Item 2. Management’s Discussion and Analysis of
Financial Condition and Results of Operations
Forward-Looking
Statements
This quarterly report
on Form 10-Q contains forward-looking statements that involve substantial risks and uncertainties. These forward-looking statements
are not historical facts, but rather are based on current expectations, estimates and projections about GSV Capital, our current
and prospective portfolio investments, our industry, our beliefs, and our assumptions. Words such as ‘‘anticipates,’’
‘‘expects,’’ ‘‘intends,’’ ‘‘plans,’’ ‘‘will,’’
‘‘may,’’ ‘‘continue,’’ ‘‘believes,’’ ‘‘seeks,’’
‘‘estimates,’’ ‘‘would,’’ ‘‘could,’’ ‘‘should,’’
‘‘targets,’’ ‘‘projects,’’ and variations of these words and similar expressions
are intended to identify forward-looking statements.
The forward looking
statements contained in this quarterly report on Form 10-Q involve risks and uncertainties, including statements as to:
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our future operating results;
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our business prospects and the prospects
of our portfolio companies;
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the impact of investments that we expect
to make;
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our contractual arrangements and relationships
with third parties;
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the dependence of our future success on
the general economy and its impact on the industries in which we invest;
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the ability of our portfolio companies
to achieve their objectives;
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our expected financings and investments;
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the adequacy of our cash resources and
working capital; and
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the timing of cash flows, if any, from
the operations of our portfolio companies.
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These statements are
not guarantees of future performance and are subject to risks, uncertainties, and other factors, some of which are beyond our control
and difficult to predict and could cause actual results to differ materially from those expressed or forecasted in the forward-looking
statements, including without limitation:
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an economic downturn could impair our
portfolio companies’ ability to continue to operate, which could lead to the loss of some or all of our equity investments
in such portfolio companies,
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an economic downturn could disproportionately
impact the market sectors in which a significant portion of our portfolio is concentrated, causing us to suffer losses in our portfolio,
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an inability to access the equity markets
could impair our investment activities,
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interest rate volatility could adversely
affect our results, particularly if we opt to use leverage as part of our investment strategy, and
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the risks, uncertainties and other factors
we identify in ‘‘Risk Factors’’ and elsewhere in this quarterly report on Form 10-Q and in our filings
with the SEC.
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Although we believe
that the assumptions on which these forward-looking statements are based are reasonable, any of those assumptions could prove to
be inaccurate, and as a result, the forward-looking statements based on those assumptions also could be inaccurate. In light of
these and other uncertainties, the inclusion of a projection or forward-looking statement in this quarterly report on Form 10-Q
should not be regarded as a representation by us that our plans and objectives will be achieved. These risks and uncertainties
include those described or identified in ‘‘Risk Factors’’ and elsewhere in this quarterly report on Form
10-Q. You should not place undue reliance on these forward-looking statements, which apply only as of the date of this quarterly
report on Form 10-Q.
The following analysis
of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and
the related notes included in the annual report on Form 10-K for the year ended December 31, 2011 and this quarterly report on
Form 10-Q.
Overview
We are an externally
managed, non-diversified closed-end management investment company that has elected to be treated as a business development company
under the 1940 Act. Our investment objective is to maximize our portfolio’s total return, principally by seeking capital
gains on our equity and equity-related investments. We invest principally in the equity securities of rapidly growing venture capital-backed
emerging companies. We acquire our investments through secondary marketplaces for private companies, negotiations with selling
stockholders and direct investments with prospective portfolio companies. We may also invest on an opportunistic basis in select
publicly-traded equity securities or certain non-U.S. companies that otherwise meet our investment criteria. Our investment activities
are managed by GSV Asset Management, and GSV Capital Service Company provides the administrative services necessary for us to operate.
Our investment philosophy
is premised on a disciplined approach of identifying high-growth emerging companies across several key industry themes which may
include, among others, social media, mobility, cloud computing, software-as-a-service, green technology and education technology.
Our investment adviser’s investment decisions are based on a disciplined analysis of available information regarding each
potential portfolio company’s business operations, focusing on the company’s growth potential, the quality of recurring
revenues and cash flow and cost structures, as well as an understanding of key market fundamentals. Many of the companies that
our investment adviser evaluates have financial backing from top tier venture capital funds or other financial or strategic sponsors.
We seek to deploy capital
primarily in the form of non-controlling equity and equity-related investments, including common stock, warrants, preferred stock
and similar forms of senior equity, which may or may not be convertible into a portfolio company’s common equity, and convertible
debt securities with a significant equity component. We anticipate that substantially all of the net proceeds of our follow-on
offerings, which closed in February and May 2012, will be used for the above purposes within six to 12 months, depending on the
availability of investment opportunities that are consistent with our investment objectives and market conditions.
We seek to create a
low-turnover portfolio that includes investments in companies representing a broad range of investment themes. As of September
30, 2012, we have completed investments in 44 companies for aggregate consideration of approximately $224.1 million (exclusive
of transaction fees and costs), or 80.6% of the net proceeds from our initial public offering and subsequent follow-on offerings.
We expect that the total number of portfolio companies in which we are invested will increase as our equity capital base grows.
On April 28, 2011,
we priced our initial public offering of 3,335,000 shares of our common stock at the offering price of $15.00 per share. The initial
public offering closed on May 3, 2011, resulting in net proceeds to GSV Capital Corp. of approximately $46.5 million. On September
26, 2011, we priced a follow-on equity offering of 2,185,000 shares of our common stock at an offering price $14.15 per share.
The follow-on equity offering included the full exercise of the underwriters’ option to purchase an additional 285,000 shares
of our common stock, resulting in net proceeds to GSV Capital Corp. of approximately $29.6 million. On February 10, 2012, we priced
a subsequent follow-on equity offering of 6,900,000 shares of our common stock at an offering price of $15.00 per share. The follow-on
equity offering included the full exercise of the underwriters’ option to purchase an additional 900,000 shares of our common
stock, resulting in net proceeds to GSV Capital Corp. of approximately $96.2 million. On May 11, 2012, we priced an additional
follow-on equity offering of 6,900,000 shares of our common stock at an offering price of $16.25 per share. The follow-on offering
included the full exercise of the underwriters’ option to purchase an additional 900,000 shares of our common stock, resulting
in net proceeds to GSV Capital Corp. of approximately $105.4 million. Our shares are currently listed on the NASDAQ Capital Market
under the symbol ‘‘GSVC’’.
Investments
The fair value of our
investments can be expected to fluctuate in future periods due to changes in our investments and changes in the fair value of the
investments. The investments made during the nine months ended September 30, 2012 include:
We
closed on an investment of $100,000, plus transaction costs, in AlwaysOn, LLC, a social media company, on January 10, 2012.
We
closed on an investment of $200,000, plus transaction costs, in Maven Research, Inc., a global knowledge marketplace, on February
28, 2012.
We
closed on an investment of $500,000, plus transaction costs, in AltEgo, LLC, an avatar technology and games developer, on February
29, 2012.
We closed on an investment
of $4,000,000, plus transaction costs, in Chegg, Inc., an online textbook rental company, on March 7, 2012.
We
closed on an investment of $150,000, plus transaction costs, in AlwaysOn, LLC, a social media company, on March 9, 2012.
We
closed on an investment of $250,000, plus transaction costs, in The Echo System Corp., a social analytics company, on March 21,
2012.
We
closed on an investment of $1,000,000, plus transaction costs, in StormWind, LLC, an electronic marketing and business services
platform, on March 23, 2012.
We
closed on an investment of $855,000, plus transaction costs, in Bloom Energy Corporation, a fuel cell energy company, on March
28, 2012.
We
closed on an investment of $2,000,000, plus transaction costs, in CUX, Inc., a corporate education company, on March 29, 2012.
We
closed on an investment of $750,000, plus transaction costs, in The Echo System Corp., a social media company, on March 30, 2012.
We
closed on an investment of $750,000, plus transaction costs, in The rSmart Group, Inc., a higher education learning platform, on
March 30, 2012.
We
closed on an investment of $1,143,800, plus transaction costs, in Bloom Energy Corporation, a fuel cell energy company, on April
4, 2012.
We
closed on an investment of $9,999,996, plus transaction costs, in Violin Memory, Inc., a flash memory company, on April 11, 2012.
We
closed on an investment of $4,000,000, plus transaction costs, in Top Hat, Inc., an internet commerce company, on April 13, 2012.
We
closed on investments of $2,369,500, $1,277,500 and $350,000, plus transaction costs, in Control4 Corporation, a smart home automation
company, on April 18, 20102, April 19, 2012 and April 20, 2012, respectively.
We
closed on an investment of $2,999,998, plus transaction costs, in Global Education Learning (Holdings) Ltd., an Asia-focused education
technology company, on April 19, 2012.
We
closed on investments of $5,312,492, $4,875,010 and $7,312,498, plus transaction costs, in Twitter, Inc., a social communication
company, on April 25, 2012, April 27, 2012, and April 30, 2012, respectively.
We
closed on an investment of $3,800,000, plus transaction costs, in Silver Spring Networks, Inc., a smart grid company, on May 1,
2012.
We
closed on an investment of $1,969,996, plus transaction costs, in Fullbridge, Inc., a business education company, on May 4, 2012.
We
closed on investments of $888,384 and $2,674,048, plus transaction costs, in Palantir Technologies, Inc., a cyber-security company,
on May 7, 2012 and May 11, 2012, respectively.
We
closed on an investment of $10,000,000, plus transaction costs, in Avenues World Holdings LLC, a globally-focused private school,
on May 9, 2012.
We
closed on an investment of $6,858,500, plus transaction costs, in Dropbox, Inc., an online storage service, on May 11, 2012.
We
closed on an investment of $200,000, plus transaction costs, in AltEgo, LLC, an avatar technology and games developer, on May 11,
2012.
We
closed on an investment of $280,005, plus transaction costs, in Fullbridge, Inc., a business education company, on May 15, 2012.
We
closed on investments of $40,500, $67,500 and $540,000, plus transaction costs, in Palantir Technologies, Inc., a cyber-security
company, on May 16, 2012, May 21, 2012 and May 22, 2012, respectively.
We
closed on an investment of $4,800,000, plus transaction costs, in Violin Memory, Inc., a flash memory company, on May 22, 2012.
We
closed on an investment of $1,000,000, plus transaction costs, in NestGSV, Inc., an entrepreneurial education company, on May 25,
2012.
We closed on an investment
of $1,900,000, plus transaction costs, in Twitter, Inc., a social communication company, on June 1, 2012.
We closed on an investment
of $300,000, plus transaction costs, in AltEgo, LLC, an avatar technology and games developer, on June 15, 2012.
We closed on an investment
of $10,000,000, plus transaction costs, in Solexel, Inc., a solar power company, on June 18, 2012.
We closed on investments
of $2,400,000 and $1,600,000, plus transaction costs, in Chegg, Inc., an online textbook rental company, on June 20, 2012 and June
25, 2012, respectively.
We closed on an investment
of $7,500,000, plus transaction costs, in Kno, Inc., an education software company, on June 27, 2012.
We closed on an investment
of $2,000,000, plus transaction costs, in Dailybreak, Inc., a social advertising company, on June 29, 2012.
We
closed on an investment of $1,999,999, plus transaction costs, in Dataminr, Inc., a social media analytics company, on July 2,
2012.
We
closed on an investment of $1,999,998, plus transaction costs, in Maven Research, Inc., a global knowledge marketplace, on July
2, 2012.
We
closed on an investment of $500,000, plus transaction costs, in NestGSV Silicon Valley, LLC, an entrepreneurial education company,
on July 10, 2012.
We
closed on an investment of $1,202,500, plus transaction costs, in Twitter, Inc., a social communication company, on July 10, 2012.
We
closed on an investment of $10,000,000, plus transaction costs, in 2tor, Inc., an online education company, on July 16, 2012.
We
closed on an investment of $5,000,000, plus transaction costs, in Totus Solutions, Inc., an LED lighting company, on July 20, 2012.
We
closed on investments of $999,999, $15,228,070 and $135,000, plus transaction costs, in Palantir Technologies, Inc., a cyber-security
company, on July 24, 2012, July 27, 2012 and July 31, 2012, respectively.
We
closed on an investment of $1,001,000, plus transaction costs, in Gilt Groupe, Inc., an eCommerce platform, on July 27, 2012.
We
closed on an investment of $400,000, plus transaction costs, in AltEgo, LLC, an avatar technology and games developer, on August
7, 2012.
We
closed on an investment of $500,000, plus transaction costs, in SinoLending Ltd, a Chinese P2P lending platform, on August 7, 2012.
We
closed on an investment of $3,589,659, plus transaction costs, in Spotify Technology S.A., a music streaming service, on August
7, 2012.
We closed on an investment
of $250,000, plus transaction costs in Neuron Fuel, Inc., a computer software company, on August 8, 2012.
We closed on an investment
of $1,190,000, plus transaction costs, in Control4 Corporation, a smart home automation company, on August 15, 2012.
We
closed on an investment of $174,000, plus transaction costs, in Palantir Technologies, Inc., a cyber-security company, on August
24, 2012.
We closed on an investment
of $500,000, plus transaction costs, in Strategic Sports Solutions, LLC, a sports analytics company, on August 31, 2012.
We
closed on an investment of $1,760,000, plus transaction costs, in Dropbox, Inc., an online storage service, on September 4, 2012.
We closed on an investment
of $1,500,000, plus transaction costs, in Whittle Schools, LLC, an affiliate of Avenues World Holdings LLC, on September 6, 2012.
We
closed on an investment of $733,493, plus transaction costs, in AlwaysOn, Inc., a social media company, on September 7, 2012.
We closed on an investment
of $1,513,750, plus transaction costs, in SugarCRM Inc., a customer relationship management company, on September 12, 2012.
The fair value, as
of September 30, 2012, of all of our portfolio investments was $217,441,538. In addition, we held $16,000,000 in two money market
funds as of September 30, 2012. We also held $26,331,482 in unrestricted cash on September 30, 2012.
Results of Operations
Comparison of the three months ended
September 30, 2012 and 2011
Investment Income
For the three months
ended September 30, 2012, we had investment income of $13,928, or $0.00 per share, which consisted of $7,063 of interest income
from our portfolio investments and $6,865 of dividend income from our money market investments.
For the three months
ended September 30, 2011, we had investment income of $53,408, or $0.02 per share, which consisted of $52,222 of interest income
from our portfolio investments and $1,186 of dividend income from our money market investments.
The decrease in investment
income for the three months ended September 30, 2012 relative to the three months ended September 30, 2011 was primarily due to
us no longer carrying fixed income investments as of September 30, 2012.
Operating Expenses
For the three months
ended September 30, 2012, we had $2,348,496 in total operating expenses consisting primarily of investment management fees and
administration fees, in addition to legal, audit and consulting fees. The investment advisory fee for the three months ended September
30, 2012, was $1,351,169, representing the base management fee as provided in our investment advisory agreement. Our base management
fee was significantly higher than during the same period in 2011 as a result of the increase in our gross assets. Costs incurred
under our administration agreement for the three months ended September 30, 2012, were $543,171. Professional fees, consisting
of legal, valuation, audit and consulting fees, were approximately $242,683 for the three months ended September 30, 2012.
For the three months
ended September 30, 2011, we had $733,496 in total operating expenses consisting primarily of legal, audit and consulting fees,
in addition to organizational expenses, investment management fees and administration fees. The investment advisory fee for the
three months ended September 30, 2011 was $233,961, representing the base management fee as provided for in our investment advisory
agreement. Costs incurred under our administration agreement for the three months ended September 30, 2011, were $192,031. Professional
fees, consisting of legal, valuation, audit and consulting fees, were approximately $152,916 for the three months ended September 30,
2011.
Net Decrease in Net Assets
For the three months
ended September 30, 2012, we had a net change in unrealized depreciation of $4,665,272, or $0.24 per share. The change in unrealized
depreciation is primarily a result of our investment in Facebook, Inc. Net investment loss was $2,334,568, or $0.12 per share,
for the three months ended September 30, 2012, resulting primarily from operating expenses incurred during the quarter. Net decrease
in net assets resulting from operations was $6,999,840, or $0.36 per share, for the three months ended September 30, 2012.
For the three months
ended September 30, 2011, we had a net change in unrealized depreciation of $494,170, or $0.14 per share. Net investment loss was
$680,088, or $0.20 per share, for the three months ended September 30, 2011. Net decrease in net assets resulting from operations
was $1,174,258, or $0.34 per share, for the three months ended September 30, 2011.
The per share figures
noted above are based on a weighted-average of 19,320,100 and 3,430,100 shares outstanding for the three months ended September
30, 2012 and 2011, respectively.
Comparison of the nine months ended
September 30, 2012 and the period from January 6, 2011 (date of inception) to September 30, 2011
As January 6, 2011
was our date of inception and April 28, 2011 was the date of our initial public offering, the period from January 6, 2011 to September
30, 2011 is not a directly comparable period to the nine months ended September 30, 2012.
Investment Income
For the nine months
ended September 30, 2012, we had investment income of $242,087, or $0.02 per share, which consisted of $222,047 of interest income
from our portfolio investments and $20,040 of dividend income from our money market investments.
For
the period from January 6, 2011 (date of inception) to September 30, 2011, we had investment income of $53,408, or $0.02 per share,
which consisted of $52,222 of interest income and $1,186 of dividend income.
Operating Expenses
For the nine months
ended September 30, 2012, we had $5,750,776 in total operating expenses consisting primarily of investment management fees and
administration fees, in addition to legal, audit and consulting fees. The investment advisory fee for the nine months ended September
30, 2012, was $3,099,186, representing the base management fee as provided in our investment advisory agreement. Our base management
fee was significantly higher than the same period in 2011 as a result of the increase in our gross assets. Costs incurred under
our administration agreement for the nine months ended September 30, 2012, were $1,490,966. Professional fees, consisting of legal,
valuation, audit and consulting fees, were approximately $597,089 for the nine months ended September 30, 2012.
For the period from
January 6, 2011 (date of inception) to September 30, 2011, we had $1,409,609 in total operating expenses primarily of investment
management fees and administration fees, in addition to legal, audit and consulting fees. The investment advisory fee for the period
from January 6, 2011 (inception) to September 30, 2011 was $384,904, representing the base fee as provided for in our investment
advisory agreement. Costs incurred under our administration agreement for the period from January 6, 2011 (inception) to September
30, 2011 were $305,066. Professional fees, consisting of legal, valuation, audit and consulting fees, were approximately $271,548
for the period from January 6, 2011 (inception) to September 30, 2011.
Net Decrease in Net Assets
For the nine months
ended September 30, 2012, we had a net change in unrealized depreciation of $5,668,589, or $0.38 per share. The change in unrealized
depreciation is primarily a result of our investment in Facebook, Inc. We had a net realized loss of $1,380,519, or $0.09 per share,
resulting primarily from our investment in PJB Fund LLC, which resulted from fluctuating share prices of Zynga, Inc. Net investment
loss was $5,508,689, or $0.37 per share, for the nine months ended September 30, 2012, resulting primarily from operating expenses
incurred during the period. Net decrease in net assets resulting from operations was $12,557,797, or $0.84 per share, for the nine
months ended September 30, 2012.
For the period from
January 6, 2011 (date of inception) to September 30, 2011, we had a net change in unrealized depreciation of $553,804, or $0.23
per share. Net investment loss was $1,356,201, or $0.55 per share, for the period from January 6, 2011 (date of inception) to September
30, 2011. Net decrease in net assets resulting from operations was $1,910,005, or $0.78 per share, for the period from January
6, 2011 (date of inception) to September 30, 2011.
The per share figures
noted above are based on a weighted-average of 15,013,896 and 2,460,565 shares outstanding for the nine months ended September
30, 2012 and for the period from January 6, 2011 (date of inception) to September 30, 2011, respectively.
Liquidity and Capital Resources
At September 30, 2012,
we had investments in 44 portfolio companies with costs totaling $224,689,927, two money market funds totaling $16,000,000 and
cash in the amount of $26,331,482.
On February 10, 2012,
we priced a follow-on equity offering of 6,900,000 shares of our common stock at an offering price of $15.00 per share. The follow-on
equity offering included the full exercise of the underwriters’ option to purchase an additional 900,000 share of our common
stock, resulting in net proceeds to GSV Capital Corp. of approximately $96.2 million. On May 11, 2012, we priced a subsequent follow-on
equity offering of 6,900,000 shares of our common stock at an offering price of $16.25 per share. The follow-on equity offering
included the full exercise of the underwriters’ option to purchase an additional 900,000 share of our common stock, resulting
in net proceeds to GSV Capital Corp. of approximately $105.4 million. Our shares are currently listed on the NASDAQ Capital Market
under the symbol ‘‘GSVC’’.
Our primary use of
cash is to make investments and to pay our operating expenses. We used substantially all of the proceeds of the offerings to invest
in portfolio companies as of September 30, 2012, except for amounts retained for purposes of funding our ongoing expenses.
Our current policy
is to maintain cash reserves in an amount sufficient to pay our operating expenses, including investment management fees, incentive
fees and costs incurred under the administration agreement, for approximately two years. For a description of the investment advisory
and administration services we receive, see ‘‘Related Party Transactions and Certain Relationships’’. We
incurred approximately $1,351,169 and $3,099,186 in investment management fees and $543,171 and $1,490,966 in costs incurred under
the administration agreement for the three and nine months ended September 30, 2012, respectively.
As of September 30,
2012, the fair value of our portfolio investments was equal to the cost of the investments, net of unrealized depreciation representing
transaction costs and any fair value adjustments. Fair value adjustments may include subsequent financing rounds, discounts due
to lack of marketability, senior management changes or any other developments that factor into our valuations. The fair value of
our investments can be expected to fluctuate in future periods due to changes in our investments and changes in the fair value
of the investments.
Off-Balance Sheet Arrangements
As of September 30,
2012, we had no off-balance sheet arrangements, including any risk management of commodity pricing or other hedging practices.
However, we may employ hedging and other risk management techniques in the future.
Distribution Policy
The timing and amount
of our dividends, if any, will be determined by our board of directors. Any dividends to our stockholders will be declared out
of assets legally available for distribution. We intend to focus on making capital gains-based investments from which we will derive
primarily capital gains. As a consequence, we do not anticipate that we will pay dividends on a quarterly basis or become a predictable
distributor of dividends, and we expect that our dividends, if any, will be much less consistent than the dividends of other business
development companies that primarily make debt investments. However, if there are earnings or realized capital gains to be distributed,
we intend to declare and pay a dividend at least annually.
We intend to elect
to be treated, and intend to qualify annually thereafter, as a RIC under Subchapter M of the Code, beginning with our 2013 taxable
year. To obtain and maintain RIC tax treatment, we must, among other things, distribute at least 90% of our ordinary income and
realized net short-term capital gains in excess of realized net long-term capital losses, if any, for each taxable year. In addition,
in order to avoid certain excise taxes imposed on RICs, we currently intend to distribute during each calendar year an amount at
least equal to the sum of (1) 98% of our ordinary income for the calendar year, (2) 98.2% of our capital gains in excess of capital
losses for the one-year period ending on October 31 of the calendar year and (3) any ordinary income and net capital gains for
preceding years that were not distributed during such years. Although we currently intend to distribute realized net capital gains
(
i.e.
, net long-term capital gains in excess of net short-term capital losses), if any, at least annually, we may in the
future decide to retain such capital gains for investment but designate the retained net capital gain as a “deemed distribution”.
If this happens, you will be treated as if you received an actual distribution of the capital gains we retain and reinvested the
net after-tax proceeds in us. You also may be eligible to claim a tax credit (or, in certain circumstances, a tax refund) equal
to your allocable share of the tax we paid on the capital gains deemed distributed to you. See ‘‘Material U.S. Federal
Income Tax Considerations.’’ There is no assurance that we will achieve results that will permit the payment of any
cash distributions and, to the extent that we issue senior securities, we will be prohibited from making distributions if doing
so causes us to fail to maintain the asset coverage ratios stipulated by the 1940 Act or if distributions are limited by the terms
of any of our borrowings.
Our current intention
is to make any distributions out of assets legally available therefrom in additional shares of our common stock under our dividend
reinvestment plan, unless you elect to receive your dividends and/or long-term capital gains distributions in cash. Under the dividend
reinvestment plan, if a stockholder owns shares of common stock registered in its own name, the stockholder will have all cash
distributions (net of any withholding) automatically reinvested in additional shares of common stock unless the stockholder opts
out of our dividend reinvestment plan by delivering a written notice to our dividend paying agent prior to the record date of the
next dividend or distribution. See ‘‘Dividend Reinvestment Plan.’’ Any distributions reinvested under the
plan will nevertheless remain taxable to the U.S. stockholder, although no cash distribution has been made. As a result, if you
do not elect to opt out of the dividend reinvestment plan, you will be required to pay applicable federal, state and local taxes
on any reinvested dividends even though you will not receive a corresponding cash distribution. In addition, reinvested dividends
have the effect of increasing our gross assets, which may correspondingly increase the management fee payable to our investment
adviser. If you hold shares in the name of a broker or financial intermediary, you should contact the broker or financial intermediary
regarding your election to receive distributions in cash.
Borrowings
We had no borrowings
outstanding as of September 30, 2012.
Related Party Transactions
We entered into an
investment advisory agreement with GSV Asset Management (the ‘‘Advisory Agreement’’) in connection with
our initial public offering. Pursuant to the Advisory Agreement, GSV Asset Management will be paid a base annual fee of 2.00% of
gross assets, and an annual incentive fee equal to the lesser of (i) 20% of the GSV Capital’s realized capital gains during
each calendar year, if any, calculated on an investment-by-investment basis, subject to a non-compounded preferred return, or ‘‘hurdle,’’
and a ‘‘catch-up’’ feature, and (ii) 20% of the GSV Capital’s realized capital gains, if any, on
a cumulative basis from inception through the end of each calendar year, 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. GSV Asset Management
earned $1,351,169 and $3,099,186 in base management fees and $0 in incentive fees for the three and nine months ended September
30, 2012, respectively.
As of September 30,
2012, we were owed $3,315 from GSV Asset Management for reimbursement of expenses paid for by us that were the responsibility of
GSV Asset Management.
In addition as of September
30, 2012, we owed GSV Asset Management $41,197 for reimbursement of travel-related and other expenses. We owed certain officers
and directors $917 in reimbursements for travel-related and other expenses.
We entered into an
Administration Agreement with GSV Capital Service Company (the ‘‘Administration Agreement’’) to provide
administrative services, including furnishing us with office facilities, equipment, clerical, bookkeeping services and other administrative
services, in connection with our initial public offering. We reimburse GSV Capital Service Company an allocable portion of overhead
and other expenses in performing its obligations under the Administration Agreement. There were $543,171 and $1,490,966 in such
costs incurred under the Administration Agreement for the three and nine months ended September 30, 2012, respectively.
We also adopted a Code
of Ethics which applies to, among others, our senior officers, including our Chief Executive Officer and Chief Financial Officer,
as well as all of our officers, directors and employees. Our Code of Ethics requires that all employees and directors avoid any
conflict, or the appearance of a conflict, between an individual’s personal interests and our interests. Pursuant to our
Code of Ethics, each employee and director must disclose any conflicts of interest, or actions or relationships that might give
rise to a conflict, to our Chief Compliance Officer. Our board of directors is charged with approving any waivers under our Code
of Ethics. As required by the NASDAQ corporate governance listing standards, the Audit Committee of our board of directors is also
required to review and approve any transactions with related parties (as such term is defined in Item 404 of Regulation S-K).
In April 2012, in connection
with our investment in Top Hat, Inc., Cherry Tree & Associates, LLC, an investment banking firm, received a fee of approximately
$259,000 for its representation of Top Hat, Inc. Mark Moe, who is the brother of our Chief Executive Officer, Michael Moe, presently
serves as a Managing Director of Cherry Tree & Associates, LLC, and may therefore be deemed to have an indirect material interest
in such transaction.
Critical Accounting Policies
Valuation of Investments at Fair
Value
We carry our investments
at fair value, as determined in good faith by our board of directors, in accordance with GAAP. Fair value is the price that one
would receive upon selling an investment or pay to transfer a liability in an orderly transaction between market participants at
the measurement date in the principal or most advantageous market for the investment or liability. GAAP emphasizes that valuation
techniques should maximize the use of observable market inputs and minimize the use of unobservable inputs. Observable inputs are
based on market data obtained from sources independent of the entity and should not be limited to information that is only available
to the entity making the fair value determination, or to a small group of users. Observable market inputs should be readily available
to participants in that market. In addition, observable market inputs should include a level of transparency that is reliable and
verifiable.
GAAP fair value measurement
guidance classifies the inputs used to measure these fair values into the following hierarchy:
Level 1.
Financial
assets and liabilities whose values are based on unadjusted quoted prices for identical assets or liabilities in an active market
that we have the ability to access.
Level 2.
Financial
assets and liabilities whose values are based on quoted prices in markets that are not active or model inputs that are observable
either directly or indirectly for substantially the full term of the asset or liability. Level 2 inputs include the following:
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a)
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Quoted prices for similar assets or liabilities in active markets;
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b)
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Quoted prices for identical or similar assets or liabilities in non-active markets;
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c)
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Pricing models whose inputs are observable for substantially the full term of the asset or liability;
and
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d)
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Pricing models whose inputs are derived principally from or corroborated by observable market data
through correlation or other means for substantially the full term of the asset or liability.
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Level 3.
Financial
assets and liabilities whose values are based on prices or valuation techniques that require inputs that are both unobservable
and significant to the overall fair value measurement. These inputs reflect management’s own assumptions about the assumptions
a market participant would use in pricing the asset or liability.
An asset’s categorization
within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement.
Securities that are
publicly traded are generally valued at the close price on the valuation date; however, if they remain subject to lock-up restrictions
they are discounted accordingly. Securities that are not publicly traded or for which there are no readily available market quotations
are valued at fair value as determined in good faith by our board of directors.
In connection with
that determination, portfolio company valuations are prepared using the most currently available data. As appropriate, we obtain
updates on each portfolio company’s financial performance, including information such as economic and industry trends, new
product development, and other operational issues.
In making our good
faith determination of the fair value of investments, we consider valuation methodologies consistent with industry practice, including
but not limited to (i) publicly available information regarding the valuation of the securities based on recent sales in comparable
transactions of private companies, (ii) when management believes there are comparable companies that are publicly traded, a review
of these publicly traded companies and applicable market multiples of their equity securities and, (iii) an income approach that
estimates value based on the expectation of future cash flows that an asset or business will generate.
We engage independent
valuation firms to perform valuations of our investments that are not publicly traded or for which there are no readily available
market quotations. We also engage independent valuation firms to perform valuations of any securities that trade on private secondary
markets, but are not otherwise publicly traded, where there is a lack of appreciable trading or a wide disparity in recently reported
trades. We consider the independent valuations, among other factors, in making our fair value determinations.
U.S. Federal and State Income Taxes
The Company
was taxed as a regular corporation (a “C corporation”) under subchapter C of the Internal Revenue Code of 1986,
as amended, for its 2011 taxable year and will continue to be taxed as such for its 2012 taxable year, and uses the liability
method of accounting for income taxes. Deferred tax assets and liabilities are recorded for temporary differences between the
tax basis of assets and liabilities and their reported amounts in the consolidated financial statements, using statutory
tax rates in effect for the year in which the temporary differences are expected to reverse. A valuation allowance is
provided against deferred tax assets when it is more likely than not that some portion or all of the deferred tax assets will
not be realized.
Beginning with
its 2013 taxable year, the Company intends to elect to be treated as a regulated investment company (“RIC”)
under subchapter M of the Internal Revenue Code of 1986, as amended, and intends to operate in a manner so as to qualify for
the tax treatment applicable to RICs. In order to qualify as a RIC, among other things, the Company is required to
distribute to its stockholders on a timely basis at least 90% of investment company taxable income, as defined by the Code,
for each year. So long as the Company maintains its status as a RIC, it generally will not pay corporate-level U.S. federal
and state income taxes on any ordinary income or capital gains that it distributes at least annually to its stockholders
as dividends. Rather, any tax liability related to income earned by the Company will represent obligations of
the Company’s investors and will not be reflected in the consolidated financial statements of the Company.
The Company evaluates
tax positions taken or expected to be taken in the course of preparing its consolidated financial statements to determine whether
the tax positions are “more-likely-than-not” of being sustained by the applicable tax authority. The Company recognizes
the tax benefits of uncertain tax positions only where the position has met the “more-likely-than-not” threshold. The
Company classifies penalties and interest associated with income taxes, if any, as income tax expense. Conclusions regarding tax
positions are subject to review and may be adjusted at a later date based on factors including, but not limited to, ongoing analyses
of tax laws, regulations and interpretations thereof. The Company did not have any unrecognized tax benefits as of the period presented
herein. The Company identified its major tax jurisdictions as U.S. federal and California, and is not aware of any tax positions
for which it is reasonably possible that the total amount of unrecognized tax benefits will change materially in the next 12 months.
Recently Adopted Accounting Standards
In May 2011, the Financial
Accounting Standards Board (‘‘FASB’’) issued guidance clarifying how to measure and disclose fair value.
This guidance amends the application of the ‘‘highest and best use’’ concept to be used only in the measurement
of fair value of nonfinancial assets, clarifies that the measurement of the fair value of equity-classified financial instruments
should be performed from the perspective of a market participant who holds the instrument as an asset, clarifies that an entity
that manages a group of financial assets and liabilities on the basis of its net risk exposure can measure those financial instruments
on the basis of its net exposure to those risks, and clarifies when premiums and discounts should be taken into account when measuring
fair value. The fair value disclosure requirements also were amended. This accounting standard is effective prospectively for interim
and annual reporting periods beginning after December 15, 2011. The adoption of this guidance did not have a significant impact
on our financial condition, results of operations or cash flows.
Recent Developments
Subsequent
to September 30, 2012, the Company closed on investments of $4.7 million, plus transaction costs as follows:
The
Company closed on an investment of $3,000,000, plus transaction costs, in Parchment, Inc., an education data company, on October
1, 2012.
The Company closed on an investment of $270,000,
plus transaction costs, in Palantir Technologies, Inc., a cyber-security company, on October 17, 2012.
The Company closed
on an investment of $735,000, plus transaction costs, in Control4 Corporation, a smart home automation company, on October 19,
2012.
The
Company closed on an investment of $500,000, plus transaction costs, in Ozy Media, Inc., a social media company, on November 2,
2012.
The
Company closed on an investment of $150,000, plus transaction costs, in Top Hat 430, Inc., an internet commerce company, on November
2, 2012.