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EX-31.1 - CERTIFICATION OF CHIEF EXECUTIVE OFFICER PURSUANT TO RULE 13A-14 - CROSSROADS LIQUIDATING TRUSTex31-1.htm
EX-32.2 - CERTIFICATION OF CHIEF FINANCIAL OFFICER PURSUANT TO SECTION 906 - CROSSROADS LIQUIDATING TRUSTex32-2.htm
EX-32.1 - CERTIFICATION OF CHIEF EXECUTIVE OFFICER PURSUANT TO SECTION 906 - CROSSROADS LIQUIDATING TRUSTex32-1.htm
EX-31.2 - CERTIFICATION OF CHIEF FINANCIAL OFFICER PURSUANT TO RULE 13A-14 - CROSSROADS LIQUIDATING TRUSTex31-2.htm
EX-10.13 - SECURITIES TRANSFER AGREEMENT, DATED MARCH [__], 2017 - CROSSROADS LIQUIDATING TRUSTex10-13.htm
EX-10.12 - REPURCHASE AGREEMENT, DATED NOVEMBER 29, 2016 - CROSSROADS LIQUIDATING TRUSTex10-12.htm
EX-10.11 - STOCK PURCHASE AGREEMENT, DATED DECEMBER 7, 2016 - CROSSROADS LIQUIDATING TRUSTex10-11.htm
 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

 

FORM 10-K

 

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the fiscal year ended December 31, 2016

 

OR

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

 

Commission file number: 000-53504

Crossroads Capital, Inc.

 

(Exact Name of Registrant as Specified in its Charter)

 

Maryland   26-2582882

(State or Other Jurisdiction of

Incorporation or Organization)

 

(I.R.S. Employer

Identification No.)

 

128 N. 13th Street, Suite, #1100

Lincoln, Nebraska 68508

(Address of principal executive offices)

(402) 261-5345 (Registrant’s telephone number, including area code)

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of Each Class Registered   Name of Each Exchange on Which Registered
Common stock, par value $0.001 per share   Nasdaq Capital Market

 

Securities registered pursuant to Section 12(g) of the Act: None

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐  No ☒

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐  No ☒

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒  No ☐.

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, 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 ☐  No ☐.

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ☒

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “accelerated filer,” “large accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer ☐  Accelerated filer ☐
Non-accelerated filer ☒ Smaller reporting company ☐

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐  No ☒.

 

The aggregate market value of the voting and non-voting common stock held by non-affiliates of the registrant as of the last business day of the registrant’s most recently completed second fiscal quarter was approximately $14.1 million based upon a closing price of $2.06 reported for such date on the Nasdaq Capital Market. Common shares held by each executive officer and director and by each person who owns 5% or more of the outstanding common shares have been excluded in that such persons may be deemed to be affiliates.

 

As of March 31, 2017, the number of outstanding shares of common stock of the registrant was 9,563,130.

 

DOCUMENTS INCORPORATED BY REFERENCE

 

Portions of the registrant’s definitive Proxy Statement relating to the 2016 Annual Meeting of Stockholders, to be filed within 120 days after the close of the registrant’s year end, are incorporated by reference into Part III of this Annual Report on Form 10-K.

 

 

 

 

TABLE OF CONTENTS

 

    Page
  Part I  
Item 1. Business 1
Item 1A. Risk Factors 11
Item 1B. Unresolved Staff Comments 28
Item 2. Properties 28
Item 3. Legal Proceedings 28
Item 4. Mine Safety Disclosures 28
     
  Part II  
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities 29
Item 6. Selected Financial Data 33
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations 34
Item 7A. Quantitative and Qualitative Disclosures About Market Risk 49
Item 8. Financial Statements and Supplementary Data 50
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 51
Item 9A. Controls and Procedures 51
Item 9B. Other Information 51
     
  Part III  
Item 10. Directors, Executive Officers and Corporate Governance 52
Item 11. Executive Compensation 52
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters 52
Item 13. Certain Relationships and Related Transactions, and Director Independence 52
Item 14. Principal Accountant Fees and Services 52
     
  Part IV  
Item 15. Exhibits and Financial Statement Schedules 53
   
Signatures 55

 

 

 

PART I

 

In this annual report on Form 10-K, unless otherwise indicated, the “Company”, “we”, “us” or “our” refer to Crossroads Capital, Inc., and “1100 Capital Consulting” or “our Administrator” refer to 1100 Capital Consulting, LLC.

 

Item 1. Business

 

Overview

 

Crossroads Capital, Inc. (“we,” “our” and “us”) was incorporated on May 9, 2008 under the laws of the State of Maryland and is an internally managed, non-diversified, closed-end management investment company that has elected to be regulated as a business development company (“BDC”) under the Investment Company Act of 1940, as amended (the “1940 Act”). Effective December 2, 2015, we changed our name from BDCA Venture, Inc. to Crossroads Capital, Inc. Effective January 1, 2010, we elected to be treated for U.S. Federal income tax purposes as a regulated investment company (“RIC”) under Subchapter M of the Internal Revenue Code of 1986, as amended (the “Code”). We commenced our portfolio company investment activities in January 2010. The shares of our common stock have been listed on the Nasdaq Capital Market since December 12, 2011.

 

Our current investment objective (our “Investment Objective”) is to preserve capital and maximize stockholder value by pursuing the sale of our portfolio investments, limiting expenses and deploying surplus cash as appropriate, including into yielding investments to offset, in part, operating expenses and, as of March 25, 2016, to monetize our portfolio holdings at the earliest practicable date. On May 3, 2016, our Board of Directors approved a Plan of Liquidation (the “Plan”) pursuant to which we plan to convert into a liquidating trust with the sole purpose of liquidating our assets and distributing the proceeds to our stockholders. The Plan is subject to the approval of our stockholders, which our Board of Directors intends to seek at a special meeting called for the purpose of approving the Plan and certain related matters, including the withdrawal of our election to be regulated as a BDC under the 1940 Act and the delisting of our stock from Nasdaq Capital Market, as detailed in the preliminary proxy statement filed with the SEC on May 5, 2016, which was subsequently amended on June 27, 2016. For more information on our Investment Objective, see “Investment Objective” below.

 

We are internally managed, although we do receive certain administrative services from 1100 Capital Consulting, LLC (our “Administrator”), including the provision of personnel to act as certain of our executive officers, including the Chief Executive Officer and Chief Financial Officer. For more information on our agreement with our Administrator, see “Administrative Services” below.

 

Governance

 

Our Board of Directors monitors and performs an oversight role with respect to our business affairs, including investment practices and performance, compliance with regulatory requirements and the services, expenses and performance of our service providers. Among other things, our Board of Directors approves the appointment of our Administrator and officers, reviews and monitors the services and activities performed by our Administrator and officers, approves the engagement, and reviews the performance of, our independent registered public accounting firm, and provides overall risk management oversight. Pursuant to the requirements under the 1940 Act and to satisfy the Nasdaq listing standards, our Board of Directors is composed of a majority of non-interested, directors, as defined in the 1940 Act.

 

Our Board of Directors has established an Audit Committee, a Nominating Committee and a Compensation Committee to assist the Board of Directors in fulfilling its responsibilities. Each of these committees is composed solely of non-interested, or independent, directors. The Audit Committee’s responsibilities include overseeing our accounting and financial reporting processes, our systems of internal control over financial reporting, and audits of our financial statements. The Nominating Committee’s responsibilities include identifying qualified individuals to serve on our Board of Directors, and to select, or recommend that the Board of Directors select such individuals. The Compensation Committee’s responsibilities include evaluating our executive officer performance and overseeing our compensation policies, including making recommendations to our Board of Directors with respect to any incentive compensation and equity-based plans, if any, that are subject to the Board of Directors’ approval.

 

Investment Objective

 

On October 5, 2015, our Board of Directors determined that we will no longer make investments in new portfolio companies and will focus on the orderly monetization of our current holdings. On January 20, 2016, our Board of Directors changed our Investment Objective to preserve capital and maximize stockholder value by pursuing the sale of our portfolio investments, limiting expenses and deploying surplus cash as appropriate, including into yielding investments to offset, in part, operating expenses. Subsequent to this change in our investment objective and in recognition that the monetization of our current holdings under our prior policies and investment objective could take three to five years or more and the amounts realized may be less than current fair values, on March 25, 2016, our Board of Directors resolved to monetize our portfolio holdings at the earliest practicable date. On August 24, 2016, we announced the engagement of Setter Capital, Inc., a Toronto-based secondary market advisory firm, to assist us in identifying prospective buyers for our portfolio investments.

 

 1 

 

 

On May 3, 2016, our Board of Directors approved the Plan, subject to the approval of our stockholders at a special meeting of our stockholders. Our Board of Directors has not yet set a date for the special meeting and continues to evaluate additional strategic alternatives.

 

Our Board of Directors cannot estimate the expected proceeds that the liquidating trust could realize from the monetization of our portfolio investments pursuant to the Plan and it is possible that the final liquidation value or the proceeds received from the sale of our portfolio investments may be less than the value or proceeds an investor might receive from pursuing a strategy of holding such investments through any potential initial public offering or other sale or liquidity event. The monetization of our portfolio investments and the adoption of the Plan, pursuant to which we are focused on the liquidation and sale of our portfolio investments, makes our investment portfolio susceptible to the risk that near-term sales could realize less than current fair values as we actively seek to sell our investments, either individually or in groups, and it is possible that we will experience substantial differences in the exit prices ultimately achieved by the liquidating trust on or the proceeds received from the sale of our portfolio holdings as compared to the respective current fair values. The prices we ultimately realize may be further impacted by volatility in the financial markets to date, in particular the market for Initial Public Offerings of previously privately-funded venture capital investments that at least in part require a functioning IPO market to provide liquidity events for venture capital-backed enterprises. Our current fair values were determined consistent with our disclosed valuation policies and procedures, and the methodologies included therein, and which were based on the concept of an orderly transaction in accordance with Financial Accounting Standards Board (“FASB”), Accounting Standards Codification Topic 820, “Fair Value Measurement and Disclosures” (“ASC 820”).

 

Our Board of Directors believes the implementation of our Investment Objective and the Plan, each focusing on the monetization of our portfolio holdings at the earliest practicable date and our conversion into a liquidating trust, even with the possibility of achieving significantly lower prices from sales, will maximize stockholder value by substantially limiting estimated future operating expenses and removing the risk of future volatility in the market values of our portfolio holdings.

 

While our Board of Directors plans to distribute cash proceeds to stockholders from the sale or other monetization of our portfolio investments, no assurance can be given regarding the timing of or amounts realized from any such transactions. Further, while our Board of Directors will adhere to its previously announced determination not to invest in new venture capital-backed companies, we may consider making opportunistic follow-on investments in our existing portfolio companies.

 

Former Investment Objectives

 

From September 22, 2014 to January 20, 2016, our investment strategy was to maximize total return by generating current income from debt investments and, to a lesser extent, capital appreciation from equity and equity-related investments.

 

Prior to our debt-focused investment strategy, our investment strategy focused on making equity investments in emerging growth companies that were committed to and capable of becoming public, or pre-IPO investments. We sought to provide investors with the ability to participate in a publicly traded fund that allowed our stockholders to share in the potential value accretion that we believed typically occurred once a company transformed from private to public status, or what we referred to as the private-to-public valuation arbitrage.

 

Our former investment strategies primarily focused on companies in the technology, healthcare, life sciences and energy industries, which our former management believed had the most favorable prospects for above-average growth and presented the most favorable investment opportunities. Within these industries, investments were intended to be made in privately held companies across various stages of development, including early, later and growth stage companies, more established companies and lower middle market companies. Lower middle market companies were defined as companies with annual revenues ranging from $10 million to $100 million.

 

Former Investment Criteria and Selection

 

Several criteria were considered important in achieving our former investment strategies with respect to prospective portfolio companies. These criteria, while not all-inclusive, provided general guidelines for our investment decisions.

 

Companies in growth industries. We generally focused our investments in companies that we believed were poised at the time of investment to grow at above-average rates relative to other sectors of the economy (“Growth Companies”). While we intended to make investments in privately held companies across various stages of development, we generally required prospective portfolio companies to be beyond the seed stage of development and to have already received or anticipated receiving commitments for their first round of institutional venture capital or private equity financing before we considered making an investment.

 

 2 

 

 

Financial sponsor commitment. We generally invested in companies in which one or more venture capital or private equity firms, which we referred to as “financial sponsors,” have previously invested and remained committed to future capital funding. We believed that financial sponsors could serve as a committed partner and would assist their portfolio companies and their management teams in creating value.

 

Operating plan and cash resources. We generally required that prospective portfolio companies, in addition to having sufficient access to capital to support leverage, demonstrated operating plans capable of generating cash flows or the ability to potentially raise the additional capital necessary to cover their operating expenses and service their debt.

 

Exit strategy. Prior to making an investment in a prospective portfolio company, we analyzed the potential for a liquidity event that would enable us to realize appreciation in the value of our equity interest. Liquidity events may include, but are not limited to, an IPO of common stock, a private sale of our equity interest to a third party, a strategic merger or acquisition of the company, and a purchase of our equity interest by the company or one of its equity holders.

 

The foundation of our former investment philosophy was investment analysis, research and diversification. We followed a rigorous selection process based on:

 

An analysis of issuer creditworthiness and growth potential, including a quantitative and qualitative assessment of the issuer’s business and future prospects, as well as an evaluation of a potential portfolio company provided by our contacts in venture capital, private equity, and industry participants;

 

An evaluation of the management team, including prior experience, cohesiveness, and years of collaboration together, as well as the level of commitment demonstrated (both financially and otherwise) by the founders;

 

An assessment of existing financial sponsors and their commitment to future capital funding, management assistance and liquidity events;

 

An analysis of business strategy, technology and intellectual property and long-term industry trends based on a review of relevant industry publications and conversations with knowledgeable industry participants; and

 

An in-depth review and assessment of capital structure, financial results and financial projections.

 

As of December 31, 2016, our portfolio consisted of equity and equity-related investments in 10 private companies that were made by prior management under a former investment strategy. We may make follow-on investments in our existing portfolio companies to the extent we believe such investments are in the best interest of our stockholders. In evaluating follow-on investment opportunities, we typically assess, among other factors, the possible adverse consequences to our existing investment if we elect not to make a follow-on investment.

 

We have not taken a control position in any of our existing portfolio companies through ownership, board seats, observation rights or other control features. Accordingly, we are not in a position to control the management, operation or strategic decision-making of our existing portfolio companies. Nevertheless, as part of a portfolio company investment, we have in most cases obtained information rights that give us access to the portfolio company’s quarterly and annual financial statements, as well as the portfolio company’s annual budget. We also attempt to have dialogue with our private portfolio company management teams to review the portfolio company’s business prospects, financial results, and exit strategy plans. We monitor the financial trends of each portfolio company to assess the performance of individual portfolio companies as well as to evaluate overall portfolio quality and risk.

 

Subject to oversight by our Board of Directors, our Administrator will continue to oversee our existing portfolio consistent with past practices.

 

Portfolio Monitoring

 

Our Administrator will monitor and periodically evaluate all of our portfolio companies to determine if each company is meeting its business plan, if information is available to us, and to assess the continuing prospects for each company.

 

We employ several methods of evaluating and monitoring the performance and value of our investments, which may include, but are not limited to, the following:

 

Assessment of successful execution of the portfolio company’s business plan, achievement of development milestones and compliance with applicable debt covenants;

 

Regular contact with portfolio company management and, if appropriate, the financial sponsor, to discuss financial position, requirements and accomplishments;

 

 3 

 

 

Evaluation of a portfolio company’s success in achieving periodic benchmarks established by our Administrator and/or portfolio company management;

 

Offering significant managerial assistance to our portfolio companies from our officers, managers and personnel, including assistance in director and officer recruitment, referral of outside professionals such as management consultants or bankers, providing financial, management and capital markets expertise through our investment adviser’s experience in the business of the portfolio company; and

 

Review of monthly and/or quarterly financial statements and financial projections of the portfolio company.

 

Competition

 

Our primary competition includes other investment funds, BDCs, investment banks and other financial services companies such as commercial banks and finance companies. Many of our competitors are not subject to the regulatory restrictions that the 1940 Act imposes on us as a BDC.

 

Employees

 

Currently, we do not have any employees. The management of our investment portfolio is the responsibility of our Board of Directors and the third-parties engaged to assist in specific related activities, including the Administrator.

 

Administrative Services

 

On November 13, 2015, our Board of Directors approved the engagement of our Administrator to provide administrative consulting services to us, including the provision of personnel to act as certain of our executive officers, including the Chief Executive Officer and Chief Financial Officer, pursuant to an Administrator Consulting Agreement.

 

Our Administrator furnishes us with equipment and clerical services, including responsibility for the financial records which we are required to maintain, and preparing reports to our stockholders and reports filed with the SEC. In addition, our Administrator assists us in monitoring our portfolio accounting and bookkeeping, managing portfolio collections and reporting, performing internal audit services, determining and publishing our net asset value, overseeing the preparation and filing of our tax returns and the printing and dissemination of reports to our stockholders. In addition, our Administrator provides support for our risk management efforts and generally overseeing the payment of our expenses and the performance of administrative and professional services rendered to us by others.

 

Effective December 2, 2015, our Board of Directors appointed Ben H. Harris to serve as our Chief Executive Officer and President and David M. Hadani to serve as our Chief Financial Officer, Treasurer and Secretary. Stephanie L. Darling, Esq. currently serves as our Chief Compliance Officer.

 

On November 10, 2015, our Board of Directors approved the engagement of US Bancorp Fund Services, LLC (“US Bancorp”) to provide administration and accounting services to us pursuant to an Administration Servicing Agreement and a Fund Accounting Servicing Agreement, respectively. On May 3, 2016, the Board announced the termination of its agreement with US Bancorp, effective as of March 29, 2016.

 

We have entered into agreements with MidFirst Bank to be the custodian of our portfolio securities and Frontier Bank to be the custodian of the majority of our cash and cash-equivalent assets.

 

Former Investment Advisory and Administrative Services Agreement

 

BDCA Venture Adviser, LLC previously served as our investment adviser and also provided us with administrative services pursuant to an Investment Advisory and Administrative Services Agreement (the “Investment Advisory Agreement”). On October 5, 2015, our Board of Directors approved the termination of the Investment Advisory Agreement between us and BDCA Venture Adviser effective as of December 6, 2015 (the “Termination Date”). The Investment Advisory Agreement, which was entered into on July 1, 2014, was approved by our stockholders at the 2014 Annual Meeting of Stockholders held on June 16, 2014. All payments due under the Investment Advisory Agreement as of the Termination Date were mutually agreed upon between us and BDCA Venture Adviser and subsequently paid by us.

 

Under the Investment Advisory Agreement, we paid BDCA Venture Adviser a fee for its investment advisory services consisting of two components: (i) a base management fee, and (ii) an incentive fee. We also reimbursed BDCA Venture Adviser for our allocable portion of overhead and other administrative expenses incurred by it in performing its administrative obligations under the Investment Advisory Agreement, including our allocable portion of the compensation of our former Chief Financial Officer and Chief Compliance Officer, and their respective staff. See Note 4 – Related Party Agreements and Transactions – to the financial statements of this annual report on Form 10-K for a further discussion of the fees under our former Investment Advisory Agreement and other agreements with BDCA Venture Adviser.

 

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Under the former Investment Advisory Agreement, absent the willful misfeasance, bad faith or gross negligence of BDCA Venture Adviser or BDCA Venture Adviser’s reckless disregard of its duties and obligations, we agreed to indemnify BDCA Venture Adviser (including its officers, managers, agents, employees and members) for any damages, liabilities, costs and expenses (including reasonable attorneys’ fees and amounts reasonably paid in settlement) arising out of BDCA Venture Adviser’s performance of its duties and obligations under the Investment Advisory Agreement or otherwise as our investment adviser, except to the extent specified in the 1940 Act. Pursuant to the former Investment Advisory Agreement, the indemnification provision shall remain in full force and effect, and BDCA Venture Adviser shall remain entitled to the benefits thereof, notwithstanding termination of the Investment Advisory Agreement.

 

Material U.S. Federal Income Tax Considerations

 

From incorporation through December 31, 2009, we were treated as a corporation under the Internal Revenue Code of 1986, as amended (the “Code”). Effective January 1, 2010, we elected to be treated for tax purposes as a regulated investment company, or RIC, under the Code. We have made no provision for income taxes as of December 31, 2016, 2015 and 2014. Our continued qualification as a RIC requires that we comply with certain requirements contained in Subchapter M of the Code that may affect our ability to pursue additional business opportunities or strategies that, if we were to determine we should pursue, could diminish the desirability of qualifying, or impede our ability to qualify, as a RIC. For example, a RIC must meet certain requirements, including source of income and asset diversification requirements (as described below) and distributing annually at least 90% of its investment company taxable income (the “Annual Distribution Requirement”).

 

As a RIC, we generally will not have to pay corporate-level federal income taxes on any investment company taxable income (which is generally our net ordinary income plus the excess, if any, of realized net short-term capital gains over realized net long-term capital losses) or any realized net capital gains (which is generally net realized long-term capital gains in excess of net realized short-term capital losses) that we distribute to our stockholders. We will be subject to United States federal income tax at the regular corporate rates on any investment company taxable income or capital gain not distributed (or deemed distributed) to our stockholders.

 

In order to qualify and continue to qualify as a RIC for federal income tax purposes and obtain the tax benefits accorded to a RIC, in addition to satisfying the Annual Distribution Requirement, we must, among other things:

 

Have in effect at all times during each taxable year an election to be regulated as a business development company under the 1940 Act;

 

Derive in each taxable year at least 90% of our gross income from (i) dividends, interest, payments with respect to certain securities loans, gains from the sale of stock or other securities, or other income derived with respect to our business of investing in such stock or securities and (ii) net income derived from an interest in a “qualified publicly traded limited partnership” (the “90% Income Test”); and

 

Diversify our holdings so that at the end of each quarter of the taxable year:

 

at least 50% of the value of our assets consists of cash, cash equivalents, U.S. government securities, securities of other RICs, and other securities if such other securities of any one issuer do not represent more than 5% of the value of our assets or more than 10% of the outstanding voting securities of such issuer; and

 

no more than 25% of the value of our assets is invested in (i) securities (other than U.S. government securities or securities of other RICs) of one issuer, (ii) securities of two or more issuers that are controlled, as determined under applicable tax rules, by us and that are engaged in the same or similar or related trades or businesses, or (iii) securities of one or more “qualified publicly traded partnerships” (the “Diversification Tests”).

 

Provided that we satisfy the Diversification Tests as of the close of any quarter, we will not fail the Diversification Tests as of the close of a subsequent quarter as a consequence of a discrepancy between the value of our assets and the requirements of the Diversification Tests that is attributable solely to fluctuations in the value of our assets. Rather, we will fail the Diversification Tests as of the end of a subsequent quarter only if such a discrepancy existed immediately after our acquisition of any asset and was wholly or partly the result of that acquisition. In addition, if we fail the Diversification Tests as of the end of any quarter, we will not lose our status as a RIC if we eliminate the discrepancy within thirty days of the end of such quarter and, if we eliminate the discrepancy within that thirty-day period, we will be treated as having satisfied the Diversification Tests as of the end of such quarter.

 

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We satisfied the above RIC requirements during each of the taxable years since our election to be treated as a RIC for tax purposes. Since we did not generate investment company taxable income in any of these taxable years, we were not required to make any distributions to satisfy the Annual Distribution Requirement. We did not generate any realized net capital gains in 2016 or 2015 and, as a result, we were not required to make any distributions to satisfy the Excise Tax Avoidance Requirement, as described below. Because we distributed all of our net realized capital gains for the year ended December 31, 2014, no corporate-level federal income or excise taxes were due on such net realized capital gains. As such, we have not made any provision for federal income or excise taxes as of December 31, 2016, 2015 and 2014.

 

Assuming we continue to qualify as a RIC, our corporate-level federal income tax should be substantially reduced or eliminated to the extent that we distribute any investment company taxable income or realized net capital gains to our stockholders. However, we will pay corporate-level federal income tax on any amount of realized net capital gain that we elect to retain. In the event we retain some or all of our realized net capital gains, we may designate the retained amount as a deemed distribution to stockholders. In such case, among other consequences, we will pay corporate-level tax on the retained amount, each U.S. stockholder will be required to include its share of the deemed distribution in income as if it had been actually distributed to the U.S. stockholder, and the U.S. stockholder will be entitled to claim a credit or refund equal to its allocable share of the corporate-level tax we pay on the retained realized net capital gain. The amount of the deemed distribution (net of such tax credit or refund) will be added to each U.S. stockholder’s cost basis for its common stock. In order to utilize the deemed distribution approach, we must provide written notice to our stockholders prior to the expiration of 60 days after the close of the relevant taxable year. We cannot treat any of our investment company taxable income as a “deemed distribution.”

 

As a RIC, we are also subject to a 4% nondeductible federal excise tax on certain undistributed income unless we distribute in a timely manner an amount at least equal to the sum of (i) 98% of our ordinary income for each calendar year, (ii) 98.2% of our capital gains in excess of capital losses for the one-year period ending December 31 in that calendar year, and (iii) any ordinary income and realized net capital gains for preceding years that were not distributed during such years (the “Excise Tax Avoidance Requirement”). We will not be subject to this excise tax on amounts on which we are required to pay corporate income tax (such as retained realized net capital gains which we designate as “undistributed capital gain” or a deemed distribution). We currently intend to make sufficient distributions (including deemed distributions of retained realized net capital gains) each taxable year to avoid the payment of this excise tax. We elected to calculate excise taxes related to any net capital gains on a calendar year basis beginning with our 2012 tax returns.

 

The following simplified examples illustrate the tax treatment under Subchapter M of the Code for us and our non-corporate U.S. stockholders with regard to three possible distribution alternatives, assuming we realize, in 2016, a net capital gain of $1.00 per share, consisting entirely of sales of non-real property assets held for more than 12 months. These illustrations exclude any additional 3.8% tax on their “net investment income” for certain U.S. individuals.

 

Under Alternative A: 100% of net capital gain declared as a cash dividend and distributed to stockholders:

 

1.No federal income taxation at the Company level.

 

2.Taxable stockholders receive a $1.00 per share dividend and pay federal income tax at a rate not in excess of 20% or $0.20 per share, retaining $0.80 per share.

 

3.Non-taxable stockholders that file a federal tax return receive a $1.00 per share dividend and pay no federal income tax, retaining $1.00 per share.

 

Under Alternative B: 100% of net capital gain retained by the Company and designated as “undistributed capital gain” or deemed dividend:

 

1.The Company pays a corporate-level federal income tax of 35% on the undistributed gain or $0.35 per share and retains 65% of the gain or $0.65 per share.

 

2.Taxable stockholders increase their cost basis in their stock by $0.65 per share. They are liable for federal income tax at a rate not in excess of 20% on 100% of the undistributed gain of $1.00 per share or $0.20 per share in tax. Offsetting this tax, stockholders receive a tax credit equal to the $0.35 per share tax paid by us, which offsets the $0.20 per share tax liability, resulting in an excess tax credit of $0.15 per share for each such stockholder.

 

3.Non-taxable stockholders that file a federal income tax return receive a tax refund equal to $0.35 per share.

 

Under Alternative C: 100% of net capital gain retained by the Company, with no designated undistributed capital gain or deemed dividend:

 

1.The Company pays a corporate-level federal income tax of 35% on the retained gain or $0.35 per share.

 

2.There is no tax consequence at the stockholder level.

 

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We are authorized to borrow funds and to sell assets in order to satisfy the Annual Distribution Requirement and the Excise Tax Avoidance Requirement (collectively, the “Distribution Requirements”). Further, under the 1940 Act, we are not permitted to make distributions to our stockholders while our debt obligations and other senior securities are outstanding unless certain “asset coverage” tests are met. Moreover, our ability to dispose of assets to meet the Distribution Requirements may be limited by: (i) the illiquid nature of our portfolio, or (ii) other requirements relating to our status as a RIC, including the Diversification Tests. If we dispose of assets in order to meet the Distribution Requirements, we may make such dispositions at times that, from an investment standpoint, are not advantageous.

 

A RIC is limited in its ability to deduct expenses in excess of its investment company taxable income. If our expenses in a given year exceed investment company taxable income (which is likely to occur since our operating expenses are expected to exceed the amount of interest or dividend income we receive on our current portfolio company investments), we would experience a net operating loss for that year. However, a RIC is not permitted to carry forward net operating losses to subsequent years. We may for tax purposes have aggregate taxable income for several years that we are required to distribute and that is taxable to our stockholders even if such income is greater than the aggregate net income we actually earned during those years. Such required distributions may be made from our cash assets or by liquidation of investments, if necessary. We may realize gains or losses from such liquidations. In the event we realize net capital gains from such transactions, our stockholders may receive a larger capital gain distribution than they would have received in the absence of such transactions.

 

If we are unable to continue to qualify for treatment as a RIC, we would be subject to tax on all of our taxable income at regular corporate rates. We would not be able to deduct distributions to stockholders, nor would distributions be required to be made. Such distributions would be taxable to our stockholders. Subject to certain limitations under the Code, corporate distributees would be eligible for the dividends received deduction. Distributions in excess of our current and accumulated earnings and profits would be treated first as a return of capital to the extent of the stockholder’s tax basis, and any remaining distributions would be treated as a capital gain.

 

If we fail to qualify as a RIC in any taxable year, we would be required to satisfy the RIC qualification requirements in order to requalify as a RIC and dispose of any earnings and profits from any year in which we failed to qualify as a RIC. Subject to a limited exception applicable to RICs that qualified as such under Subchapter M of the Code for at least one year prior to disqualification and that requalify as a RIC no later than the second year following the nonqualifying year, we could be subject to tax on any unrealized net built-in gains in the assets held by us during the period in which we failed to qualify as a RIC that were recognized within the subsequent 10 years, unless we made a special election to pay corporate-level tax on such built-in gain at the time of our requalification as a RIC. If we fail to satisfy the 90% Income Test or the Diversification Test described above, however, we may be able to avoid losing our status as a RIC by timely providing notice of such failure to the IRS, curing such failure and possibly paying an additional tax.

 

If we convert to a liquidating trust pursuant to the Plan, which remains subject to stockholder approval, there could be additional federal income tax consequences to our stockholders as a result of such conversion and going forward as a beneficiary of the liquidating trust. These potential tax consequences are discussed in detail in the preliminary proxy statement filed with the SEC on May 5, 2016, which was subsequently amended on June 27, 2016, and will be relevant only to the extent stockholders vote to approve the Plan and we proceed with converting into the liquidating trust.

 

Regulation as a BDC

 

We have elected to be regulated as a BDC under the 1940 Act. The 1940 Act requires that a majority of our directors be persons other than “interested persons,” as that term is defined in the 1940 Act. In addition, the 1940 Act provides that we may not change the nature of our business so as to cease to be, or to withdraw our election as, a BDC without the approval of a “majority of our outstanding voting securities,” within the meaning of the 1940 Act.

 

Qualifying assets

 

Under the 1940 Act, a BDC may not acquire any asset other than assets of the type listed in Section 55(a) of the 1940 Act, which are referred to here as “qualifying assets,” unless, at the time the acquisition is made, qualifying assets represent at least 70% of the company’s total assets (the “70% test”). The principal categories of qualifying assets relevant to our business are any of the following:

 

1.Securities purchased in transactions not involving any public offering from the issuer of such securities, which issuer (subject to certain limited exceptions) is an eligible portfolio company, or from any person who is, or has been during the preceding 13 months, an affiliated person of an eligible portfolio company, or from any other person, subject to such rules as may be prescribed by the SEC. An eligible portfolio company is defined in the 1940 Act as any issuer which:

 

a.is organized under the laws of, and has its principal place of business in, the United States;

 

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b.is not an investment company (other than a small business investment company wholly owned by the BDC) or a company that would be an investment company but for certain exclusions under the 1940 Act; and

 

c.Satisfies any of the following:

 

i.does not have any class of securities that is traded on a national securities exchange;

 

ii.has a class of securities listed on a national securities exchange, but has an aggregate market value of outstanding voting and non-voting common equity of less than $250 million;

 

iii.is controlled by a BDC or group of companies including a BDC and the BDC has an affiliated person who is a director of the eligible portfolio company; or

 

iv.is a small and solvent company having gross assets of not more than $4.0 million and capital and surplus of not less than $2.0 million.

 

2.Securities of any eligible portfolio company that we control.

 

3.Securities purchased in a private transaction from a U.S. issuer that is not an investment company or from an affiliated person of the issuer, or in transactions incident thereto, if the issuer is in bankruptcy and subject to reorganization or if the issuer, immediately prior to the purchase of its securities was unable to meet its obligations as they came due without material assistance other than conventional lending or financing arrangements.

 

4.Securities of an eligible portfolio company purchased from any person in a private transaction if there is no ready market for such securities and we already own 60% of the outstanding equity of the eligible portfolio company.

 

5.Securities received in exchange for or distributed on or with respect to securities described in (1) through (4) above, or pursuant to the exercise of warrants or rights relating to such securities.

 

6.Cash, cash equivalents, certificates of deposit, U.S. Government securities or high-quality debt securities maturing in one year or less from the time of investment.

 

If less than 70% of our total assets are comprised of qualifying assets, we would generally not be permitted to acquire any additional non-qualifying assets, until such time as 70% of our then current total assets were comprised of qualifying assets. We would not be required, however, to dispose of any non-qualifying assets in such circumstances. As of December 31, 2016, approximately 99.7% of our portfolio company investments constituted qualifying investments under Section 55(a) of the 1940 Act.

 

Managerial assistance to portfolio companies

 

In general, in order to count portfolio securities as qualifying assets for the purpose of the 70% test, we must either control the issuer of the securities or must offer to make available to the issuer of the securities (other than small and solvent companies described above) significant managerial assistance; except that, where we purchase such securities in conjunction with one or more other persons acting together, one of the other persons in the group may make available such managerial assistance. Making available managerial assistance means, among other things, any arrangement whereby the BDC, through its directors, officers or employees, offers to provide, and, if requested to, provides significant guidance and counsel concerning the management, operations or business objectives and policies of a portfolio company.

 

Senior securities

 

We are permitted, under specified conditions, to issue multiple classes of debt and one class of stock senior to our common stock if our asset coverage, as defined in the 1940 Act, is at least equal to 200% immediately after each such issuance. In addition, while any senior securities remain outstanding, we must make provisions to prohibit any distribution to our stockholders or the repurchase of such securities or shares unless we meet the applicable asset coverage ratios at the time of the distribution or repurchase. We may also borrow amounts up to 5% of the value of our gross assets for temporary or emergency purposes without regard to asset coverage.

 

We may borrow funds to make investments, to the extent we determine that additional capital would allow us to take advantage of additional investment opportunities or if our Board of Directors determines that leveraging our portfolio would be in our best interest and the best interests of our stockholders.

 

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Proxy voting policies and procedures

 

We vote proxies relating to our portfolio securities in the best interest of our stockholders. We review on a case-by-case basis each proposal submitted to a stockholder vote to determine its impact on the portfolio securities held by us. Although we generally vote against proposals that may have a negative impact on our portfolio securities, we may vote for such a proposal if there exists compelling long-term reasons to do so.

 

Our proxy voting decisions are made by our Board of Directors. To ensure that our vote is not the product of a conflict of interest, we require that any member of the Board of Directors disclose to our Chief Compliance Officer any potential conflict that he is aware of and obtain the consent of the Chief Compliance Officer prior to entering into discussion with the Board of Directors with respect to how the proxy should be voted.

 

Stockholders may obtain information regarding how we voted proxies with respect to our portfolio securities by making a written request for proxy voting information to: Chief Executive Officer, Crossroads Capital, Inc., 128 North 13th Street, Suite 1100, Lincoln, Nebraska 68508.

 

Temporary investments

 

Pending investment in other types of “qualifying assets,” as described above, our investments may consist of cash, cash equivalents, certificates of deposit, U.S. government securities or high-quality debt securities maturing in one year or less.

 

Code of Ethics

 

We have adopted a Code of Ethics pursuant to Rule 17j-1 under the 1940 Act that establishes procedures for personal investments and restricts certain transactions by our personnel. Our Code of Ethics generally does not permit investments by officers and directors in securities that may be purchased or held by us. The Code of Ethics is available on the SEC’s website at www.sec.gov. You may also obtain a copy of the Code of Ethics, after paying a duplicating fee, by electronic request at the following email address: publicinfo@sec.gov, or by writing the SEC’s Public Reference Section, 100 F Street, N.E., Washington, DC 20549. You may also obtain a copy of our Code of Ethics on our website at www.xroadscap.com.

 

Capital Raising

 

We do not intend to raise additional equity capital in the foreseeable future.

 

Compliance Policies and Procedures

 

We have adopted and implemented written policies and procedures reasonably designed to detect and prevent violation of the federal securities laws and are required to review these compliance policies and procedures annually for their adequacy and the effectiveness of their implementation and designate a Chief Compliance Officer to be responsible for administering the policies and procedures.

 

Sarbanes-Oxley Act

 

The Sarbanes-Oxley Act imposes a wide variety of regulatory requirements on publicly-held companies and their insiders. Many of these requirements affect us. For example:

 

●       Pursuant to Rule 13a-14 of the Securities Exchange Act of 1934, as amended (“Exchange Act”), our Chief Executive Officer and Chief Financial Officer must certify the accuracy of the financial statements contained in our periodic reports;

 

●       Pursuant to Item 307 of Regulation S-K, our periodic reports must disclose our conclusions about the effectiveness of our disclosure controls and procedures;

 

●       Pursuant to Rule 13a-15 of the Exchange Act, our management must prepare an annual report regarding its assessment of our internal controls over financial reporting and, if, as and when, our public float exceeds $75 million, must obtain an audit of the effectiveness of internal controls over financial reporting performed by our independent registered public accounting firm;

 

●       Pursuant to Item 308 of Regulation S-K and Rule 13a-15 of the Exchange Act, our periodic reports must disclose whether there were significant changes in our internal controls over financial reporting or in other factors that could significantly affect these controls subsequent to the date of their evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses; and

 

●       Pursuant to Section 404 of the Sarbanes-Oxley Act and Rule 13a-15 of the Exchange Act, we are required to include in our annual report on Form 10-K a report from our management on internal controls over financial reporting, including a statement that our management is responsible for establishing and maintaining adequate internal control over financial reporting as well as our management’s assessment of the effectiveness of our internal control over financial reporting.

 

A reporting company that is a non-accelerated filer (with a public float below $75 million as of June 30 of the previous year) is exempt from the requirement to obtain an audit of the effectiveness of internal controls over financial reporting performed by their auditors. Accordingly, until such time as we have a public float in excess of $75 million, our auditors will not need to report on our management’s assessment of our internal control over financial reporting. However, we will be required to assess the effectiveness of our internal controls over financial reporting each year. Based on our public float at June 30, 2016, we are a non-accelerated filer for the year ended December 31, 2016 and, thus, we are not required to obtain an audit of the effectiveness of internal controls over financial reporting for that year.

 

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The Sarbanes-Oxley Act requires us to review our current policies and procedures to determine whether we comply with the Sarbanes-Oxley Act and the regulations promulgated thereunder. We will continue to monitor our compliance with all regulations that are adopted under the Sarbanes-Oxley Act and will take actions necessary to ensure that we are in compliance therewith.

 

Privacy Policy

 

We are committed to protecting your privacy. This privacy notice, which is required by federal law, explains the privacy policy of Crossroads Capital, Inc. This notice supersedes any other privacy notice you may have received from Crossroads Capital, Inc., and its terms apply both to our current stockholders and to former stockholders as well.

 

We will safeguard, according to strict standards of security and confidentiality, all information we receive about you. With regard to this information, we maintain procedural safeguards that comply with federal standards.

 

Our goal is to limit the collection and use of information about you. In certain cases, when you purchase shares of our common stock, our transfer agent collects personal information about you, such as your name, address, Social Security number or tax identification number. This information is used only so that we can send you annual reports, proxy statements and other information required by law, and to send you information we believe may be of interest to you.

 

We do not share such information with any non-affiliated third party except as described below:

 

●       It is our policy that only authorized employees of our Administrator who need to know your personal information will have access to it.

 

●       We may disclose stockholder-related information to companies that provide services on our behalf, such as record keeping, processing your trades, and mailing you information. These companies are required to protect your information and use it solely for the purpose for which they received it.

 

●       If required by law, we may disclose stockholder-related information in accordance with a court order or at the request of government regulators. Only that information required by law, subpoena, or court order will be disclosed.

 

Other

 

We may also be prohibited under the 1940 Act from knowingly participating in certain transactions with our affiliates without the prior approval of our Board of Directors who are not interested persons and, in some cases, prior approval of the SEC.

 

We expect to be periodically examined by the SEC for compliance with the 1940 Act.

 

We are required to provide and maintain a bond issued by a reputable fidelity insurance company to protect us against larceny and embezzlement. Furthermore, as a BDC, we are prohibited from protecting any director or officer against any liability to us or our stockholders arising from willful misfeasance, bad faith, gross negligence or reckless disregard of the duties involved in the conduct of such person’s office.

 

Available Information

 

We are required to file with or submit to the SEC annual, quarterly and current reports, proxy statements and other information meeting the informational requirements of the Exchange Act. You may inspect and copy these reports, proxy statements and other information, as well as related exhibits and schedules, at the Public Reference Room of the SEC. You may obtain information on the operation of the Public Reference Room by calling the SEC at (202) 551-8090. The SEC maintains an Internet site that contains reports, proxy and information statements and other information filed electronically by us with the SEC, which are available on the SEC’s website at www.sec.gov. Copies of these reports, proxy and information statements and other information may be obtained, after paying a duplicating fee, by electronic request at the following e-mail address: publicinfo@sec.gov, or by writing the SEC’s Public Reference Section, 100 F Street, N.E., Washington, DC 20549. This information is also available free of charge by contacting us at Crossroads Capital, Inc., 128 North 13th Street, Suite 1100, Lincoln, Nebraska 68508, (402) 261-5345 or on our website at www.xroadscap.com. We make available free of charge on our website access to these reports, proxy and information statements and other information as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC. Information contained on our website is not incorporated by reference into this annual report on Form 10-K and you should not consider information contained on our website to be part of this annual report on Form 10-K.

 

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Item 1A. Risk Factors

 

Our Investment Objective was approved by our Board of Directors on January 20, 2016 and as of March 25, 2016, our Board has resolved to monetize our portfolio holdings at the earliest practicable date in furtherance of our Investment Objective. Our Investment Objective and existing portfolio involve a number of significant risks discussed below. Additional risks and uncertainties not presently known to us might also impair our operations and performance. If any of the following events occur, our business, financial condition and results of operations could be materially and adversely affected. In such case, our net asset value and the trading price of our common stock could decline, and you may lose all or part of your investment in our common stock.

 

Risks Related to our Investment Objective

 

There can be no guarantee that we will proceed with the Plan of Liquidation and, if we do, that stockholders will realize the current fair values of our portfolio investments.

 

On March 25, 2016, our Board of Directors resolved to monetize the Company’s portfolio holdings at the earliest practicable date and on May 3, 2016 approved a Plan of Liquidation, or the Plan, pursuant to which the Company would convert into a liquidating trust with the sole purpose of liquidating the Company’s assets and distributing the proceeds to the Company’s stockholders. The Plan is subject to the approval of the stockholders, which the Board would seek at a special meeting called for the purpose of approving the Plan and certain related matters as detailed in the preliminary proxy statement filed with the U.S. Securities and Exchange Commission, or the SEC, on May 5, 2016, which was subsequently amended on June 27, 2016.

 

If we fail to implement the Plan, we may remain subject to regulation under the Investment Company Act of 1940 as a business development company and therefore continue to incur significant general and administrative expenses in order to comply with such regulation. Even if our stockholders approve the Plan and it is implemented by us, we cannot estimate the expected proceeds that the liquidating trust could realize from the monetization of our portfolio investments pursuant to the Plan or the expected proceeds, if any, from the sale of our investments and it is possible that the final liquidation value or the proceeds received from the sale of our portfolio investments may be less than the value or proceeds an investor might receive from pursuing a strategy of holding such investments through any potential initial public offering or other sale or liquidity event. It is possible that we will experience substantial differences in the exit prices ultimately achieved by the liquidating trust on our portfolio investments as compared to the respective current fair values.

 

We continue to evaluate and consider strategic alternatives to the Plan.

 

Although we have adopted the Plan, our Board of Directors continues to evaluate and consider potential strategic alternatives to best implement our Investment Objective to monetize our portfolio holdings at the earliest practicable date, which may include transactions such as a sale, a merger with another party or another strategic transaction involving some or all of our assets. There can be no assurance that the evaluation of strategic alternatives will result in the identification or consummation of any transaction. In addition, we may incur substantial expenses associated with identifying and evaluating potential strategic alternatives. We also cannot assure that any potential transaction, if identified, evaluated and consummated, will provide greater value to our stockholders than that reflected in our current stock price. Any potential transaction would be dependent upon a number of factors that may be beyond our control, including, among other factors, market conditions, industry trends, the interest of third parties in our business and the availability of financing to potential buyers on reasonable terms.

 

Our expenses will increase as a percentage of our net assets and we may be unable to achieve the economies of scale we believe are necessary to provide our stockholders with maximum distributions.

 

Because we intend to seek to monetize our existing investments and make distributions from the proceeds thereof rather than make investments in new portfolio companies, our net assets will decline and operating expenses will increase as a percentage of our net assets. We must bear certain fixed expenses, such as certain administrative, governance, regulatory and compliance costs that do not generally vary based on our size. As a public company, we incur legal, accounting and other expenses, including costs associated with the periodic reporting requirements applicable to a company whose securities are registered under the Exchange Act, as well as additional corporate governance requirements, including requirements under the Sarbanes-Oxley Act, and other rules implemented by the SEC, that do not generally vary based on our total assets. Although the Plan is intended to reduce such expenses, and we expect it would do so, there is no guarantee that the Plan will result in the intended reduction of expenses and we anticipate the liquidating trust would continue to incur legal, accounting and other expenses in connection with the liquidation of its assets.

 

Because the equity investments in our current portfolio do not generate current income, and because we intend to distribute 100% of our net realized capital gains on at least an annual basis, our operating expenses have historically caused a steady decline in, and depletion of, our net assets. This depletion of net assets will continue for the foreseeable future.

 

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The disposition of our portfolio investments will be offset by operating expenses and subject to contingent liabilities.

 

Any amounts we will be able to distribute to our stockholders from the sale or other monetization of our portfolio investments, whether pursuant to the Plan, a strategic alternative or other transaction in connection with our Investment Objective, will be reduced by our operating expenses and may result in losses and no distributions for an extended period of time. In addition, any disposition of our portfolio investments that involves private securities may require us to make representations about the business and financial affairs of the portfolio company typical of those made in connection with the sale of a business. We may also be required to indemnify the purchasers of such investment to the extent any such representations turn out to be inaccurate or with respect to potential liabilities. These arrangements may result in contingent liabilities, that ultimately may result in funding obligations that we must satisfy through return of distributions previously made.

 

The recent change to our Investment Objective, including the monetization of our portfolio holdings, could significantly impact the value of our investments and the amounts realized upon the sale of our investments.

 

As discussed above, on March 25, 2016, our Board of Directors resolved to monetize our portfolio holdings at the earliest practicable date. Previously, on January 20, 2016, our Board of Directors changed our Investment Objective to preserve capital and maximize stockholder value by pursuing the sale of our portfolio investments, limiting expenses and deploying surplus cash as appropriate, including into yielding investments to offset, in part, operating expenses, but resolved on March 25, 2016 to fulfill that Investment Objective by monetizing our portfolio holdings at the earliest practicable date in recognition that the monetization of our current holdings under our prior policies and investment objective could take three to five years or more and the amounts realized may be less than current fair values.

 

This resolution, together with uncertainty in financial markets in 2016 and early 2017, makes our investment portfolio susceptible to the risk that near-term sales could result in amounts realized being less than the fair values determined as of December 31, 2016, as we actively seek to sell our investments, either individually or in groups, it is possible that we will experience substantial differences in the exit prices ultimately achieved on our portfolio holdings as compared to the respective fair values as of December 31, 2016. Such values were determined consistent with our disclosed policies and procedures, and the methodologies included therein, and which were based on the concept of an orderly transaction in accordance with Financial Accounting Standards Board (“FASB”), Accounting Standards Codification Topic 820, “Fair Value Measurement and Disclosures,” (“ASC 820”).

 

We may have difficulty monetizing assets, which could have an adverse impact on our operating results as well as our ability to make distributions.

 

As we work to monetize our portfolio company holdings pursuant to our Investment Objective, we may be unable to monetize assets in a challenging market environment that may preclude buyers from purchasing our portfolio investments at the fair values established by our Board of Directors. We are susceptible to the risk of significant loss if we are forced to discount the value of our investments in order to monetize assets to provide liquidity to fund operations. In addition, we may be unable to monetize assets in the relatively near future and we will not be able to sell a portfolio investment if it results in our failure to maintain BDC status. Some assets may take years to monetize, which could result in increased costs to us during such period and adversely affect our financial condition, business and results of operations, as well as our ability to make distributions. Moreover, there may be limited opportunities for us or, if our stockholders approve the Plan, the liquidating trust to sell our interests in existing private portfolio companies to third parties in privately negotiated transactions. There can be no assurance that the prices we or the liquidating trust realize for our portfolio company holdings will be equal to or more than their current fair values. Accordingly, it is possible that an orderly monetization of our current holdings, either directly by us or by the liquidating trust pursuant to the Plan, may take three to five years or more and the amounts realized may be less than current fair values.

 

A lack of IPO or strategic sale/merger opportunities may cause our existing portfolio companies to stay in our portfolio longer, leading to lower returns, unrealized depreciation, or realized losses on our pre-IPO equity investments.

 

A typical “liquidity event” for our pre-IPO equity investments may be an IPO or a strategic sale/merger. We currently hold investments in ten private portfolio companies which were made under our former pre-IPO investment strategy. A lack of IPO or strategic sale/merger opportunities for our pre-IPO equity investments could lead to companies remaining in our portfolio as private entities still requiring funding. This situation could lead to unrealized depreciation and realized losses as some companies run short of cash and have to accept lower valuations in private financings or are not able to access additional capital at all, cease business activities or enter a bankruptcy proceeding. A lack of IPO or strategic sale/merger opportunities for our pre-IPO equity investments could also cause some financial sponsors to change their strategies, leading some of them to reduce funding of their portfolio companies and making it more difficult for such companies to access capital and to fulfill their potential, which can result in unrealized depreciation and realized losses in such companies by other capital providers including us. In the event our existing portfolio companies experience a delay in completing an IPO or strategic sale/merger or we are unable to generate capital gains on the disposition of our pre-IPO equity investments either following our contractual lock-up period in the case of an IPO or upon a strategic sale/merger, we may have no or limited capital gains from which to make distributions to our stockholders.

 

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Because the pre-IPO portfolio company equity securities that we acquired under our former investment strategy are typically illiquid until an IPO or sale/merger of the company, we generally cannot predict the regularity and time periods between sales of these equity investments and the realizations of capital gains, if any, from such sales. Since we do not expect to generate current income from our pre-IPO portfolio company equity investments, our annual operating expenses will be financed primarily from our capital base during periods of time between realizations of capital gains on our equity existing investments.

 

Risks Related to Existing Investments

 

There will be uncertainty as to the value of our portfolio investments.

 

As of December 31, 2016, all of our portfolio investments were in the form of securities that are not publicly traded. The fair value of securities and other investments that are not publicly traded may not be readily determinable. We expect to value these securities on a quarterly basis in accordance with our valuation policy, which is at all times consistent with GAAP. Our Board of Directors has utilized the services of the Administrator and a third-party valuation firm to aid it in determining the fair value of these securities. Our Board of Directors will discuss valuations and determine the fair value in good faith based on the input of our Administrator and the respective third-party valuation firm, if any. The factors that may be considered in fair value pricing our investments include the nature and realizable value of any collateral, the portfolio company’s ability to make payments and its earnings, the markets in which the portfolio company does business, comparisons to publicly traded companies, discounted cash flow and other relevant factors. Because such valuations, and particularly valuations of private securities and private companies, are inherently uncertain, may fluctuate over short periods of time and may be based on estimates, our determinations of fair value may differ materially from the values that would have been used if a ready market for these securities existed. Our net asset value could be adversely affected if our determinations regarding the fair value of our investments were materially higher or lower than the amounts that we ultimately realize upon the disposal of such securities.

 

Our portfolio companies are subject to many risks, including volatility, intense competition, current operating losses, shortened product life cycles and periodic downturns.

 

Our portfolio companies consist primarily of investments in Growth Companies in industries that our former investment adviser believed were poised to grow at above-average rates relative to other sectors, which may have relatively limited operating histories and may be particularly vulnerable to U.S. and foreign economic downturns. Many of these companies have narrow product lines and small market shares, compared to larger established publicly owned firms, which tend to render them more vulnerable to competitors’ actions and market conditions, as well as general economic downturns. Most of these portfolio companies experience operating losses, which may be substantial, and there can be no assurance when or if such companies will operate at a profit. Many of the companies targeted for investment had more limited access to capital and higher funding costs, will have a weaker financial position and will need additional capital to expand or complete their business plans. They may face intense competition, including from larger, more established companies with greater financial, technical and marketing resources. These companies generally have less predictable operating results, may from time to time be parties to litigation, may be engaged in rapidly changing businesses with products subject to a substantial risk of obsolescence, and require substantial additional capital to support their operations, finance expansion or maintain their competitive position. The revenues, income (or losses) and valuations of these companies can and often do fluctuate suddenly and dramatically. For these reasons, our portfolio companies, if rated by one or more ratings agencies, would typically be rated below “investment grade,” which refers to securities rated by ratings agencies below the four highest rating categories. In addition, the growth industries that were targeted under the former investment strategy including, but not limited to, technology, healthcare, life sciences and energy, are generally characterized by abrupt business cycles and intense competition, and the competitive environment can change abruptly due to rapidly evolving technology. Therefore, these portfolio companies may face considerably more risk than companies in other industry sectors. Accordingly, these factors could impair their cash flow or result in other events, such as bankruptcy, which could limit their ability to repay their obligations to us and may materially adversely affect the return on, or the recovery of, our investments in these businesses.

 

Because of rapid technological change, the average selling prices of products and some services provided by our portfolio companies may decrease with corresponding rapid speed over their productive lives. These decreases could adversely affect their operating results and cash flow, their ability to meet obligations under their debt securities and the value of their equity securities. This could, in turn, materially adversely affect our business, financial condition and results of operations.

 

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Our investments in private Growth Companies present certain challenges, including the lack of available information about these companies, a dependence on the talents and efforts of only a few key personnel at a given portfolio company, a lack of a diversified product line, a dependence on several key customers and a greater vulnerability to economic downturns.

 

Under our former investment strategy, investments were made in private Growth Companies across various stages of development. Generally, at the time of these investments, there was little publicly available information about these businesses since they are primarily privately owned. Therefore, although our former investment adviser performed due diligence investigations on these portfolio companies, their operations and their prospects, we may not have learned all of the material information we needed to know regarding these businesses prior to making our investments. At the time of our investments, we typically only had access to the portfolio company’s actual financial results as of and for the most recent quarter end or, in certain cases, the quarter end preceding the most recent quarter end. In addition, we typically relied on financial statements from a prior year-end which have not been audited. There can be no assurance that the information that we obtained with respect to any investment was reliable. If we were unable to uncover all material information about these companies, we may not have made a fully informed investment decision, and we may lose money on our investments. Also, privately held companies frequently have less diverse product lines, dependence on a few key customers and a smaller market presence than larger competitors. Thus, they are generally more vulnerable to economic downturns and a dependence on a few key sources of revenue and may experience substantial variations in operating results. These factors could affect our investment returns.

 

In addition, our success depends, in large part, upon the abilities of the key management personnel of our portfolio companies, who are responsible for the day-to-day operations of our portfolio companies. Competition for qualified personnel is intense at any stage of a company’s development, particularly so in the growth industries in which we hold investments. The loss of one or more key managers can hinder or delay a company’s implementation of its business plan and harm its financial condition. Our portfolio companies may not be able to attract and retain qualified managers and personnel. Any inability to do so may negatively affect our investment returns.

 

Our failure to make follow-on equity investments in our portfolio companies could impair the value of our equity portfolio and may result in significant dilution of the value of our investment.

 

Often during a growth company’s life cycle, an additional or “follow-on” equity investment is required to fully realize the value to be created by the portfolio company. Following an initial equity investment in a portfolio company in accordance with our new Investment Objective we may make such “follow-on” equity investments, in order to attempt to preserve or enhance the value of our initial equity investment. We may elect not to make these follow-on investments or otherwise lack sufficient funds to make those investments. We will have the discretion to make any follow-on investments, subject to the availability of capital resources. The failure to make follow-on equity investments may, in some circumstances, jeopardize the continued viability of a portfolio company, result in a diminished current value, impair the ability or likelihood for a full recovery of the value of our initial equity investment, result in a default under any outstanding debt investment with the portfolio company, or result in a missed opportunity for us to maintain or increase our equity participation in a successful operation. In addition, the seniority and protections provided in our equity investments may be diminished if a portfolio company issues more senior securities in a subsequent equity financing round. Even if we have sufficient capital to make a desired follow-on equity investment, we may elect not to make such follow-on investment because we do not want to increase our concentration of risk in that portfolio company, we prefer other opportunities, we are subject to BDC requirements that would prevent or limit such follow-on investment or the follow-on investment would affect our qualification as a RIC, particularly the RIC diversification requirements.

 

The lack of liquidity in our debt and equity investments may adversely affect our business, and as we seek to sell our investments, we may not be able to do so at a favorable price, if at all. As a result, we may suffer losses.

 

Under our former investment strategy, investments were made primarily in companies whose securities were not publicly traded, and whose securities may be currently subject to legal and other restrictions on resale or are otherwise less liquid than publicly traded securities. The illiquidity of our debt and equity investments may make it difficult for us to sell these investments when desired, if at all, and meet our Investment Objective, and may result in substantial differences in the exit prices ultimately achieved on our portfolio holdings as compared to the respective fair values as of December 31, 2016. We may also face other restrictions on our ability to liquidate an investment in a publicly traded portfolio company to the extent that we possess material non-public information regarding the portfolio company or during the underwriters’ customary 180-day lockup period following an IPO. Because our investments are typically illiquid, we may be unable to dispose of them, in which case we could fail to qualify as a RIC or BDC, or we may not be able to dispose of them at favorable prices, and as a result, we may suffer losses.

 

Our existing investments may become concentrated in certain industries and in a limited number of companies, which subjects us to the risk of significant loss if any of the industry sectors experience a downturn.

 

We currently hold investments in 10 portfolio companies and do not expect to make investments in additional portfolio companies. As a consequence of this limited number of investments, the aggregate returns we realize may be significantly adversely affected if a small number of investments perform poorly or if we need to write down the value of any one investment. Beyond the asset diversification requirements to which we will be subject as a RIC, we do not have fixed guidelines for diversification or limitations on the size of our investments in any one portfolio company and our investments could be concentrated in relatively few issuers. In addition, our portfolio primarily consists of Growth Companies, including those in technology, healthcare, life sciences, energy and other industries with above-average rates of growth, at various stages of development. As a result, a downturn in industry sectors and particularly those in which we are heavily concentrated could materially adversely affect our financial condition.

 

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Our financial results could be negatively affected if a significant portfolio investment fails to perform as expected.

 

Our total investment in companies may be significant individually or in the aggregate. As a result, if a significant investment in one or more companies fails to perform as expected, our financial results could be more negatively affected and the magnitude of the loss could be more significant than if we had made smaller investments in more companies.

 

We cannot assure you that any of our investments in our portfolio companies will be successful. There can be no assurance as to the levels of defaults or recoveries that may be experienced on our debt investments. The secured and unsecured debt in which we invest may be issued by companies with limited financial resources and limited access to alternative financing. Issuers of debt may be unable to meet their obligations under their debt securities that we hold. Such developments may be accompanied by deterioration in the value of collateral, if any, backing our investments. Moreover, as we monetize our investments, the remaining investments will represent a larger percentage of our assets and a failure of one of such investments to perform will have a greater impact on our financial results. This could lead to a decline in value of our debt investments, which could result in a decline in our net earnings and NAV. We may lose our entire investment in any or all of our portfolio companies.

 

Most of our portfolio companies will need additional capital, which may not be readily available.

 

Most of the portfolio companies targeted under our former investment strategy may have limited financial resources and typically require substantial additional financing to satisfy their continuing working capital and other capital requirements. We cannot predict the circumstances or market conditions under which these portfolio companies will seek additional capital. Each round of institutional equity financing is typically intended to provide a company with only enough capital to reach the next stage of development. It is possible that one or more of our portfolio companies will not be able to raise additional financing or may be able to do so only at a price or on terms that are unfavorable to the portfolio company, either of which would negatively impact our investment returns. Some of these companies may be unable to obtain sufficient financing from any provider of capital under any terms, thereby requiring these companies to cease or curtail business operations. Accordingly, investments in these types of companies generally entails a higher risk of loss than investments in companies that do not have significant incremental capital raising requirements.

 

Portfolio companies that do not have venture capital or private equity firms as financial sponsors may entail a higher risk of loss than do companies with institutional equity investors, which could increase the risk of loss of your investment.

 

Portfolio companies that do not have venture capital or private equity investors as financial sponsors, including certain of our portfolio investments, may be unable to raise any additional capital to satisfy their obligations or to raise sufficient additional capital to reach the next stage of development. Portfolio companies that do not have financial sponsors may be less financially sophisticated and may not have access to independent members to serve on their boards, which means that they may be less successful than portfolio companies sponsored by venture capital or private equity firms. Accordingly, investments in these types of companies may entail a higher risk of loss than would financing companies that have a financial sponsor.

 

If our portfolio companies are unable to commercialize their technologies, products, business concepts or services, the returns on our debt and equity investments could be adversely affected.

 

The value of our debt and equity investments in our portfolio companies may decline if our portfolio companies are not able to commercialize their technology, products, business concepts or services. Additionally, although some of our portfolio companies may already have a commercially successful product or product line at the time of our investment, technology-related products and services often have a more limited market or life span than products in other industries. Thus, the ultimate success of these companies often depends on their ability to innovate continually in increasingly competitive markets. If they are unable to do so, our investment returns could be adversely affected, and their ability to service their debt obligations to us over the life of a loan could be impaired. Our portfolio companies may be unable to acquire or develop successful new technologies and the intellectual property they currently hold may not remain viable. Even if our portfolio companies are able to develop commercially viable products, the market for new products and services is highly competitive and rapidly changing. Neither our portfolio companies nor we have any control over the pace of technology development. Commercial success is difficult to predict, and the marketing efforts of our portfolio companies may not be successful.

 

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If our portfolio companies are unable to protect their intellectual property rights, our business and prospects could be harmed, and if portfolio companies are required to devote significant resources to protecting their intellectual property rights, the value of our investment could be reduced.

 

Our future success and competitive position depends in part upon the ability of our portfolio companies to obtain, maintain and protect proprietary technology used in their products and services. The intellectual property held by our portfolio companies often represents a substantial portion of the collateral securing our debt investments or constitutes a significant portion of the portfolio companies’ value that may be available in a downside scenario to repay our secured debt investments. Our portfolio companies rely, in part, on patent, trade secret and trademark law to protect that technology, but competitors may misappropriate their intellectual property, and disputes as to ownership of intellectual property may arise. Portfolio companies may, from time to time, be required to institute litigation to enforce their patents, copyrights or other intellectual property rights, protect their trade secrets, determine the validity and scope of the proprietary rights of others or defend against claims of infringement. Such litigation could result in substantial costs and diversion of resources. Similarly, if a portfolio company is found to infringe or misappropriate a third party’s patent or other proprietary rights, it could be required to pay damages to the third party, alter its products or processes, obtain a license from the third party or cease activities utilizing the proprietary rights, including making or selling products utilizing the proprietary rights. Any of the foregoing events could negatively affect both the portfolio company’s ability to service our debt investment and the value of any related debt and equity securities that we own, as well as the value of any collateral securing our investment.

 

Our investments in technology companies are subject to many risks, including regulatory concerns, litigation risks and intense competition.

 

Investments in technology companies are subject to substantial risks. For example, our portfolio companies face intense competition since their businesses are rapidly evolving, intensely competitive and subject to changing technology, shifting user needs and frequent introductions of new products and services. Potential competitors to our portfolio companies in the technology industry range from large and established companies to emerging start-ups. Further, such companies are subject to laws that were adopted prior to the advent of the Internet and related technologies and, as a result, may not contemplate or address the unique issues of the Internet and related technologies. The laws that do reference the Internet are being interpreted by the courts, but their applicability and scope remain uncertain. Claims have been threatened and filed under both U.S. and foreign laws for defamation, invasion of privacy and other tort claims, unlawful activity, copyright and trademark infringement, or other theories based on the nature and content of the materials searched and the ads posted by a company’s users, a company’s products and services, or content generated by a company’s users. Further, the growth of technology companies into a variety of new fields implicate a variety of new regulatory issues and may subject such companies to increased regulatory scrutiny, particularly in the U.S. and Europe. Any of these factors could materially and adversely affect the operations of a portfolio company in the technology industry and, in turn, impair our ability to timely collect principal and interest payments owed to us or adversely affect the value of these portfolio companies.

 

Our investments in life sciences companies are subject to numerous risks, including competition, extensive government regulation, product liability and commercial difficulties.

 

Our investments in companies in the life sciences industries, including biotechnology, pharmaceuticals and medical device companies are subject to numerous risks. The successful and timely implementation of the business model of our biotechnology, pharmaceutical and medical device portfolio companies depends on their ability to adapt to changing technologies and introduce new products. As competitors continue to introduce competitive products, the development and acquisition of innovative products and technologies that improve efficacy, safety, patient’s and clinician’s ease of use and cost-effectiveness are important to the success of such portfolio companies. Moreover, there may be a limited number of suppliers to provide necessary components or a limited number of manufacturers for their products, creating a risk of disruption to the manufacturing process if they are unable to find alternative suppliers when needed. The success of new product offerings will depend on many factors, including the ability to properly anticipate and satisfy customer needs, obtain regulatory approvals on a timely basis, develop and manufacture products in an economic and timely manner, obtain or maintain advantageous positions with respect to intellectual property, and differentiate products from those of competitors. Failure by our portfolio companies to introduce planned products or other new products or to introduce products on schedule could have a material adverse effect on our business, financial condition and results of operations.

 

Further, the development of products by biotechnology, pharmaceutical and medical device companies requires significant research and development, clinical trials and regulatory approvals. The results of product development efforts may be affected by a number of factors, including the ability to innovate, develop and manufacture new products, complete clinical trials, obtain regulatory approvals and reimbursement in the U.S. and abroad, or gain and maintain market approval of products. In addition, regulatory review processes by U.S. and foreign agencies may extend longer than anticipated as a result of decreased funding and tighter fiscal budgets. Further, patents attained by others can preclude or delay the commercialization of a product. There can be no assurance that any products now in development will achieve technological feasibility, obtain regulatory approval, or gain market acceptance. Failure can occur at any point in the development process, including after significant funds have been invested. Products may fail to reach the market or may have only limited commercial success because of efficacy or safety concerns, failure to achieve positive clinical outcomes, inability to obtain necessary regulatory approvals, failure to achieve market adoption, limited scope of approved uses, excessive costs to manufacture, the failure to establish or maintain intellectual property rights, or the infringement of intellectual property rights of others. Moreover, even if products reach the market, they will continue to be subject to extensive regulation by the Food and Drug Administration and other federal, state and foreign agencies, and failure to comply with applicable regulations can result in significant penalties and claims that could materially and adversely affect their operations.

 

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Changes in healthcare laws and other regulations applicable to some of our portfolio companies’ businesses may constrain their ability to offer their products and services.

 

Changes in healthcare or other laws and regulations applicable to the businesses of some of our portfolio companies may occur that could increase their compliance and other costs of doing business, require significant systems enhancements, or render their products or services less profitable or obsolete, any of which could have a material adverse effect on their results of operations. In recent years in the United States there have been and will likely continue to be a number of legislative and regulatory changes regarding the healthcare system. For example, the Patient Protection and Affordable Care Act (the “ACA”), enacted in March 2010, introduced significant changes to how healthcare is financed by both governmental and private insurers. Some of the provisions of the ACA have yet to be fully implemented, while certain provisions have been subject to judicial and Congressional challenges. Furthermore, in January 2017, Congress voted to adopt a budget resolution for fiscal year 2017 that is widely viewed as the first step toward the passage of legislation that would repeal certain aspects of the ACA. The President of the United States also signed an Executive Order on January 20, 2017, directing federal agencies with authority and responsibilities under the ACA to waive, defer, grant exemptions from, or delay the implementation of any provision of the ACA that would impose a fiscal burden on states or a cost, fee, tax, penalty or regulatory burden on individuals, healthcare providers, health insurers or manufacturers of pharmaceuticals or medical devices. Congress has also announced its intent to consider subsequent legislation to replace elements of the ACA. Thus, the full impact of the ACA and of the uncertainty related the future legal and regulatory environment for healthcare in the United States on the businesses of some of our portfolio companies remains unclear. We cannot predict what healthcare reform initiatives may be adopted in the future and such reforms could have an adverse effect on the operations of certain of our portfolio companies and, in turn, adversely impact the value of these portfolio companies.

 

Our investments in the energy and energy-related technology industries are subject to many risks, including volatility, intense competition, unproven technologies, periodic downturns, loss of government subsidies and incentives, and potential litigation.

 

Our investments in energy and energy-related technology companies are subject to substantial operational risks, such as underestimated cost projections, unanticipated operation and maintenance expenses, loss of government subsidies, and inability to deliver cost-effective alternative energy solutions compared to traditional energy products. In addition, energy companies employ a variety of means of increasing cash flow, including increasing utilization of existing facilities, expanding operations through new construction or acquisitions, or securing additional long-term contracts. Thus, energy and energy-related companies in our portfolio may be subject to construction risk, acquisition risk or other risks arising from their specific business strategies. Furthermore, production levels for solar, wind and other renewable energies may be dependent upon adequate sunlight, wind, or biogas production, which can vary from market to market and period to period, resulting in volatility in production levels and profitability. In addition, our energy companies may have narrow product lines and small market shares, which tend to render them more vulnerable to competitors’ actions and market conditions, as well as to general economic downturns. Moreover, there may be a limited number of suppliers to provide necessary components or a limited number of manufacturers for their products, creating a risk of disruption to the manufacturing process if they are unable to find alternative suppliers when needed. The revenues, income (or losses) and valuations of energy and energy-related technology companies can and often do fluctuate suddenly and dramatically and the markets in which these companies operate are generally characterized by abrupt business cycles and intense competition.

 

Demand for energy technology and renewable energy is also influenced by the available supply and prices for other energy products, such as coal, oil and natural gases. A change in prices in these energy products, such as a substantial or extended decline in oil and natural gas prices, could reduce demand for alternative energy. Furthermore, some of our portfolio companies are heavily dependent upon the demand for oil and natural gas, and a prolonged or continued decline in oil and natural gas prices could have a material adverse effect on the business, financial condition and results of operations of these portfolio companies and may impair their ability to meet capital expenditure obligations and financial commitments. Our investments in energy companies also face potential litigation, including significant warranty and product liability claims, as well as class action and government claims arising from business failures of companies supported government subsidies. Such litigation could adversely affect the business and results of operations of our energy portfolio companies. There is also particular uncertainty about whether agreements providing government incentives and subsidies for reductions in greenhouse gas emissions, such as the Kyoto Protocol and the Paris Agreement, will continue and whether countries around the world will enact or maintain legislation that provides such incentives and subsidies for reductions in greenhouse gas emissions, without which such investments in energy technology dependent portfolio companies may not be economical or financing for such projects may become unavailable. As a result, these portfolio company investments face considerable risk, including the risk that favorable regulatory regimes or government subsidies and incentives expire or are adversely modified. Any of these factors could materially and adversely affect the operations of a portfolio company in the energy and energy-related technology industries and, in turn, impair our ability to timely collect principal and interest payments owed to us and adversely affect the value of these portfolio companies.

 

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Our investments in obligations of non-U.S. obligors, involve certain risks related to regional economic conditions and risks not normally associated with investments in the obligations of sovereign and corporate obligors located in the United States.

 

Investments in the obligations of non-U.S. obligors involve certain special risks related to regional economic conditions and sovereign risks which are not normally associated with investments in the obligations of sovereign and corporate obligors located in the U.S. We are unable to provide any information regarding the specific risks associated with purchasing a loan, a participation interest or an investment governed by a law other than those of a U.S. jurisdiction. These risks may include and economic uncertainty, fluctuations of currency exchange rates, lower levels of disclosure and regulation in foreign securities markets, confiscatory taxation, taxation of income earned in foreign nations or other taxes or restrictions imposed with respect to investments in foreign nations, foreign exchange controls (which may include suspension of the ability to transfer currency from a given country and repatriation of investments) and uncertainties as to the status, interpretation and application of laws including, but not limited to those relating to insolvency. In addition, there is often less publicly available information about non-U.S. obligors than about sovereign and corporate obligors in the U.S. Sovereign and corporate obligors in countries other than the U.S. may not be subject to uniform accounting, auditing and financial reporting standards, and auditing practices and requirements for both foreign public and private obligors may not be comparable to those applicable to U.S. companies. It also may be difficult to obtain and enforce a judgment relating to investments issued by a non-U.S. obligor in a court outside the U.S.

 

We generally do not control our portfolio companies.

 

We generally do not control our portfolio companies, even though we may have board representation or board observation rights in some cases. As a result, we are subject to the risk that a portfolio company in which we invest may make business decisions with which we disagree and the management of such company may take risks or otherwise act in ways that do not serve our interests. Due to the lack of liquidity for our investments in privately held companies, we may not be able to dispose of our interests in our portfolio companies as readily as we would like or at an appropriate valuation. As a result, a portfolio company may make decisions that could decrease the value of our portfolio holdings.

 

Defaults by our portfolio companies will harm our operating results.

 

A portfolio company’s failure to satisfy financial or operating covenants imposed by us or other lenders could lead to defaults and, potentially, termination of its loans and foreclosure on its secured assets, which could trigger cross-defaults under other agreements and jeopardize a portfolio company’s ability to meet its obligations under the debt or equity securities that we hold. We may incur expenses to the extent necessary to seek recovery upon default or to negotiate new terms, which may include the waiver of certain financial covenants, with a defaulting portfolio company.

 

We hold the debt and equity securities of companies that may enter into bankruptcy proceedings.

 

One or more of our portfolio companies may experience bankruptcy or similar financial distress. The bankruptcy process has a number of significant inherent risks. Many events in a bankruptcy proceeding are the product of contested matters and adversary proceedings and are beyond the control of the creditors. A bankruptcy filing by a borrower may adversely and permanently affect the borrower. If the proceeding is converted to a liquidation, the value of the borrower may not equal the liquidation value that was believed to exist at the time of the investment. The duration of a bankruptcy proceeding is also difficult to predict, and a creditor’s return on investment can be adversely affected by delays until the plan of reorganization or liquidation ultimately becomes effective. The administrative costs of a bankruptcy proceeding are frequently high and would be paid out of the debtor’s estate prior to any return to creditors. Because the standards for classification of claims under bankruptcy law are vague, our influence with respect to the class of securities or other obligations we own may be lost by increases in the number and amount of claims in the same class or by different classification and treatment. In the early stages of the bankruptcy process, it is often difficult to estimate the extent of, or even to identify, any contingent claims that might be made. In addition, certain claims that have priority by law (for example, claims for taxes) may be substantial.

 

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Any unrealized depreciation we experience on our debt and equity investments may be an indication of future realized losses, which could reduce amounts available for distribution.

 

As a BDC, we are required to carry our debt and equity investments at fair value, which shall be the market value of our investments or, if no market value is ascertainable, at the fair value as determined in good faith pursuant to procedures approved by our board of directors in accordance with our valuation policy. We are not permitted to maintain a reserve for loan losses. Decreases in the fair values of our debt and equity investments are recorded as unrealized depreciation. Any unrealized depreciation in our debt or equity portfolio could be an indication of a portfolio company’s inability to meet its repayment obligations to us and the potential future decline in the value of our investments. This could result in realized losses in the future and ultimately reduces our gains available for distribution in future periods.

 

While substantially all of our debt and equity investments are not publicly traded, applicable accounting standards require us to assume as part of our valuation process that our investments are sold in a principal market to market participants (even if we plan on holding an investment through its maturity). As a result, volatility in the capital markets can also adversely affect our investment valuations.

 

As part of the valuation process, we may take into account the following types of factors, if relevant, in determining the fair value of our debt and equity investments: the enterprise value of a portfolio company (an estimate of the total fair value of the portfolio company’s debt and equity), 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 similar publicly traded securities, changes in the interest rate environment and the credit markets generally that may affect the price at which similar investments may be made in the future and other relevant factors. When an external event such as a purchase transaction, public offering or subsequent equity sale occurs, we use the pricing indicated by the external event to corroborate our valuation. While substantially all of our debt and equity investments are not publicly traded, applicable accounting standards require us to assume as part of our valuation process that our investments are sold in a principal market to market participants (even if we plan on holding an investment through its maturity). As a result, volatility in the capital markets can also adversely affect our investment valuations.

 

We may participate on creditors’ committees to negotiate the management of financially troubled companies.

 

We may (through an agent) participate on committees formed by creditors to negotiate the management of financially troubled companies that may or may not be in bankruptcy or we may seek to negotiate directly with the debtors with respect to restructuring issues. If we do join a creditors’ committee, the participants of the committee would be interested in obtaining an outcome that is in their respective individual best interests and there can be no assurance of obtaining results most favorable to our interests. By participating on such committees, we may be deemed to have duties to other creditors represented by the committees, which might expose us to liability to such other creditors who disagree with our actions.

 

We may also be provided with material non-public information that may restrict our ability to trade in such company’s securities. While we intend to comply with all applicable securities laws and to make judgments concerning restrictions on trading in good faith, we may trade in a company’s securities while engaged in such company’s restructuring activities. Such trading creates a risk of litigation and liability that may cause us to incur significant legal fees and potential losses.

 

Our debt investments involve a number of significant risks, including default risk, covenant compliance risk and subordination risk.

 

Our debt investments involve a number of significant risks, including risks related to defaults, covenant compliance and subordination. Approximately 1% of our total assets as of December 31, 2016 consist of debt investments in BrightSource Energy, both secured and unsecured. In the event of a default on our secured debt, we will only have recourse to the assets collateralizing the loan. If the underlying collateral value is less than the loan amount, we will suffer a loss. In addition, we currently hold debt investments that are unsecured, which are subject to the risk that other lenders may be directly secured by the assets of the portfolio company. In the event of a default, those collateralized lenders would have priority over us with respect to the proceeds of a sale of the underlying assets. In cases described above, we may lack control over the underlying asset collateralizing our secured debt or the underlying assets of the portfolio company prior to a default, and as a result the value of the collateral may be reduced by acts or omissions by owners or managers of the assets. Moreover, because our debt investments are in a Growth Company, a substantial portion of the assets securing the secured portion of our debt investment may be in intangible assets such as intellectual property, which could lose value if the portfolio company’s rights to the intellectual property are challenged or if the company’s license to the intellectual property is revoked or expires. Rapid changes in technology may also render previously valuable intellectual property less valuable. If the value of collateral underlying our secured debt declines or interest rates increase during the term of our debt, a portfolio company may not be able to obtain the necessary funds to repay our debt investment at maturity through refinancing. Decreasing collateral value or increasing interest rates may hinder a portfolio company’s ability to refinance our debt securities because the underlying collateral cannot satisfy the debt service coverage requirements necessary to obtain new financing. If a borrower is unable to repay our debt investment at maturity, we could suffer a loss which may adversely impact our financial performance.

 

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Our debt investments in our portfolio companies may include business and financial covenants placing affirmative and negative obligations on the operation of the company’s business and its financial condition. The purpose of these provisions is to require our portfolio companies to act, or refrain from acting, in a manner that we believe will best protect the capital we have invested. However, the financial condition and results of operations of our portfolio companies may cause us to determine that it would be in our stockholders’ and portfolio companies’ best interest to waive or defer enforcement of these provisions. As a result, we may offer a flexible payment and covenant enforcement structure to our portfolio companies. Accordingly, determination to waive or defer enforcement of some or all of these covenants may not provide us with the same level of protection as more restrictive conditions that traditional lenders typically impose on borrowers. In certain situations, we may even elect to waive breaches of these covenants, including our right to payment, or waive or defer enforcement of remedies, such as acceleration of obligations or foreclosure on collateral, depending upon the financial condition and prospects of the particular portfolio company, including situations where we believe that one or more financial sponsors intend to, express their intent to, or provide subject to milestones or contingencies, continued support, assistance or financial commitment to the borrower. These actions may reduce the likelihood in the short term of our receiving the full amount of future payments of interest or principal and be accompanied by a deterioration in the value of the underlying collateral as many of these companies may have limited financial resources, may be unable to meet future obligations and may go bankrupt. These events could harm our financial condition and operating results.

 

Some of our debt investments are secured on a second priority basis by the same collateral securing outstanding and future senior debt of the portfolio companies. The holders of obligations secured by the first priority liens on the collateral will generally control the liquidation of and be entitled to receive proceeds from any realization of the collateral to repay their obligations in full before we receive anything. In addition, our rights may also be limited pursuant to the terms of one or more intercreditor agreements that we enter into with the holders of senior debt. Furthermore, payment on our unsecured debt investments will generally be subject to full payment of the secured indebtedness of the portfolio company. There can be no assurance that the proceeds, if any, from the sale or sales of all of the collateral would be sufficient to satisfy the debt obligations secured by our second priority liens after payment in full of all obligations secured by the first priority liens on the collateral or to satisfy debt obligations of our unsecured debt investments after payment in full of all obligations to holders of secured indebtedness. If such proceeds are not sufficient to repay amounts outstanding under debt obligations secured by the second priority liens or unsecured debt obligations, then we may never receive full payment of interest and principal to which we would otherwise be entitled pursuant to our debt investments.

 

Many of our portfolio companies have complex capital structures.

 

Many of our portfolio companies have complex capital structures based on multiple rounds of equity financing and, as a result, may have multiple classes of common and preferred equity securities with differing rights, including with respect to voting, dividends, redemptions, liquidation, and conversion rights. Although our former investment adviser sought to make equity investments in the portfolio company’s most senior class of equity securities, the seniority and protections provided in these types of equity investments may be diminished if the portfolio company issues more senior securities in a subsequent equity financing round. The value of our equity investments may also be adversely affected by subsequent financing by a portfolio company. The former investment adviser typically required information on the private company’s capital structure as part of its due diligence process. Although, to our knowledge, we believe that our former investment adviser’s investment professionals had extensive experience evaluating and investing in Growth Companies with such complex capital structures, there can be no assurance that we will be able to adequately evaluate the relative risks and benefits of investing in a particular class of a portfolio company’s equity securities. Further, a preferred equity investment we make may be superseded by another series of preferred stock with greater priority. Any failure on our part to properly evaluate the relative rights and value of a class of equity securities in which we invest could cause us to lose part or all of our equity investment, which in turn could have a material and adverse effect on our NAV and results of operations.

 

The warrants that we hold, as well as the direct equity investments, are highly speculative, and may not appreciate in value and may result in unrealized depreciation or realized losses which may adversely affect our returns.

 

Certain of the warrants we hold to acquire equity securities in portfolio companies include a “cashless exercise” provision to allow us to exercise these rights without requiring us to make any additional cash investment. Our goal is ultimately to dispose of these equity interests and realize gains upon disposition of such interests. Over time, the gains that we realize on these equity interests may offset, to some extent, losses that we experience on defaults under debt securities that we hold. However, the equity interests that we receive may not appreciate in value and, in fact, may decline in value. It is possible that these equity interests may become worthless. Accordingly, we may not be able to realize gains from our equity interests, and any gains that we do realize on the disposition of any equity interests may not be sufficient to offset any other losses that we experience on our debt securities.

 

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We have also made direct equity investments, where we make an upfront cash investment in a company’s equity securities, either as part of our debt investment or as a stand-alone investment. We attempt to dispose of these investments and realize gains upon our disposition of them. However, these equity investments are highly speculative and may not appreciate in value or may decline in value. We also may be unable to realize any value if a portfolio company does not have a liquidity event, such as a sale of the business or an IPO, or if the portfolio company defaults under its outstanding indebtedness, which could materially decrease the value of, or prevent us from being able to sell, our equity investments. If our direct equity investments decline in value, we may have unrealized depreciation or realized losses which may adversely affect our returns.

 

Certain of our direct equity investments do not have structural protections, and we cannot assure you that we will realize gains from structural protections in those investments which have those protections.

 

Certain of our portfolio investments contain structural protections with respect to our direct equity investments that may provide an opportunity to earn a potential enhanced return upon an IPO, sale, merger or liquidation. Such structural protections may include preferred rights relative to other security holders, conversion rights which would result in us receiving shares of common stock at a discount to the IPO price upon conversion at the time of the IPO, warrants that would result in us receiving additional shares for a nominal exercise price at the time of an IPO or liquidation preferences at amounts greater than our investment cost or with participation rights entitling us to participate with common stockholders after all liquidation preference are paid. Our ability to realize the potential value associated with these structural protections will depend on a number of factors including the completion of the IPO, any adjustment to the terms of the structural protection that may be negotiated during the IPO process and the possible subsequent issuance of more senior securities that may impact the relative value of our investment. Further, even if an IPO is completed, we would not realize the potential value associated with these structural protections unless the market price of the portfolio company’s common shares equaled or exceeded the IPO price at the time such shares were sold following the customary 180-day lockup period. Further, our ability to realize the potential value associated with any structural protections at the time of a sale, merger or liquidation of a portfolio company will depend on a number of factors including the realization of sale, merger or liquidation proceeds (after payment of liabilities) sufficient to pay our senior preference amount, any adjustment to our preference amount that may be negotiated prior to any sale, merger or liquidation and the possible subsequent issuance of more senior securities that may make our preference rights subordinate to the preference rights of senior security holders. As a result, there can be no assurance that we will be able to realize the potential value of these structural protections even if we are able to obtain them.

 

Risks Relating to Our Business and Structure

 

Any failure on our part to maintain our status as a BDC would reduce our operating flexibility.

 

The 1940 Act imposes numerous constraints on the operations of business development companies. For example, business development companies are required to invest at least 70% of their total assets primarily in securities of eligible portfolio companies, cash, cash equivalents, U.S. government securities and other high quality debt investments that mature in one year or less. Furthermore, any failure to comply with the requirements imposed on business development companies by the 1940 Act could cause the SEC to bring an enforcement action against us and/or expose us to claims of private litigants. Upon approval of a majority of our stockholders, we may elect to withdraw our status as a BDC. If we decide to withdraw our election, or if we otherwise fail to qualify, or maintain our qualification, as a BDC, we might be regulated as a closed-end investment company under the 1940 Act, which would subject us to substantially more regulatory restrictions under the 1940 Act and correspondingly decrease our operating flexibility and increase our costs of doing business.

 

We may experience fluctuations in our periodic results, and the net asset value of our common stock may decline.

 

We could experience fluctuations in our periodic results due to a number of factors, some of which are beyond our control, including our ability to monetize our investments at favorable prices, the level of our expenses (including the interest rates payable on any borrowings we may incur), variations in and the timing of the recognition of realized gains or losses and unrealized appreciation and depreciation on our investments, the degree to which we encounter competition in our markets and general economic conditions. Our periodic results will also be affected by the ability of our private portfolio companies in which we have made equity investments to complete their IPOs or complete a strategic sale/merger. As a result of these factors, results for any period should not be relied upon as being indicative of performance in future periods.

 

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The previously paid incentive fee to our former investment adviser may have induced our former investment adviser to make speculative investments or incur leverage.

 

The incentive fee payable by us to our former investment adviser, calculated as a percentage of the return on invested capital, may have created an incentive for our former investment adviser to make investments on our behalf that are risky or more speculative than would be the case in the absence of such compensation arrangement, which could result in higher investment losses, particularly during cyclical economic downturns.

 

In addition, our former investment adviser had control over the timing of the acquisition and sale of our equity investments, and therefore control over when we realized gains and losses on these equity investments. As a result, our former investment adviser may have faced a conflict of interest in determining when it was appropriate to sell a specific equity investment, to the extent that doing so may serve to maximize its incentive fee at a point where selling such investment may not necessarily be in the best interests of our stockholders. Our Board of Directors monitored such conflicts of interest in connection with its review of the performance of our former investment adviser under our former Investment Advisory Agreement, as well as during its quarterly review of our financial performance and results of operations.

 

Our Administrator can resign on 90 days’ notice and we may be unable to find a suitable replacement within that time, resulting in a disruption in our operations that could adversely affect our financial condition, business and results of operations.

 

Our Administrator has the right, under our Administrative Consulting Agreement, to resign at any time upon not less than 90 days’ written notice, whether we have found a replacement or not. If our Administrator resigns, we may not be able to find a new Administrator or hire internal management with similar expertise and ability to provide the same or equivalent services on acceptable terms within 90 days, or at all. If we are unable to do so promptly, our operations are likely to experience a disruption, our financial condition, business and results of operations as well as our ability to make distributions are likely to be adversely affected and the market price of our shares may decline. In addition, the coordination of our internal management and investment activities is likely to suffer if we are unable to identify and reach an agreement with a single institution or group of executives having the expertise possessed by our Administrator. Even if we were able to retain comparable management, the integration of such management and their lack of familiarity with our Investment Objective might result in additional costs and time delays that could adversely affect our financial condition, business and results of operations.

 

Operating under the constraints imposed on us as a BDC and a regulated investment company may hinder the achievement of our Investment Objective.

 

The 1940 Act imposes numerous constraints on the operations of BDCs. For example, BDCs are required to invest at least 70% of their total assets primarily in securities of U.S.-based private companies or public companies with market capitalizations of less than $250 million, cash, cash equivalents, U.S. government securities and other high quality debt instruments that mature in one year or less. In addition, qualification for taxation as a regulated investment company, or RIC, requires satisfaction of source-of-income, diversification and distribution requirements. These constraints, among others, may hinder our Administrator and Board of Directors’ ability to monetize investments and achieve our Investment Objective.

 

Our ability to enter into transactions with our affiliates is restricted, which may limit our ability to liquidate our portfolio investments.

 

We are prohibited under the 1940 Act from knowingly participating in certain transactions with certain of our affiliates without the prior approval of our independent directors and, in some cases, of the SEC. Any person that owns, directly or indirectly, 5% or more of our outstanding voting securities will be our affiliate for purposes of the 1940 Act and we are generally prohibited from buying or selling any security to such affiliate, absent the prior approval of our independent directors. These restrictions, by restricting possible purchasers of our portfolio investments, may limit our ability to monetize our portfolio investments and achieve our Investment Objective.

 

We will be subject to corporate-level income tax if we are unable to qualify as a regulated investment company, or RIC.

 

Effective January 1, 2010, we elected to be treated for tax purposes as a regulated investment company, or RIC, under the Code. No assurance can be given that we will be able to continue to qualify for and maintain RIC status in future years. In order to qualify for the special treatment accorded to a RIC, we must meet certain income source, asset diversification and annual distribution requirements. In order to satisfy the income source requirement, we must derive in each taxable year at least 90% of our gross income from dividends, interest, payments with respect to certain securities loans, gains from the sale of stock or other securities or foreign currencies, income from “qualified publicly traded partnerships” or other income derived with respect to our business of investing in such stock or securities. To qualify as a RIC, we must also meet certain asset diversification requirements at the end of each quarter of our taxable year. Failure to meet these tests may result in our having to sell certain investments quickly in order to prevent the loss of RIC status. Because most of our investments will be in private companies, any such sales could be made at disadvantageous prices and may result in substantial losses. In order to satisfy the annual distribution requirement for a RIC, we must distribute at least 90% of our investment company taxable income (which is generally our net ordinary income plus the excess, if any, of realized net short-term capital gains over realized net long-term capital losses), if any, to our stockholders on at least an annual basis. In the event we borrow funds or issue senior securities, we may be subject to certain asset coverage ratio requirements under the 1940 Act and financial covenants under loan and credit agreements that could, under certain circumstances, restrict us from making distributions necessary to satisfy the annual distribution requirement. If we are unable to obtain cash from other sources, we may fail to qualify for special tax treatment as a RIC and, thus, may be subject to corporate-level income tax on all our income. If we fail to qualify as a RIC for any reason and remain or become subject to corporate income tax, the resulting corporate-level federal taxes could substantially reduce our net assets, the amount of income available for distribution, and the amount of our distributions. Such a failure would have a material adverse effect on us and our stockholders.

 

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We may have difficulty paying our required distributions if we recognize income before or without receiving cash representing such income, such as payment-in-kind (PIK) interest on certain debt investments.

 

We derive current interest income on our debt investments. With respect to the debt obligations we have acquired with PIK provisions, under applicable tax rules, we must include in income each year a portion of the PIK interest earned in that year. Because PIK interest will be included in our investment company taxable income in the year it is earned, we may be required to make a distribution to our stockholders in order to satisfy the Annual Distribution Requirement, even though we may not have received any corresponding cash amount. As a result, we may have difficulty meeting the annual distribution requirement necessary to maintain our qualification for RIC tax treatment under the Code. We may have to sell some of our investments at times and/or at prices we would not consider advantageous, raise additional debt or equity capital or forgo new investment opportunities for this purpose. If we are not able to obtain cash from other sources, we may fail to continue to qualify for RIC tax treatment and thus become subject to corporate-level income tax.

 

To the extent original issue discount (OID) or PIK interest constitute a portion of our income, we will be exposed to typical risks associated with such income being required to be included in taxable and accounting income prior to receipt of cash representing such income.

 

Our investments include OID instruments or contractual PIK interest arrangements, which represents contractual interest added to a loan balance and due at the end of such loan’s term. To the extent OID or PIK interest constitute a portion of our income, we are exposed to typical risks associated with such income being required to be included in taxable and accounting income prior to receipt of cash, including the following:

 

     The higher interest rates of OID and PIK instruments reflect the payment deferral and increased credit risk associated with these instruments, and OID and PIK instruments generally represent a significantly higher credit risk than coupon loans.

 

    Even if the accounting conditions for income accrual are met, the borrower could still default when our actual collection is supposed to occur at the maturity of the obligation.

 

    OID and PIK instruments may have unreliable valuations because their continuing accruals require continuing judgments about the collectability of the deferred payments and the value of any associated collateral. OID and PIK income may also create uncertainty about the source of our cash distributions.

 

    For accounting purposes, any cash distributions to stockholders representing OID and PIK income are not treated as coming from paid-in capital, even though the cash to pay them comes from the offering proceeds. As a result, despite the fact that a distribution representing OID and PIK income could be paid out of amounts invested by our stockholders, the 1940 Act does not require that stockholders be given notice of this fact by reporting it as a return of capital.

 

Global economic, political and market conditions may adversely affect our business, results of operations and financial condition, including our revenue growth and profitability.

 

The current worldwide financial market situation, as well as various social and political tensions in the United States and around the world, may contribute to increased market volatility, may have long-term effects on the U.S. and worldwide financial markets, and may cause economic uncertainties or deterioration in the United States and worldwide. The U.S. and global capital markets experienced extreme volatility and disruption during the economic downturn that began in mid-2007, and the U.S. economy was in a recession for several consecutive calendar quarters during the same period. In 2010, a financial crisis emerged in Europe, triggered by high budget deficits and rising direct and contingent sovereign debt, which created concerns about the ability of certain nations to continue to service their sovereign debt obligations. Risks resulting from such debt crisis, including any austerity measures taken in exchange for bailout of certain nations, and any future debt crisis in Europe or any similar crisis elsewhere could have a detrimental impact on the global economic recovery, sovereign and non-sovereign debt in certain countries and the financial condition of financial institutions generally. In June 2016, the United Kingdom held a referendum in which voters approved an exit from the European Union, which led to disruption and instability in the global markets, and the implications of the United Kingdom’s pending withdrawal from the European Union are unclear at present. There is continued concern about national-level support for the Euro and the accompanying coordination of fiscal and wage policy among European Economic and Monetary Union member countries. In addition, the fiscal and monetary policies of foreign nations, such as Russia and China, may have a severe impact on the worldwide and U.S. financial markets.

 

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As a result of the 2016 U.S. election, the Republican Party currently controls both the executive and legislative branches of government, which increases the likelihood that legislation may be adopted that could significantly affect the regulation of U.S. financial markets. Areas subject to potential change, amendment or repeal include the Dodd-Frank Act and the authority of the Federal Reserve and the Financial Stability Oversight Council. The United States may also potentially withdraw from or renegotiate various trade agreements and take other actions that would change current trade policies of the United States. We cannot predict which, if any, of these actions will be taken or, if taken, their effect on the financial stability of the United States. Such actions could have a significant adverse effect on our business, financial condition and results of operations. We cannot predict the effects of these or similar events in the future on the U.S. economy and securities markets or on our existing portfolio investments or our ability to monetize those portfolio investments in accordance with our Investment Objective.

 

We incur significant costs as a result of being a public company.

 

As a public company, we incur legal, accounting and other expenses, including costs associated with the periodic reporting requirements applicable to a company whose securities are registered under the Exchange Act, as well as additional corporate governance requirements and other rules implemented by the SEC.

 

Our compliance with Section 404 of the Sarbanes-Oxley Act involves significant expenditures, and non-compliance with Section 404 of the Sarbanes-Oxley Act would adversely affect us and the market price of our common stock.

 

We are required to report on our internal control over financial reporting pursuant to Section 404 of the Sarbanes-Oxley Act and related rules and regulations of the SEC. As a result, we incur expenses that may negatively impact our financial performance and our ability to make distributions. This process also results in a diversion of management’s time and attention. We cannot ensure that our evaluation, testing and remediation process is effective or that our internal control over financial reporting will be effective. In the event that we are unable to maintain compliance with Section 404 of the Sarbanes-Oxley Act and related rules, we and the market price of our securities would be adversely affected.

 

We face cyber-security risks.

 

Our business operations rely upon secure information technology systems for data processing, storage and reporting. Despite careful security and controls design, implementation and updating, our information technology systems could become subject to cyber-attacks. Network, system, application and data breaches could result in operational disruptions or information misappropriation, which could have a material adverse effect on our business, results of operations and financial condition.

 

The failure in cyber security systems, as well as the occurrence of events unanticipated in our disaster recovery systems and management continuity planning could impair our ability to conduct business effectively.

 

The occurrence of a disaster such as a cyber-attack, a natural catastrophe, an industrial accident, a terrorist attack or war, events unanticipated in our disaster recovery systems, or a support failure from external providers, could have an adverse effect on our ability to conduct business and on our results of operations and financial condition, particularly if those events affect our computer-based data processing, transmission, storage, and retrieval systems or destroy data. If a significant number of our investment professionals were unavailable in the event of a disaster, our ability to effectively conduct our business could be severely compromised.

 

We depend heavily upon computer systems to perform necessary business functions. Despite our implementation of a variety of security measures, our computer systems could be subject to cyber-attacks and unauthorized access, such as physical and electronic break-ins or unauthorized tampering. Like other companies, we may experience threats to our data and systems, including malware and computer virus attacks, unauthorized access, system failures and disruptions. If one or more of these events occurs, it could potentially jeopardize the confidential, proprietary and other information processed and stored in, and transmitted through, our computer systems and networks, or otherwise cause interruptions or malfunctions in our operations, which could result in damage to our reputation, financial losses, litigation, increased costs, regulatory penalties and/or customer dissatisfaction or loss.

 

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We are dependent on information systems and systems failures could significantly disrupt our business, which may, in turn, negatively affect the market price of our common stock and our ability to make distributions.

 

Our business is dependent on our and third parties’ communications and information systems. Any failure or interruption of those systems, including as a result of the termination of an agreement with any third-party service providers, could cause delays or other problems in our activities. Our financial, accounting, data processing, backup or other operating systems and facilities may fail to operate properly or become disabled or damaged as a result of a number of factors including events that are wholly or partially beyond our control and adversely affect our business. There could be:

 

sudden electrical or telecommunication outages;

 

natural disasters such as earthquakes, tornadoes and hurricanes;

 

disease pandemics;

 

events arising from local or larger scale political or social matters, including terrorist acts; and

 

cyber-attacks.

 

These events, in turn, could have a material adverse effect on our operating results and negatively affect the market price of our common stock and our ability to make distributions to our stockholders.

 

Our business and operation could be negatively affected if we become subject to any securities litigation or shareholder activism, which could cause us to incur significant expense, hinder execution of our Investment Objective and impact our stock price.

 

In the past, following periods of volatility in the market price of a company’s securities, securities class action litigation has often been brought against that company. Shareholder activism, which could take many forms or arise in a variety of situations, has been increasing in the BDC space recently. While we are currently not subject to any securities litigation or shareholder activism, due to the potential volatility of our stock price and for a variety of other reasons, including potentially significant corporate transactions such as the Plan or any potential strategic alternatives to the Plan, we may in the future become the target of securities litigation or shareholder activism. Securities litigation and shareholder activism, including potential proxy contests, could result in substantial costs and divert management’s and our Board of Directors’ attention and resources from our business. Also, we may be required to incur significant legal fees and other expenses related to any securities litigation and activist shareholder matters, which may impair our ability to execute our Investment Objective and monetize our portfolio investments.

 

Our Board of Directors may change certain of our investment objective, operating policies and strategies without prior notice or stockholder approval, the effects of which may be adverse.

 

Our Board of Directors has the authority to modify or waive our Investment Objective, certain of our current operating policies, investment criteria and strategies without prior notice and without stockholder approval (except as required by the 1940 Act). We cannot predict the effect any changes to our Investment Objective, current operating policies, investment criteria and strategies would have on our business, net asset value, operating results and value of our stock. However, the effects might be adverse, which could negatively impact our ability to pay you distributions and cause you to lose all or part of your investment.

 

We have internalized and engaged third parties to provide administrative functions to us, and, therefore, expect to incur significant costs, even in the event the value of your investment declines.

 

On October 5, 2015, our Board of Directors approved the termination of the Investment Advisory Agreement to take effect on the Termination Date. Our Board of Directors has engaged the Administrator to provide administrative consulting services to us, including the provision of personnel to act as certain of our executive officers, including our Chief Executive Officer and Chief Financial Officer. Following the Termination Date, although we no longer bear the costs of the various fees and expenses we had paid to our former investment adviser under the Investment Advisory Agreement, by engaging third parties to provide administrative functions, we will incur additional costs.

 

The Administrator fee is $669,500 per annum. The Administrator fee is payable regardless of whether the value of our gross assets or your investment declines. As a result, we will owe our Administrator a fee regardless of whether we incurred significant realized capital losses and unrealized capital depreciation (losses) during the period for which the Administrator fee is paid.

 

Risks Related to Our Common Stock

 

The market price of our shares of common stock may be adversely affected if we are unable to implement our Investment Objective.

 

Many of our operating expenses as a public company are fixed and independent of the size of our net assets. Also, declining net assets and/or an increasing operating expense ratio may diminish the marketability of our common stock, which in turn may lead to diminished (or no) institutional ownership of our stock and the corresponding risk of a stock price that trades at a sustained discount to net asset value, which discount may be large.

 

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Our investments also involve a high degree of risk and, as a result, we may incur losses in the value of our investment portfolio. Portfolio company investments are highly speculative and, therefore, an investor in our common stock may lose his entire investment. Unrealized depreciation of the debt and equity securities of our portfolio companies will always be a by-product and risk of our business, and there can be no assurance that we will be successful in executing our Investment Objective. The market price of our shares of common stock may be adversely affected if we are unable to successfully implement our investment strategy, and an investment in our common stock would not be suitable for investors with lower risk tolerance.

 

Investing in shares of our common stock is highly speculative and an investor could lose all or some of the amount invested.

 

Our current and former investment objective and strategies result in a high degree of risk in our investments and may result in losses in the value of our investment portfolio. Our investments in portfolio companies are highly speculative and, therefore, an investor in our common stock may lose his entire investment. Write-downs of our debt and equity investments in privately held companies will always be a by-product and risk of our business, and there can be no assurance that we will be able to achieve an acceptable return on our portfolio company investments. An investment in our common stock would not be suitable for investors with lower risk tolerance.

 

Our common stock price may be volatile and may decrease substantially.

 

Since shares of our common stock were listed on the Nasdaq Capital Market beginning December 12, 2011, the trading price of our common stock has fluctuated substantially. We expect that the trading price of our common stock will continue to fluctuate substantially. The price of our common stock in the market on any particular day depends on many factors, some of which are beyond our control and may not be directly related to our operating performance. These factors include, but are not limited to, the following:

 

price and volume fluctuations in the overall stock market from time to time;

 

investor demand for our shares;

 

significant volatility in the market price and trading volume of securities of regulated investment companies, business development companies or other financial services companies;

 

changes in regulatory policies or tax guidelines with respect to regulated investment companies or business development companies;

 

failure to qualify as a RIC for a particular taxable year, or the loss of RIC status;

 

actual or anticipated changes in our earnings, fluctuations in our operating results and net asset value, or changes in the expectations of securities analysts;

 

general economic conditions and trends;

 

fluctuations in the valuation of our portfolio investments;

 

public perception of the value of our portfolio companies;

 

operating performance of companies comparable to us;

 

market sentiment in the technology sector in which we invest; or

 

departures of any of the officers, directors, or other investment professionals.

 

If we are unable to increase the institutional ownership of our stock and the number of analysts covering our stock, the trading volume of our stock is likely to remain low which could, in turn, increase the volatility of our stock price.

 

In the past, following periods of volatility in the market price of a company’s securities, securities class action litigation has often been brought against that company. Due to the potential volatility of our stock price, we may therefore be the target of securities litigation in the future. Securities litigation could result in substantial costs and divert management’s attention and resources from our business.

 

Our shares might trade at a sustained discount from net asset value, and since the listing of our common stock on Nasdaq on December 12, 2011, our shares have typically traded at a discount to our net asset value per share.

 

Shares of closed-end funds, including business development companies like us, may, during some periods, trade at prices higher than their net asset value per share and, during other periods, as frequently occurs with closed-end investment companies, trade at prices lower than their net asset value per share. The perceived value of our investment portfolio may be affected by a number of factors including perceived prospects for individual companies we invest in, market conditions for common stock investments generally, for initial public offerings and other exit events for venture capital-backed companies, and the mix of companies in our investment portfolio over time. Because accurate financial and other data on our portfolio companies may be limited and not publicly disseminated, the public perception of their value may be unduly influenced by trading levels on secondary marketplaces, speculation about their prospects, market conditions, uninformed investor sentiment or other factors. Negative or unforeseen developments affecting the perceived value of companies in our investment portfolio could result in a decline in the trading price of our common stock relative to our net asset value per share. Since the listing of our common stock on Nasdaq on December 12, 2011, our shares have typically traded at a discount to our net asset value per share, and there is no assurance that shares of our common stock will ever trade at or above our net asset value.

 

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The possibility that our shares will continue to trade at a discount from net asset value is a risk separate and distinct from the risk that our net asset value per share will decrease. The risk of purchasing shares of a BDC that might trade at a sustained discount is more pronounced for investors who wish to sell their shares in a relatively short period of time because, for those investors, realization of a gain or loss on their investments is likely to be more dependent upon changes in discount levels than upon increases or decreases in net asset value per share.

 

There is a risk that you may not receive dividends or that our dividends may be reduced over time, particularly since we do not intend to make new portfolio investments, our current portfolio company investments consist primarily of securities that do not produce current income, and our board has approved the liquidating trust Plan.

 

Due to the uncertainty of our current portfolio companies achieving a liquidity event and our ability to sell our positions at a gain following a liquidity event, we can give no assurance that we will be able make distributions from the sale of our portfolio investments. Furthermore, we can give no assurance that we will achieve investment results that will allow such distributions to be paid from net investment income or net realized capital gains from year-to-year. There is no assurance that our current portfolio companies will complete an IPO, sale/merger or other liquidity event or that we will be able to realize any net capital gains from the sale of our publicly traded portfolio company investments. Our ability to make distributions may also be adversely affected by, among other things, the impact of one or more risk factors described herein. Accordingly, no assurances can be made that we will make distributions to our stockholders in the future.

 

In addition, any unrealized depreciation in our investment portfolio could be an indication that we will be unable to recover the cost of our investment when we sell it in the future. This could result in realized capital losses in the future and ultimately in reductions of any net capital gains distributions in future periods.

 

If we convert to a liquidating trust pursuant to the Plan, subject to final approval of the trustees of the liquidating trust, we anticipate that the liquidating trust will make a special cash distribution to holders of beneficial interests in the liquidating trust shortly after the conversion. There can be no assurances at this time as to the amount of the special cash distribution or that our stockholders will approve the Plan and we will convert to the liquidating trust. Moreover, although the liquidating trust will be required to make distributions at least annually, we cannot make guarantees as to the amount of such distributions or the ability of the liquidating trust to dispose of its illiquid assets.

 

A portion of our distributions may constitute a return of capital and affect our stockholders’ tax basis in our shares.

 

We plan to make distributions from any assets legally available for distribution and will be required to determine the extent to which such distributions are paid out of current or accumulated earnings, realized capital gains or are returns of capital. To the extent there is a return of capital, investors will be required to reduce their cost basis in our stock for federal tax purposes, which will result in higher tax liability when the shares are sold, even if they have not increased in value or have lost value.

 

The market price of our shares of common stock may be adversely affected by the sale of shares by our management or large stockholders.

 

Sales of our shares of common stock by our officers or by large stockholders could adversely and unpredictably affect the price of those securities. Additionally, the price of our shares of common stock could be affected even by the potential for sales by these persons. We cannot predict the effect that any future sales of our common stock, or the potential for those sales, will have on our share price. Furthermore, due to relatively low trading volume of our stock, should one or more large stockholders seek to sell a significant portion of its stock in a short period of time, the price of our stock may decline.

 

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Provisions of the Maryland General Corporation Law and of our charter and bylaws could deter takeover attempts and have an adverse impact on the price of our common stock.

 

Our charter and bylaws, as well as certain statutory and regulatory requirements, contain certain provisions that may have the effect of discouraging a third party from making an acquisition proposal for us. Our bylaws contain a provision exempting any and all acquisitions by any person of our shares of stock from the Control Share Act under the Maryland General Corporation Law. If our Board of Directors does not otherwise approve a business combination, the Control Share Act (if we amend our bylaws to be subject to that Act) may discourage others from trying to acquire control of us and increase the difficulty of consummating any offer. Although our bylaws include such a provision, such a provision may also be amended or eliminated by our Board of Directors at any time in the future, provided that we notify the Division of Investment Management at the SEC prior to amending or eliminating this provision. However, the SEC has recently taken the position that the Control Share Act is inconsistent with the 1940 Act and may not be invoked by a BDC. It is the view of the staff of the SEC that opting into the Control Share Act would be acting in a manner inconsistent with section 18(i) of the 1940 Act. Additionally, under our charter, our Board of Directors may, without stockholder action, authorize the issuance of shares of stock in one or more classes or series, including preferred stock; and our Board of Directors may, without stockholder action, amend our charter to increase the number of shares of stock of any class or series that we have authority to issue. These antitakeover provisions may inhibit a change of control in circumstances that could give the holders of our common stock the opportunity to realize a premium over the market price for our common stock.

 

Item 1B. Unresolved Staff Comments

 

Not applicable.

 

Item 2. Properties

 

We do not own any real estate or other physical properties materially important to our operation. Our headquarters are located at 128 North 13th Street, Suite 1100, Lincoln, Nebraska 68508, where we occupy our office space pursuant to an Administrator Consulting Agreement between us and the Administrator. We believe that our office facilities are suitable and adequate for our business as it is presently conducted.

 

Item 3. Legal Proceedings

 

We are not currently subject to any material legal proceedings, nor, to our knowledge, is any material legal proceeding threatened against us. From time to time, we may be a party to certain legal proceedings in the ordinary course of business, including proceedings relating to the enforcement of our rights under contracts with our portfolio companies. While the outcome of these legal proceedings cannot be predicted with certainty, we do not expect that these proceedings will have a material effect upon our financial condition or results of operations.

 

Item 4. Mine Safety Disclosures

 

Not applicable.

 

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PART II

 

Item 5.   Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

 

Price Range of Common Stock

 

Our common stock is listed and began trading on the Nasdaq Capital Market on December 12, 2011. Our shares of common stock are traded under the symbol “XRDC.” Prior to December 3, 2015, our shares of common stock were traded under the symbol “BDCV,” and, prior to July 1, 2014, our shares of common stock were traded under the symbol “KIPO.” The following table sets forth the range of high and low sales prices of our common stock as reported on the Nasdaq Capital Market for the past two fiscal years.

 

    Price Range 
Quarter Ended   High   Low 
2016         
December 31, 2016   $2.35   $1.47 
September 30, 2016   $2.52   $1.78 
June 30, 2016   $2.73   $1.83 
March 31, 2016   $3.20   $1.96 
            
2015           
December 31, 2015   $4.74   $3.02 
September 30, 2015   $5.19   $4.31 
June 30, 2015   $5.30   $3.75 
March 31, 2015   $5.15   $4.70 

 

The last reported price for our common stock on March 30, 2017 was $2.27 per share. As of March 31, 2017, we had approximately 700 stockholders of record.  

 

Shares of BDCs may trade at a market price that is less than the value of the net assets attributable to those shares. The possibility that our shares of common stock will trade at a sustained discount from net asset value over the long term is separate and distinct from the risk that our net asset value will decrease. Since the listing of our common stock on Nasdaq, our shares have typically traded at a discount to our net asset value per share, and there is no assurance that shares of our common stock will ever trade at or above our net asset value, or near the initial listing price of $10.00 per share.

 

Stock Repurchases

 

On November 10, 2015, our Board of Directors authorized a stock repurchase program of up to $1 million for a six month period to expire on May 10, 2016. On January 20, 2016, our Board of Directors approved an amendment to this stock repurchase program to allow for greater flexibility, by narrowing the current “blackout” period during which we are prohibited from purchasing shares, and increasing the size of the program from $1 million to $2 million. On May 9, 2016, our Board of Directors authorized an extension of our stock repurchase program for an additional six months to expire on November 10, 2016. On November 7, 2016, our Board of Directors authorized a further extension of our stock repurchase program for an additional six months to expire on May 10, 2017. Under the repurchase program, we are authorized to repurchase shares of our common stock in open market transactions, including through block purchases, depending on prevailing market conditions and other factors. The repurchase program may be extended, modified or discontinued at any time for any reason. The stock repurchase program does not obligate us to acquire any specific number of shares, and all repurchases will be made in accordance with Rule 10b-18 under the Exchange Act, which sets certain restrictions on the method, timing, price and volume of stock repurchases.

 

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During the year ended December 31, 2016, we repurchased 113,354 shares of our common stock at an average price of $2.08 per share, including commissions, with a total cost of $235,577. Our net asset value per share increased by $0.02 per share as a result of the repurchased shares during the year ended December 31, 2016. The weighted average discount to net asset value per share of the shares repurchased during the year ended December 31, 2016 was 41%. Details of the monthly share repurchases under our stock repurchase program during the year ended December 31, 2016 are set forth in the table below.

 

Period Total Number of Shares Repurchased     Total Cost of Shares Repurchased     Average Price Paid per Share     Total Number of Shares Purchased as Part of the Publicly Announced Program(1)     Total Cost of Shares Purchased as Part of the Publicly Announced Program(1)     Maximum Dollar Value of Shares that May Yet be Purchased Under the Program  
Balance at December 31, 2015                               $     $ 2,000,000  
January 2016   2,008     $ 4,236     $ 2.11       2,008       4,236       1,995,764  
February 2016   4,400       9,372       2.13       6,408       13,608       1,986,392  
April 2016   18,808       49,775       2.65       25,216       63,383       1,936,617  
May 2016   3,083       7,103       2.30       28,299       70,486       1,929,514  
June 2016   1,344       2,907       2.16       29,643       73,393       1,926,607  
August 2016   36,116       70,215       1.94       65,759       143,608       1,856,392  
September 2016   47,595       91,969       1.93       113,354       235,577       1,764,423  
Total   113,354     $ 235,577     $ 2.08       113,354     $ 235,577          

  

(1)The table above reflects shares purchased as part of the stock repurchase program authorized on November 10, 2015 which expires on May 10, 2017.

 

During the year ended December 31, 2015, we repurchased 117,510 shares of our common stock at an average price of $4.96 per share, including commissions, with a total cost of $582,468. Our net asset value per share increased by $0.02 per share as a result of the share repurchases during the year ended December 31, 2015. The weighted average discount to net asset value per share of the shares repurchased during the year ended December 31, 2015 was 24%. Details of the monthly share repurchases under our stock repurchase program during the year ended December 31, 2015 are set forth in the table below.

 

Period   Total Number of Shares Repurchased   Total Cost of Shares Repurchased   Average Price Paid per Share   Total Number of Shares Purchased as Part of the Publicly Announced Program(1)   Total Cost of Shares Purchased as Part of the Publicly Announced Program(1)   Maximum Dollar Value of Shares that May Yet be Purchased Under the Program 
Balance at December 31, 2014                   128,977   $665,998   $4,334,002 
May 2015    15,231   $78,103   $5.13    144,208    744,101    4,255,899 
June 2015    55,308    273,935    4.95    199,516    1,018,036    3,981,964 
August 2015    16,554    81,757    4.94    216,070    1,099,793    3,900,207 
September 2015    30,417    148,673    4.89    246,487    1,248,466    3,751,534 
Total    117,500   $582,468   $4.96    246,487   $1,248,466      

 

(1)The table above reflects shares purchased as part of the stock repurchase program authorized on September 22, 2014 which expired on September 22, 2015.

 

Distributions

 

Distribution Policy

 

Distributions to our stockholders, if any, will be out of assets legally available for distribution, as determined by our Board of Directors, with the intention of distributing up to 100% of the proceeds from the sales of our portfolio investments.

 

On March 25, 2016, our Board of Directors adopted a distribution policy with the objective to make special distributions to stockholders as declared by our Board of Directors in its discretion. Based on our Board of Directors’ change to our investment objective to preserve capital and maximize stockholder value and resolution to monetize our portfolio holdings at the earliest practicable date, we will no longer pay regular quarterly distributions to our stockholders. Our Board of Directors may amend or terminate the distribution policy at any time.

 

Due to the uncertainty of our current portfolio companies achieving a liquidity event, we can give no assurance that we will be able make distributions from the sale of our portfolio investments. Furthermore, we can give no assurance that we will achieve investment results that will allow such distributions to be paid from net investment income or net realized capital gains. There is no assurance that our current portfolio companies will complete an IPO, sale/merger or other liquidity event or that we will be able to realize any net capital gains from the sale of our portfolio company investments. Our ability to make distributions may also be adversely affected by, among other things, the impact of one or more risk factors described herein. Accordingly, no assurances can be made that we will make distributions to our stockholders in the future.

 

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If our distributions for any year exceed our net investment income and net realized capital gains, the difference will be distributed from our capital and will constitute a return of capital to our stockholders. A return of capital is generally not taxable and, instead, reduces a stockholder’s tax basis in his shares of our common stock. A return of capital does not necessarily reflect our investment performance and generally does not reflect income earned. The tax character of a distribution is determined based upon our total net investment income, net realized capital gains and distributions made with respect to a taxable year and, therefore, cannot be finally determined until after the close of the relevant taxable year. Distributions representing a return of capital also deplete our total assets.

 

Section 19 of the 1940 Act requires us to accompany each distribution payment with a notice if any part of that payment is from a source other than taxable net investment income. This Section 19(a) notice is not for tax reporting purposes and is provided for informational purposes. The Section 19(a) notice provides details on the anticipated source(s) of our distributions. The amounts and sources of distributions reported in Section 19(a) notices are only estimates and the actual amounts and sources of the amounts for tax reporting purposes will depend upon our investment experience during the year and may be subject to changes based on tax regulations. Distributions in excess of our accumulated earnings and profits would generally be treated first as a return of capital to the extent of the stockholder’s tax basis, and any remaining distributions would be treated as a capital gain. We will send stockholders a Form 1099-DIV for the calendar years that will report to stockholders the tax characterization of these distributions for federal income tax purposes.

 

If we convert to a liquidating trust pursuant to the Plan, subject to final approval of the trustees of the liquidating trust, we anticipate that the liquidating trust will make a special cash distribution to holders of beneficial interests in the liquidating trust shortly after the conversion. There can be no assurances at this time as to the amount of the special cash distribution or that our stockholders will approve the Plan and we will convert to the liquidating trust. Moreover, although the liquidating trust will be required to make distributions at least annually, to the extent there are any proceeds from a sale of assets, we cannot make guarantees as to the amount of such distributions or the ability of the liquidating trust to dispose of its illiquid assets.

 

Dividend Reinvestment Plan

 

We maintain a dividend reinvestment plan (“DRIP”) that provides for the reinvestment of dividends on behalf of our stockholders, unless a stockholder has elected to receive dividends in cash. As a result, if we declare a dividend, stockholders who have not “opted out” of the DRIP by the dividend record date will have their dividend automatically reinvested into additional shares of our common stock. Although we have a number of options to satisfy the share requirements of the DRIP, we currently expect that the shares required to be purchased under the DRIP will be acquired through open market purchases of our common stock by our DRIP administrator. The shares purchased in the open market to satisfy the DRIP requirements will be valued based upon the average price of the applicable shares purchased by the DRIP administrator.

 

Dividend History

 

We did not declare any distributions to stockholders during the year ended December 31, 2016. The following table summarizes our distributions declared for the year ended December 31, 2015:

 

Date Declared  Record Date  Payment Date  Amount Per Share   Source of Distribution 
2015 Dividends:               
March 26, 2015  April 15, 2015  April 29, 2015  $0.15   Return of Capital 
March 26, 2015  June 11, 2015  June 25, 2015   0.15   Return of Capital 
March 26, 2015  September 11, 2015  September 25, 2015   0.15   Return of Capital 
March 26, 2015  December 4, 2015  December 18, 2015   0.15   Return of Capital 
 Total - 2015 Dividends         0.60     

 

Performance Graph

 

Our common stock was listed and began trading on Nasdaq on December 12, 2011. We have presented the last five years of performance history and cumulative stockholder return for the period beginning December 31, 2011 and ending December 31, 2016.

 

The following stock performance graph compares the cumulative stockholder return assuming that, at the beginning of the period, a person invested $100 in each of our common stock, the Russell 2000 Index, and each component of the selected peer issuer index. The graph measures total stockholder return, which takes into account both changes in stock price and dividends. It assumes that dividends paid are reinvested in like securities.

 

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The Russell 2000 Index is a broad equity market index that includes companies whose equity securities are traded on the same exchange as us. Our selected peer issuer index consists of three BDCs (with relatively comparable market capitalizations to us) whose investment objective is to maximize capital appreciation with a focus on making equity investments in private portfolio companies, which is consistent with our former investment objective. The selected peer issuer index includes: Firsthand Technology Value Fund (Nasdaq: SVVC), GSV Capital Corp. (Nasdaq: GSVC) and Harris & Harris Group, Inc. (Nasdaq: TINY).

  

COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN*

Among Crossroads Capital, Inc., the Russell 2000 Index,
and a Peer Group

 

(line graph) 

 

This graph and other information furnished under Part II. Item 5 of this Form 10-K shall not be deemed to be “soliciting material” or to be “filed” with the SEC or subject to Regulation 14A or 14C, or to the liabilities of Section 18 of the Exchange Act.

 

Because of the change in our investment objective to preserve capital and maximize stockholder value and the expected variance in our ability to make distributions to stockholders, the above performance measurement may not be meaningful going forward. The stock price performance included in the above graph is not necessarily indicative of future stock price performance.

 

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Item 6. Selected Financial Data

 

The following selected financial data for the years ended December 31, 2016, 2015, 2014, 2013 and 2012 is derived from our audited financial statements included our annual reports on Form 10-K for the respective years. The data should be read in conjunction with our financial statements and related notes thereto and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included elsewhere in this annual report.

 

       At and for the Years Ended December 31,     
   2016   2015   2014   2013   2012 
Statement of Operations Data:                    
Total investment income  $175,316   $48,431   $69,295  $39,953   $3,870 
Operating expenses:                         
Base management fees       1,232,563    1,568,964    1,462,495    1,533,808 
Incentive fees       (2,130,443)   548,796    1,523,189    425,519 
Administrative expenses allocated from investment adviser       423,628    570,074    651,811    633,997 
Operating expenses before expense waiver from investment adviser   2,065,916    1,338,426    3,847,903    5,352,788    4,056,856 
Waiver of base management fees           (97,797)        
Total operating expenses net of expense waiver from investment adviser   2,065,916    1,338,426    3,750,106    5,352,788    4,056,856 
Net investment loss   (1,890,600)   (1,289,995)   (3,680,811)   (5,312,835)   (4,052,986)
Net realized gain (loss)   (1,345,417)   (1,157,446)   6,778,371    4,400,178    282,203 
Net (decrease) increase in unrealized appreciation   (17,143,896)   (9,051,699)   (4,034,392)   3,215,772    1,845,390 
Net (decrease) increase in net assets resulting from operations   (20,379,913)   (11,499,140)   (936,832)   2,303,115    (1,925,393)
                          
Per Share Data:                         
Net asset value per common share  $2.96   $5.06   $6.82  $7.65   $8.00 
Net investment loss (1)   (0.20)   (0.13)   (0.38)   (0.59)   (0.44)
Net (decrease) increase in net assets resulting from operations (1)   (2.12)   (1.18)   (0.10)   0.25    (0.21)
Distributions declared       0.60    0.70    0.49    0.03 
                          
Balance Sheet Data at Period End:                         
Investment in portfolio company securities at fair value  $9,204,468   $34,745,757   $45,841,199  $61,976,805   $65,023,706 
Cash and cash equivalents   19,329,250    13,655,862    27,437,568    13,537,328    8,934,036 
Total assets   28,723,562    49,162,791    74,073,236    75,616,554    74,385,077 
Total liabilities   423,993    247,732    7,239,699    2,577,084    972,137 
Net assets   28,299,569    48,915,059    66,833,537    73,039,470    73,412,940 
Common shares outstanding   9,563,130    9,676,484    9,793,994    9,548,902    9,174,785 

 

(1)Per share amounts are calculated using weighted average shares outstanding during the period.

 

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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

FORWARD-LOOKING STATEMENTS AND PROJECTIONS

 

This annual report on Form 10-K contains forward-looking statements that involve substantial risks and uncertainties. These forward-looking statements are not historical facts, but are based on current management expectations that involve substantial 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 in, or implied by, these forward-looking statements. Forward-looking statements relate to future events or our future financial performance. We generally identify forward-looking statements by terminology such as “may,” “will,” “should,” “expects,” “plans,” “anticipates,” “could,” “intends,” “target,” “projects,” “contemplates,” “believes,” “estimates,” “predicts,” “potential” or “continue” or the negative of these terms or other similar words. The forward-looking statements contained in this annual report 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 express or forecasted in the forward-looking statements, including without limitation:

 

our ability to implement and proceed with the plan of liquidation, the difficulty associated with monetizing certain of our portfolio investments due to the lack of liquidity in many such investments and the ability of our stockholders to achieve current fair values of portfolio investments pursuant to the plan of liquidation, if implemented;

 

risks related to our consideration of strategic alternatives;

 

the impact of our current investment objective on the value of our investments, including a decline in the value of our net assets and an increase in operating expenses as a percentage of our net assets and the possibility that near-term sales will realize values less than the current fair values of our investments;

 

the impact of our operating expenses and contingent liabilities on the disposition of our portfolio investments;

 

the impact of a protracted decline in the market for IPOs or a lack of IPO or strategic sale/merger opportunities for our pre-IPO equity investments;

 

uncertainty as to the value of our portfolio investments;

 

risks inherent to the operations of our portfolio companies, including market volatility, operating losses, intense competition and general economic or industry-specific downturns and other risks specific to certain industries in which our portfolio investments are engaged, such as the technology industry, healthcare and life sciences industries, and energy and energy-related technology industries;

 

risks inherent to our investment in Growth Companies, including a lack of available information, dependence on the talents of key management personnel, lack of a diversified product line, customer concentration and vulnerability to economic downturns;

 

our failure to make follow-on investments in our portfolio companies;

 

the inability of our portfolio investments to perform as expected, to commercialize their technologies, products, business concepts or services, or to adequately protect their intellectual property rights;

 

the inability of our portfolio investments to obtain additional capital to satisfy continuing working capital and other capital requirements necessary to reach the next stage of development or continue operations;

 

the impact of specific laws and regulations applicable to our portfolio investments that may constrain their ability to offer their products or services;

 

the risks associated with our debt investments, including default risk, covenant compliance risk and subordination risk;

 

the possibility of defaults by our portfolio investments;

 

our portfolio companies entering into bankruptcy or insolvency proceedings;

 

the complex capital structure of our portfolio investments and the impact that may have on the value of our existing equity investments;

 

the speculative nature of our equity investments;

 

our failure to maintain our status as a BDC;

 

fluctuations in our periodic results that may cause a decline in the net asset value of our common stock;

 

the ability of our Administrator to terminate upon short notice and the risk that we may be unable to find a suitable replacement;

 

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the significant costs and expenses associated with our Administrator;

 

the restrictions imposed on us from regulations specific to BDCs, including our limited ability to enter into transactions with our affiliates;

 

our exposure to corporate-level income tax if we are unable to qualify as a RIC;

 

difficulty in paying required distributions;

 

risks associated with a portion of our income being OID or PIK interest;

 

general economic, political and market conditions that may adversely affect our business;

 

the significant expense associated with being a public company;

 

cyber-security risks and risks associate with failures in our information systems;

 

securities litigation;

 

future changes in our investment objective, operating policies and strategies; and

 

the additional risks, uncertainties and other factors we identify in “Risk Factors” and elsewhere in this annual report on Form 10-K and in our filings with the SEC.

 

Although we believe that the assumptions on which these forward-looking statements are based are reasonable, any of those assumptions could prove to be inaccurate, and as a result, the forward-looking statements based on those assumptions also could be inaccurate. In light of these and other uncertainties, the inclusion of a projection or forward-looking statement in this annual report on Form 10-K should not be regarded as a representation by us that our plans and objectives will be achieved. These risks and uncertainties include those described or identified in “Risk Factors” in this annual report on Form 10-K. You should not place undue reliance on these forward-looking statements, which apply only as of the date of this annual report on Form 10-K. Except as required by the federal securities laws, we undertake no obligation to revise or update any forward-looking statements, whether as a result of new information, future events or otherwise, to reflect events or circumstances occurring after the date of this annual report on Form 10-K.

 

Overview

 

We were incorporated on May 9, 2008 under the laws of the State of Maryland and are an internally managed, non-diversified, closed-end management investment company that has elected to be regulated as a BDC under the 1940 Act. Effective December 2, 2015, we changed our name from BDCA Venture, Inc. to Crossroads Capital, Inc. Effective January 1, 2010, we elected to be treated for U.S. Federal income tax purposes as a regulated investment company (“RIC”) under Subchapter M of the Internal Revenue Code of 1986, as amended (the “Code”). We commenced our portfolio company investment activities in January 2010. The shares of our common stock have been listed on the Nasdaq Capital Market since December 12, 2011 and we are currently traded under the ticker symbol “XRDC”.

 

Our Investment Objective is to preserve capital and maximize stockholder value by pursuing the sale of our portfolio investments, limiting expenses and deploying surplus cash as appropriate, including into yielding investments to offset, in part, operating expenses and, as of March 25, 2016, to monetize our portfolio holdings at the earliest practicable date. On May 3, 2016, our Board of Directors approved the Plan, pursuant to which we plan to convert into a liquidating trust with the sole purpose of liquidating our assets and distributing the proceeds to our stockholders. The Plan is subject to the approval of our stockholders, which our Board of Directors intends to seek at a special meeting called for the purpose of approving the Plan and certain related matters, including the withdrawal of our election to be regulated as a BDC under the 1940 Act and the delisting of our stock from Nasdaq Capital Market, as detailed in the preliminary proxy statement filed with the SEC on May 5, 2016, which was subsequently amended on June 27, 2016. Our Board of Directors has not yet set a date for the special meeting. Prior to the approval by our stockholders and our conversion into the liquidating trust, our Board of Directors reserves the right to consider additional strategic alternatives. On August 24, 2016, as part of this strategy to liquidate the Company, we announced the engagement of Setter Capital, Inc., a Toronto-based secondary market advisory firm (“Setter Capital”), to assist us in identifying prospective buyers for our portfolio investments.

 

We are internally managed, although we do receive certain administrative services from our Administrator, including the provision of personnel to act as certain of our executive officers, including the Chief Executive Officer and Chief Financial Officer.

 

For the December 31, 2016 valuation of our portfolio investments that are not publicly traded, an independent valuation firm assisted our Board of Directors in its determination of the value of three investments in our portfolio. Our Administrator assisted our Board of Directors in its determination of the value of all of the investments in our portfolio and the funds held in escrow from the sale of investments (“Escrowed Funds”).

 

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Portfolio Activity

 

Given the nature of investing in the securities of private companies, our investments generally will not have readily available market quotations. Generally, our equity investments in publicly traded companies in which the lockup restriction has expired are valued at the closing market price on the valuation date. However, equity investments in publicly traded portfolio companies which remain subject to lockup restrictions are valued in good faith by our Board of Directors based on a discount to the most recently available closing market prices. Our equity investments in private companies will not generally have readily available market quotations and, as such, are valued at fair value as determined in good faith by or under the direction of our Board of Directors, see “Critical Accounting Policies” below.

 

We had the following portfolio company activity during the year ended December 31, 2016.

 

On January 13, 2016, Suniva closed a stock-for-stock merger transaction with Shunfeng International Clean Energy Limited, a Hong Kong Stock Exchange company (“SFCE”), and a global integrated energy provider. As a result, our 10.022 shares of Series F preferred stock and 197.942 shares of Series D preferred stock were exchanged for 2,844 shares of Suniva Class A common stock and 820,868 shares of SFCE common stock. Our shares of SFCE common stock were subject to a lockup period which expired in February 2016. In August 2016, we completed the disposition of our entire position in SFCE, selling 820,686 shares of SFCE common stock in open market transactions for total net proceeds of $110,746, resulting in a net realized loss of $1,198,707.

 

On January 15, 2016, $606,984 was released to us from the Xtime escrow without any offset for indemnity claims. As of December 31, 2016, we recognized $6,067 in additional proceeds in connection with the expense fund related to Xtime’s merger transaction. These funds continue to be held in escrow and any remaining balance will be distributed to us on or around November 18, 2017 in accordance with the transaction agreements.

 

On January 20, 2016, our Board of Directors approved and, on January 25, 2016, we signed an indication of interest to purchase additional Series B preferred stock in Harvest Power, Inc. as part of a “pay-to-play” extension offering of Series B preferred stock (the “Series B Extension”). On February 17, 2016, we purchased 244,039 shares of Series B preferred stock in Harvest Power for a total of $244,039. These newly purchased shares of Series B preferred stock have the same rights and preferences as our existing Series B preferred stock, with the exception that all of our Series B preferred stock now has a preferred-to-common conversion ratio of 1-to-1.5 versus 1-to-0.5301 previously. Any Series B stockholder that did not elect to purchase their pro rata share of the Series B Extension was subject to a mandatory conversion of their Series B preferred shares and Series A preferred shares into common stock. As part of this financing, participating stockholders were also offered the opportunity to purchase newly created Series B-1 preferred shares. We did not elect to purchase any Series B-1 preferred shares in this offering.

 

On May 17, 2016, we completed an investment of $30,459 in BrightSource Energy as part of a rights offering of senior secured promissory notes to certain holders of BrightSource Energy preferred stock and its outstanding promissory notes. Since we purchased our pro rata portion in the debt financing, 52,357 shares of Series 1A non-convertible preferred stock were automatically exchanged for 52,357 shares of Series 1 convertible preferred stock. In connection with the debt financing, the maturity date for the July 2014 and August 2014 promissory notes, which were issued to us in the initial principal amount of $107,977, and the convertible bridge notes, which were issued to us in the initial principal amount of $205,193, was extended to March 31, 2017.

 

In July and August 2016, we sold our remaining position in Tremor Video, selling 299,999 shares of Tremor Video common stock in open market transactions for total net proceeds of $582,613, resulting in a net realized loss of $1,417,384.

 

On August 9, 2016, Deem completed an initial closing of its Series CC-1 Preferred Stock financing (the “Series CC-1 Financing”). We did not participate in this offering. Pursuant to the Series CC-1 Financing, each share of outstanding preferred stock was automatically converted into common stock (the “Conversion”) and a 20-for-one reverse stock split was effected on all outstanding shares of common stock (the “Reverse Split”). As a result of the Conversion and Reverse Split, our 929,212 shares of Series AA-1 Convertible Preferred Stock were exchanged into 46,461 shares of Common Stock.

 

On September 15, 2016, Mode Media ceased operations and subsequently announced the assignment of substantially all the assets of Mode Media to its liquidating agent, Sherwood Partners, Inc., of Mountain View, CA. As of December 31, 2016, our securities in Mode Media had a fair value of $0.

 

On November 29, 2016, we sold 1,338,302 shares of our Metabolon Series D preferred stock in a secondary market sale for total net proceeds of $3,466,202, resulting in a net realized gain of $1,064,606. We continue to own 890,719 shares of Metabolon Series D preferred stock.

 

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On December 7, 2016, we sold our entire position of 1,084,873 shares of Centrify Series E convertible preferred stock in a secondary market sale for total net proceeds of $3,200,000, resulting in a net realized gain of $200,001.

 

During the year ended December 31, 2016, Setter Capital assisted us with the sale of our securities in Metabolon and Centrify. Setter Capital continues to assist us with the sale of our remaining portfolio investments. As a December 31, 2016, we had Investment banking advisory fees payable to Setter Capital of $175,000.

 

The following table summarizes the net realized gain (loss) and net change in unrealized appreciation (depreciation) for the years ended December 31, 2016, 2015 and 2014 for: (i) our portfolio company investments sold during each period, and (ii) our portfolio company investments and funds held in escrow from the sale of investments (“Escrowed Funds”) held at the end of each period:

 

   Years Ended 
   December 31, 2016   December 31, 2015   December 31, 2014 
    Net Realized Gain (Loss)    Net Change in Unrealized Appreciation (Depreciation)    Net Realized Gain (Loss)    Net Change in Unrealized Appreciation (Depreciation)    Net Realized Gain (Loss)    Net Change in Unrealized Appreciation (Depreciation) 
Portfolio Company Investments Sold During Period                              
Metabolon, Inc.  $1,064,606   $(1,573,045)  $   $   $   $ 
Centrify Corporation   200,001    (70,001)                
Shunfeng International Clean Energy Ltd.   (1,198,707)   1,127,463                 
Tremor Video, Inc.   (1,417,384)   1,381,999    (1,182,240)   1,139,004         
Xtime, Inc.   6,067    (487)   13,930        7,511,947    (2,830,000)
TrueCar, Inc.                   3,519,048    (720,004)
Kabam, Inc.                   671,140    (291,140)
Millennial Media, Inc.           10,864        (348,201)   (3,074,247)
Livescribe, Inc.                   (606,186)   606,186 
Stoke, Inc.                   (3,969,283)   2,560,000 
Subtotal - Portfolio Company Investments Sold During Period   (1,345,417)   865,929    (1,157,446)   1,139,004    6,778,465    (3,749,205)
Portfolio Company Investments Held at End of Period       (18,017,567)       (10,274,427)       (185,444)
Total Portfolio Company Investments   (1,345,417)   (17,151,638)   (1,157,446)   (9,135,423)   6,778,465    (3,934,649)
Funds Held in Escrow from Sale of Investment       7,742        83,724        (99,743)
Total Portfolio Company Financial Assets  $(1,345,417)  $(17,143,896)  $(1,157,446)  $(9,051,699)  $6,778,465   $(4,034,392)

 

Portfolio Composition

 

The total value of our investments was $9.2 million at December 31, 2016, compared to $34.7 million at December 31, 2015.

 

The following table summarizes the composition of our portfolio company investments by type of security and Escrowed Funds at cost and value as of December 31, 2016 and December 31, 2015.

 

   December 31, 2016   December 31, 2015 
Security Type  Cost   Fair Value   Percentage of Portfolio   Cost   Fair Value   Percentage of Portfolio 
Privately Held Portfolio Companies:                              
Preferred Stock  $22,225,681   $8,648,677    93.00%  $32,937,524   $32,976,000    93.06%
Preferred Stock Warrants       191,323    2.06%       420,000    1.19%
Common Stock   10,333,392    155,000    1.67%   6,088,558    80,000    0.23%
Convertible Notes   296,594    45,052    0.48%   265,929    530,000    1.50%
Secured Notes   168,448    164,416    1.77%   121,759    121,759    0.34%
Subtotal - Privately Held Portfolio Companies   33,024,115    9,204,468    98.98%   39,413,770    34,127,759    96.32%
Publicly Traded Portfolio Companies:                              
Common Stock           %   1,999,997    617,998    1.74%
Total Portfolio Company Investments   33,024,115   $9,204,468    98.98%   41,413,767    34,745,757    98.06%
Funds Held in Escrow from Sale of Investment   103,185    94,907    1.02%   704,101    688,082    1.94%
Total Portfolio Company Financial Assets  $33,127,300   $9,299,375    100.00%  $42,117,868   $35,433,839    100.00%

 

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See the Schedules of Investments in our financial statements for additional information regarding industry and headquarter locations of our portfolio companies.

 

Results of Operations

 

The principal measure of our financial performance is the net increase (decrease) in our net assets resulting from operations, which is the sum of (i) net investment income (loss), (ii) net realized gain (loss), and (iii) the net change in unrealized appreciation (depreciation). Net investment income (loss) is the difference between our income from interest, dividends, fees and other investment income and our operating expenses. Net realized gain (loss), if any, is the difference between the net proceeds from the disposition of portfolio company investments or other relevant assets and their stated cost. Net unrealized appreciation (depreciation) is the net change in the fair value of our portfolio company investments or other relevant assets.

 

Set forth below are the results of operations comparing the years ended December 31, 2016 and 2015 and the years ended December 31, 2015 and 2014.

 

Comparison of the Years Ended December 31, 2016 and 2015

 

Investment Income

 

For the years ended December 31, 2016 and 2015, we earned interest and dividend income from cash and cash equivalents of $128,420 and $8,446, respectively. During the year ended December 31, 2016, we also earned payment-in-kind (“PIK”) interest of $46,896 on our convertible note and secured note investments in BrightSource. During the year ended December 31, 2015, we earned PIK interest of $39,985 on our convertible note and secured note investments in BrightSource.

 

To maintain our status as a RIC, PIK interest, which is a non-cash source of income, must generally be distributed to stockholders at least annually from other sources such as available cash or the proceeds from the disposition of our portfolio company investments. However, since we do not expect to have investment company taxable income, we would generally not be required to distribute PIK interest from our available cash or the proceeds from the disposition of our portfolio company investments.

 

The following table shows our PIK loan activity for the years ended December 31, 2016 and 2015, at cost:

 

   Years Ended December 31, 
   2016   2015 
Beginning PIK loan balance (inclusive of PIK interest capitalized)  $387,688   $347,703 
Addition of PIK loans during period   30,459     
PIK interest accreted to principal during period   46,895    39,985 
Ending PIK loan balance (inclusive of PIK interest capitalized)  $465,042   $387,688 

 

During the year ended December 31, 2016, we purchased $30,459 of senior secured promissory notes in BrightSource with an interest rate of 11.5% and maturity date of March 31, 2017. As of December 31, 2016, the only notes with PIK interest that we held were issued by BrightSource. As of December 31, 2016, we were accruing PIK interest on each of our PIK loans, and none of our PIK loans were on non-accrual status.

 

We did not make any investments in PIK loans during the year ended December 31, 2015.

 

Operating Expenses

 

The composition of our operating expenses for the years ended December 31, 2016 and 2015, respectively, were as follows.

 

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   Year Ended December 31,     
   2016   2015   Increase / Decrease 
Operating expenses:               
Professional fees  $731,787   $919,030   $(187,243)
Administrator fees   750,495    180,000    570,495 
Investment banking advisory fees   175,000        175,000 
Directors fees   117,500    128,750    (11,250)
Insurance expenses   101,645    80,872    20,773 
Chief compliance officer fees   59,000    4,000    55,000 
Stock transfer agent fees   44,602    52,880    (8,278)
Marketing and advertising expenses   9,467    19,800    (10,333)
Custody fees   6,000    6,000     
Postage and fulfillment expenses   2,815    45,417    (42,602)
Travel expenses   5,345    17,357    (12,012)
Public and investor relations expenses       205,295    (205,295)
Printing and production expenses       26,259    (26,259)
Base management fees       1,232,563    (1,232,563)
Incentive fees       (2,130,443)   2,130,443 
Administrative expenses allocated from investment adviser       423,628    (423,628)
General and administrative expenses   62,260    127,018    (64,758)
Total operating expenses  $2,065,916   $1,338,426   $727,490 

 

Total operating expenses for the years ended December 31, 2016 and 2015 were $2,065,916 and $1,338,426, respectively, an increase of $727,490 compared to the prior period.

 

Professional fees for the year ended December 31, 2016 and 2015 were $731,787 and $919,030, respectively, a decrease of $187,243 compared to the prior period due primarily to decreases in audit fees, legal fees and Sarbanes Oxley consulting fees, partially offset by increases in valuation services and accounting consulting fees compared to the prior period.

 

Administrator fees for the year ended December 31, 2016 and 2015 were $750,495 and $180,000, respectively, an increase of $570,495 compared to the prior period primarily as a result of the engagement of our Administrator following the termination of our former Investment Advisory Agreement. For the year ended December 31, 2015, we incurred base management fees of $1,232,563 and administrative expenses allocated from BDCA Venture Adviser of $423,628. For the year ended December 31, 2015, we also recorded a reduction of accrued incentive fees of $2,130,443.

 

Investment banking advisory fees for the year ended December 31, 2016 and 2015 were $175,000 and $0, respectively, an increase of $175,000 compared to the prior period primarily as a result of the engagement of Setter Capital, Inc. to assist us in identifying prospective buyers for our portfolio investments during the year ended December 31, 2016.

 

Chief compliance officer fees for the year ended December 31, 2016 and 2015 were $59,000 and $4,000, respectively, an increase of $55,000 compared to the prior period as a result of the engagement of our Chief Compliance Officer following the termination of our former Investment Advisory Agreement.

 

Directors fees for the year ended December 31, 2016 and 2015 were $117,500 and $128,750, respectively, a decrease of $11,250 compared to the prior period due primarily to a decrease in the total number of members serving on our Board of Directors compared to the prior period, partially offset by an increase in the compensation paid to our Nominating Committee Chairman and Compensation Committee Chairman during the year ended December 31, 2016.

 

Public and investor relations expenses for the year ended December 31, 2016 and 2015 were $0 and $205,295, respectively, a decrease of $205,295 compared to the prior period due primarily to the proxy administrative and solicitation services expenses incurred during the year ended December 31, 2015 as a result of the contested proxy campaign in connection with our 2015 Annual Meeting and a decrease in investor relations services previously provided by RCS Advisory Services, LLC (“RCS Advisory”), an affiliated entity of BDCA Venture Adviser, compared to the prior period. RCS Advisory no longer provides us with services.

 

Base management fees, accrued incentive fees and administrative expenses allocated from our investment adviser ended in connection with the termination of our former Investment Advisory Agreement in December 2015. Accordingly, for the year ended December 31, 2016, we did not pay any fees to an investment adviser. For the year ended December 31, 2015, we incurred base management fees of $1,232,563 and administrative expenses allocated from BDCA Venture Adviser of $423,628. For the year ended December 31, 2015, we also recorded a reduction of accrued incentive fees of $2,130,443. No incentive fees were earned for the year ended December 31, 2015. See Note 4 – Related Party Agreements and Transactions – to the financial statements of this annual report on Form 10-K for a further discussion of the fees under our former Investment Advisory Agreement and other agreements with BDCA Venture Adviser.

 

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Net Investment Loss

 

Net investment losses for the years ended December 31, 2016 and 2015 were $1,890,600 and $1,289,995, respectively. The increase of $600,605 in net investment loss for the year ended December 31, 2016 compared to the year ended December 31, 2015 is primarily attributable to increases in administrator fees and investment banking advisory fees during the year ended December 31, 2016 and the reversal of incentive fees during the prior period, partially offset by decreases in base management fees, administrative expenses allocated from our former investment adviser, public and investor relations expenses and professional fees during the year ended December 31, 2016, as discussed above.

 

Basic and diluted net investment loss per common share outstanding was $0.20 for the year ended December 31, 2016 compared to basic and diluted net investment loss per common share outstanding of $0.13 for the year ended December 31, 2015. The weighted average common shares outstanding for the years ended December 31, 2016 and 2015 were 9,627,958 and 9,739,237, respectively.

 

Net Realized Gain (Loss)

 

For the year ended December 31, 2016, net realized loss totaled $1,345,417. During the year ended December 31, 2016, we sold 299,999 shares of Tremor Video common stock, 1,338,302 shares of Metabolon Series D preferred stock and our entire positions in SFCE and Centrify Corp. During the year ended December 31, 2016, we also we recognized $6,067 in additional proceeds in connection with the expense fund related to Xtime’s merger transaction.

 

For the year ended December 31, 2015, net realized loss totaled $1,157,446. During the year ended December 31, 2015, we sold 300,000 shares of Tremor Video common stock. During the same period, we also sold 3,986 shares of previously written-off Millennial Media common stock and received additional proceeds which had been released from Millennial Media’s indemnity escrow, and received additional proceeds related to the sale of our investment in Xtime based on a post-closing working capital adjustment to the merger consideration.

 

For additional information regarding the investment cost, net proceeds and net realized gain (loss) for each of the portfolio company positions sold by us during the years ended December 31, 2016 and 2015, see “-Portfolio Activity” above.

 

Net Increase (Decrease) in Unrealized Appreciation (Depreciation)

 

For the year ended December 31, 2016, the net increase in unrealized depreciation on portfolio company investments and Escrowed Funds totaled $17,143,896. For the year ended December 31, 2015, the net decrease in unrealized appreciation on portfolio company investments and Escrowed Funds totaled $9,051,669. The following table summarizes the cost and fair value of our portfolio company investments and Escrowed Funds as of December 31, 2016 and 2015, and the change in unrealized appreciation (depreciation) on our portfolio company investments and Escrowed Funds comprising the net increase in unrealized depreciation of $17,143,896 for the year ended December 31, 2016, or $1.78 per common share outstanding during the period:

 

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   December 31, 2016   December 31, 2015   Year to Date 
Portfolio Company  Cost   Fair Value   Unrealized Appreciation (Depreciation)   Cost   Fair Value   Unrealized Appreciation (Depreciation)   Net Change In Unrealized Appreciation (Depreciation) 
Zoosk, Inc.  $2,999,999   $3,300,000   $300,001   $2,999,999   $3,780,000   $780,001   $(480,000)
Metabolon, Inc.   1,598,404    2,685,000    1,086,596    4,000,000    6,620,000    2,620,000    (1,533,404)
SilkRoad, Inc.   6,337,785    1,340,000    (4,997,785)   6,337,785    9,620,000    3,282,215    (8,280,000)
Harvest Power, Inc.   3,148,565    1,415,000    (1,733,565)   2,904,526    1,430,000    (1,474,526)   (259,039)
BrightSource Energy, Inc.   3,362,173    209,468    (3,152,706)   3,284,819    1,051,759    (2,233,060)   (919,646)
Suniva, Inc.(1)   1,244,834    155,000    (1,089,834)   1,244,834    173,010    (1,071,824)   (18,010)
MBA Polymers, Inc.   2,000,000    100,000    (1,900,000)   2,000,000    235,000    (1,765,000)   (135,000)
Mode Media Corporation   4,999,999        (4,999,999)   4,999,999    4,806,000    (193,999)   (4,806,000)
Agilyx Corporation   4,332,356        (4,332,356)   4,332,356        (4,332,356)    
Deem, Inc.   3,000,000        (3,000,000)   3,000,000    3,160,000    160,000    (3,160,000)
Centrify Corporation               2,999,999    3,070,000    70,001    (70,001)
Tremor Video, Inc.               1,999,997    617,998    (1,381,999)   1,381,999 
Shunfeng International Clean Energy Ltd. (1)               1,309,453    181,990    (1,127,463)   1,127,463 
Total Portfolio Company Investments   33,024,115    9,204,468    (23,819,648)   41,413,767    34,745,757    (6,668,010)   (17,151,638)
Funds held in escrow from sale of investment   103,185    94,907    (8,278)   704,101    688,082    (16,019)   7,742 
Total Portfolio Company Financial Assets  $33,127,300   $9,299,375   $(23,827,926)  $42,117,868   $35,433,839   $(6,684,029)  $(17,143,896)

 

(1)On January 13, 2016, Suniva closed a stock-for-stock merger transaction with SFCE and our 10.022 shares of Series F preferred stock and 197.942 shares of Series D preferred stock in Suniva were exchanged for 2,844 shares of Suniva Class A common stock and 820,868 shares of SFCE common stock. The aggregate cost and fair value of our Suniva Series F and Series D preferred stock as of December 31, 2015 was $2,554,287 and $355,000, respectively. For purposes of this presentation, the cost and fair value of our Suniva preferred stock as of December 31, 2015 has been allocated to the Suniva Class A common stock and SFCE common stock based on the final merger consideration received in the transaction.

 

Net Increase (Decrease) in Net Assets Resulting From Operations and Per Share Information

 

The net decrease in our net assets resulting from operations for the year ended December 31, 2016 was $20,379,913, which included $1,345,417 in net realized losses and a net increase in unrealized depreciation of $17,143,896 during such period, compared to a net decrease in our net assets resulting from operations for the year ended December 31, 2015 of $11,499,140, which included $1,157,446 in net realized losses and a net decrease in unrealized appreciation of $9,051,699 during such period.

 

Basic and diluted net decrease in net assets resulting from operations per common share was $2.12 for the year ended December 31, 2016, compared to basic and diluted net decrease in net assets resulting from operations per common share of $1.18 per common share for the year ended December 31, 2015. The weighted average common shares outstanding for the years ended December 31, 2016 and 2015 were 9,627,958 and 9,739,237, respectively.

 

Comparison of the Years Ended December 31, 2015 and 2014

 

Investment Income

 

For the years ended December 31, 2015 and 2014, we earned interest and dividend income from cash and cash equivalents of $8,446 and $2,809, respectively. During the year ended December 31, 2015, we also earned payment-in-kind (“PIK”) interest of $39,985 on our subordinated convertible bridge note and our subordinated secured note investments in BrightSource. During the year ended December 31, 2014, we earned PIK interest of $66,486 on our subordinated convertible bridge note investments in BrightSource, SilkRoad and Agilyx and our subordinated secured note investments in BrightSource.

 

To maintain our status as a RIC, PIK interest, which is a non-cash source of income, must generally be distributed to stockholders at least annually from other sources such as available cash or the proceeds from the disposition of our portfolio company investments. However, since we do not expect to have investment company taxable income, we would generally not be required to distribute PIK interest from our available cash or the proceeds from the disposition of our portfolio company investments.

 

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The following table shows our PIK loan activity for the years ended December 31, 2015 and 2014, at cost:

 

   Years Ended December 31, 
   2015   2014 
Beginning PIK loan balance (inclusive of PIK interest capitalized)  $347,703   $1,242,569 
Addition of PIK loans during period       440,334 
PIK interest accreted to principal during period   39,985    66,486 
Conversion of PIK loans into equity during the period       (1,401,288)
Payments received from PIK loans during the period       (398)
Ending PIK loan balance (inclusive of PIK interest capitalized)  $387,688   $347,703 

 

As of December 31, 2015, the only notes with PIK interest that we held were issued by BrightSource. As of December 31, 2015, we were accruing PIK interest on each of our PIK loans, and none of our PIK loans were on non-accrual status.

 

Operating Expenses

 

Following the termination of the Investment Advisory Agreement, our primary operating expenses include the payment of: (i) fees to our Administrator under the Administrator Consulting Agreement; (ii) fees to US Bancorp under the Administration Servicing Agreement and a Fund Accounting Servicing Agreement; and (iii) other operating costs. The composition of our operating expenses for the years ended December 31, 2015 and 2014, respectively, were as follows.

 

   Years Ended December 31,     
   2015   2014   Increase / Decrease 
Operating expenses:               
Base management fees  $1,232,563   $1,568,964   $(336,401)
Incentive fees   (2,130,443)   548,796    (2,679,239)
Administrative expenses allocated from investment adviser   423,628    570,074    (146,446)
Professional fees   1,103,030    403,959    669,071 
Directors fees   128,750    112,500    16,250 
Public and investor relations expenses   205,295    86,588    118,707 
Insurance expenses   80,872    55,718    25,154 
Travel expenses   17,357    68,733    (51,376)
Stock transfer agent fees   52,880    58,929    (6,049)
Marketing and advertising expenses   19,800    46,747    (26,947)
Printing and production expenses   26,259    46,696    (20,437)
Postage and fulfillment expenses   45,417    34,884    10,533 
Interest expense on borrowings       14,819    (14,819)
Custody fees   6,000    6,000     
General and administrative expenses   127,018    224,496    (97,478)
Total operating expenses   1,338,426    3,847,903    (2,509,477)
Waiver of base management fees       (97,797)   97,797 
Net operating expenses  $1,338,426   $3,750,106   $(2,411,680)

 

Total operating expenses for the years ended December 31, 2015 and 2014 were $1,338,426 and $3,847,903, respectively, a decrease of $2,509,477 compared to the prior period.

 

Total operating expenses, excluding base management fees and incentive fees, for the years ended December 31, 2015 and 2014 were $2,236,306 and $1,730,143, respectively, an increase of $506,163 compared to the prior period. This increase was due primarily to increases in: (i) legal and litigation expenses of $305,961 and proxy administrative and solicitation services of $107,861, each related to the contested proxy campaign in connection with our Annual Meeting, (ii) $125,157 in legal and proxy solicitation fees payable to Bulldog Investors, LLC (“Bulldog”) as reimbursement of its costs of litigation against us in the Circuit Court of Maryland and the New York Supreme Court and costs associated with the proxy process and the election of our new Board of Directors, and (iii) audit fees of $139,280 as a result of the resignation of our former auditor and the appointment of a new auditor, partially offset by reductions in allocated administrative expenses allocated from our former investment adviser and other operating expense categories.

 

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Base management fees paid to BDCA Venture Adviser for the years ended December 31, 2015 and 2014 were $1,232,563 and $1,568,964, of which BDCA Venture Adviser waived $0 and $97,797, respectively, a decrease of $336,401 compared to the prior period. For the years ended December 31, 2015 and 2014, we recorded a reduction of accrued incentive fees of $2,130,443 and $86,445, a decrease of $2,043,998 compared to the prior period. No incentive fee was due and payable to BDCA Venture Adviser as of the Termination Date, and, accordingly, the accrued incentive fee payable to BDCA Venture Adviser as of September 30, 2015 was reversed as of the Termination Date. As of December 31, 2014, $635,241 of earned incentive fees was due and payable to BDCA Venture Adviser in accordance with the contractual terms of the Investment Advisory Agreement.

 

Administrative expenses allocated from BDCA Venture Adviser for the years ended December 31, 2015 and 2014 were $423,628 and $570,074, respectively, a decrease of $146,446 compared to the prior period which was a result of decreased allocations of adviser expenses.

 

Professional fees for the years ended December 31, 2015 and 2014 were $1,103,030 and $403,959, respectively, an increase of $699,071 compared to the prior period due primarily to increases in: (i) legal and litigation expenses of $305,961 related to the contested proxy campaign in connection with our Annual Meeting, (ii) $39,245 in legal fees payable to Bulldog as reimbursement of its costs of litigation against us in the Circuit Court of Maryland and the New York Supreme Court and costs associated with the proxy process and the election of our new Board of Directors, (iii) $191,112 in administrative services related to the engagement of our Administrator and US Bancorp, and (iv) audit fees of $139,280 as a result of the resignation of our former auditor and the appointment of a new auditor, partially offset by a reduction in Sarbanes Oxley consulting services compared to the prior period.

 

Directors fees for the years ended December 31, 2015 and 2014 were $128,750 and $112,500, respectively, an increase of $16,250 compared to the prior period due primarily to the payment of directors fees to: (i) the incumbent Board of Directors prior to our Annual Meeting during July 2015, and (ii) our new Board of Directors in August 2015 following their election at our Annual Meeting.

 

Public and investor relations expenses for the years ended December 31, 2015 and 2014 were $205,295 and $86,588, respectively, an increase of $118,707 compared to the prior period due primarily to an increase in proxy administrative and solicitation services of $107,861 related to the contested proxy campaign in connection with our Annual Meeting and $69,562 in proxy solicitation fees payable to Bulldog as reimbursement of its costs associated with the proxy process and the election of our new Board of Directors, partially offset by a decrease in seminar and conference expenses compared to the prior period.

 

The decrease of $14,819 in interest expense on borrowings for the year ended December 31, 2015 compared to the year ended December 31, 2014 was the result of the interest expense on our short-term borrowing used to finance the purchase of $20 million of short-term U.S. Treasury Bills to satisfy our RIC diversification requirement in 2014.

 

See Note 4 – Related Party Agreements and Transactions – to the financial statements of this annual report on Form 10-K for a further discussion of the fees paid to our former investment adviser and the reimbursement to Bulldog.

 

Net Investment Loss

 

Net investment losses for the years ended December 31, 2015 and 2014 were $1,289,995 and $3,680,811, respectively. The decrease of $2,390,816 in net investment loss for the year ended December 31, 2015 compared to the year ended December 31, 2014 is primarily attributable to decreases in incentive fees, base management fees and administrative expenses allocated from our former investment adviser, during the year ended December 31, 2015, which were partially offset by increases in professional fees and public and investor relations expenses during the year ended December 31, 2015, as discussed above.

 

Basic and diluted net investment loss per common share outstanding was $0.13 for the year ended December 31, 2015 compared to basic and diluted net investment loss per common share outstanding of $0.38 for the year ended December 31, 2014. The weighted average common shares outstanding for the years ended December 31, 2015 and 2014 were 9,739,237 and 9,729,764, respectively.

 

Net Realized Gain (Loss)

 

For the year ended December 31, 2015, net realized loss totaled $1,157,446. During the year ended December 31, 2015, we sold 300,000 shares of Tremor Video common stock. During the same period, we also sold 3,986 shares of previously written-off Millennial Media common stock and received additional proceeds which had been released from Millennial Media’s indemnity escrow, and received additional proceeds related to the sale of our investment in Xtime based on a post-closing working capital adjustment to the merger consideration.

 

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For the year ended December 31, 2014, net realized gain totaled $6,778,371. During the year ended December 31, 2014, we sold our entire position in Kabam, TrueCar, Xtime and Stoke, and 1,230,747 shares of Millennial Media common stock. During the year ended December 31, 2014, we also wrote off the remaining 17,146 shares of Millennial Media common stock and our entire position in Livescribe.

 

Net Increase (Decrease) in Unrealized Appreciation (Depreciation)

 

For the year ended December 31, 2015, the net decrease in unrealized appreciation on portfolio company investments and Escrowed Funds totaled $9,051,699. For the year ended December 31, 2014, the net decrease in unrealized appreciation on portfolio company investments and Escrowed Funds totaled $4,034,392. The following table summarizes the cost and fair value of our portfolio company investments and Escrowed Funds as of December 31, 2015 and 2014, and the change in unrealized appreciation (depreciation) on our portfolio company investments and Escrowed Funds comprising the net decrease in unrealized appreciation of $9,051,699 for the year ended December 31, 2015, or $0.93 per common share outstanding during the period:

  

   December 31, 2015   December 31, 2014   Year to Date 
                             
   Cost   Fair Value   Unrealized Appreciation (Depreciation)   Cost   Fair Value   Unrealized Appreciation (Depreciation)   Net Change In Unrealized Appreciation (Depreciation) 
SilkRoad, Inc.  $6,337,785   $9,620,000   $3,282,215   $6,337,785   $8,860,000   $2,522,215   $760,000 
Metabolon, Inc.   4,000,000    6,620,000    2,620,000    4,000,000    7,790,000    3,790,000    (1,170,000)
Mode Media Corporation   4,999,999    4,806,000    (193,999)   4,999,999    6,850,000    1,850,001    (2,044,000)
Zoosk, Inc.   2,999,999    3,780,000    780,001    2,999,999    3,790,000    790,001    (10,000)
Deem, Inc.   3,000,000    3,160,000    160,000    3,000,000    4,290,000    1,290,000    (1,130,000)
Centrify Corporation   2,999,999    3,070,000    70,001    2,999,999    3,310,000    310,001    (240,000)
Harvest Power, Inc.   2,904,526    1,430,000    (1,474,526)   2,904,526    2,620,000    (284,526)   (1,190,000)
BrightSource Energy, Inc.   3,284,819    1,051,759    (2,233,060)   3,244,834    1,389,202    (1,855,632)   (377,428)
Tremor Video, Inc.   1,999,997    617,998    (1,381,999)   4,000,001    1,721,997    (2,278,004)   896,005 
Suniva, Inc.   2,554,287    355,000    (2,199,287)   2,554,287    1,740,000    (814,287)   (1,385,000)
MBA Polymers, Inc.   2,000,000    235,000    (1,765,000)   2,000,000    2,100,000    100,000    (1,865,000)
Agilyx Corporation   4,332,356        (4,332,356)   4,332,356    1,380,000    (2,952,356)   (1,380,000)
Total Portfolio Company Investments   41,413,767    34,745,757    (6,668,010)   43,373,786    45,841,199    2,467,413    (9,135,423)
Funds held in escrow from sale of investment   704,101    688,082    (16,019)   809,311    709,568    (99,743)   83,724 
Total Portfolio Company Financial Assets  $42,117,868   $35,433,839   $(6,684,029)  $44,183,097   $46,550,767   $2,367,670   $(9,051,699)

 

The net decrease in unrealized depreciation in Tremor Video, a publicly traded company, during the year ended December 31, 2015 was comprised of: (i) the net decrease (reversal) of unrealized depreciation of $1,139,004 on the shares of Tremor Video we sold during the period for which we realized a net loss of $1,182,240, and (ii) the change in market price for the shares of Tremor Video we continued to hold, representing a net decrease in unrealized depreciation of $242,999.

 

Net Increase (Decrease) in Net Assets Resulting From Operations and Per Share Information

 

The net decrease in our net assets resulting from operations for the year ended December 31, 2015 was $11,499,140, which included $1,157,446 in net realized losses and a net decrease in unrealized appreciation of $9,051,699 during such period, compared to a net decrease in our net assets resulting from operations for the year ended December 31, 2014 of $936,832, which included $6,778,371 in net realized gains and a net decrease in unrealized appreciation of $4,034,392 during such period.

 

Basic and diluted net decrease in net assets resulting from operations per common share was $1.18 for the year ended December 31, 2015, compared to basic and diluted net decrease in net assets resulting from operations per common share of $0.10 per common share for the year ended December 31, 2014. The weighted average common shares outstanding for the years ended December 31, 2015 and 2014 were 9,739,237 and 9,729,764, respectively.

 

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Financial Condition, Liquidity and Capital Resources

 

Cash and Cash Equivalents

 

As of December 31, 2016, we had cash and cash equivalents of $19.3 million as compared to $13.7 million and $27.4 million as of December 31, 2015 and 2014, respectively. The increase of $5.7 million in cash and cash equivalents during the year ended December 31, 2016 was primarily the result of: (i) net proceeds from the sales of our portfolio investments of $7.4 million, (ii) the receipt of $0.6 million in Escrowed Funds from the Xtime escrow, (iii) repurchases of our common stock totaling $0.2 million, and (iv) net cash used in operating activities of $2.1 million during the year ended December 31, 2016.

 

As of December 31, 2016, we had no indebtedness and accounts payable and accrued expenses of $0.4 million as compared to $0.2 million for the year ended December 31, 2015. As of December 31, 2014, we had no indebtedness and total accounts payable, accrued expenses and dividends payable of $7.2 million, including amounts owed to BDCA Venture Adviser.

 

Capital Raising

 

As of December 31, 2016, we had 9,563,130 shares of our common stock issued and outstanding.

 

We do not currently intend to raise additional common equity capital in the foreseeable future.

 

Regulatory Compliance

 

Due to the limited number of investments we currently hold, we closely monitor our asset composition in order to continue to satisfy the asset diversification test and maintain our status as a RIC. To maintain our status as a RIC, in addition to other requirements, as of the close of each quarter end, we must meet the asset diversification test, which requires that at least 50% of the value of our assets consist of cash, cash items, U.S. government securities or certain other qualified securities (the “50% Threshold”). However, the failure to meet the 50% Threshold alone will not result in our loss of RIC status. In circumstances where the failure to meet the 50% Threshold is the result of fluctuations in the value of our assets, including as a result of the sale of assets, we will still be deemed to have satisfied the 50% Threshold and, therefore, maintain our RIC status, provided that we have not made any new investments in non-qualifying securities, including additional investments in non-qualifying securities of existing portfolio companies, since the time that we fell below the 50% Threshold. We satisfied the diversification test as of December 31, 2016. A more detailed description of our RIC status is located in Item 1. — Business - Material U.S. Federal Income Tax Considerations of this annual report on Form 10-K.

 

Distributions

 

Distributions to our stockholders are payable only when and as declared by our Board of Directors and are paid out of assets legally available for distribution. We may fund cash distributions to stockholders from any sources of funds available to us. We have not established limits on the amount of funds we may use from available sources to make distributions.

 

We did not declare any distributions to stockholders during the year ended December 31, 2016. The following table summarizes our dividends declared for the year ended December 31, 2015:

 

Date Declared  Record Date  Payment Date  Amount Per Share  Source of Distribution
2015 Dividends:              
March 26, 2015  April 15, 2015  April 29, 2015  $ 0.15  Return of Capital
March 26, 2015  June 11, 2015  June 25, 2015    0.15  Return of Capital
March 26, 2015  September 11, 2015  September 25, 2015    0.15  Return of Capital
March 26, 2015  December 4, 2015  December 18, 2015    0.15  Return of Capital
 Total - 2015 Dividends          0.60   

 

Distribution Policy

 

Distributions to our stockholders, if any, will be out of assets for distribution, as determined by our Board of Directors, with the intention of distributing up to 100% of the proceeds from the sales of our portfolio investments.

 

On March 25, 2016, our Board of Directors adopted a distribution policy with the objective to make special distributions to stockholders as declared by our Board of Directors in its discretion. Based on our Board of Directors’ change to our investment objective to preserve capital and maximize stockholder value and resolution to monetize our portfolio holdings at the earliest practicable date, we will no longer pay regular quarterly distributions to our stockholders. Our Board of Directors may amend or terminate the distribution policy at any time.

 

 45 

 

 

A more detailed description of our distribution policy is located in Item 5. — Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity - Distributions and Note 8 – Dividends and Distributions - to the financial statements of this annual report on Form 10-K.

 

Dividend Reinvestment Plan

 

We maintain a dividend reinvestment plan (“DRIP”) that provides for the reinvestment of dividends on behalf of our stockholders, unless a stockholder has elected to receive dividends in cash. As a result, if we declare a dividend, stockholders who have not “opted out” of the DRIP by the dividend record date will have their dividend automatically reinvested into additional shares of our common stock. Although we have a number of options to satisfy the share requirements of the DRIP, we currently expect that the shares required to be purchased under the DRIP will be acquired through open market purchases of common stock by the DRIP administrator. The shares purchased in the open market to satisfy the DRIP requirements will be valued based upon the average price of the applicable shares purchased by the DRIP administrator.

 

Commitments and Contingencies

 

In the normal course of business, we may enter into investment agreements under which we commit to make an investment in a portfolio company at some future date or over a specified period of time. As of December 31, 2016, we had not entered into any investment agreements which required us to make a future investment in a portfolio company.

 

On October 15, 2015, Suniva completed a stock-for-stock merger transaction with SFCE. Pursuant to the merger agreement, we are required to indemnify SFCE for certain breaches of warranties and representations made to SFCE, subject to a cap of approximately 12.5% of the merger consideration received by us. Any damages payable by us would be settled through an adjustment to the number of shares of common stock in the surviving company held by us and/or SFCE.

 

On November 18, 2014, Xtime, Inc., a private portfolio company, completed an all-cash merger transaction with Cox Automotive, Inc. At the closing of the merger, we were required to set aside approximately $809,311 in escrow as partial security for potential stockholder indemnification obligations under the merger agreement. The $809,311 represents additional proceeds that may be released to us at a later date subject to potential indemnity claims. On January 13, 2015, Escrowed Funds totaling $105,210 were released to us from the Xtime escrow without any offset for indemnity claims. On January 15, 2016, Escrowed Funds totaling $606,983 were released to us from the Xtime escrow without any offset for indemnity claims. As of December 31, 2016, we recognized $6,067 in additional proceeds in connection with the expense fund related to Xtime’s merger transaction. The remaining funds held in the Xtime escrow are expected to be released in November of 2017, net of settlement of any indemnity claims. Although recovery under the stockholder indemnity obligation is generally limited to the escrow fund, we may be liable for our pro rata amount of any damages for certain types of indemnity claims not to exceed the cash consideration received by us, provided, however, in the case of our fraud or intentional misrepresentation, there is no limitation on liability. Except as discussed above, we have not been notified of any stockholder indemnity claims. As of December 31, 2016 and 2015, Escrowed Funds were fair valued at $94,907 and $688,082, respectively. See Note 9 - Commitments and Contingencies.

 

We maintain a directors and officers liability insurance policy (the “D&O Policy”) and an excess coverage policy (the “Excess Policy”) which provide liability insurance coverage for our officers and directors. We have also agreed to indemnify our directors and officers to the maximum extent permitted by Maryland law subject to the restrictions in the 1940 Act.

 

Under our former Investment Advisory Agreement, absent the willful misfeasance, bad faith or gross negligence of BDCA Venture Adviser or BDCA Venture Adviser’s reckless disregard of its duties and obligations, we agreed to indemnify BDCA Venture Adviser (including its officers, managers, agents, employees and members of its investment committee) for any damages, liabilities, costs and expenses (including reasonable attorneys’ fees and amounts reasonably paid in settlement) arising out of BDCA Venture Adviser’s performance of its duties and obligations under the Investment Advisory Agreement, except to the extent specified in the 1940 Act. Pursuant to the former Investment Advisory Agreement, the indemnification provision shall remain in full force and effect, and BDCA Venture Adviser shall remain entitled to the benefits thereof, notwithstanding termination of the Investment Advisory Agreement.

 

As of December 31, 2016, we and our officers and directors are not a party to any material legal proceedings. However, from time to time, we may be party to certain legal proceedings incidental to the normal course of our business including the enforcement of our rights under contracts with our portfolio companies.

 

 46 

 

 

Recent Developments

 

Portfolio Company Activity

 

On March 29, 2017, we sold our entire investment in SilkRoad, which was acquired before the present Board of Directors was elected, consisting of 6,361,938 shares of Series D-1 convertible preferred stock, 19,132,283 shares of Series D-2 convertible preferred stock and 1,683,460 Series D-1 preferred stock warrants. The transaction was a secondary market sale for total net proceeds of $1,340,000, resulting in a net realized loss of $4,997,785.

 

Nasdaq Notice of Delisting

 

On January 6, 2017, we received a notice (the “Notice”) from the Listings Qualifications Department of The Nasdaq Stock Market (“Nasdaq”) stating that we did not hold an annual meeting of stockholders during the 12 months from the end our fiscal year on December 31, 2015, as required by Nasdaq Listing Rules 5620(a) and 5810(c)(2)(G).

 

We subsequently submitted a plan to regain compliance on February 17, 2017 pursuant to the procedures set forth in the Nasdaq Listing Rules. The plan was accepted by Nasdaq on February 28, 2017, and we have been granted an extension to hold our annual meeting no later than June 29, 2017 to regain compliance with the applicable Nasdaq Listing Rules. If we fail to satisfy these terms, Nasdaq would provide written notification of the delisting of our securities, which we could appeal to a Nasdaq hearings panel pursuant to procedures set forth in the Nasdaq Listing Rules.

 

Tabular Disclosure of Contractual Obligations

 

We are currently not a party to any long-term debt obligations, capital lease obligations, operating lease obligations, purchase obligations or other long-term liabilities and thus have omitted the tabular disclosure of contractual obligations.

 

Off Balance Sheet Arrangements

 

As of December 31, 2016, we had no off-balance sheet arrangements.

 

We have entered into agreements with MidFirst Bank to be the custodian of our portfolio securities and Frontier Bank to be the custodian of the majority of our cash and cash equivalent assets.

 

Critical Accounting Policies

 

The preparation of financial statements and related disclosures in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and revenues and expenses during the periods reported. Actual results could materially differ from those estimates. We have identified the following items as critical accounting policies.

 

Valuation of Investments

 

Our investments generally consist of securities issued by private and publicly traded companies consisting of preferred stock, common stock, convertible notes, secured notes and warrants to purchase preferred stock which are included on our Schedule of Investments in the financial statements of this annual report on Form 10-K.

 

Investments are stated at value as defined under the 1940 Act, in accordance with the applicable regulations of the SEC, and in accordance with FASB, ASC 820. Value, as defined in Section 2(a)(41) of the 1940 Act, is: (i) the market price for those securities for which a market quotation is readily available, and (ii) the fair value as determined in good faith by, or under the direction of, the Board of Directors for all other assets. See Note 3 - Portfolio Investments and Fair Value to the financial statements of this annual report on Form 10-K for a further discussion of our portfolio investments and fair value. The 1940 Act requires periodic valuation of each investment in our portfolio to determine our net asset value. Under the 1940 Act, unrestricted securities with readily available market quotations are to be valued at the closing market price on the valuation date; all other assets must be valued at fair value as determined in good faith by or under the direction of our Board of Directors.

 

Given the nature of investing in the securities of private companies, our investments are generally considered Level 3 assets under ASC 820 until these portfolio companies become public and begin trading on a stock exchange and the securities are no longer subject to any post-initial public offering lockup restrictions. As such, we value all of our investments, other than unrestricted securities in publicly traded portfolio companies, at fair value as determined in good faith by our Board of Directors, pursuant to a consistent valuation policy in accordance with the provisions of ASC 820 and the 1940 Act.

 

 47 

 

 

Determination of fair values involves subjective judgments and estimates. Due to the inherent uncertainty in determining the fair value of investments that do not have a readily available market value, the fair value of our investments determined in good faith by our Board of Directors may differ significantly from the value that would have been used had a ready market existed for such investments and the differences could be material. Changes in fair value of these investments are recorded in our Statement of Operations as “Net change in unrealized appreciation (depreciation).”

 

We have a lead valuation director, who is a non-interested member of our Board of Directors and acts as the liaison between our Board of Directors and our management for valuing our investments. With respect to investments for which market quotations are not readily available, our Board of Directors undertakes a multi-step valuation process each quarter, as described below:

 

On a quarterly basis, each portfolio company will be analyzed based on the portfolio company’s most recently available historical and projected financial results, public market comparables, equity or other transactions and other factors.

 

Our management or an independent valuation firm, if involved, will conduct appraisals and make an assessment of the fair value of each investment, which will be used in deriving a preliminary valuation.

 

Our lead valuation director will review and discuss the preliminary valuations with our management and the assistance of the independent valuation firm, if any.

 

Our Board of Directors will discuss the valuations and determine, in good faith, the fair value of each investment in our portfolio for which market quotations are not readily available based on the input of our management, the independent valuation firm, if any, and the lead valuation director.

 

For the December 31, 2016 valuation of our portfolio investments that are not publicly traded, an independent valuation firm assisted our Board of Directors in its determination of the value of three investments in our portfolio.

 

ASC 820 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (exit price). In accordance with ASC 820, we use a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value as follows:

 

Level 1: Observable inputs such as unadjusted quoted prices in active markets;

 

Level 2: Includes inputs such as quoted prices for similar securities in active markets and quoted prices for identical securities where there is little or no activity in the market; and

 

Level 3: Unobservable inputs for which little or no market data exists, therefore requiring an entity to develop its own assumptions.

 

In instances where the determination of the fair value measurement is based on inputs from different levels of the fair value hierarchy, the level in the fair value hierarchy within which the entire fair value measurement falls is based on the lowest level input that is significant to the fair value measurement in its entirety.

 

See Note 2 – Summary of Significant Accounting Policies to the financial statements of this annual report on Form 10-K for a further discussion of the framework for determining fair value as described above.

 

Administrative Services

 

On November 13, 2015, our Board of Directors approved the engagement of our Administrator to provide administrative consulting services to us, including the provision of personnel to act as certain of our executive officers, including the Chief Executive Officer and Chief Financial Officer, pursuant to an Administrator Consulting Agreement. For the year ended December 31, 2016 and 2015, we incurred $741,000 and $180,000 of expenses related to the Administrator, respectively. As of December 31, 2016 and 2015, we had expenses payable to the Administrator of $191,000 and $51,308, respectively.

 

Effective December 2, 2015, we engaged the services of our Chief Compliance Officer. For the year ended December 31, 2016 and 2015, we incurred $59,000 and $4,000, respectively, of compliance fees. Prior to the Termination Date, we also reimbursed BDCA Venture Adviser for the allocable portion of compensation of our Chief Compliance Officer during the year ended December 31, 2015, with such expense included in the payment of administrative expenses allocated from our former investment adviser for the period. As of December 31, 2016 and 2015, we had expenses payable to our Chief Compliance Officer of $5,206 and $4,000, respectively.

 

 48 

 

 

Other Transactions with Related Parties

 

On March 25, 2016, the Audit Committee of our Board of Directors approved the reimbursement of $125,157 in legal and proxy solicitation costs incurred by Bulldog Investors, LLC (“Bulldog”), a stockholder and beneficial owner of more than 5% of our outstanding common stock, as a result of the contested proxy campaign in connection with our 2015 Annual Meeting. This reimbursement was paid to Bulldog on March 30, 2016 and included the costs of Bulldog’s litigation against us in the Circuit Court of Maryland and the New York Supreme Court and costs associated with the proxy process and the election of our new Board of Directors. The Audit Committee of our Board of Directors is required to review and approve any transactions with related parties (as such term is defined in Item 404 of Regulation S-K).

 

In addition, our code of business conduct and ethics, which is applicable to all of our officers and directors, requires that all officers and directors avoid any conflict, or the appearance of a conflict, between an individual’s personal interests and our interests. Our code of business conduct and ethics is available on our website at www.xroadscap.com.

 

Item 7A. Quantitative and Qualitative Disclosures about Market Risk

 

Our business activities contain elements of risk. We consider the primary type of market risk attributable to us to be valuation risk.

 

Valuation Risk

 

Value, as defined in Section 2(a)(41) of the 1940 Act, is (i) the market price for those securities for which market quotations are readily available, and (ii) fair value as determined in good faith by, or under the direction of, the Board of Directors for all other assets. See Note 2 - Summary of Significant Accounting Policies and Note 3 - Portfolio Investments and Fair Value in the audited financial statements filed in this Annual Report on Form 10-K.

 

Because there is initially no public market for the securities of the private companies in which we invest, the valuation of these investments is estimated in good faith by our Board of Directors, in accordance with our valuation procedures. In the absence of a readily ascertainable market value, the estimated value of our portfolio company investments may differ significantly from the value that would be placed on the portfolio if a ready market for such securities existed. Changes in valuation of these portfolio company investments are recorded in our Statements of Operations as “Net change in unrealized appreciation (depreciation).” Changes in valuation of any of our investments in privately held companies from one period to another may be volatile.

 

Interest Rate Risk

 

We are subject to financial market risks, including changes in interest rates. Changes in interest rates may affect our interest income from cash and cash equivalents. As of December 31, 2016, we had cash and cash equivalents of $19.3 million, pending payment of our operating expenses or payment of distributions or potential stock repurchases, for which we have market risk exposure relating to fluctuations in interest rates. We primarily invest our cash on hand in demand deposit accounts, short-term U.S. Treasury securities and money market funds that invest primarily in U.S. Treasury securities, U.S. Government agency securities, and repurchase agreements fully-collateralized by such securities.

 

During December 2016, our demand deposit accounts earned an effective interest rate of approximately 0.95%. Assuming no other changes to our holdings of demand deposit accounts as of December 31, 2016, a one percentage point change in the underlying interest rate payable on our demand deposit accounts as of December 31, 2016 would not have a material effect on the amount of dividend income earned from our demand deposit accounts for the following 90-day period.

 

Our investment income from portfolio companies will also be affected by changes in various interest rates to the extent our debt investments include floating interest rates. As of December 31, 2016, none of our income-bearing debt investments in portfolio companies bore interest based on floating rates.

 

As of December 31, 2016, we had no debt or borrowed money.

 

We may engage in hedging transactions with respect to the market risks to which we are exposed subject to the requirements of the 1940 Act. We may hedge against interest rate fluctuations by using standard hedging instruments such as futures, options and forward contracts. However, if we do engage in hedging transactions, we may expose ourselves to risks associated with such transactions. We have not engaged in any hedging activities since our inception, and we currently do not expect to engage in any hedging activities with respect to the market risks to which we are exposed.

 

 49 

 

 

Item 8. Financial Statements

 

CROSSROADS CAPITAL, INC.

 

INDEX TO FINANCIAL STATEMENTS

 

Financial Statements Page
Reports of Independent Registered Public Accounting Firms F-!
Audited Financial Statements F-3
Statements of Assets and Liabilities as of December 31, 2016 and 2015 F-3
Statements of Operations for the Years Ended December 31, 2016, 2015 and 2014 F-4
Statements of Changes in Net Assets for the Years Ended December 31, 2016, 2015 and 2014 F-5
Statements of Cash Flows for the Years Ended December 31, 2016, 2015 and 2014 F-6
Schedule of Investments as of December 31, 2016 F-7
Schedule of Investments as of December 31, 2015 F-9
Notes to Financial Statements F-11

 

 50 

 

 

Report of Independent Registered Public Accounting Firm

 

To the Shareholders and

The Board of Directors of

Crossroads Capital, Inc.

Lincoln, Nebraska

 

We have audited the accompanying statement of assets and liabilities, including the schedule of investments, of Crossroads Capital, Inc. (the “Company”), as of December 31, 2016 and the related statement of operations, statement of changes in net assets, statement of cash flows and the financial highlights for the year then ended. These financial statements and financial highlights are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and financial highlights based on our audit.

 

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and financial highlights are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. Our procedures included confirmation of securities owned as of December 31, 2016, by correspondence with the issuers. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provide a reasonable basis for our opinion.

 

In our opinion, the financial statements and financial highlights referred to above present fairly, in all material respects, the financial position of Crossroads Capital, Inc., as of December 31, 2016, and the results of its operations, changes in its net assets, cash flows, and the financial highlights for the year then ended, in conformity with accounting principles generally accepted in the United States of America.

 

As explained in Note 3, the financial statements include investments valued at $9,204,468 (32.53% of net assets), whose fair values have been estimated under procedures established by the Board of Directors in the absence of readily ascertainable fair values. These estimated values may differ significantly from the values that would have been used had a ready market for the investments existed, and the differences could be material. Our opinion is not modified with respect to this matter.

 

 

TAIT, WELLER & BAKER LLP

 

Philadelphia, Pennsylvania

March 31, 2017

 F-1 

 

 

 

Report of Independent Registered Public Accounting Firm

 

Board of Directors and Shareholders

Crossroads Capital, Inc.

 

We have audited the accompanying statement of assets and liabilities of Crossroads Capital, Inc. (the “Company”), including the schedule of investments, as of December 31, 2015, and the related statements of operations, changes in net assets, and cash flows, and the financial highlights (included in Note 10), for the years ended December 31, 2015 and 2014. These financial statements and financial highlights are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and financial highlights based on our audits. The accompanying financial highlights for the years ended December 31, 2013 and 2012 were audited by other auditors whose report thereon dated February 24, 2014, expressed an unqualified opinion on those financial highlights.

 

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and financial highlights are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. Our procedures included confirmation of securities owned as of December 31, 2015, by correspondence with the custodian, or by other appropriate auditing procedures. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

 

In our opinion, the financial statements and financial highlights referred to above present fairly, in all material respects, the financial position of Crossroads Capital, Inc. as of December 31, 2015, and the results of its operations, its cash flows, the changes in its net assets and the financial highlights for the years ended December 31, 2015 and 2014, in conformity with U.S. generally accepted accounting principles.

 

 

 

Crowe Horwath LLP

 

New York, New York

March 29, 2016

 

 F-2 

 

 

Crossroads Capital, Inc.
Statement of Assets and Liabilities

 

   December 31, 
   2016   2015 
Assets        
Investments in portfolio company securities at fair value:          
Unaffiliated investments:          
Privately held portfolio companies (Cost: $33,024,115 and $35,413,770, respectively)  $9,204,468   $27,507,759 
Publicly-traded portfolio companies (Cost: $0 and $1,999,997, respectively)       617,998 
Non-controlled affiliated investments:          
Privately held portfolio companies (Cost: $0 and $4,000,000, respectively)       6,620,000 
Total, investments in portfolio company securities at fair value (Cost: $33,024,115 and $41,413,767, respectively)   9,204,468    34,745,757 
           
Cash and cash equivalents   19,329,250    13,655,862 
Funds held in escrow from sale of investment at fair value (Cost: $103,185 and $704,101, respectively)   94,907    688,082 
Prepaid expenses and other assets   94,937    73,090 
Total assets  $28,723,562   $49,162,791 
           
Liabilities          
Due to related parties  $197,966   $180,703 
Accounts payable   21,789    67,009 
Accrued expenses and other liabilities   204,238    20 
Total liabilities  $423,993   $247,732 
           
Commitments and contingencies (Note 9)          
           
Net Assets          
Common stock, $0.001 par value, 200,000,000 shares authorized; 9,563,130 and 9,676,484 issued and outstanding, respectively  $9,563   $9,676 
Additional paid-in capital   54,620,794    56,746,858 
Accumulated net realized loss   (2,502,863)   (1,157,446)
Net unrealized depreciation on investments and funds held in escrow from sale of investment   (23,827,925)   (6,684,029)
Total net assets  $28,299,569   $48,915,059 
Total liabilities and net assets  $28,723,562   $49,162,791 
Net asset value per share  $2.96   $5.06 

 

The accompanying notes are an integral part of these statements.

 

 F-3 

 

 

Crossroads Capital, Inc.
Statement of Operations

 

   Years Ended December 31, 
   2016   2015   2014 
Investment income:               
Interest from portfolio company investments:               
Unaffiliated investments  $46,896   $39,985   $66,486 
Interest and dividends from cash and cash equivalents   128,420    8,446    2,809 
Total investment income   175,316    48,431    69,295 
                
Operating expenses:               
Professional fees   731,787    919,030    403,959 
Administrator fees   750,495    180,000     
Investment banking advisory fees   175,000         
Directors fees   117,500    128,750    112,500 
Insurance expenses   101,645    80,872    55,718 
Chief compliance officer fees   59,000    4,000     
Stock transfer agent fees   44,602    52,880    58,929 
Marketing and advertising expenses   9,467    19,800    46,747 
Custody fees   6,000    6,000    6,000 
Travel expenses   5,345    17,357    68,733 
Postage and fulfillment expenses   2,815    45,417    34,884 
Printing and production expenses       26,259    46,696 
Public and investor relations expenses       205,295    86,588 
Interest expense on borrowings           14,819 
Base management fees       1,232,563    1,568,964 
Incentive fees       (2,130,443)   548,796 
Administrative expenses allocated from investment adviser       423,628    570,074 
General and administrative expenses   62,260    127,018    224,496 
Operating expenses before expense waiver from investment adviser   2,065,916    1,338,426    3,847,903 
Waiver of base management fees           (97,797)
Total operating expenses net of expense waiver from investment adviser   2,065,916    1,338,426    3,750,106 
Net investment loss   (1,890,600)   (1,289,995)   (3,680,811)
                
Net realized gain (loss):               
Unaffiliated investments   (2,416,090)   (1,157,446)   6,778,465 
Non-controlled affiliated investments   1,064,606         
Funds held in escrow from sale of investment   6,067         
United States Treasury Bills           (94)
Total net realized gain (loss)   (1,345,417)   (1,157,446)   6,778,371 
                
Net change in unrealized appreciation (depreciation):               
Unaffiliated investments   (14,531,638)   (7,965,423)   (5,584,649)
Non-controlled affiliated investments   (2,620,000)   (1,170,000)   1,650,000 
Funds held in escrow from sale of investment   7,742    83,724    (99,743)
Total net change in unrealized appreciation (depreciation)   (17,143,896)   (9,051,699)   (4,034,392)
                
Net increase (decrease) in net assets resulting from operations  $(20,379,913)  $(11,499,140)  $(936,832)
                
Net investment loss per common share outstanding (basic and diluted)  $(0.20)  $(0.13)  $(0.38)
Net increase (decrease) in net assets resulting from operations per common share outstanding (basic and diluted)  $(2.12)  $(1.18)  $(0.10)
Weighted average common shares outstanding (basic and diluted)   9,627,958    9,739,237    9,729,764 

 

The accompanying notes are an integral part of these statements.

 

 F-4 

 

 

Crossroads Capital, Inc.

Statement of Changes in Net Assets

 

   Common Stock                         
   Shares (1)   Par Value   Additional Paid-In Capital   Treasury Stock At Cost   Accumulated Net Investment Loss   Accumulated Undistributed Net Realized Gain (Accumulated Net Realized Loss)   Unrealized Appreciation (Depreciation)   Net Assets 
Balance, December 31, 2013 (2)   9,997,343   $9,997   $71,806,893   $(2,962,594)  $(2,216,888)  $   $6,402,062   $73,039,470 
Net (decrease) increase in net assets from operations                   (3,680,811)   6,778,371    (4,034,392)   (936,832)
Distributions to stockholders from net realized gains (3)   374,069    374    2,174,894            (6,778,371)       (4,603,103)
Repurchase of common stock (128,977 shares)               (665,998)               (665,998)
Retirement of treasury stock at cost   (577,418)   (577)   (3,628,015)   3,628,592                 
Reclassification of permanent book to tax differences           (3,767,256)       3,767,256             
Balance, December 31, 2014 (2)   9,793,994   $9,794   $66,586,516   $   $(2,130,443)  $   $2,367,670   $66,833,537 
Net decrease in net assets from operations                   (1,289,995)   (1,157,446)   (9,051,699)   (11,499,140)
Distributions to stockholders as a return of capital           (5,836,870)                   (5,836,870)
Repurchase and retirement of common stock at cost   (117,510)   (118)   (582,350)                   (582,468)
Reclassification of permanent book to tax differences           (3,420,438)       3,420,438             
Balance, December 31, 2015 (2)   9,676,484   $9,676   $56,746,858   $   $   $(1,157,446)  $(6,684,029)  $48,915,059 
Net (decrease) increase in net assets from operations                   (1,890,600)   (1,345,417)   (17,143,896)   (20,379,913)
Repurchase and retirement of common stock at cost   (113,354)   (113)   (235,464)                   (235,577)
Reclassification of permanent book to tax differences           (1,890,600)       1,890,600             
Balance, December 31, 2016 (2)   9,563,130   $9,563   $54,620,794   $   $   $(2,502,863)  $(23,827,925)  $28,299,569 

 

(1)Common shares issued.

 

(2)Net assets as of December 31, 2016, 2015, 2014 and 2013 include no accumulated undistributed net investment income.

 

(3)Includes distribution payable to stockholders of record on December 31, 2014 (with ex-dividend date of December 29, 2014) of $3,878,014 which was paid on January 13, 2015. For income and excise tax purposes, the distribution was treated as paid in 2014 and taxable to stockholders in 2014.

 

The accompanying notes are an integral part of these statements.

 

 F-5 

 

 

Crossroads Capital, Inc.

Statement of Cash Flows

 

   Years Ended December 31, 
   2016   2015   2014 
Cash flows from operating activities:               
Net decrease in net assets resulting from operations  $(20,379,913)  $(11,499,140)  $(936,832)
Adjustments to reconcile net decrease in net assets resulting from operations to net cash provided by (used in) operating activities:               
Investments in portfolio companies   (274,498)       (5,167,990)
Net proceeds from sales of portfolio company investments   7,365,629    842,558    24,213,500 
Net realized (gain) loss on investments   1,345,417    1,157,446    (6,778,465)
Net change in unrealized depreciation (appreciation) on investments   17,151,638    9,135,423    3,934,649 
Net change in unrealized depreciation (appreciation) on funds held in escrow from sales of investments   (7,742)   (83,724)   99,743 
Increase in investment balance cost basis due to payment-in-kind interest   (46,896)   (39,985)   (66,088)
Changes in operating assets and liabilities:               
Decrease (increase) in receivable from funds held in escrow from sales of investments   600,916    105,210    (809,311)
Decrease in prepaid expenses and other assets   (21,847)   11,811    17,520 
Increase (decrease) in base management fees payable       (354,633)   228,118 
Increase (decrease) in earned incentive fees payable       (635,241)   635,241 
Increase (decrease) in accrued incentive fees       (2,130,443)   (86,445)
Increase (decrease) in administrative expenses payable       (113,596)   61,841 
Increase in amounts due to related parties   72,809    59,092    66,065 
Increase (decrease) in accounts payable   (100,766)   81,455    (6,609)
Increase (decrease) in accrued expenses and other liabilities   204,218    (20,587)   (9,538)
Net cash provided by (used in) operating activities  $5,908,965   $(3,484,354)  $15,395,399 
                
Cash flows from financing activities:               
Proceeds from short-term borrowings  $   $   $19,400,000 
Repayment of short-term borrowings           (19,400,000)
Repurchase of common stock   (235,577)   (582,468)   (665,998)
Cash distributions to stockholders       (9,714,884)   (829,161)
Net cash used in financing activities  $(235,577)  $(10,297,352)  $(1,495,159)
                
Net increase (decrease) in cash and cash equivalents  $5,673,388   $(13,781,706)  $13,900,240 
Cash and cash equivalents, beginning of period   13,655,862    27,437,568    13,537,328 
Cash and cash equivalents, end of period  $19,329,250   $13,655,862   $27,437,568 
                
Supplemental disclosure of non-cash operating activities               
Conversion of payment-in-kind interest income into preferred stock  $   $   $68,932 
Supplemental disclosure of non-cash financing activities               
Dividends payable  $   $   $3,878,014 
Stock distributions to stockholders  $   $   $2,175,268 
Supplemental disclosure of cash flow information               
Interest paid on borrowings  $   $   $14,819 
Net realized loss on sale of treasury bills  $   $   $94 

 

The accompanying notes are an integral part of these statements.

 

 F-6 

 

 

Crossroads Capital, Inc.

Schedule of Investments

December 31, 2016

                       
Portfolio Company  Headquarters /
Industry (1)
  Type of Investment  Shares / Warrants / Principal   Cost   Value (2)   Value as % of Net Assets 
Unaffiliated Investments (3)                          
Privately Held Portfolio Companies:                          
MBA Polymers, Inc.  Worksop, Nottinghamshire, UK Plastics Recycling  Series G Convertible Preferred Stock   2,000,000   $2,000,000   $100,000    0.35%
BrightSource Energy, Inc.  Oakland, CA  Common Stock   132,972    1,756,202        %
   Solar Thermal Energy  Series 1A Preferred Stock   2,134,523    635,065        %
      Series 1 Convertible Preferred Stock   108,136    505,864        %
      Subordinated Convertible Bridge Notes (4) (5)Original principal $205,193; PIK interest 11.5%, compounded annually; mature 3/31/2017  $296,594    296,594    45,052    0.16%
      Subordinated Secured Notes (4) (5)Original principal $107,977; PIK interest 11.5%, compounded annually; mature 3/31/2017  $135,800    135,800    54,623    0.19%
      Senior Secured Notes (4) (5) Original principal $30,459; PIK interest 11.5%, compounded annually; mature 3/31/2017  $32,648    32,648    109,793    0.39%
Harvest Power, Inc.  Waltham, MA  Series A-2 Preferred Stock   1,249,999    1,249,433    480,000    1.70%
   Waste Management  Series B Convertible Preferred Stock   648,566    1,899,132    935,000    3.30%
Suniva, Inc.  Norcross, GA  Class A Common Stock   2,844    1,244,834    155,000    0.55%
Metabolon, Inc.  Durham, NC  Series D Convertible Preferred Stock   890,719    1,598,404    2,685,000    9.49%
   Molecular Diagnostics and Services                       
Agilyx Corporation  Beaverton, OR Renewable Oils  Common Stock   16    4,332,356        %
Zoosk, Inc.  San Francisco, CA Online Dating  Series E Convertible Preferred Stock   715,171    2,999,999    3,300,000    11.66%
SilkRoad, Inc.  Chicago, IL  Series D-1 Convertible Preferred Stock   6,361,938    1,337,785    1,131,843    4.00%
   Software as a Service  Series D-2 Convertible Preferred Stock   19,132,283    5,000,000    16,834    0.06%
      Series D-1 Convertible Preferred Stock Warrants                    
      Exercise price $0.2823 per share; expire 6/30/2018 (subject to adjustment)   1,683,460        191,323    0.68%
Mode Media Corporation(6)  Brisbane, CA Social Media  Series F Convertible Preferred Stock   1,196,315    4,999,999        %
Deem, Inc.  San Francisco, CA E-commerce Network  Series AA-1 Convertible Preferred Stock   46,461    3,000,000        %
Subtotal - Unaffiliated Investments, Privately Held Portfolio Companies             $33,024,115   $9,204,468    32.53%
                           
Total - Investments in Portfolio Company Securities (7)             $33,024,115   $9,204,468    32.53%

 

 F-7 

 

 

Crossroads Capital, Inc.

Schedule of Investments

December 31, 2016

 

Reconciliation to Net Assets  Amount   % of Net Assets 
Investments in portfolio company securities at fair value  $9,204,468    32.53%
Cash and cash equivalents          
Demand deposit accounts   19,101,153    67.50%
Money market funds consisting of 435,882 Class A shares in the SEI Daily Income Trust Government Fund (SEOXX) with a value of $1 per share (4)   11,315    0.04%
Other cash and cash equivalents   216,782    0.77%
Funds held in escrow from sale of investment at fair value   94,907    0.33%
Prepaid expenses and other assets   94,937    0.33%
Less: Total liabilities   (423,993)   (1.50)%
Net Assets  $28,299,569    100.00%

 

(1)The corporate headquarters of the portfolio company may not be indicative of the primary source of the portfolio company’s business. The industry description generally identifies the types of products or services provided by each portfolio company.

 

(2)All investments were valued at fair value as determined in good faith by the Board of Directors and are restricted securities under the Securities Act of 1933, as amended (the “Securities Act”) or are subject to legal restrictions on transfer (including lockup and other contractual restrictions) as of December 31, 2016. As of December 31, 2016, restricted securities held by the Company comprised approximately 33% of the Company’s net assets.

 

(3)Controlled investments are defined by the Investment Company Act of 1940, as amended (the “1940 Act”), as investments in which the Company owns more than 25% of the voting securities or where the Company has the ability to nominate greater than 50% of the board representation. Non-controlled, affiliated investments are defined by the 1940 Act as investments in which the Company owns between 5% and 25% of the voting securities. Unaffiliated investments are defined by the 1940 Act as investments that are neither controlled investments nor non-controlled, affiliated investments.

 

(4)Investment is income producing.

 

(5)Investment is a payment-in-kind (“PIK”) note. Principal and cost includes accumulated PIK interest, which is fixed for the term of the notes. The PIK interest is computed at the contractual rate specified in each note and is added to the principal balance of the note and recorded as interest income as earned. As of December 31, 2016, the Company was accruing PIK interest on each of its payment-in-kind notes, and none of such notes were on non-accrual status.

 

(6)Mode Media Corporation ceased operations on September 15, 2016.

 

(7)As of December 31, 2016, approximately 99.7% of the Company’s total assets were qualifying investments under Section 55(a) of the 1940 Act.

 

 F-8 

 

 

Crossroads Capital, Inc.

Schedule of Investments

December 31, 2015

                       
Portfolio Company  Headquarters /
Industry (1)
  Type of Investment  Shares / Warrants / Principal   Cost   Value (2)   Value as % of Net Assets 
Unaffiliated Investments (3)                          
Privately Held Portfolio Companies:                          
MBA Polymers, Inc.  Worksop, Nottinghamshire, UK Plastics Recycling  Series G Convertible Preferred Stock   2,000,000   $2,000,000   $235,000    0.48%
BrightSource Energy, Inc.  Oakland, CA Solar Thermal Energy  Common Stock   132,972    1,756,202    80,000    0.16%
     Series 1A Preferred Stock   2,186,880    650,642    100,000    0.20%
      Series 1 Convertible Preferred Stock   55,779    490,287    220,000    0.45%
      Subordinated Convertible Bridge Notes (4) (5)Original principal $205,193; PIK interest 11.5%, compounded annually; mature 3/30/2015 (See Note 3)  $265,929    265,929    530,000    1.08%
      Subordinated Secured Notes (4) (5)Original principal $107,977; PIK interest 11.5%, compounded annually; mature 3/30/2015 (See Note 3)  $121,759    121,759    121,759    0.25%
Harvest Power, Inc.  Waltham, MA  Series A-2 Preferred Stock   1,249,999    1,249,433    770,000    1.57%
   Waste Management  Series B Convertible Preferred Stock   404,527    1,655,093    660,000    1.35%
Suniva, Inc.  Norcross, GA  Series D Convertible Preferred Stock (See Note 15)   198    2,500,007    165,000    0.34%
   Solar Photovoltaic Cells  Series F Convertible Preferred Stock (See Note 15)   10    54,280    190,000    0.39%
Agilyx Corporation  Beaverton, OR Renewable Oils  Common Stock   16    4,332,356        %
Zoosk, Inc.  San Francisco, CA Online Dating  Series E Convertible Preferred Stock   715,171    2,999,999    3,780,000    7.73%
SilkRoad, Inc.  Chicago, IL  Series D-1 Convertible Preferred Stock   6,361,938    1,337,785    3,140,000    6.42%
   Software as a Service  Series D-2 Convertible Preferred Stock   19,132,283    5,000,000    6,060,000    12.39%
      Series D-1 Convertible Preferred Stock Warrants                    
      Exercise price $0.2823 per share; expire 6/30/2018 (subject to adjustment)   1,683,460        420,000    0.86%
Mode Media Corporation  Brisbane, CA Social Media  Series F Convertible Preferred Stock   1,196,315    4,999,999    4,806,000    9.83%
Deem, Inc.  San Francisco, CA E-commerce Network  Series AA-1 Convertible Preferred Stock   929,212    3,000,000    3,160,000    6.46%
Centrify Corporation  Santa Clara, CA  Series E Convertible Preferred Stock   1,084,873    2,999,999    3,070,000    6.28%
   Enterprise Software                       
Subtotal - Unaffiliated Investments, Privately Held Portfolio Companies             $35,413,770   $27,507,759    56.24%

 

 F-9 

 

 

Crossroads Capital, Inc.

Schedule of Investments

December 31, 2015

 

Portfolio Company  Headquarters /
Industry (1)
  Type of Investment  Shares / Warrants / Principal   Cost   Value (2)   Value as % of Net Assets 
Publicly Traded Portfolio Companies:                          
Tremor Video, Inc. (6)  New York, NY  Common Stock   299,999   $1,999,997   $617,998    1.26%
   Online Video Advertising                       
Subtotal - Unaffiliated Investments, Publicly Traded Portfolio Companies             $1,999,997   $617,998    1.26%
                           
Non-Controlled, Affiliated Investments (3)                          
Privately Held Portfolio Companies:                          
Metabolon, Inc.  Durham, NC  Series D Convertible Preferred Stock   2,229,021   $4,000,000   $6,620,000    13.53%
   Molecular Diagnostics and Services                       
Subtotal - Non-controlled, Affiliated Investments, Privately Held Portfolio Companies             $4,000,000   $6,620,000    13.53%
                           
Total - Investments in Portfolio Company Securities (7)             $41,413,767   $34,745,757    71.03%

 

Reconciliation to Net Assets  Amount   % of Net Assets 
Investments in portfolio company securities at fair value  $34,745,757    71.03%
Cash and cash equivalents          
Demand deposit accounts   13,005,421    26.59%
Money market funds consisting of 435,882 Class A shares in the SEI Daily Income Trust Government Fund (SEOXX) with a value of $1 per share (4)   435,882    0.89%
Other cash and cash equivalents   214,559    0.44%
Funds held in escrow from sale of investment at fair value   688,082    1.41%
Prepaid expenses and other assets   73,090    0.15%
Less: Total liabilities   (247,732)   (0.51)%
Net Assets  $48,915,059    100.00%

 

(1)The corporate headquarters of the portfolio company may not be indicative of the primary source of the portfolio company’s business. The industry description generally identifies the types of products or services provided by each portfolio company.

 

(2)Except for the shares of common stock of Tremor Video, all investments were valued at fair value as determined in good faith by the Board of Directors and are restricted securities under the Securities Act of 1933, as amended (the “Securities Act”) or are subject to legal restrictions on transfer (including lockup and other contractual restrictions) as of December 31, 2015. As of December 31, 2015, restricted securities held by the Company comprised approximately 71% of the Company’s net assets.

 

(3)Controlled investments are defined by the Investment Company Act of 1940, as amended (the “1940 Act”), as investments in which the Company owns more than 25% of the voting securities or where the Company has the ability to nominate greater than 50% of the board representation. Non-controlled, affiliated investments are defined by the 1940 Act as investments in which the Company owns between 5% and 25% of the voting securities. Unaffiliated investments are defined by the 1940 Act as investments that are neither controlled investments nor non-controlled, affiliated investments.

 

(4)Investment is income producing.

 

(5)Investment is a payment-in-kind (“PIK”) note. Principal and cost includes accumulated PIK interest, which is fixed for the term of the notes. The PIK interest is computed at the contractual rate specified in each note and is added to the principal balance of the note and recorded as interest income as earned. As of December 31, 2015, the Company was accruing PIK interest on each of its payment-in-kind notes, and none of such notes were on non-accrual status.

 

(6)As of December 31, 2015, the Company valued its shares of common stock in Tremor Video based on the closing price on that date.

 

(7)As of December 31, 2015, approximately 99.5% of the Company’s total assets constituted qualifying investments under Section 55(a) of the 1940 Act. Qualifying assets must represent at least 70% of the Company’s total assets at the time of acquisition of any additional non-qualifying assets.

 

 F-10 

 

 

Crossroads Capital, Inc.

Notes to Financial Statements

 

Note 1 - Description of Business

 

Crossroads Capital, Inc. (the “Company”) was incorporated on May 9, 2008 under the laws of the State of Maryland and is an internally managed, non-diversified, closed-end management investment company that has elected to be regulated as a business development company (“BDC”) under the Investment Company Act of 1940, as amended (the “1940 Act”). Effective December 2, 2015, the Company changed its name from BDCA Venture, Inc. to Crossroads Capital, Inc. Effective January 1, 2010, the Company elected to be treated for U.S. federal income tax purposes as a regulated investment company (“RIC”) under Subchapter M of the Internal Revenue Code of 1986, as amended (the “Code”). The Company commenced its portfolio company investment activities in January 2010. The shares of the Company’s common stock have been listed on the Nasdaq Capital Market since December 12, 2011.

 

The Company’s current investment objective (the “Investment Objective”) is to preserve capital and maximize stockholder value by pursuing the sale of the Company’s portfolio investments, limiting expenses and deploying surplus cash as appropriate, including into yielding investments to offset, in part, operating expenses and, as of March 25, 2016, to monetize the Company’s portfolio holdings at the earliest practicable date.

 

On May 3, 2016, the Board approved a Plan of Liquidation (the “Plan”) pursuant to which the Company plans to convert into a liquidating trust with the sole purpose of liquidating the Company’s assets and distributing the proceeds to the Company’s stockholders. The Plan is subject to the approval of the stockholders, which the Board intends to seek at a special meeting called for the purpose of approving the Plan and certain related matters as detailed in the preliminary proxy statement filed with the U.S. Securities and Exchange Commission (the “SEC”) on May 5, 2016, which was subsequently amended on June 27, 2016.

 

The Company is internally managed, although it does receive certain administrative services from 1100 Capital Consulting, LLC (the “Administrator”), including the provision of personnel to act as certain of the Company’s executive officers, including the Chief Executive Officer and Chief Financial Officer.

 

The Company has entered into agreements with MidFirst Bank to be the custodian of its portfolio securities and Frontier Bank to be the custodian of the majority of its cash and cash equivalent assets.

 

Note 2 - Summary of Significant Accounting Policies

 

Basis of Presentation

 

The accompanying financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America, (“U.S. GAAP”).

 

Consolidation

 

The Company’s financial statements include only the accounts of Crossroads Capital, Inc. as the Company has no subsidiaries.

 

Use of Estimates

 

The preparation of financial statements in conformity with U.S. GAAP requires the Company’s management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of income and expenses during the reported period. Such estimates and judgments could change in the future as more information becomes known, and actual results could differ from these estimates and the differences could be material. The Company considers its significant estimates to include the fair value of portfolio company securities and income taxes.

 

Valuation of Investments

 

The Company’s investments generally consist of securities issued by private or publicly traded companies consisting of preferred stock, common stock, convertible notes, secured notes and warrants to purchase preferred stock which are included on the Company’s Schedule of Investments.

 

Investments are stated at value as defined under the 1940 Act, in accordance with the applicable regulations of the U.S. Securities and Exchange Commission (the “SEC”), and in accordance with Financial Accounting Standards Board (“FASB”), Accounting Standards Codification Topic 820, “Fair Value Measurement and Disclosures,” (“ASC 820”). Value, as defined in Section 2(a)(41) of the 1940 Act, is: (i) the market price for those securities for which a market quotation is readily available, and (ii) the fair value as determined in good faith by, or under the direction of, the Board of Directors for all other assets. See Note 3 - Portfolio Investments and Fair Value. The 1940 Act requires periodic valuation of each investment in the Company’s portfolio to determine the Company’s net asset value. Under the 1940 Act, unrestricted securities with readily available market quotations are to be valued at the closing market price on the valuation date; all other assets must be valued at fair value as determined in good faith by or under the direction of the Board of Directors.

 

 F-12 
 

 

Crossroads Capital, Inc.
Notes to Financial Statements

 

Given the nature of investing in the securities of private companies, the Company’s investments are generally considered Level 3 assets under ASC 820 until these portfolio companies become public and begin trading on a stock exchange and the securities are no longer subject to any post-initial public offering lockup restrictions. As such, the Company values all of its investments, other than unrestricted securities in publicly traded portfolio companies, at fair value as determined in good faith by the Company’s Board of Directors, pursuant to a consistent valuation policy in accordance with the provisions of ASC 820 and the 1940 Act.

 

Determination of fair values involves subjective judgments and estimates. Due to the inherent uncertainty in determining the fair value of investments that do not have a readily available market value, the fair value of the Company’s investments determined in good faith by its Board of Directors may differ significantly from the value that would have been used had a ready market existed for such investments and the differences could be material. Changes in fair value of these investments are recorded in the Company’s Statement of Operations as “Net change in unrealized appreciation (depreciation).”

 

The Company has a lead valuation director, who is a non-interested member of the Board of Directors and acts as the liaison between the Board of Directors and the Company’s management for valuing the Company’s investments. With respect to investments for which market quotations are not readily available, the Company’s Board of Directors undertakes a multi-step valuation process each quarter, as described below:

 

On a quarterly basis, each portfolio company will be analyzed based on the portfolio company’s most recently available historical and projected financial results, public market comparables, equity or other transactions and other factors.

 

The Company’s management or an independent valuation firm, if involved, will conduct appraisals and make an assessment of the fair value of each investment, which will be used in deriving a preliminary valuation.

 

The Company’s lead valuation director will review and discuss the preliminary valuations with the Company’s management and the assistance of the independent valuation firm, if any.

 

The Board of Directors will discuss the valuations and determine, in good faith, the fair value of each investment in the portfolio for which market quotations are not readily available based on the input of the Company’s management, the independent valuation firm, if any, and the lead valuation director.

 

For the December 31, 2016 valuation of the Company’s portfolio investments that are not publicly traded, an independent valuation firm assisted the Board of Directors in its determination of the value of three investments in the Company’s portfolio. The Administrator assisted the Board of Directors in its determination of the value of all of the investments in the Company’s portfolio and the funds held in escrow from the sale of investments (“Escrowed Funds”).

 

ASC 820 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (exit price). In accordance with ASC 820, the Company uses a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value as follows:

 

Level 1: Unadjusted quoted prices in active markets for identical assets or liabilities that the Company has the ability to access;

 

Level 2: Observable inputs other than quoted prices included in level 1 that are observable for the asset or liability either directly or indirectly. These inputs may include quoted prices for the identical instrument on an inactive market, prices for similar instruments, interest rates, prepayment speeds, credit risk, yield curves, default rates, and similar data; and

 

Level 3: Unobservable inputs for the asset or liability to the extent that relevant observable inputs are not available, representing the Company’s own assumptions about the assumptions that a market participant would use in valuing the asset or liability, and that would be based on the best information available.

 

In instances where the determination of the fair value measurement is based on inputs from different levels of the fair value hierarchy, the level in the fair value hierarchy within which the entire fair value measurement falls is based on the lowest level input that is significant to the fair value measurement in its entirety.

 

 F-13 
 

 

Crossroads Capital, Inc.
Notes to Financial Statements

 

The Company applies the framework for determining fair value as described above to the valuation of investments in each of the following categories:

 

Equity Investments

 

Equity investments for which market quotations are readily available in an active market are generally valued at the most recently available closing market prices and are classified as Level 1 assets. However, equity investments for which market quotations are readily available, but which are subject to lockup provisions restricting the resale of such investments for a specified period of time, are valued at a discount to the most recently available closing market prices and, accordingly, are classified as Level 3 assets.

 

The fair values of the Company’s equity investments for which market quotations are not readily available are determined based on various factors and are classified as Level 3 assets. To determine the fair value of a portfolio company for which market quotations are not readily available, the Company may analyze the portfolio company’s most recently available historical and projected financial results, public market comparables and other factors. The Company may also consider other events, including the transaction in which the Company acquired its securities, subsequent equity sales by the portfolio company, mergers or acquisitions affecting the portfolio company or the completion of an initial public offering (“IPO”) by the portfolio company. In addition, the Company may consider the trends of the portfolio company’s basic financial metrics from the time of its original investment until the measurement date, with material improvement of these metrics indicating a possible increase in fair value, while material deterioration of these metrics may indicate a possible reduction in fair value. The fair values of the Company’s portfolio company securities are generally discounted for lack of marketability or when the securities are illiquid. See Note 3 - Portfolio Investments and Fair Value.

 

In cases where a portfolio company completes a subsequent financing with different rights and preferences than the equity securities the Company holds, or where the Company owns common stock in a portfolio company with preferred stock outstanding or where a merger or acquisition event involving a portfolio company has been completed or is pending, the Company may consider the aforementioned transaction to estimate the portfolio company’s equity value.

 

In determining the value of equity or equity-linked securities (including warrants to purchase common or preferred stock) in a portfolio company, the Company considers the rights, preferences and limitations of such securities. In cases where a portfolio company’s capital structure includes multiple classes of preferred and common stock and equity-linked securities with different rights and preferences, the Company may use an option pricing model or another appropriate method to allocate value to each equity and equity-linked security.

 

Debt Investments

 

Given the nature of the Company’s current debt investments, principally convertible bridge notes issued by venture capital-backed portfolio companies, these investments are Level 3 assets under ASC 820 because there is no known or accessible market for these investment securities to be traded or exchanged. Since the Company invested in convertible bridge notes for the primary purpose of potential conversion into equity at a future date, the fair value of the Company’s convertible debt investments for which market quotations are not available may be determined on an as-converted to equity basis using the same factors and methodologies the Company uses to value its equity investments. In making a good faith determination of the value of its convertible debt investments, the Company generally starts with the cost basis of the investment, which includes the value attributed to the original issue discount, if any, and payment-in-kind (“PIK”) interest which has been accreted to principal as earned.

 

If the Company determines that there is a low likelihood that its convertible debt investments will be converted into equity or repaid, the Company applies a procedure that assumes a sale of the investment in a hypothetical market to a hypothetical market participant where buyers and sellers are willing participants. The hypothetical market does not include scenarios where the underlying security was simply repaid or extinguished, but includes an exit concept. As part of this process, the Company may evaluate the creditworthiness of the portfolio company, its ability to meet its current debt obligations, the collateral (if any) for recoverability of the debt investment in the event of default and whether the security lien, if any, is subordinated to senior lenders.

 

Portfolio Company Investment Classification

 

The Company classifies its portfolio company investments in accordance with the requirements of the 1940 Act. Under the 1940 Act, “Controlled Investments” are defined as investments in which the Company owns more than 25% of the voting securities or has rights to nominate greater than 50% of the board representation. Under the 1940 Act, “Non-controlled, Affiliated Investments” are defined as investments in which the Company owns between 5% and 25% of the voting securities. Under the 1940 Act, “Unaffiliated Investments” are defined as investments that are neither Controlled Investments nor Non-controlled, Affiliated Investments.

 

 F-14 
 

 

Crossroads Capital, Inc.
Notes to Financial Statements

 

As of December 31, 2016, each of the Company’s ten portfolio company investments were classified as an Unaffiliated Investment. As of December 31, 2015, the Company had eleven portfolio company investments that were classified as an Unaffiliated Investment and had one portfolio company investment classified as a Non-controlled, Affiliated Investment.

 

Cash and Cash Equivalents

 

Cash and cash equivalents include short-term liquid investments in demand deposit accounts and money market funds. Cash and cash equivalents are carried at amortized cost which approximates fair value.

 

The Company may place its cash and cash equivalents with various financial institutions and, at times, cash held in depository accounts at such institutions may exceed the Federal Deposit Insurance Corporation insured limit.

 

Funds Held in Escrow from Sale of Investments

 

Funds held in escrow from the sale of investments are valued at fair value by the Company’s Board of Directors using certain indemnity risk and deferred payment discounts applied to the amounts withheld.

 

Securities Transactions

 

Securities transactions are accounted for on the date the transaction for the purchase or sale of the securities is entered into by the Company. Securities transactions outside conventional channels, such as private transactions, are recorded as of the date the Company obtains the right to demand the securities purchased or to collect the proceeds from a sale, and incurs an obligation to pay for securities purchased or to deliver securities sold, respectively. Cash due from brokers related to sales of securities that had not settled as of the balance sheet date is classified as a receivable for investments sold. Commissions and other costs associated with transactions involving securities, including legal costs, are included in the cost basis of purchases and deducted from the proceeds of sales.

 

Interest and Dividend Income

 

Interest income from certificates of deposit and other short-term investments is recorded on an accrual basis to the extent such amounts are expected to be collected and accrued interest income is evaluated periodically for collectability. PIK interest represents contractually deferred interest computed at a contractual rate specified in the loan agreement. PIK interest may be prepaid by either contract or the portfolio company’s election, but generally is paid at the end of the loan term. PIK interest is added to the principal balance of the loan and is generally recorded as interest income on an accrual basis to the extent such PIK interest is expected to be collected. The Company recorded PIK interest income of $46,896, $39,985 and $66,486, during the years ended December 31, 2016, 2015 and 2014, respectively. See “Income Taxes” below.

 

When one of the Company’s loans becomes more than 90 days past due, or if the Company otherwise does not expect the portfolio company to be able to service its debt and other obligations, the Company will, as a general matter, place the loan on non-accrual status and generally will cease recognizing interest income on that loan until all principal and interest has been brought current through payment or due to a restructuring such that the interest income is deemed to be collectible. However, the Company may make exceptions to this policy if the loan has sufficient collateral value and is in the process of collection. If the fair value of a loan is below cost, the Company may cease recognizing PIK interest on the debt investment until such time that the fair value equals or exceeds cost.

 

Net Realized Gain or Loss and Unrealized Appreciation or Depreciation

 

Net realized gain or loss is recognized when a portfolio company investment or other financial asset is disposed of and is computed as the difference between the Company’s cost basis in such investment or asset at the disposition date and the net proceeds received from such disposition (after reduction for commissions and other selling expenses). Net realized gains and losses on transactions involving portfolio company investments and other financial assets are determined by specific identification. Unrealized appreciation or depreciation is computed as the difference between the fair value of the portfolio company investment or other financial asset and the cost basis of such investment or asset.

 

Income Taxes

 

Effective January 1, 2010, the Company elected to be treated for tax purposes as a RIC under the Code. To maintain RIC tax treatment, the Company must meet specified source-of-income and asset diversification requirements and distribute annually at least 90% of its “investment company taxable income” as defined in the Code.

 

 F-15 
 

 

Crossroads Capital, Inc.
Notes to Financial Statements

 

Due to the Company’s limited number of investments, it closely monitors its asset composition in order to continue to satisfy the asset diversification test and maintain its status as a RIC. To maintain its status as a RIC, in addition to other requirements, as of the close of each quarter end, the Company must meet the asset diversification test, which requires that at least 50% of the value of its assets consist of cash, cash items, U.S. government securities or certain other qualified securities (the “50% Threshold”). However, the failure to meet the 50% Threshold alone will not result in the Company’s loss of RIC status. In circumstances where the failure to meet the 50% Threshold is the result of fluctuations in the value of the Company’s assets, including as a result of the sale of assets, the Company will still be deemed to have satisfied the 50% Threshold and, therefore, maintain its RIC status, provided that the Company has not made any new investments in non-qualifying securities, including additional investments in non-qualifying securities of existing portfolio companies, since the time that the Company fell below the 50% Threshold. The Company satisfied the diversification requirement as of December 31, 2016.

 

As a RIC, the Company generally will not have to pay corporate-level federal income taxes on any investment company taxable income or any realized net capital gains that the Company distributes to its stockholders as dividends. Taxable income generally differs from net income for financial reporting purposes due to temporary and permanent differences in the recognition of income and expenses. In addition, taxable income generally excludes any unrealized appreciation or depreciation.

 

The Company is not required to distribute its realized net capital gains, if any, to stockholders to maintain RIC tax treatment. However, the Company generally will have to pay corporate-level federal income taxes on any realized net capital gains that the Company does not distribute to its stockholders. In the event the Company retains any of its realized net capital gains, the Company may designate the retained amount as a deemed distribution to stockholders and will be required to pay corporate-level tax on the retained amount.

 

The Company would also be subject to certain nondeductible federal excise taxes imposed on RICs if it fails to distribute during each calendar year an amount at least equal to the sum of: (i) 98% of its ordinary income for the calendar year, (ii) 98.2% of its capital gains in excess of capital losses for the calendar year, if any, and (iii) any recognized and undistributed income from prior years for which it paid no federal income taxes. The Company will not be subject to this excise tax on amounts on which the Company is required to pay corporate income tax.

 

Dividends and Distributions

 

Dividends and distributions to common stockholders must be approved by the Company’s Board of Directors and any dividend payable is recorded on the ex-dividend date.

 

The Company may fund cash dividends and distributions to stockholders from any sources of funds available to the Company. The Company has not established limits on the amount of funds it may use from available sources to make dividends or distributions. See Note 8 - Dividends and Distributions.

 

Per Share Information

 

Net changes in net assets resulting from operations per common share, or basic earnings per share, are calculated using the weighted average number of common shares outstanding for the period presented. Diluted earnings per share are not presented as there are no potentially dilutive securities outstanding.

 

Capital Accounts

 

Certain capital accounts including undistributed net investment income or loss, accumulated net realized gain or loss, net unrealized appreciation or depreciation and paid-in capital in excess of par, are adjusted, at least annually, for permanent differences between book and tax. In addition, the character of income and gains to be distributed is determined in accordance with income tax regulations that may differ from U.S. GAAP. U.S. GAAP requires that certain components of net assets relating to permanent differences are to be reclassified between financial statement reporting and tax reporting. These reclassifications have no effect on the net assets or net asset value per share and are intended to enable the Company’s stockholders to determine the amount of accumulated and undistributed earnings they potentially could receive in the future and on which they could be taxed.

 

Recently Issued Accounting Pronouncements

 

From time to time, new accounting pronouncements are issued by FASB or other standards setting bodies that are adopted by the Company as of the specified effective date. Unless otherwise discussed, the Company believes that the impact of recently issued standards that are not yet effective will not have a material impact on its financial statements upon adoption.

 

 F-16 
 

 

Crossroads Capital, Inc.
Notes to Financial Statements

 

Note 3 - Portfolio Investments and Fair Value

 

The following table summarizes the composition of the Company’s portfolio company investments by type of security and Escrowed Funds at cost and fair value as of December 31, 2016 and 2015.

 

   December 31, 2016   December 31, 2015 
Security Type  Cost   Fair Value   Percentage of Portfolio   Cost   Fair Value   Percentage of Portfolio 
Privately Held Portfolio Companies:                              
Preferred Stock  $22,225,681   $8,648,677    93.00%  $32,937,524   $32,976,000    93.06%
Preferred Stock Warrants       191,323    2.06%       420,000    1.19%
Common Stock   10,333,392    155,000    1.67%   6,088,558    80,000    0.23%
Convertible Notes   296,594    45,052    0.48%   265,929    530,000    1.50%
Secured Notes   168,448    164,416    1.77%   121,759    121,759    0.34%
Subtotal - Privately Held Portfolio Companies   33,024,115    9,204,468    98.98%   39,413,770    34,127,759    96.32%
Publicly Traded Portfolio Companies:                              
Common Stock           %   1,999,997    617,998    1.74%
Total Portfolio Company Investments   33,024,115   $9,204,468    98.98%   41,413,767    34,745,757    98.06%
Funds Held in Escrow from Sale of Investment   103,185    94,907    1.02%   704,101    688,082    1.94%
Total Portfolio Company Financial Assets  $33,127,300   $9,299,375    100.00%  $42,117,868   $35,433,839    100.00%

 

The following table categorizes the Company’s portfolio company investments, money market funds and Escrowed Funds measured at fair value based upon the lowest level of significant input used in the valuation of such assets as of December 31, 2016 and 2015:

 

Description  Level 1   Level 2   Level 3   Total Fair Value 
As of December 31, 2016                    
Privately Held Portfolio Company Securities:                    
Preferred Stock  $   $   $8,648,677   $8,648,677 
Preferred Stock Warrants           191,323    191,323 
Common Stock           155,000    155,000 
Convertible Notes           45,052    45,052 
Secured Notes           164,416    164,416 
Cash Equivalents:                    
Money Market Funds   11,315            11,315 
Funds Held in Escrow From Sale of Investment           94,907    94,907 
Total  $11,315   $   $9,299,375   $9,310,960 

 

Description  Level 1   Level 2   Level 3   Total Fair Value 
As of December 31, 2015                    
Privately Held Portfolio Company Securities:                    
Preferred Stock  $   $   $32,976,000   $32,976,000 
Preferred Stock Warrants           420,000    420,000 
Common Stock           80,000    80,000 
Convertible Notes           530,000    530,000 
Secured Notes           121,759    121,759 
Publicly Traded Portfolio Company Securities:                    
Common Stock   617,998            617,998 
Cash Equivalents:                    
Money Market Funds   435,882            435,882 
Funds Held in Escrow From Sale of Investment           688,082    688,082 
Total  $1,053,880   $   $34,815,841   $35,869,721 

 

 F-17 
 

 

Crossroads Capital, Inc.
Notes to Financial Statements

 

The following table provides a reconciliation of the changes in fair value for the Company’s portfolio company investments and Escrowed Funds measured at fair value using significant unobservable inputs (Level 3) for the twelve months ended December 31, 2016:

 

   Level 3
Preferred
Stock
   Level 3
Preferred
Stock
Warrants
   Level 3
Common
Stock
   Level 3
Convertible
Notes
   Level 3
Secured Notes
   Level 3
Funds Held in
Escrow
   Total 
Fair Value as of December 31, 2015  $32,976,000   $420,000   $80,000   $530,000   $121,759   $688,082   $34,815,841 
Purchases and other adjustments to cost of Level 3 portfolio company investments (1)   244,039            30,665    46,689    (600,916)   (273,523)
Sale, exchange or conversion of Level 3 portfolio company investments (2)   (10,181,202)       3,515,000                (6,666,202)

Gross transfers out of Level 3 to Level 1 (2) 

           (181,990)               (181,990)
Total net realized gain   1,264,607                        1,264,607 
Total net change in unrealized appreciation (depreciation)   (15,654,767)   (228,677)   (3,258,010)   (515,613)   (4,032)   7,741    (19,653,358)
Fair Value as of December 31, 2016  $8,648,677   $191,323   $155,000   $45,052   $164,416   $94,907   $9,299,375 
                                    
Total net change in unrealized appreciation (depreciation) on Level 3 portfolio company investments held as of December 31, 2016  $(14,011,721)  $(228,677)  $(3,258,010)  $(515,613)  $(4,032)  $7,741   $(18,010,312)

 

(1)Purchases and other adjustments to cost of Level 3 portfolio company investments include purchases of new investments at cost and payment-in kind interest accreted to principal.

 

(2)Exchanges, conversions and transfers out of Level 3 portfolio company investments and Escrowed Funds are reflected at cost if originally acquired during the period or at the fair value as of the beginning of the period if originally acquired before the beginning of the period. Sales of Level 3 portfolio company investments and settlement of Escrowed Funds are reflected at the net proceeds from such sale or settlement.

 

During the year ended December 31, 2016, the transfers out of Level 3 to Level 1 were the result of the exchange of a portion the Company’s shares of Series F preferred stock and Series D preferred stock held in Suniva, Inc. for shares of Shunfeng International Clean Energy Limited, a Hong Kong Stock Exchange-listed company (“SFCE”) common stock.

 

The following table provides a reconciliation of the changes in fair value for the Company’s portfolio company investments and Escrowed Funds measured at fair value using significant unobservable inputs (Level 3) for the year ended December 31, 2015:

 

   Level 3
Preferred
Stock
   Level 3
Preferred
Stock
Warrants
   Level 3
Common
Stock
   Level 3
Convertible
Notes
   Level 3
Secured Notes
   Level 3
Funds Held in
Escrow
   Total 
Fair Value as of December 31, 2014  $43,060,000   $340,000   $160,000   $450,000   $109,202   $709,568   $44,828,770 
Purchases and other adjustments to cost of Level 3 portfolio company investments (1)               27,428    12,557    (105,210)   (65,225)
Sale, exchange or conversion of Level 3 portfolio company investments (2)   (1,380,000)       1,380,000                 
Gross transfers out of Level 3 to Level 1 (2)                             
Total net realized gain (loss)                            
Total net change in unrealized appreciation (depreciation)   (8,704,000)   80,000    (1,460,000)   52,572        83,724    (9,947,704)
Fair Value as of December 31, 2015  $32,976,000   $420,000   $80,000   $530,000   $121,759   $688,082   $34,815,841 
                                    
Total net change in unrealized appreciation (depreciation) on Level 3 portfolio company investments held as of December 31, 2015  $(8,704,000)  $80,000   $(1,460,000)  $52,572   $   $83,724   $(9,947,704)

 

(1)Purchases and other adjustments to cost of Level 3 portfolio company investments include purchases of new investments at cost and payment-in kind interest accreted to principal.

 

 F-18 
 

 

Crossroads Capital, Inc.
Notes to Financial Statements

 

(2)Exchanges, conversions and transfers out of Level 3 portfolio company investments and Escrowed Funds are reflected at cost if originally acquired during the period or at the fair value as of the beginning of the period if originally acquired before the beginning of the period. Sales of Level 3 portfolio company investments and settlement of Escrowed Funds are reflected at the net proceeds from such sale or settlement.

 

Portfolio Company Investment Activity

 

The Company had the following portfolio company activity during the year ended December 31, 2016.

 

On January 13, 2016, Suniva closed a stock-for-stock merger transaction with Shunfeng International Clean Energy Limited, a Hong Kong Stock Exchange company (“SFCE”), and a global integrated energy provider. As a result, the Company’s 10.022 shares of Series F preferred stock and 197.942 shares of Series D preferred stock were exchanged for 2,844 shares of Suniva Class A common stock and 820,868 shares of SFCE common stock. The Company’s shares of SFCE common stock were subject to a lockup period which expired in February 2016. In August 2016, the Company completed the disposition of its entire position in SFCE, selling 820,686 shares of SFCE common stock in open market transactions for total net proceeds of $110,746, resulting in a net realized loss of $1,198,707.

 

On January 15, 2016, $606,984 was released to the Company from the Xtime escrow without any offset for indemnity claims. As of December 31, 2016, the Company recognized $6,067 in additional proceeds in connection with the expense fund related to Xtime’s merger transaction. These funds continue to be held in escrow and any remaining balance will be distributed on or around November 18, 2017 in accordance with the transaction agreements.

 

On January 20, 2016, the Board of Directors approved and, on January 25, 2016, the Company signed an indication of interest to purchase additional Series B preferred stock in Harvest Power, Inc. as part of a “pay-to-play” extension offering of Series B preferred stock (the “Series B Extension”). On February 17, 2016, the Company purchased 244,039 shares of Series B preferred stock in Harvest Power for a total of $244,039. These newly purchased shares of Series B preferred stock have the same rights and preferences as the Company’s existing Series B preferred stock, with the exception that all of the Company’s Series B preferred stock now has a preferred-to-common conversion ratio of 1-to-1.5 versus 1-to-0.5301 previously. Any Series B stockholder that did not elect to purchase their pro rata share of the Series B Extension was subject to a mandatory conversion of their Series B preferred shares and Series A preferred shares into common stock. As part of this financing, participating stockholders were also offered the opportunity to purchase newly created Series B-1 preferred shares. The Company did not elect to purchase any Series B-1 preferred shares in this offering.

 

On May 17, 2016, the Company completed an investment of $30,459 in BrightSource Energy as part of a rights offering of senior secured promissory notes to certain holders of BrightSource Energy preferred stock and its outstanding promissory notes. Since the Company purchased its pro rata portion in the debt financing, 52,357 shares of Series 1A non-convertible preferred stock were automatically exchanged for 52,357 shares of Series 1 convertible preferred stock. In connection with the debt financing, the maturity date for the July 2014 and August 2014 promissory notes, which were issued to the Company in the initial principal amount of $107,977, and the convertible bridge notes, which were issued to the Company in the initial principal amount of $205,193, was extended to March 31, 2017.

 

In July and August 2016, the Company sold its remaining position in Tremor Video, selling 299,999 shares of Tremor Video common stock in open market transactions for total net proceeds of $582,613, resulting in a net realized loss of $1,417,384.

 

On August 9, 2016, Deem completed an initial closing of its Series CC-1 Preferred Stock financing (the “Series CC-1 Financing”). The Company did not participate in this offering. Pursuant to the Series CC-1 Financing, each share of outstanding preferred stock was automatically converted into common stock (the “Conversion”) and a 20-for-one reverse stock split was effected on all outstanding shares of common stock (the “Reverse Split”). As a result of the Conversion and Reverse Split, the Company’s 929,212 shares of Series AA-1 Convertible Preferred Stock were exchanged into 46,461 shares of Common Stock.

 

On September 15, 2016, Mode Media ceased operations and subsequently announced board approval of the assignment of substantially all the assets of Mode Media to its liquidating agent, Sherwood Partners, Inc., of Mountain View, CA.

 

On November 29, 2016, the Company sold 1,338,302 shares of its Metabolon Series D preferred stock in a secondary market sale for total net proceeds of $3,466,202, resulting in a net realized gain of $1,064,606. The Company continues to own 890,719 shares of Metabolon Series D preferred stock.

 

On December 7, 2016, the Company sold its entire position of 1,084,873 shares of Centrify Series E convertible preferred stock in a secondary market sale for total net proceeds of $3,200,000, resulting in a net realized gain of $200,001.

 

 F-19 
 

 

Crossroads Capital, Inc.
Notes to Financial Statements

  

On August 24, 2016, the Company announced the engagement of Setter Capital, Inc., a Toronto-based secondary market advisory firm, to assist it in identifying prospective buyers for its portfolio investments. During the year ended December 31, 2016, Setter Capital assisted the Company with the sale of its securities in Metabolon and Centrify. Setter Capital continues to assist the Company with the sale of its remaining portfolio investments.

 

Significant Unobservable Inputs for Level 3 Portfolio Company Securities

 

In accordance with ASC 820, the table set forth below provides quantitative information about the Level 3 fair value measurements of the Company’s portfolio company investments and Escrowed Funds as of December 31, 2015. In addition to the approaches and inputs noted in the table below, according to the Company’s valuation policy, the Company may also use other valuation approaches and methodologies when determining the Company’s fair value measurements. The below table is not intended to be all-inclusive, but rather provides information on the significant Level 3 inputs as they relate to the Company’s fair value measurements. To the extent an unobservable input is not reflected in the table below, such input is deemed insignificant or is not applicable with respect to the Company’s Level 3 fair value measurements as of December 31, 2015. Changes in the inputs in isolation could result in a material change in the fair value measurement, depending on the input and the materiality of the investment:

 

    December 31, 2016
Investment Type   Fair Value   Valuation Approaches / Methodologies   Unobservable Input (1)   Range   Weighted Average (2)

Level 3 Portfolio Company Investments: Preferred Stock(3)

  $ 5,985,000   Comparable transactions   Revenue multiple   1.6 to 5.0   3.0
  $ 7,400,000   Option pricing model   Comparable public company equity volatility   30% to 58%   50%
  $ 7,500,000   Comparable public companies   Revenue multiple   0.6 to 4.0   2.3
        EBITDA multiple   9.9 to 10.4   10.2
Level 3 Portfolio Company Investments: Preferred Stock Warrants(3)   $ n/a   Comparable public companies   Revenue multiple   n/a to n/a   n/a
Level 3 Portfolio Company Investments: Common Stock   $ 155,000   Comparable public companies   Revenue multiple   0.6 to 0.6   n/a
      Discount for lack of marketability   23% to 23%   23%
Level 3 Portfolio Company Investments: Convertible Notes and Secured Notes   $ 209,468   Comparable public companies   Revenue multiple   0.6 to 0.6   0.6
Level 3 Funds Held in Escrow From Sale of Investment   $ 94,907   Escrow Discounts   Indemnity risk discount   4% to 4%   4%
      Deferred payment discount   5% to 5%   5%

 

(1)The significant unobservable inputs that may be used in the fair value measurement of the Company’s portfolio company investments in convertible preferred stock, common stock and warrants to purchase common or preferred stock for which market quotations are not readily available include: (i) revenue multiples for comparable transactions, (ii) revenue, earnings before interest, taxes, depreciation and amortization, and price to earnings multiples (collectively, “Multiples”) for comparable public companies, (iii) discount rates and terminal year Multiples for comparable public companies applied in a discounted cash flow analysis of the portfolio company; and (iv) a discount for lack of marketability (“DLOM”). For some portfolio company investments, additional consideration may be given to data from a prior or contemporaneous financing transaction, the last round of financing or a merger or acquisition event near the measurement date (collectively, a “Precedent Transaction”). Inputs used in deriving an appropriate DLOM include the time frame in which the portfolio company expects to pursue or complete an IPO or sale/merger and, where put option models are used to estimate the price of a plain-vanilla, at-the-money put option and the price of an average-strike put option, inputs may include a range of term and volatility assumptions. A change in the assumptions used for Precedent Transactions and Multiples may indicate a directionally similar change in the fair value of the Company’s portfolio company investments in convertible preferred stock or common stock, while a change in the assumptions used for discount rate and DLOM may indicate a directionally opposite change in the fair value of the portfolio company investment.

 

Additional inputs that may be used in an option pricing model when applicable include the volatility of equity in comparable public companies, the risk free interest rate and the estimated time to exit. The significant unobservable input used in an option pricing model for valuing certain of the Company’s portfolio company investments in convertible preferred stock, common stock and preferred and common stock warrants for which market quotations are not readily available is the volatility of equity in comparable public companies. A change in the assumption used for equity volatility may indicate a directionally similar change in the fair value of the convertible preferred stock, common stock and preferred and common stock warrant investments.

 

Since the Company has invested in convertible debt investments, principally convertible bridge notes, for the primary purpose of potential conversion into equity at a future date, the significant unobservable inputs that may be used in the fair value measurement of its convertible debt investments on an as-converted to equity basis are the same inputs used by the Company to value its equity securities (including convertible preferred stock). An option pricing model may also be used to derive the fair value of the conversion feature of convertible notes. If the Company determines that there is a low likelihood that its convertible debt investments will be converted into equity or repaid the significant unobservable inputs that may be used in the fair value measurement of the Company’s convertible debt investments are hypothetical market yields and premiums/(discounts). For non-convertible debt investments, which the Company generally holds for cash payment at maturity, the significant unobservable inputs that may be used in the fair value measurement of the Company’s non-convertible debt are hypothetical market yields and premiums/(discounts). The hypothetical market yield is defined as the exit price of an investment in a hypothetical market to hypothetical market participants where buyers and sellers are willing participants. The premiums (discounts) relate to company specific characteristics such as underlying investment performance, collateral, and other characteristics of the investment. In certain investments, the Company may value its convertible and non-convertible debt investments using a liquidation approach in which case the realizable value of the collateral would be a significant unobservable input.

 

Funds held in escrow from the sale of investments are valued using certain indemnity risk and deferred payment discounts applied to the amounts withheld.

 

 F-20 
 

  

Crossroads Capital, Inc.
Notes to Financial Statements

 

(2)Weighted average based on fair value as of December 31, 2016.

 

(3)As of December 31, 2016, the fair value measurement of the Company’s Level 3 investment in SilkRoad was based on an agreed upon sales price for a secondary market purchase offer of such securities. See Note 14 – Subsequent Events.

 

    December 31, 2015
Investment Type   Fair Value   Valuation Approaches / Methodologies   Unobservable Input (1)   Range   Weighted Average (2)
Level 3 Portfolio Company Investments: Preferred Stock   $ 32,386,000   Option pricing model   Comparable public company equity volatility   40% to 70%   51%
  $ 32,621,000   Comparable public companies   Revenue multiple   1.0 to 6.5   2.8
          EBITDA multiple   7.8 to 7.8   7.8
        Discount for lack of marketability   9% to 29%   13%
  $ 32,386,000   Discounted cash flow   Discount rate   20% to 35%   26%
        Terminal revenue multiple   1.8 to 4.3   3.4
          Terminal EBITDA multiple   6.0 to 6.0   6.0
        Discount for lack of marketability   9% to 29%   13%
Level 3 Portfolio Company Investments: Preferred Stock Warrants   $ 420,000   Option pricing model   Comparable public company equity volatility   40% to 40%   40%
  $ 420,000   Comparable public companies   Revenue multiple   2.3 to 2.8   2.5
          Discount for lack of marketability   6% to 7%   6%
  $ 420,000   Discounted cash flow   Discount rate   25% to 25%   25%
          Terminal revenue multiple   4.0 to 4.0   4.0
        Discount for lack of marketability   6% to 7%   6%
Level 3 Portfolio Company Investments: Common Stock   $ 80,000   Option pricing model   Comparable public company equity volatility   65% to 65%   65%
  $ 80,000   Comparable public companies   Revenue multiple   1.0 to 2.0   1.5
          Discount for lack of marketability   22% to 32%   27%
  $ 80,000   Discounted cash flow   Discount rate   35% to 35%   35%
          Terminal EBITDA multiple   6.0 to 6.0   6.0
          Discount for lack of marketability   22% to 32%   27%
Level 3 Portfolio Company Investments: Subordinated Convertible Bridge Notes and Subordinated Secured Notes   $ 530,000   Option pricing model   Comparable public company equity volatility   65% to 65%   65%
  $ 530,000   Comparable public companies   Revenue multiple   1.0 to 2.0  

1.5

          Discount for lack of marketability   12% to 15%   13%
  $ 530,000   Discounted cash flow   Discount rate   35% to 35%   35%
          Terminal EBITDA multiple   6.0 to 6.0   6.0
          Discount for lack of marketability   12% to 15%   13%
Level 3 Funds Held in Escrow From Sale of Investment   $ 688,082   Escrow Discounts   Indemnity risk discount   4% to 4%   4%
        Deferred payment discount   —% to 10%   5%

 

(1)The significant unobservable inputs that may be used in the fair value measurement of the Company’s portfolio company investments in convertible preferred stock, common stock and warrants to purchase common or preferred stock for which market quotations are not readily available include: (i) revenue multiples for comparable transactions, (ii) revenue, earnings before interest, taxes, depreciation and amortization, and price to earnings multiples (collectively, “Multiples”) for comparable public companies, (iii) discount rates and terminal year Multiples for comparable public companies applied in a discounted cash flow analysis of the portfolio company; and (iv) a discount for lack of marketability (“DLOM”). For some portfolio company investments, additional consideration may be given to data from a prior or contemporaneous financing transaction, the last round of financing or a merger or acquisition event near the measurement date (collectively, a “Precedent Transaction”). Inputs used in deriving an appropriate DLOM include the time frame in which the portfolio company expects to pursue or complete an IPO or sale/merger and, where put option models are used to estimate the price of a plain-vanilla, at-the-money put option and the price of an average-strike put option, inputs may include a range of term and volatility assumptions. A change in the assumptions used for Precedent Transactions and Multiples may indicate a directionally similar change in the fair value of the Company’s portfolio company investments in convertible preferred stock or common stock, while a change in the assumptions used for discount rate and DLOM may indicate a directionally opposite change in the fair value of the portfolio company investment.

 

 F-21 
 

 

Crossroads Capital, Inc.
Notes to Financial Statements

 

Additional inputs used in the option pricing model include the volatility of equity in comparable public companies, the risk free interest rate and the estimated time to exit. The significant unobservable input used in the option pricing model for valuing certain of the Company’s portfolio company investments in convertible preferred stock, common stock and preferred and common stock warrants for which market quotations are not readily available is the volatility of equity in comparable public companies. A change in the assumption used for equity volatility may indicate a directionally similar change in the fair value of the convertible preferred stock, common stock and preferred and common stock warrant investments.

 

Since the Company has invested in convertible debt investments, principally convertible bridge notes, for the primary purpose of potential conversion into equity at a future date, the significant unobservable inputs that may be used in the fair value measurement of its convertible debt investments on an as-converted to equity basis are the same inputs used by the Company to value its equity securities (including convertible preferred stock). An option pricing model may also be used to derive the fair value of the conversion feature of convertible notes. If the Company determines that there is a low likelihood that its convertible debt investments will be converted into equity or repaid the significant unobservable inputs that may be used in the fair value measurement of the Company’s convertible debt investments are hypothetical market yields and premiums/(discounts). For non-convertible debt investments, which the Company generally holds for cash payment at maturity, the significant unobservable inputs that may be used in the fair value measurement of the Company’s non-convertible debt are hypothetical market yields and premiums/(discounts). The hypothetical market yield is defined as the exit price of an investment in a hypothetical market to hypothetical market participants where buyers and sellers are willing participants. The premiums (discounts) relate to company specific characteristics such as underlying investment performance, collateral, and other characteristics of the investment. In certain investments, the Company may value its convertible and non-convertible debt investments using a liquidation approach in which case the realizable value of the collateral would be a significant unobservable input.

 

Funds held in escrow from the sale of investments are valued using certain indemnity risk and deferred payment discounts applied to the amounts withheld.

 

(2)Weighted average based on fair value as of December 31, 2015.

 

As of December 31, 2016 and 2015, 32.4% and 70.8%, respectively, of the Company’s gross assets represented portfolio company investments and Escrowed Funds valued at fair value by the Company’s Board of Directors.

 

Net Realized Gain (Loss) and Net Change in Unrealized Appreciation (Depreciation)

 

The following table summarizes the net realized gain (loss) and net change in unrealized appreciation (depreciation) for the years ended December 31, 2016, 2015 and 2014 for: (i) the Company’s portfolio company investments sold during the years ended December 31, 2016, 2015 and 2014 and (ii) the Company’s portfolio company investments and Escrowed Funds held as of December 31, 2016, 2015 and 2014.

 

    Years Ended  
    December 31, 2016     December 31, 2015     December 31, 2014  
    Net Realized Gain (Loss)     Net Change in Unrealized Appreciation (Depreciation)     Net Realized Gain (Loss)     Net Change in Unrealized Appreciation (Depreciation)     Net Realized Gain (Loss)     Net Change in Unrealized Appreciation (Depreciation)  
Portfolio Company Investments Sold During Period                        
Metabolon, Inc.   $ 1,064,606     $ (1,573,045 )   $     $     $     $  
Centrify Corporation   200,001     (70,001 )                
Shunfeng International Clean Energy Ltd.   (1,198,707 )   1,127,463                  
Tremor Video, Inc.   (1,417,384 )   1,381,999     (1,182,240 )   1,139,004          
Xtime, Inc.   6,067     (487 )   13,930         7,511,947     (2,830,000 )
TrueCar, Inc.                   3,519,048     (720,004 )
Kabam, Inc.                   671,140     (291,140 )
Millennial Media, Inc.           10,864         (348,201 )   (3,074,247 )
Livescribe, Inc.                 (606,186 )   606,186  
Stoke, Inc.                   (3,969,283 )   2,560,000  
Subtotal - Portfolio Company Investments Sold During Period   (1,345,417 )   865,929     (1,157,446 )   1,139,004     6,778,465     (3,749,205 )
Portfolio Company Investments Held at End of Period       (18,017,567 )       (10,274,427 )       (185,444 )
Total Portfolio Company Investments   (1,345,417 )   (17,151,638 )   (1,157,446 )   (9,135,423 )   6,778,465     (3,934,649 )
Funds Held in Escrow from Sale of Investment       7,742         83,724         (99,743 )
Total Portfolio Company Financial Assets   $ (1,345,417 )   $ (17,143,896 )   $ (1,157,446 )   $ (9,051,699 )   $ 6,778,465     $ (4,034,392 )

 

 F-22 
 

 

Crossroads Capital, Inc.
Notes to Financial Statements

 

See the accompanying schedule of investments for the fair value of the Company’s portfolio company investments. The methodology for the determination of the fair value of the Company’s portfolio company investments is discussed in Note 2 - Summary of Significant Accounting Policies.

 

Note 4 - Related Party Agreements and Transactions

 

Administrative Services

 

On November 13, 2015, the Company’s Board of Directors approved the engagement of the Administrator to provide administrative consulting services to the Company, including the provision of personnel to act as certain of the Company’s executive officers, including the Chief Executive Officer and Chief Financial Officer, pursuant to an Administrator Consulting Agreement. For the year ended December 31, 2016 and 2015, the Company incurred $741,000 and $180,000 of expenses related to the Administrator, respectively. As of December 31, 2016 and 2015, the Company had expenses payable to the Administrator of $191,000 and $51,308, respectively.

 

The Administrator furnishes the Company with equipment and clerical services, including responsibility for the financial records which it is required to maintain, and preparing reports to the Company’s stockholders and reports filed with the SEC. In addition, the Administrator assists the Company in monitoring its portfolio accounting and bookkeeping, managing portfolio collections and reporting, performing internal audit services, determining and publishing its net asset value, overseeing the preparation and filing of its tax returns and the printing and dissemination of reports to its stockholders. In addition, the Administrator provides support for the Company’s risk management efforts and generally overseeing the payment of its expenses and the performance of administrative and professional services rendered to the Company by others.

 

Effective December 2, 2015, the Company engaged the services of its Chief Compliance Officer. For the year ended December 31, 2016 and 2015, the Company incurred $59,000 and $4,000 of compliance fees, respectively. The Company also reimbursed BDCA Venture Adviser for the allocable portion of compensation of its Chief Compliance Officer during the year ended December 31, 2015, with such expense included in the payment of administrative expenses allocated from BDCA Venture Adviser for the period. As of December 31, 2016 and 2015, the Company had expenses payable to its Chief Compliance Officer of $5,206 and $4,000, respectively.

 

On November 10, 2015, the Company’s Board of Directors approved the engagement of US Bancorp to provide administration and accounting services to the Company pursuant to an Administration Servicing Agreement and a Fund Accounting Servicing Agreement, respectively. On May 3, 2016, the Board announced the termination of its agreement with US Bancorp, effective as of March 29, 2016. For the year ended December 31, 2016 and 2015, the Company incurred $9,495 and $11,114 of expenses, respectively, related to US Bancorp. As of December 31, 2016 and 2015, the Company had expenses payable to US Bancorp of $0 and $11,114, respectively.

 

Former Investment Advisory and Administrative Services Agreement

 

BDCA Venture Adviser, LLC previously served as the Company’s investment adviser and also provided the Company with administrative services pursuant to the Investment Advisory and Administrative Services Agreement (the “Investment Advisory Agreement”). On October 5, 2015, the Board of Directors approved the termination of the Investment Advisory Agreement between the Company and BDCA Venture Adviser effective as of December 6, 2015 (the “Termination Date”). The Investment Advisory Agreement, which was entered into on July 1, 2014, was approved by the Company’s stockholders at the 2014 Annual Meeting of Stockholders held on June 16, 2014. All payments due under the Investment Advisory Agreement as of the Termination Date were mutually agreed upon between the Company and BDCA Venture Adviser and subsequently paid by the Company.

 

Under the Investment Advisory Agreement, the Company paid BDCA Venture Adviser a fee for its investment advisory services consisting of two components: (i) a base management fee and (ii) an incentive fee.

 

BDCA Venture Adviser earned an incentive fee of $635,241 during the year ended December 31, 2014. This earned incentive fee for the 2014 year was due and payable to BDCA Venture Adviser as of December 31, 2014 and was paid by the Company in March 2015. For the year ended December 31, 2015, BDCA Venture Adviser did not earn any incentive fees with respect to the 2015 year. The Investment Advisory Agreement was not in effect during the year ended December 31, 2016.

 

 F-23 
 

 

Crossroads Capital, Inc.
Notes to Financial Statements

 

For accounting purposes only, the Company was required under U.S. GAAP to accrue a theoretical incentive fee based upon unrealized appreciation at the end of each period while the Investment Advisory Agreement was in effect. The accrual of this theoretical incentive fee assumed all unrealized balances were realized in order to reflect an incentive fee that would theoretically have been payable to BDCA Venture Adviser. No incentive fee was due and payable to BDCA Venture Adviser as of the Termination Date, and, accordingly, the accrued incentive fee payable to BDCA Venture Adviser as of September 30, 2015 was reversed as of the Termination Date. During the years ended December 31, 2015 and 2014, the Company recorded a reduction of theoretical incentive fees of $2,130,443 and $86,445 respectively.

 

The Company also reimbursed BDCA Venture Adviser for the allocable portion of overhead and other expenses incurred by BDCA Venture Adviser in performing its administrative obligations under the Investment Advisory Agreement, including the allocable portion of compensation of the Company’s Chief Financial Officer and Chief Compliance Officer, and their respective staff. The Company reimbursed BDCA Venture Adviser for allocable administrative expenses through the Termination Date at which time BDCA Venture Adviser’s obligation to provide services to the Company ended. For the years ended December 31, 2015 and 2014, the Company incurred $423,628 and $570,074 of administrative expenses allocated from BDCA Venture Adviser, respectively.

 

BDCA Venture Adviser agreed that, to the extent that the Company’s Adjusted Operating Expenses (as defined below) in 2015 exceeded $1,500,000 (the “Excess Amount”), BDCA Venture Adviser would, without recourse against or reimbursement by the Company, waive Reimbursable Expenses (as defined below) due and owing by the Company and/or pay on behalf of the Company certain Adjusted Operating Expenses, in such amounts so that the total of the waived Reimbursable Expenses and expenses paid by BDCA Venture Adviser on behalf of the Company equaled the Excess Amount. “Adjusted Operating Expenses” was defined as the Company’s total operating expenses less Base Fees, incentive fees, any stock issuance costs, any costs related to borrowings by the Company (including any interest and fees), any litigation costs, expenses or fees and any extraordinary expenses. For purposes of clarity, any operating expenses incurred by BDCA Venture Adviser and reimbursable by the Company with respect to 2015 (“Reimbursable Expenses”) are included in Adjusted Operating Expenses.

 

For accounting purposes, during the year ended December 31, 2015, the Company recorded quarterly amounts due from BDCA Venture Adviser, representing the amount by which its Adjusted Operating Expenses for each quarter exceeded the prorated amount of the annualized $1,500,000 Adjusted Operating Expense threshold for such quarter. In connection with the termination of the Investment Adviser Agreement, the Excess Amount and Adjusted Operating Expenses were calculated based on the eleven month period ended November 30, 2015. There were no expenses waived or reimbursed from BDCA Venture Adviser as of the Termination Date, and, accordingly, the amount due from BDCA Venture Adviser as of September 30, 2015 was reversed as of the Termination Date. No such agreement existed for the year ended December 31, 2014.

 

Services Provided by Related Parties

 

RCS Advisory Services, LLC (“RCS Advisory”), an affiliated entity of BDCA Venture Adviser, previously provided the Company with legal services, website design and maintenance, and investor relations services. RCS Advisory no longer provides the Company with services. For the year ended December 31, 2015, the Company incurred $1,755 of legal services, $1,733 of website design and maintenance and $17,955 of investor relations services provided by RCS Advisory. For the year ended December 31, 2014, the Company incurred $75,119 of legal services, $26,375 of website design and maintenance and $20,000 of investor relations services provided by RCS Advisory.

 

Joint Liability Insurance Agreement

 

For the policy year ended August 28, 2016, 10% of the total D&O Policy premium and 10% of the total Excess Policy premium was allocated to and paid by BDCA Venture Adviser pursuant to a joint liability insurance agreement with BDCA Venture Adviser which allocated the premium cost of the Company’s directors and officers liability insurance policy and the Company’s excess coverage policy between the Company and BDCA Venture Adviser.

 

On August 28, 2016, the Company renewed its directors and officers liability insurance policy and its excess liability policy for another policy year ending August 28, 2017 but no portion of the premium was paid by, or reimbursed by, BDCA Venture Adviser. The Company also acquired an additional excess liability policy. The continuing directors and officers policy covers the Company’s directors, officers, and other specified parties, insures the Company against loss that it may be required or permitted to pay as indemnities of the Company’s directors and officers, and insures the Company for certain securities claims. The two excess liability policies provide for excess coverage to the Company’s officers and directors in the case of non-indemnifiable claims. To the extent the officers, managers and employees of BDCA Venture Adviser bring a contractual claim for indemnification against the Company pursuant to the former Investment Advisory Agreement, the directors and officers liability insurance policy and one of the two excess liability policies would cover such claims.

 

 F-24 
 

 

Crossroads Capital, Inc.
Notes to Financial Statements

 

Other Transactions with Related Parties

 

On March 25, 2016, the Audit Committee of the Company’s Board of Directors approved the reimbursement of $125,157 in legal and proxy solicitation costs incurred by Bulldog Investors, LLC (“Bulldog”), a stockholder and beneficial owner of more than 5% of the Company’s outstanding common stock, as a result of the contested proxy campaign in connection with the Company’s 2015 Annual Meeting of Stockholders (“Annual Meeting”). This reimbursement was paid to Bulldog on March 30, 2016 and included the costs of Bulldog’s litigation against the Company in the Circuit Court of Maryland and the New York Supreme Court and costs associated with the proxy process and the election of the Company’s new Board of Directors.

 

The Audit Committee of the Company’s Board of Directors is required to review and approve any transactions with related parties (as such term is defined in Item 404 of Regulation S-K).

 

Note 5 - Equity Offerings and Related Costs

 

During the year ended December 31, 2016, the Company did not issue any new shares of its common stock.

 

Note 6 - Stock Repurchases

 

On November 10, 2015, the Board authorized a stock repurchase program of up to $1 million for a six month period to expire on May 10, 2016. On January 20, 2016, the Board approved an amendment to this stock repurchase program to allow for greater flexibility, by narrowing the current “blackout” period during which the Company is prohibited from purchasing shares, and increasing the size of the program from $1 million to $2 million. On May 9, 2016, the Board authorized an extension of the Company’s stock repurchase program for an additional six months to expire on November 10, 2016. On November 7, 2016, the Board authorized a further extension of the Company’s stock repurchase program for an additional six months to expire on May 10, 2017. Under the repurchase program, the Company is authorized to repurchase shares of its common stock in open market transactions, including through block purchases, depending on prevailing market conditions and other factors. This stock repurchase program may be extended, modified or discontinued at any time for any reason. Furthermore, the repurchase program does not obligate the Company to acquire any specific number of shares and all repurchases will be made in accordance with SEC Rule 10b-18, which sets certain restrictions on the method, timing, price and volume of stock repurchases.

 

During the year ended December 31, 2016, the Company repurchased 113,354 shares of its common stock at an average price of $2.08 per share, including commissions, with a total cost of $235,577. The Company retired all 113,354 shares of its repurchased common stock during the year ended December 31, 2016, with $113 of the total cost of the retired shares charged to common stock and $235,464 charged to additional paid-in capital. The Company’s net asset value per share increased by $0.02 per share as a result of the repurchased shares during the year ended December 31, 2016. The weighted average discount to net asset value per share of the shares repurchased during the year ended December 31, 2016 was 41%.

 

During the year ended December 31, 2015, the Company repurchased 117,510 shares of its common stock at an average price of $4.96 per share, including commissions, for a total cost of $582,468. The Company retired all 117,510 shares of its repurchased common stock during the year ended December 31, 2015, with $118 of the total cost of the retired shares charged to common stock and $582,350 charged to additional paid-in capital. The Company’s net asset value per share increased by $0.02 per share as a result of the shares repurchased during the year ended December 31, 2015. The weighted average discount to net asset value per share of the shares repurchased during the year ended December 31, 2015 was 24%.

 

The Company accounted for the repurchases of its common stock under the cost method based on the actual cost of the repurchases.

 

Note 7 - Dividends and Distributions

 

Distributions to the Company’s stockholders are payable only when and as declared by the Company’s Board of Directors and are paid out of assets legally available for distribution.

 

 F-25 
 

 

Crossroads Capital, Inc.
Notes to Financial Statements

 

The Company did not declare any distributions to stockholders during the year ended December 31, 2016. The following table summarizes the Company’s dividends declared for the year ended December 31, 2015:

 

Date Declared   Record Date   Payment Date     Dividend Per Share   Source of Distribution  
2015 Dividends:                      
March 26, 2015   April 15, 2015   April 29, 2015   $ 0.15     Return of Capital  
March 26, 2015   June 11, 2015   June 25, 2015     0.15     Return of Capital  
March 26, 2015   September 11, 2015   September 25, 2015     0.15     Return of Capital  
March 26, 2015   December 4, 2015   December 18, 2015     0.15     Return of Capital  
 Total – 2015 Dividends         0.60        

 

Distributions to its stockholders, if any, will be out of assets legally available for distribution, as determined by the Board of Directors, with the intention of distributing up to 100% of the proceeds from the sale of the Company’s portfolio investments.

 

On March 25, 2016, the Company’s Board of Directors adopted a distribution policy with the objective to make special distributions to stockholders as declared by the Board of Directors in its discretion. Based on the Board of Directors’ recent change to the Company’s investment objective to preserve capital and maximize stockholder value and resolution to monetize the Company’s portfolio holdings at the earliest practicable date, the Company will no longer pay regular quarterly distributions to its stockholders.

 

If the Company’s distributions for any year exceed the Company’s net investment income and net realized capital gains, the difference will be distributed from the Company’s capital and will constitute a return of capital to its stockholders.

 

In the event the Company retains some or all of its realized net capital gains, the Company may designate the retained amount as a deemed distribution to stockholders. In such case, among other consequences, the Company will pay corporate-level tax on the retained amount, each U.S. stockholder will be required to include its share of the deemed distribution in income as if it had been actually distributed to the U.S. stockholder and the U.S. stockholder will be entitled to claim a credit or refund equal to its allocable share of the corporate-level tax the Company pays on the retained realized net capital gain.

 

For income tax purposes, distributions paid to stockholders are reported as ordinary income, return of capital, long-term capital gains or a combination thereof.

 

The Company maintains a dividend reinvestment plan (“DRIP”) that provides for the reinvestment of dividends on behalf of its stockholders, unless a stockholder has elected to receive dividends in cash. As a result, if the Company declares a dividend, stockholders who have not “opted out” of the DRIP by the dividend record date will have their dividend automatically reinvested into additional shares of common stock. Although the Company has a number of options to satisfy the share requirements of the DRIP, it currently expects that the shares required to be purchased under the DRIP will be acquired through open market purchases of common stock by the DRIP administrator. The shares purchased in the open market to satisfy the DRIP requirements will be valued based upon the average price of the applicable shares purchased by the DRIP administrator.

 

Note 8 - Commitments and Contingencies

 

In the normal course of business, the Company may enter into investment agreements under which it commits to make an investment in a portfolio company at some future date or over a specified period of time. As of December 31, 2016, the Company had not entered into any investment agreements which required it to make a future investment in a portfolio company.

 

On October 15, 2015, Suniva completed a stock-for-stock merger transaction with SFCE. Pursuant to the merger agreement, the Company is required to indemnify SFCE for certain breaches of warranties and representations made to SFCE, subject to a cap of approximately 12.5% of the merger consideration received by the Company. Any damages payable by the Company would be settled through an adjustment to the number of shares of common stock in the surviving company held by the Company and/or SFCE.

 

On November 18, 2014, Xtime, Inc., a private portfolio company, completed an all-cash merger transaction with Cox Automotive, Inc. At the closing of the merger, the Company was required to set aside $809,311 in escrow as partial security for potential stockholder indemnification obligations under the merger agreement. The $809,311 represents additional cash proceeds that may be released to the Company at a later date subject to potential indemnity claims. On January 13, 2015, Escrowed Funds totaling $105,210 were released to the Company from the Xtime escrow without any offset for indemnity claims. On January 15, 2016, Escrowed Funds totaling $606,984 were released to the Company from the Xtime escrow without any offset for indemnity claims. As of December 31, 2016, the Company recognized $6,067 in additional proceeds in connection with the expense fund related to Xtime’s merger transaction. The remaining Escrowed Funds are anticipated to be released in November 2017, net of settlement of any indemnity claims. As of December 31, 2016, the Escrowed Funds were fair valued at $94,907. Although recovery under the stockholder indemnity obligation is generally limited to the escrow fund, the Company may be liable for its pro rata amount of any damages for certain types of indemnity claims not to exceed the cash consideration received by the Company, provided, however, in the case of the Company’s fraud or intentional misrepresentation, there is no limitation on liability. Except as discussed above, the Company has not been notified of any stockholder indemnity claims.

 

 F-26 
 

 

Crossroads Capital, Inc.
Notes to Financial Statements

 

The Company maintains a directors and officers liability insurance policy and two excess liability policies, which provide liability insurance coverage for its officers, directors and other specified parties. The Company has also agreed to indemnify its directors and officers to the maximum extent permitted by Maryland law subject to the restrictions in the 1940 Act.

 

Under the former Investment Advisory Agreement, absent the willful misfeasance, bad faith or gross negligence of BDCA Venture Adviser or BDCA Venture Adviser’s reckless disregard of its duties and obligations, the Company has agreed to indemnify BDCA Venture Adviser (including its officers, managers, agents, employees and members) for any damages, liabilities, costs and expenses (including reasonable attorneys’ fees and amounts reasonably paid in settlement) arising out of BDCA Venture Adviser’s performance of its duties and obligations under the Investment Advisory Agreement, except to the extent specified in the 1940 Act. Pursuant to the former Investment Advisory Agreement, the indemnification provision shall remain in full force and effect, and BDCA Venture Adviser shall remain entitled to the benefits thereof, notwithstanding termination of the Investment Advisory Agreement.

 

As of December 31, 2016, the Company was not a party to any material legal proceedings. However, from time to time, the Company may be party to certain legal proceedings incidental to the normal course of its business including the enforcement of its rights under contracts with its portfolio companies.

 

Note 9 - Changes in Net Assets Per Share

 

The following table sets forth the computation of the basic and diluted per share net increase (decrease) in net assets resulting from operations for the years ended December 31, 2016, 2015 and 2014:

 

   Years Ended 
   December 31, 2016   December 31, 2015   December 31, 2014 
  Net increase (decrease) in net assets resulting from operations  $(20,379,913)  $(11,499,140)  $(936,832)
  Basic and diluted weighted-average shares outstanding   9,627,958    9,739,237    9,729,764 
Basic and diluted net (decrease) increase in net assets per share resulting from operations  $(2.12)  $(1.18)  $(0.10)

 

During the years ended December 31, 2016, 2015 and 2014, the Company had no dilutive securities outstanding.

 

Note 10 - Financial Highlights

 

The following is a schedule of financial highlights for the years ended December 31, 2016, 2015, 2014, 2013 and 2012.

 

 F-27 
 

 

Crossroads Capital, Inc.

Notes to Financial Statements

 

   Years Ended 
   December 31, 2016   December 31, 2015   December 31, 2014   December 31, 2013   December 31, 2012 
Per common share data                    
Net asset value, beginning of period  $5.06   $6.82   $7.65   $8.00   $8.23 
                          
Net investment loss (1)(2)   (0.20)   (0.13)   (0.38)   (0.59)   (0.44)
Net realized gain (loss) on investments (1)   (0.14)   (0.12)   0.70    0.49    0.03 
Net increase (decrease) in unrealized appreciation on investments and funds held in escrow from sale of investment (1)   (1.78)   (0.93)   (0.42)   0.35    0.20 
Net increase (decrease) in net assets resulting from operations   (2.12)   (1.18)   (0.10)   0.25    (0.21)
                          
Stockholder distributions:                         
Distributions from net realized gains           (0.70)   (0.49)   (0.03)
Distributions as a return of capital       (0.60)            
Net decrease in net assets resulting from stockholder distributions       (0.60)   (0.70)   (0.49)   (0.03)
                          
Capital stock transactions:                         
Issuance of common stock (3)           (0.06)   (0.15)    
Offering costs from issuance of common stock (1)               (0.04)    
Repurchases of common stock (4)   0.02    0.02    0.03    0.08    0.01 
Net increase (decrease) in net assets from capital stock transactions   0.02    0.02    (0.03)   (0.11)   0.01 
                          
Net asset value, end of period  $2.96   $5.06   $6.82   $7.65   $8.00 
                          
Ratios and supplemental data:                         
Per share market price, end of period  $2.13   $3.21   $4.89   $6.15   $6.27 
Total return based on change in net asset value (5)   (41.50)%   (18.49)%   (1.87)%   1.67%   (2.43)%
Total return based on stock price (6)   (33.64)%   (24.96)%   (9.71)%   5.23%   (25.52)%
Common shares outstanding, end of period   9,563,130    9,676,484    9,793,994    9,548,902    9,174,785 
Weighted average common shares outstanding during period   9,627,958    9,739,237    9,729,764    9,033,267    9,198,016 
Net assets, end of period  $28,299,569   $48,915,059   $66,833,537   $73,039,470   $73,412,940 
Ratio of operating expenses to average net assets (7)   5.74%   2.25%   5.36%   7.45%   5.39%
Ratio of net investment loss to average net assets (7)   (5.25)%   (2.17)%   (5.26)%   (7.39)%   (5.39)%
Weighted average debt per common share (8)  $   $   $0.07   $   $ 
Portfolio turnover (9)   20.46%   1.42%   34.60%   20.73%   2.47%

 

(1)Based on weighted average shares outstanding during the period. For purposes of this presentation, the per share amount attributable to net increase (decrease) in unrealized appreciation on investments and funds held in escrow from sale of investment for the years ended December 31, 2014 and 2013 was decreased by $0.01 per share to $(0.42) and $0.35, respectively, to reconcile the net increase (decrease) in net assets resulting from operations per share to the other per share information presented.

 

(2)For the year ended December 31, 2014, net investment loss per share excluding the waiver of base management fee expense by BDCA Venture Adviser equaled $0.39. There was no waiver of base management fee expense by BDCA Venture Adviser for the years ended December 31, 2015, 2013, 2012, and 2011. See Note 4 – Related Party Agreements and Transactions.

 

(3)Issuance of common stock for the year ended December 31, 2014 is based on the payment of the Company’s distributions made in shares of the Company’s common stock during the period and represents the dilutive effect of issuing common stock below net asset value per share during the period. However, for purposes of this presentation, the per share amount attributable to the dilutive effect of issuing common stock below net asset value per share was reduced from $(0.07) per share to $(0.06) per share to reconcile the change in net asset value per share to the other per share information presented. Issuance of common stock for the year ended December 31, 2013 is based on the change in net asset value attributable to the rights offering on December 17, 2013.

 

(4)Represents the increase in net asset value attributable to repurchases of common stock during the period. The increase in net asset value per share attributable to repurchases of common stock for the year ended December 31, 2013 was $0.05 per share. However, for purposes of this presentation, the per share amount attributable to purchases of common stock was increased by $0.03 per share to a total of $0.08 per share to reconcile the change in net asset value per share to the other per share information presented.

 

 F-28 

 

 

Crossroads Capital, Inc.

Notes to Financial Statements

 

(5)Total return based on change in net asset value equals the change in the end of the period net asset value over the beginning of the period net asset value plus distributions during the period, divided by the beginning of the period net asset value.

 

(6)For the years ended December 31, 2015, 2014, 2013 and 2012, total return based on stock price is calculated based on the change in the market price of the Company’s shares taking into account distributions reinvested in accordance with the Company’s dividend reinvestment plan, or lacking such plan, at the lesser of net asset value or market price per share on the dividend distribution date.

 

(7)Because the ratios are calculated for the Company’s common stock taken as a whole, an individual investor’s ratios may vary from these ratios. For the year ended December 31, 2014, the ratios of operating expenses and net investment loss to average net assets excluding the waiver of base management fee expense by BDCA Venture Adviser were 5.50% and (5.40%), respectively. There was no waiver of base management fee expense by BDCA Venture Adviser for the years ended December 31, 2015, 2013, 2012, and 2011. See Note 4 – Related Party Agreements and Transactions.

 

(8)For the year ended December 31, 2014, weighted average debt per common share is calculated as the weighted average debt during the period divided by the weighted average shares outstanding during the period. During the years ended December 31, 2016, 2015, 2013 and 2012, the Company did not have any debt.

 

(9)Portfolio turnover is calculated as net proceeds from the sale of portfolio company investments during the period divided by average quarterly net assets during the period.

 

Note 11 - Income Taxes

 

The Company did not have any net realized capital gains for the year ended December 31, 2016 and 2015. The Company distributed 100% of its net realized capital gains for the year ended December 31, 2014. Therefore, no corporate-level federal income or excise taxes were due on such net realized capital gains and, as such, the Company did not make any provision for federal income or excise taxes as of December 31, 2016, 2015 and 2014.

 

The following table reconciles the Company’s net (decrease) increase in net assets resulting from operations for the years ended December 31, 2016, 2015 and 2014 to the Company’s ordinary loss for tax purposes for such years. As a RIC, the Company’s ordinary loss for tax purposes cannot be carried forward to subsequent years and therefore no deferred tax asset has been recorded in relation to the ordinary loss for tax purposes. For book purposes, the ordinary loss for tax purposes (excluding the permanent book-to-tax difference) is reclassified to additional paid-in capital at year-end.

 

   For the Year Ended 
   December 31, 2016   December 31, 2015   December 31, 2014 
Net (decrease) increase in net assets resulting from operations (per U.S. GAAP)  $(20,379,913)  $(11,499,140)  $(936,832)
Change in net unrealized appreciation   17,143,896    9,051,699    4,034,392 
Net capital (gain) loss   1,345,417    1,157,446    (6,778,371)
Net investment loss (per GAAP)  $(1,890,600)  $(1,289,995)  $(3,680,811)
Permanent book-to-tax differences   153    220    6,391 
Temporary book-to-tax difference (theoretical incentive fees)       (2,130,443)   (86,445)
Ordinary loss for tax purposes  $(1,890,447)  $(3,420,218)  $(3,760,865)
Less: Permanent book-to-tax differences   153    220    6,391 
Ordinary loss for tax purposes reclassified to additional paid-in capital(1)  $(1,890,600)  $(3,420,438)  $(3,767,256)

 

(1)Represents the Company’s net investment loss before accrual of theoretical incentive fees which is a temporary book-to-tax difference.

 

 F-29 

 

 

Crossroads Capital, Inc.

Notes to Financial Statements

 

The net unrealized appreciation and the aggregate cost of the Company’s portfolio company investments and Escrowed Funds for federal income tax purposes as of December 31, 2016 and 2015 were as follows:

 

   December 31, 2016   December 31, 2015 
Aggregate cost for federal income tax purposes: (1)          
Portfolio company investments  $33,024,115   $41,413,767 
Funds held in escrow from sale of investment   103,185    704,101 
Total aggregate cost for federal income tax purposes of portfolio company financial assets  $33,127,300   $42,117,868 
           
Gross unrealized appreciation on portfolio company investments  $1,386,597   $6,912,217 
Gross unrealized depreciation on portfolio company investments   (25,206,244)   (13,580,227)
Gross unrealized depreciation on funds held in escrow from sale of investment   (8,278)   (16,019)
Net unrealized appreciation (depreciation) of portfolio company financial assets  $(23,827,925)  $(6,684,029)

 

(1)Includes cumulative PIK interest accreted to principal.

 

As of December 31, 2016 and 2015, the Company had no undistributed ordinary income or undistributed long-term capital gains for federal income tax purposes. As of December 31, 2016 and 2015, the Company had long term capital loss carryforwards with no expiration date of $2,502,863 and $1,157,446, respectively, for federal income tax purposes.

 

The Company evaluates tax positions taken or expected to be taken in the course of preparing its tax returns to determine whether the tax positions are “more-likely-than-not” of being sustained by the applicable tax authority. Tax positions deemed to meet a “more-likely-than-not” threshold would be recorded as a tax benefit or expense in the applicable period. Although the Company files federal and state tax returns, its major tax jurisdiction is federal. The 2013, 2014, 2015 and 2016 federal tax years for the Company remain subject to examination by the Internal Revenue Service. The 2013, 2014 and 2015 state tax years for the Company remain subject to examination by the Colorado Department of Revenue. The 2015 state tax year for the Company remains subject to examination by the New York Department of Revenue. The 2015 and 2016 state tax years for the Company remain subject to examination by the Nebraska Department of Revenue.

 

As of December 31, 2016 and December 31, 2015, the Company had not recorded a liability for any unrecognized tax positions. Management’s evaluation of uncertain tax positions may be subject to review and adjustment at a later date based upon factors including, but not limited to, an on-going analysis of tax laws, regulations and interpretations thereof. The Company’s policy is to include interest and penalties related to income taxes, if applicable, in general and administrative expenses. There were no such expenses for the years ended December 31, 2016, 2015 and 2014.

 

Note 12 - Investments in and Advances to Affiliates

 

During the year ended December 31, 2016, the Company had one portfolio company investment, Metabolon, which was a Non-controlled, Affiliated Investment and the Company had no Controlled Investments. On November 29, 2016, the Company sold 1,338,302 shares of its Metabolon Series D preferred stock in a secondary market sale for total net proceeds of $3,466,202, resulting in a net realized gain of $1,064,606. The Company continues to own 890,719 shares of Metabolon Series D preferred stock, however, as of December 31, 2016, the Company’s investment in Metabolon no longer meets the definition of a Non-controlled, Affiliated Investment. During the year ended December 31, 2016, the Company made no advances to this affiliate. The following is a schedule of the Company’s activity in this affiliate for the year ended December 31, 2016.

 

      Year Ended December 31,
2016
                
Portfolio Company  Investment Description  Amount of
Interest and Dividends
Credited to
Income (1)
  December 31, 2015 Fair Value  Gross
Additions (2)
  Gross
Reductions (3)
  December 31, 2016 Fair Value  Net Realized
Gain (Loss)
 
Metabolon, Inc.  Series D Convertible Preferred Stock(4)  $  $6,620,000  $  $(3,935,000) $2,685,000  $1,064,606 

 

(1)Non-controlled, Affiliated investments consist of convertible preferred stock, common stock and common stock warrants that are generally non-income producing and restricted. The convertible preferred stock investment carries a non-cumulative, preferred dividend payable when and if declared by the portfolio company’s board of directors. Since no dividends have been declared or paid, or are expected to be declared or paid, with respect to this convertible preferred stock investment, this investment is considered to be non-income producing.

 

 F-30 

 

 

Crossroads Capital, Inc.

Notes to Financial Statements

 

(2)Gross additions include increases in investments resulting from new portfolio company investments, paid-in-kind interest or dividends, and exchange of one or more existing securities for one or more new securities. Gross additions also include net decreases in unrealized depreciation or net increases in unrealized appreciation.

 

(3)Gross reductions include decreases in investments resulting from sales and the exchange of one or more existing securities for one or more new securities. Gross reductions also include net increases in unrealized depreciation or net decreases in unrealized appreciation.

 

(4)As of December 31, 2016, the Company’s investment in Metabolon no longer meets the definition of a Non-controlled, Affiliated Investment.

 

As of December 31, 2015, the Company had one portfolio company investment, Metabolon, which was a Non-controlled, Affiliated Investment and the Company had no Controlled Investments. During the year ended December 31, 2015, the Company made no advances to this affiliate. The following is a schedule of the Company’s activity in this affiliate for the year ended December 31, 2015.

 

      Year Ended December
31, 2015
             
Portfolio Company  Investment Description 

Amount of

Interest and Dividends
Credited to
Income (1)

  December 31,
2014 Fair Value
  Gross
Additions (2)
  Gross
Reductions (3)
  December 31, 2015 Fair Value 
Metabolon, Inc.  Series D Convertible Preferred Stock  $  $7,790,000  $  $(1,170,000) $6,620,000 

 

(1)Non-controlled, Affiliated investments consist of convertible preferred stock, common stock and common stock warrants that are generally non-income producing and restricted. The convertible preferred stock investment carries a non-cumulative, preferred dividend payable when and if declared by the portfolio company’s board of directors. Since no dividends have been declared or paid, or are expected to be declared or paid, with respect to this convertible preferred stock investment, this investment is considered to be non-income producing.

 

(2)Gross additions include increases in investments resulting from new portfolio company investments, paid-in-kind interest or dividends, and exchange of one or more existing securities for one or more new securities. Gross additions also include net decreases in unrealized depreciation or net increases in unrealized appreciation.

 

(3)Gross reductions include decreases in investments resulting from sales and the exchange of one or more existing securities for one or more new securities. Gross reductions also include net increases in unrealized depreciation or net decreases in unrealized appreciation.

 

Note 13 - Selected Quarterly Financial Data (Unaudited)

 

The following tables set forth certain quarterly financial information for each of the last eight quarters ended December 31, 2016. This information was derived from the Company’s unaudited financial statements. Results for any quarter are not necessarily indicative of results for the full year or for any further quarter.

 

    Investment Income   Net Investment Income (Loss)   Net Realized Gain (Loss)   Net Change in Unrealized Appreciation (Depreciation)   Net Increase (Decrease) in Net Assets from Operations 
Quarter Ended   Total   Per
Share (1)
   Total   Per
Share (1)
   Total   Per
Share (1)
   Total   Per
Share (1)
   Total   Per
Share (1)
 
March 31, 2016   $42,824   *   $(579,088)  $(0.06)  $   $   $(7,250,737)  $(0.75)  $(7,829,825)  $(0.81)
June 30, 2016    42,388   *    (388,803)   (0.04)           (9,427,003)   (0.98)   (9,815,806)   (1.02)
September 30, 2016    43,144   *    (296,089)   (0.03)   (2,616,091)   (0.27)   

2,401,558

   

0.25

   (510,622)   (0.05)
December 31, 2016    46,960   *    (626,620)   (0.07)   1,270,674    0.13    (2,867,714   (0.30   (2,223,660)   

(0.24

)
                                                   
March 31, 2015   $10,710   *   $(629,826)  $(0.06)  $20,108   $*    $(518,890)  $(0.05)  $(1,128,608)  $(0.11)
June 30, 2015    10,694   *    (1,062,341)   (0.11)   (1,182,240)   (0.12)   958,157    0.10    (1,286,424)   (0.13)
September 30, 2015    10,621   *    335,992    0.03            (5,336,179)   (0.55)   (5,000,187)   (0.51)
December 31, 2015    16,406   *    66,180    0.01    4,686    *    (4,154,787)   (0.43)   (4,083,921)   (0.42)
   
*Per share amounts less than $0.01.

 

(1)Per share amounts are calculated using weighted average shares outstanding during the quarterly period.

 

 F-31 

 

 

Crossroads Capital, Inc.

Notes to Financial Statements

 

Note 14 - Subsequent Events

 

In preparing these financial statements, the Company has evaluated events after December 31, 2016. Except as set forth below, there were no subsequent events since December 31, 2016 that would require adjustment to or additional disclosure in these financial statements.

 

Portfolio Company Activity

 

On March 29, 2017, the Company sold its entire investment in SilkRoad, which was acquired before the present Board of Directors was elected, consisting of 6,361,938 shares of Series D-1 convertible preferred stock, 19,132,283 shares of Series D-2 convertible preferred stock and 1,683,460 Series D-1 preferred stock warrants. The transaction was a secondary market sale for total net proceeds of $1,340,000, resulting in a net realized loss of $4,997,785.

 

 F-32 

 

 

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

 

None.

 

Item 9A. Controls and Procedures

 

Evaluation of Disclosure Controls and Procedures

 

As of December 31, 2016 (the end of the period covered by this annual report), we, including our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) of the 1934 Act). Based on that evaluation, our management, including our Chief Executive Officer and Chief Financial Officer, concluded that our disclosure controls and procedures were effective and provided reasonable assurance that information required to be disclosed in our periodic SEC filings is recorded, processed, summarized and reported within the time periods specified in the SECs rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. However, in evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated can provide only reasonable assurance of achieving the desired control objectives, and management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

 

Management’s Report on Internal Control over Financial Reporting

 

Management is responsible for establishing and maintaining adequate internal control over financial reporting, and for performing an assessment of the effectiveness of internal control over financial reporting as of December 31, 2016. Internal control over financial reporting is a process designed by, or under the supervision of, our principal executive and principal financial officers, or persons performing similar functions, and effected by our Board of Directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Our internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures are being made only in accordance with authorizations; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of our assets that could have a material effect on the financial statements.

 

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation.

 

Management performed an assessment of the effectiveness of our internal control over financial reporting as of December 31, 2015 based upon the criteria set forth in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission in May 2013 (“COSO”). Based on our assessment, management determined that our internal control over financial reporting was effective as of December 31, 2016.

 

This annual report on Form 10-K does not include an attestation report of the Company’s independent registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the Company’s independent registered public accounting firm pursuant to rules of the Securities and Exchange Commission that permit the Company to provide only management’s report in this annual report on Form 10-K.

 

Changes in Internal Control over Financial Reporting

 

Management has not identified any change in the Company’s internal control over financial reporting that occurred during the fourth quarter of 2016 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

Item 9B. Other Information

 

None.

 

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PART III

 

We will file a definitive Proxy Statement for our 2016 Annual Meeting of Stockholders with the Securities and Exchange Commission, pursuant to Regulation 14A, not later than 120 days after the end of our fiscal year. Accordingly, certain information required by Part III has been omitted under General Instruction G(3) to Form 10-K. Only those sections of our definitive Proxy Statement that specifically address the items set forth herein are incorporated by reference.

 

Item 10. Directors, Executive Officers and Corporate Governance

 

Information in response to this Item is incorporated herein by reference to the information provided in our definitive Proxy Statement for our next Annual Meeting of Stockholders (the “Proxy Statement”) to be filed with the Securities and Exchange Commission pursuant to Regulation 14A under the Exchange Act.

 

We have adopted a code of business conduct and ethics that applies to our directors, officers and employees. The code of business conduct and ethics is available on our website at www.xroadscap.com. We will report any amendments to or waivers of a required provision of the code of business conduct and ethics on our website or in a Form 8-K.

 

Item 11. Executive Compensation

 

The information with respect to compensation of executives and directors will be contained in the Proxy Statement to be filed with the Securities and Exchange Commission and is incorporated in this Annual Report by reference in response to this item.

 

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

 

The information with respect to security ownership of certain beneficial owners and management will be contained in the Proxy Statement to be filed with the Securities and Exchange Commission and is incorporated in this Annual Report by reference in response to this item.

 

Item 13. Certain Relationships and Related Transactions, and Director Independence

 

The information with respect to certain relationships and related transactions will be contained in the Proxy Statement to be filed with the Securities and Exchange Commission and is incorporated in this Annual Report by reference in response to this item.

 

Item 14. Principal Accountant Fees and Services

 

The information with respect to principal accountant fees and services will be contained in the Proxy Statement to be filed with the Securities and Exchange Commission and is incorporated in this Annual Report by reference in response to this item.

 

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PART IV

 

Item 15. Exhibits and Financial Statement Schedules

 

The following exhibits are included, or incorporated by reference, in this Annual Report on Form 10-K for the year ended December 31, 2016 (and are numbered in accordance with Item 601 of Regulation S-K).

 

a. Financial Statement Schedules

 

See the Index to the Financial Statements at page 61 of this report.

 

b. Exhibits

 

The following exhibits are filed as part of this Annual Report or hereby incorporated by reference to exhibits previously filed with the SEC:

 

Exhibit No.   Description
3.1   Amended and Restated Articles of Incorporation (Incorporated by reference to Post-Effective Amendment No. 1 to the Registrant’s Registration Statement on Form N-2 (File No. 333-157217), filed on April 21, 2010)
3.2   Articles of Amendment to Amended and Restated Articles of Incorporation (Incorporated by reference to Post-Effective Amendment No. 3 to the Registrant’s Registration Statement on Form N-2 (File No. 333-157217), filed on May 27, 2010)
3.3   Articles of Amendment to Amended and Restated Articles of Incorporation (Incorporated by reference to the Registrant’s Current Report on Form 8-K (File No. 0-53504), filed on July 1, 2014)
3.4   Articles of Amendment to Amended and Restated Articles of Incorporation (Incorporated by reference to the Registrant’s Current Report on Form 8-K (File No. 0-53504), filed on December 2, 2015)
3.5   Amended and Restated Bylaws (Incorporated by reference to the Registrant’s Current Report on Form 8-K (File No. 0-53504), filed on April 23, 2009)
3.6   Amendment to Amended and Restated Bylaws dated August 5, 2010 (Incorporated by reference to the Registrant’s Current Report on Form 8-K (File No. 0-53504), filed on August 9, 2010)
3.7   Amendment to Amended and Restated Bylaws dated October 22, 2010 (Incorporated by reference to the Registrant’s Current Report on Form 8-K (File No. 0-53504), filed on October 26, 2010)
3.8   Amendment to Amended and Restated Bylaws dated July 1, 2014 (Incorporated by reference to the Registrant’s Current Report on Form 8-K (File No. 0-53504), filed on July 1, 2014)
3.9   Amendment to Amended and Restated Bylaws dated December 2, 2015 (Incorporated by reference to the Registrant’s Current Report on Form 8-K (File No. 0-53504), filed on December 2, 2015)
3.10   Amended and Restated Dividend Reinvestment Plan (Incorporated by reference to the Registrant’s Registration Statement on Form N-2 (File No. 333-191525), filed on October 2, 2013)
4.1   Form of Share Certificate (Incorporated by reference to the Registrant’s Annual Report on Form 10-K (File No. 0-53504), filed on March 9, 2009)
10.1   Investment Advisory and Administrative Services Agreement between BDCA Venture, Inc. and BDCA Venture Adviser, LLC dated July 1, 2014 (Incorporated by reference to the Registrant’s Current Report on Form 8-K (File No. 0-53504), filed on July 1, 2014)
10.2   Trademark Sublicense Agreement between BDCA Venture, Inc. and BDCA Venture Adviser, LLC dated July 1, 2014 (Incorporated by reference to the Registrant’s Current Report on Form 8-K (File No. 0-53504), filed on July 1, 2014)
10.3   Form of Indemnification Agreement for Directors (Incorporated by reference to the Registrant’s Quarterly Report on Form 10-Q (File No. 0-53504), filed on August 12, 2015)
10.4   Custody Agreement between the Company and MidFirst Bank (f/k/a Steele Street Bank & Trust) (Incorporated by reference to the Registrant’s Registration Statement on Form 10 (File No. 0-53504), filed on November 20, 2008)
10.5   Custody Agreement between the Company and Frontier Bank (Incorporated by reference to Registrant’s Annual Report on Form 10-K (File No. 0-53504), filed on March 29, 2016)
10.6   First Amendment to Custody Agreement between the Company and MidFirst Bank (f/k/a Steele Street Bank & Trust) dated December 21, 2012 (Incorporated by reference to the Registrant’s Annual Report on Form 10-K (File No. 0-53504), filed on February 15, 2013)
10.7   Second Amendment to Custody Agreement between the Company and MidFirst Bank (f/k/a Steele Street Bank & Trust) dated September 24, 2014 (Incorporated by reference to the Registrant’s Current Report on Form 8-K (File No. 0-53504), filed on September 29, 2014)
10.8   Administration Servicing Agreement by and between the Company and U.S. Bancorp Fund Services, LLC (Incorporated by reference to the Registrant’s Current Report on Form 8-K (File No. 0-53504), filed on November 16, 2015)
10.9   Fund Accounting Servicing Agreement by and between the Company and U.S. Bancorp Fund Services, LLC (Incorporated by reference to the Registrant’s Current Report on Form 8-K (File No. 0-53504), filed on November 16, 2015)

  

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Exhibit No.   Description
10.10   Administrator Consulting Agreement by and between the Company and 1100 Capital Consulting, LLC (Incorporated by reference to the Registrant’s Current Report on Form 8-K (File No. 0-53504), filed on November 16, 2015)
10.11*   Stock Purchase Agreement, dated December 7, 2016, by and among the Company, Novirian Pacific, LP, Novirian Palomar, LP and Centrify Corporation.
10.12*   Repurchase Agreement, dated November 29, 2016, by and between the Company and Metabolon, Inc.
10.13*   Securities Transfer Agreement, dated March 29, 2017, by and among the Company, Foundation Capital V, L.P., Foundation Capital V Principals Fund, LLC, Azure Capital Partners II, L.P., Azure Entrepreneurs II, L.P. and Silkroad, Inc.
11   Computation of Per Share Earnings (included in the notes to the unaudited financial statements contained in this report)
31.1*   Certification of Chief Executive Officer pursuant to Rule 13a-14 of the Securities Exchange Act of 1934, as amended
31.2*   Certification of Chief Financial Officer pursuant to Rule 13a-14 of the Securities Exchange Act of 1934, as amended
32.1*   Certification of Chief Executive Officer pursuant to Section 906 of The Sarbanes-Oxley Act of 2002
32.2*   Certification of Chief Financial Officer pursuant to Section 906 of The Sarbanes-Oxley Act of 2002

 

*Filed herewith.

 

c. Financial statement schedules

 

No financial statement schedules are filed herewith because (i) such schedules are not required, or (ii) the information has been presented in the aforementioned financial statements.

 

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SIGNATURES

 

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

  CROSSROADS CAPITAL, INC.
   
March 31, 2017 /s/ Ben H. Harris J.D.
 

Ben H. Harris J.D. 

President and Chief Executive Officer

 

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacity and on the dates indicated.

 

  /s/ Ben H. Harris J.D.
March 31, 2017

Ben H. Harris J.D. 

President and Chief Executive Officer

 

(Principal Executive Officer) 

   
  /s/ David M. Hadani
March 31, 2017

David M. Hadani 

Chief Financial Officer, Treasurer and Secretary 

(Principal Accounting and Financial Officer) 

   
  /s/ Andrew Dakos
March 31, 2017

Andrew Dakos 

Director 

   
  /s/ Phillip Goldstein
March 31, 2017

Phillip Goldstein 

Director 

   
  /s/ Gerald Hellerman
March 31, 2017

Gerald Hellerman 

Director

 

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