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EX-32.2 - EXHIBIT 32.2 - Integrity Capital Income Fund, Inc.ex32x2.htm
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EX-31.2 - EXHIBIT 31.2 - Integrity Capital Income Fund, Inc.ex31x2.htm
EX-31.1 - EXHIBIT 31.1 - Integrity Capital Income Fund, Inc.ex31x1.htm
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q

 QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended January 31, 2017

 TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT

Commission file number: 000-55277
 
INTEGRITY CAPITAL INCOME FUND, INC.
 (Exact name of the registrant as specified in its charter)
 
Colorado 
46-4285184
 (State or other jurisdiction of incorporation or organization)
(IRS Employer Identification No.)

13540 Meadowgrass Drive, Suite 100
Colorado Springs, Colorado 80921
 (Address of principal executive offices)

(719) 955-4801
Telephone number, including
Area code
 
(Former name or former address if changed since last report)


Indicate by check mark whether the registrant (1) 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 for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.   Yes T  No ☐

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes T No ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes ☐   No T
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company:

Large accelerated filer ☐    Accelerated filer ☐     Non-accelerated filer T    Smaller reporting Company ☐

There were 2,525,040 shares of the issuer's common stock, par value $0.0001, outstanding as of March 17, 2017.
 

FORWARD LOOKING STATEMENTS

This report contains forward-looking statements that involve substantial risks and uncertainties.  These forward-looking statements are not historical facts, but rather are based on current expectations, estimates and projections about us, our current and prospective portfolio investments, our industry, our beliefs, and our assumptions.  Words such as "anticipates," "expects," "intends," "plans," "believes," "seeks," "estimates," "would," "should," "targets," "projects," and variations of these words and similar expressions are intended to identify forward-looking statements.  These statements are not guarantees of future performance and are subject to risks, uncertainties, and other factors, some of which are beyond our control and difficult to predict and could cause actual results to differ materially from those expressed or forecasted in the forward-looking statements including, without limitation:

·
an economic downturn could impair our portfolio companies' abilities to continue to operate, which could lead to the loss of some or all of our investments in such portfolio companies;
·
the risks, uncertainties and other factors we identify in the sections entitled "Risk Factors" in our Annual Report on Form 10-K for the year ended October 31, 2016 filed with the SEC on January 27, 2017 and elsewhere in this report and in our filings with the SEC.
Although management believes that the assumptions on which these forward-looking statements are based are reasonable, any of those assumptions could prove to be inaccurate, and as a result, the forward-looking statements based on those assumptions also could be inaccurate.  In light of these and other uncertainties, the inclusion of a projection or forward-looking statement in this annual report should not be regarded as a representation by management that its plans and objectives will be achieved.  Do not place undue reliance on these forward-looking statements, which apply only as of the date of this report.  Management does not undertake any obligation to update or revise any forward-looking statements.
 

INTEGRITY CAPITAL INCOME FUND, INC.
QUARTERLY REPORT ON FORM 10-Q
FOR THE PERIOD ENDED January 31, 2017
 
CONTENTS


PART I – Financial Information
1
 
 
Item 1. Financial Statements
1
 
 
    Statements of Assets, Liabilities and Net Assets as of January 31, 2017 (unaudited) and October 31, 2016
2
 
 
    Schedules of Investments as of January 31, 2017 (unaudited) and October 31, 2016
3
 
 
    Statements of Operations for the three months ended January 31, 2017 (unaudited)  and for the three months ended January 31, 2016 (unaudited)
7
   
    Statements of Changes in Net Assets for the three months ended January 31, 2017 (unaudited)  and January 31, 2016 (unaudited)
8
 
 
    Statements of Cash Flows for the three months ended January 31, 2017 (unaudited) and January 31, 2016 (unaudited)
 
    Notes to Financial Statements (unaudited) 
10
 
 
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
24
 
 
Item 3. Quantitative and Qualitative Disclosures About Market Risk
28
 
 
Item 4. Controls and Procedures 
29
   
Part II. Other Information
 
 
 
Item 6. Exhibits 
30
   
Signatures
31
   
 

1

PART I – FINANCIAL INFORMATION

Item 1. FINANCIAL STATEMENTS
 
Integrity Capital Income Fund, Inc.
     
       
       
STATEMENTS OF ASSETS, LIABILITIES AND NET ASSETS
     
 
             
             
   
As of  
 
   
January 31, 2017
   
October 31, 2016
 
   
(unaudited)
       
             
ASSETS:
           
Investments at fair value
           
    Non-controlled/non-affiliate company investments
 
$
23,437,146
   
$
21,805,282
 
    Controlled affiliate company investments
   
902,312
     
902,312
 
Total Investments at fair value (cost $23,585,848 and $22,045,584)
   
24,339,458
     
22,707,594
 
Cash and cash equivalents
   
3,198,674
     
2,528,322
 
Interest receivable
   
1,192,264
     
1,032,000
 
Prepaid insurance
   
11,667
     
15,916
 
Other assets
   
-
     
12,500
 
           Total assets
 
$
28,742,063
   
$
26,296,332
 
                 
LIABILITIES:
               
Due to Adviser
 
$
336,896
   
$
168,694
 
Line of credit payable
   
3,502,533
     
1,700,687
 
Income taxes payable
   
8,506
     
125,508
 
Prepaid interest income on non-affiliate company investments
   
13,200
     
-
 
           Total liabilities
 
$
3,861,135
   
$
1,994,889
 
                 
Commitments and contingencies (Note 6)
   
-
     
-
 
                 
NET ASSETS
 
$
24,880,928
   
$
24,301,443
 
                 
NET ASSETS REPRESENTED BY SHAREHOLDERS' EQUITY:
               
Common stock, par value $0.0001 per share, 200,000,000 shares authorized; 2,525,040 and 2,459,506 common shares issued and outstanding
 
$
253
   
$
246
 
Preferred stock, par value $0.0001 per share, 10,000,000 shares authorized; Zero shares issued and outstanding
   
-
     
-
 
Paid-in capital in excess of par value
   
25,547,836
     
24,872,843
 
Accumulated over-distributed net investment income
   
(1,593,887
)
   
(1,406,772
)
Net unrealized appreciation on investments
   
753,610
     
662,010
 
Net realized gain on investments
   
173,116
     
173,116
 
                 
TOTAL NET ASSETS REPRESENTED BY SHAREHOLDERS' EQUITY
 
$
24,880,928
   
$
24,301,443
 
                 
Net asset value per share
 
$
9.85
   
$
9.88
 
 
 
See Notes to Financial Statements
 

2

 
Integrity Capital Income Fund, Inc.
                 
                       
SCHEDULE OF INVESTMENTS
                   
AS OF JANUARY 31, 2017
                     
(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) (1)
                                 
5500 South Quebec Holdings, LLC
 
Real Estate
 
Promissory note ($4,175,000 par due 12/2019)
0% Cash /
8% PIK
 
 Senior
Secured
 
$
4,152,941
   
$
4,277,035
   
$
124,094
     
17.2
%
                                               
Aequitas Commercial Finance, LLC
(5)
Financial Services
 
Promissory note ($500,000 par due 5/2016)
14.50%
 
 Senior
Secured
   
500,000
     
350,816
     
(149,184
)
   
1.4
%
                                               
Aequitas Peer-To-Peer Funding, LLC 1
(5)
Financial Services
 
Promissory note ($110,000 par due 5/2016)
14.50%
 
 Senior
Secured
   
110,000
     
25,140
     
(84,860
)
   
0.1
%
                                               
Aequitas Peer-To-Peer Funding, LLC 2
(5)
Financial Services
 
Promissory note ($16,500 par due 10/2016)
14.50%
 
 Senior
Secured
   
16,500
     
3,771
     
(12,729
)
   
0.0
%
                                               
Ajubeo, LLC
 
Technology
 
Promissory note ($375,000 par due 12/2017)
0% Cash /
 8% PIK
 
 Secondary
Secured
   
375,000
     
369,965
     
(5,035
)
   
1.5
%
                                               
All Pro Funding II, LLC
 
Real Estate
 
Promissory note ($1,000,000 par due 12/2020)
11.00%
 
 Senior
Secured
   
1,000,000
     
1,000,000
     
-
     
4.0
%
                                               
Burnham & Sullivan Holdings, LLC
 
Real Estate
 
Promissory note ($299,000 par due 7/2018)
10.50%
 
 Secondary
Secured
   
299,000
     
294,691
     
(4,309
)
   
1.2
%
                                               
Care Payment Holdings, LLC
 (5)
Healthcare
 
Promissory note ($1,000,000 par due 9/2018)
12.00%
 
 Senior
Secured
   
1,000,000
     
731,394
     
(268,606
)
   
2.9
%
                                               
eCOS, LLC
 
Real Estate
 
Promissory note ($1,138,695 par due 5/2018)
12.00%
 
 Secondary
Secured
   
1,132,597
     
1,124,096
     
(8,501
)
   
4.6
%
                                               
IRC Malibu, LLC
 
Real Estate
 
Promissory note ($1,619,000 par due 3/2017)
12.00%
 
 Secondary
Secured
   
1,612,524
     
1,619,000
     
6,476
     
6.5
%
                                               
Monarch Country Meadows, LLC
 
Real Estate
 
Promissory note ($199,800 par due 8/2017)
12.00%
 
 Secondary
Secured
   
196,300
     
199,800
     
3,500
     
0.8
%
                                               
Monarch Lincoln Meadows, LLC
 
Real Estate
 
Promissory note ($1,340,000 par due 2/2017)
12.70%
 
 Secondary
Secured
   
1,340,000
     
1,329,102
     
(10,898
)
   
5.3
%
                                               
NC Foundation
 
Real Estate
 
Promissory note ($1,200,000 par due 10/2018)
12.00%
 
 Secondary
Secured
   
1,191,000
     
1,219,514
     
28,514
     
4.9
%
                                               
Northstar Portfolio, LLC
 
Real Estate
 
Promissory note ($3,915,445 par due 9/2020)
0% Cash /
6% PIK
Secondary
Secured
   
3,915,445
     
4,126,128
     
210,683
     
16.6
%
                                               
Patriot Park
 
Real Estate
 
Promissory note ($1,000,000 par due 10/2021)
12.00%
 
 Secondary
Secured
   
988,750
     
1,000,000
     
11,250
     
4.0
%
                                               
Subsentio, LLC
 
Technology
 
Promissory note ($1,200,000 par due 7/2020)
8.75%
 
 Secondary
Secured
   
1,196,479
     
1,200,000
     
3,521
     
4.8
%
                                               
PCM Tax Lien Fund, LP
(2)(4)
Real Estate
 
Promissory note ($902,312 par due 11/2017)
7.00%
 
 Secondary
Secured
   
902,312
     
902,312
     
-
     
3.6
%
                                               
TVO Capital Management, LLC - Westport on the River
(6)
Real Estate
 
Promissory note ($987,000 par due at Final Close)
8.00%
 
 Secondary
Secured
   
987,000
     
987,000
     
-
     
4.0
%
                                               
TVO North America, LLC 1
 
Real Estate
 
Promissory note ($500,000 par due at 3/2017)
12.00%
 
 Secondary
Secured
   
500,000
     
500,000
     
-
     
2.0
%
                                               
TVO North America, LLC 2
 
Real Estate
 
Promissory note ($820,000 par due 3/2017)
12.00% 
 
 Secondary
Secured
      820,000        820,000       -       3.3
                                               
Total debt securities
                $ 22,235,848     $ 22,079,764     $ (156,084     88.7
 
 
See Notes to Financial Statements
 
3

 
 
 
 
                                   
Equity Securities (United States) (1) (3)
   
Contracts
                         
5500 South Quebec Holdings, LLC
Real Estate
Warrants (expiration date 7/2025)
   
49
   
$
-
   
$
-
   
$
-
     
0.0
%
                                             
Ajubeo, LLC
Technology
Warrants (expiration date 12/2019)
   
73,424
     
-
     
392,084
     
392,084
     
1.6
%
                                             
Subsentio, LLC
Technology
Warrants (expiration date 5/2025)
   
136,459
     
-
     
371,756
     
371,756
     
1.5
%
                                             
Subsentio, LLC
Technology
Warrants (expiration date 7/2026)
   
66,666
     
-
     
151,732
     
151,732
     
0.6
%
                                             
Total equity securities
             
$
-
   
$
915,572
   
$
915,572
     
3.7
%
                                             
Investments in Partnership interests (United States) (1)
 
Non-Voting Preferred Ownership %
                                 
BAL Riverchase Capital Partners, LLC
Real Estate
Member Interest
   
14%
 
 
$
850,000
   
$
850,000
   
$
-
     
3.4
%
                                             
Total partnership interests
             
$
850,000
   
$
850,000
   
$
-
     
3.4
%
                                             
Investment in Publicly Traded Partnerships (United States) (1)
 
Shares/Units
                                 
Landmark Infrastructure Partners, LP (2)
Infrastructure
Restricted Stock
   
31,982
   
$
500,000
   
$
494,122
   
$
(5,878
)
   
2.0
%
                                             
Total other investment companies
             
$
500,000
   
$
494,122
   
$
(5,878
)
   
2.0
%
                                             
Total investments
             
$
23,585,848
   
$
24,339,458
   
$
753,610
     
97.8
%
                                             
 
(1) Illiquid investment. At January 31, 2017 100% of investments held by the Company were illiquid.
       
                       
(2) The investment is treated as a non-qualifying asset under Section 55(a) of the 1940 Act. Under the 1940 Act, the Company may not acquire any non-qualifying asset unless, at the time the acquisition is made, qualifying assets represent at least 70% of the Company's total assets. Total non-qualifying assets made up 5.6% of net assets at January 31, 2017.
                       
(3) Non-income producing securities.
                 
 
 
(4) As defined in the Investment Company Act, the Company is deemed to be both an "Affiliated Person" and "Control" to this portfolio company because it owns more than 25% of the portfolio company's outstanding voting securities or it has the power to exercise control over the management or policies of such portfolio company (including through a management agreement).  Transactions during the period for the year ended January 31, 2017 in which the issuer was both an Affiliated company and a portfolio company that the Company is deemed to Control are as follows:
 
 
Company
 
Purchases
   
Redemptions (cost)
   
Sales (cost)
   
Interest income
   
Other
   
Net realized gains (losses)
   
Net unrealized gains (losses)
 
PCM Tax Lien Fund, LP
 
$
-
   
$
-
   
$
-
   
$
15,790
   
$
-
   
$
-
   
$
-
 
 
                     
(5) Non-income producing. Investment was placed on non-accrual status as of April 30, 2016, meaning the company has ceased recognizing interest income on the investment.
                     
(6) This investment does not have a defined closing date. If successful in acquiring property, the debt security will convert into equity at closing. If unsuccessful in acquiring a property, TVO Management, LLC will repay the loan plus interest upon demand.
 
 
See Notes to Financial Statements
 
 
 
4

 
 
Integrity Capital Income Fund, Inc.
                             
                                   
SCHEDULE OF INVESTMENTS
                                 
AS OF OCTOBER 31, 2016
                                 
                                   
Company
Portfolio Company Industry
Investment
 
Interest Rate
 
Senior/ Secondary
 
Cost
   
Fair Value
   
Unrealized Appreciation/ (Depreciation) on Investments
 
% of Net Assets 
                                   
Debt Securities (United States) (1)
                               
5500 South Quebec Holdings, LLC
Real Estate
Promissory note ($4,175,000 par due 12/2019)
 
0% Cash / 8% PIK
 
 Senior
Secured
 
$
4,151,103
   
$
4,260,403
   
$
109,300
 
17.6
%
                                         
Aequitas Commercial Finance, LLC (5)
Financial Services
Promissory note ($500,000 par due 5/2016)
   
14.50%
 
 Senior
Secured
   
500,000
     
337,568
     
(162,432
)
1.4
%
                                           
Aequitas Peer-To-Peer Funding, LLC (5)
Financial Services
Promissory note ($110,000 par due 5/2016)
   
14.50%
 
 Senior
Secured
   
110,000
     
22,279
     
(87,721
)
0.1
%
                                           
Aequitas Peer-To-Peer Funding, LLC (5)
Financial Services
Promissory note ($16,500 par due 10/2016)
   
14.50%
 
 Senior
Secured
   
16,500
     
3,342
     
(13,158
)
0.0
%
                                           
Ajubeo, LLC
Technology
Promissory note ($375,000 par due 12/2017)
 
0% Cash / 8% PIK
 Secondary
Secured
   
375,000
     
366,200
     
(8,800
)
1.5
%
                                         
All Pro Funding II, LLC
Real Estate
Promissory note ($1,000,000 par due 12/2020)
   
11.00%
 
 Senior
Secured
   
1,000,000
     
1,000,000
     
-
 
4.1
%
                                           
Burnham & Sullivan Holdings, LLC
Real Estate
Promissory note ($299,000 par due 7/2018)
   
10.50%
 
 Secondary
Secured
   
299,000
     
299,000
     
-
 
1.2
%
                                           
Care Payment Holdings, LLC (5)
Healthcare
Promissory note ($1,000,000 par due 9/2018)
   
12.00%
 
 Senior
Secured
   
1,000,000
     
707,633
     
(292,367
)
2.9
%
                                           
eCOS, LLC
Real Estate
Promissory note ($1,150,059 par due 5/2018)
   
12.00%
 
 Secondary
Secured
   
1,142,741
     
1,119,418
     
(23,323
)
4.6
%
                                           
Monarch Country Meadows, LLC
Real Estate
Promissory note ($350,000 par due 2/2017)
   
12.00%
 
 Secondary
Secured
   
344,750
     
350,000
     
5,250
 
1.4
%
                                           
Monarch Lincoln Meadows, LLC
Real Estate
Promissory note ($1,340,000 par due 2/2017)
   
12.70%
 
 Secondary
Secured
   
1,247,400
     
1,289,754
     
42,354
 
5.3
%
                                           
NC Foundation
Real Estate
Promissory note ($1,200,000 par due 10/2018)
   
12.00%
 
 Secondary
Secured
   
1,200,000
     
1,218,946
     
18,946
 
5.0
%
                                           
Northstar Portfolio, LLC
Real Estate
Promissory note ($3,915,445 par due 9/2020)
 
0% Cash / 6% PIK
 Secondary
Secured
   
3,915,445
     
4,088,368
     
172,923
 
16.8
%
                                           
Patriot Park
Real Estate
Promissory note ($1,000,000 par due 10/2021)
   
12.00%
 
 Secondary
Secured
   
988,125
     
1,000,000
     
11,875
 
4.1
%
                                           
Subsentio, LLC
Technology
Promissory note ($1,200,000 par due 7/2020)
   
8.75%
 
 Secondary
Secured
   
1,196,208
     
1,200,000
     
3,792
 
4.9
%
                                           
PCM Tax Lien Fund, LP (2) (4)
Real Estate
Promissory note ($902,312 par due 11/2017)
   
7.00%
 
 Secondary
Secured
   
902,312
     
902,312
     
-
 
3.7
%
                                           
TVO Capital Management, LLC - Westport on the River (6)
Real Estate
Promissory note ($987,000 par due at Final Close)
   
8.00%
 
 Secondary
Secured
   
987,000
     
987,000
     
-
 
4.1
%
                                           
TVO North America, LLC (7)
Real Estate
Promissory note ($500,000 par due at 1/2016)
   
12.00%
 
 Secondary
Secured
   
500,000
     
500,000
     
-
 
2.1
%
                                           
TVO North America, LLC (8)
Real Estate
Promissory note ($820,000 par due 9/2016)
   
12.00%
 
 Secondary
Secured
   
820,000
     
820,000
     
-
 
3.4
%
                                           
Total debt securities
                  
$
20,695,584
   
$
20,472,223
   
$
(223,361
)
84.2
%
 
 
See Notes to Financial Statements
 
5

 
 
 
                                 
Company
Portfolio Company Industry
Investment
   
Interest Rate 
 
Senior/ Secondary
   
Cost
     
Fair Value
     
Unrealized Appreciation/ (Depreciation) on Investments
 
% of Net Assets  
 
Equity Securities (United States) (1) (3)
       
 
Contracts
                               
5500 South Quebec Holdings, LLC
Real Estate
Warrants (expiration date 7/2025)
   
49
     
$
-
   
$
-
   
$
-
 
0.0
%
                                           
Ajubeo, LLC
Technology
Warrants (expiration date 12/2019)
   
73,424
       
-
     
359,778
     
359,778
 
1.5
%
                                           
Subsentio, LLC
Technology
Warrants (expiration date 5/2025)
   
136,459
       
-
     
344,559
     
344,559
 
1.4
%
                                           
Subsentio, LLC
Technology
Warrants (expiration date 7/2026)
   
66,666
       
-
     
151,732
     
151,732
 
0.6
%
                                           
Total equity securities
                  
$
-
   
$
856,069
   
$
856,069
 
3.5
%
                                           
Investments in Partnership interests (United States) (1)
 
Non-Voting Preferred Ownership %
                               
BAL Riverchase Capital Partners, LLC
Real Estate
Member Interest
   
14%
 
   
$
850,000
   
$
850,000
   
$
-
 
3.5
%
                                           
Total partnership interests
                  
$
850,000
   
$
850,000
   
$
-
 
3.5
%
                                           
Investment in Publicly Traded Partnerships (United States) (1)
 
Shares/Units
                               
Landmark Infrastructure Partners, LP (2)
Infrastructure
Restricted Stock
   
31,982
     
$
500,000
   
$
529,302
   
$
29,302
 
2.2
%
                                           
Total other investment companies
               
$
500,000
   
$
529,302
   
$
29,302
 
2.2
%
                                           
Total investments
                  
$
22,045,584
   
$
22,707,594
   
$
662,010
 
93.4
%
   
 
(1) Illiquid investment. At October 31, 2016 100% of investments held by the Company were illiquid.
   
                     
(2) The investment is treated as a non-qualifying asset under Section 55(a) of the 1940 Act. Under the 1940 Act, the Company may not acquire any non-qualifying asset unless, at the time the acquisition is made, qualifying assets represent at least 70% of the Company's total assets. Total non-qualifying assets made up 5.9% of net assets at October 31, 2016.
                     
(3) Non-income producing securities.
               
                     
(4) As defined in the Investment Company Act, the Company is deemed to be both an "Affiliated Person" and "Control" to this portfolio company because it owns more than 25% of the portfolio company's outstanding voting securities or it has the power to exercise control over the management or policies of such portfolio company (including through a management agreement).  Transactions during the period for the year ended October 31, 2016 in which the issuer was both an Affiliated company and a portfolio company that the Company is deemed to Control are as follows:
 
Company 
Purchases
 
Redemptions (cost)
 
Sales (cost)
 
Interest income
 
Other
 
Net realized gains (losses)
 
Net unrealized gains (losses)
 
PCM Tax Lien Fund, LP
 
$
-
   
$
-
   
$
-
   
$
63,228
   
$
-
   
$
-
   
$
-
 
 
                                                         
(5) Non-income producing. Investment was on non-accrual status as of April 30, 2016, meaning the company has ceased recognizing interest income on the investment.
 
                                                         
(6) This investment does not have a defined closing date. If successful in acquiring property, the debt security will convert into equity at closing. If unsuccessful in acquiring a property, TVO Management, LLC will repay the loan plus interest upon demand.
 
                                                         
(7) This investment has an original maturity date in January 2016, but was extended in December 2016 to a par due date of March 2017. Partial payments of accrued interest were made on April 19, 2016, June 16, 2016, and August 29, 2016. As such, the note has not been placed on non-accrual status. At October 31, 2016, this note had $10,000 of outstanding interest in the Company's note receivable balance.
 
                                                         
(8) This investment has an original maturity date in September 2016, but was extended in December 2016 to a par due date of March 2017. A partial payment of accrued interest was made on September 30, 2016. As such, the note has not been placed on non-accrual status. At October 31, 2016, this note had $82,000 of outstanding interest in the Company's note receivable balance.
 
 
See Notes to Financial Statements
 
 
6

 
 
Integrity Capital Income Fund, Inc.
     
       
       
STATEMENTS OF OPERATIONS
     
 
   
Three months ended   
 
   
January 31, 2017
   
January 31, 2016
 
   
(unaudited)
   
(unaudited)
 
             
INVESTMENT INCOME:
           
From non-controlled/non-affiliate company investments:
           
Interest on investments, net
 
$
536,183
   
$
344,085
 
Dividend and interest income
   
12,360
     
7,964
 
   Total investment income from non-controlled/non-affiliate company investments
   
548,543
     
352,049
 
From controlled affiliate company investments:
               
Interest on investments
   
15,790
     
16,141
 
   Total investment income from controlled affiliate company investments
   
15,790
     
16,141
 
Total investment income
   
564,333
     
368,190
 
                 
EXPENSES:
               
Base management fees
   
99,966
     
88,971
 
Professional fees
   
127,224
     
127,036
 
Marketing expenses
   
10,642
     
4,020
 
Custody fees
   
9,997
     
8,897
 
Insurance expense
   
4,250
     
3,875
 
Director fees
   
6,799
     
1,500
 
Interest expense
   
21,313
     
5,554
 
Other expenses
   
2,423
     
-
 
                 
Total expenses
   
282,614
     
239,853
 
                 
Operating expenses refunded/(reimbursed) (Note 4)
   
-
     
(78,196
)
                 
Net expenses
   
282,614
     
161,657
 
                 
NET INVESTMENT INCOME
   
281,719
     
206,533
 
                 
REALIZED AND UNREALIZED GAIN/(LOSS):
               
Net realized gain on investments:
               
Non-controlled/non-affiliate company investments
   
-
     
171,376
 
Net change in unrealized appreciation/(depreciation) on investments:
               
Non-controlled/non-affiliate company investments
   
91,600
     
(50,418
)
                 
Net realized and unrealized gain on investments:
   
91,600
     
120,958
 
                 
Income tax expense
   
-
     
-
 
                 
NET INCREASE IN NET ASSETS RESULTING  FROM OPERATIONS
 
$
373,319
   
$
327,491
 
                 
Per Common Share data:
               
                 
Net investment income per common share - basic and diluted
 
$
0.11
   
$
0.10
 
Earnings per common share - basic and diluted
 
$
0.15
   
$
0.15
 
Weighted average shares of common stock outstanding - basic and diluted
   
2,494,574
     
2,148,460
 
Distributions declared per common share
 
$
0.19
   
$
0.19
 
 
 
See Notes to Financial Statements
 
7

 
Integrity Capital Income Fund, Inc.
                       
                             
                             
STATEMENTS OF CHANGES IN NET ASSETS
                   
 
                                           
   
Common Stock
   
Paid-in Capital in
Excess of
   
Accumulated over- distributed net investment
   
Net Unrealized Appreciation (Depreciation) on Investments Accumulated over- distributed net investment
   
Net Realized
 Gain on
   
Total Net
 
   
Shares
    Amount     Par Value     income    
 income
    investments     Assets  
For the three months ended January 31, 2016 (unaudited)
                         
BALANCE -- October 31, 2015
   
1,849,246
   
$
185
   
$
18,612,085
   
$
(262,113
)
 
$
474,791
   
$
-
   
$
18,824,948
 
                                                         
Issuance of common stock
   
459,404
     
46
     
4,676,554
     
-
     
-
     
-
     
4,676,600
 
Net increase in net assets resulting from operations
   
-
     
-
     
-
     
206,533
     
(50,418
)
   
171,376
     
327,491
 
Distributions (0.19 per share)
   
-
     
-
     
-
     
(408,821
)
   
-
     
-
     
(408,821
)
                                                         
BALANCE — January 31, 2016
   
2,308,650
   
$
231
   
$
23,288,639
   
$
(464,401
)
 
$
424,373
   
$
171,376
   
$
23,420,218
 
                                                         
                                                         
For the three months ended January 31, 2017 (unaudited)
                                 
BALANCE -- October 31, 2016
   
2,459,506
   
$
246
   
$
24,872,843
   
$
(1,406,772
)
 
$
662,010
   
$
173,116
   
$
24,301,443
 
                                                         
Issuance of common stock
   
65,534
     
7
     
674,993
     
-
     
-
     
-
     
675,000
 
Redemption of common stock
   
-
     
-
     
-
     
-
     
-
     
-
     
-
 
Net increase in net assets resulting from operations
   
-
     
-
     
-
     
281,719
     
91,600
     
-
     
373,319
 
Distributions ($0.19 per share)
   
-
     
-
     
-
     
(468,834
)
   
-
     
-
     
(468,834
)
                                                         
BALANCE — January 31, 2017
   
2,525,040
   
$
253
   
$
25,547,836
   
$
(1,593,887
)
 
$
753,610
   
$
173,116
   
$
24,880,928
 
 
 
 
See Notes to Financial Statements
 
 
8

 
 
Integrity Capital Income Fund, Inc.
       
         
         
STATEMENTS OF CASH FLOWS
       
 
   
For the three months ended
   
For the three months ended
 
   
January 31, 2017
   
January 31, 2016
 
   
(unaudited)
   
(unaudited)
 
             
CASH FLOWS FROM OPERATING ACTIVITIES:
           
Net increase in net assets resulting from operations
 
$
373,319
   
$
327,491
 
Adjustments to reconcile net increase in net assets resulting from
               
operations to net cash used in operating activities:
               
Purchase of investments
   
(1,590,810
)
   
(2,450,782
)
Proceeds from principal payments and sales of investments
   
161,564
     
925,941
 
Net realized gain on investments
   
-
     
(171,376
)
Net change in unrealized appreciation on investments
   
(91,600
)
   
50,418
 
Accretion of loan origination fees
   
(111,018
)
   
(13,651
)
PIK interest
   
(129,924
)
   
(240,034
)
Change in assets and liabilities:
               
Interest receivable
   
(30,340
)
   
33,701
 
Prepaid insurance
   
4,249
     
3,875
 
Other assets
   
12,500
     
682
 
Due to Adviser
   
168,202
     
41,212
 
Income taxes payable
   
(117,002
)
   
-
 
Prepaid interest income on non-affiliate company investments
   
13,200
     
-
 
Deferred loan origination fees
   
-
     
(35,649
)
                 
Net cash used in operating activities
   
(1,337,660
)
   
(1,528,172
)
                 
CASH FLOWS FROM FINANCING ACTIVITIES:
               
Proceeds from issuances of common stock
   
675,000
     
4,676,600
 
Distributions of income paid
   
(468,834
)
   
(408,821
)
Borrowings on line of credit
   
1,801,846
     
-
 
Repayments on line of credit
   
-
     
(1,701,008
)
                 
Net cash provided by financing activities
   
2,008,012
     
2,566,771
 
                 
NET CHANGE IN CASH AND CASH EQUIVALENTS
   
670,352
     
1,038,599
 
                 
CASH AND CASH EQUIVALENTS — Beginning of period
   
2,528,322
     
3,764,999
 
                 
CASH AND CASH EQUIVALENTS — End of period
 
$
3,198,674
   
$
4,803,598
 
                 
                 
Interest Paid during the period
 
$
19,467
   
$
5,554
 
Taxes paid during the period
 
$
(117,002
)
 
$
-
 
Distributions declared and paid during the period
 
$
(468,834
)
 
$
(408,821
)
 
 
See Notes to Financial Statements
 
 
9

 
Integrity Capital Income Fund, Inc.
Notes to Financial Statements
Three Months Ended January 31, 2017
(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 and was initially funded on January 21, 2014 (commencement of operations). 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 and 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 by (1) accessing established relationship channels of Integrity Trust Company, LLC, a Colorado limited liability company (the "Adviser"), (2) selecting investments within our core markets, (3) partnering with experienced private equity, real estate and investment firms, (4) implementing the disciplined underwriting standards of the Adviser and (5) drawing upon the combined experience and resources of the Adviser and its affiliates.

The Company generally invests in securities that have not been rated by independent rating agencies or that would be rated below investment grade if they were rated.  These securities have predominately speculative characteristics with respect to the issuer's capacity to pay interest and repay principal.

2.
SIGNIFICANT ACCOUNTING POLICIES

Basis of Accounting

The accompanying 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. The Company has determined it meets the definition of an investment company and follows the accounting and reporting guidance in the Financial Accounting Standards Board ("FASB") Accounting Standards Codification ("ASC") Topic 946—Financial Services—Investment Companies ("ASC Topic 946"). 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.

Use of Estimates

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.
 
 
10

 
 
Integrity Capital Income Fund, Inc.
Notes to Financial Statements
Three Months Ended January 31, 2017
(unaudited)

 
 
Cash and Cash Equivalents

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; however, management does not believe it is exposed to any significant credit risk.

Fair Value of Investments

The Company's fair value accounting policies adhere to the provisions of FASB ASC Topic 820, Fair Value Measurements and Disclosures ("Topic ASC 820").  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. See further description of fair value methodology in Note 5.

 
 
11

 
Integrity Capital Income Fund, Inc.
Notes to Financial Statements
Three Months Ended January 31, 2017
(unaudited)


 
Revenue Recognition

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 months ended January 31, 2017 and January 31, 2016, the Company earned interest income of $551,973 and $360,226 (including $15,790 and $16,141 in interest on investments from affiliate company), respectively.  As of January 31, 2017 and October 31, 2016, the Company had interest receivable of $1,192,264 and $1,032,000, respectively.  The Company had no allowances on interest receivable balances as of January 31, 2017 and October 31, 2016.
 
Fee income such as loan origination, closing, commitment, structuring and other upfront fees is capitalized, and the Company accretes or amortizes such amounts over the life of the loan as net interest on investments. For the three months ended January 31, 2017 and 2016, interest income included $111,018 and $13,651, respectively, of accretion of loan origination fees. For the three months ended January 31, 2017 and 2016, the Company received fee income of $28,190 and $0, respectively.

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 Statements of Operations.

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 three months ended January 31, 2017 and the year ended October 31, 2016, the Company held three investments, Ajubeo, LLC, Northstar Portfolio, LLC and 5500 South Quebec Holdings, LLC with contractual PIK interest. As of January 31, 2017, the balance of accrued PIK interest related to these investments was $67,677, $291,260, and $474,625, respectively. As of October 31, 2016 the balance of accrued PIK interest related to these investments was $59,066, $260,852, and $383,720, respectively.  All PIK interest amounts are recorded within the interest receivable balances as of January 31, 2017 and October 31, 2016. The Company notes that investments held with PIK interest do not have cash interest rates.

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 investment 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 months ended January 31, 2017 and 2016, the Company recorded dividend income of $10,794 and 7,964, 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 three non-accrual loans held as of January 31, 2017 (Aequitas Commercial Finance, LLC, Aequitas Peer-To-Peer Funding, LLC, and Care Payment Holdings, LLC) with a fair value of $1,111,121 and cost of $1,626,500.  As of October 31, 2016 there were three non-accrual loans (Aequitas Commercial Finance, LLC, Aequitas Peer-To-Peer Funding, LLC, and Care Payment Holdings, LLC) with a fair value of $1,070,822 and cost of $1,626,500
 
 
12

 
 
Integrity Capital Income Fund, Inc.
Notes to Financial Statements
Three Months Ended January 31, 2017
(unaudited)



Partial loan sales: The Company follows the guidance in FASB 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 Statements 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 January 31, 2017, there were no partial loan sales which met the definition of a participating interest to a related party.  For the three months ended January 31, 2016 there were partial loan sales which met the definition of a participating interest to an unrelated third party of $40,000 of the Company's interest in its Promissory Note in eCOS, LLC. There was no gain or loss resulting from these partial loan sales.

Income Taxes

The Company has elected to be treated as a BDC under the 1940 Act.  The Company elected to be treated as a RIC under the Internal Revenue Code beginning with the tax year ended October 31, 2015. Such election was made upon the filing of the Company's first federal tax return for RIC purposes.  In order to continue to qualify as a RIC, among other things, the Company must 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 has made, and intends to continue to make, the requisite distributions to its stockholders, which generally relieves 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 it distributes at least annually to its stockholders as distributions of income. 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) 98.0% of ordinary income for each calendar year, (ii) 98.2% 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 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. For the three months ended January 31, 2017 and January 31, 2016, there were no amounts recorded for U.S. federal excise tax.
 
The Company accounts for income taxes in conformity with ASC Topic 740 — Income Taxes ("ASC Topic 740"). ASC Topic 740 provides guidelines for how uncertain tax positions should be recognized, measured, presented and disclosed in financial statements. ASC Topic 740 requires the evaluation of tax positions taken in the course of preparing the Company's tax returns to determine whether the tax positions are "more-likely-than-not" to be sustained by the applicable tax authority. Tax benefits of positions not deemed to meet the more-likely-than-not threshold would be recorded as a tax expense in the current year. It is the Company's policy to recognize accrued interest and penalties related to uncertain tax benefits in income tax expense. As of and during the three months ended January 31, 2017, the Company did not have any unrecognized tax benefits. All tax years since inception remain subject to examination by U.S. federal and most state tax authorities.
 
 
 
 
13

 
 
Integrity Capital Income Fund, Inc.
Notes to Financial Statements
Three Months Ended January 31, 2017
(unaudited)



Distributions

Distributions to common stockholders are recorded on the record date. The amount to be paid out as a 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. During the three months ended January 31, 2017 and 2016, there were total distributions of $468,834 and $408,821, respectively.

Redemptions of Common Stock

As the Company's common stock is currently not sold in a publicly traded marketplace, the Company has limited its redemption of common stock to 2.5% of the weighted average number of shares outstanding in the prior four calendar quarters. All redemptions of common stock must be formally requested by the shareholder.

3.
BORROWINGS

Revolving Credit Facility

During the fiscal year ended October 31, 2015, the Company established a line of credit of $3,200,000. The Company renewed the line of credit during the fiscal year ended October 31, 2016 and the line of credit now expires on October 21, 2017, unless extended again. In the process of renewing the line of credit, the credit facility was increased to $4,000,000 from $3,200,000. Borrowings under the line of credit bear interest at a rate of 4.85% over a year of 360 days. All borrowings are collateralized by all assets of the Company. The outstanding balance on the line of credit was $3,502,533 and $1,700,687 at January 31, 2017 and October 31, 2016, respectively. Borrowings under the line of credit are subject to certain financial covenants and restrictions on indebtedness, distribution payments, financial guarantees, business combinations, and other related items. As of January 31, 2017 and October 31, 2016, the Company was in compliance with all covenants.

In accordance with the 1940 Act, with certain limited exceptions, the Company is only allowed to borrow amounts such that its asset coverage, calculated pursuant to the 1940 Act, is at least 200% after such borrowing. As of January 31, 2017 and October 31, 2016, the Company's asset coverage was 810% and 1,529%, respectively.
 
 
14

 
Integrity Capital Income Fund, Inc.
Notes to Financial Statements
Three Months Ended January 31, 2017
(unaudited)

 

 
4.
RELATED PARTY TRANSACTIONS AND AGREEMENTS

Investment Advisory and Management Agreement

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 1.50% 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 7.50% 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 months ended January 31, 2017 and January 31, 2016, the Adviser earned $99,966 and $88,971 in base management fees, respectively.  There was no Incentive Fee for the three months ended January 31, 2017 and January 31, 2016.

Custody Agreement

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 through October 31, 2015. Effective November 1, 2015, Custodial Property was amended to be defined as gross assets at the end of the most recently completed fiscal quarter, appropriately adjusted for any equity capital raises or repurchases during the current fiscal quarter.  The  Adviser invoices the Company quarterly in arrears for the pro-rata portion of the annual amount.  For the three months ended January 31, 2017 and January 31, 2016, the Adviser earned $9,997 and $8,897, respectively, in custody fees.

 
 
15


 
Integrity Capital Income Fund, Inc.
Notes to Financial Statements
Three Months Ended January 31, 2017
(unaudited)



Administration Agreement
Pursuant to the Investment 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 total operating expense to 2.34% of total operating expenses of the Company.  Effective September 1, 2014, the OELA was amended to 2.95%, whereby any expenses in excess of the OELA will be reimbursed to the Company by the Adviser.  However, the Adviser will be able to recoup from the Company these expenses reimbursed in excess of the limit over a period not to exceed three years.  On August 30, 2016, the Adviser gave a termination notice of the Operating Expense Limitation Agreement to the Company, effective as of the close of business, October 31, 2016. The Company's independent directors have reviewed the request and have approved the termination of the agreement. Amounts due under the agreement at the time of cancellation will still be collected under the terms of the agreement.

For the three months ended January 31, 2017, the total operating expenses did not fall below the 2.95% limit or the 2.34% limit and as such no amounts were refunded to the Adivser.  As of January 31, 2016, the total amount of operating expenses incurred by the Company was more than the limit by $78,196 and this amount was refunded to the Company by the Adviser.  Such expenses paid by the Adviser each quarter will be subject to reimbursement to the Adviser over a period not to exceed three years, if the Company's expense ratio for such future period is less than the 2.95% limit or the 2.34% limit related to each respective period. The following table presents the amounts reimbursed by the Adviser and the expiration date for such future possible reimbursement by the Company.
 
Date Reimbursed
 
Waiver Amount
   
Operating Expenses Refunded
   
Remaining Waiver Amount
 
Expiration Date
June 30, 2014
 
$
121,939
   
$
-
   
$
121,939
 
June 30, 2017
October 31, 2014
   
55,091
     
(28,817
)
   
26,274
 
October 31, 2017
January 31, 2015
   
77,836
     
-
     
77,836
 
January 31, 2018
April 30, 2015
   
49,943
     
-
     
49,943
 
April 30, 2018
July 31, 2015
   
15,643
     
-
     
15,643
 
July 31, 2018
October 31, 2015
   
16,920
     
-
     
16,920
 
October 31, 2018
January 31, 2016
   
78,196
     
-
     
78,196
 
January 31, 2019
October 31, 2016
   
21,758
     
-
     
21,758
 
October 31, 2019
   
$
437,326
   
$
(28,817
)
 
$
408,509
   
 
 
 
 
 
16

 
 
Integrity Capital Income Fund, Inc.
Notes to Financial Statements
Three Months Ended January 31, 2017
(unaudited)


 
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 on a quarterly basis. As of January 31, 2017,  $336,896  was due to the Adviser for such reimbursements, which did not include any amounts reimbursed or refunded related to the agreement. As of October 31, 2016, $168,694 was due to the Adviser for such reimbursements, net of the fourth quarter OELA reimbursement of $21,758.  The Due to Adviser balance is settled monthly in arrears. Amounts paid by the Adviser on behalf of the Company are non-interest bearing.

Line of Credit Agreement
As discussed in Footnote 3, the Company holds a revolving credit facility with Central Bank & Trust Co. ("the Lender"). The  Lender is a correspondent bank with the Adviser. In addition, Gemini Bancshares, Inc., the sole shareholder of the Adviser, also has a correspondent bank relationship with the Lender and has a loan currently outstanding with the Lender in the amount of $3,205,000 as of January 31, 2017.

Bank Account

The Company has held a bank account with Integrity Bank & Trust, Inc. ("Integrity Bank"), an affiliate of the Adviser, since its inception. The Company's ending balance in the Integrity Bank account was $0 as of January 31, 2017 and October 31, 2016.

5.
FAIR VALUE OF INVESTMENTS

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.  Topic 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 Topic ASC 946. 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. As of January 31, 2017 and October 31, 2016, the Company did not hold any investments valued using NAV.

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.  At January 31, 2017 and October 31, 2016, the Company held one Level 1 investment, Landmark Infrastructure Partners, LP.
 
 
17

 
 
Integrity Capital Income Fund, Inc.
Notes to Financial Statements
Three Months Ended January 31, 2017
(unaudited)



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. The primary method for determining enterprise value uses a multiple analysis whereby appropriate multiples are applied to the portfolio company's net income before net interest expense, income tax expense, depreciation, and amortization. The enterprise analysis is performed to determine the value of equity investments and to determine if debt investments are credit impaired. If debt investments are credit impaired, the Company will use the enterprise value analysis or a liquidation basis analysis to determine fair value. For debt investments that are not determined to be credit impaired, the Company uses a market interest rate yield analysis to determine fair value. 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 throughout this note. 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 readily available 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.

The following tables present information about the Company's assets measured at fair value on a recurring basis at January 31, 2017 and October 31, 2016. 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 three months ended January 31, 2017 and the year ended October 31, 2016, there were no transfers in or out of Level 1, 2, and 3.
 
 
 
18

 
 
Integrity Capital Income Fund, Inc.
Notes to Financial Statements
Three Months Ended January 31, 2017
(unaudited)



Assets Measured at Fair Value on a Recurring Basis at January 31, 2017:
 
   
Quoted Prices in Active Markets for Identical Assets
   
Significant Other
Observable Inputs
   
Significant Unobservable Inputs
   
Balance at
January 31,
 
   
(Level 1)
   
(Level 2)
   
(Level 3)
    2017  
Investments:
                       
Debt Securities
 
$
-
   
$
-
   
$
22,079,764
   
$
22,079,764
 
Equity Securities
   
-
     
-
     
915,572
     
915,572
 
Investments in Partnership
                 
    Interests
   
-
     
-
     
850,000
     
850,000
 
Investment in Publicly Traded
                 
    Partnerships
   
494,122
     
-
     
-
     
494,122
 
   Total
 
$
494,122
   
$
-
   
$
23,845,336
   
$
24,339,458
 
 
 
Assets Measured at Fair Value on a Recurring Basis at October 31, 2016:
 
 
   
Quoted Prices in Active Markets for Identical Assets
   
Significant Other
Observable Inputs
   
Significant Unobservable Inputs
   
Balance at
October 31,
 
   
(Level 1)
   
(Level 2)
   
(Level 3)
    2016  
Investments:
                       
Debt Securities
 
$
-
   
$
-
   
$
20,472,223
   
$
20,472,223
 
Equity Securities
   
-
     
-
     
856,069
     
856,069
 
Investments in Partnership
                 
    Interests
   
-
     
-
     
850,000
     
850,000
 
Investment in Publicly Traded
                 
    Partnerships
   
529,302
     
-
     
-
     
529,302
 
   Total
 
$
529,302
   
$
-
   
$
22,178,292
   
$
22,707,594
 
 
 
On August 30, 2016, the Company's investment in Other Investment Companies, which was valued using NAV, was purchased by a publicly traded partnership. As compensation for the Company's investment, the Company received shares in the publicly traded partnership based on the Company's pro rata interest in the Fund and the final purchase price of the sale. As such, the Company's investment in the publicly traded partnership is classified as a Level 1 investment at January 31, 2017 and October 31, 2016.




19

 
Integrity Capital Income Fund, Inc.
Notes to Financial Statements
Three Months Ended January 31, 2017
(unaudited)




Changes in Level 3 Assets Measured at Fair Value on a Recurring Basis:
 
   
Debt Securities
   
Equity Securities
   
Investments in Partnership Interests
   
Total
 
                         
Balance at October 31, 2015
 
$
14,067,446
   
$
301,084
   
$
1,706,233
   
$
16,074,763
 
Purchase of investments
   
8,545,224
     
-
     
-
     
8,545,224
 
Proceeds from principal payments
                 
     and sales of investments
   
(2,062,126
)
   
-
     
(860,916
)
   
(2,923,042
)
Net realized gains
   
-
     
-
     
173,116
     
173,116
 
Net unrealized gains/(losses)
   
(201,695
)
   
554,985
     
(168,433
)
   
184,857
 
Accretion of loan origination fees
   
123,374
     
-
     
-
     
123,374
 
Balance at October 31, 2016
 
$
20,472,223
   
$
856,069
   
$
850,000
   
$
22,178,292
 
Purchase of investments
 
$
1,590,810
   
$
-
   
$
-
   
$
1,590,810
 
Proceeds from principal payments
                 
     and sales of investments
   
(161,564
)
   
-
     
-
     
(161,564
)
Net realized gains
   
-
     
-
     
-
     
-
 
Net unrealized gains/(losses)
   
67,277
     
59,503
     
-
     
126,780
 
Accretion of loan origination fees
   
111,018
     
-
     
-
     
111,018
 
Balance at January 31, 2017
 
$
22,079,764
   
$
915,572
   
$
850,000
   
$
23,845,336
 
 
 
Quantitative Information About Level 3 Fair Value Measurements:

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 January 31, 2017 and October 31, 2016.
 
January 31, 2017     
Type of Security
 
Fair Value
 
Valuation Technique
Unobservable Input
 
Range (Wtd Avg)
 
Debt Securities
 
$
20,968,643
 
Yield Analysis
Market Yield
   
6.0 - 12.7% (9.3%)
 
   
$
1,111,121
 
Liquidation Basis
Discount Rate
   
14.0 - 16.5% (14.9%)
 
Equity Securities
 
$
915,572
 
Earnings Multiple
Market Comparables
   
2.3 - 3.8(3.1)
 
   
$
-
 
Income Approach
Capitalization Rate
   
14.8%
 
Investments in Partnership Interests
 
$
850,000
 
Income Approach
Capitalization Rate
   
7.0%
 
                     
October 31, 2016       
Type of Security
 
Fair Value
 
Valuation Technique
Unobservable Input
 
Range (Wtd Avg)
 
Debt Securities
 
$
19,401,401
 
Yield Analysis
Market Yield
   
6.0 - 12.7% (9.1%)
 
   
$
1,070,822
 
Liquidation Basis
Discount Rate
   
14.0 - 16.5% (14.8%)
 
Equity Securities
 
$
856,069
 
Earnings Multiple
Market Comparables
   
2.3 - 3.0(2.8)
 
   
$
-
 
Income Approach
Capitalization Rate
   
14.8%
 
Investments in Partnership Interests
 
$
850,000
 
Income Approach
Capitalization Rate
   
7.0%
 
 
 
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.

6.
COMMITMENTS AND CONTINGENCIES

In the normal course of business, the Company may enter into commitments to invest in certain private equity funds. Under these agreements, the Company would be required to make payments to third parties upon request. The Company had no such commitments outstanding at January 31, 2017 and October, 31 2016.

7.
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 months ended January 31, 2017 and January 31, 2016.
 
   
Three months ended
 
   
January 31, 2017
   
January 31, 2016
 
Earnings per share - basic:
           
Net increase in net assets resulting from operations
 
$
373,319
   
$
327,491
 
Weighted average shares outstanding - basic
   
2,494,574
     
2,148,460
 
Earnings per share - basic:
 
$
0.15
   
$
0.15
 
 
 

20


 
 
Integrity Capital Income Fund, Inc.
Notes to Financial Statements
Three Months Ended January 31, 2017
(unaudited)




8.
DISTRIBUTIONS FROM INCOME

The Company's distributions from income and realized gains are recorded on the date declared (record date). The following table summarizes the Company's declarations and distributions during the three months ended January 31, 2017:

Declaration Date
Distribution Date
Amount Per Share
Cash Distribution
11/28/2016
11/28/2016
$0.0625
$153,901
12/27/2016
12/27/2016
$0.0625
$157,117
1/25/2017
1/25/2017
$0.0625
$157,816

 
9.
FINANCIAL HIGHLIGHTS
 
    
For the three months ended
   
For the three months ended
 
Per Share Data:
 
January 31, 2017
   
January 31, 2016
 
             
Net asset value at beginning of period
 
$
9.88
   
$
10.18
 
Issuance of common stock
   
-
     
-
 
Net investment income (2)
   
0.11
     
0.10
 
Net realized and unrealized gain (2)
   
0.04
     
0.05
 
Net increase in shareholder's equity
   
0.15
     
0.15
 
Accretive effect of share issuance above NAV (3)
   
0.01
     
-
 
Shareholder distributions:
               
From net investment income
   
(0.19
)
   
(0.19
)
Income tax expense
   
-
     
-
 
Net asset value at end of period
 
$
9.85
   
$
10.14
 
Shares outstanding at end of period
   
2,525,040
     
2,308,650
 
Ratio/Supplemental Data:
               
Weighted average net assets at end of period
   
24,668,937
     
21,919,631
 
                 
Total return based on net asset value (4)
   
1.52
%
   
1.47
%
                 
Ratio of gross operating expenses to average net assets (1)
   
4.58
%
   
4.38
%
Waived or reimbursed expenses (1)
   
0.00
%
   
-1.43
%
Ratio of net operating expenses to average net assets (1)
   
4.58
%
   
2.95
%
                 
Ratio of net investment income to average net assets (1)
   
4.57
%
   
3.77
%
Average debt outstanding
   
2,601,610
     
850,504
 
Average debt outstanding per share (2)
 
$
1.04
   
$
0.40
 
Portfolio turnover
   
0.74
%
   
7.43
%
 
(1)
The ratios have been annualized except for those expenses that are not recurring.
(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 distribution 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. Financial highlights are calculated for all outstanding common stock as a whole.  An individual shareholder's return and ratios may vary.


 
 
21

 
 
Integrity Capital Income Fund, Inc.
Notes to Financial Statements
Three Months Ended January 31, 2017
(unaudited)




10.
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 three investments with PIK interest, we note that the interest rate and warrants received 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 Company'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 Company for these fees.
 
 
 
22

 
 
Integrity Capital Income Fund, Inc.
Notes to Financial Statements
Three Months Ended January 31, 2017
(unaudited)




11.
INDEMNIFICATION

The Company has provided general indemnifications to the Adviser, any affiliate of the Adviser and any person acting on behalf of the Adviser or such affiliate when they act, in good faith, in the best interest of the Company. The Company is unable to develop an estimate of the maximum potential amount of future payments that could potentially result from any hypothetical future claim, but expects the risk of having to make any payments under these general business indemnifications to be remote.

12.
SUBSEQUENT EVENTS

For the purpose of issuing these financial statements, the Company evaluated events and transactions through the date the financial statements were issued.

The Company continued to pay its monthly distribution of $0.0625 per share.

On February 21, 2017, the Company received a partial principal payment of $297,449 related to it's promissory note with NC Foundation. On February 28, 2017 the Company received a payoff of $1,340,000 related to its promissory note with Monarch Lincoln Meadows, LLC.
 
On March 10, 2017, the Company made an investment of $750,000 through Class B member interest in 860 Potomac, LLC.
 
On February 14, 2017, the Company filed a tender offer to purchase up to 61,262.45 shares of its issued and outstanding Common Stock, par value $0.0001, at $9.88 per share, which represents the Company's net asset value per share as of the quarter ended October 31, 2016. The tender offer expired on March 15, 2017.

On March 1, 2017, the Company made a payment of $750,000 on its line of credit.

On March 3, 2017, the Board of Directors approved requesting shareholder approval via proxy for conversion from a BDC to a private real estate investment trust (REIT).  The conversion must be approved by a majority of shareholders for the Company to be converted to a REIT.


 
 
 
23


Item 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion should be read in conjunction with our unaudited financial statements and notes thereto included in this quarterly report and our 2016 Annual Report on Form 10-K for the year ended October 31, 2016.

Overview 

We were incorporated on December 10, 2013 under the laws of the State of Colorado.  We are externally managed and have elected to be regulated as a BDC under the 1940 Act. As a BDC, we are required to comply with certain regulatory requirements. We must not acquire any assets other than "qualifying assets" specified in the 1940 Act unless, at the time the acquisition is made, at least 70% of our total assets are qualifying assets (with certain limited exceptions). Qualifying assets include investments in "eligible portfolio companies." Under the relevant SEC rules, the term "eligible portfolio company" includes all private companies, companies whose securities are not listed on a national securities exchange, and certain public companies that have listed their securities on a national securities exchange and have a market capitalization of less than $250 million. These rules also permit us to include as qualifying assets certain follow-on investments in companies that were eligible portfolio companies at the time of initial investment but no longer meet the definition.

We invest principally in debt securities and 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.  We expect that the debt securities will generally be collateralized by the assets of the company and will carry a market rate of interest.

We seek to create a diverse portfolio that includes senior secured and second lien loans and warrants and equity securities by primarily investing approximately $500,000 to $5.0 million of capital, on average, in the securities of U.S. micro-cap companies. As of January 31, 2017, we had twenty debt investments in eighteen companies, equity investments in one investment partnership, one other investment company and three portfolio companies in the form of warrants. As of October 31, 2016, we had nineteen debt investments in seventeen companies, equity investments in one investment partnership, one other investment company and three portfolio companies in the form of warrants.

On March 3, 2017, the Board of Directors approved requesting shareholder approval via proxy for conversion from a BDC to a private real estate investment trust (REIT).  The conversion must be approved by a majority of shareholders for the Company to be converted to a REIT.
Results of Operations

Investment Income.  We generate revenue in the form of interest and fee income on debt investments and capital gains and distributions, if any, on portfolio company investments that we originate or acquire.  Our debt investments typically have a term of two to five years and bear interest at a fixed or floating rate.  In some cases, our investments provide for deferred interest payments or payment-in–kind (or "PIK") interest. We may also generate revenue in the form of commitment, origination (related to debt investments), structuring or diligence fees, consulting fees, and fees for providing significant managerial assistance. 
 
24

 

We generated revenue of $564,333 during the three months ended January 31, 2017.  This included $551,973 in interest on investments (including $15,790 interest on investments from affiliated company and $111,018 in revenue recognized from origination fees), $1,566 in interest from bank accounts, and $10,794 in dividend income.  For the comparable three months ended January 31, 2016, we generated revenue of $368,190. This included $360,226 in interest on investments (including $16,141 interest on investments from affiliated company and $13,651 in revenue recognized from origination fees), $0 in interest income from bank accounts, and $7,964 in dividend income.

Expenses. We expect our operating expenses to be relatively stable or decline as a percentage of total assets during periods of asset growth and increase during periods of asset declines. Once current expenses fall below the Operating Expense Limitation Agreement ("OELA") of 2.95% or 2.34%, the Adviser will start to receive reimbursements from the Company for any deferred expenses up to the 2.95% limit or the 2.34% limit related to each respective period. 

During the three months ended January 31, 2017, the Company had expenses of $282,614, consisting of: (i) base management fees of $99,966; (ii) legal fees of $17,544; (iii) other professional fees of $109,680; (iv) marketing expenses of $10,642; (v) custody fees of $9,997; (vi) insurance expenses of $4,250; (vii) directors' fees of $6,799; (viii) interest expense of $21,313; and (ix) other expenses of $2,423. During the three months ended January 31, 2016, the Company had expenses of $239,853, consisting of: (i) base management fees $88,971 (ii) legal fees of $22,296; (iii) other professional fees of $104,740; (iv) marketing expenses of $4,020; (v) custody fees of $8,897; (vi) insurance expenses of $3,875; (vii) directors' fees of $1,500; and (viii) interest expense of $5,554.

The Adviser has entered into the 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 be reimbursed to the Company by the Adviser.  However, the Adviser will be able to recoup from the Company these expenses reimbursed in excess of the limit over a period not to exceed three years.

On August 30, 2016 the Adviser gave a termination notice of the OELA to the Company, effective as of the close of business, October 31, 2016.  The Company's independent directors have reviewed the request and have approved the termination of the agreement.  The original purpose of the OELA was to limit the expenses during the initial start of the Company.  The Directors noted that this purpose has been achieved.  In their determination, the independent directors reviewed the relevant factors including the operating expense and performance history of the Company and compared that information with the performance of other BDC's.  This revealed that the Company's operating expenses were materially lower than the average operating expenses of those reviewed.  It is noted that the existing operating expense reimbursement schedule and expiration dates are not affected by this termination and reimbursements to the Adviser remain in place subject to the OELA agreement.
 
25

 

For the three months ended January 31, 2017, total operating expenses did not fall below the 2.95% limit or the 2.34% limit and as such no amounts were refunded to the Adviser.  As of January 31, 2016, the total amount of operating expenses incurred by the Company, which exceeded the limit and were reimbursed by the Adviser was $78,196. Such expenses paid by the Adviser each quarter will be subject to reimbursement to the Adviser over a period not to exceed three years, if the Company's expense ratio for such future period is less than the 2.95% limit or the 2.34% limit related to each respective period.

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. The Company reimburses the Adviser for expenses paid on its behalf monthly in arrears. These reimbursements are presented net of the OELA discussed above, if applicable.

Net Changes in Unrealized Gains and Losses.

For the three months ended January 31, 2017, the Company had $91,600 in change in net unrealized gains, of which $67,277 was as a result of change in net unrealized gain on investments in debt securities, $59,503 was as a result of change in net unrealized gain on investments in equity securities, $0 was a result of change in net unrealized gain/(loss) on investment in partnership interests, and $35,180 was a result of change in unrealized loss on investment in publicly traded partnerships.

For the three months ended January 31, 2016, the Company had $50,418 in change in net unrealized losses, of which $65,121 was as a result of change in net unrealized gain on investments in debt securities, $36,560 was as a result of change in net unrealized gain on investments in equity securities, $156,236 was a result of change in net unrealized loss on investment in partnership interests (as a result of the realized gain discussed below), and $4,137 was a result of the change in net unrealized gain on investment in other real estate investment companies.

Net Realized Gains and Losses.

For the three months ended January 31, 2017, the Company had $0 in net realized gains or losses. For the three months ended January 31, 2016, the Company had $171,376 in net realized gains as a result of investments in partnership interests.

Financial condition, liquidity and capital resources. 

We received $675,000 from the net proceeds of sales of the Company's common stock during the three months ended January 31, 2017.  We received $4,676,600 from the net proceeds of sales of the Company's common stock during the three months ended January 31, 2016. We invested the net proceeds in portfolio companies in accordance with our investment objective and strategies described in this report and paid off the Company's line of credit.
 
 
26


Our primary use of funds is investments in portfolio companies, cash distributions to holders of our common stock, and the payment of operating expenses, including debt service if we borrow to fund our investments. 

As of January 31, 2017, we were approximately 98% invested, compared to 93% invested at October 31, 2016.  We had cash resources of $3,198,674, which is an increase of 27% over cash resources held on October 31, 2016. We had indebtedness of $3,502,533 as of January 31, 2017. As of January 31, 2017, the balance of organization and operating expenses subject to the OELA was $408,509. This is not a liability of the Company unless operating expenses in future periods are less than 2.95% or 2.34% of average net assets. See Note 4 in the notes to the financial statements for additional details.  As of October 31, 2016, we had cash resources of $2,528,322 and indebtedness of $1,700,687.  As of October 31, 2016, the balance of organization and operating expenses subject to recoupment per the OELA was $408,509.

As of January 31, 2017, our debt investments included:  (i) three secured promissory notes currently on non-accrual status, previously bearing interest rates of 14.5%; (ii) subordinated debt bearing an interest rate of 8% with 73,424 warrants (5% of the outstanding equity of the portfolio company); (iii) a secured promissory note at 75% loan to value bearing an interest rate of 11%; (iv) seven secured promissory notes bearing an interest rate of 12%; (v) one secured promissory note bearing an interest rate of 12.7%; (vi) a secured promissory note bearing an interest rate of 8.75% with 203,125 warrants (6.59% of the outstanding equity of the portfolio company); (vii) a promissory note secured by tax liens bearing a 7% interest rate; (viii) subordinated debt bearing an interest rate of 8% with 49 warrants for the purchase of Class B shares of the portfolio company; (ix) a secured promissory note bearing an interest rate of 6%; (x) a secured promissory note bearing an interest rate of 8%; (xi) a secured promissory note bearing an interest rate of 10.5%; and (xii) a non-accrual promissory note previously bearing an interest rate of 12%.

As of October 31, 2016, our debt investments included:  (i) three secured promissory notes currently on non-accrual status, previously bearing interest rates of 14.5%; (ii) subordinated debt bearing an interest rate of 8% with 73,424 warrants (5% of the outstanding equity of the portfolio company); (iii) a secured promissory note at 75% loan to value bearing an interest rate of 11%; (iv) six secured promissory notes bearing an interest rate of 12%; (v) one secured promissory note bearing an interest rate of 12.7%; (vi) a secured promissory note bearing an interest rate of 8.75% with 203,125 warrants (6.59% of the outstanding equity of the portfolio company); (vii) a promissory note secured by tax liens bearing a 7% interest rate; (viii) subordinated debt bearing an interest rate of 8% with 49 warrants for the purchase of Class B shares of the portfolio company; (ix) a secured promissory note bearing an interest rate of 6%; (x) a secured promissory note bearing an interest rate of 8%; (xi) a secured promissory note bearing an interest rate of 10.5%; and (xii) a non-accrual promissory note previously bearing an interest rate of 12%.

On March 10, 2016 the SEC filed a complaint against the Aequitas group of companies which are related to two of the Company's debt investments. Both notes have been placed on non-accrual and the Company has written-off all unpaid accrued interest. In addition, the Care Payment Holdings promissory note due September 18, 2018 has also been placed on non-accrual. During the year ended October 31, 2016, a receiver was appointed over these investments. The total invested amount in receivership is $1,626,500. During the three months ended January 31, 2017, the Company wrote down the non-accrual notes to a fair value of $1,111,121, which reflects 70.2% of par value on the Aequitas Commercial Finance, LLC, 22.9% of par value on both Aequitas Peer-To-Peer Funding, LLC notes and 73.1% of par value on the Care Payment Holdings note.  The Company is continuing to monitor the notes and the potential impact on valuations and income to the Fund.
 
27

 

As of January 31, 2017 and October 31, 2016, the Company holds membership interest in a publicly traded partnership that invests in real property rights to ground leases and easements under infrastructure assets. The partnership anticipates paying quarterly dividends as approved by the Board of Directors. The Company holds 14% membership interest in a limited liability company that is also in the real estate industry. Our cash resources are held in depository accounts at First Republic Bank, Integrity Bank & Trust (see Note 4 in the notes to the financial statements for additional details) and Central Bank and Trust. We currently have no other investments in debt or equity securities of public companies.

As of January 31, 2017 we had net assets of $24,880,928 and, based on 2,525,040 shares of common stock outstanding, a net asset value per common share of $9.85. This represents an increase of 2% in net assets as compared to October 31, 2016. As of October 31, 2016, we had net assets of $24,301,443 and, based on 2,459,506 shares of common stock outstanding, a net asset value per common share of $9.88.

Revolving Credit Facility

The Company has available a senior secured revolving credit facility which allows the Company to borrow up to $3,200,000 at any one time outstanding, which was entered into on October 21, 2015. The line of credit was extended during the year ended October 31, 2016 and expires on October 21, 2017, unless extended again. In the process of renewing the line of credit, the credit facility was increased to $4,000,000 from $3,200,000. Borrowings under the line of credit bear interest at a rate of 4.85% over a year of 360 days. All borrowings are collateralized by all assets of the Company. The outstanding balance on the line of credit was $3,502,533 and $1,700,687 at January 31, 2017 and October 31, 2016, respectively. Borrowings under the line of credit are subject to certain financial covenants and restrictions on indebtedness, distribution payments, financial guarantees, business combinations, and other related items. As of January 31, 2017 and October 31, 2016, the Company was in compliance with all covenants.

Item 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We are subject to financial market risks, including changes in interest rates.  As of January 31, 2017, we did not have any loans in our portfolio that had floating interest rates.  In the future, we may enter into loan arrangements that may have floating interest rates.  Future floating loan arrangements may be based on a floating rate index and typically will have interest rate reset provisions that adjust applicable interest rates under such loans to current market rates either on a quarterly basis or a rest to changes in the national prime rate index.
 
 
28


 
Assuming that the Statements of Assets, Liabilities, and Net Assets as of January 31, 2017 was to remain constant and that we took no actions to alter interest rate sensitivity as of such date, the annualized impact of hypothetical changes in interest rates would have limited impact on interest income, interest expense, or net investment income. The following table shows the annualized impact of hypothetical base rate changes in interest rates.

   
Increase(decrease) in
   
Increase(decrease) in
   
Increase(decrease) in
 
Change in Interest Rates
 
Interest Income
   
Interest Expense
   
Investment Income
 
   
in thousands
             
                   
Down 25 basis points
 
$
(17
)
 
$
(9
)
 
$
(8
)
Up 50 basis points
   
34
     
18
     
17
 
Up 100 basis points
   
69
     
35
     
34
 
Up 200 basis points
   
138
     
70
     
68
 
Up 300 basis points
   
207
     
105
     
102
 
                         

We have not engaged in any hedging activities since our inception. We do not expect to engage in any hedging activities with respect to the market risk to which we are exposed.

Item 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures.

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

The Company entered into a service agreement in January 27, 2017 with Cohen & Company to provide certain tax-related and testing services to the Fund to strengthen its controls and procedures. Services include, but are not limited to, preparing taxable income calculations and preparation of tax filings, reports, documentation, disclosure, and RIC Compliance support to the Company.



29





Item 5. EXHIBITS
 
 Exhibit No.
Document
3.1
Articles of Incorporation*
3.2
By-laws*
31.1
Rule 13a-14(a)/15d-14(a) - Certification of Principal Executive Officer.  Filed herewith.
31.2
Rule 13a-14(a)/15d-14(a) - Certification of Principal Financial Officer.  Filed herewith.
32.1
Certification of Principal Executive Officer Pursuant to 18 U.S.C.  Section 1350, as adopted by Section 906 of the Sarbanes-Oxley Act of 2002.  Filed herewith.
32.2
Certification Principal Financial Officer Pursuant to 18 U.S.C.  Section 1350, as adopted by Section 906 of the Sarbanes-Oxley Act of 2002.  Filed herewith.
101
 
Interactive data files pursuant to Rule 405 of Regulation S-T.  Filed herewith.

*Incorporated by reference from Form 10 filed August 29, 2014.
 
 
 
30


SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

Date:  March 17, 2017
 
Integrity Capital Income Fund, Inc.
 
 
 
 
 
 
By:
/s/ Eric Davis
 
 
Name:
Eric Davis
 
 
Title:
President, Chief Investment Officer, Chief Compliance Officer and Director
       
 
 
By:
/s/ Randall Rush
 
 
Name:
Randall Rush
 
 
Title:
Chief Financial Officer, Treasurer and Director



 
 
 

 
31