UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington D. C. 20549

 

FORM 10-K

 

For the year ended December 31, 2017

For the transition period from

Commission File Number 000-55432

 

TriLinc Global Impact Fund, LLC

(Exact name of registrant as specified in its charter)

 

 

1230 Rosecrans Avenue, Suite 605,

Manhattan Beach, CA 90266

(Address of principal executive offices)

(310) 997-0580

(Registrant’s telephone number, including area code)

(Former name, former address and former fiscal year, if changed since last report)

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

Securities registered pursuant to Section 12(g) of the Act: Units of Limited Liability Company Interest

 

Indicate by check mark whether 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 Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ☑    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 the definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company”, and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

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

There is no established trading market for the registrant’s units, and therefore the aggregate market value of the registrant’s units held by non-affiliates cannot be determined.

As of March 26, 2018, the Company had outstanding 18,366,611 Class A units, 8,469,747 Class C units, 10,629,452 Class I units, 24,555 Class W units, 1,116,053 Class Y units and 5,877,513 Class Z units.

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FORM 10-K

FOR THE YEAR ENDED DECEMBER 31, 2017

INDEX

 

 

 

 

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FORWARD-LOOKING STATEMENTS

This Annual Report on Form 10-K contains certain “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, as amended, or Securities Act, and Section 21E of the Securities Exchange Act of 1934, as amended, or Exchange Act. Forward-looking statements are generally identifiable by use of forward-looking terminology such as “may,” “will,” “should,” “potential,” “intend,” “expect,” “seek,” “anticipate,” “estimate,” “believe,” “could,” “project,” “predict,” “continue,” “future” or other similar words or expressions. Forward-looking statements are not guarantees of performance and are based on certain assumptions, discuss future expectations, describe plans and strategies, contain projections of results of operations or of financial condition or state other forward-looking information. Such statements include, but are not limited to, those relating to our ability to deploy capital quickly and successfully, our ability to pay distributions to our unitholders, our reliance on TriLinc Advisors, LLC, or the Advisor, and TriLinc Global, LLC, or the Sponsor, strategies and investment activities and our ability to effectively deploy capital. Our ability to predict results or the actual effect of plans or strategies is inherently uncertain. Although we believe that the expectations reflected in such forward-looking statements are based on reasonable assumptions, our actual results and performance could differ materially from those set forth in the forward-looking statements and you should not unduly rely on these statements. These forward-looking statements involve risks, uncertainties and other factors that may cause our actual results in future periods to differ materially from those forward-looking statements. These factors include, but are not limited to:

The foregoing list of factors is not exhaustive. All forward-looking statements included in this Annual Report on Form 10-K are based on information available to us on the date hereof and we are under no duty to update any of the forward-looking statements after the date of this report to conform these statements to actual results.

Factors that could have a material adverse effect on our operations and future prospects are set forth in our filings with the United States Securities and Exchange Commission, or the SEC, including the “Risk Factors” in this Annual Report on Form 10-K beginning on page 17. The risk factors set forth in our filings with the SEC could cause our actual results to differ significantly from those contained in any forward-looking statement contained in this report.

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PART I

 

 

ITEM 1. BUSINESS

TriLinc Global Impact Fund, LLC is a Delaware limited liability company formed on April 30, 2012. Unless otherwise noted, the terms “we,” “us,” “our,” “the Company” and “our Company” refer to TriLinc Global Impact Fund, LLC; the term our “Advisor” and “TriLinc Advisors” refers to TriLinc Advisors, LLC, our external advisor; the term “SC Distributors” and our “dealer manager” refers to SC Distributors, LLC, our dealer manager; and the term our “Sponsor” refers to TriLinc Global, LLC, our sponsor.

Overview

The Company makes impact investments in Small and Medium Enterprises, or SMEs, which we define as those businesses having less than 500 employees, primarily in developing economies that provide the opportunity to achieve both competitive financial returns and positive measurable impact. To a lesser extent, we may also make impact investments in companies that may not meet our technical definition of SMEs due to a larger number of employees but that also provide the opportunity to achieve both competitive financial returns and positive measurable impact. We generally expect that such investments will have similar investment characteristics as SMEs as defined by us. We were organized as a Delaware limited liability company on April 30, 2012. We believe that we operate and intend to operate our business in a manner that permits us to maintain our exemption from registration under the Investment Company Act of 1940. We invest in SMEs through local market sub-advisors and our objective is to build a diversified portfolio of financial assets, including direct loans, loan participations, convertible debt instruments, trade finance, structured credit and preferred and common equity investments. We anticipate that a substantial portion of our assets will continue to consist of collateralized private debt instruments, which we believe offer opportunities for competitive risk-adjusted returns through income generation. We are externally managed and advised by TriLinc Advisors.

To assist the Company in achieving its investment objective, the Company makes investments via wholly owned subsidiaries. As of December 31, 2017, the Company has 13 subsidiaries, all of which are Cayman Islands exempted companies. To assist the Advisor in managing the Company and its subsidiaries, the Advisor may provide services via TriLinc Advisors International, Ltd. (“TAI”), a Cayman Islands exempted company that is wholly owned by TriLinc Advisors, LLC.

Our business strategy is to generate competitive financial returns and positive economic, social and/or environmental impact by providing financing to SMEs, primarily in developing economies, defined as countries with national income classified by the World Bank as upper-middle income and below. Our style of investment is referred to as impact investing, which J.P. Morgan Global Research and Rockefeller Foundation in a 2010 report called “an emerging alternative asset class” and defined as investing with the intent to create positive impact beyond financial return. We believe it is possible to generate competitive financial returns while creating positive, measurable impact. Through our investments in SMEs, we intend to enable job creation and stimulate economic growth.

Our investment objectives are to provide our unitholders current income, capital preservation and modest capital appreciation. These objectives are achieved primarily through SME trade finance and term loan financing, while employing rigorous risk mitigation and due diligence practices, and transparently measuring and reporting the economic, social and environmental impacts of our investments. The majority of our investments are senior secured trade finance, senior secured loans, and other collateralized loans or loan participations to SMEs with established, profitable businesses in developing economies. With our sub-advisors, we expect to provide growth capital financing generally ranging in size from $5-20 million per transaction for direct SME loans and $500,000 to $15 million for trade finance transactions. We seek to protect and grow investor capital by: (1) targeting countries with favorable economic growth and investor protections; (2) partnering with sub-advisors with significant experience in local markets; (3) focusing on creditworthy lending targets which have at least 3-year operating histories and demonstrated cash flows enabling loan repayment; (4) making primarily debt investments, backed by collateral and borrower guarantees; (5) employing best practices in our due diligence and risk mitigation processes; and (6) monitoring our portfolio on an ongoing basis.

Our goal is to create a diversified portfolio of primarily private debt instruments, including trade finance and term loans, whose counterparties are small and medium-size businesses in developing economies. Private debt facilities generate current income and in some cases offer the potential for modest capital appreciation, while maintaining a higher place in a company’s capital structure than the equity held by the owners and other investors.  As small and growing businesses, our borrowers have used and we expect them to continue to use capital to expand operations, improve the financial standing of their operations, or finance the trade of their goods. According to the most recent IFC SME Banking Guide, SMEs have been shown to improve job creation and GDP growth throughout the world, and we expect the portfolio of our investments to have a positive, measurable impact in their communities, in addition to offering a competitive financial return to the investor.

 

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On February 25, 2013, our registration statement on Form S-1 was declared effective by the SEC. Pursuant to the registration statement, we commended our initial public offering of up to $1.5 billion in units of our limited liability company interest, consisting of up to $1.25 billion of units in our primary offering, consisting of Class A units and Class C units at the initial offering prices of $10.00 per unit and $9.576 per unit, respectively, and Class I units at $9.025 per unit, which we refer to as the primary offering, and up to $250 million of units pursuant to our distribution reinvestment plan, which we refer to as the Distribution Reinvestment Plan, and which we collectively refer to as the Offering. In May 2012, the Advisor purchased 22,161 Class A units for aggregate gross proceeds of $200,000. In June 2013, we satisfied our minimum offering requirement of $2,000,000 when the Sponsor purchased 321,330 Class A units for aggregate gross proceeds of $2,900,000 and we commenced operations. The Offering terminated on March 31, 2017. Through the termination of the Offering, we raised approximately $361,776,000 in gross proceeds, including approximately $13,338,000 raised through the Distribution Reinvestment Plan.

Upon termination of the Offering, we registered $75 million in Class A, Class C and Class I units to continue to be offered pursuant to our Distribution Reinvestment Plan to the investors who have purchased units in the Offering. On March 7, 2018, our board of managers approved an amendment to our distribution reinvestment plan, pursuant to which, commencing with distributions declared for the month of March 2018, which were reinvested on March 30, 2018, units issued pursuant to the Distribution Reinvestment Plan are being offered at the price equal to the net asset value per unit of each class of units, as most recently disclosed by the Company in a public filing with the SEC at the time of reinvestment. Distributions declared for the month of March 2018 were reinvested at a price equal to $8.507 for Class A units, Class C units, and Class I units, which was the net asset value per unit as of September 30, 2017, the most recently disclosed net asset value per unit at the time of reinvestment. Distributions declared for the month of April 2018 will be reinvested at a price equal to $8.466 per Class A unit, Class C units and Class I unit, which was the net asset value per unit as of December 31, 2017. Prior to March 30, 2018, units were issued pursuant to the Distribution Reinvestment Plan at a price equal to the greater of $9.025 per unit or the net asset value per unit of each class, as most recently disclosed by the Company in a public filing with the SEC. For more information regarding the amendment to the Distribution Reinvestment Plan, please see “Management’s Discussion and Analysis—Subsequent Events—Amendments to the Distribution Reinvestment Plan and Unit Repurchase Program.” We will offer units pursuant to the Distribution Reinvestment Plan until we sell all of $75 million worth of units, although our board may determine to terminate the offering prior thereto. 

For the period from April 1, 2017 to December 31, 2017, we issued 971,564 of our units pursuant to the Distribution Reinvestment Plan for gross proceeds of approximately $8,762,000. In addition, for the period from April 1, 2017 to December 31, 2017, we issued 1,654,871 of our units for gross proceeds of approximately $14,204,000 pursuant to a private placement to accredited investors. As of December 31, 2017, we had issued 40,321,610 of our units, including 2,449,295 units issued under our Distribution Reinvestment Plan, for gross proceeds of approximately $384,742,000 including approximately $22,100,000 reinvested under our Distribution Reinvestment Plan (before dealer manager fees of approximately $4,780,000 and selling commissions of $16,905,000, for net proceeds of $363,057,000).

Our Dealer Manager

SC Distributors, LLC, or SC Distributors, a Delaware limited liability company formed in March 2009, served as our dealer manager for the Offering. Strategic Capital Advisory Services, LLC, or Strategic Capital, is an affiliate of our dealer manager and has an equity interest in our Advisor. Our dealer manager is a member firm of the Financial Industry Regulatory Authority, or FINRA. Our dealer manager receives dealer manager fees, selling commissions, distribution fees and other ongoing fees with respect to certain classes of units, and certain reimbursements for services relating to our Offering.

Our Advisor

TriLinc Advisors manages our investments. TriLinc Advisors is a private investment advisory firm focusing on impact investments in SMEs around the world. TriLinc Advisors is a registered investment adviser with the SEC. Led by its Chief Executive Officer and President, Gloria Nelund, its Chief Operating Officer and Chief Financial Officer, Brent VanNorman, and its Chief Investment Officer, Paul Sanford, TriLinc Advisors’ management team has a long track record and broad experience in the management of regulated, multi-billion dollar fund complexes and global macro portfolio management. TriLinc Advisors and our sub-advisors have an extensive network of relationships with emerging market private equity and debt managers, bilateral and multilateral Development Financial Institutions, or DFIs, and international consultancies and service providers that we believe benefit our portfolio of investments. We benefit from both the top-down, global macro investing approach of TriLinc Advisors and the bottom-up deal sourcing and structuring of our sub-advisors. Pursuant to the joint venture agreement and its ownership in TriLinc Advisors, Strategic Capital is entitled to receive distributions equal to 15% of the gross cash proceeds received by TriLinc Advisors from the management and incentive fees payable by us to TriLinc Advisors under the Amended and Restated Advisory Agreement, dated as of February 25, 2014, by and between the Company and the Advisor, as renewed through February 25, 2019 (the “Advisory Agreement”). See “Investment Advisory Agreements and Fees” section below.

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We seek to capitalize on the significant investment experience of our Advisor’s management team, which has over 100 years of collective experience in financial services and investment. Our CEO and President, Gloria Nelund, founded our Sponsor in 2008 after a thirty year career in the international asset management industry.

To date, we have engaged, through our Advisor, ten investment managers in a sub-advisory capacity to source, evaluate, and monitor investments. Our local market sub-advisors have significant experience and established networks in our targeted asset classes, regions and countries, and adhere to the investment parameters as directed by the Advisor’s investment team and our board of managers. Primary sub-advisors, who will source the majority of our investments, must have a minimum five year investment track record and have invested at least $250 million in their target region. Secondary sub-advisors, who focus on a specific region or asset class, must have a minimum three year investment track record and have invested at least $100 million in their target region. All sub-advisors must have continuity in their investment team, including senior management, and an investment strategy that can responsibly deploy appropriate levels of capital. Sub-advisors must have strong, independent risk controls and must screen for and track impact and the Environmental, Social and Governance (ESG) practices of the borrowers.

TriLinc Advisors has selected the following managers to act as sub-advisors:

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TriLinc Advisors is a joint venture between our Sponsor and Strategic Capital. The purpose of the joint venture is to permit our Advisor to capitalize upon the expertise of our Sponsor’s management team as well as the experience of the executives of Strategic Capital in providing advisory services in connection with the formation, organization, registration and operation of entities similar to us. Strategic Capital provides certain services to, and on behalf of, our Advisor, including but not limited to formation and advisory services related to our formation, financial and strategic planning advice and analysis, overseeing the development of marketing materials, selecting and negotiating with third party vendors and other administrative and operational services.

Investment Strategy

The Company seeks to generate competitive financial returns and positive economic, social and environmental impact by providing financing to SMEs. Our investment objectives are to provide our unitholders current income, capital preservation, and modest capital appreciation. We intend to meet our investment objectives through:

The majority of our investments have been and will continue to be senior secured trade finance, senior secured loans and other collateralized loans or loan participations to SMEs with established, profitable businesses in developing economies. With our sub-advisors, we provide growth capital financing generally ranging in size from $5-20 million per transaction for direct SME loans and $500,000 to $15 million for trade finance transactions. We seek to protect and grow investor capital by: (1) targeting countries with favorable economic growth and investor protections; (2) partnering with sub-advisors with significant experience in local markets; (3) focusing on creditworthy lending targets who have at least 3-year operating histories and demonstrated cash flows enabling loan repayment; (4) making primarily debt investments, backed by collateral and borrower guarantees; (5) employing sound due diligence and risk mitigation processes; and (6) monitoring our portfolio on an ongoing basis.

Investments have been and will continue to be primarily credit facilities to developing economy SMEs, including trade finance and SME term loans, through TriLinc Advisors’ team of professional sub-advisors with a local presence in the markets where they invest. We typically provide financing that is collateralized, has a short to medium-term maturity and is self-liquidating through the repayment of principal. By providing additional liquidity to growing small businesses, we believe we will support both economic growth and the expansion of the global middle class.

Investment Portfolio

The Company invests in various industries. The Company separately evaluates the performance of each of its investment relationships. However, because each of these investment relationships has similar business and economic characteristics, they have been aggregated into a single investment segment.

During the year ended December 31, 2017, we invested, either through direct loans or loan participations, approximately $323.2 million across 37 portfolio companies. Our investments consisted of senior secured trade finance participations, senior secured term loan participations, and senior secured term loans. Additionally, we received proceeds from repayments of investment principal of approximately $196.6 million. During the year ended December 31, 2016, we had invested approximately $252.2 million across 33 portfolio companies and received repayments of $150.2 million.

At December 31, 2017, our portfolio included 43 companies and was comprised of $78,573,493 or 23.4% in senior secured term loans, $119,165,378 or 35.6% in senior secured term loan participations, $111,030,621 or 33.1% in senior secured trade finance

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participations, and $26,500,000 or 7.9% in short term investments. At December 31, 2016, our portfolio included 32 companies and was comprised of $28,673,487 or 14.1% in senior secured term loans, $58,450,761 or 28.7% in senior secured term loans participations, and $116,671,565 or 57.2% in senior secured trade finance participations.

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As of December 31, 2017, we had the following investments:

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¹    In prior periods, the Company has used Standard Industrial Classification (SIC) codes for purposes of presentation of its investments in publicly filed and other offering documents. There are several industry classification systems widely used by the investment industry and there is no specific industry classification system the Company is required to use either internally or in its public materials. The Company believes that the traditional industrial classification systems, including SIC codes, do not accurately reflect the sustainable nature of certain of the Company’s investments and, in some cases, may be misleading. Therefore, starting with the quarter ending December 31, 2017, the Company has determined to use a Company created industry classification system for presentation of its investments, which the Company believes will be more appropriate in light of the sustainable nature of the Company’s investments.

²  Trade finance borrowers may be granted flexibility with respect to repayment relative to the stated maturity date to accommodate specific contracts and/or business cycle characteristics. This flexibility in each case is agreed upon between the Company and the sub-advisor and between the sub-advisor and the borrower.

 

As of December 31, 2017, the composition our investments based on the Company created industry classification was as follows:

 

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The industrial and geographic composition of our portfolio at fair value as of December 31, 2017 and 2016 were as follows:

 

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As of December 31, 2017, our largest investment represented approximately 5.8% of our net assets or 5.5% of our total portfolio.  

 

As of December 31, 2016, our largest investment represented approximately 7.8% of our net assets or 9.6% of our total portfolio.

Measuring Impact

We measure and expect to regularly provide accounting of economic, social and/or environmental impact achieved through our investments. The Company’s impact measurement system is utilized with investments to evaluate the progress of borrower companies toward their impact objectives during the life of the investment. The system leverages technology that has been specifically developed for tracking and analyzing impact and includes full integration of the Global Impact Investing Network’s Impact Reporting and Investment Standards (“IRIS”) metrics. Impact measurement is accomplished through the establishment of initial baseline measurements for both the Company core economic development metrics, as well as metrics associated with borrower companies’ stated impact objectives. These baseline measurements will be compared against future measurements in order to track incremental progress. In addition to furthering the Company’s economic development impact objectives, we anticipate that our investments will have a positive effect on borrower companies’ ability to make progress toward their stated impact objectives(s).

On an annual basis, an updating assessment is completed. This includes collection of our core impact metrics and borrower company impact objective-specific metrics. Annual external assurance of impact metrics data will be completed by an independent, third party provider. In February 2015, we engaged Moss Adams LLP, with the approval of our Audit Committee, to perform an independent review of certain impact data which will be reported once the Company reaches a statistically significant sample of borrower companies that have been in our portfolio for at least one year. In February 2018, the Company issued its second Sustainability and Impact Report as of June 30, 2017.

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Financing Strategy

We may opt to supplement our equity capital and increase potential returns to our unitholders through the use of prudent levels of borrowings from either commercial financial institutions or DFIs. We may use debt when the available terms and conditions are favorable to long-term investing and well-aligned with our investment strategy and portfolio composition. In determining whether to borrow money, we will seek to optimize maturity, covenant packages and rate structures. Most importantly, the risks of borrowing within the context of our investment outlook and the impact on our investment portfolio will be extensively analyzed in making this determination. As of December 31, 2017 and 2016, we had borrowings amounting to $28,160,000 and $1,635,000, respectively. If we are not able to obtain additional financings, our returns are expected to be lower than originally anticipated.

Hedging Activities

Most of our investments are anticipated to continue to be denominated in U.S. dollars, but when exposed to foreign currencies, we will seek to hedge the exposure when prudent and cost-effective. These hedging activities may include the use of derivatives, swaps, or other financial products to hedge our interest rate or currency risk. At December 31, 2017 and 2016, all our investments were denominated in U.S. Dollars and, accordingly, we had not entered into any hedging transactions.

Operating Expense Responsibility Agreement

On March 26, 2018, the Company, Advisor and the Sponsor entered into an Amended and Restated Operating Expense Responsibility Agreement (“Responsibility Agreement”) originally effective as of June 11, 2013 and covering expenses through December 31, 2017. Since the inception of the Company through December 31, 2017, pursuant to the terms of the Responsibility Agreement, the Sponsor has paid approximately $12,422,100 of operating expenses, management fees, and incentive fees on behalf of the Company and will pay or reimburse the Company for an additional $4,238,700 of expenses, which have been accrued by the Sponsor as of December 31, 2017. The Sponsor will only be entitled to reimbursement of the cumulative Company expenses to the extent the Company’s investment income in any quarter, as reflected on the statement of operations, exceeds the sum of (a) total distributions to unitholders incurred during the quarter and (b) the Company’s expenses as reflected on the statement of operations for the same quarter (the “Reimbursement Hurdle”). To the extent the Company is not successful in satisfying the Reimbursement Hurdle, no amount will be payable in that quarter by the Company for reimbursement to the Sponsor of the cumulative Company expenses. If the Sponsor is entitled to receive reimbursement for any given quarter because the Company’s investment income exceeds the Reimbursement Hurdle for such quarter, the Company will apply the excess amount (the “Excess Amount”) as follows: (i) first, the Company will reimburse the Sponsor for all expenses, other than management fees and incentive fees, that the Sponsor previously paid on behalf of the Company, which generally consist of operating expenses (the “Previously Paid Operating Expenses”) until all Previously Paid Operating Expenses incurred to date have been reimbursed; and (ii) second, the Company will apply 50% of the Excess Amount remaining after the payment of Previously Paid Operating Expenses to reimburse the Sponsor for the management fees and incentive fees that the Sponsor has agreed to pay on the Company’s behalf until all such management fees and incentive fees accrued to date have been reimbursed. The Company has not met the Reimbursement Hurdle for the quarter ended December 31, 2017. Therefore, expenses of the Company covered by the Responsibility Agreement have not been recorded as expenses of the Company as of December 31, 2017. In accordance with ASC 450, Contingencies, such expenses will be accrued and payable by the Company in the period that they become both probable and estimable. The Sponsor may demand the reimbursement of our cumulative expenses covered by the Responsibility Agreement to the extent we exceed the Reimbursement Hurdle during any quarter. The Company cannot predict if or when this may occur.

Investment Advisory Agreements and Fees

We pay TriLinc Advisors an asset management fee and an incentive fee for its services under the Advisory Agreement. For the years ended December 31, 2017 and 2016, the Company incurred $6,484,850 and $4,172,643, respectively in management fees and $4,599,941 and $3,319,149, respectively in incentive fees to our Advisor. During the years ended December 31, 2017 and 2016, our Sponsor made expense support payments to the Company under the Responsibility Agreement amounting to $0 and $842,468, respectively, for management fees and $2,701,511 and $2,970,292, respectively, for incentive fees.

Asset Management Fee

The asset management fee is calculated at an annual rate of 2.00% of our gross assets payable quarterly in arrears. For purposes of calculating the asset management fee, the term “gross assets” means the total net fair value of the Company’s assets at the end of the quarter, other than intangibles and after the deduction of associated allowance and reserves, as determined by the Advisor in its sole discretion.

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Incentive Fee

The incentive fee is comprised of two parts: (i) a subordinated incentive fee on income and (ii) an incentive fee on capital gains. Each part of the incentive fee is outlined below.

The subordinated incentive fee on income is earned on pre-incentive fee net investment income and is determined and payable in arrears as of the end of each calendar quarter during which the Advisory Agreement is in effect. If the Advisory Agreement is terminated, the fee will also become payable as of the effective date of the termination.

The subordinated incentive fee on income is subject to a quarterly preferred return to investors, expressed as a rate of return on net assets at the beginning of the most recently completed calendar quarter, of 1.50% (6.0% annualized), subject to a “catch up” feature. The subordinated incentive fee on income for each quarter is calculated as follows:

No incentive fee is earned by the Advisor in any calendar quarter in which our pre-incentive fee net investment income does not exceed the preferred return rate of 1.50%, or the preferred return.

100% of our pre-incentive fee net investment income, if any, that exceeds the quarterly preferred return, but is less than or equal to 1.875% (7.5% annualized) on our net assets at the end of the immediately preceding fiscal quarter, in any quarter, is payable to the Advisor. We refer to this portion of our subordinated incentive fee on income as the catch up. It is intended to provide an incentive fee of 20% on all of our pre-incentive fee net investment income when our pre-incentive fee net investment income exceeds 1.875% on our net assets at the end of the immediately preceding fiscal quarter in any quarter.

For any quarter in which our pre-incentive fee net investment income exceeds 1.875% on our net assets at the end of the immediately preceding fiscal quarter, the subordinated incentive fee on income equals 20% of the amount of our pre-incentive fee net investment income, because the preferred return and catch up will have been achieved.

Pre-incentive fee net investment income is defined as interest income, dividend income and any other income accrued during the calendar quarter, minus our operating expenses for the quarter, including the asset management fee and operating expenses reimbursed to the Advisor. Pre-incentive fee net investment income does not include any realized capital gains, realized capital losses or unrealized capital appreciation or depreciation.

The following is a graphical representation of the calculation of the quarterly subordinated incentive fee on income:

Quarterly Subordinated Incentive Fee on Income

Pre-incentive fee net investment income

(expressed as a percentage of net assets)

Percentage of pre-incentive fee net investment income

allocated to quarterly incentive fee

The incentive fee on capital gains is earned on investments sold or matured and shall be determined and payable in arrears as of the end of each calendar year during which the Advisory Agreement is in effect. In the case the Advisory Agreement is terminated, the fee will also become payable as of the effective date of such termination. The fee will equal 20% of our realized capital gains, less the aggregate amount of any previously paid incentive fee on capital gains. Incentive fee on capital gains is equal to our realized capital gains on a cumulative basis from inception, computed net of all realized capital losses and unrealized capital depreciation on a cumulative basis.

Because of the structure of the subordinated incentive fee on income and the incentive fee on capital gains, it is possible that we may pay such fees in a quarter where we incur a net loss. For example, if we receive pre-incentive fee net investment income in excess of the 1.75% on our net assets at the end of the immediately preceding fiscal quarter for a quarter, we will pay the applicable incentive fee even if we have incurred a net loss in the quarter due to a realized or unrealized capital loss. Our Advisor will not be under any obligation to reimburse us for any part of the incentive fee it receives that is based on prior period accrued income that we never receive as a result of a subsequent decline in the value of our portfolio.

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The fees that are payable under the Advisory Agreement for any partial period are appropriately prorated. The fees are calculated using a detailed policy and procedure approved by our Advisor and our board of managers, including a majority of the independent managers, and such policy and procedure is consistent with the description of the calculation of the fees set forth above.

Our Advisor may elect to defer or waive all or a portion of the fees that would otherwise be paid to it in its sole discretion. Any portion of a fee not taken as to any month, quarter or year will be deferred without interest and may be taken in any such other month prior to the occurrence of a liquidity event as our Advisor may determine in its sole discretion.

Emerging Growth Company

We are an “emerging growth company,” as defined in the Jumpstart Our Business Startups Act, or the JOBS Act. For as long as we continue to be an emerging growth company, we may take advantage of exemptions from various reporting requirements that are applicable to other public companies that are not emerging growth companies, including not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and shareholder approval of any golden parachute payments not previously approved. Although these exemptions will be available to us, they will not have a material impact on our public reporting and disclosure. As of December 31, 2017, we are deemed a “smaller reporting company” under the Securities Exchange Act of 1934, or the Exchange Act, and as long as we continue to qualify as a smaller reporting company, we are permanently exempt from compliance with the auditor attestation of internal control over financial reporting requirements of Section 404 of the Sarbanes-Oxley Act. In addition, because we have no employees, we do not have any executive compensation or golden parachute payments to report in our periodic reports and proxy statements.

We could be an emerging growth company for up to five years, although circumstances could cause us to lose that status earlier. We will remain an “emerging growth company” until the earliest to occur of (i) the last day of the fiscal year during which our total annual revenues equal or exceed $1 billion (subject to adjustment for inflation), (ii) the last day of the fiscal year following the fifth anniversary of our initial public offering, (iii) the date on which we have, during the previous three-year period, issued more than $1 billion in non-convertible debt, or (iv) the date on which we are deemed a “large accelerated filer” under the Exchange Act.

Under the JOBS Act, emerging growth companies can also delay the adoption of new or revised accounting standards until such time as those standards apply to private companies. We are choosing to take advantage of the extended transition period for complying with new or revised accounting standards. As a result, our financial statements may not be comparable to those of companies that comply with public company effective dates.

Investment Company Act Considerations

We have conducted and intend to continue to conduct our operations so that we and our subsidiaries will qualify for an exemption under, or otherwise will not be required to register as an investment company under, the Investment Company Act of 1940, as amended, which we refer to as the Investment Company Act.

Section 3(a)(1)(A) of the Investment Company Act defines an investment company as any issuer that is or holds itself out as being engaged primarily, or proposes to engage primarily, in the business of investing, reinvesting or trading in securities. Section 3(a)(1)(C) of the Investment Company Act defines an investment company as any issuer that is engaged or proposes to engage in the business of investing, reinvesting, owning, holding or trading in securities and owns or proposes to acquire investment securities having a value exceeding 40% of the value of the issuer’s total assets (exclusive of U.S. Government securities and cash items) on an unconsolidated basis, which we refer to as the 40% test. Excluded from the term “investment securities,” among other things, are U.S. Government securities and securities issued by majority-owned subsidiaries that are not themselves investment companies and are not relying on the exception from the definition of investment company set forth in Section 3(c)(1) or Section 3(c)(7) of the Investment Company Act.

We conduct our business primarily through our direct and indirect wholly- and majority-owned subsidiaries, including foreign subsidiaries, which were established to carry out specific activities. Although we reserve the right to modify our business methods at any time, the focus of our business involves providing loans and other financing of the nature described in this Form 10-K. We conduct our operations so that they comply with the limit imposed by the 40% test and we do not hold ourselves out as being engaged primarily, or actually engaged, in the business of investing in securities. Therefore, we expect that we will not be subject to registration or regulation as an investment company of any kind (including, without limitation, a face-amount certificate company, unit investment trust, open-end or closed-end company or a management company electing to be treated as a business development company) under the Investment Company Act. The securities issued to us by our wholly-owned or majority-owned subsidiaries, which subsidiaries will be neither investment companies nor companies exempt under Section 3(c)(1) or 3(c)(7) of the Investment Company Act, will not be investment securities for the purpose of this 40% test.

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One or more of our subsidiaries may seek to qualify for an exception or exemption from registration as an investment company under the Investment Company Act pursuant to other provisions of the Investment Company Act, such as Sections 3(c)(5)(A) which is available for entities “primarily engaged in the business of purchasing or otherwise acquiring notes, drafts, acceptances, open accounts receivable, and other obligations representing part or all of the sales price of merchandise, insurance and services” and Section 3(c)(5)(B) which is available for entities “primarily engaged in the business of making loans to manufacturers, wholesalers, and retailers of, and to prospective purchasers of, specified merchandise, insurance and services.” Each of these exemptions generally requires that at least 55% of such subsidiary’s assets be invested in eligible loans and receivables. To qualify for either of the foregoing exemptions, the subsidiary would be required to comply with interpretations issued by the staff of the SEC that govern the respective activities.

We monitor our holdings and those of our subsidiaries to ensure continuing and ongoing compliance with these and/or other applicable tests, and we are responsible for making the determinations and calculations required to confirm our compliance with tests. If the SEC does not agree with our determinations, we may be required to adjust our activities and/or those of our subsidiaries.

Qualification for these or other exceptions or exemptions could affect our ability to originate, participate in or hold fixed-income assets, or could require us to dispose of investments that we might prefer to retain in order to remain qualified for such exemptions. Changes in current policies by the SEC and its staff could also require that we alter our business activities for this purpose. For a discussion of certain risks associated with the Investment Company Act, please see “Risk Factors.”

Competition

We compete with a large number of commercial banks, non-bank financial institutions, private equity funds, leveraged buyout and venture capital funds, investment banks and other equity and non-equity based investment funds. Many of our potential competitors are substantially larger and have considerably greater financial, technical and marketing resources than we do. For example, some competitors may have a lower cost of funds and access to funding sources that are not available to us. In addition, certain of our competitors may have higher risk tolerances or different risk assessments, which could allow them to consider a wider variety of investments and establish more relationships and build their market shares.

Concentration of credit risk

At December 31, 2017, our portfolio of $335,269.491 (at fair value) included 43 companies and was comprised of $78,573,493 or 23.4% in senior secured term loans, $119,165,378 or 35.6% in senior secured term loan participations, $111,030,621 or 33.1% in senior secured trade finance participations, and $26,500,000 or 7.9% in short term investments. Our largest loan by value was $18,527,237 or 5.5% of our total portfolio. Our 5 largest loans by value comprised 24.8% of our portfolio at December 31, 2017. Participation in loans represented 68.7% of our portfolio at December 31, 2017.

Employees

We have no employees. Pursuant to the terms of the Advisory Agreement, the Advisor assumes principal responsibility for managing our affairs and we compensate the Advisor for these services.

Additional Information

Our internet address is www.trilincglobalimpactfund.com. Through a link on our website, we make available, free of charge, our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, along with any amendments to those filings, as soon as reasonably practicable after we file or furnish them to the SEC.

Our privacy policy and Code of Ethics are also available on our website. Within the time period and as required by the rules of the SEC, we will post on our website any amendment to our Code of Ethics.

 

 

ITEM 1A. RISK FACTORS

You should carefully read and consider the risks described below together with all other information in this Annual Report, including our consolidated financial statements and the related notes thereto, before making a decision to purchase our units. If certain of the following risks actually occur, our results of operations and ability to pay distributions would likely suffer materially, or could be eliminated entirely. As a result, the value of our units may decline, and our unitholders could lose all or part of the money they paid to buy our units.

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Risks Relating to our Business and Structure: General

We have limited operating history and may be unable to successfully implement our investment strategy.

We were formed on April 30, 2012, and are subject to all of the business risks and uncertainties associated with any new business, including the risk that we will not achieve our investment objectives and that the value of units could decline substantially. Our financial condition and results of operations will depend on many factors including the availability of investment opportunities, general economic and market conditions and the performance of our Advisor and sub-advisors.

The lack of liquidity of our privately held investments may adversely affect our business.

Most of our investments consist and will continue to consist of loans and other fixed income instruments either originated in private transactions directly from borrowers or via participating agreements with direct lenders and the borrower. Investments may be subject to restrictions on resale, including, in some instances, legal restrictions, or will otherwise be less liquid than publicly traded securities. The illiquidity of our investments may make it difficult for us to quickly obtain cash equal to the value at which we record our investments if the need arises. This could cause us to miss important business opportunities or react to changes in the market. In addition, if we are required to quickly liquidate all or a portion of our portfolio, we may realize significantly less than the value at which we have previously recorded our investments. In addition, we may face other restrictions on our ability to liquidate an investment in a public company to the extent that the Company, its Advisor, or respective officers, employees or affiliates have material non-public information regarding such company.

We may not raise sufficient capital to sustain our operations or the operations of our Sponsor and Advisor

Pursuant to the terms of the Amended and Restated Operating Expense Responsibility Agreement, our Sponsor has absorbed and deferred reimbursement for a substantial portion of our operating expenses since we began our operations. As of December 31, 2017, the Sponsor has agreed to pay a cumulative total of approximately $16.7 million of operating expenses. If we fail to raise sufficient capital, our Sponsor and Advisor may not attain profitability and may not have sufficient liquidity to continue to support our operations. The lack of financial support from the Sponsor and Advisor could force us to significantly reduce our planned operations.

When we are a debt or minority equity investor in a portfolio company, which we expect will generally be the case, we may not be in a position to control the entity, and its management may make decisions that could decrease the value of our investment.

Most of our investments are and, we anticipate will continue to be in the future, either debt or minority equity investments in our portfolio companies. Therefore, we will be subject to risk that a portfolio company 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 best interests. As a result, a portfolio company may make decisions that could decrease the value of our portfolio holdings. In addition, we will generally not be in a position to control any portfolio company by investing in its debt securities.

We operate in a highly competitive market for investment opportunities.

A large number of entities compete with us and make the types of investments that we seek to make in small and medium-sized privately owned businesses. We compete with a large number of commercial banks, non-bank financial institutions, private equity funds, leveraged buyout and venture capital funds, investment banks and other equity and non-equity based investment funds. Many of our competitors are substantially larger and have considerably greater financial, technical and marketing resources than we do. For example, some competitors may have a lower cost of funds and access to funding sources that are not available to us. In addition, certain of our competitors may have higher risk tolerances or different risk assessments, which could allow them to consider a wider variety of investments and establish more relationships and build their market shares. The competitive pressures we face may have a material adverse effect on our business, financial condition and results of operations. Also, as a result of this competition, we may not be able to take advantage of attractive investment opportunities from time to time, or to identify and make investments that satisfy our investment objectives or that we will be able to fully invest our available capital.

An investment strategy focused primarily on privately held companies presents certain challenges, including the lack of available information about these companies, a dependence on the talents and efforts of only a few key borrower personnel and a greater vulnerability to economic downturns.

We have invested, and will continue to invest in the future, primarily in privately held companies. Generally, little public information exists about these companies, and we will be required to rely on the ability of the Advisor and sub-advisors’ investment professionals to obtain adequate information to evaluate the potential returns from investments made in, with or through these companies. If we are unable to uncover all material information about these companies, we may not make a fully informed investment decision, and we may lose money on our investments.

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We may not realize gains from equity instruments granted as return enhancement vehicles when we acquire certain debt instruments.

When we invest in collateralized or senior secured loans, we may acquire warrants or other equity securities as well. Our goal is to ultimately dispose of such equity interests and realize gains upon our disposition of such interests. However, the equity interests we receive may not appreciate in value and, in fact, may decline in value. 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 we experience.

Actions of our investment partners could negatively impact our performance.

We participate in investments with third parties. Such participations may involve risks not otherwise present with a direct origination of loans, including, for example:

Actions by such an investment partner, which are generally out of our control, might have the result of subjecting the investment to liabilities in excess of those contemplated and may have the effect of reducing our unitholders’ returns, particularly if the loan agreement provides that our partner can take actions contrary to our interests. As of December 31, 2017, 68.5% of our investment portfolio consisted of participations in loans.

Economic slowdowns or recessions could impair our borrowers and harm our operating results.

Our borrowers may be susceptible to economic slowdowns or recessions and may be unable to repay our loans during these periods. Therefore, our non-performing assets are likely to increase and the value of our portfolio is likely to decrease during these periods. Adverse economic conditions also may decrease the value of collateral securing some of our loans and the value of our equity investments. Economic slowdowns or recessions could lead to financial losses in our portfolio and a decrease in revenues, net income and assets. Unfavorable economic conditions also could increase our funding costs, limit our access to the capital markets or result in a decision by lenders to not extend credit to us. These events could prevent us from increasing investments and harm our operating results.

A borrower’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 our borrower’s ability to meet its obligations under the investment instruments that we hold. We may incur expenses to the extent necessary to seek recovery upon default or to negotiate new terms with a defaulting borrower. In addition, if one of our borrowers were to go bankrupt, even though we may have structured our interest as senior debt, depending on the facts and circumstances, including the extent to which we actually provided managerial assistance to that borrower, a bankruptcy court might re-characterize our debt holding and subordinate all or a portion of our claim to that of other creditors.

Our borrowers may incur debt that ranks equally with, or senior to, the debt instruments in which we invest.

Our borrowers may have, or may be permitted to incur, other debt that ranks equally with, or senior to, the debt instruments in which we invest. By their terms, such debt instruments may provide that the holders are entitled to receive payment of interest or principal on or before the dates on which we are entitled to receive payments with respect to the debt instruments in which we invest. Also, in the event of insolvency, liquidation, dissolution, reorganization or bankruptcy of a borrower, holders of debt instruments ranking senior to our investment in that borrower would typically be entitled to receive payment in full before we receive any distribution with respect to our investment. After repaying such senior creditors, such borrower may not have any remaining assets to use for repaying its obligation to us. In the case of debt ranking equally with that of our debt instruments, we would have to share on an equal basis any distributions with other creditors in the event of an insolvency, liquidation, dissolution, reorganization or bankruptcy of the relevant borrower. In addition, we may not be in a position to control any borrower through the loans we make. As a result, we are subject to the risk that any borrower in which we invest may make business decisions with which we disagree and the management of such company, as representatives of the holders of their common equity, may take risks or otherwise act in ways that do not serve our interests as debt investors.

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There is a risk that our unitholders may not receive distributions or that our distributions may not grow over time or may be reduced.

We may not achieve investment results that will allow us to make a specified level of cash distributions. In addition, due to covenants and asset coverage tests, which may apply to us in the event we choose to employ financial leverage, we may be subject to restrictions on unitholder distributions.

In addition, pursuant to the terms of the Amended and Restated Operating Expense Responsibility Agreement, our Sponsor has absorbed and deferred reimbursement for a substantial portion of our operating expenses since we began our operations. Our Sponsor is under no obligation to continue to pay our operating expenses and, if our Sponsor does not absorb our operating expenses, the distributions we pay to our unitholders may need to be reduced. Our Sponsor determined not to pay for any operating expenses for the fourth quarter of 2017. Commencing with distributions payable for the month of March 2018, our board of managers approved a decrease in our daily distribution rate from $0.00197808 to $0.00168675 per unit, per day (less the ongoing fees applicable to certain classes of units which reduce the amount of distributions paid to the applicable unitholders). Our Sponsor is under no obligation to pay our operating expenses in the future, and if our Sponsor chooses not to pay our operating expenses and we do not generate sufficient investment income to cover our operating expenses, our distributions to our unitholders may further be reduced. In addition, the Sponsor could demand the reimbursement of operating expenses covered by the Responsibility Agreement if and when the Company has met the Reimbursement Hurdle. Such reimbursements to the Sponsor could affect the amount of cash available to the Company to pay distributions and/or make investments.

If we pay distributions from sources other than our cash flow from operations, we will have less funds available for the investments, and the overall return for our unitholders may be reduced.

Our operating agreement permits us to make distributions from any source, including offering proceeds and, subject to certain limitations, borrowings, and we may choose to pay distributions from such other sources when we do not have sufficient cash flow from operations to fund such distributions. We have not established a limit on the amount of proceeds we may use to fund distributions. From time to time during our operational stage, we may not generate sufficient cash flow from operations to fund distributions. If we fund distributions from borrowings or the net proceeds from this offering, we will have less funds available for the investments, and your overall return may be reduced.

If we internalize our management functions, we could incur adverse effects on our business and financial condition, including significant costs associated with becoming and being self-managed and the percentage of our units owned by our unitholders could be reduced.

If we seek to list our units on an exchange as a way of providing our unitholders with a liquidity event, we may consider internalizing the functions performed for us by our Advisor. An internalization could take many forms, for example, we may hire our own group of executives and other employees or we may acquire our Advisor or its respective assets including its existing workforce. Internalizing our management functions may not result in anticipated benefits to us and our unitholders. For example, we may not realize the perceived benefits because of: (i) the costs of being self-managed; (ii) our inability to effectively integrate a new staff of managers and employees; or (iii) our inability to properly replicate the services provided previously by our Advisor or its affiliates. Additionally, internalization transactions have also, in some cases, been the subject of litigation and even if these claims are without merit, we could be forced to spend significant amounts of money defending claims which would reduce the amount of funds available for us to make investments or to pay distributions. In connection with any such internalization transaction, a special committee consisting of all or some of our independent managers will be appointed to evaluate the transaction and to determine whether a fairness opinion should be obtained.

We may engage in hedging activity, which could expose us to risks associated with such transactions, including the risk that we may artificially limit the investment income realized by the Company on certain investments.

As of December 31, 2017, we had not engaged in any hedging transaction. If we do engage in hedging transactions, we may expose ourselves to risks associated with such transactions. We may utilize instruments such as forward contracts, currency options and interest rate swaps, caps, collars and floors to seek to hedge against fluctuations in the relative values of our portfolio positions from changes in currency exchange rates and market interest rates. Hedging against a decline in the values of our portfolio positions does not eliminate the possibility of fluctuations in the values of such positions or prevent losses if the values of such positions decline. However, such hedging can establish other positions designed to gain from those same developments, thereby offsetting the decline in the value of such portfolio positions. Such hedging transactions may also limit the opportunity for gain if the values of the portfolio positions should increase. Moreover, it may not be possible to hedge against an exchange rate or interest rate fluctuation for any given investment at an acceptable price.

The success of our hedging transactions will depend on our ability to correctly predict movements, currencies and interest rates. Therefore, while we may enter into such transactions to seek to reduce currency exchange rate and interest rate risks, unanticipated changes in currency exchange rates or interest rates may result in poorer overall investment performance than if we had not engaged in

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any such hedging transactions. In addition, the degree of correlation between price movements of the instruments used in a hedging strategy and price movements in the portfolio positions being hedged may vary. Moreover, for a variety of reasons, we may not seek to establish a perfect correlation between such hedging instruments and the portfolio holdings being hedged. Any such imperfect correlation may prevent us from achieving the intended hedge and expose us to risk of loss. In addition, it may not be possible to hedge fully or perfectly against currency fluctuations affecting the value of investments denominated in non-U.S. currencies because the value of those investments is likely to fluctuate as a result of factors not related to currency fluctuations.

Our business plan anticipates external financing which may expose us to risks associated with leverage.

In order to achieve our investment objectives and our originally anticipated returns, we will need to utilize financial leverage. We may borrow money in order to make investments, for working capital and to make distributions to our unitholders. Under current or future market conditions, we may not be able to borrow all of the funds we may need. If we cannot obtain debt or equity financing on acceptable terms, our ability to acquire new investments to expand our operations will be adversely affected and we may be unable to pay distributions. As a result, we would be less able to achieve our investment objectives, which may negatively impact our results of operations and reduce our ability to make distributions to our unitholders. Furthermore, borrowing money for investments increases the risk of a loss. A decrease in the value of our investments will have a greater impact on the value of units to the extent that we have borrowed money to make investments. There is a possibility that the costs of borrowing could exceed the income we receive on the investments we make with such borrowed funds. Accordingly, we are subject to the risks that our cash flow will not be sufficient to cover the required debt service payments and that we will be unable to meet the other covenants or requirements of the credit agreements. In addition, our ability to pay distributions or incur additional indebtedness may be restricted by our credit agreements. If the value of our assets declines, we may be required to liquidate a portion or our entire investment portfolio and repay a portion or all of our indebtedness at a time when liquidation may be disadvantageous. Furthermore, any amounts that we use to service our indebtedness will not be available for distributions to our unitholders

All of our outstanding debt is collateralized with shares of the Company’s subsidiary that holds all of the Company’s assets and if we default on the payment our creditholders will have rights against such collateral, thereby reducing our asset base and the income we receive from such investments. As of December 31, 2017, we have $28,160,000 debt outstanding with a debt to equity ratio of 8.8%.

We may enter into and have entered into financing arrangements involving balloon payment obligations, which may adversely affect our ability to make distributions to our unitholders.

Some of our financing arrangements require us to make a lump-sum or “balloon” payment at maturity. Our ability to make a balloon payment at maturity will be uncertain and may depend upon our ability to obtain additional financing. At the time the balloon payment is due, we may or may not be able to refinance the balloon payment on terms as favorable as the original financing. The effect of a refinancing could affect the rate of return to our unitholders. In addition, payments of principal and interest made to service our debts, including balloon payments, may reduce our ability to make distributions to our unitholders.

As of December 31, 2017, we have $28.2 million in total debt, which require balloon payments as follows: $0.4 million due in February 2018, $22.8 million due in July 2020, and $5 million due in in August 2021.

We may be unable to invest a significant portion of our raised capital on acceptable terms or within the time period we anticipate.

Delays in investing our raised capital may impair our performance. We may be unable to identify any investment opportunities that meet our investment objectives or that any investment that we make will produce a positive return. We may be unable to invest the net proceeds from our private placement of units, our notes offerings or future offerings on acceptable terms within the time period that we anticipate or at all, which could harm our financial condition and operating results.

We expect to invest proceeds we receive from our raised capital in short-term, highly-liquid investments until we use such funds to invest in assets meeting our investment objectives. The income we earn on these temporary investments is not substantial. Further, we may use the principal amount of these investments, and any returns generated on these investments, to pay for fees and expenses in connection with our capital raises and distributions. Therefore, delays in investing proceeds from our raised capital could impact the amount of and our ability to generate cash flow for distributions.

We may enter into financing arrangements that require us to enter into restrictive covenants that relate to or otherwise limit our operations, which could limit our ability to make distributions to our unitholders, to replace the Advisor or to otherwise achieve our investment objectives.

When providing financing, a lender may impose restrictions on us that affect our distribution and operating policies and our ability to incur additional debt. Financing documents we enter into may contain covenants that limit our ability to make distributions under

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certain circumstances. In addition, provisions of our financing documents may deter us from replacing the Advisor because of the consequences under such agreements. These or other limitations may adversely affect our flexibility and our ability to achieve our investment objectives.

We may enter into financing arrangements that require us to use and pledge offering proceeds to secure and repay such borrowings, and such arrangements may adversely affect our ability to make investments and operate our business.

We may enter into financing arrangements that require us to use and pledge future proceeds from the Offering or future offerings to secure and repay such borrowings. Such arrangements may cause us to have less proceeds available to make investments or otherwise operate our business, which may adversely affect our flexibility and our ability to achieve our investment objectives.

A change in interest rates may adversely affect our profitability and our hedging strategy may expose us to additional risks.

We may use a combination of equity and long-term and short-term borrowings denominated in one or more currencies to finance our lending activities. If we utilize borrowings, a portion of our income will depend upon the difference between the rate at which we borrow funds and the rate at which we loan these funds. Certain of our borrowings may be at fixed rates and others at variable rates. In connection with any borrowings, we may decide to enter into interest rate hedging interests. Hedging activities may limit our ability to participate in the benefits of lower interest rates with respect to the hedged portfolio. Adverse developments resulting from changes in interest rates or hedging transactions could have a material adverse impact on our business, financial condition and operating results. An increase in interest rates would decrease the value of our investments were we seeking to liquidate our portfolio.

Our investments may be long term and may require several years to realize liquidation events.

We anticipate maintaining an average portfolio duration in excess of two years with regard to our debt investments. As a result, our unitholders should not expect liquidity, if any, to occur over the near term. In addition, we expect that any warrants or other return enhancements that we receive when we make loans may require several years to appreciate in value and may not appreciate at all.

Prepayments by our borrowers could adversely impact our operating results, reducing total income and increasing the number of investments the Company will have to execute.

We are also subject to the risk that investments that we make may be repaid prior to scheduled maturity. In such an event, we will generally use proceeds from prepayments first to repay any borrowings outstanding on any line of credit, if we have any outstanding. In the event that funds remain after repayment of our outstanding borrowings, we will generally reinvest these proceeds in short-term securities, pending their future investment in new investment instruments. These short-term securities will typically have substantially lower yields than the debt securities being prepaid and we could experience significant delays in reinvesting these amounts. As a result, our operating results could be materially adversely affected if one or more of our borrowers elect to prepay amounts owed to us. For the years ended December 31, 2017 and 2016, we did not receive any such material prepayments.

Non-payment by our borrowers would prevent us from realizing expected income and could result in the decrease in our net asset value.

All of our fixed-income investments are subject to the risk that a borrower will fail to repay a portion or all of periodically scheduled interest and/or principal and, as of December 31, 2017, we had six borrowers who had failed to make repayment of principal and interest. Four of these borrowers have also been placed on non-accrual status. When this occurs, we may fail to realize expected income and, in some instances, this could possibly result in a write-down of the value of under-performing loans as well as our net asset value.

We allocate substantially all of our fixed-income investment capital to unrated instruments, which may be viewed as highly speculative.

We have and will likely continue to allocate substantially all of our fixed-income investment capital to unrated instruments. Such instruments may be viewed as highly speculative and the recovery of projected interest and principal payments is reliant on the Advisor’s and sub-advisors’ ability to accurately underwrite and manage our investments.

Terrorist attacks, acts of war or national disasters may affect any market for units, impact the businesses in which we invest, and harm our business, operating results and financial conditions.

Terrorist acts, acts of war or national disasters have created, and continue to create, economic and political uncertainties and have contributed to global economic instability. Future terrorist activities, civil war, military or security operations, or national disasters could further weaken the domestic/global economies and create additional uncertainties in the regions in which we may invest, which

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may negatively impact the businesses in which we invest directly or indirectly and, in turn, could have a material adverse impact on our business, operating results and financial condition. Losses from terrorist attacks and national disasters are generally uninsurable.

The occurrence of cyber incidents, or a deficiency in our cyber security, could negatively impact our business by causing a disruption to our operations, a compromise or corruption of our confidential information, and/or damage to our business relationships, all of which could negatively impact our financial results.

A cyber incident is considered to be any adverse event that threatens the confidentiality, integrity, or availability of our information resources. More specifically, a cyber incident is an intentional attack or an unintentional event that can include gaining unauthorized access to systems to disrupt operations, corrupt data, or steal confidential information. As our reliance on technology has increased, so have the risks posed to our systems, both internal and those we have outsourced. Our three primary risks that could directly result from the occurrence of a cyber incident include operational interruption, damage to our relationship with our borrowers, and private data exposure.

Small and Medium-Sized Businesses

Small and medium-sized businesses may have limited financial resources and may not be able to repay the loans we make to them.

Our strategy includes providing financing to borrowers that typically is not readily available to them. This may make it difficult for the borrowers to repay their loans to us. A borrower’s ability to repay its loan may be adversely affected by numerous factors, including the failure to meet its business plan, a downturn in its industry or negative economic conditions. A deterioration in a borrower’s financial condition and prospects will usually be accompanied by a deterioration in the value of any collateral and a reduction in the likelihood of us realizing on any guarantees we may have obtained from the borrower’s management. We may at times be subordinated to a senior lender, and, in such situations, our interest in any collateral would likely be subordinate to another lender’s security interest.

Small and medium-sized businesses typically have narrower product offerings and smaller market shares than large businesses.

Because our target borrowers are smaller businesses, they tend to be more vulnerable to competitors’ actions and market conditions, as well as general economic downturns. In addition, borrowers may face intense competition, including competition from companies with greater financial resources, more extensive development, manufacturing, marketing and other capabilities and a larger number of qualified managerial and technical personnel.

Small and medium-sized businesses generally have less predictable operating results.

Our borrowers may have significant variations in their 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, may require substantial additional capital to support their operations, finance expansion or maintain their competitive position, may otherwise have a weak financial position or may be adversely affected by changes in the business cycle. Our borrowers may not meet net income, cash flow and other coverage tests typically imposed by their senior lenders. A borrower’s failure to satisfy financial or operating covenants imposed by senior lenders could lead to defaults and, potentially, foreclosure on its senior credit facility, which could additionally trigger cross-defaults in other agreements. If this were to occur, it is possible that the borrower’s ability to repay our loan would be jeopardized.

Small and medium-sized businesses are more likely to be dependent on one or two persons.

Typically, the success of a small or medium-sized business depends on the management talents and efforts of one or two persons or a small group of persons. The death, disability or resignation of one or more of these persons could have a material adverse impact on our borrower and, in turn, on us.

Small and medium-sized businesses are likely to have greater exposure to economic downturns than larger businesses.

Our borrowers tend to have fewer resources than larger businesses and an economic downturn is more likely to have a material adverse effect on them. If one of our borrowers is adversely impacted by an economic downturn, its ability to repay our loan would be diminished.

Small and medium-sized businesses may have limited operating histories.

Borrowers with limited operating histories will be exposed to all of the operating risks that new businesses face and may be particularly susceptible to, among other risks, market downturns, competitive pressures and the departure of key executive officers.

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Lack of minimum requirements when lending to small and medium-sized businesses could increase the risk of default.

Although our investment strategy is focused on small and medium-sized businesses meeting certain underwriting criteria, we are not required to invest only in businesses meeting certain minimum asset size, revenue size or profitability standards and the lack of these minimum requirements could create additional risks with respect to our investments, including the risk of default.

Non-U.S. Investments

Our investments in foreign debt and equity instruments may involve significant risks in addition to the risks inherent in U.S. investments.

Our investment strategy contemplates investing primarily in debt and equity instruments issued by foreign companies. During 2017 and 2016, we have made loans to companies located in Argentina, Brazil, Cabo Verde, Cayman Islands, Chile, China, Colombia, Ecuador, Ghana, Guatemala, Hong Kong, Indonesia, Italy, Kenya, Malaysia, Mauritius, Mexico, Morocco, Namibia, New Zealand, Nigeria, Peru, Singapore, South Africa, Tanzania, the United Arab Emirates, the United Kingdom, Uruguay, and Zambia. Investing in foreign companies may expose us to additional risks not typically associated with investing in U.S. companies. These risks include changes in exchange control regulations, political and social instability, expropriation, imposition of foreign taxes, less liquid markets and less available information than is generally the case in the U.S., higher transaction costs, less government supervision of exchanges, brokers and issuers, less developed bankruptcy laws, difficulty in enforcing contractual obligations, lack of uniform accounting and auditing standards and greater price volatility.

Non-U.S. investments involve certain legal, geopolitical, investment, repatriation, and transparency risks not typically associated with investing in the U.S.

A portion of our investments are likely to be denominated in foreign currencies, and we may be exposed to fluctuation in currency exchange rates, which could result in losses.

As of December 31, 2017, all our investments are denominated in U.S. dollars. In the future, some of our investments are likely to be denominated in a foreign currency and will be subject to the risk that the value of a particular currency will change in relation to one or more other currencies. Among the factors that may affect currency values are trade balances, the level of short-term interest rates, differences in relative values of similar assets in different currencies, long-term opportunities for investment and capital appreciation, and political developments. We may employ hedging techniques to minimize these risks, but effective hedging instruments may not be available in all cases, or may not be available at economically-feasible pricing or that hedging strategies may not be effective.

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Fluctuation in currency exchange rates may negatively affect our borrowers’ ability to pay U.S. dollars denominated loans

For investment denominated in U.S. dollars, if the U.S. dollar rises, it may become more difficult for borrowers to make loan payments if the borrowers are operating in markets where the local currencies are depreciating relative the U.S. dollar.

Lack of compliance with the U.S. Foreign Corrupt Practices Act, or FCPA, could subject us to penalties and other adverse consequences.

We are subject to the FCPA, which generally prohibits U.S. companies from engaging in bribery or other prohibited payments to foreign officials for the purpose of obtaining or retaining business. Foreign companies, including potential competitors, are not subject to these prohibitions. Fraudulent practices, including corruption, extortion, bribery, pay-offs, theft and others, occur from time-to-time in countries in which we may do business. If people acting on our behalf or at our request are found to have engaged in such practices, severe penalties and other consequences could be imposed on us that may have a material adverse effect on our business, results of operations, cash flows and financial condition and our ability to make distributions to you and the value of your investment.

Risks Related to our Advisor and its Affiliates:

Our success will be dependent on the performance of our Advisor; however, our Advisor has limited operating history and experience managing a public company, which may hinder our ability to achieve our investment objectives.

TriLinc Advisors was formed in April 2012 and had no operating history at that time. Furthermore, our Advisor had never before acted as an advisor to a public company and has no prior experience complying with regulatory requirements applicable to public companies. Our current management team has no prior direct experience in impact lending. The Advisor and its affiliates are responsible for selecting the sub-advisors. Our current management team has not previously been involved in the selection or supervision of sub-advisors who are private debt impact investors. Although our Advisor retains ultimate responsibility for the performance of services under the Advisory Agreement, it can delegate its responsibilities to one of its affiliates or a third party. If our Advisor or any of its affiliates fail to perform according to our expectations and in accordance with the Advisory Agreement, we could be materially adversely affected.

We are dependent upon our key management personnel and the key management personnel of our Advisor, who will face conflicts of interest relating to time management, and on the continued operations of our Advisor, for our future success.

We have no employees. Our executive officers and the officers and employees of our Advisor and its affiliates may hold similar positions in other affiliated entities and they may from time to time allocate more of their time to service the needs of such entities than they allocate to servicing our needs.

In addition, we have no separate facilities and are completely reliant on our Advisor, which has significant discretion as to the implementation and execution of our business strategies and risk management practices. We are subject to the risk of discontinuation of our Advisor’s operations or termination of the Advisory Agreement and the risk that, upon such event, no suitable replacement will be found. We believe that our success depends to a significant extent upon our Advisor and that discontinuation of its operations could have a material adverse effect on our ability to achieve our investment objectives.

We may compete with other Sponsor affiliated entities for opportunities to originate or participate in investments, which may have an adverse impact on our operations.

We may compete with other Sponsor affiliated entities, and with other entities that Sponsor affiliated entities may advise or own interests in, whether existing or created in the future, for opportunities to originate or participate in impact investments. The Advisor may face conflicts of interest when evaluating investment opportunities for us and other owned and/or managed by Sponsor affiliated entities and these conflicts of interest may have a negative impact on us.

Sponsor affiliated entities may have, and additional entities (including those that may be advised by Sponsor affiliated entities or in which Sponsor affiliated entities own interests) may be given, priority over us with respect to the acquisition of certain types of investments. As a result of our potential competition with these entities, certain investment opportunities that would otherwise be available to us may not in fact be available.

Our success will be dependent on the performance of our sub-advisors.

Our Advisor employs sub-advisors in its execution of the investment strategy, not all of whom have been identified. Sub-advisors are responsible for locating, performing due diligence and closing on suitable acquisitions based on their access to local markets, local market knowledge for quality deal flow and extensive local private credit experience. However, because the sub-advisors are separate companies from our Advisor, the risk exists that our sub-advisors will be ineffective or materially underperform. In addition, the Sub-

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Advisory Agreements with the sub-advisors can only be terminated under specific circumstances and they do not automatically terminate upon the termination of the Advisory Agreement.

We may be unable to find suitable investments through our sub-advisors. Our ability to achieve our investment objectives and to pay distributions will be dependent upon the performance of our local sub-advisors in the identification, performance of due diligence on and acquisition of investments, the determination of any financing arrangements, and the management of our projects and assets. If our sub-advisors fail to perform according to our expectations, or if the due diligence conducted by the sub-advisors fails to reveal all material risks of the businesses of our target investments, we could be materially adversely affected.

Our sub-advisors’ failure to identify and make investments that meet our investment criteria or perform their responsibilities under the Sub-Advisory Agreements may adversely affect our ability to realize our investment objectives.

Our ability to achieve our investment objectives will depend, in part, on our sub-advisors’ ability to identify and invest in debt and equity instruments that meet our investment criteria. Accomplishing this result on a cost-effective basis will, in part, be a function of our sub-advisors’ execution of the investment process, their capacity to provide competent and efficient services to us, and, their ability to source attractive investments. Our sub-advisors will have substantial responsibilities under the Sub-Advisory Agreements. Any failure to manage the investment process effectively could have a material adverse effect on our business, financial condition and results of operations.

We pay substantial compensation to our Advisor, our dealer manager and their respective affiliates, which may be increased by our independent managers. The fees we pay in connection with the agreements entered into with our Advisor and our dealer manager were not determined on an arm’s-length basis and therefore may not be on the same terms we could achieve from a third party.

As of December 31, 2017, we have paid fees totaling approximately $23,626,000 to our Advisor or its affiliates and $21,685,000 to our dealer manager or its affiliates. The compensation paid to our Advisor, our dealer manager and their respective affiliates for services they provide us pursuant to the Advisory Agreement and the Dealer Manager Agreements was not determined on an arm’s-length basis. A third party unaffiliated with us may be willing and able to provide certain services to us at a lower price.

In addition, subject to limitations in our operating agreement, the fees, compensation, income, expense reimbursements, interests and other payments payable to our Advisor, our dealer manager and their respective affiliates may increase in the future from those previously disclosed, if such increase is approved by a majority of our independent managers.

There are significant potential conflicts of interest, which could impact our investment returns.

In the course of our investing activities, we also pay management and incentive fees to our Advisor and reimburse our Advisor for certain administrative expenses incurred on behalf of the Company. As a result, our investors invest on a “gross” basis and receive distributions on a “net” basis after expenses, resulting in, among other things, a lower rate of return than one might achieve by making direct investments. As a result of this arrangement, there may be times when the management team of our Advisor has interests that differ from those of our unitholders, giving rise to a conflict. For example, our Advisor has incentives to recommend that we make investments using borrowings since the asset management fees that we pay to our Advisor will increase if we use borrowings in connection with our investments.

Our subordinated incentive fee may induce our Advisor to make certain investments, including speculative investments.

The management compensation structure that has been implemented under the Advisory Agreement, with our Advisor may cause our Advisor to invest in higher-risk investments or take other risks. In addition to its asset management fee, our Advisor is entitled under the Advisory Agreement to receive subordinated incentive compensation based in part upon our achievement of specified levels of net cash flows. The incentive fee payable by us to our Advisor may create an incentive for the Advisor to make investments on our behalf that are risky or more speculative than would be the case in the absence of such compensation arrangement. The way in which the incentive fee payable from operations, sales or other sources is determined, which is calculated as a percentage of our net cash flows, may encourage our Advisor to use leverage to increase the return on our investments. Under certain circumstances, the use of leverage may increase the likelihood of default, which would disfavor our unitholders.

In evaluating investments and other management strategies, the opportunity to earn subordinated incentive compensation may lead our Advisor to place undue emphasis on the maximization of investment income at the expense of other criteria, such as preservation of capital, maintaining sufficient liquidity, or management of credit risk or market risk, in order to achieve higher subordinated incentive compensation. Investments with higher yield potential are generally riskier or more speculative. This could result in increased risk to the value of our investment portfolio.

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Risks related to Tax Matters:

Tax Treatment as a Partnership

We intend to be treated as a partnership (other than a publicly traded partnership) for federal income tax purposes and not as a corporation. We have not sought a ruling from the Internal Revenue Service, or IRS, on the tax treatment of us or our units, and such treatment as a partnership may not be sustained by a court if challenged by the IRS.

If we were taxable as a corporation, the “pass through” treatment of our income and losses would be lost. Instead, we would, among other things, pay income tax on our earnings in the same manner and at the same rate as a corporation, and our losses, if any, would not be deductible by the unitholders. Unitholders would be taxed upon distributions substantially in the manner that corporate shareholders are taxed on dividends.

Avoiding Publicly Traded Partnership Status

No transfer of an interest may be made if it would result in the Company being treated as a publicly traded partnership taxable as a corporation under the Internal Revenue Code of 1986, as amended, or the Code. We may, without the consent of any unitholder, amend our operating agreement in order to improve, upon advice of counsel, the Company’s position in avoiding such publicly traded partnership status for the Company (and we may impose time-delay and other restrictions on recognizing transfers or on repurchases pursuant to unit repurchase program as necessary to do so). Furthermore, we, upon advice of counsel, may restructure the Company (including the creation or liquidation of subsidiary entities) and/or enter into any agreements that we deem necessary, without the prior approval of the unitholders, if such activities are reasonably determined by us, in our sole discretion, to avoid the Company being characterized as a publicly traded partnership under the Code that is taxable as a corporation.

Taxable Income in Excess of Cash Available for Distribution

For federal income tax purposes, we may include in income certain amounts that we have not yet received in cash, such as original issue discount, which may arise if we receive warrants in connection with the making of a loan or possibly in other circumstances, or contracted payment-in-kind interest, which represents contractual interest added to the loan balance and due at the end of the loan term. Such original issue discount, which could be significant relative to our overall investment activities, or increases in loan balances as a result of contracted payment-in-kind arrangements, will be included in income before we receive any corresponding cash payments. We may also be required to include in income certain other amounts that we will not receive in cash. If a borrower defaults on a loan that is structured to provide accrued interest, it is possible that accrued interest previously reported as investment income will become uncollectible.

Since in certain cases we may recognize income before or without receiving cash representing such income, we may have difficulty paying investor distributions without resorting, in part or in whole, to borrowings or other sources of capital.

The payment of the distribution fee over time with respect to the Class C units, certain Class I units, and Class W units is deemed to be paid from cash distributions that would otherwise be distributable to such unitholders. Accordingly, the holders of Class C units, certain Class I units, and Class W units will receive a lower cash distribution to the extent of such unitholders’ obligation to pay such fees. Because the payment of such fees is not a deductible expense for tax purposes, the taxable income of the Company allocable to the Class C, certain Class I, and Class W unitholders may, therefore, exceed the amount of cash distributions made to such unitholders.

Risk of Audit and Adjustments

The IRS could challenge certain federal income tax positions taken by us if we are audited. Any adjustment to our return resulting from an audit by the IRS would result in adjustments to tax returns of our unitholders and might result in an examination of items in such returns unrelated to their investment in the units or an examination of tax returns for prior or later years. Moreover, we and our unitholders could incur substantial legal and accounting costs in contesting any IRS challenge, regardless of the outcome. Our management generally will have the authority and power to act for, and bind the Company in connection with, any such audit or adjustment for administrative or judicial proceedings in connection therewith.

Pursuant to legislative changes enacted in the Bipartisan Budget Act of 2015, which are effective for tax years beginning in 2018, the IRS may, in certain circumstances, collect taxes (together with applicable interest and penalties) directly from the Company following a determination that the Company has underreported taxable income to our unitholders with respect to such years.  The payment of such taxes by the Company would reduce the funds available for distribution by the Company, and could adversely affect the value of our units.

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No Rulings

We will not seek rulings from the IRS with respect to any of the federal income tax considerations. Thus, positions to be taken by the IRS as to tax consequences could differ from positions taken by us.

 

Recent Tax Reform may Adversely Affect the Company, its Subsidiaries or Unitholders

 

On December 22, 2017, President Trump signed into law P.L. 115-97, informally titled the Tax Cuts and Jobs Act (the “Tax Act”). The Tax Act makes significant changes to the Code, including a number of provisions that could affect the taxation of the Company, its subsidiaries or unitholders. The Tax Act limits the ability of taxpayers to utilize certain tax attributes, including the following:

 

 

The Tax Act also requires taxpayers to recognize certain income for tax purposes not later than the taxable year in which such income is taken into account in an applicable financial statement, which may, in some cases, accelerate the taxation of our income. Also, although non-corporate owners of pass-through entities, including partnerships, are eligible for a new deduction under the Tax Act of up to 20% of their share of the amount of business income generated by the entity, this deduction will generally not be available to unitholders with respect to their income from the Company, which could adversely affect the value of units in the Company relative to investments in other pass-through vehicles. In addition, new provisions in the Tax Act that relate to the taxation of certain foreign earnings could, depending on their application to the Company or its subsidiaries, have adverse tax consequences.

 

The individual and collective impact of these and other provisions of the Tax Act on the Company and its subsidiaries and unitholders is uncertain, and may not become evident for some period of time.

Possible Legislative or Other Developments

All statements contained in this Form 10-K concerning the expected federal income tax consequences of any investment in the Company are based upon existing law and the interpretations thereof. The income tax treatment of an investment in the Company may be modified by legislative, judicial or administrative changes, possibly with retroactive effect, to the detriment of the unitholders.

Reportable Transactions

Under regulations promulgated by the U.S. Treasury Department regulations, the activities of the Company may create one or more “reportable transactions,” requiring the Company and each unitholder, respectively, to file information returns with the IRS. We will give notice to all unitholders of any reportable transaction of which we become aware in the annual tax information provided to unitholders in order to file their tax returns.

Filings and Information Returns

We will use reasonable commercial efforts to cause all tax filings to be made in a timely manner (taking permitted extensions into account); however, investment in the Company may require the filing of tax return extensions. Unitholders may have to obtain one or more tax filing extensions if the Company does not deliver Schedule K-1 by the due date of the unitholders’ returns. Although our management will attempt to cause the Company to provide unitholders with estimated annual federal tax information prior to March 15th as long as the Company’s taxable year is the calendar year, the Company may not obtain annual federal tax information from all borrowers by such date and tax return extensions may be required to be filed by unitholders. Moreover, although estimates will be provided to the unitholders by the Company in good faith based on the information obtained from the borrowers, such estimates may be different from the actual final tax information and such differences could be significant, resulting in interest and penalties to the unitholders due to underpayment of taxes or loss of use of funds for an extended period of time due to overpayment of taxes. Furthermore, the Company’s activities may require unitholders to file in multiple jurisdictions if composite state returns are not filed by the Company. We may file composite state tax returns for the benefit of unitholders that elect to participate in the filing of such returns.

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Unrelated Business Taxable Income

Tax-exempt investors (such as an employee pension benefit plan or an IRA) may have Unrelated Business Taxable Income, or UBTI, from investments that are made by us. We have borrowed and may in the future borrow funds, which can lead to the generation of UBTI from debt financed property. We may also receive income from services rendered in connection with making loans, which is likely to constitute UBTI. We may acquire investments that generate UBTI and unitholders can expect some or all of their profits from the Company to be UBTI. Although we have attempted to structure our investments so as to minimize generating UBTI, there is no assurance that UBTI will not be generated from our investments. The Company will not be liable to tax-exempt investors for the recognition of UBTI.

Foreign Income Taxes

We have and may continue to conduct our activities in foreign jurisdictions and, in conjunction therewith, we have formed four subsidiaries to conduct such activities and we may form additional subsidiaries. The conduct of activities in foreign jurisdictions (whether or not foreign subsidiaries are formed to conduct such activities) may result in the Company or its subsidiaries being subject to tax in such foreign jurisdictions. Taxes paid by the Company in such foreign jurisdictions will reduce the cash available for distribution to the unitholders. However, because we are taxable as a partnership for U.S. Federal income tax purposes, certain foreign income taxes paid by the Company may generate a foreign tax credit that will be allocated to each unitholder, which may be used to reduce, on a dollar-for-dollar basis, the tax liability of such unitholder.

Effectively Connected Income, FIRPTA, and State Tax Withholding

We may generate income that is “effectively connected” with a U.S. trade or business, and, if so, a foreign unitholder will generally be required to file an annual federal income tax return. A federal withholding tax, at the highest applicable effective tax rate, generally will be imposed on a foreign unitholder’s allocable share of such effectively connected income (whether or not such income is distributed). There also may be state or local tax withholding. Foreign investors may also be subject to the provisions of the Foreign Investment in Real Property Tax Act of 1980, as amended, which generally treats any gain or loss of a foreign person that is realized in connection with the (actual or constructive) disposition of a “U.S. real property interest” as gain or loss effectively connected with a trade or business engaged in by the taxpayer in the U.S. A 30% U.S. “branch profits tax” will generally apply to an investment in the Company by foreign unitholders that are corporations.

Risks related to the Investment Company Act:

We are not registered as an investment company under the Investment Company Act and, therefore, we will not be subject to the requirements imposed on an investment company by the Investment Company Act which may limit or otherwise affect our investment choices.

The Company and our subsidiaries will conduct our businesses so that none of such entities are required to register as “investment companies” under the Investment Company Act. Although we could modify our business methods at any time, at the present time we expect that the focus of our activities will involve investments in fixed-income assets and other loans of the nature described earlier.

Companies subject to the Investment Company Act are required to comply with a variety of substantive requirements including, but not limited to:

These and other requirements are intended to provide benefits and/or protections to security holders of investment companies. Because we and our subsidiaries do not expect to be subject to these requirements, you will not be entitled to these benefits or protections. It is our policy to operate in a manner that will not require us to register as an investment company, and we do not expect or intend to register as an investment company under the Investment Company Act.

Whether a company is an investment company can involve analysis of complex laws, regulations and SEC staff interpretations. We intend to conduct the Company’s operations so as not to become subject to regulation as an investment company under the Investment Company Act. So long as the Company conducts its businesses directly and through its wholly-owned or majority-owned subsidiaries that are not investment companies and none of the Company and the wholly-owned or majority-owned subsidiaries hold themselves

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out as being engaged primarily in the business of investing in securities, the Company should not have to register. The securities issued by any subsidiary that is excepted from the definition of investment company under Section 3(c)(1) or Section 3(c)(7) of the Investment Company Act, together with any other “investment securities” (as used in the Investment Company Act) its parent may own, may not have a combined value in excess of 40% of the value of the parent entity’s total assets on an unconsolidated basis (which we refer to as the 40% test). In other words, even if some interests in other entities were deemed to be investment securities, so long as such investment securities do not comprise more than 40% of an entity’s assets, the entity will not be required to register as an investment company. If an entity held investment securities and the value of these securities exceeded 40% of the value of its total assets, and no other exemption from registration was available, then that entity might be required to register as an investment company.

We do not expect that we or any of our majority- or wholly-owned subsidiaries will be an investment company, and in particular, we will seek to assure that holdings of investment securities in the Company do not exceed 40% of the total assets of that entity as calculated under the Investment Company Act. In order to operate in compliance with that standard, we may be required to conduct our business in a manner that takes account of these provisions. In order for us to so comply, we or a subsidiary could be unable to sell assets we would otherwise want to sell or we may need to sell assets we would otherwise wish to retain, if we deem it necessary to remain in compliance with the 40% test. In addition, we may also have to forgo opportunities to acquire certain assets or interests in companies or entities that we would otherwise want to acquire, or acquire assets we might otherwise not select for purchase, if we deem it necessary to remain in compliance with the 40% test. For example, these restrictions will limit our ability to invest directly in certain types of assets, such as in securities that represent less than 50% of the voting securities (as used in the Investment Company Act) of the issuer thereof.

If the Company or any subsidiary owns assets that qualify as “investment securities” as such term is defined under the Investment Company Act and the value of such assets exceeds 40% of the value of its total assets, the entity could be deemed to be an investment company. In that case the entity would have to qualify for an exemption from registration as an investment company in order to operate without registering as an investment company. Certain of the subsidiaries that we may form in the future could seek to rely upon one of the exemptions from registration as an investment company under the Investment Company Act pursuant to Section 3(c)(5)(A) or Section 3(c)(5)(B) of the Investment Company Act. The exemption pursuant to Section 3(c)(5)(A) is available for entities “primarily engaged in the business of purchasing or otherwise acquiring notes, drafts, acceptances, open accounts receivable, and other obligations representing part or all of the sales price of merchandise, insurance, and services” (which we refer to as the 3(c)(5)(A) exemption), while the exemption pursuant to Section 3(c)(5)(B) is available for entities “primarily engaged in the business of making loans to manufacturers, wholesalers, and retailers of, and to prospective purchasers of, specified merchandise, insurance, and services” (which we refer to as the 3(c)(5)(B) exemption). Each of the 3(c)(5)(A) exemption and the 3(c)(5)(B) exemption generally requires that at least 55% of the assets of a subsidiary relying on such exemption be invested in eligible loans and receivables. To qualify for either of the foregoing exemptions, the subsidiary would be required to comply with interpretations issued by the staff of the SEC that govern the respective activities.

In addition to the exceptions discussed above, we and/or our subsidiaries may rely upon other exceptions and exemptions, including the exemptions provided by Section 3(c)(6) of the Investment Company Act (which exempts, among other things, parent entities whose primary business is conducted through majority-owned subsidiaries relying upon the 3(c)(5)(A) exemption and/or the 3(c)(5)(B) exemption discussed above) from the definition of an investment company and the registration requirements under the Investment Company Act.

The laws and regulations governing the Investment Company Act status of entities like the Company and our subsidiaries, including actions by the Division of Investment Management of the SEC providing more specific or different guidance regarding these exemptions, may change in a manner that adversely affects our operations. To the extent that the SEC staff provides more specific guidance regarding any of the matters bearing upon the exceptions discussed above or other exemptions from the definition of an investment company under the Investment Company Act upon which we may rely, we may be required to adjust our strategy accordingly. Any additional guidance from the SEC staff could provide additional flexibility to us, or it could further inhibit our ability to pursue the strategies we have chosen.

If the Company or any of our subsidiaries is required to register as an investment company under the Investment Company Act, the additional expenses and operational limitations associated with such registration may reduce our unitholders’ investment return or impair our ability to conduct our business as planned.

If we become an investment company or are otherwise required to register as such, we might be required to revise some of our current policies, or substantially restructure our business, to comply with the Investment Company Act. This would likely require us to incur the expense of holding a unitholder meeting to vote on such changes. Further, if we were required to register as an investment company, but failed to do so, we would be prohibited from engaging in our business, criminal and civil actions could be brought against us, some of our contracts might be unenforceable, unless a court were to direct enforcement, and a court could appoint a receiver to take control of us and liquidate our business.

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Risks related to ERISA:

If our assets are deemed to be Employee Retirement Income Security Act of 1974, as amended (“ERISA”), plan assets, the Advisor and we may be exposed to liabilities under Title I of ERISA and the Code.

In some circumstances where an ERISA plan holds an interest in an entity, the assets of the entire entity are deemed to be ERISA plan assets unless an exception applies. This is known as the “look-through rule.” Under those circumstances, the obligations and other responsibilities of plan sponsors, plan fiduciaries and plan administrators, and of parties in interest and disqualified persons, under Title I of ERISA and Section 4975 of the Code, as applicable, may be applicable, and there may be liability under these and other provisions of ERISA and the Code. We believe that our assets will not be treated as plan assets because our units should qualify as “publicly-offered securities” that are exempt from the look-through rules under applicable Treasury Regulations. We note, however, that because certain limitations are imposed upon the transferability of our units, it is possible that this exemption may not apply. If that is the case, and if the Advisor or we are exposed to liability under ERISA or the Code, our performance and results of operations could be adversely affected. Prior to making an investment in us, our unitholders should consult with their legal and other advisors concerning the impact of ERISA and the Code on our unitholders’ investment and our performance.

Risks Relating to Investing in our Units:

The units sold will not be listed on an exchange for the foreseeable future, if ever. Therefore, it will be difficult for our unitholders to sell their units and, if they are able to sell their units, they will likely sell them at a substantial discount.

The units that may be offered by us are illiquid assets for which there is not expected to be any secondary market nor is it expected that any will develop in the future. Moreover, our unitholders should not rely on our unit repurchase program as a method to sell units promptly because our unit repurchase program includes numerous restrictions that limit the unitholders’ ability to sell our units to us, and our board of managers may amend, suspend or terminate our unit repurchase program at any time. In particular, the unit repurchase program provides that we may make repurchase offers only if our unitholders have held our units for a minimum of one year, we have sufficient funds available for repurchase from our distribution reinvestment plan and to the extent the total number of units for which repurchase is requested in any 12 month period does not exceed 5% of our weighted average number of outstanding units as of the same date in the prior 12 month period. Therefore, it will be difficult for our unitholders to sell their units promptly or at all. If our unitholders are able to sell their units, they may only be able to sell them at a substantial discount from the price they paid. Investor suitability standards imposed by certain states may also make it more difficult to sell units to someone in those states. The units should be purchased as a long-term investment only.

In the future, our board of managers may consider various forms of liquidity, each of which is referred to as a liquidity event, including, but not limited to: (1) dissolution and winding up distribution of our assets; (2) merger or sale of all or substantially all of our assets; or (3) the listing of units on a national securities exchange. If we do not consummate a liquidity event by August 25, 2021, we will be required to commence an orderly liquidation of the assets unless a majority of our board, including a majority of the independent managers, determines that liquidation is not in the best interests of our unitholders. Under such circumstances the commencement of an orderly liquidation will be postponed for one year. Further postponement of the liquidity event would only be permitted if a majority of our board, including a majority of independent managers, again determined that liquidation would not be in the best interest of our unitholders and our board must make a determination in this manner during each successive year until a liquidity event has occurred. If we at any time choose to seek but then fail to obtain unitholders’ approval of our liquidation, our operating agreement would not require us to consummate a liquidity event or liquidate and would not require our board to revisit the issue of liquidation, and we could continue to operate as before.

We may be unable to liquidate all assets. After we adopt a plan of liquidation, we would likely remain in existence until all our investments are liquidated. If we do not pursue a liquidity transaction, or delay such a transaction due to market conditions, our units may continue to be illiquid and our unitholders may, for an indefinite period of time, be unable to convert their investment to cash easily and could suffer losses on their investment.

We established the initial offering prices for our classes of units in the Offering on an arbitrary basis, and the offering price may not accurately reflect the value of our assets.

We terminated the Offering effective March 31, 2017 and approximately $362 million in units initially registered for the Offering were issued. The initial prices of our units in the Offering were established on an arbitrary basis and were not based on the amount or nature of our assets, the market value of our assets, or our book value. Even though we conduct quarterly valuations of our assets, the price our unitholders paid for their units may not be indicative of the price at which such units would trade if they were listed on an exchange or actively traded by brokers nor of the proceeds that a unitholder would receive if we were liquidated or dissolved. In addition, our board of managers may determine the fair value of our assets based upon internal valuation assessments and not independent valuation assessments, which may be materially different. In addition, determination of fair value involves subjective judgments and estimates, which may not be accurate or complete.

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Our net asset value would have decreased for all unit classes if the Sponsor had not made capital contributions in the amount of $51,034 and $31,750 in the quarters ended December 31, 2013 and March 31, 2014, respectively, or had not absorbed and deferred reimbursement for a substantial portion of our operating expenses since we began our operations.

Our unitholders will not have the opportunity to evaluate our investments before we make them, which makes investment in our units more speculative.

Our investments are selected by our sub-advisors and reviewed by our Advisor and our unitholders do not have input into such investment decisions, so our unitholders have to rely entirely on the ability of our Advisor and sub-advisors to select suitable and successful investment opportunities. Both of these factors will increase the uncertainty, and thus the risk, of investing in units.

Our dealer manager has limited experience in offerings, which may affect the amount of funds we raise in any future offerings in which they serve as dealer manager, and our ability to achieve our investment objectives.

Our dealer manager, SC Distributors, LLC, was formed in March 2009 and has limited experience conducting offerings. This lack of experience may affect the way in which our dealer manager conducts any future offerings in which they serve as dealer manager.  The success of any possible future offerings, and correspondingly our ability to implement our business strategy, is dependent upon the ability of our dealer manager to enter into selling agreements with a network of licensed participating brokers dealers. If our dealer manager failed to perform for any reason, it could significantly impact the success any future offerings and, likewise the success of our operations. Substantially less than the maximum units available in the Offering were sold when the Offering terminated on March 31, 2017. Accordingly, we may not have adequate funds to purchase a diversified portfolio of investments. As a result, we may be unable to achieve our investment objectives, and our unitholders could lose some or all of the value of their investment.

Our unitholders will experience substantial dilution in the net tangible book value of their units equal to the offering costs associated with their units.

Our unitholders will incur immediate dilution, which will be substantial, equal to the costs of any offering associated with the sale of units. This means that the investors who have or will purchase units will pay a price per unit that substantially exceeds the amount available with which to purchase assets and therefore, the value of these assets upon purchase. As of December 31, 2017, we have incurred a cumulative total of approximately $17.2 million in offering costs which has been reimbursed to our Sponsor.

Because of all the risks described in this section, investing in units may involve an above average degree of risk.

Because of all the risks described in this section, the investments we make in accordance with our investment objectives may result in a higher amount of risk than alternative investment options and volatility or loss of principal. Our investments may be highly risky and aggressive, and therefore, an investment in units may not be suitable for someone with lower risk tolerance.

Our unitholders may experience dilution.

Our unitholders do not have preemptive rights. If, as expected, we engage in a subsequent offering of units or securities convertible into units, issue units pursuant to our distribution reinvestment plan or otherwise issue additional units, investors who purchase units in this offering who do not participate in those other securities issuances will experience dilution in their percentage ownership of our outstanding units. Furthermore, unitholders may experience a dilution in the value of their units depending on the terms and pricing of any unit issuances and the value of our assets at the time of issuance.

We do not, and do not expect to, have research analysts reviewing our performance.

We do not, and do not expect to, have research analysts reviewing our performance or our securities on an ongoing basis. Therefore, our unitholders will not have an independent review of our performance and the value of our units relative to publicly traded companies.

We are an “emerging growth company” under the JOBS Act, and we cannot be certain if the reduced disclosure requirements applicable to emerging growth companies will make our units less attractive to investors.

Section 107 of the JOBS Act provides that an “emerging growth company” can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act of 1933, as amended, or Securities Act, for complying with new or revised accounting standards. In other words, an “emerging growth company” can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. We are choosing to take advantage of the extended transition period for complying with new or revised accounting standards. As a result, our financial statements may not be comparable to those of companies that comply with public company effective dates. As of December 31, 2017, there are no new or revised accounting standards that we have not adopted.

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ITEM 1B. UNRESOLVED STAFF COMMENTS

None.

 

 

ITEM 2. PROPERTIES

We do not own or lease any properties. Our administrative and principal executive offices, which are located at 1230 Rosecrans Avenue, Suite 605, Manhattan Beach, CA 90266, are leased by our Sponsor.

 

 

ITEM 3. LEGAL PROCEEDINGS

The Company is not party to any material legal proceedings.

 

 

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

There is no public trading market for our units.

We determine our net asset value on a quarterly basis. Our net asset value is determined by our board of managers based on the input of 1) our Advisor, 2) our audit committee, 3) an opinion of Duff & Phelps, LLC as to the reasonableness of our internal estimates of fair value of selected loans and, 4) if engaged by our board of managers, one or more independent valuation firms. We may value our investments using different valuation approaches. We calculate our net asset value per unit by subtracting total liabilities from the total value of our assets on the date of valuation and dividing the result by the total number of outstanding units on the date of valuation.  Our board of managers has determined our estimated net asset value, as of December 31, 2017, to be $8.466 per Class A, Class C, Class I and Class Y unit as compared to $8.507 per Class A, Class C, Class I and Class Y unit as of September 30, 2017. The decrease of $0.041 in the estimated net asset value from September 30, 2017 to December 31, 2017 resulted primarily from our failure to realize sufficient investment income during the fourth quarter of 2017 to cover operating expenses and the Sponsor’s determination not to pay for any operating expenses on our behalf for such quarter. Our net asset value would have decreased for all unit classes in all prior periods if the Sponsor had not absorbed and deferred reimbursement for a substantial portion of our operating expenses since we began our operations. Our estimated net asset value was determined in accordance with the procedures set forth above.

We are offering $75 million in Class A, Class C and Class I units pursuant to our Distribution Reinvestment Plan to the investors who have purchased units in the Offering. On March 7, 2018, our board of managers approved an amendment to our distribution reinvestment plan, pursuant to which, commencing with distributions declared for the month of March 2018, which were reinvested on March 30, 2018, units issued pursuant to the Distribution Reinvestment Plan are being offered at the price equal to the net asset value per unit of each class of units, as most recently disclosed by the Company in a public filing with the SEC at the time of reinvestment. Distributions declared for the month of March 2018 were reinvested at a price equal to $8.507 for Class A units, Class C units, and Class I units, which was the net asset value per unit as of September 30, 2017, the most recently disclosed net asset value at the time of reinvestment. Distributions declared for the month of April 2018 will be reinvested at a price equal to $8.466 per Class A unit, Class C units and Class I unit, which was the net asset value per unit as of December 31, 2017. Prior to March 30, 2018, units were issued pursuant to the Distribution Reinvestment Plan at a price equal to the greater of $9.025 per unit or the net asset value per unit of each class, as most recently disclosed by the Company in a public filing with the SEC.

As of March 26, 2018, there were 18,366,611 Class A units outstanding held of record by 4,071 persons, 8,469,747 Class C units outstanding held of record by 2,158 persons, 10,629,452 Class I Units outstanding held of record by 1,925 persons, 24,555 Class W units outstanding held of record by 5 persons, 1,116,053 Class Y units outstanding held of record by 62 persons, and 5,877,513 Class Z units outstanding held of record by one person. There were no outstanding options or warrants to purchase, or securities convertible into, our units.

Distributions

We pay distributions pursuant to the terms of our operating agreement on a monthly basis when declared by our board of managers. From time to time, we may also pay interim distributions at the discretion of our board. Distributions are subject to the board of managers’ discretion and applicable legal restrictions and accordingly, there can be no assurance that we will continue to make distributions at a specific rate or at all. Generally, our policy is to pay distributions from cash flow from operations. However, our organizational documents permit us to pay distributions from any source, including borrowings and offering proceeds, provided, however, that no funds will be advanced or borrowed for purpose of distributions, if the amount of such distributions would exceed our accrued and received revenues for the previous four quarters, less paid and accrued operating costs with respect to such revenues. We have not established a cap on the use of offering proceeds to fund distributions. If we pay distributions from sources other than cash flow from operations, we will have less funds available for investments and unitholders’ overall returns will be reduced.

Distributions are made on all classes of our units at the same time. The cash distributions received by our unitholders with respect to the Class C units, certain Class I units, and Class W units are and will continue to be lower than the cash distributions with respect to Class A and certain other Class I units because of the distribution fee relating to Class C units an ongoing dealer manager fee with respect to certain Class I units and Class W units and an ongoing service fee with respect to Class W units, which is an expense specific to these unitholders. Amounts distributed to each class are allocated among the unitholders in such class in proportion to their units. Because the payment of such fees is not a deductible expense for tax purposes, the taxable income of the Company allocable to the Class C, certain Class I and Class W unitholders may, therefore, exceed the amount of cash distributions made to such unitholders.

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Starting in July 2013, the Company has paid monthly distributions for all classes of units. For the year ended December 31, 2017 and 2016, $14,285,443 and $9,258,169, respectively, of these distributions were paid in cash and $11,267,412 and $7,212,502, respectively, were reinvested in units for those unitholders participating in the Company’s amended and restated distribution reinvestment plan (the “Distribution Reinvestment Plan”).

The following table summarizes our distributions declared for the years ended December 31, 2017 and 2016, including the breakout between the distributions paid in cash and those reinvested pursuant to our Distribution Reinvestment Plan:

 

Unregistered Sales of Equity Securities and Use of Proceeds.

During the three months ended December 31, 2017, we sold an aggregate of 1,181,564 units of Class A, Class C, Class I and Class Y units to accredited investors for an aggregate amount of $10,101,619 pursuant to a private placement. SC Distributors, LLC served as the dealer manager in connection with the private placement. The units were issued pursuant to an exemption from registration under Section 4(a)(2) of the Securities Act of 1933, as amended (the “Securities Act”), for transactions not involving a public offering. 

Unit Repurchase Program

Beginning June 11, 2014, we commenced a unit repurchase program pursuant to which we conduct quarterly unit repurchases of up to 5% of our weighted average number of outstanding units in any 12-month period to allow our unitholders, who have held our units for a minimum of one year, to sell their units back to us at a price equal to the then current offering price less the sales fees associated with that class of units. Our unit repurchase program includes numerous restrictions, including a one-year holding period, that limit our unitholders’ ability to sell their units. Unless our board of managers determines otherwise, we will limit the number of units to be repurchased during any calendar year to the number of units we can repurchase with the proceeds we receive from the sale of units under our distribution reinvestment plan. At the sole discretion of our board of managers, we may also use cash on hand, cash available from borrowings and cash from liquidation of investments as of the end of the applicable quarter to repurchase units.

On November 11, 2014, our board of managers amended our unit repurchase program to provide for the repurchases to be made on the last calendar day of the quarter rather than the last business day of the quarter. On March 3, 2017, the board of managers authorized an amendment to the unit repurchase program and commencing with redemption requests processed at the end of the second quarter of 2017, units were redeemed at a price equal to the greater of $9.025 or the estimated net asset per unit for each class of units, as most recently disclosed by us in a public filing with the SEC. Our March 7, 2018, the board authorized a further amendment to our unit repurchase program and commencing with repurchase requests processed on the last day of the first quarter of 2018, units are redeemed at a price equal to the estimated net asset value per unit for each class of units, as most recently disclosed by us in a public filing with the SEC. Redemptions for the first quarter of 2018 were redeemed at the price equal to $8.507 for Class A units, Class C units, Class I units and Class Y unit, which was the net asset value per unit of each class as of September 30, 2017, the most recently disclosed net asset value at the time of redemption. Redemptions for the second quarter of 2018 will be redeemed at a price equal to $8.466 per Class A unit, Class C units, Class I unit and Class Y units, which was the net asset value per unit of each class as of December 31, 2017. For more information regarding the Amended Unit Repurchase Program, please see “Management’s Discussion and Analysis—Subsequent Events—Amendments to the Distribution Reinvestment Plan and Unit Repurchase Program.”

Our board of managers has the right to amend, suspend or terminate the unit repurchase program to the extent that it determines that it is in our best interest to do so. We will promptly notify our unitholders of any changes to the unit repurchase program, including

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any amendment, suspension or termination of it in our periodic or current reports or by means of other notice. Moreover, the unit repurchase program will terminate on the date that our units are listed on a national securities exchange, are included for quotation in a national securities market or, in the sole determination of our board of managers, a secondary trading market for the units otherwise develops.

For the year ended December 31, 2017, the Company had received and processed 149 repurchase requests. The Company repurchased an aggregate of 403,439 Class A units, 64,757 Class C units, and 495,792 Class I units at a price of $9.025 per unit for a total of $8,699,994.

For the year ended December 31, 2016, the Company had received and processed 31 repurchase requests. The Company repurchased an aggregate of 565,549 Class A units, 8,943 Class C units, and 10,573,750 Class I units at a price of $9.025 per unit for a total of $10,362,875.

The following table reflects the activity under our unit repurchase program during the three months ended December 31, 2017.

 

Distribution Reinvestment Plan

We have adopted the Distribution Reinvestment Plan pursuant to which our unitholders who have purchased Units in the Offering may elect to have the full amount of their cash distributions from us reinvested in additional units of the same class. Prior to the second quarter of 2017, units under the Distribution Reinvestment Plan were offered at a price equal to $9.025 per unit of each class, which was equal to the offering price per unit of each class less the sales fees associated with such class of units in the Primary Offering. No selling commissions or dealer manager fees were paid on units sold under the Distribution Reinvestment Plan. On March 3, 2017, the board of managers authorized an amendment to the Distribution Reinvestment Plan and commencing with all reinvestments made with respect to distributions during the second quarter of 2017, units are offered at a price equal to the greater of $9.025 or the net asset value per unit for each class of units. On March 7, 2018, our board of managers approved an amendment to our distribution reinvestment plan, pursuant to which, commencing with distributions declared for the month of March 2018, which were reinvested on March 30, 2018, units issued pursuant to the Distribution Reinvestment Plan are being offered at the price equal to the net asset value per unit of each class of units, as most recently disclosed by the Company in a public filing with the SEC at the time of reinvestment. Distributions declared for the month of March 2018 were reinvested at a price equal to $8.507 for Class A units, Class C units, and Class I units, which was the net asset value per unit as of September 30, 2017, the most recently disclosed net asset value at the time of reinvestment. Distributions declared for the month of April 2018 will be reinvested at a price equal to $8.466 per Class A unit, Class C units and Class I unit, which was the net asset value per unit as of December 31, 2017. Following the termination of the Offering, units offered pursuant to our Distribution Reinvestment Plan are sold pursuant to a registration statement on Form S-3. The Company does not pay any selling commissions, dealer manager fees or distribution fees in connection with the Distribution Reinvestment Plan. However, while there are no additional distribution fees that are paid for any Class C units sold pursuant to the Distribution Reinvestment Plan, distribution fees have been and may be paid on an ongoing basis for Class C units sold pursuant to other Company offerings. Because distribution fees payable with respect to Class C units sold in other offerings are paid from and reduce the amount available for distribution on all Class C units, distributions will be reduced for Class C units purchased pursuant to the Distribution Reinvestment Plan.  This will result in lower cash distributions with respect to the Class C units than the cash distributions with respect to Class A and certain Class I units. We may amend, suspend or terminate the distribution reinvestment plan at our discretion.

For the period from June 12, 2013 through December 31, 2017, we issued 2,449,295 units totaling approximately $22,099,799 of gross offering proceeds pursuant to our Distribution Reinvestment Plan.

 

 

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ITEM 6. SELECTED FINANCIAL DATA

The following selected financial data should be read in conjunction with our consolidated financial statements and related notes and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included elsewhere in this Annual report.

 

 

(2) For financial statement reporting purposes under GAAP, as of December 31, 2017, the Company recorded a liability in the amount of $1,895,000 for the estimated future amount of Class C Distribution Fees and Class I Dealer Manager Fees payable. This liability is reflected in this table, which is consistent with the financial statements.  While the Company follows GAAP for financial reporting purposes, beginning with the quarter ended June 30, 2017, it has determined that deducting the accrual for the estimated future amount of Class C Distribution Fees and Class I Dealer Manager Fees may not be the appropriate approach for determining the net asset value used on the quarterly investor statements and for all other purposes, including the net asset value used for purposes of price determination for the Company’s Distribution Reinvestment Plan and unit repurchase program. The Company believes that not making such deduction for purposes of net asset value determination is consistent with the industry standard and is more appropriate since the Company intends for the net asset value to reflect the estimated value on the date that the Company determines its net asset value. As of December 31, 2017, based on the new approach to the treatment of future Class C Distribution Fees and Class I Dealer Manager Fees, the Company has calculated the net asset value to be $8.466 for all units.  If the Company would have used the same approach for presentation in determining the net asset value as of December 31, 2016, the net asset value per unit would have been $8.534.

 

 

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis should be read in conjunction with our financial statements and related notes and other financial information appearing elsewhere in this annual report on Form 10-K.

Overview

We make impact investments in SMEs that provide the opportunity to achieve both competitive financial returns and positive measurable impact. We were organized as a Delaware limited liability company on April 30, 2012. We have operated and intend to continue to operate our business in a manner that will permit us to maintain our exemption from registration under the Investment

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Company Act of 1940, as amended. We use the proceeds raised from the issuance of units to invest in SMEs through local market sub-advisors in a diversified portfolio of financial assets, including direct loans, loan participations, convertible debt instruments, trade finance, structured credit and preferred and common equity investments. A substantial portion of our assets consists of collateralized private debt instruments, which we believe offer opportunities for competitive risk-adjusted returns and income generation. We are externally managed and advised by TriLinc Advisors, LLC, or the Advisor. The Advisor is an investment advisor registered with the SEC.

Our business strategy is to generate competitive financial returns and positive economic, social and environmental impact by providing financing to SMEs, which we define as those business having less than 500 employees, primarily in developing economies. To a lesser extent, we may also make impact investments in companies that may not meet our technical definition of SMEs due to a larger number of employees but that also provide the opportunity to achieve both competitive financial returns and positive measurable impact. We generally expect that such investments will have similar investment characteristics as SMEs as defined by us. Our style of investment is referred to as impact investing, which J.P. Morgan Global Research and Rockefeller Foundation in a 2010 report called “an emerging alternative asset class” and defined as investing with the intent to create positive impact beyond financial return. We believe it is possible to generate competitive financial returns while creating positive, measurable impact. We measure the economic, social and environmental impact of our investments using industry-standard metrics, including the Impact Reporting and Investment Standards. Through our investments in SMEs, we intend to enable job creation and stimulate economic growth.

We commenced the Offering on February 25, 2013. Pursuant to the Offering, we were offering on a continuous basis up to $1.5 billion in units of our limited liability company interest, consisting of up to $1.25 billion of units in the primary offering consisting of Class A and Class C units at initial offering prices of $10.00 and $9.576 per unit, respectively, and Class I units at $9.025 per unit, and up to $250 million of units pursuant to the Distribution Reinvestment Plan. SC Distributors, LLC was the dealer manager for the Offering. In May 2012, the Advisor purchased 22,161 Class A units for aggregate gross proceeds of $200,000. On June 11, 2013, we satisfied the minimum offering requirement of $2,000,000 when the Sponsor purchased 321,330 Class A units for aggregate gross proceeds of $2,900,000 and we commenced operations. The Offering terminated on March 31, 2017.  Through the termination of the Offering, we raised approximately $361,776,000 in gross proceeds, including approximately $13,338,000 raised through the Distribution Reinvestment Plan.

Upon termination of the Offering, we registered $75 million in Class A, Class C and Class I units to continue to be offered pursuant to our Distribution Reinvestment Plan to the investors who have purchased units in the Offering. On March 7, 2018, our board of managers approved an amendment to our distribution reinvestment plan, pursuant to which, commencing with distributions declared for the month of March 2018, which were reinvested on March 30, 2018, units issued pursuant to the Distribution Reinvestment Plan are being offered at the price equal to the net asset value per unit of each class of units, as most recently disclosed by the Company in a public filing with the SEC at the time of reinvestment. Distributions declared for the month of March 2018 were reinvested at a price equal to $8.507 for Class A units, Class C units, and Class I units, which was the net asset value per unit as of September 30, 2017, the most recently disclosed net asset value per unit at the time of reinvestment. Distributions declared for the month of April 2018 will be reinvested at a price equal to $8.466 per Class A unit, Class C units and Class I unit, which was the net asset value per unit as of December 31, 2017. We will offer units pursuant to the Distribution Reinvestment Plan until we sell all of $75 million worth of units, although our board may determine to terminate the offering prior thereto.  The offering must be registered or exempt from registration in every state in which we offer or sell units. If the offering is not exempt from registration, the required registration generally is for a period of one year. Therefore, we may have to stop selling units in any state in which the registration is not renewed annually and the offering is not otherwise exempt from registration.

For the period from April 1, 2017 to December 31, 2017, we issued 971,564 of our units pursuant to our Distribution Reinvestment Plan for gross proceeds of approximately $8,762,000. In addition, the period from April 1, 2017 to December 31, 2017, we issued 1,654,871 of our units for gross proceeds of approximately $14,204,000 pursuant to a private placement. As of December 31, 2017, we had issued 40,321,610 of our units, including 2,449,295 units issued under our Distribution Reinvestment Plan, for gross proceeds of approximately $384,742,000 including approximately $22,100,000 reinvested under our Distribution Reinvestment Plan (before dealer manager fees of approximately $4,780,000 and selling commissions of $16,905,000, for net proceeds of $363,057,000).

 

Investments

Our investment objectives are to provide our unitholders current income, capital preservation, and modest capital appreciation. These objectives are achieved primarily through SME trade finance and term loan financing, while employing rigorous risk-mitigation and due diligence practices, and transparently measuring and reporting the economic, social and environmental impacts of our investments. The majority of our investments are senior and other collateralized loans to SMEs with established, profitable businesses in developing economies. With the twelve sub-advisors that we have contracted to assist the Advisor in implementing the Company’s investment program, we expect to provide growth capital financing generally ranging in size from $5-20 million per transaction for direct SME loans and $500,000 to $15 million for trade finance transactions. We seek to protect and grow investor capital by: (1) targeting countries with favorable economic growth and investor protections; (2) partnering with sub-advisors with significant

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experience in local markets; (3) focusing on creditworthy lending targets who have at least 3-year operating histories and demonstrated cash flows enabling loan repayment; (4) making primarily debt investments, backed by collateral and borrower guarantees; (5) employing best practices in our due diligence and risk mitigation processes; and (6) monitoring our portfolio on an ongoing basis.

Investments will continue to be primarily credit facilities to developing economy SMEs, including trade finance and term loans, through the Advisor’s team of professional sub-advisors with a local presence in the markets where they invest. As of December 31, 2017, more than a majority of our investments were in the form of participations and we expect that future investments will continue to be primarily participations. We typically provide financing that is collateralized, has a short to medium-term maturity and is self-liquidating through the repayment of principal. By providing additional liquidity to growing small businesses, we believe we support both economic growth and the expansion of the global middle class.

Revenues

Since we anticipate that the majority of our assets will consist of trade finance instruments and term loans, we expect that the majority of our revenue will continue to be generated in the form of interest. Our senior and subordinated debt investments may bear interest at a fixed or floating rate. Interest on debt securities is generally payable monthly, quarterly or semi-annually. In some cases, some of our investments may provide for deferred interest payments or PIK interest. The principal amount of the debt securities and any accrued but unpaid interest generally is due at the maturity date. In addition, we generate revenue in the form of acquisition and other fees in connection with some transactions. Original issue discounts and market discounts or premiums are capitalized, and we accrete or amortize such amounts as interest income. We record prepayment premiums on loans and debt securities as interest income. Dividend income, if any, will be recognized on an accrual basis to the extent that we expect to collect such amounts.

Expenses

Our primary operating expenses include the payment of asset management fees and expenses reimbursable to our Advisor under the Advisory Agreement. We bear all other costs and expenses of our operations and transactions.

Since our inception and through December 31, 2017, under the terms of the Expense Responsibility Agreement, our Sponsor has assumed substantially all our operating expenses. As of December 31, 2017, the Sponsor has agreed to pay a cumulative total of approximately $16.7 million of operating expenses.

Portfolio and Investment Activity

During the year ended December 31, 2017, we invested, either through direct loans or loan participations, approximately $323.2 million across 37 portfolio companies. Our investments consisted of senior secured trade finance participations, senior secured term loan participations, and senior secured term loans. Additionally, we received proceeds from repayments of investment principal of approximately $196.6 million.

During the year ended December 31, 2016, we invested, either through direct loans or loans participation, approximately $252.2 million across 33 portfolio companies. Our investments consisted of senior secured trade finance participations, senior secured term loan participations, and senior secured term loans. Additionally, we received proceeds from repayments of investment principal of approximately $150.2 million.

At December 31, 2017 and 2016, our investment portfolio included 43 and 32 companies, respectively and the fair value of our portfolio was comprised of the following:

 

*Short term investments are defined by the Company as investments that generally meet the standard underwriting guidelines for trade finance and term loan transactions and that also have the following characteristics: (1) maturity of less than one year, (2) loans to

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borrowers to whom, at the time of funding, the Company does not expect to re-lend. Impact data is not tracked for short term investments.

As of December 31, 2017, the weighted average yield, based upon the cost of our portfolio, on trade finance participations, term loan participations, senior secured term loans, and short term investments were 10.6%, 13.5%, 12.5%, and 8.4%, respectively, for a weighted average yield on investments of approximately 11.9% on our total portfolio.

As of December 31, 2016, the weighted average yield, based upon the cost of our portfolio, on trade finance participations, term loan participations, and senior secured term loans were 11.1%, 14.9%, and 12.3%, respectively, for a weighted average yield on investments of approximately 12.3% on our total portfolio.  

 

Concentration Limits

 

The Company is subject to the following concentration limits as a percentage of total assets:

 

 

As of December 31, 2017, the Company was in compliance with all of the above concentration limits.

Watch List Investments

Prodesa

As of December 31, 2017, the Company’s investment in Corporacion Prodesa S.R.L. (“Prodesa”) is comprised of two senior secured term loan participations with an aggregate balance of $3,210,000 and $1,750,000 due under a senior secured purchase order revolving credit facility.  The Company has been working with Prodesa to re-align its operations since 2015, starting with a senior secured purchase order revolving credit facility.  The purchase order facility is secured by specific purchase orders from customers of Prodesa, as well as pledges of additional unencumbered assets and all shares of Prodesa. A number of draws and repayments have occurred under this facility. For example, during the year ended December 31, 2016, the Company funded seven additional draws under the purchase order facility for an aggregate of $1,750,000.

On January 31, 2017, the Company entered into a series of loan amendments with Prodesa. First, the $2,000,000 term loan facility with an original maturity date of July 15, 2016 was amended to increase the commitment to $3,540,000 to finance the acquisition of additional machinery and equipment and refinance existing property. As part of the amendment, the loan facility also extended the maturity date to July 28, 2021, and amended the interest rate on the $3,540,000 loan to 12.00% per annum, reflecting the increased and improved collateral supporting the loan facility. Separately, the Company simultaneously entered into amendments for the $750,000 inventory loan facility and the $1,750,000 purchase order facility to extend those facilities to mature concurrently with the amended term loan facility above, as each facility is cross-defaulted and cross-collateralized.  The $750,000 inventory loan, with an original maturity date February 15, 2015 and previously extended to December 22, 2016, now matures on July 28, 2021. The $1,750,000 purchase order facility, with an original maximum term of December 31, 2020, now matures on July 28, 2021.

The Company has estimated the fair value of the Prodesa loans as of December 31, 2017 at $4,960,000 based on the income valuation approach as further described in Note 4 to the financial statements.

Usivale  

In May 2015, one of the Company’s borrowers, Usivale Industria E Commercio (“Usivale”), with an aggregate principal balance of $3,000,000, notified the Company that it would be unable to make its monthly interest payment for May 2015 and requested the deferment of interest payments until October 2015. Usivale is a sugar producer located in Brazil that has been in business since 1958.  Usivale’s business is highly cyclical and it generates the majority of its revenues during the first and fourth quarters of any calendar year.  In accordance with the terms of the loans, the Company originally increased the annual interest rate charged Usivale from 12.43% to 17.43%.  On August 27, 2015, Usivale filed for judicial recuperation or recovery (the “Filing”) with the local court in Brazil.  The Filing was led by the ongoing pricing pressure within the sugar market, leading up to the material drop in the month of August, when prices reached a seven year low. The Filing provided for a 180 day “standstill” period relative to any claim for payment by Usivale’s creditors. During this period, Usivale was permitted to operate as usual, but was required to develop and present a recovery plan to its creditors to allow it to emerge from judicial recovery. Usivale submitted an initial plan to the judicial court for review at the end of November 2015, which was published by the court on January 19, 2016. Creditors had 30 days to review and

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either approve or reject the plan. As the only secured creditor within the greater credit group, the Company’s acceptance of any plan was required.  The Company placed Usivale on non-accrual status effective August 27, 2015, the date of the judicial recovery filing.

On February 17, 2016, the Company filed a rejection of the plan presented by Usivale. In accordance with the judicial recovery process, a general assembly of Usivale’s creditors was held on June 14, 2016 and an agreed upon restructure plan was submitted to the court and subsequently approved by the court on October 7, 2016. Under the restructure plan, interest on the principal started accruing effective July 1, 2016 at an annual rate of 12.43% and Usivale is required to make annual principal payments starting in the fourth quarter of 2016. On November 10, 2016, the Company received payments of principal and interest of $316,777 and $144,390, respectively.  The Company recorded the $144,390 payment as interest income and started accruing interest on the unpaid principal effective November 10, 2016. As of December 31, 2017, the principal balance of the Usivale loans amounted to $2,851,296 and the Company has estimated the fair value of the Usivale loans at $2,851,296, which is based on a discounted cash flow analysis (income approach). As of December 31, 2017, accrued interest amounted to $410,532, of which $393,795 was received in March 2018.

Fruit and Nut Distributor

The Company has a trade finance participation with a fruit and nut distributor (“the Distributor”) located in South Africa, with a total balance outstanding of $785,806 as of December 31, 2017. The Distributor trade finance has a stated maturity date of May 22, 2015, which the Company agreed to extend. The Distributor had made partial payments of principal during 2015 and 2016 (the original loan from the Company to the Distributor was for $1,250,000), with the most recent payment being made on October 2016. Through the latter part of 2015, the depreciation in the South African Rand had proven to be problematic for the Distributor given that it has to purchase its inventory in U.S. Dollars and then sells in South African Rand. This situation has led the Distributor to experience some cash flow difficulties and operating losses. As of December 31, 2016, the Company, together with its sub-advisor, had agreed to extend further the principal maturity date to facilitate the strategic sale of the Distributor, which closed in June 2016.  As a result of the sale, one of the Company’s sub-advisor now owns 40% of the Distributor. Accordingly, the Company placed this participation on non-accrual status effective February 1, 2016 and interest not recorded relative to the original terms of this participation amounted to approximately $139,600 and $127,400 for the years ended December 31, 2017 and 2016. Based on the information available to the Company and according to its valuation policies, the Company has estimated the fair value of its investment in the Distributor to be $726,729 as of December 31, 2017.

Farm Supplies Distributor

The Company had several trade finance participations in a facility to a farm supplies distributor, Neria Investment Ltd. (“Neria”), located in Zambia with an aggregate principal balance of $5,078,526 and net accrued interest of $550,370 as of December 31, 2016. The Company placed this participation on non-accrual status effective July 1, 2016. In addition, during the year ended December 31, 2016, the Company reversed $550,370 of interest income that had been previously accrued. On December 1, 2016, the Company’s sub-advisor declared an event of default and filed a claim against the credit insurance policy. The insurer had 180 days from time of filing (June 1, 2017) to conclude its initial review, acceptance of the claim and waiting period. Following expiration of the waiting period, a formal demand letter was sent to the Zambian government. During September 2017, the Company received a payment from Neria of $6,981,578 which was comprised of the entire principal balance of $5,078,526 and interest of $1,903,052.  Accordingly the Company recorded additional interest income of $1,352,682 during the year ended December 31, 2017.

Sesame Seed Exporter

 

The Company has a trade finance participation with a Sesame Seed Exporter (the “Exporter”) located in Guatemala, with a principal balance outstanding of $881,800 as of December 31, 2017. The participation had a maturity date of March 31, 2016 and is secured by inventory. During 2016, the Exporter lost a major customer, which resulted in a slowdown in business, affecting its ability to repay the amount due under the participation.  Although the Exporter was able to secure new customers during 2017 to replace the lost order(s), the Exporter had a shipment rejected and returned, and as a result, the Exporter had difficulties making payments. As the Exporter’s financial position further deteriorated, the Company’s sub-advisor determined that a restructuring of the Exporter’s business was required and, as such, the sub-advisor started taking control over the Exporter’s operations.  The Company’s existing loan to the Exporter is also going to be restructured with the following term: 3 year senior secured term loan, secured by share pledge, 12% deferred interest compounded quarterly and payable at maturity, monthly principal amortization based upon available cash flow, expected to begin in June 2018.

The Exporter has made three principal payments totaling $92,435 during October and November 2016, an interest payment of $90,402 in February 2017, an interest payment of $8,388 in July 2017 and interest payments of approximately $81,500 during October, November, and December 2017.  The Company has determined that the restructured term loan should be valued using the income approach, in accordance with its valuation policy, and has determined that the fair value of this investment should be $881,800 as of December 31, 2017. The Company has, however, placed this position on non-accrual status as of July 1, 2017.

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Mac Z Group SARL

The Company has a $9,000,000 trade finance position with Mac Z Group SARL (“Mac Z”), a scrap metal recycler in Morocco. As of December 31, 2017, the outstanding principal balance on this position was $7,349,626. The primary collateral securing this position is 1,970 tons of copper scrap.  In late October, the sub-advisor’s designated Collateral Manager for Mac Z notified the sub-advisor of an investigation into a 1,820 ton, approximately $13.3 million, shortage of copper scrap inventory physically held in the warehouse. The copper scrap is pledged to the Company and serves as the primary collateral for this position. In addition to conducting its investigation, the sub-advisor has issued an Event of Default and is taking steps to enforce the Corporate Guarantee, Personal Guarantee and relevant pledges, which include two insurance policies. The sub-advisor has placed a blocking notice on all of the borrower’s bank accounts and has requested a freeze order from the Moroccan local courts on the physical assets of the company. Mac Z has an estimated $12 million in Zinc Ore inventory, which may serve as secondary collateral for this position. The Company is working with the sub-advisor and is investigating the issue. Based on the results of the initial investigation, the Company believes there is sufficient collateral available to cover both the outstanding principal balance and the accrued interest. The Company placed this position on non-accrual effective October 1, 2017 and believes no adjustment to fair value is necessary as of December 31, 2017

Vicentin – Nacadie S.A.

The Company has a trade finance position with Vicentin – Nacadie S.A (“Vicentin”), an Argentinian company focused on trading of the “soy bean complex” (soybeans, soybean meals, and oils) originating from Argentina, Paraguay and Uruguay. As of December 31, 2017, the outstanding principal balance on this position was $12,000,000 and accrued interest of $539,042.  The Company’s sub-advisor, IIG called a technical default on the borrower due to the breach of informational covenants by Vicentin and due to non-payment of interest by Vicentin. The technical default called by IIG resulted in a filing in the Commercial Court in Buenos Aires, Argentina on July 4, 2017. The Commercial Court has jurisdiction over commercial claims/disputes of this type. After IIG filed its claims in the Commercial Court, the court ruled that they were valid claims and enjoined Vicentin’s cash accounts to allow for recovery by IIG. Once sufficient cash had been secured, the court allowed Vicentin to replace the enjoined cash accounts with a payment guarantee from Zurich International with a 100% LTV, including accrued interest.

 

As a short-term trade finance facility, Vicentin has historically been valued at cost. The remaining principal balance of $12,000,000 has been outstanding since March 2017. As IIG is seeking full repayment through its court action to secure assets from Vicentin, the Company believes, that as of December 31, 2017, the most appropriate valuation method is the liquidation approach. With the bond secured by IIG through the Commercial Court, whose value is for all principal and interest outstanding, there is sufficient collateral available to pay off the principal and accrued interest balances in full and the Company has determined the fair value of this investment should remain at $12,000,000.

 

Frigorifico Regional Industrias Alimentarias S.A. Sucursal Uruguay

 

The Company has a trade finance position with Frigorifico Regional Industrias Alimentarias S.A. Sucursal Uruguay (“FRIAR”), an Argentinian company that produces, processes and exports bovine meat for human consumption. As of December 31, 2017, the outstanding principal balance on this position was $9,000,000 and accrued interest of $264,500.  The Company’s subadvisor, IIG called a technical event of default due to non-payment by FRIAR. IIG filed the promissory notes for FRIAR in the Commercial Court in Buenos Aires, Argentina. The Commercial Court has jurisdiction over commercial claims/disputes of this type. During January 2018 the court granted IIG’s motion to freeze FRIAR’s accounts. IIG is also in the process of securing additional collateral to cover the full balance outstanding, including accrued interest and penalties. It is expected that once enough cash and assets are secured, FRIAR will secure a payment guarantee bond. IIG has confirmed that FRIAR continues to operate and is a going concern.

 

As a short-term trade finance facility, FRIAR has historically been valued at cost. The remaining principal balance of $9,000,000 has been outstanding since July 2016. As IIG is seeking full repayment through its court action to secure assets from FRIAR, we believe the most appropriate valuation method is the liquidation approach. The Company has determined the fair value of this investment should remain at $9,000,000. However, the Company is placing the position on non-accrual status effective January 1, 2018.

 

Sancor Cooperativas Unidas

 

The Company has a trade finance position with Sancor Cooperativas Unidas (“Sancor”), an Argentinian company that distributes dairy products.  As of December 31, 2017, the outstanding principal balance on this position was $6,000,000.  Interest has been paid in full through December 31, 2017.  Sancor, however, did not make the required interest payments for the first and second quarters of 2017 on a timely basis. As a result, the sub-advisor exercised pledged warrants to cover interest payments for 2017. The sub-advisor has worked with Sancor to restructure the existing loan and has extended the maturity to July 29, 2018, with an annual renewal option.  It is anticipated a further extension will be agreed to as part of the restructuring.  As part of the restructure, a co-

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borrower (Sancor Brazil) was added, additional collateral (face value of $56.6 million) was secured and key customers pay into the sub-advisor’s designated collection account. An unrelated loan from another lender of approximately $26 million was fully repaid by Sancor in the first quarter of 2017 and the release of the associated mortgage and reassignment of the collateral is in the final stages of being released and assigned to the Company.

 

Functional Products Trading S.A.

 

The Company has a trade finance position with Functional Products Trading S.A. (“Functional”), a Chilean company that exports chia seeds to United States and European off-takers.  As of December 31, 2017, the outstanding principal balance on this position was $1,326,688.  In 2017, Functional experienced operational losses due to volatile prices for raw chia seeds and its byproducts, with sales declining from 2016 by 57%. As a result, the company is developing a full restructuring plan (selling office building and entering lease back agreement) with its current lenders, including the Company, to provide more cash flow flexibility, become current on all interest payments and improve its capital structure, in order to support the company’s growth initiatives. During February 2018, we received $25,000 in interest payments, which covered accrued interest up to the end of November 2017 and $10,000 in March 2018, which brought Functional current on interest payments through December 2017. The Company is currently working with Functional on restructuring the facility, which it believes will be completed in the near term.

Interest Receivable

Depending on the specific terms of the Company’s investments, interest earned by the Company is payable either monthly, quarterly, or, in the case of most trade finance investments, at maturity.  As such, some of the Company’s investments have up to a year or more of accrued interest receivable as of December 31, 2017.  The Company’s interest receivable balances at December 31, 2017 and 2016 are recorded at the amounts that the Company expects to collect.  In addition, certain of the Company’s investment in term loans accrue deferred interest, which is not payable until the maturity of the loans.  Accrued deferred interest included in the interest receivable balance as of December 31, 2017 and 2016 amounted to $1,960,157 and $1,403,416, respectively.

Results of Operations

Consolidated operating results for the years ended December 31, 2017 and 2016 are as follows:

 

Revenues.

For the years ended December 31, 2017 and 2016, total investment income amounted to $32,854,074 and $20,440,362, respectively. Interest income increased by $12,363,525 during 2017 primarily as a result of an increase in our weighted average investment portfolio of approximately $108,302,000 offset by a decrease in the weighted average yield of approximately 0.69% from a weighted average yield of 13.08% for 2016 to approximately 12.39% for 2017. The decrease in yield was primarily due to a change in the mix of our investment portfolio.

For the year ended December 31, 2017, interest income from loan participations and direct loans amounted to $26,021,839 and $6,472,573, respectively. Interest income also included $250,792 in fees earned.  In addition, we earned $359,682 in interest income on our cash balances.

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For the year ended December 31, 2016, interest income from loan participations and direct loans amounted to $17,539,075 and $2,591,792, respectively. Interest income also included $266,569 in fees earned.  In addition, we earned $309,495 in interest income on our cash balances.  

Expenses.

Total operating expenses, excluding the management and incentive fees, incurred for the year ended December 31, 2017 increased by $1,398,165 or 69% to $3,433,375 from $2,035,210 for the year ended December 31, 2016. The increase was primarily due to the following: 1) an increase in interest expense of $590.715, which was attributable to the addition of leverage, 2) an increase in general and administrative expenses of $494,126, which was attributable to increases in a number of expenses, the largest being a $114,453 increase in fees paid to our transfer agent,  $91,000 in commissions paid related to obtaining leverage, $69,409 increase in travel related expenses, $67,650 increase in expenses reimbursements to our sub-advisors, and $64,551 increase in fund accounting; and 3) an increase in professional fees of $283,324. Our Sponsor assumed responsibility for a portion of our operating expenses in the amount of $1,129,104 and $1,520,770 under the Responsibility Agreement for expenses paid or incurred by the Company for the years ended December 31, 2017 and 2016, respectively.

For the years ended December 31, 2017 and 2016, the management fees amounted to $6,484,850 and $4,172,643, respectively. The incentive fees for the years ended December 31, 2017 and 2016 amounted to $4,599,941 and $3,319,149, respectively.  A portion of the management fees, amounting to $0 and $842,468 for 2017 and 2016, respectively, and $2,701,511 and $2,970,292, respectively, of the incentive fees for 2017 and 2016 were paid by the Sponsor under the Responsibility Agreement.

Going forward, we expect our primary expenses to continue to be the payment of asset management fees and the reimbursement of expenses under our Advisory Agreement with the Advisor. We bear other expenses, which include, among other things:

Net Realized Gains or Losses and Net Change in Unrealized Appreciation or Depreciation on Investments.

We measure net realized gains or losses by the difference between the net proceeds from the repayment or sale and the amortized cost basis of the investment, without regard to unrealized appreciation or depreciation previously recognized, but considering unamortized upfront fees and prepayment penalties. Net change in unrealized appreciation or depreciation reflects the change in portfolio investment values during the reporting period, including any reversal of previously recorded unrealized appreciation or depreciation, when gains or losses are realized. For the year ended December 31, 2017, we had no unrealized gains or losses. For the year ended December 31, 2016, we recorded $259,347 in net unrealized gains. We had no realized gains or losses for the years ended December 31, 2017 and 2016.

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Changes in Net Assets from Operations.

For the year ended December 31, 2017 and 2016, we recorded net increases in net assets resulting from operations of $22,167,323 and $16,506,237, respectively.

Financial Condition, Liquidity and Capital Resources

As of December 31, 2017, we had $9.6 million in cash. We generate cash primarily from cash flows from private placements of our units, interest, dividends and fees earned from our investments and principal repayments, and proceeds from sales of our investments and from sales of promissory notes. We may also generate cash in the future from debt financing. Our primary use of cash will be to make loans, either directly or through participations, payments of our expenses, payments on our notes and any other borrowings, and cash distributions to our unitholders. We expect to maintain cash reserves from time to time for investment opportunities, working capital and distributions. From the beginning of the Company’s operations to date, our Sponsor has absorbed a significant portion of our operating expenses under the Responsibility Agreement in the amount of approximately $16.7 million. The Company may only reimburse the Sponsor for expenses covered under the Responsibility Agreement to the extent the Company’s investment income in any quarter, as reflected on the statement of operations, exceeds the sum of (a) total distributions to unitholders incurred during the quarter and (b) the Fund’s expenses as reflected on the statement of operations for the same quarter (the “Reimbursement Hurdle”). To the extent the Company is not successful in satisfying the Reimbursement Hurdle, no amount will be payable in that quarter by the Company for reimbursement to the Sponsor of the cumulative Company Expenses.  The Company has not met the Reimbursement Hurdle for the quarter ended December 31, 2017. Thus, such amounts are not yet payable by the Company to the Sponsor. Following the end of the primary offering, which terminated on March 31, 2017, the Sponsor can demand the reimbursement of operating expenses covered by the Responsibility Agreement if it does not cause a drop in the net asset value per unit.  Such reimbursements to the Sponsor would affect the amount of cash available to the Company to pay distributions and/or make investments.

We may borrow funds to make investments. We have not decided to what extent going forward we will finance portfolio investments using debt or the specific form that any such financing would take, but we believe that obtaining financing is necessary for the Company to fully achieve its long term goals.  We have been, and still are, actively seeking further financing through both development banks and several commercial banks. Accordingly, we cannot predict with certainty what terms any such financing would have or the costs we would incur in connection with any such arrangement. On October 14, 2016, TriLinc Global Impact Fund Cayman, Ltd. (“TGIFC”), a wholly owned subsidiary of the Company, issued $1.635 million in the first series of four issuances of notes pursuant to an ongoing private offering of senior secured promissory notes targeting $100 million. On February 17, 2017, TGIFC issued an additional $225,000 in the second series of notes under the private offering. As of December 31, 2017, we had raised $1.86 million in the note offering and $410,000 of such debt was outstanding after repayment of $1.45 million during 2017. On July 3, 2017, TGIFC entered into a $10.5 million facility agreement with Micro, Small & Medium Enterprises Bonds S.A. as Lender and Symbiotics SA as Servicer (“Symbiotics Facility”). On November 2, 2017, TGIFC entered into a second Facility Agreement to receive an additional $9.75 million in the second tranche of financing with MSMEB as Lender and Symbiotics SA as Servicer.  On December 5, 2017, TGIFC received an additional $2.5 million under the second tranche of financing under the Symbiotics Facility.  As of December 31, 2017, TGIFC has $22.75 million total outstanding under the Symbiotics Facility and may request an additional $17.5 million, subject to the conditions precedent set forth in the second Facility Agreement, including availability of funding.  For more information on this facility, please see “Notes to the Consolidated Financial Statements— Note 7. Notes Payable— Symbiotics Facility.” On August 7, 2017, TGIFC issued $5 million in the first of a Series 1 Senior Secured Promissory Notes private offering to State Street Australia Ltd ACF Christian Super. For more information on this note, please see “Notes to the Consolidated Financial Statements— Note 7. Notes Payable—Christian Super Promissory Note.” As of December 31, 2017, we have $28,160,000 debt outstanding with a debt to equity ratio of 8.8%.

Contractual Obligations and Commitments

The following table shows our payment obligations for repayment of debt, which represent our total contractual obligations as of December 31, 2017:

 

We have included the following information related to commitments of the Company to further assist investors in understanding the Company’s outstanding commitments.

We have entered into certain contracts under which we have material future commitments. Our Advisory Agreement between us and the Advisor, dated as of February 25, 2014, had previously been renewed and is subject to an unlimited number of one-year renewals upon mutual consent of the Company and the Advisor. On February 14, 2018, our board of managers determined to extend

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our Advisory Agreement until February 25, 2019. The Advisor will serve as our advisor in accordance with the terms of our Advisory Agreement. Payments under our Advisory Agreement in each reporting period will consist of (i) an asset management fee equal to a percentage of the value of our gross assets, as defined in the agreement, and (ii) the reimbursement of certain expenses. Certain subordinated fees based on our performance are payable after our subordination is met.

If any of our contractual obligations discussed above are terminated, our costs may increase under any new agreements that we enter into as replacements. We would also likely incur expenses in locating alternative parties to provide the services we expect to receive under our Advisory Agreement.

Off-Balance Sheet Arrangements

Other than contractual commitments and other legal contingencies incurred in the normal course of our business, we do not expect to have any off-balance sheet financings or liabilities. The Company reimburses organization and offering expenses to the Sponsor to the extent that the aggregate of selling commissions, dealer manager fees and other organization and offering costs do not exceed 15% of the gross offering proceeds raised from the offering. As of December 31, 2017, there is approximately $419,500 in offering costs that have been paid by the Sponsor that may be reimbursed to the Sponsor.

Pursuant to the terms of the Responsibility Agreement between the Company, the Advisor and the Sponsor, the Sponsor has paid expenses on behalf of the Company through December 31, 2017 and will pay additional accrued operating expenses of the Company, which may not be reimbursable to the Sponsor if the Company does not satisfy the Reimbursement Hurdle. Such expenses will be expensed and payable by the Company in the period they become reimbursable and are estimated to be approximately $16.7 million through December 31, 2017.

Distributions

We have paid distributions commencing with the month beginning July 1, 2013, and we intend to continue to pay distributions on a monthly basis. From time to time, we may also pay interim distributions at the discretion of our board. Distributions are subject to the board of managers’ discretion and applicable legal restrictions and accordingly, there can be no assurance that we will make distributions at a specific rate or at all. Distributions will be made on all classes of our units at the same time. The cash distributions received by our unitholders with respect to the Class C units, Class W units and certain Class I units, are and will continue to be lower than the cash distributions with respect to Class A units, certain other Class I units, and Class Y units because of the distribution fee relating to Class C units, the ongoing dealer manager fee relating to Class W units and Class I units issued pursuant to a private placement and the ongoing service fee relating to the Class W units, which are expenses specific to those classes of units. Amounts distributed to each class are allocated among the unitholders in such class in proportion to their units. Distributions will be paid in cash or reinvested in units, for those unitholders participating in the Distribution Reinvestment Plan. For the year ended December 31, 2017, we paid a total of $25,552,855 in distributions, comprised of $14,285,443 paid in cash and $11,267,412 reinvested under our Distribution Reinvestment Plan. For the year ended December 31, 2016, we paid a total of $16,470,671 in distributions, comprised of $9,258,169 paid in cash and $7,212,502 reinvested under our Distribution Reinvestment Plan.

Legal Proceedings

The Company is not party to any material legal proceedings.

Subsequent Events

There have been no subsequent events that occurred during such period that would require disclosure in the Form 10-K or would be required to be recognized in the consolidated financial statements as of and for the year ended December 31, 2017, except as discussed below.

Distributions

On January 16, 2018, with the authorization of our board of managers, the Company declared distributions for all classes of units for the period from January 1 through January 31, 2018. These distributions were calculated based on unitholders of record for each day in an amount equal to $0.00197808 per unit per day (less the distribution fee with respect to Class C units, an ongoing dealer manager fee with respect to certain Class I units and Class W units and an ongoing service fee with respect to Class W units). On February 1, 2018, $1,301,699 of these distributions were paid in cash and on January 31, 2018, $988,859 were reinvested in the Company’s units for those investors participating in the Company’s unit Distribution Reinvestment Plan.

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On February 14, 2018, with the authorization of the Company’s board of managers, the Company declared distributions for all classes of units for the period from February 1 through February 28, 2018. These distributions were calculated based on unitholders of record for each day in an amount equal to $0.00197808 per unit per day (less the distribution fee with respect to Class C units, an ongoing dealer manager fee with respect to certain Class I units and Class W units and an ongoing service fee with respect to Class W units). On March 1, 2018, $1,497,579 of these distributions were paid in cash and on February 28, 2018, $895,266 were reinvested in the Company’s units for those unitholders participating in the Distribution Reinvestment Plan.

On March 26, 2018, with the authorization of the Company’s board of managers, the Company declared distributions for all classes of units for the period from March 1 through March 31, 2018. These distributions will be calculated based on unitholders of record for each day in an amount equal to $0.00168675 per unit per day (less the distribution fee with respect to Class C units, an ongoing dealer manager fee with respect to certain Class I units and Class W units and an ongoing service fee with respect to Class W units). These distributions will be paid in cash on or about April 2, 2018 or reinvested in units, for those unitholders participating in the Distribution Reinvestment Plan on March 31, 2018.

Fifth Amended and Restated Operating Agreement

Effective as of January 20, 2018, pursuant to the authorization of the board of managers, the Company’s operating agreement was amended and restated (the “Amended and Restated Operating Agreement”. The Amended and Restated Operating Agreement reflects the addition of a class of units designated as Class Z units.  Prior to the addition of the Class Z units, the Company’s authorized units consisted solely of Class A, Class C, Class I, Class W and Class Y units, all of which have the same rights and privileges, including voting rights, and are considered by the Company to constitute one class of securities.  The Class Z units are distinct from the Company’s Class A, Class C, Class I, Class W and Class Y units because the Class Z units are non-voting units, and the Company therefore considers the Class Z units to be a class of securities that is separate and distinct from the Company’s Class A, Class C, Class I, Class W and Class Y units. The Class Z units are not registered under Section 12(b) or 12(g) of the Securities Exchange Act of 1934, as amended.

TGIF Cayman Investment

 

On February 2, 2018, we sold 5,877,512 Class Z units of limited liability company interest for an aggregate offering price of $50 million to TriLinc Global Impact Fund Cayman Feeder, Ltd., or TGIF Cayman, an exempted company incorporated in the Cayman Islands and controlled by the Sponsor. A Saudi Arabian sovereign wealth fund owns 100% of the economic interest in TGIF Cayman and invested $50 million in TGIF Cayman to fund investment in the Class Z units.

 

Amendments to the Distribution Reinvestment Plan and Unit Repurchase Program

 

On March 7, 2018, the board of managers (the “Board”) of the Company approved the Third Amended and Restated Distribution Reinvestment Plan (the “Amended DRP”).  Commencing on March 30, 2018, the date on which the distributions declared for the month of March 2018 were reinvested (the “DRP Effective Date”), the Company amended the price at which additional units of the same class may be purchased pursuant to the distribution reinvestment plan to a price equal to the net asset value per unit of the unit class being reinvested, as most recently disclosed by the Company in a public filing with the SEC at the time of reinvestment. Accordingly, the Amended DRP has superseded and replaced the Company’s current distribution reinvestment plan as of the DRP Effective Date and the new offering price under the Amended DRP was first applied to distributions declared for the month of March 2018, which were reinvested on March 30, 2018.  . Distributions declared for the month of March 2018 were reinvested at a price equal to $8.507 for Class A units, Class C units, and Class I units, which was the net asset value per unit as of September 30, 2017, the most recently disclosed net asset value at the time of reinvestment. Distributions declared for the month of April 2018 will be reinvested at a price equal to $8.466 per Class A unit, Class C units and Class I unit, which was the net asset value per unit as of December 31, 2017.

 

 Additionally, on March 7, 2018, the Board approved the Third Amended and Restated Unit Repurchase Program (the “Amended URP”). The Company amended the price at which units presented for redemption will be repurchased, beginning with units to be repurchased by the Company on the last day of the first quarter of 2018 (the “URP Effective Date”).  Subject to the limitations of the Amended URP, beginning on the URP Effective Date, units repurchased under the Amended URP will be repurchased at a price equal to the estimated net asset value per unit of the unit class being repurchased, as most recently disclosed by the Company in a public filing with the SEC. Accordingly, the Amended URP superseded and replaced the Company’s current unit repurchase program as of the URP Effective Date and the new offering price under the Amended URP was first applied to units repurchased by the Company on the last day of the first quarter of 2018. Redemptions for the first quarter of 2018 were redeemed at the price equal to $8.507 for Class A units, Class C units, Class I units and Class Y unit, which was the net asset value per unit of each class as of September 30, 2017, the most recently disclosed net asset value at the time of redemption. Redemptions for the second

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quarter of 2018 will be redeemed at a price equal to $8.466 per Class A unit, Class C units, Class I unit and Class Y units, which was the net asset value per unit of each class as of December 31, 2017.

 

Investments

Subsequent to December 31, 2017 through March 26, 2018, the Company funded approximately $80.1 million in new loans and received proceeds from repayment of loans of approximately $37.1 million.

Agreements

On March 26, 2018, we entered into an Amended and Restated Operating Expenses Responsibility Agreement with our Sponsor and Advisor. Pursuant to the term of this agreement, our Sponsor agreed to be responsible for our cumulative operating expenses incurred through December 31, 2017, including management and incentive fees earned by the Advisor during the quarter ended December 31, 2017.

Our Advisory Agreement between us and the Advisor, dated as of February 25, 2014, had been previously renewed and is subject to an unlimited number of one-year renewals upon mutual consent of the Company and the Advisor. On February 14, 2018, our board of managers determined to extend our Advisory Agreement until February 25, 2019.

Critical Accounting Policies and Use of Estimates

The following discussion addresses the accounting policies that we utilize based on our current operations. Our most critical accounting policies involve decisions and assessments that could affect our reported assets and liabilities, as well as our reported revenues and expenses. We believe that all of the decisions and assessments upon which our financial statements are based are reasonable at the time made and based upon information available to us at that time. Our critical accounting policies and accounting estimates will be expanded over time as we continue to implement our business and operating strategy. In addition to the discussion below, we also describe our critical accounting policies in the notes to our financial statements.

Basis of Presentation

Our financial statements are prepared in accordance with accounting principles generally accepted in the United States of America, which requires the use of estimates, assumptions and the exercise of subjective judgment as to future uncertainties.

Although we were organized and conduct our business in a manner so that we are not required to register as an investment company under the Investment Company Act of 1940, our financial statements are prepared using the specialized accounting principles of the Financial Accounting Standards Board Accounting Standards Codification (“ASC”) Topic 946, Financial Services — Investment Companies. Overall, we believe that the use of investment company accounting makes our financial statements more useful to investors and other financial statement users since it allows a more appropriate basis of comparison to other entities with similar objectives.

Valuation of Investments

Our board of managers has established procedures for the valuation of our investment portfolio in accordance with ASC Topic 820, Fair Value Measurement (“ASC 820”). ASC 820 requires enhanced disclosures about assets and liabilities that are measured and reported at fair value. As defined in ASC 820, fair value is the price that would be received when selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.

ASC 820 establishes a hierarchal disclosure framework that prioritizes and ranks the level of market price observability of inputs used in measuring investments at fair value. Market price observability is affected by a number of factors, including the type of investment and the characteristics specific to the investment. Investments with readily available active quoted prices or for which fair value can be measured from actively quoted prices generally will have a higher degree of market price observability and a lesser degree of judgment used in measuring fair value.

Based on the observability of the inputs used in the valuation techniques, the Company is required to provide disclosures on fair value measurements according to the fair value hierarchy. The fair value hierarchy ranks the observability of the inputs used to determine fair values. Investments carried at fair value are classified and disclosed in one of the following three categories:

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The inputs used in the determination of fair value may require significant judgment or estimation.

Investments for which market quotations are readily available are valued at those quotations. Most of our investments are private investments in companies whose securities are not actively traded in the market and for which quotations are not be available. For those investments for which market quotations are not readily available, or when such market quotations are deemed by the Advisor not to represent fair value, our board of managers has approved a multi-step valuation process to be followed each fiscal quarter, as described below:

Below is a description of factors that our board of managers may consider when valuing our investments.

Fixed income investments are typically valued utilizing a market approach, income approach, cost approach, or a combination of these approaches (and any others, as appropriate). The market approach uses prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities (including the sale of a business) and is used less frequently due to the private nature of the Company’s investments. The income approach uses valuation techniques to convert future amounts (for example, interest and principal payments) to a single present value amount (discounted) calculated based on an appropriate discount rate. The measurement is based on the net present value indicated by current market expectations about those future amounts. The cost approach is a valuation technique that uses the concept of replacement cost as an indicator of value.  The premise of the cost approach holds that a prudent investor would pay no more for an asset than the amount for which the asset could be replaced.  To clarify, the cost approach as a method for valuing an investment is to be distinguished from holding an investment at cost as of the initial investment date.  In following a given approach, the types of factors that the Company may take into account in valuing the Company’s investments include, as applicable:

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We may also look to private merger and acquisition statistics, public trading multiples discounted for illiquidity and other factors, valuations implied by third-party investments in the portfolio companies or industry practices in determining fair value. We may also consider the size and scope of a portfolio company and its specific strengths and weaknesses, as well as any other factors we deem relevant in measuring the fair values of our investments.

Revenue Recognition

We record interest income on an accrual basis to the extent that we expect to collect such amounts. We do not accrue as a receivable interest on loans for accounting purposes if there is reason to doubt the ability to collect such interest. Structuring, upfront and similar fees are recorded as a discount on investments purchased and are accreted into interest income, on a straight line basis, which we have determined not to be materially different from the effective yield method.

We record prepayment fees for loans and debt securities paid back to us prior to the maturity date as income upon receipt.

We generally place loans on non-accrual status when principal and interest are past due 90 days or more or when there is a reasonable doubt that we will collect principal or interest. If, however, management believes the principal and interest will be collected, a loan may be left on accrual status during the period we are pursuing repayment of the loan. Interest payments received on non-accrual loans may be recognized as income or applied to principal depending upon management’s judgment of the financial condition of the borrower. Non-accrual loans are generally restored to accrual status when past due principal and interest is paid and, in the Advisor’s judgment, is likely to remain current over the remainder of the term. At December 31, 2017, three portfolio companies were on non-accrual status with an aggregate fair value of $8,958,155 or 2.7% of the fair value of our total investments. At December 31, 2016, two portfolio companies were on non-accrual status with an aggregate fair value of $5,819,216 or 2.9% of the fair value of our total investments. Interest income not recorded relative to the original terms of the loans to the companies on non-accrual status amounted to approximately $401,838 and $449,927, respectively for the years ended December 31, 2017 and 2016.

Net Realized Gains or Losses and Net Change in Unrealized Appreciation or Depreciation on Investments

We measure net realized gains or losses by the difference between the net proceeds from the repayment or sale and the amortized cost basis of the investment, including unamortized upfront fees and prepayment penalties. Realized gains or losses on the disposition of an investment are calculated using the first in first out (FIFO) method, utilizing the amortized cost basis of the investment, without regard to unrealized appreciation or depreciation previously recognized, but considering unamortized upfront fees and prepayment penalties. Net change in unrealized appreciation or depreciation reflects the change in portfolio investment values during the reporting period, including any reversal of previously recorded unrealized appreciation or depreciation, when gains or losses are realized.

Payment-in-Kind Interest

We may have investments that contain a payment-in-kind, or PIK, interest provision. For loans with contractual PIK interest, any interest will be added to the principal balance of such investments and be recorded as income, if the valuation indicates that such interest is collectible.

Distribution and Ongoing Dealer Manager Fees

We pay a distribution fee equal to 0.8% per annum of our current estimated value per share for each Class C unit sold in the Offering or pursuant to a private placement. In addition, we pay an ongoing dealer manager fee for each Class I unit sold pursuant to a private placement. The aggregate amount of underwriting compensation for each public and private offering of the Class A, Class C, Class I, Class Y and Class W units, including any applicable distribution fee and ongoing dealer manager fee, cannot exceed the Financial Industry Regulatory Authority’s 10% cap on underwriting compensation. The distribution fees and ongoing dealer manager fees are not paid at the time of purchase. Such fees are payable monthly in arrears, as they become contractually due.

In prior periods, we had been recording distribution fees as a periodic charge to equity as they are incurred.  Starting in June 2016, we determined to account for the distribution fees as a charge to equity at the time each Class C unit is sold in its Offering and record a corresponding liability for the estimated amount to be paid in future periods. We account for the ongoing dealer manager fees paid in connection with the sale of Class I units in the private placement in the same manner. At December 31, 2017, the estimated unpaid aggregate distribution fee for Class C units amounted to $1,820,000 and the unpaid dealer manager fee for Class I units amounted to $65,000.

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Organization and Offering Expenses

The Sponsor has incurred organization and offering costs on our behalf. Organization and offering costs are reimbursable to the Sponsor to the extent the aggregate of selling commissions, dealer manager fees and other organization and offering costs do not exceed 15.0% of the gross offering proceeds (the “O&O Reimbursement Limit”) raised from the Offering and will be accrued and payable by us only to the extent that such costs do not exceed the O&O Reimbursement Limit. Reimbursement of organization and offering costs that exceed the O&O Reimbursement Limit will be expensed in the period they become reimbursable, which is dependent on the gross offering proceeds raised in such period, and are therefore not included on the Statements of Assets and Liabilities as of December 31, 2017 and 2016. These expense reimbursements are subject to regulatory caps and approval by our board of managers.  Reimbursements to the Sponsor are included as a reduction to net assets on the Consolidated Statement of Changes in Net Assets. Based on the proceeds raised in the Offering at the end of the primary offering, the organization and offering expenses equaled to 4.7% of the gross proceeds.  As a result of the termination of the primary offering, effective March 31, 2017, we no longer pay the dealer manager selling commissions and dealer manager fees under a dealer manager agreement relating to the Offering. We will continue to incur certain organization and offering costs associated with the Distribution Reinvestment Plan and ongoing distribution fees on Class C units. In addition, the Sponsor has and may continue to incur organization and offering costs on our behalf in connection with private placements of our units and we will pay selling commissions, dealer manager fees and ongoing distribution and dealer manager fees to the dealer manager for certain sales pursuant to a private placement.  As of December 31, 2017 the Sponsor has incurred $481,722 in organization and offering costs on our behalf related to a private placement of our units.  As of December 31, 2017, we have reimbursed $68,672 of the organization and offering incurred relating to such private placement.

Expense Responsibility Agreement

On March 26, 2018, the Company, the Advisor and the Sponsor entered into the Responsibility Agreement originally effective as of June 11, 2013 and covering expenses through December 31, 2017. Since our inception through December 31, 2017, pursuant to the terms of the Responsibility Agreement, the Sponsor has paid approximately $12,422,100 of operating expenses, management fees, and incentive fees on our behalf and will pay or reimburse us an additional $4,238,700 of expenses, which have been accrued by the Sponsor as of December 31, 2017. The Sponsor will only be entitled to reimbursement of our cumulative expenses to the extent our investment income in any quarter, as reflected on the statement of operations, exceeds the sum of (a) total distributions to unitholders incurred during the quarter and (b) our expenses as reflected on the statement of operations for the same quarter (the “Reimbursement Hurdle”). To the extent we are not successful in satisfying the Reimbursement Hurdle, no amount will be payable in that quarter by us for reimbursement to the Sponsor of our cumulative expenses.  If the Sponsor is entitled to receive reimbursement for any given quarter because the Company’s investment income exceeds the Reimbursement Hurdle for such quarter, we will apply the excess amount (the “Excess Amount”) as follows: (i) first, we will reimburse the Sponsor for all expenses, other than management fees and incentive fees, that the Sponsor previously paid on our behalf, which will generally consist of operating expenses (the “Previously Paid Operating Expenses”) until all Previously Paid Operating Expenses incurred to date have been reimbursed; and (ii) second, we will apply 50% of the Excess Amount remaining after the payment of Previously Paid Operating Expenses to reimburse the Sponsor for the management fees and incentive fees that the Sponsor has agreed to pay on our behalf until all such management fees and incentive fees accrued to date have been reimbursed. We have not met the Reimbursement Hurdle for the quarter ended December 31, 2017. Therefore, our expenses covered by the Responsibility Agreement have not been recorded as expenses by us as of December 31, 2017. In accordance with ASC 450, Contingencies, such expenses will be accrued and payable by us in the period that they become both probable and estimable.  The Sponsor may demand the reimbursement of our cumulative expenses covered by the Responsibility Agreement to the extent we exceed the Reimbursement Hurdle during any quarter.

U.S. Federal Income Taxes

We believe that we are properly characterized as a partnership for U.S. Federal income tax purposes, and expect to continue to qualify as a partnership (and not be treated as a publicly traded partnership or otherwise be treated as a taxable corporation) for such purposes.  As a partnership, we are generally not subject to U.S. Federal income tax at the entity level.

Calculation of Net Asset Value

Our net asset value is calculated on a quarterly basis. As of December 31, 2017, we have five classes of units: Class A units, Class C units, Class I units, Class W units and Class Y units, with only Class A units, Class C units, Class I and Class Y units outstanding. All units participate in our income and expenses on a pro-rata basis based on the number of units outstanding. Under GAAP, pursuant to the SEC guidance, effective June 30, 2016, we record liabilities for distribution fees that we (i) currently owe to the dealer manager under the terms of the dealer manager agreement and (ii) for an estimate that we may pay to the dealer manager in future periods. As of December 31, 2017, under GAAP, we recorded a liability in the aggregate amount of $1,895,000 for the estimated future amount of Class C units distribution fee and Class I units dealer manager fee payable. We are not required to determine our net asset value under GAAP and thus, our determination of net asset value per share for Class C units now varies from GAAP. In the prior periods, we deducted the liability for the estimated future distribution fees in our net asset value calculation for Class C units. As a result, for each period from June 30, 2016 through March 31, 2017, the Class A and Class I units had a higher net

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asset value per unit than Class C units with the difference being the result of the future distribution fee deduction for Class C units. We have determined that such approach is not the most appropriate for determining net asset value per share for Class C units and, beginning with the net asset value determination as of June 30, 2017, we do not deduct the liability for estimated future distribution fees in our calculation of net asset value per share for Class C units. We believe this approach is consistent with the industry standard and is more appropriate since we intend for the net asset value to reflect the estimated value on the date that we determine our net asset value. Accordingly, we believe that our estimated net asset value at any given time should not include consideration of any estimated future distribution fees that may become payable after such date. As a result of this change in the calculation of the net asset value, as of December 31, 2017, each of the Class A, Class C and Class I units have the same net asset value per unit of $8.466. As of March 31, 2017, Class A and Class I units had a net asset value of $8.529 per unit and Class C units had a net asset value of $8.267 (with a blended net asset value of $8.467 per unit). The increase in the net asset value per Class C unit from $8.267 as of March 31, 2017 to $8.466 as of December 31, 2017 is solely as a result of the change in the treatment of future distribution fees in the net asset value calculation discussed above and is not reflective of any increase in the value of our assets. Without taking into account the change in the treatment of the future distribution fees, the net asset value per unit has decreased by $0.063 from $8.529 as of March 31, 2017 to $8.466 as of December 31, 2017 as a result of the Sponsor’s determination to absorb a reduced amount of operating expenses during the second and fourth quarters of 2017. In addition, we failed to realize sufficient investment income during the second and fourth quarters of 2017 to cover operating expenses.  

In addition, our net asset value would have decreased for all unit classes in all prior quarters if the Sponsor had not absorbed and deferred reimbursement for substantially all of our operating expenses since we began our operations.

Recently Issued Accounting Pronouncements

Under the Jumpstart Our Business Startups Act (the “JOBS Act”), emerging growth companies can delay the adoption of new or revised accounting standards until such time as those standards apply to private companies. We are choosing to take advantage of the extended transition period for complying with new or revised accounting standards. As a result, our financial statements may not be comparable to those of companies that comply with public company effective dates. There are no new or revised accounting standards that we have not adopted.

In May 2014, the FASB issued Accounting Standards Update 2014-09, Revenue from Contracts with Customers (Topic 606) (“ASU 2014-09”). The update supersedes the revenue recognition requirements in ASC 605, Revenue Recognition. Under the new guidance, an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In July 2015, the FASB deferred the implementation of this standard by one year.  ASU 2014-09 is now effective for annual reporting periods beginning after December 15, 2018, including interim periods within that reporting period. Early adoption is permitted for annual reporting periods beginning after December 15, 2016. The adoption of the amended guidance in ASU 2014-09 is not expected to have a significant effect on the Company’s financial statements.

In August 2014, the FASB issued ASU 2014-15, “Presentation of Financial Statements - Going Concern (Subtopic 205-40).” ASU 2014-15 addresses management’s responsibility to evaluate whether there is substantial doubt about an entity’s ability to continue as a going concern and to provide related footnote disclosures. For each reporting period, management will be required to evaluate whether there are conditions or events that raise substantial doubt about a company’s ability to continue as a going concern within one year from the date the financial statements are issued. Management’s evaluation should be based on relevant conditions and events that are known and reasonably knowable at the date that the financial statements are issued. ASU 2014-15 is effective for annual periods ending after December 15, 2016, and interim periods thereafter. Management has adopted this guidance effective for the fourth quarter of 2016.

In January, 2016, the FASB issued ASU 2016-01, “Recognition and Measurement of Financial Assets and Financial Liabilities.” ASU 2016-01 addresses certain aspects of recognition, measurement, presentation and disclosure of financial instruments that are marked to fair value and reported as available-for-sale (“AFS”).  ASU 2016-01 requires public business entities that are required to disclose fair value of financial instruments measured at amortized cost on the balance sheet to measure that fair value using the exit price notion consistent with Topic 820, Fair Value Measurement.  For public business entities, ASU 2016-01 is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years.  Management has adopted this guidance effective for the fiscal period beginning January 1, 2018.

In June 2016, the FASB issued ASU 2016-13, “Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.” ASU 2016-13 introduces an approach based on expected losses to estimate credit losses on certain types of financial instruments. ASU 2016-13 also modifies the impairment model for available-for-sale debt securities and provides for a simplified accounting model for purchased financial assets with credit deterioration since their origination. ASU 2016-13 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. Early adoption is permitted for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. The guidance requires companies to

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apply the requirements in the year of adoption through cumulative adjustment with some aspects of the update requiring a prospective transition approach. We are currently evaluating the potential impact of the pending adoption of ASU 2016-13 on our consolidated financial statements.

In August 2016, the FASB issued ASU 2016-15, “Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments (a consensus of the Emerging Issues Task Force).” ASU 2016-15 is intended to reduce diversity in practice in how certain transactions are classified in the statement of cash flows. ASU 2016-15 addresses eight classification issues related to the statement of cash flows: (i) debt prepayment or debt extinguishment, (ii) settlement of zero-coupon bonds, (iii) contingent consideration payments made after a business combination, (iv) proceeds from the settlement of insurance claims, (v) proceeds from the settlement of corporate-owned life insurance policies, including bank-owned life insurance policies, (vi) distributions received from equity method invitees, (vii) beneficial interest in securitizations transactions, and (viii) separately identifiable cash flows and application of the predominance principle. ASU 2016-15 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017. Early adoption is permitted. The guidance requires companies to apply the requirements retrospectively to all prior periods presented. If it is impracticable for a company to apply ASU 2016-15 retrospectively, requirements may be applied prospectively as of the earliest date practicable. We are currently evaluating the potential impact of the pending adoption of ASU 2016-15 on our consolidated financial statements.

 

 

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We are subject to financial market risks, including changes in interest rates. Our investments are currently structured with both fixed and floating interest rates. Those structured with floating rates are referenced to LIBOR and incorporate fixed interest rate floors. If rates go down further, interest income will not decrease from current levels. To the extent that interest rates go up substantially, these investments will accrue higher amounts of income than currently being realized. Returns on investments that carry fixed rates are not subject to fluctuations in interest rates, and will not adjust should rates move up or down.

To the extent that we borrow money to make investments, our net investment income will be dependent upon the difference between the rate at which we borrow funds and the rate at which we invest these funds. In periods of rising interest rates, our cost of funds would increase, which may reduce our net investment income. As a result, there can be no assurance that a significant change in market interest rates will not have a material adverse effect on our net investment income.

Although we operate in a number of foreign markets, all investments are currently denominated in U.S. dollars. Therefore, the current portfolio does not present currency risk to U.S. unitholders. In the future, we may hedge against interest rate and currency exchange rate fluctuations by using standard hedging instruments such as futures, options and forward contracts. While hedging activities may insulate us against adverse changes in interest rates, they may also limit our ability to participate in benefits of lower interest rates with respect to our portfolio of investments with fixed interest rates.

The following table provides information about our market risk related to changes in interest rates. The future principal payments and weighted-average interest rates are presented as of December 31, 2017. These investments maturities reflect contractual maturity dates. See note 3 to our consolidated financial statements for additional information regarding our investments

 

 

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ITEM 8. FINANCIAL STATEMENTS

See the Consolidated Financial Statements beginning on page F-1.

 

 

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

The Company’s management, with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act) as of the end of the period covered by this report. Based upon such evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective.

Internal Control Over Financial Reporting

The Company’s management is responsible for establishing and maintaining adequate internal control over financial reporting for the Company (as defined in Rule 13a-15(f) and 15d-15(f) of the Exchange Act). Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America. Internal control involves maintaining records that accurately represent our business transactions, providing reasonable assurance that receipts and expenditures of company assets are made in accordance with management authorization, and providing reasonable assurance that unauthorized acquisition, use or disposition of company assets that could have a material effect on our financial statements would be detected or prevented on a timely basis.

Because of its innate limitations, internal control over our financial statements is not intended to provide absolute guarantee that a misstatement can be detected or prevented on the statements.  Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation.  Also projections of any evaluation of effectiveness to future periods are subject to risk that controls may become inadequate because of changes in condition, or that the degree of compliance with the policies or procedures may deteriorate.

Under the supervision and with the participation of management, including the Company’s Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).  Based on this evaluation and those criteria, the management concluded that the Company’s internal control over financial reporting was effective as of December 31, 2017.

Changes in Internal Control Over Financial Reporting

There have not been any changes in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the three months ended December 31, 2017 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

 

ITEM 9B. OTHER INFORMATION

 

None

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PART III

 

 

ITEM 10. DIRECTORS, OFFICERS AND CORPORATE GOVERNANCE.

Board of Managers

We operate under the direction of our board of managers, whose members are accountable to us and to our unitholders as fiduciaries. The board is responsible for the direction and control of our affairs. The board has engaged our Advisor to manage our day-to-day affairs and our portfolio of investment assets, subject to the board’s supervision. Because of the conflicts of interests created by the relationships between us and our Advisor and its affiliates, certain of the responsibilities of the board have been delegated to a committee comprised exclusively of independent managers.

We currently have five managers on our board of managers, three of whom are independent of us, our Advisor, our Sponsor and our respective affiliates. Our full board of managers has determined that each of our independent managers is independent in accordance with our operating agreement. Our operating agreement defines an “independent manager” as a person who has not been, directly or indirectly associated with our Sponsor or the Advisor within previous two years by virtue of:

We refer to our managers who are not independent as our “affiliated managers.” Our operating agreement sets forth the material business or professional relationships that cause a person to be affiliated with us and therefore not eligible to serve as an independent manager. A business or professional relationship is per se material if the prospective independent manager received more than five percent of his or her annual gross income in the last two years from our Sponsor, our Advisor or any affiliate of our Sponsor or our Advisor, or if more than five percent of his or her net worth, on a fair market value basis, has come from our Sponsor, our Advisor or any affiliate of our Sponsor or our Advisor.

The board of managers may increase the number of managers and fill any vacancy on the board of managers, whether resulting from an increase in the number of managers or otherwise. Any vacancies on our board of managers may be filled only by the affirmative vote of a majority of the remaining managers in office, even if the remaining managers do not constitute a quorum. Any replacements for vacancies among the independent managers will be nominated by the remaining independent managers. In addition, our unitholders, by a majority vote, may remove a manager and elect a new manager.

Our managers are accountable to us and to our unitholders as fiduciaries. This means that each manager must perform his or her duties in good faith and in a manner that each manager considers to be in our best interest and in the best interests of the unitholders. Our managers have a fiduciary responsibility for the safekeeping and use of all funds and assets of the Company and will not employ or permit another to employ such funds or assets in any manner except for the exclusive benefit of the Company. Further, our managers must act with such care as a prudent person in a similar situation would use under similar circumstances, including exercising reasonable inquiry when acting. However, our managers are not required to devote all of their time to our business and must devote only that portion of their time to our business as the reasonable execution of the duties shall require. We do not expect that our managers will be required to devote a significant portion of their time to us in discharging their duties.

In addition to meetings of the various committees of the board, which committees we describe below, we expect our board of managers to hold at least four regular board meetings each year. During 2017, the board of managers held 13 meetings. Our board has the authority to pay compensation to independent managers in connection with services rendered to us in any other capacity.

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Managers and Executive Officers

As of the date of this report, our managers and executive officers and their positions and offices are as follows:

 

Gloria S. Nelund, Chairman, President and Chief Executive Officer

Gloria S. Nelund has served as our Chairman and Chief Executive Officer since our formation in April 2012 and became our President in December 2014. In addition, she has served as the Chairman and Chief Executive Officer of our Advisor since its formation in April 2012, Chief Compliance Officer of our Advisor since October 2013, President of our Advisor since December 2014, the Chairman and Chief Executive Officer of our Sponsor since its formation in August 2008, and President of our Sponsor from December 2014 to October 2015. From October 2006 until August 2008, Ms. Nelund served as the President and founder of Titus Development Group, LLC, a consulting firm focusing on strategy development, business planning and launch for start-up companies, as well as growth planning for small to mid-sized firms. Prior to founding Titus Development, LLC, Ms. Nelund spent her career as a high level executive in the international Asset Management Industry. Most recently, Ms. Nelund served as Head of the U.S. Private Wealth Management Division at Deutsche Bank, the world’s fifth largest financial institution. In this capacity, Ms. Nelund held fiduciary responsibility for more than $50 billion in investment assets, including more than $20 billion in emerging markets and credit instruments. In addition to this role, Ms. Nelund served as the only female member of the Global Private Wealth Management Executive Committee. Ms. Nelund had served as the Managing Director of Scudder Kemper Investments, prior to its purchase by Deutsche Bank.

Prior to her tenure at Deutsche Bank, Ms. Nelund spent sixteen years as an executive at Bank of America / Security Pacific Bank, most notably as President and CEO of BofA Capital Management, Inc., an investment management subsidiary managing $35 billion in assets for both retail and institutional investors. In addition to managing fixed-income and equity mutual funds in both the U.S. and internationally, Ms. Nelund’s division was responsible for managing assets on behalf of public funds, common trust funds and corporate funds. Ms. Nelund also spent five years as Manager of Worldwide Sales and Marketing of BofA Global Asset Management and three years as CEO of InterCash Capital Advisors, Inc., a $15 billion investment management subsidiary of Security Pacific Bank.

Ms. Nelund has been a pioneer in the development of Social Impact products for institutional and high net worth investors. While at Scudder, she supported the development and growth of one of the industry’s first socially responsible investment (SRI) products. In addition, Ms. Nelund was instrumental in making Deutsche Bank a major institutional supporter of microcredit, creating multiple programs for Private Wealth Management clients.

Ms. Nelund brings to us more than 30 years of experience in executive management of financial institutions, as well as deep expertise in the creation, sale and distribution of financial products within the wealth management community.

In addition to her activities with TriLinc, Ms. Nelund is Chairman of the Board and Independent Trustee for RS Investments, a mutual fund complex with more than $20 billion in assets under management. She is also a life-long supporter of development-oriented philanthropic causes. While at Deutsche Bank, Ms. Nelund served on the Board of the Deutsche Bank Americas Community Development Group, with responsibility for providing loans, investments and grants to targeted organizations throughout the U.S. and Latin America. She has also volunteered as a teacher of at-risk youth in the Los Angeles Unified School District and the YMCA of Los Angeles. Ms. Nelund currently sits on the board of multiple not-for-profit organizations and actively supports entrepreneurship research and education. She is an active speaker and guest lecturer on Impact Investing at conferences and several top business schools, including Wheaton, Kellogg and the Massachusetts Institute of Technology. Ms. Nelund attended the University of Dayton in Dayton, Ohio as a Business and Economics major, and she is a graduate of the University of Virginia Colgate Darden Graduate School’s Sales and Marketing Executives Program.

We believe that Ms. Nelund’s qualifications to serve as Chairman of our board of managers include her over 30 years of experience in the international asset management industry, including significant experience serving as CEO of multiple investment institutions. In addition, her experience as a pioneer in the development of social impact products for institutional and high net worth investors affords her a unique perspective on the evolving world of impact investing and these insights will be valuable to us.

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Brent L. VanNorman, Esq., CPA, Chief Operating Officer, Chief Financial Officer, Chief Compliance Officer, Secretary and Manager

Brent L. VanNorman has served as our Chief Financial Officer since August 2014 and as our Chief Operating Officer, Chief Compliance Officer and Secretary, as Chief Operating Officer and Chief Financial Officer of our Advisor since October 2013, and as President of our Sponsor since November 2015. Mr. VanNorman also served as the Interim Chief Financial Officer of the Company from October 2013 until his appointment as Chief Financial Officer of the Company in August 2014. Mr. VanNorman has served as a Manager since December 2014.  Prior to joining us, Mr. VanNorman served as a key member of the Intellectual Property and Litigation Team for the international law firm of Hunton & Williams LLP, beginning his practice there in August 2000, and terminating when he joined the Company. Prior to practicing law, Mr. VanNorman served as a Chief Information Officer for The Title Office, where he managed the accounting, data processing and marketing departments, along with 15 of the company’s 42 offices.

Prior to his tenure at The Title Office, Mr. VanNorman was a Senior Manager with the international CPA firm of Crowe Horwath (formerly Crowe Chizek), where he oversaw large consulting projects in the firm’s Systems Consulting Group. In addition to appearing in many federal courts throughout the country and at all levels in the Virginia state court system, Mr. VanNorman is a patent attorney. He is also a Certified Public Accountant, Certified Computer Programmer and is Certified in Production and Inventory Management. Mr. VanNorman graduated magna cum laude from Anderson University in Anderson, Indiana, with majors in Accounting and Computer Science. He was recognized as the Outstanding Accounting graduate. Mr. VanNorman graduated summa cum laude, from Regent University School of Law and was recognized as the Outstanding Law School Graduate in addition to being Editor-in-Chief of the school’s law review. He has served as an adjunct law professor at his alma mater. Mr. VanNorman is Gloria S. Nelund’s brother-in-law. Mr. VanNorman brings a breadth of experience in business, accounting, data processing, and the law to the TriLinc’s management team. Mr. VanNorman has served on the Board of Directors of IMPACT International, a not for profit organization since 2004. Mr. VanNorman has served on the Board of Directors of CCG Systems, Inc., a provider of fleet management software since August of 2015.

Paul Sanford, Chief Investment Officer

Paul Sanford has served as our Chief Investment Officer since our formation in April 2012. In addition, Mr. Sanford has served as the Chief Investment Officer of our Advisor since its formation in April 2012 and as Chief Investment Officer of our Sponsor since July 2011. From September 2007 until July 2011, Mr. Sanford was Managing Director and Chief Investment Officer for a Los Angeles-based boutique Registered Investment Advisor, where he was responsible for developing and implementing the firm’s Global Investment Strategy, performing manager due diligence, and managing all fund investment relationships. Mr. Sanford’s extensive experience in the banking and investment industry also includes portfolio manager positions at Deutsche Bank, HSBC and Morton Capital Management.

Mr. Sanford has over fourteen years of experience developing, managing and executing global macro investment strategies at both large global banks and boutique investment firms. Throughout his career, Mr. Sanford has followed and invested in emerging markets as part of his various investment mandates, including conducting extensive research on developing economies and reviewing and selecting leading managers of emerging market debt and equities, most prominently as Portfolio Manager for Latin American accounts at the U.S. Private Bank of HSBC. Mr. Sanford has a deep understanding of macroeconomics and geo-politics, and an in-depth knowledge of traditional and alternative asset classes in both public and private capital markets. For over a decade, Mr. Sanford has been a global macro investor with a focus on Central Bank policy, GDP growth trends, global interest rates, global currencies and foreign government policies.

Mr. Sanford holds a B.A. in Business Economics from California State University, Long Beach and previously served in the United States Marine Corps. He is a member of the CFA Society of Los Angeles and the CFA Institute. Mr. Sanford serves on the Investment Committee for the City of Hope, an independent biomedical research, treatment and education institution, leading the fight to conquer cancer, diabetes, HIV/AIDS and other life-threatening diseases.

Terry Otton, Independent Manager

Terry Otton served as Chief Executive Officer of RS Investments from September 2005 until his retirement in March 2012 and as President and Trustee of RS Investment Trust and RS Variable Products Trust since April 2004 and May 2006 until March 2012, respectively. Mr. Otton re-joined RS Investments in 2004 and became Chief Executive Officer in September 2005. Mr. Otton has 30 years of experience in the investment management and securities industry, having previously served since 2001 as a Managing Director of the mergers and acquisition practice at Putnam Lovell NBF Group, an investment banking firm focused on the investment management and securities industry. Previously, Mr. Otton spent more than 10 years as a Managing Director and CFO of Robertson, Stephens & Company and Robertson Stephens Investment Management, the predecessor to RS Investments. Mr. Otton was one of the principal founders of Robertson Stephens Investment Management in 1986. Mr. Otton serves on the Board of Trustees of the Children’s Hospital and Research Center Foundation and as a Board member and past President of the Foundation of City College of San Francisco and serves on the Board of Trustees of the Cal State East Bay Educational Foundation Board. Mr. Otton holds a

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Bachelor of Science degree in Business Administration from the University of California at Berkeley and is a Certified Public Accountant. Mr. Otton has served on our board of managers since February 2013.

Mr. Otton was selected to serve on the Company’s board of managers because of his over 30 years of experience in the investment management and securities industry. Having most recently served as Chief Executive Officer of RS Investments and President and Trustee of RS Investment Trust and RS Variable Products Trust, Mr. Otton brings recent and relevant perspective on the state of the investment management industry. He is also able to provide valuable insight with regard to our investment strategy, regulatory and compliance oversight and operational processes.

Cynthia Hostetler, Independent Manager

Cynthia Hostetler has been an independent trustee of the Artio Global Investment Funds since November 2011 and an independent director of Artio Global Equity Fund Inc. since November 2010 until 2013, when Artio Global was acquired by Aberdeen Asset Management. Since 2013, Ms. Hostetler has served as an independent trustee of the Aberdeen Investment Funds. Ms. Hostetler also served from May 2012 as an independent director of Edgen Group (NYSE:EDG), an energy infrastructure company until EDG was acquired by Sumitomo Corporation in late 2013. Additionally, Ms. Hostetler serves on the Board of Directors of Vulcan Materials Company (NYSE: VMC), a producer of construction aggregates and other construction materials, since July 2014.  From August 2001 until her retirement in January 2009, Ms. Hostetler was the Head of Private Equity and Vice President of Investment Funds at the Overseas Private Investment Corporation (OPIC). Prior to OPIC, Ms. Hostetler was the President and a member of the Board of Directors of First Manhattan Bancorporation. Ms. Hostetler began her professional career as an attorney in the corporate/banking department of the law firm Simpson Thacher & Bartlett, and received a Bachelor of Arts degree from Southern Methodist University and her law degree from The University of Virginia School of Law. Ms. Hostetler has served on our board of managers since February 2013.

Ms. Hostetler was selected to serve on the Company’s board of managers because of her direct experience in investing and development in the geographic regions in which TriLinc operates, as well as her extensive experience in the banking and investment industries. As TriLinc seeks to establish and leverage relationships with DFIs, Ms. Hostetler’s seven years as Vice President of Investment Funds at OPIC should position her as an excellent source of insight and guidance in working with these institutions. Her diverse board positions make her a valuable resource in the areas of risk management, governance, valuation and with regard to certain sectors in which we anticipate making investments.

R. Michael Barth, Independent Manager

R. Michael Barth has been a Managing Partner of Barth & Associates LLC, an emerging markets capital advisory and consulting firm, since January 2012. Previously, Mr. Barth held various positions with Darby Overseas Investment Ltd., a 100% subsidiary of Franklin Templeton Investments, including Senior Advisor, Business Development from January 2011 until January 2012, Senior Director, Business Development from January 2009 until January 2011, Senior Managing Director, Global Investment from March 2007 until January 2009 and Managing Director, Global Investment from March 2006 until March 2007. Before joining Darby, Mr. Barth spent over twenty years working for some of the most prominent development finance institutions in the world. Mr. Barth holds a Masters Degree in International Economics / International Affairs from the Johns Hopkins University, School of Advanced International Studies, and a Bachelor’s Degree in Economics from Brandeis University. Mr. Barth has served on our board of managers since February 2013.

Mr. Barth was selected to serve on the Company’s board of managers because of his distinguished career in emerging markets development and investment. His qualifications to serve on the Company’s board of managers span more than 30 years’ of relevant experience in development/emerging markets, including serving as Chief Executive Officer of FMO (Netherlands Development Finance Company), Director of the Capital Markets Development Department at the World Bank and several senior positions at the International Finance Corporation, the private sector arm of the World Bank Group. Mr. Barth is currently Chairman of the Board of SFC Ltd., part of the AfricInvest Group, and is also a member of the Boards of Directors of FINCA Microfinance Holding and SNV (USA). He is also a member of the Investment Committee of the MPEF III fund of private equity manager Tuninvest /Africinvest and is on the Advisory Committee of CASF and African River Funds. Additionally, he is Senior Advisor of the Emerging Markets Private Equity Association (EMPEA); Senior Advisor to McKinsey and Company; a non-resident Associate of the Center for Strategic and International Studies; and a member of the International Council of the Bretton Woods Committee. Previously, he has held several board positions, including of EMPEA and the Emerging Markets Growth Fund.

Unless a manager resigns, is removed “for cause” by the majority of the remaining managers (excluding the manager being removed) or is removed by the majority vote of our unitholders, our managers serve for our duration. Our executive officers serve until their successors are elected and qualify. Our executive officers act as our agents, execute contracts and other instruments in our name and on our behalf, and in general perform all duties incident to their offices and such other duties as may be prescribed by our

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board of managers from time to time. Our officers devote such portion of their time to our affairs as is required for the performance of their duties, but they are not required to devote all of their time to us. Each of our executive officers is also an officer of our Advisor.

Code of Ethics

The Company has adopted a Code of Ethics that applies to the Company’s managers and to officers or employees of the Company, whether acting directly as an officer or employee of the Company or indirectly as an officer of our Sponsor or employee of our Advisor, which conducts the day-to-day operations of the Company.

Committees of the Board of Managers

Our board of managers may delegate many of its powers to one or more committees. Our operating agreement requires that each of these committees be majority-comprised of our independent managers and our board will have two committees, the audit committee and the corporate governance and conflicts committee, each of which consists solely of independent managers.

Audit Committee

Our board of managers has established an audit committee that consists of Messrs. Terry Otton and R. Michael Barth, and has designated Mr. Terry Otton as an audit committee financial expert. Mr. Otton serves as chair of this committee. All members of our Audit Committee are independent managers. The Audit Committee assists our board in overseeing the following:

The audit committee selects the independent registered public accounting firm to audit our annual financial statements, and reviews with the independent registered public accounting firm the plans and results of the audit engagement, and consider and approve the audit and non-audit services provided by the independent registered public accounting firm. During 2017, our Audit Committee had four meetings.

Corporate Governance and Conflicts Committee

In order to assist our board with certain corporate governance procedures and to reduce or eliminate certain potential conflicts of interest, our operating agreement creates a corporate governance and conflicts committee of the board of managers, which is composed of all of our independent managers, Messrs. Terry Otton and R. Michael Barth and Ms. Cynthia Hostetler. Ms. Hostetler serves as chair of this committee. Our Corporate Governance and Conflicts Committee had four meetings in 2017. Our operating agreement authorizes the Corporate Governance and Conflicts Committee to act on any matter permitted under state law. Both the board of managers and the corporate governance and conflicts committee are expected to act jointly on any conflict-of-interest issues. Our operating agreement also authorizes the corporate governance and conflicts committee to retain its own legal or financial advisors. For more information, please see the section entitled “Conflicts of Interest.”

Limited Liability and Indemnification of Managers, Officers, Employees and Other Agents

Our organizational documents limit the liability of our managers and officers to us and our unitholders for monetary damages and generally require us to indemnify our managers, officers, our Advisor, and its affiliates for losses they may incur by reason of their service in that capacity. We will not provide that our sponsor, a manager, our Advisor or its affiliates (the “Indemnitee”) is held harmless for any loss or liability suffered by us unless all of the following conditions are met:

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Furthermore, our organizational documents prohibit the indemnification of an Indemnitee for losses, liabilities or expenses arising from or out of an alleged violation of state or federal securities laws, unless one or more of the following conditions is met:

The Securities and Exchange Commission and certain states, take the position that indemnification against liabilities arising under the Securities Act of 1933 is against public policy and unenforceable.

Our operating agreement also provides that we shall indemnify and, without requiring a preliminary determination of the ultimate entitlement to indemnification, pay or reimburse reasonable expenses in advance of final disposition of a proceeding to:

These aforementioned rights to indemnification and advance of expenses vest immediately upon the appointment as a manger, officer, Advisor or affiliate.

Additionally, pursuant to our operating agreement, the advancement of funds to the Advisor or its affiliates for reasonable legal expenses and other costs incurred as a result of any legal action for which indemnification is being sought is permissible only if all of the following conditions are met:

We also purchase and maintain insurance on behalf of all our managers and executive officers against liability asserted against or incurred by them in their official capacities with us.

 

 

ITEM 11. EXECUTIVE COMPENSATION

Compensation of Executive Officers and Managers

We do not currently have any employees nor do we currently intend to hire any employees. Each of our executive officers, including each executive officer who serves as a manager, is employed by our Sponsor and also serves as an executive officer of our Advisor. Each of these individuals receives compensation from our Sponsor for his or her services, including services performed for us and for our Advisor. As executive officers of our Advisor, these individuals will manage our day-to-day affairs and carry out the directives of our board of managers in the review and selection of our sub-advisor and review of our investment opportunities and will oversee and monitor our acquired investments. Although we will reimburse our Advisor for certain expenses incurred in connection with providing these services to us, we do not intend to pay any compensation directly to our executive officers and we will not reimburse our Advisor for the salaries and benefits paid to our named executive officers, as defined under the federal securities rules and regulations.

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During 2017, we compensated each of our independent managers with an annual retainer of $60,000, which will be pro-rated in the event of a partial term. In addition, we pay our independent managers fees for participating on committees of the board as follows:

All managers are entitled to reimbursement of reasonable and documented out-of-pocket expenses incurred in connection with attendance at any meeting of the board of managers or a committee thereof. If a manager is also one of our officers, we will not pay any compensation to said manager for services rendered as a manager. In addition, we purchase and maintain liability insurance on behalf of our managers and officers.

The following table sets forth compensation of the Company’s independent managers for the year ended December 31, 2017:

 

The Company did not have any outstanding equity awards as of December 31, 2017.

Compensation Discussion and Analysis

Because the Advisory Agreement provides that the Advisor assumes principal responsibility for managing our affairs, we have no employees, and our executive officers, in their capacities as such, do not receive compensation from us, nor do they work exclusively on our affairs. In their capacities as officers or employees of the Advisor or its affiliates, they devote such portion of their time to our affairs as is required for the performance of the duties of the Advisor under the Advisory Agreement. The compensation received by our executive officers is not paid or determined by us, but rather by an affiliate of the Advisor based on all of the services provided by these individuals. See “Certain Relationships and Related Transactions, and Director Independence” below for a summary of the fees and expenses payable to the Advisor and other affiliates.

Compensation Committee Report

We do not currently have a compensation committee, however, our compensation committee, if formed, would be comprised entirely of independent managers. In lieu of a formal compensation committee, our independent managers perform an equivalent function. Our independent directors have reviewed and discussed the Compensation Discussion and Analysis contained in this Annual Report on Form 10-K (“CD&A”) with management. Based on the independent managers’ review of the CD&A and their discussions of the CD&A with management, the independent managers recommended to the board of managers, and the board of managers has approved, that the CD&A be included in this Annual Report on Form 10-K.

INDEPENDENT MANAGERS:

Terry Otton

Cynthia Hostetler

R. Michael Barth

Compensation Committee Interlocks and Insider Participation

We do not currently have a compensation committee, however, we intend that our compensation committee, if formed, would be comprised entirely of independent managers. In lieu of a formal compensation committee, our independent managers perform an equivalent function. None of our independent managers served as one of our officers or employees or as an officer or employee of any of our subsidiaries during the fiscal years ended December 31, 2017 and 2016, or formerly served as one of our officers or as an officer of any of our subsidiaries. In addition, during the fiscal years ended December 31, 2017 and 2016, none of our executive officers served as a manager or member of a compensation committee (or other board committee performing equivalent functions or, in the absence of any such committee, the entire board of directors) of any entity that has one or more executive officers or managers serving as a member of our board of managers.

We do not expect that any of our executive officers will serve as a director or member of the compensation committee of any entity whose executive officers include a member of our compensation committee, if formed. We have not retained any independent compensation consultants.

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The foregoing report shall not be deemed to be incorporated by reference by any general statement incorporating by reference this Annual Report on Form 10-K into any filing under the Securities Act of 1933, as amended (the “Securities Act”), or under the Exchange Act, except to the extent that we specifically incorporate this information by reference, and shall not otherwise be deemed filed under such Acts.

 

 

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

The following table sets forth the beneficial ownership of units as of the date of this report for each person or group that holds more than 5% of any class of our voting securities, for each manager and executive officer and for our managers and executive officers as a group. To our knowledge, each person that beneficially owns units has sole voting and disposition power with regard to such units.

Unless otherwise indicated below, each person or entity has an address in care of our principal executive offices at 1230 Rosecrans Ave, Suite 605, Manhattan Beach, California 90266.

 

The Company did not have any outstanding equity awards as of December 31, 2017.

 

 

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

Certain Relationships and Related Transactions

General

Our executive officers, two of our managers and the key investment professionals of our Advisor who perform services for us on behalf of our Advisor are also officers, directors, managers, and/or key professionals of our Sponsor, our dealer manager and other affiliates. For an overview of the positions held by these individuals at our affiliates, please see “Part III, Item 10: Directors, Officers and Corporate Governance— Managers and Executive Officers.” These persons have legal obligations with respect to those entities that are similar to their obligations to us.

Dealer Manager

Strategic Capital has an equity interest in our Advisor and is affiliated with SC Distributors, our dealer manager for the Offering.

No Arm’s-Length Agreements

All agreements, contracts or arrangements between or among us and our affiliates, including our Advisor and our dealer manager, were not negotiated at arm’s-length. Such agreements, contracts or arrangements include our Advisory Agreement and our Dealer

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Manager Agreement. The procedures with respect to conflicts of interest described herein were designed to lessen the effect of potential conflicts that arise from such relationships. However, we cannot assure you that these procedures will eliminate the conflicts of interest or reduce the risks related thereto.

Certain Conflict Resolution Measures

Corporate Governance and Conflicts Committee

In order to ameliorate the risks created by conflicts of interest, our operating agreement creates a corporate governance and conflicts committee of our board of managers composed solely of independent managers. Our operating agreement authorizes the corporate governance and conflicts committee to act on any matter related to conflicts of interest and to retain its own legal and financial advisors when and if it deems such an action appropriate. Among the issues relating to conflict of interest we expect the corporate governance and conflicts committee to act upon are:

Other Provisions Relating to Conflicts of Interest

In addition to the creation of the corporate governance and conflicts committee, our operating agreement contains many other restrictions regarding conflicts of interest, including the following:

Advisor Compensation: Our independent managers review, at least annually, whether the compensation we contract to pay TriLinc Advisors and its affiliates is reasonable relative to the nature and quality of the services provided and the investment performance of the Company and that the provisions of the Advisory Agreement are being carried out. The board of managers may consider all factors that they deem relevant in making these determinations.

Investments with affiliates: We may not invest in any asset or company in which the Advisor, any of our managers or officers or any of their affiliates has a direct economic interest without a determination by the majority of our board of managers (including a majority of our independent managers) that such an investment is fair and reasonable to us. In addition, with respect to any potential debt investment in a portfolio company in which our sub-advisor has an equity interest, our Advisor must determine, before the investment is made, that the procedures by which this potential debt investment is evaluated and priced are fair and reasonable.

Purchase of assets from affiliates: We may not purchase assets from the Sponsor, Advisor, manager or any of their affiliates unless a majority of our board of managers (including a majority of our independent managers) not otherwise interested in the transaction determine that such transaction is fair and reasonable to us and at a price to us no greater than the cost of the assets to the Advisor or its affiliates or such manager, unless there is substantial justification for any amount that exceeds such cost and such excess amount is determined to be reasonable. In no event would the cost of any such assets to us exceed its then current appraised value.

Sale of assets to affiliates: We may not sell or lease assets to the Sponsor, Advisor, manager or any of their affiliates or to the managers without a determination by a majority of our board of managers (including a majority of our independent managers) not otherwise interested in the transaction, that such transaction is fair and reasonable to us.

Loans to/from affiliates: We may not borrow money from the Sponsor, Advisor, managers or any of their affiliates unless a majority of our board of managers (including a majority of our independent managers) not otherwise interested in transaction approve it as being fair, competitive and commercially reasonable to us and no less favorable to us than loans between unaffiliated parties under similar circumstances.

Other restrictions on transactions with affiliates: We may not give our Advisor an exclusive right to sell our assets. Our Advisor is prohibited from commingling our funds with the funds of any other entity or person for which it provides advisory or other services. Our Advisor is prohibited from providing any financing with a term in excess of 12 months to us. We may not pay a commission or fee, either directly or indirectly to our Advisor, or its affiliates, except as otherwise permitted by our operating agreement. In addition, our operating agreement prohibits our Advisor and its affiliates from receiving or accepting any rebate, give-up or similar arrangement that is prohibited under federal or state securities laws. Our Advisor and its affiliates are also prohibited from participating in any reciprocal business arrangement that would circumvent provisions of federal or state securities laws governing conflicts of interest or investment restrictions.

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We may not invest in general partnerships or joint ventures with affiliates and non-affiliates unless certain conditions, described in our operating agreement are met.

A majority of our board of managers (including a majority of our independent managers) not otherwise interested in the transaction must conclude that all other transactions between us and the Sponsor, Advisor, any of the managers or any of their affiliates are fair and reasonable to us and on terms and conditions not less favorable to us than those available from unaffiliated third parties. The terms pursuant to which any goods or services, other than those services provided pursuant to the Advisory Agreement, are provided to us by the Advisor, will be embodied in a written contract, the material terms of which will be fully disclosed to our unitholders in a prospectus supplement or another filing.

Allocation of Investment Opportunities

We rely on our executive officers and our Advisor’s investment professionals to identify suitable investments. Our Sponsor and other affiliated entities also rely on these same key investment professionals. Many investment opportunities that are suitable for us may also be suitable for the Sponsor or affiliates of the Sponsor, including TriLinc Global Sustainable Income Fund, LLC (“TGSIF”), a private impact investment fund sponsored by the Sponsor. The Sponsor, the Advisor and their affiliates share certain of the same executive officers and key employees, which we refer to as “TriLinc Professionals.” When the TriLinc Professionals direct an investment opportunity to the Sponsor or any affiliate of the Sponsor, including TGSIF, they, in their sole discretion, have to determine the program for which the investment opportunity is most suitable based on the investment objectives, portfolio and criteria of each program. The Advisory Agreement requires that this determination be made in a manner that is fair without favoring the Sponsor or any affiliate of the Sponsor. The factors that the TriLinc Professionals consider when determining the entity for which an investment opportunity would be the most suitable are the following:

In the event that our investment objectives overlap with those of another affiliate’s program and the opportunity is equally suitable for us and the affiliated program, then the opportunity shall be allocated to such program that had the funds available for investment for a longer time period.

If a subsequent event or development causes any investment, in the opinion of the TriLinc Professionals, to be more appropriate for another affiliated entity, they may offer the investment to such entity.

Our independent managers are responsible for reviewing our Advisor’s performance and determining that the compensation to be paid to our Advisor is reasonable and, in doing so, our independent managers must consider, among other factors, the success of our Advisor in generating appropriate investment opportunities for us.

Related Transactions

As of December 31, 2017, pursuant to the terms of the Operating Expense Responsibility Agreement, the Sponsor has assumed approximately $16,661,000 of management fees, incentive fees, and operating expenses on behalf of the Company. The Sponsor will only be entitled to reimbursement of our cumulative expenses to the extent our investment income in any quarter, as reflected on the statement of operations, exceeds the Reimbursement Hurdle. To the extent we are not successful in satisfying the Reimbursement Hurdle, no amount will be payable in that quarter by us for reimbursement to the Sponsor of our cumulative expenses.  If the Sponsor is entitled to receive reimbursement for any given quarter because the Company’s investment income exceeds the Reimbursement Hurdle for such quarter, we will apply the excess amount (the “Excess Amount”) as follows: (i) first, we will reimburse the Sponsor for all expenses, other than management fees and incentive fees, that the Sponsor previously paid on our behalf, which will generally consist of operating expenses (the “Previously Paid Operating Expenses”) until all Previously Paid Operating Expenses incurred to date have been reimbursed; and (ii) second, we will apply 50% of the Excess Amount remaining after the payment of Previously Paid

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Operating Expenses to reimburse the Sponsor for the management fees and incentive fees that the Sponsor has agreed to pay on our behalf until all such management fees and incentive fees accrued to date have been reimbursed. We have not met the Reimbursement Hurdle for the quarter ended December 31, 2017. The Sponsor may demand the reimbursement of our cumulative expenses covered by the Responsibility Agreement to the extent we exceed the Reimbursement Hurdle during any quarter.

For the years ended December 31, 2017 and 2016, the Company paid $6,484,850 and $4,172,643, respectively, in management fees and $4,599,941 and $$3,319,149, respectively, in incentive fees to our Advisor.

As of December 31, 2017, the Sponsor has paid approximately $17,340,000 of offering costs and $236,000 of organization costs relating to the Offering, all of which were paid directly by the Sponsor on behalf of the Company, and were reimbursed to the Sponsor as disclosed in Note 2 of the consolidated financial statements. Such amounts include approximately $3,016,600 and $4,540,000 of offering costs, which were incurred by the Sponsor during the years ended December 31, 2017 and 2016, respectively. During the years ended December 31, 2017 and 2016, the Company paid $2,612,810 and $6,721,325, respectively, in reimbursement of offering costs to the Sponsor. Such offering costs reimbursed by the Company have been recognized against the proceeds from the issuance of units. As of December 31, 2017, there is a remaining balance of approximately $419,500 of offering costs that have not been reimbursed to the Sponsor.

For the years ended December 31, 2017 and 2016, the Company paid $643,566 and $1,938,827, respectively, in dealer manager fees and $2,516,109 and $6,744,561, respectively, in selling commission to our dealer manager, SC Distributors.

 

 

ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES

In accordance with the SEC’s definitions and rules, “audit fees” are fees for professional services for the audit and review of our annual financial statements, and includes fees for the audit and review of our annual financial statements included in a registration statement filed under the Securities Act as well as issuance of consents and for services that are normally provided by the accountant in connection with statutory and regulatory filings or engagements except those not required by statute or regulation. “Audit-related fees” are fees for assurance and related services that were reasonably related to the performance of the audit or review of our financial statements, including attestation services that are not required by statute or regulation, due diligence and services related to acquisitions. “Tax fees” are fees for tax compliance, tax advice and tax planning, and “all other fees” are fees for any services not included in the first three categories.

Independent Registered Public Accounting Firm

On June 18, 2014, the Company’s Audit Committee approved the engagement of Moss Adams LLP (“Moss Adams”) as the Company’s independent registered public accounting firm.

Audit Fees

The aggregate amount of fees billed by Moss Adams for the professional services rendered in connection with the audit of the Company’s annual financial statements and reviews of the financial statements included in the Company’s Forms 10-K and 10-Qs for fiscal years 2017 and 2016 was approximately $256,200 and $228,100, respectively.

Audit Related Fees

There were no audit related fees billed by Moss Adams for assurance and related services that were reasonably related to the performance of the audit or review of our financial statements in fiscal years 2017 and 2016.

Tax Fees

There were approximately $155,185 and $169,100 in tax fees billed by Deloitte Tax, LLP to the Company for fiscal years 2017 and 2016, respectively. Tax services fees consist of fees billed for professional services performed by Deloitte Tax, LLP’s tax personnel for tax compliance. These services include assistance regarding federal and state tax compliance.

All Other Fees

Moss Adams completed, under approval of the audit committee, an attestation engagement on the Company’s Impact Report whose fees was $19,000. There were no other fees billed by Moss Adams or Deloitte Tax, LLP to the Company for fiscal years 2017 or 2016.

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Audit Committee Pre-Approval Policy

The Audit Committee is responsible for appointing our independent registered public accounting firm and approving the terms of the independent registered public accounting firm’s services. In accordance with applicable laws and regulations, our Audit Committee reviews and pre-approves any audit and non-audit services to be performed by our independent accountant to ensure that the work does not compromise its independence in performing audit services. The responsibility for pre-approval of audit and permitted non-audit services includes pre-approval of the fees for such services and the other terms of the engagement. Our Audit Committee annually reviews and pre-approves all audit, audit-related, tax and all other services that are performed by the Company’s independent registered public accounting firm. In some cases, our Audit Committee may pre-approve the provision of a particular category or group of services for up to a year. Our Audit Committee approved all of the services listed in the table above. On February 2, 2015, in accordance with the Audit Committee Charter and the Company’s pre-approval policy, our Audit Committee approved engagement of Moss Adams to provide certain services associated with the assurance review of the Company’s 2014 Annual Impact Report after determining that such engagement would not compromise Moss Adams’s independence in performing audit services.

PART IV

 

 

ITEM 15. EXHIBITS AND CONSOLIDATED FINANCIAL STATEMENTS SCHEDULES

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TRILINC GLOBAL IMPACT FUND, LLC

INDEX TO THE CONSOLIDATED FINANCIAL STATEMENTS

 

 

 

 

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

 

To the Unit-holders and the Board of Managers of

TriLinc Global Impact Fund, LLC

 

 

Opinion on the Financial Statements

We have audited the accompanying consolidated statements assets and liabilities of TriLinc Global Impact Fund, LLC (the “Company”) as of December 31, 2017 and 2016, including the consolidated schedules of investments, and the related consolidated statements operations, consolidated changes in net assets and consolidated cash flows for each of the three years ended December 31, 2017. In our opinion, the consolidated financial statements present fairly, in all material respects, the consolidated financial position of the Company as of December 31, 2017 and 2016, and the consolidated results of its operations and its cash flows for each of the three years then ended December 31, 2017, in conformity with accounting principles generally accepted in the United States of America.

 

Basis for Opinion

These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

 

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audit we are required to obtain an understanding of internal control over financial reporting 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.

Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures to respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.

/s/ Moss Adams LLP

San Francisco, California

March 31, 2018

 

We have served as the Company’s auditor since 2014.

 

 

 

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TriLinc Global Impact Fund, LLC

Consolidated Statements of Assets and Liabilities

 

 

See accompanying notes to the consolidated financial statements.

 

 

 

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TriLinc Global Impact Fund, LLC

Consolidated Statements of Operations

 

 

See accompanying notes to the consolidated financial statements.

 

 

 

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TriLinc Global Impact Fund, LLC

Consolidated Statements of Changes in Net Assets

 

 

See accompanying notes to the consolidated financial statements.

 

 

 

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TriLinc Global Impact Fund, LLC

Consolidated Statements of Cash Flows

 

 

See accompanying notes to the consolidated financial statements.

 

 

 

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TriLinc Global Impact Fund, LLC

Consolidated Schedule of Investments

December 31, 2017

 

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See accompanying notes to the consolidated financial statements.

 

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₂₁  Secured short term note receivable from Barak Mikopo Leveraged Structured Credit Fund SP, which is managed by Barak Fund Management Ltd., a sub-advisor to the Company. Principal and accrued interest are due at maturity.  

 

 

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TriLinc Global Impact Fund, LLC

Consolidated Schedule of Investments

December 31, 2016

 

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See accompanying notes to the consolidated financial statements.

 

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TRILINC GLOBAL IMPACT FUND, LLC

Notes to Consolidated Financial Statements

 

 

Note 1. Organization and Operations of the Company

TriLinc Global Impact Fund, LLC (the “Company”) was organized as a Delaware limited liability company on April 30, 2012 and formally commenced operations on June 11, 2013. The Company makes impact investments in Small and Medium Enterprises, known as SMEs, which the Company defines as those business having less than 500 employees, primarily in developing economies that provide the opportunity to achieve both competitive financial returns and positive measurable impact. To a lesser extent, the Company may also make impact investments in companies that may not meet our technical definition of SMEs due to a larger number of employees but that also provide the opportunity to achieve both competitive financial returns and positive measurable impact. The Company generally expects that such investments will have similar investment characteristics as SMEs as defined by the Company. The Company uses the proceeds raised from the issuance of units to invest in SMEs through local market sub-advisors in a diversified portfolio of financial assets, including direct loans, convertible debt instruments, trade finance, structured credit and preferred and common equity investments. The Company’s investment objectives are to generate current income, capital preservation and modest capital appreciation primarily through investments in SMEs. The Company is externally managed by TriLinc Advisors, LLC (the “Advisor”). The Advisor is an investment advisor registered with the SEC.

TriLinc Global, LLC (the “Sponsor”) owns 85% of the units of the Advisor, and is the sponsor of the Company. Strategic Capital Advisory Services, LLC (“SCAS”) owns 15% of the Advisor, and is considered an affiliate of the Company. The Sponsor employs staff who operate both the Advisor and the Company. The Sponsor, the Advisor and SCAS are Delaware limited liability companies.

In May 2012, the Advisor purchased 22,161 Class A units for aggregate gross proceeds of $200,000. The Company commenced its initial public offering of up to $1,500,000,000 in units of limited liability company interest (the “Offering”) on February 25, 2013. On June 11, 2013, the Company satisfied its minimum offering requirement of $2,000,000 when the Sponsor purchased 321,330 Class A units for aggregate gross proceeds of $2,900,000 and the Company commenced operations. The primary offering terminated on March 31, 2017. The Company continues to offer and sell units pursuant to its Distribution Reinvestment Plan (“DRP”). Through the termination of the primary offering, the Company raised approximately $361,776,000 in gross proceeds, including approximately $13,338,000 raised through the DRP. For the period from April 1, 2017 to December 31, 2017, the Company raised an additional $14,204,000 pursuant to a private placement and $8,762,000 pursuant to the DRP for the gross proceeds of $384,742,000 as of December 31, 2017.

Although the Company was organized and intends to conduct its business in a manner so that it is not required to register as an investment company under the Investment Company Act of 1940, as amended, the consolidated financial statements are prepared using the specialized accounting principles of the Financial Accounting Standards Board Accounting Standards Codification (“ASC”) Topic 946, Financial Services — Investment Companies. Overall, the Company’s management believes the use of investment company accounting makes the Company’s financial statements more useful to investors and other financial statement users since it allows a more appropriate basis of comparison to other entities with similar objectives.

To assist the Company in achieving its investment objective, the Company makes investments via wholly owned subsidiaries (the “Subsidiaries”), all of which are Cayman Islands exempted companies. In June 2016, the Company created TriLinc Global Impact Fund Cayman, Ltd. (“TGIFC”) to allow the Company to use financial leverage.  The Company transferred all of the shares of all of its Subsidiaries to TGIFC.  The Subsidiaries own all of the Company’s investments. As of December 31, 2017, the Company’s subsidiaries are as follows:

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Through December 31, 2017, the Company has made, through its subsidiaries, loans in several countries located in Europe, South America, Asia and Africa.

 

 

Note 2. Significant Accounting Policies

Basis of Presentation

The Company follows the accounting and reporting guidance in the Financial Accounting Standards Board Accounting Standards Codification (“ASC”) Topic 946 — Financial Services, Investment Companies (“ASC 946”). The Company’s financial information is prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). The preparation of financial statements in accordance with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. These financial statements are presented in United States dollars, which is the functional and reporting currency of the Company and all its subsidiaries.

The accompanying consolidated financial statements include the accounts of the Company and its subsidiaries, which were established to hold certain investments of the Company. The Company owns 100% of each subsidiary and, as such, the subsidiaries are consolidated into the Company’s consolidated financial statements. Transactions between subsidiaries, to the extent they occur, are eliminated in consolidation. The consolidated financial statements reflect all adjustments and reclassifications that, in the opinion of management, are necessary for the fair presentation of the results of the operations and financial condition as of and for the periods presented.

Cash

Cash consists of demand deposits at a financial institution located in the United States of America. Such deposits may be in excess of the Federal Deposit Insurance Corporation insurance limits. The Company considers the credit risk of this financial institution to be remote and has not experienced and does not expect to experience any losses in any such accounts.

 

Revenue Recognition

The Company records interest income on an accrual basis to the extent that the Company expects to collect such amounts. The Company does not accrue as a receivable interest on loans for accounting purposes if there is reason to doubt the ability to collect such interest. Structuring, upfront and similar fees are recorded as a discount on investments purchased and are accreted into interest income, on a straight line basis, which we have determined not to be materially different from the effective yield method.

The Company records prepayment fees for loans and debt securities paid back to the Company prior to the maturity date as income upon receipt.

The Company generally places loans on non-accrual status when principal and interest are past due 90 days or more or when there is a reasonable doubt that principal or interest will be collected. If, however, management believes the principal and interest will be collected, a loan may be left on accrual status during the period the Company is pursuing repayment of the loan. Interest payments received on non-accrual loans may be recognized as income or applied to principal depending upon management’s judgment of the financial condition of the borrower. Non-accrual loans are generally restored to accrual status when past due principal and interest is paid and, in the Company’s management’s judgment, is likely to remain current over the remainder of the term. At December 31, 2017, three portfolio companies were on non-accrual status with an aggregate fair value of $8,958,155 or 2.7% of the fair value of the Company’s total investments. At December 31, 2016, two portfolio company was on non-accrual status with a fair value of $5,819,216 or 2.9% of the fair value of the Company’s total investments. Interest income not recorded relative to the original terms of the loans to the companies on non-accrual status amounted to approximately $401,838 and $449,927 respectively, for the years ended December 31, 2017 and 2016.

Valuation of Investments

The Company applies fair value accounting to all of its investments in accordance with ASC Topic 820, Fair Value Measurement (“ASC 820”). ASC 820 requires enhanced disclosures about assets and liabilities that are measured and reported at fair value. As defined in ASC 820, fair value is the price that would be received when selling an asset or paid to transfer a liability in an orderly

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transaction between market participants at the measurement date. In accordance with ASC 820, the Company has categorized its investments into a three-level fair value hierarchy as discussed in Note 3.

ASC 820 establishes a hierarchal disclosure framework that prioritizes and ranks the level of market price observability of inputs used in measuring investments at fair value. Market price observability is affected by a number of factors, including the type of investment and the characteristics specific to the investment. Investments with readily available active quoted prices or for which fair value can be measured from actively quoted prices generally will have a higher degree of market price observability and a lesser degree of judgment used in measuring fair value.

Based on the observability of the inputs used in the valuation techniques, the Company is required to provide disclosures on fair value measurements according to the fair value hierarchy. The fair value hierarchy ranks the observability of the inputs used to determine fair values. Investments carried at fair value are classified and disclosed in one of the following three categories:

The inputs used in the determination of fair value may require significant judgment or estimation.

Investments for which market quotations are readily available are valued at those quotations. Most of the Company’s investments are investments in private companies, which are not actively traded in any market and for which quotations are not available. For those investments for which market quotations are not readily available, or when such market quotations are deemed by the Advisor not to represent fair value, the Company’s board of managers has approved a multi-step valuation process to be followed each fiscal quarter, as described below:

Below is a description of factors that the Company’s board of managers may consider when valuing our investments.

Fixed income investments are typically valued utilizing a market approach, income approach, cost approach, or a combination of these approaches, (and any others, as appropriate). The market approach uses prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities (including the sale of a business) and is used less frequently due to the private nature of the Company’s investments. The income approach uses valuation techniques to convert future amounts (for example, interest and principal payments) to a single present value amount (discounted) calculated based on an appropriate discount rate. The measurement is based on the net present value indicated by current market expectations about those future amounts. The cost approach is a valuation technique that uses the concept of replacement cost as an indicator of value.  The premise of the cost approach holds that a prudent investor would pay no more for an asset than the amount for which the asset could be replaced.  To

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clarify, the cost approach as a method for valuing an investment is to be distinguished from holding an investment at cost as of the initial investment date. In following a given approach, the types of factors that the Company may take into account in valuing the Company’s investments include, as applicable:

The Company may also look to private merger and acquisition statistics, public trading multiples discounted for illiquidity and other factors, valuations implied by third-party investments in the portfolio companies or industry practices in determining fair value. The Company may also consider the size and scope of a portfolio company and its specific strengths and weaknesses, as well as any other factors the Company deems relevant in measuring the fair values of the Company’s investments.

Net Realized Gains or Losses and Net Change in Unrealized Appreciation or Depreciation on Investments

The Company measures net realized gains or losses by the difference between the net proceeds from the repayment or sale on investments and the amortized cost basis of the investment including unamortized upfront fees and prepayment penalties. Realized gains or losses on the disposition of an investment are calculated using the first in first out (FIFO) method, utilizing the amortized cost basis of the investment, without regard to unrealized appreciation or depreciation previously recognized, but considering unamortized upfront fees and prepayment penalties. Net change in unrealized appreciation or depreciation reflects the change in portfolio investment values during the reporting period, including any reversal of previously recorded unrealized appreciation or depreciation, when gains or losses are realized.

Payment-in-Kind Interest

The Company may have investments that contain a payment-in-kind, or PIK, interest provision. For loans with contractual PIK interest, any interest will be added to the principal balance of such investments and be recorded as income, if the valuation indicates that such interest is collectible.

Distribution and Ongoing Dealer Manager Fees

The Company pays a distribution fee equal to 0.8% per annum of the Company’s current estimated value per share for each Class C unit sold in the Offering. In addition, the Company pays an ongoing dealer manager fee for each Class I unit sold pursuant to a private placement. The aggregate amount of underwriting compensation for each public and private offering of the Class A, Class C, Class I, Class Y and Class W units, including any applicable distribution fee and ongoing dealer manager fee, cannot exceed the Financial Industry Regulatory Authority’s 10% cap on underwriting compensation. The distribution fee is not paid at the time of purchase of Class C units. The distribution fee is payable monthly in arrears, as it becomes contractually due.

In prior periods, the Company had been recording the fees as a periodic charge to equity as they are incurred. Starting in June 2016, the Company determined to account for the fees as a charge to equity at the time each Class C unit is sold in its Offering and record a corresponding liability for the estimated amount to be paid in future periods. The Company accounts for the ongoing dealer manager fees paid in connection with the sale of Class I units in the private placement in the same manner. At December 31, 2017 and 2016, the estimated unpaid distribution fee for Class C units amounted to $1,835,000 and $1,907,000, respectively, and the unpaid dealer manager fee for Class I units amounted to $60,000 and $0, respectively. 

Income Taxes

The Company is classified as a partnership for U.S. Federal income tax purposes. As such, the Company allocates all income or loss to its unitholders according to their respective percentage of ownership, and is generally not subject to tax at the entity level. Therefore, no provision for federal or state income taxes has been included in these financial statements.

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The Company may be subject to withholding taxes on income and capital gains imposed by certain countries in which the Company invests. The withholding tax on income is netted against the income accrued or received. Any reclaimable taxes are recorded as income. The withholding tax on realized or unrealized gain is recorded as a liability.

The Company follows the guidance for uncertainty in income taxes included in the ASC 740, Income Taxes. This guidance requires the Company to determine whether a tax position of the Company is more likely than not to be sustained upon examination by the applicable taxing authority, including the resolution of any related appeals or litigation processes, based on the technical merits of the position.

As of December 31, 2017 and 2016, no tax liability for uncertain tax provision had been recognized in the accompanying financial statements nor did the Company recognize any interest and penalties related to unrecognized tax benefits. The earliest year that the Company’s income tax returns are subject to examination is the period ending December 31, 2014.

Unitholders are individually responsible for reporting income or loss, to the extent required by the federal and state income tax laws and regulations, based upon their respective share of the Company’s income and expense as reported for income tax purposes.

Calculation of Net Asset Value

The Company’s net asset value is calculated on a quarterly basis. As of December 31, 2017, the Company has five classes of units: Class A units, Class C units, Class I units, Class W units and Class Y units, with only Class A units, Class C units, Class I units and Class Y units outstanding. All units participate in the income and expenses of the Company on a pro-rata basis based on the number of units outstanding. Under GAAP, pursuant to the SEC guidance, effective June 30, 2016, the Company records liabilities for distribution fees that the Company (i) currently owes to the dealer manager under the terms of the dealer manager agreement and (ii) for an estimate that the Company may pay to the dealer manager in future periods. As of December 31, 2017, under GAAP, the Company recorded a liability in the amount of $1,895,000 for the estimated future amount of Class C unit distribution fee and Class I unit dealer manager fee payable. The Company is not required to determine its net asset value under GAAP and thus, the Company’s determination of net asset value per share for Class C units now varies from GAAP. In the prior periods, the Company deducted the liability for the estimated future distribution fees in the Company’s net asset value calculation for Class C units. As a result, for each period from June 30, 2016 through March 31, 2017, the Class A and Class I units had a higher net asset value per unit than Class C units with the difference being the result of the future distribution fee deduction for Class C units. The Company has determined that such approach is not the most appropriate for determining net asset value per share for Class C units and, beginning with the net asset value determination as of June 30, 2017, the Company does not deduct the liability for estimated future distribution fees in its calculation of net asset value per share for Class C units. Further, the Company does not deduct the liability for estimated future dealer manager fees in its calculation of the net asset value per share for Class I units. The Company believes this approach is consistent with the industry standard and is more appropriate since the Company intends for the net asset value to reflect the estimated value on the date that the Company determines its net asset value. Accordingly, the Company believes that its estimated net asset value at any given time should not include consideration of any estimated future distribution fees that may become payable after such date. As a result of this change in the calculation of the net asset value, as of December 31, 2017, each of the Class A, Class C, Class I and Class Y units have the same net asset value per unit of $8.466. As of March 31, 2017, Class A and Class I units had a net asset value of $8.529 per unit and Class C units had a net asset value of $8.267 (with a blended net asset value of $8.467 per unit). The increase in the net asset value per Class C unit from $8.267 as of March 31, 2017 to $8.466 as of December 31, 2017 is solely as a result of the change in the treatment of future distribution fees in the net asset value calculation discussed above and is not reflective of any increase in the value of the Company’s assets. Without taking into account the change in the treatment of the future distribution fees, the net asset value per unit has decreased by $0.063 from $8.529 as of March 31, 2017 to $8.466 as of December 31, 2017 as a result of the Sponsor’s determination to absorb a reduced amount of operating expenses during the second and fourth quarters of 2017. In addition, the Company failed to realize sufficient investment income during the second and fourth quarters of 2017, as a result of delays in finding suitable investments, to cover operating expenses.

Net Income (Loss) per Unit

Basic net income (loss) per unit is computed by dividing net income (loss) by the weighted average number of members’ units outstanding during the period. Diluted net income or loss per unit is computed by dividing net income (loss) by the weighted average number of members’ units and members’ unit equivalents outstanding during the period. The Company did not have any potentially dilutive units outstanding at December 31, 2017 and 2016.

Organization and Offering Costs

The Sponsor has incurred organization and offering costs on behalf of the Company. Organization and offering costs are reimbursable to the Sponsor to the extent the aggregate of selling commissions, dealer manager fees and other organization and offering costs do not exceed 15% of the gross offering proceeds (the “O&O Reimbursement Limit”) raised from the Offering and will

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be accrued and payable by the Company only to the extent that such costs do not exceed the O&O Reimbursement Limit. Reimbursement of organization and offering costs that exceed the O&O Reimbursement Limit will be expensed in the period they become reimbursable, which is dependent on the gross offering proceeds raised in such period, and are therefore not included on the Statements of Assets and Liabilities as of December 31, 2017 and 2016. These expense reimbursements are subject to regulatory caps and approval by the Company’s board of managers. Reimbursements to the Sponsor are included as a reduction to net assets on the Consolidated Statement of Changes in Net Assets. Based on the proceeds raised in the Offering at the end of the primary offering, the organization and offering expenses equaled to 4.7% of the gross proceeds. As a result of the termination of the primary offering, effective March 31, 2017, the Company no longer pays the dealer manager selling commissions and dealer manager fees under a dealer manager agreement relating to the Offering. The Company will continue to incur certain organization and offering costs associated with the DRP and ongoing distribution fees on Class C units. In addition, the Sponsor has and may continue to incur organization and offering  costs on behalf of the Company in connection with private placements of the Company’s units and the Company will pay selling commissions, dealer manager fees and ongoing distribution and dealer manager fee to the dealer manager for certain sales pursuant to a private placement.  As of December 31, 2017 the Sponsor has incurred $481,722 in organization and offering costs on behalf of the Company related to a private placement of the Company’s units.  As of December 31, 2017, the Company has reimbursed $68,672 of the organization and offering incurred relating to such private placement.

Operating Expense Responsibility Agreement

On March 26, 2018, the Company, Advisor and the Sponsor entered into an Amended and Restated Operating Expense Responsibility Agreement (“Responsibility Agreement”) originally effective as of June 11, 2013 and covering expenses through December 31, 2017. Pursuant to the terms of the Responsibility Agreement, the Sponsor has paid approximately $12,422,100 of operating expenses, management fees, and incentive fees on behalf of the Company and will pay or reimburse to the Company an additional $4,238,700 of expenses, which have been accrued by the Sponsor as of December 31, 2017. The Sponsor will only be entitled to reimbursement of the cumulative Company expenses to the extent the Company’s investment income in any quarter, as reflected on the statement of operations, exceeds the sum of (a) total distributions to unitholders incurred during the quarter and (b) the Company’s expenses as reflected on the statement of operations for the same quarter (the “Reimbursement Hurdle”). To the extent the Company is not successful in satisfying the Reimbursement Hurdle, no amount will be payable in that quarter by the Company for reimbursement to the Sponsor of the cumulative Company expenses.  The Company has not met the Reimbursement Hurdle for the quarter ended December 31, 2017. Therefore, expenses of the Company covered by the Responsibility Agreement have not been recorded as expenses of the Company as of December 31, 2017. In accordance with ASC 450, Contingencies, such expenses will be accrued and payable by the Company in the period that they become both probable and estimable.  The Sponsor may demand the reimbursement of cumulative Company expenses covered by the Responsibility Agreement to the extent the Company exceeds the Reimbursement Hurdle during any quarter.

Recently Issued Accounting Pronouncements

Under the Jumpstart Our Business Startups Act (the “JOBS Act”), emerging growth companies can delay the adoption of new or revised accounting standards until such time as those standards apply to private companies. The Company is choosing to take advantage of the extended transition period for complying with new or revised accounting standards. As a result, the Company’s financial statements may not be comparable to those of companies that comply with public company effective dates. There are no new or revised relevant accounting standards that the Company has not adopted.

In May 2014, the FASB issued Accounting Standards Update 2014-09, Revenue from Contracts with Customers (Topic 606) (“ASU 2014-09”). The update supersedes the revenue recognition requirements in ASC 605, Revenue Recognition. Under the new guidance, an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In July 2015, the FASB deferred the implementation of this standard by one year.  ASU 2014-09 is now effective for annual reporting periods beginning after December 15, 2018, including interim periods within that reporting period. Early adoption is permitted for annual reporting periods beginning after December 15, 2016. The adoption of the amended guidance in ASU 2014-09 is not expected to have a significant effect on the Company’s financial statements.

In August 2014, the FASB issued ASU 2014-15, “Presentation of Financial Statements - Going Concern (Subtopic 205-40).” ASU 2014-15 addresses management’s responsibility to evaluate whether there is substantial doubt about an entity’s ability to continue as a going concern and to provide related footnote disclosures. For each reporting period, management will be required to evaluate whether there are conditions or events that raise substantial doubt about a company’s ability to continue as a going concern within one year from the date the financial statements are issued. Management’s evaluation should be based on relevant conditions and events that are known and reasonably knowable at the date that the financial statements are issued. ASU 2014-15 is effective for annual periods ending after December 15, 2016, and interim periods thereafter. Management has adopted this guidance effective for the fourth quarter of 2016.

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In January, 2016, the FASB issued ASU 2016-01, “Recognition and Measurement of Financial Assets and Financial Liabilities.” ASU 2016-01 addresses certain aspects of recognition, measurement, presentation and disclosure of financial instruments that are marked to fair value and reported as available-for-sale (“AFS”).  ASU 2016-01 requires public business entities that are required to disclose fair value of financial instruments measured at amortized cost on the balance sheet to measure that fair value using the exit price notion consistent with Topic 820, Fair Value Measurement.  For public business entities, ASU 2016-01 is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years.  Management has adopted this guidance effective for the fiscal period beginning January 1, 2018.

In June 2016, the FASB issued ASU 2016-13, “Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.” ASU 2016-13 introduces an approach based on expected losses to estimate credit losses on certain types of financial instruments. ASU 2016-13 also modifies the impairment model for available-for-sale debt securities and provides for a simplified accounting model for purchased financial assets with credit deterioration since their origination. ASU 2016-13 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. Early adoption is permitted for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. The guidance requires companies to apply the requirements in the year of adoption through cumulative adjustment with some aspects of the update requiring a prospective transition approach. We are currently evaluating the potential impact of the pending adoption of ASU 2016-13 on our consolidated financial statements.

In August 2016, the FASB issued ASU 2016-15, “Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments (a consensus of the Emerging Issues Task Force).” ASU 2016-15 is intended to reduce diversity in practice in how certain transactions are classified in the statement of cash flows. ASU 2016-15 addresses eight classification issues related to the statement of cash flows: (i) debt prepayment or debt extinguishment, (ii) settlement of zero-coupon bonds, (iii) contingent consideration payments made after a business combination, (iv) proceeds from the settlement of insurance claims, (v) proceeds from the settlement of corporate-owned life insurance policies, including bank-owned life insurance policies, (vi) distributions received from equity method investees, (vii) beneficial interest in securitizations transactions, and (viii) separately identifiable cash flows and application of the predominance principle. ASU 2016-15 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017. Early adoption is permitted. The guidance requires companies to apply the requirements retrospectively to all prior periods presented. If it is impracticable for a company to apply ASU 2016-15 retrospectively, requirements may be applied prospectively as of the earliest date practicable. We are currently evaluating the potential impact of the pending adoption of ASU 2016-15 on our consolidated financial statements.

Risk Factors

The Company has limited operating history and is subject to the business risks and uncertainties associated with any new business. As an externally-managed Company, the Company is largely dependent on the efforts of the Advisor and other service providers.

The Company is subject to financial market risks, including changes in interest rates. Global economies and capital markets can and have experienced significant volatility, which has increased the risks associated with investments in collateralized private debt instruments. Investment in the Company carries risk and there are no guarantees that the Company’s investment objectives will be achieved. The Company is also exposed to credit risk related to maintaining all of its cash at a major financial institution.

The Company’s investments consist of loans, loan participations and trade finance that are illiquid and non-traded, making purchase or sale of such financial instruments at desired prices or in desired quantities difficult. Furthermore, the sale of any such investments may be possible only at substantial discounts, and it may be extremely difficult to value any such investments accurately.

The value of the Company’s investments in loans may be detrimentally affected to the extent, among other things, that a borrower defaults on its obligations, there is insufficient collateral securing the loan and/or there are extensive legal and other costs incurred in collecting on a defaulted loan, observable secondary or primary market yields for similar instruments issued by comparable companies increase materially or risk premiums required in the market between smaller companies, such as the Company’s borrowers, and those for which market yields are observable increase materially. In addition, as of December 31, 2017, all of the Company’s investments are denominated in U.S. dollars. If the U.S. dollar rises, it may become more difficult for borrowers to make loan payments if the borrowers are operating in markets where the local currencies are depreciating relative the U.S. dollar.

At December 31, 2017, the Company’s investment portfolio included 43 companies and was comprised of $78,573,493 or 23.4% in senior secured term loans, $119,165,378 or 35.6% in senior secured term loan participations, $111,030,621 or 33.1% in senior secured trade finance participations, and $26,500,000 or 7.9% in short term investments. At December 31, 2017, the Company’s largest loan by value was $16,545,994 or 5.0% of the total portfolio and the Company’s 5 largest loans by value amounted to an aggregate of $83,096,926, representing 24.8% of total investments. Participation in loans amounted to 68.7% of the Company’s total portfolio at December 31, 2017.

 

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Note 3. Investments

As of December 31, 2017, the Company’s investments consisted of the following:

 

 

Participations

The majority of the Company’s investments are in the form of Participation Interests (“Participations”).  Participations are interests, which may be divided or undivided, in financing facilities. Participations may be interests in one specific loan or trade finance transaction, several loans or trade finance transactions under a facility, or may be interests in an entire facility.  The Company’s rights under Participations include, without limitations, all corresponding rights in payments, collaterals, guaranties, and any other security interests obtained in the underlying financing facilities.

Interest Receivable

Depending on the specific terms of the Company’s investments, interest earned by the Company is payable either monthly, quarterly, or, in the case of most trade finance investments, at maturity.  As such, some of the Company’s investments have up to a year or more of accrued interest receivable as of December 31, 2017.  In addition, certain of the Company’s investment in term loans accrue deferred interest, which is not payable until the maturity of the loans.  Deferred interest included in the interest receivable balance as of December 31, 2017 and 2016 amounted to $1,960,157 and $1,403,416, respectively. The Company’s interest receivable balances at December 31, 2017 and 2016 are recorded at the amounts that the Company expects to collect.

Trade Finance

Trade finance encompasses a variety of lending structures that support the export, import or sale of goods between producers and buyers in various countries and across various jurisdictions. The strategy is most prevalent in the financing of commodities. The Company’s trade finance position typically fall into two broad categories: pre-export financing and receivable/inventory financing. Pre-export financing represent advances to borrower based on proven orders from buyers. For trade finance, the structure and terms vary according to the nature of the transaction being financed. The structure can take the form of a revolver (up to one year) with draw requests with maturity up to one year based on collateral and performance requirements. The structure can also be specific to the individual transaction being financed, which typically have shorter durations of 60 – 180 days. In terms of underwriting, particular consideration is given to the following:

Collateral varies by transaction, but is typically raw or finished goods inventory, and/or receivables.  In the case of pre-export finance, the transaction is secured by purchase orders from buyers or offtake contracts, which are agreements between a buyer and seller to purchase/sell a future product.

Terms depend on the nature of the facility or transaction being financed. As such, they depend on the credit profile of the underlying financing, as well as the speed and detail associated with the request for financing. Interest can be paid as often as monthly or quarterly on revolving facilities (one year in duration) or at maturity when dealing with specific transactions with shorter duration, which is the case for the majority of the Company’s trade finance positions. At times, settlement can be delayed due to documentation,

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shipment, transportation or port clearing issues, delays associated with the end buyer or off-taker assuming possession, possible changes to contract or offtake terms, and the aggregation of settlement of multiple individual transactions. Conversely, at times payments are made ahead of schedule as transactions either clear faster than expected, borrowers decide to prepay or pay down ahead of schedule, counterparties clear multiple individual transactions in one settlement, or less expensive financing is secured by the borrower.

On occasion, the Company may receive notice that a borrower or counterparty intends to pay ahead of schedule or in one lump sum (settling multiple draw requests all at once). Depending on timing and the ability to redeploy these funds, combined with projected inflows of fund capital, these outsize payments can negatively impact the Company’s performance. In these situations, the credit profile of the borrower, and the transaction in general, is reviewed with the sub-advisor and a request may be made to either stagger payments, where at all possible, or request that payment only be made at the end of that specific financial quarter. These requests or accommodations, which happen very rarely, will only be made where the Company has strong comfort in and around the credit profile of the transaction or borrower.

 

Short Term Investments

Short term investments are defined by the Company as investments that generally meet the standard underwriting guidelines for trade finance and term loan transactions and that also have the following characteristics: (1) maturity of less than one year, (2) loans to borrowers to whom, at the time of funding, the Company does not expect to re-lend. Impact data is not tracked for short term investments.  Due to Short Term Investments’ unique characteristics, the Company has determined to present these investments separately.

 

Watch List Investments

 

Prodesa

 

As of December 31, 2017, the Company’s investment in Corporacion Prodesa S.R.L. (“Prodesa”) is comprised of two senior secured term loan participations with an aggregate principal balance of $3,210,000 and $1,750,000 due under a senior secured purchase order revolving credit facility.  The total accrued interest balance as of December 31, 2017 amounts to $640,278 including $466,103 of deferred interest payable at maturity. The Company has been working with Prodesa to re-align its operations since 2015, starting with a senior secured purchase order revolving credit facility.  The purchase order facility is secured by specific purchase orders from customers of Prodesa, as well as pledges of additional unencumbered assets and all shares of Prodesa. A number of draws and repayments have occurred under this facility. For example, during the year ended December 31, 2016, the Company funded seven additional draws under the purchase order facility for an aggregate of $1,750,000.

 

On January 31, 2017, the Company entered into a series of loan amendments with Prodesa. First, the $2,000,000 term loan facility with an original maturity date of July 15, 2016 was amended to increase the commitment to $3,540,000 to finance the acquisition of additional machinery and equipment and refinance existing property. As part of the amendment, the loan facility also extended the maturity date to July 28, 2021, and amended the interest rate on the $3,540,000 loan to 12.00% per annum, reflecting the increased and improved collateral supporting the loan facility. Separately, the Company simultaneously entered into amendments for the $750,000 inventory loan facility and the $1,750,000 purchase order facility to extend those facilities to mature concurrently with the amended term loan facility above, as each facility is cross-defaulted and cross-collateralized. The $750,000 inventory loan, with an original maturity date February 15, 2015 and previously extended to December 22, 2016, now matures on July 28, 2021. The $1,750,000 purchase order facility, with an original maximum term of December 31, 2020, now matures on July 28, 2021.

 

The Company has estimated the fair value of the Prodesa loans as of December 31, 2017 at $4,960,000 based on the income valuation approach as further described in Note 4.

 

Usivale  

 

In May 2015, one of the Company’s borrowers, Usivale Industria E Commercio (“Usivale”), with an aggregate principal balance of $3,000,000, notified the Company that it would be unable to make its monthly interest payment for May 2015 and requested the deferment of interest payments until October 2015. Usivale is a sugar producer located in Brazil that has been in business since 1958.  Usivale’s business is highly cyclical and it generates the majority of its revenues during the first and fourth quarters of any calendar year.  In accordance with the terms of the loans, the Company originally increased the annual interest rate charged Usivale from 12.43% to 17.43%.  On August 27, 2015, Usivale filed for judicial recuperation or recovery (the “Filing”) with the local court in Brazil.  The Filing was led by the ongoing pricing pressure within the sugar market, leading up to the material drop in the month of August, when prices reached a seven year low. The Filing provided for a 180 day “standstill” period relative to any claim for payment

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by Usivale’s creditors. During this period, Usivale was permitted to operate as usual, but was required to develop and present a recovery plan to its creditors to allow it to emerge from judicial recovery. Usivale submitted an initial plan to the judicial court for review at the end of November 2015, which was published by the court on January 19, 2016. Creditors had 30 days to review and either approve or reject the plan. As the only secured creditor within the greater credit group, the Company’s acceptance of any plan was required.  The Company placed Usivale on non-accrual status effective August 27, 2015, the date of the judicial recovery filing.

 

On February 17, 2016, the Company filed a rejection of the plan presented by Usivale. In accordance with the judicial recovery process, a general assembly of Usivale’s creditors was held on June 14, 2016 and an agreed upon restructure plan was submitted to the court and subsequently approved by the court on October 7, 2016. Under the restructure plan, interest on the principal started accruing effective July 1, 2016 at an annual rate of 12.43% and Usivale is required to make annual principal payments starting in the fourth quarter of 2016. On November 10, 2016, the Company received payments of principal and interest of $316,777 and $144,390, respectively.  The Company recorded the $144,390 payment as interest income and stated accruing interest on the unpaid principal effective November 10, 2016. As of December 31, 2017, the principal balance of the Usivale loans amounted to $2,851,296 and the Company has estimated the fair value of the Usivale loans at $2,851,296, which is based on a discounted cash flow analysis (income approach).  As of December 31, 2017, accrued interest amounted to $410,532, of which $393,795 was received in March 2018.

 

Fruit and Nut Distributor

 

The Company has a trade finance participation with a fruit and nut distributor (“the Distributor”) located in South Africa, with a total balance outstanding of $785,806 as of December 31, 2017. The Distributor trade finance has a stated maturity date of May 22, 2015, which the Company agreed to extend. The Distributor had made partial payments of principal during 2015 and 2016 (the original loan from the Company to the Distributor was for $1,250,000), with the most recent payment being made on October 2016. Through the latter part of 2015, the depreciation in the South African Rand had proven to be problematic for the Distributor given that it has to purchase its inventory in U.S. Dollars and then sells in South African Rand. This situation has led the Distributor to experience some cash flow difficulties and operating losses. As of December 31, 2016, the Company, together with its sub-advisor, had agreed to extend further the principal maturity date to facilitate the strategic sale of the Distributor, which closed in June 2016.  As a result of the sale, one of the Company’s sub-advisor now owns 40% of the Distributor. Accordingly, the Company placed this participation on non-accrual status effective February 1, 2016 and interest not recorded relative to the original terms of this participation amounted to approximately $139,600 and $127,400, respectively, for the years ended December 31, 2017 and 2016. Based on the information available to the Company and according to its valuation policies, the Company has estimated the fair value of its investment in the Distributor to be $726,729 as of December 31, 2017.

Farm Supplies Distributor

The Company had several trade finance participations in a facility to a farm supplies distributor, Neria Investment Ltd. (“Neria”), located in Zambia with an aggregate principal balance of $5,078,526 and net accrued interest of $550,370 as of June 30, 2017. The Company placed this participation on non-accrual status effective July 1, 2016. In addition, during the year ended December 31, 2016, the Company reversed $550,370 of interest income that had been previously accrued. On December 1, 2016, the Company’s sub-advisor declared an event of default and filed a claim against the credit insurance policy. The insurer had 180 days from time of filing (June 1, 2017) to conclude its initial review, acceptance of the claim and waiting period. Following expiration of the waiting period, a formal demand letter was sent to the Zambian government. During the quarter ended September 30, 2017, the Company received a payment from Neria of $6,981,578, which was comprised of the entire principal balance of $5,078,526 and interest of $1,903,052.  Accordingly the Company recorded additional interest income of $1,352,682 during the year ended December 31, 2017.

Sesame Seed Exporter

 

The Company has a trade finance participation with a Sesame Seed Exporter (“the Exporter”) located in Guatemala, with a principal balance outstanding of $881,800 as of December 31, 2017. The participation had a maturity date of March 31, 2016 and is secured by inventory. During 2016, the Exporter lost a major customer, which resulted in a slowdown in business, affecting its ability to repay the amount due under the participation.  Although the Exporter was able to secure new customers during 2017 to replace the lost order(s), the Exporter had a shipment rejected and returned, and as a result, the Exporter had difficulties making payments. As the Exporter’s financial position further deteriorated, the Company’s sub-advisor determined that a restructuring of the Exporter’s business was required and, as such, the sub-advisor started taking control over the Exporter’s operations.  The Company’s existing loan to the Exporter is also going to be restructured with the following term: 3 year senior secured term loan, secured by share pledge, 12% deferred interest compounded quarterly and payable at maturity, monthly principal amortization based upon available cash flow, expected to begin in June 2018.  

 

The Exporter has made three principal payments totaling $92,435 during October and November 2016, an interest payment of $90,402 in February 2017, an interest payment of $8,388 in July 2017 and interest payments of approximately $81,500 during

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October, November, and December 2017.  The Company has determined that the restructured term loan should be valued using the income approach, in accordance with its valuation policy, and has determined that the fair value of this investment should be $881,800 as of December 31, 2017. The Company has, however, placed this position on non-accrual status as of July 1, 2017.

 

Mac Z Group SARL

The Company has a $9,000,000 trade finance position with Mac Z Group SARL (“Mac Z”), a scrap metal recycler in Morocco. As of December 31, 2017, the outstanding principal balance on this position was $7,349,626 and accrued interest amounted to $483,775. The primary collateral securing this position is 1,970 tons of copper scrap.  In late October, the sub-advisor’s designated Collateral Manager for Mac Z notified the sub-advisor of an investigation into a 1,820 ton, approximately $13.3 million, shortage of copper scrap inventory physically held in the warehouse. The copper scrap is pledged to the Company and serves as the primary collateral for this position. In addition to conducting its investigation, the sub-advisor has issued an Event of Default and is taking steps to enforce the Corporate Guarantee, Personal Guarantee and relevant pledges, which include two insurance policies. The sub-advisor has placed a blocking notice on all of the borrower’s bank accounts and has requested a freeze order from the Moroccan local courts on the physical assets of the company. Mac Z has an estimated $12 million in Zinc Ore inventory, which may serve as secondary collateral for this position. The Company is working with the sub-advisor and is investigating the issue. Based on the results of the initial investigation, the Company believes there is sufficient collateral available to cover both the outstanding principal balance and the accrued interest. The Company placed this position on non-accrual effective October 1, 2017 and believes no adjustment to fair value is necessary as of December 31, 2017

Vicentin – Nacadie S.A.

The Company has a trade finance position with Vicentin – Nacadie S.A (“Vicentin”), an Argentinian company focused on trading of the “soy bean complex” (soybeans, soybean meals, and oils) originating from Argentina, Paraguay and Uruguay. As of December 31, 2017, the outstanding principal balance on this position was $12,000,000 and accrued interest of $539,042.  The Company’s sub-advisor, IIG called a technical default on the borrower due to the breach of informational covenants by Vicentin and due to non-payment of interest by Vicentin. The technical default called by IIG resulted in a filing in the Commercial Court in Buenos Aires, Argentina on July 4, 2017. The Commercial Court has jurisdiction over commercial claims/disputes of this type. After IIG filed its claims in the Commercial Court, the court ruled that they were valid claims and enjoined Vicentin’s cash accounts to allow for recovery by IIG. Once sufficient cash had been secured, the court allowed Vicentin to replace the enjoined cash accounts with a payment guarantee from Zurich International with a 100% LTV, including accrued interest.

 

As a short-term trade finance facility, Vicentin has historically been valued at cost. The remaining principal balance of $12,000,000 has been outstanding since March 2017. As IIG is seeking full repayment through its court action to secure assets from Vicentin, the Company believes, that as of December 31, 2017, the most appropriate valuation method is the liquidation approach. With the bond secured by IIG through the Commercial Court, whose value is for all principal and interest outstanding, there is sufficient collateral available to pay off the principal and accrued interest balances in full and the Company has determined the fair value of this investment should remain at $12,000,000.

 

Frigorifico Regional Industrias Alimentarias S.A. Sucursal Uruguay

 

The Company has a trade finance position with Frigorifico Regional Industrias Alimentarias S.A. Sucursal Uruguay (“FRIAR”), an Argentinian company that produces, processes and exports bovine meat for human consumption. As of December 31, 2017, the outstanding principal balance on this position was $9,000,000 and accrued interest of $264,500.  The Company’s sub-advisor, IIG called a technical event of default due to non-payment by FRIAR. IIG filed the promissory notes for FRIAR in the Commercial Court in Buenos Aires, Argentina. The Commercial Court has jurisdiction over commercial claims/disputes of this type. During January 2018 the court granted IIG’s motion to freeze FRIAR’s accounts. IIG is also in the process of securing additional collateral to cover the full balance outstanding, including accrued interest and penalties. It is expected that once enough cash and assets are secured, FRIAR will secure a payment guarantee bond. IIG has confirmed that FRIAR continues to operate and is a going concern.

 

As a short-term trade finance facility, FRIAR has historically been valued at cost. The remaining principal balance of $9,000,000 has been outstanding since July 2016. As IIG is seeking full repayment through its court action to secure assets from FRIAR, we believe the most appropriate valuation method is the liquidation approach. The Company has determined the fair value of this investment should remain at $9,000,000. However, the Company is placing the position on non-accrual status effective January 1, 2018.

 

Sancor Cooperativas Unidas

 

The Company has a trade finance position with Sancor Cooperativas Unidas (“Sancor”), an Argentinian company that distributes dairy products.  As of December 31, 2017, the outstanding principal balance on this position was $6,000,000.  Interest has been paid in full through December 31, 2017.  Sancor, however, did not make the required interest payments for the first and second quarters of 2017 on a timely basis. As a result, the sub-advisor exercised pledged warrants to cover interest payments for 2017. The

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sub-advisor has worked with Sancor to restructure the existing loan and has extended the maturity to September 30, 2018, with an annual renewal option.  It is anticipated a further extension will be agreed to as part of the restructuring.  As part of the restructure, a co-borrower (Sancor Brazil) was added, additional collateral (face value of $56.6 million) was secured and key customers pay into the sub-advisor’s designated collection account. An unrelated loan from another lender of approximately $26 million was fully repaid by Sancor in the first quarter of 2017 and the release of the associated mortgage and reassignment of the collateral is in the final stages of being released and assigned to the Company.

 

Functional Products Trading S.A.

 

The Company has a trade finance position with Functional Products Trading S.A. (“Functional”), a Chilean company that exports chia seeds to United States and European off-takers.  As of December 31, 2017, the outstanding principal balance on this position was $1,326,688.  In 2017, Functional experienced operational losses due to volatile prices for raw chia seeds and its byproducts, with sales declining from 2016 by 57%. As a result, the company is developing a full restructuring plan (selling office building and entering lease back agreement) with its current lenders, including the Company, to provide more cash flow flexibility, become current on all interest payments and improve its capital structure, in order to support the company’s growth initiatives. During February 2018, we received $25,000 in interest payments, which covered accrued interest up to the end of November 2017 and $10,000 in March 2018, which brought Functional current on interest payments through December 2017. The Company is currently working with Functional on restructuring the facility, which it believes will be completed in the near term.

 

As of December 31, 2016, the Company’s investments consisted of the following:

 

 

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The industry composition of the Company’s portfolio, at fair market value as of December 31, 2017 and 2016, was as follows:

 

 

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The table below shows the portfolio composition by geographic classification at fair value as of December 31, 2017 and 2016:

 

 

 

Note 4. Fair Value Measurements

The following table summarizes the valuation of the Company’s investments by the fair value hierarchy levels required under ASC 820 as of December 31, 2017:

 

 

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The following table summarizes the valuation of the Company’s investments by the fair value hierarchy levels required under ASC 820 as of December 31, 2016:

 

 

The following is a reconciliation of activity for the year ended December 31, 2017, of investments classified as Level 3:

 

 

The following is a reconciliation of activity for the year ended December 31, 2016 of investments classified as Level 3:

 

 

There were no realized gains or losses for any of our investments classified as Level 3 during the years ended December 31, 2017 and 2016.

As of December 31, 2017, all of the Company’s portfolio investments utilized Level 3 inputs. The following table presents the quantitative information about Level 3 fair value measurements of the Company’s investments as of December 31, 2017:

 

 

The significant unobservable inputs used in the fair value measurement of the Company’s trade finance investments are market yields. Significant increases in market yields would result in significantly lower fair value measurements.

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As of December 31, 2016, all of the Company’s portfolio investments utilized Level 3 inputs. The following table presents the quantitative information about Level 3 fair value measurements of the Company’s investments as of December 31, 2016:

 

 

 

The significant unobservable inputs used in the fair value measurement of the Company’s trade finance investments are market yields. Significant increases in market yields would result in significantly lower fair value measurements.

For details of the country-specific risk concentrations for the Company’s investments, refer to the Consolidated Schedule of Investments and Note 3.

 

 

Note 5. Related Parties

Agreements

Advisory Agreement

On February 14, 2018, the Company’s board of managers determined to extend the Amended and Restated Advisory Agreement, (the “Advisory Agreement”) until February 25, 2019.  

Asset management fees payable to the Advisor are remitted quarterly in arrears and are equal to 0.50% (2.00% per annum) of Gross Asset Value, as defined in the Advisory Agreement between the Company and the Advisor. Asset management fees are paid to the Advisor in exchange for fund management and administrative services. Although the Advisor manages, on the Company’s behalf, many of the risks associated with global investments in developing economies, management fees do not include the cost of any hedging instruments or insurance policies that may be required to appropriately manage the Company’s risk.  

If certain financial goals are reached by the Company, the Company is required to pay the Advisor an incentive fee which is comprised of two parts: (i) a subordinated fee on net investment income and (ii) an incentive fee on capital gains. The subordinated incentive fee on income is calculated and payable quarterly in arrears and is based upon the Company’s pre-incentive fee net investment income for the immediately preceding quarter. No subordinated incentive fee is earned by the Advisor in any calendar quarter in which the Company’s pre-incentive fee net investment income does not exceed the quarterly preferred return rate of 1.50% (6.00% annualized) (the “Preferred Return”). In any quarter, all of the Company’s pre-incentive fee net investment income, if any, that exceeds the quarterly Preferred Return, but is less than or equal to 1.875% (7.50% annualized) at the end of the immediately preceding fiscal quarter, is payable to the Advisor. For any quarter in which the Company’s pre-incentive fee net investment income exceeds 1.875% on its net assets at the end of the immediately preceding fiscal quarter, the subordinated incentive fee on income equals 20% of the amount of the Company’s pre-incentive fee net investment income.

An incentive fee on capital gains will be earned on investments sold and shall be determined and payable to the Advisor in arrears as of the end of each calendar year. The incentive fee on capital gains is equal to 20% of the Company’s realized capital gains on a cumulative basis from inception, computed net of all realized capital losses and unrealized capital depreciation on a cumulative basis, less the aggregate amount of any previously paid incentive fees on capital gains. The Company had no capital gains and therefore did not accrue an incentive fee for the years ended December 31, 2017 and 2016.

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Transactions

As discussed in Note 2, for the year ended December 31, 2017 and 2016, the Sponsor assumed responsibility for $3,831,415 and $5,333,530 of the Company’s operating expenses, management and incentive fees, which are deferred under the Responsibility Agreement.

For the years ended December 31, 2017 and 2016, the Advisor earned $6,484,850 and $4,172,643, respectively, in management fees and $4,599,941 and $3,319,149, respectively, in incentive fees.

Since the inception of the Company through December 31, 2017, pursuant to the terms of the Responsibility Agreement, the Sponsor has paid approximately $12,422,100 of operating expenses, management fees, and incentive fees on behalf of the Company and will pay or reimburse to the Company an additional $4,238,700 of expenses, which have been accrued by the Sponsor as of December 31, 2017. Such expenses, in the aggregate of $16,660,800 since the Company’s inception, may be expensed and payable by the Company to the Sponsor only if the Company satisfies the Reimbursement Hurdle as further described in Note 2.

As of December 31, 2017 and 2016, due from affiliates on the Consolidated Statement of Assets and Liabilities in the amounts of $3,997,314 and $3,175,656, respectively, was due from the Sponsor in connection with the Responsibility Agreement for operating expenses which were paid by the Company, but, under the terms of the Responsibility Agreement, are the responsibility of the Sponsor. The Sponsor anticipates paying this receivable in the due course of business.

For the years ended December 31, 2017 and 2016, the Company paid $643,566 and $1,938,827, respectively, in dealer manager fees and $2,516,109 and $6,744,561, respectively, in selling commission to our dealer manager, SC Distributors. These fees and commissions were paid in connection with the sales of our units to investors and, as such, were recorded against the proceeds from the issuance of units and are not reflected in the Company’s consolidated statement of operations.

As of December 31, 2017 and 2016, due to affiliates, which were related to reimbursement of offering expenses to the Company’s Sponsor, amounted to $0 and $68,312, respectively.

 

 

Note 6. Organization and Offering Costs

As of December 31, 2017, the Sponsor has paid approximately $17,340,000 of offering costs and $236,000 of organization costs, all of which were paid directly by the Sponsor on behalf of the Company, and will be reimbursed to the Sponsor as disclosed in Note 2 of the consolidated financial statements. Such amounts include approximately $3,016,600 and $4,540,000, respectively, of offering costs, which were incurred by the Sponsor during the years ended December 31, 2017 and 2016. During the years ended December 31, 2017 and 2016, the Company paid $2,612,810 and $6,721,325, respectively, in reimbursement of offering costs to the Sponsor. Such offering costs reimbursed by the Company have been recognized against the proceeds from the issuance of units.

Since the Company started operations to December 31, 2017, the Company has reimbursed the Sponsor a total of $17,156,501 of offering costs and organization costs and there is a remaining balance of approximately $419,500 of offering costs that have not been reimbursed to the Sponsor as of December 31, 2017.

 

 

Note 7. Promissory Notes

 

The Company notes payable consist of the following:

 

 

 

Promissory Notes

 

On October 14, 2016, TGIFC issued $1.635 million in the first series of notes pursuant to a private offering of senior secured promissory notes (the “Notes”). The Notes were issued under an ongoing private offering targeting $100 million in the aggregate amount and will be comprised of four different series with four different issuance and maturity dates.  The Notes issued on October 14, 2016 comprised the first series of the Notes.

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The Notes have an interest rate of 3.0% per annum plus the one year LIBOR (1.59%) and will be payable quarterly in arrears within 15 days after the end of each calendar quarter. The interest rate is determined on each issuance date and adjusted on each anniversary of the issuance date and shall not exceed the maximum rate of non-usurious interest permitted by applicable law, with excess interest to be applied to the principal amount of the Note.

On February 17, 2017, TGIFC issued $0.225 million in the second series of the Notes pursuant to such private offering. The notes issued on February 17, 2017 comprised the second series of the Notes and bear interest at a rate of 3.0% per annum plus one year LIBOR (1.74%) as determined on their issuance date.

 

The entire principal balance of each Note (and any unpaid interest) is due in one balloon payment on the “Maturity Date,” which is the first anniversary of the issuance date that either TGIFC or the applicable noteholder has designated as the Maturity Date by not less than 30 days’ prior written notice to the other party. The principal balance of each Note may not be prepaid, in whole or in part, prior to the Maturity Date.

 

In October, 2016, the Company transferred all of the shares of all of its wholly owned subsidiaries (the “Subsidiaries”) to TGIFC.  The Subsidiaries own all of the Company’s investments. TGIFC’s obligations under the Notes are secured by an equitable mortgage pursuant to the Equitable Mortgage Over Shares by and between TGIFC and Noteholders, dated as of October 14, 2016 granting the holders of Notes a mortgage over 1.86 shares out of a total of 27.11 of the issued and outstanding shares of the Subsidiaries.  While the collateral initially pledged under the equitable mortgage greatly exceeds the amount funded under the Notes based on the current net asset value of the Company’s investments held by the Subsidiaries, the Company may issue more shares of the Subsidiaries to secure further financing obligations as long as the pro rata value of TGIFC shares (based on the aggregate net asset value of the investments held by the Subsidiaries) is equal to at least the outstanding amount due and payable under the Notes. The Notes and the equitable mortgage contain representations, warranties and covenants customary for financing and mortgage arrangements of this type.  As of December 31, 2017, the Company is in full compliance with all such representations, warranties and covenants.

 

Symbiotics Facility

 

On July 3, 2017, TGIFC entered into a $10.5 million Facility Agreement (the “Facility Agreement”) with Micro, Small & Medium Enterprises Bonds S.A. (“MSMEB”) as Lender and Symbiotics SA as Servicer.  On November 2, 2017, TGIFC entered into a second Facility Agreement to receive an additional $12.25 million in the second tranche of financing with MSMEB as Lender and Symbiotics SA as Servicer. TGIFC may request an additional $17.5 million under the Facility Agreement, subject to the conditions precedent set forth in the Facility Agreement, including availability of funding.  

 

The Facility Agreement has an interest rate of 4.65% per annum plus the three month LIBOR (1.36% as of December 31, 2017) and will be payable quarterly in arrears within 15 days after the end of each calendar quarter. The interest rate shall not exceed the maximum rate of non-usurious interest permitted by applicable law, with excess interest to be applied to the principal amount of the note.

 

The entire principal balance under the Facility Agreement (and any unpaid interest) is due in one balloon payment on July 7, 2020 (the “Maturity Date”). The principal balance under the Facility Agreement may be voluntarily prepaid, in whole or in part, prior to the Maturity Date, subject to a prepayment premium of 1.00% of the prepayment amount if the voluntary prepayment is made prior to July 3, 2019.

 

TGIFC’s obligations under the Facility Agreement is secured by an equitable mortgage pursuant to the Equitable Mortgage Over Shares by and between TGIFC and MSMEB, dated as of July 3, 2017 granting the holders of the Facility Agreement a mortgage over 20.25 shares out of a total of 27.11 of the issued and outstanding shares of the Subsidiaries.  While the collateral initially pledged under the equitable mortgage greatly exceeds the amount funded under the Facility Agreement based on the current net asset value of the Company’s investments held by the Subsidiaries, the Company may issue more shares of the Subsidiaries to secure further financing obligations as long as the pro rata value of TGIFC shares (based on the aggregate net asset value of the investments held by the Subsidiaries) is equal to at least the outstanding amount due and payable under the Facility Agreement.  The Facility Agreement and the equitable mortgage contain representations, warranties and covenants customary for financing and mortgage arrangements of this type.  As of December 31, 2017, the Company is in full compliance with all such representations, warranties and covenants.

 

Christian Super Promissory Note

On August 7, 2017, TGIFC issued $5 million in the first of a Series 1 Senior Secured Promissory Notes private offering (the “CS Note”) to State Street Australia Ltd ACF Christian Super (“Christian Super”). The CS Note was issued pursuant to an ongoing private offering targeting $25 million in the aggregate amount and will be comprised of up to five different series with five different issuance dates, but likely the same maturity date (collectively the “CS Notes”).  The CS Note issued on August 7, 2017 comprised the

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first series of the CS Notes. Borrowings from the CS Notes offering will be used to pursue the Company’s investment strategy and for general corporate purposes.  

The CS Notes have an interest rate of 4.0% per annum plus the one year LIBOR (1.73%) and will be payable quarterly in arrears within 15 days after the end of each calendar quarter. The interest rate may not exceed the maximum rate of non-usurious interest permitted by applicable law, with excess interest to be applied to the principal amount of the CS Note.

The entire principal balance under the CS Note (and any unpaid interest) is due in one balloon payment on August 7, 2021, which is the fourth anniversary of the issuance date. The principal balance of the CS Note may be prepaid prior to the maturity date without premium or penalty.

 

  TGIFC’s obligations under the CS Notes is secured by an equitable mortgage pursuant to the Equitable Mortgage Over Shares by and between TGIFC and the Noteholders, dated as of August 7, 2017, granting the holder of the CS Notes a mortgage over 5 shares out of a total of 27.11 of the issued and outstanding shares of the Subsidiaries. While the collateral initially pledged under the equitable mortgage greatly exceeds the amount funded under the CS Notes based on the current net asset value of the Company’s investments held by the Subsidiaries, the Company may issue more shares of the Subsidiaries to secure further financing obligations as long as the pro rata value of TGIFC shares (based on the aggregate net asset value of the investments held by the Subsidiaries) is equal to at least the outstanding amount due and payable under the CS Notes.  The CS Note and the equitable mortgage contain representations, warranties and covenants customary for financing and mortgage arrangements of this type. As of December 31, 2017, the Company is in full compliance with all such representations, warranties and covenants.

 

For the years ended December 31, 2017 and 2016, the Company recognized $606,943 and $16,228, respectively, in interest expense. Due to the variable rate structure of these borrowings, the carrying basis of these debt obligations is considered to approximate their fair value.

 

The principal payments due on borrowings for each of the next five years ending December 31 and thereafter, are as follows:

 

 

 

Note 8. Unit Capital

As of December 31, 2017, the Company has five classes of units: Class A, Class C, Class I, Class W and Class Y units, with only Class A, Class C, Class I and Class Y units outstanding. The unit classes have different upfront sales commissions and dealer manager fees and there are ongoing distribution fees, dealer manager fees and/or service fees with respect to certain classes of units, including a distribution fee with respect to Class C units, an ongoing dealer manager fee with respect to Class I and Class W units, and an ongoing service fee with respect to Class W units. As of December 31, 2017, the Company recorded a liability in the aggregate amount of $1,895,000 for the estimated future amount of Class C distribution fee payable and Class I unit dealer manager fee payable. The estimated liability is calculated based on a net asset value per Class C and Class I units of $9.025 with distribution and dealer manager fees of 0.8% and 0.5%, respectively, per annum applied to the net asset value, during the expected period that Class C and Class I units remain outstanding, and discounted using an annual rate of 4%. All units participate in the income and expenses of the Company on a pro-rata basis based on the number of units outstanding.

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The following table is a summary of transactions with respect to the Company’s units during the year ended December 31, 2017:

 

 

The total of 9,539,710 units issued during the year ended December 31, 2017 included 1,249,131 units issued under the Second Amended and Restated Distribution Reinvestment Plan (“Distribution Reinvestment Plan”) at a value of $11,267,412.

Beginning June 11, 2014, the Company commenced a unit repurchase program pursuant to which the Company may conduct quarterly unit repurchases of up to 5% of the weighted average number of outstanding units in any 12-month period to allow the Company’s unitholders, who have held units for a minimum of one year, to sell their units back to the Company at a price equal to the then current offering price less the sales fees associated with that class of units. On March 3, 2017, the board of managers authorized an amendment to the unit repurchase program and commencing with redemption requests processed at the end of the second quarter of 2017, units were redeemed at a price equal to the greater of $9.025 or the estimated net asset per unit for each class of units, as most recently disclosed by us in a public filing with the SEC. Our March 7, 2018, the board authorized a further amendment to our unit repurchase program and commencing with repurchase requests processed on the last day of the first quarter of 2018, units are redeemed at a price equal to the most recently determined net asset value per unit for each class of units, as most recently disclosed by us in a public filing with the SEC at the time of redemption. Redemptions for the first quarter of 2018 were redeemed at the price equal to $8.507 for Class A units, Class C units, Class I units and Class Y unit, which was the net asset value per unit of each class as of September 30, 2017, the most recently disclosed net asset value at the time of redemption. Redemptions for the second quarter of 2018 will be redeemed at a price equal to $8.466 per Class A unit, Class C units, Class I unit and Class Y units, which was the net asset value per unit of each class as of December 31, 2017. The unit repurchase program includes numerous restrictions, including a one-year holding period, that limit the ability of our unitholders to sell their units. Unless the Company’s board of managers determines otherwise, the Company will limit the number of units to be repurchased during any calendar year to the number of units we can repurchase with the proceeds we receive from the sale of units under the Distribution Reinvestment Plan. At the sole discretion of our board of managers, we may also use cash on hand, cash available from borrowings and cash from liquidation of investments as of the end of the applicable quarter to repurchase units.

For the year ended December 31, 2017, the Company had received and processed 149 repurchase requests. The Company repurchased an aggregate of 403,439 Class A units, 64,757 Class C units, and 495,792 Class I units at a price of $9.025 per unit for a total of $8,699,994.

For the year ended December 31, 2016, the Company had received and processed 31 repurchase requests. The Company repurchased an aggregate of 565,549 Class A units, 8,943 Class C units, and 573,750 Class I units at a price of $9.025 per unit for a total of $10,362,875.

The following table is a summary of the units issued during the year ended December 31, 2016:

 

 

 

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Note 9. Distributions

Starting in July 2013, the Company has paid monthly distributions for all classes of units. For the year ended December 31, 2017, the distributions were calculated based on unitholders of record for each day in an amount equal to $0.00197808 per unit per day (“Distribution rate”) (less the distribution fee for Class C Units and an ongoing dealer manager fee with respect to certain Class I units). For the year ended December 31, 2016, the distributions were calculated based on unitholders of record for each day in an amount equal to $0.00197268 per unit per day (less the distribution fee for Class C units). For the years ended December 31, 2017 and 2016, $14,285,443 and $9,258,169, respectively, of these distributions were paid in cash and $11,267,412 and $7,212,502, respectively, were reinvested in units for those unitholders participating in the Company Distribution Reinvestment Plan.

The following table summarizes the distributions paid for the years ended December 31, 2017 and 2016.

 

 

 

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Note 10. Financial Highlights

The following is a schedule of financial highlights of the Company for the years ended December 31, 2017 and 2016. The Company’s income and expense is allocated pro-rata across the outstanding Class A, Class C and Class I units, as applicable, and therefore the financial highlights are equal for each of the outstanding classes.

 

 

 

 

Note 11. Selected Quarterly Data (Unaudited)

 

 

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Note 12. Subsequent Events

The Company’s management has evaluated subsequent events through the date of issuance of the consolidated financial statements included herein. There have been no subsequent events that occurred during such period that would require disclosure in the Form 10-K or would be required to be recognized in the consolidated financial statements as of and for the year ended December 31, 2017, except as discussed below.

Distributions

On January 16, 2018, with the authorization of the Company’s board of managers, the Company declared distributions for all classes of units for the period from January 1 through January 31, 2018. These distributions were calculated based on unitholders of record for each day in an amount equal to $0.00197808 per unit per day (less the distribution fee with respect to Class C units, an ongoing dealer manager fee with respect to certain Class I units and Class W units and an ongoing service fee with respect to Class W units). On February 1, 2018, $1,301,699 of these distributions were paid in cash and on January 31, 2018, $988,859 were reinvested in units, for those unitholders participating in the Distribution Reinvestment Plan.

On February 14, 2018, with the authorization of the Company’s board of managers, the Company declared distributions for all classes of units for the period from February 1 through February 28, 2018. These distributions will be calculated based on unitholders of record for each day in an amount equal to $0.00197808 per unit per day (less the distribution fee with respect to Class C units, an ongoing dealer manager fee with respect to certain Class I units and Class W units and an ongoing service fee with respect to Class W units). On March 1, 2018, $1,497,579 of these distributions were paid in cash and on February 28, 2018, $895,266 were reinvested in units, for those unitholders participating in the Distribution Reinvestment Plan.

On March 25, 2018, with the authorization of the Company’s board of managers, the Company declared distributions for all classes of units for the period from March 1 through March 31, 2018. These distributions will be calculated based on unitholders of record for each day in an amount equal to $0.00168675 per unit per day (less the distribution fee with respect to Class C units, an ongoing dealer manager fee with respect to certain Class I units and Class W units and an ongoing service fee with respect to Class W units). These distributions will be paid in cash on or about April 2, 2018 or reinvested in units, for those unitholders participating in the Distribution Reinvestment Plan, on March 31, 2018.

Fifth Amended and Restated Operating Agreement

Effective as of January 20, 2018, pursuant to the authorization of the board of managers, the Company’s operating agreement was amended and restated (the “Amended and Restated Operating Agreement”. The Amended and Restated Operating Agreement reflects the addition of a class of units designated as Class Z units.  Prior to the addition of the Class Z units, the Company’s authorized units consisted solely of Class A, Class C, Class I, Class W and Class Y units, all of which have the same rights and privileges, including voting rights, and are considered by the Company to constitute one class of securities.  The Class Z units are distinct from the Company’s Class A, Class C, Class I, Class W and Class Y units because the Class Z units are non-voting units, and the Company therefore considers the Class Z units to be a class of securities that is separate and distinct from the Company’s Class A, Class C, Class I, Class W and Class Y units. The Class Z units are not registered under Section 12(b) or 12(g) of the Securities Exchange Act of 1934, as amended.

TGIF Cayman Investment

 

On February 2, 2018, we sold 5,877,512 Class Z units of limited liability company interest for an aggregate offering price of $50 million to TriLinc Global Impact Fund Cayman Feeder, Ltd., or TGIF Cayman, an exempted company incorporated in the Cayman Islands and controlled by the Sponsor. A Saudi Arabian sovereign wealth fund owns 100% of the economic interest in TGIF Cayman and invested $50 million in TGIF Cayman to fund investment in the Class Z units.

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Amendments to the Distribution Reinvestment Plan and Unit Repurchase Program

 

On March 7, 2018, the board of managers (the “Board”) of the Company approved the Third Amended and Restated Distribution Reinvestment Plan (the “Amended DRP”).  Commencing on March 30, 2018, the date on which the distributions declared for the month of March 2018 were reinvested (the “DRP Effective Date”), the Company amended the price at which additional units of the same class may be purchased pursuant to the distribution reinvestment plan to a price equal to the estimated net asset value per unit of the unit class being reinvested, as most recently disclosed by the Company in a public filing with the SEC at the time of reinvestment. Accordingly, the Amended DRP has superseded and replaced the Company’s current distribution reinvestment plan as of the DRP Effective Date and the new offering price under the Amended DRP was first applied to distributions declared for the month of March 2018, which were reinvested on March 30, 2018.  Distributions declared for the month of March 2018 were reinvested at a price equal to $8.507 for Class A units, Class C units, and Class I units, which was the net asset value per unit as of September 30, 2017, the most recently disclosed net asset value at the time of reinvestment. Distributions declared for the month of April 2018 will be reinvested at a price equal to $8.466 per Class A unit, Class C units and Class I unit, which was the net asset value per unit as of December 31, 2017. 

 

Additionally, on March 7, 2018, the Company’s board of managers approved the Third Amended and Restated Unit Repurchase Program (the “Amended URP”). The Company amended the price at which units presented for redemption were repurchased, beginning with units to be repurchased by the Company on the last day of the first quarter of 2018 (the “URP Effective Date”).  Subject to the limitations of the Amended URP, beginning on the URP Effective Date, units repurchased under the Amended URP will be repurchased at a price equal to the net asset value per unit of the unit class being repurchased, as most recently disclosed by the Company in a public filing with the SEC. Accordingly, the Amended URP superseded and replaced the Company’s prior unit repurchase program as of the URP Effective Date and the new offering price under the Amended URP was first applied to units repurchased by the Company on the last day of the first quarter of 2018. Redemptions for the first quarter of 2018 were redeemed at the price equal to $8.507 for Class A units, Class C units, Class I units and Class Y unit, which was the net asset value per unit of each class as of September 30, 2017, the most recently disclosed net asset value at the time of redemption. Redemptions for the second quarter of 2018 will be redeemed at a price equal to $8.466 per Class A unit, Class C units, Class I unit and Class Y units, which was the net asset value per unit of each class as of December 31, 2017.

Investments

Subsequent to December 31, 2017 through March 26, 2018, the Company funded approximately $80.1 million in new loans and received proceeds from repayment of loans of approximately $37.1 million.

Agreements

On February 14, 2018, the Company’s board of managers determined to extend the Advisory Agreement until February 25, 2019. 

On March 26, 2018, we entered into an Amended and Restated Operating Expenses Responsibility Agreement with our Sponsor and Advisor. Pursuant to the term of this agreement, our Sponsor agreed to be responsible for our cumulative operating expenses incurred through December 31, 2017, including management and incentive fees earned by the Advisor during the quarter ended December 31, 2017.

 

 

 

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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 on April 2, 2018.

 

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 capacities and on the date indicated:

 

SUPPLEMENTAL INFORMATION

No proxy statement has been sent to the registrant’s unitholders. If a proxy statement is delivered to more than ten of the registrant’s unitholders with respect to an annual or other meeting of unitholders, copies of such materials will be furnished to the SEC at that time. The registrant will deliver to its unitholders a copy of this annual report on Form 10-K.