affect securities inversely and can be reduced by diversifying (for example, investing in fixed- income securities with different durations) or hedging (for example, through an interest rate swap).

Equity Risk

Equity risk is the risk that the market values of equities, such as common stocks or equity related investments such as futures and options, may decline due to general market conditions, such as political or macroeconomic factors. Additionally, equities may decline in value due to specific factors affecting a related industry or industries. Equity securities and equity related investments generally have greater market price volatility than fixed income securities.

Credit and Counterparty Risk

The Company is exposed to credit risk to counterparties with whom it transacts with and also bears the risk of settlement default. The company may lose money if the issuer or guarantor of a fixed income security, or the counterparty to a derivative instrument contract, repurchase agreement or securities lending is unable or unwilling to make timely principal and/or interest payments, or to otherwise honor its obligations. Securities are subject to varying degrees of credit risk, which are often reflected in credit ratings. The Company minimizes concentrations of credit risk by undertaking transactions with a diverse population of counterparties with a history of good credit quality. Further, the company manages counterparty risk by entering into appropriate legally enforceable master netting agreements, or similar agreements which include provisions for offsetting positions, collateral, or both in the event of counterparty default or nonperformance.

As the Company currently holds one investment with PIK interest, we note that the higher interest rate on PIK securities reflects the payment deferral and increased credit risk associated with such instruments. Such investments generally represent a significantly higher credit risk than coupon loans. We note that even if accounting conditions were met, the borrower could still default when the Fund's actual collection is supposed to occur at the maturity of the obligation. PIK securities may have unreliable valuations because their continuing accruals require continuing judgments about the collectability of the deferred payments and the value of associated collateral.  PIK interest has the effect of generating investment income and increasing the incentive fees payable at a compounding rate.  In addition, the deferral of PIK interest also reduces the loan-to-value ratio at a compounding rate. PIK securities also create the risk that incentive fees will be paid to the Adviser based on non-cash accruals that ultimately may not be realized, but the Adviser will be under no obligation to reimburse the Fund for these fees.

On May 5, 2015, the Company made an additional investment of $50,000 through a promissory note with TVO Capital Management - Riverchase. On May 7, 2015, the Company entered into a participation certificate and agreement in which it purchased $2,265,900 of a loan with eCOS, LLC.  On May 8, 2015, the Company transferred $575,000 to eCOS, LLC. On May 28, 2015, the Company made an investment of $800,000 through a promissory note with Subsentio, LLC.

On June 1, 2015, the Company's loan with Brighton East Land, LLC was closed and paid in full in the amount of $1,814,950, of which $14,950 related to interest.

The Company continued to pay its monthly dividend of $0.625 per share.

From May 1, 2015 to June 15, 2015, the Company sold 71,576 shares of our common stock at a price of $10.15 per share for a total of $726,500 of new capital invested.

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Evaluation of Disclosure Controls and Procedures.

We have established disclosure controls and procedures to ensure that material information relating to the Company is made known to the officers who certify the Company's financial reports and the Board of Directors.

 

 

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Our President, Eric Davis, and our Chief Financial Officer, Randall Rush, evaluated the effectiveness of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, as of the end of the period covered by this report on Form 10-Q (the "Evaluation Date").  Based on this evaluation, they believe that as of the Evaluation Date our disclosure controls and procedures were effective to ensure that information required to be disclosed by us in the reports we file or submit under the Exchange Act (i) is recorded, processed, summarized, and reported within the time periods specified in the SEC's rules and forms; and (ii) is accumulated and communicated to the Company's management, including the President and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosures.

Changes in Internal Control Over Financial Reporting.

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