Notes to Financial Statements
September 30, 2016
(Unaudited)
Note 1 - Description of Business
Crossroads Capital,
Inc. (the "Company"), formerly known as BDCA Venture, Inc., was incorporated on May 9, 2008 under the laws of the
State of Maryland and is an internally managed, non-diversified, closed-end management investment company that has elected to be
regulated as a business development company ("BDC") under the Investment Company Act of 1940, as amended (the "1940
Act"). Effective December 2, 2015, the Company changed its name from BDCA Venture, Inc. to Crossroads Capital, Inc. Effective
January 1, 2010, the Company elected to be treated for U.S. federal income tax purposes as a regulated investment company ("RIC")
under Subchapter M of the Internal Revenue Code of 1986, as amended (the "Code"). The Company commenced its portfolio
company investment activities in January 2010. The shares of the Company's common stock have been listed on the Nasdaq Capital
Market since December 12, 2011.
On October 5, 2015,
the Company’s Board of Directors (the “Board”) determined that the Company will no longer make investments in
new portfolio companies and will focus on the orderly monetization of the Company’s current holdings.
Effective January
20, 2016, the Board changed the Company’s investment objective to preserve capital and maximize stockholder value (the “Investment
Objective”) by pursuing the sale of the Company’s portfolio investments, limiting expenses and deploying surplus cash
as appropriate, including into yielding investments to offset, in part, operating expenses.
On March 25, 2016,
the Board resolved to monetize the Company’s portfolio holdings at the earliest practicable date and on May 3, 2016, approved
a Plan of Liquidation (the “Plan”) pursuant to which the Company plans to convert into a liquidating trust with the
sole purpose of liquidating the Company’s assets and distributing the proceeds to the Company’s stockholders. The Plan
is subject to the approval of the stockholders, which the Board intends to seek at a special meeting called for the purpose of
approving the Plan and certain related matters as detailed in the preliminary proxy statement filed with the U.S. Securities and
Exchange Commission (the “SEC”) on May 5, 2016, which was subsequently amended on June 27, 2016. The Board has not
yet set the date for the special meeting. Prior to its approval by the stockholders and conversion into the liquidating trust,
the Board reserves the right to consider additional strategic alternatives.
On August 24, 2016,
as part of this strategy to liquidate the Company, the Company announced the engagement of Setter Capital, Inc., a Toronto-based
secondary market advisory firm, to assist it in identifying prospective buyers for its portfolio investments.
The Board cannot estimate
the expected value that the liquidating trust could receive from the monetization of the Company’s portfolio investments
or the expected proceeds, if any, from the sale of the Company’s investments and it is possible that the final liquidation
value or the proceeds received in a secondary market sale of the Company’s portfolio investments may be less than the value
or proceeds an investor might receive from pursuing a strategy of holding such investments through any potential initial public
offering or other sale or liquidity event.
On October 5, 2015,
the Board approved the termination of the Investment Advisory and Administrative Services Agreement dated July 1, 2014 (the "Investment
Advisory Agreement") between the Company and its former investment adviser, BDCA Venture Adviser, LLC. The effective date
of termination of the Investment Advisory Agreement was December 6, 2015 (the "Termination Date").
On November 10, 2015,
the Board approved the Company’s engagement of US Bancorp Fund Services, LLC ("US Bancorp") to provide administration
and accounting services. On May 3, 2016, the Board announced the termination of its agreement with US Bancorp, which was effective
as of March 29, 2016.
On November 13, 2015,
the Board approved the engagement of 1100 Capital Consulting, LLC (the “Administrator”) to provide administrative consulting
services to the Company, including the provision of personnel to act as certain of the Company’s executive officers, including the
Chief Executive Officer and Chief Financial Officer.
Effective December
2, 2015, the Board appointed Ben H. Harris to serve as the Company’s Chief Executive Officer and President, David M. Hadani
to serve as the Company’s Chief Financial Officer, Treasurer and Secretary, both officers of the Administrator, and Stephanie
L. Darling to serve as the Company’s Chief Compliance Officer.
On June 30, 2016,
the Board appointed Phillip Goldstein to serve on the Board to fill a vacancy created by the resignation of Richard Cohen. Mr.
Cohen’s resignation was not the result of any disagreement with the Company or any matters relating to the Company's operations,
policies or practices.
Crossroads Capital, Inc.
Notes to Financial Statements
September 30, 2016
(Unaudited)
The Company has entered
into agreements with MidFirst Bank to be the custodian of its portfolio securities and Frontier Bank to be the custodian of the
majority of its cash and cash equivalent assets.
Note 2 - Summary of Significant Accounting
Policies
Basis of Presentation
The accompanying interim
financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America,
("U.S. GAAP") for interim financial information and pursuant to the requirements for reporting on Form 10-Q and Regulation
S-X. In the opinion of management, all adjustments, all of which were of a normal recurring nature, considered necessary for the
fair presentation of financial statements for the interim period, have been included. The results of operations for the current
period are not necessarily indicative of results that ultimately may be achieved for any other interim period or for the year ending
December 31, 2016. The interim unaudited financial statements and notes hereto should be read in conjunction with the audited financial
statements and notes thereto contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2015.
The Company follows the accounting and reporting guidelines in Financial Accounting Standards Board ("FASB"), Accounting
Standards Codification Topic 946, "Financial Services—Investment Companies”.
The preparation of
financial statements in conformity with U.S. GAAP requires the Company’s management to make estimates and assumptions that
affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of income
and expenses during the reported period.
Valuation of Investments
The Company’s
investments consist of securities issued by private or publicly traded companies consisting of preferred stock, common stock, convertible
notes, secured notes and warrants to purchase preferred stock which are included on the Company's Schedule of Investments.
Investments are stated
at value as defined under the 1940 Act, in accordance with the applicable regulations of the SEC, and in accordance with FASB,
Accounting Standards Codification Topic 820, "Fair Value Measurement and Disclosures," ("ASC 820"). Value,
as defined in Section 2(a)(41) of the 1940 Act, is: (i) the market price for those securities for which a market quotation is readily
available, and (ii) the fair value as determined in good faith by, or under the direction of, the Board of Directors for all other
assets. See Note 3 - Portfolio Investments and Fair Value. The 1940 Act requires periodic valuation of each investment in the Company’s
portfolio to determine the Company’s net asset value. Under the 1940 Act, unrestricted securities with readily available
market quotations are to be valued at the closing market price on the valuation date; all other assets must be valued at fair value
as determined in good faith by or under the direction of the Board of Directors.
Given the nature of
investing in the securities of private companies, the Company’s investments are generally considered Level 3 assets under
ASC 820 until these portfolio companies become public and begin trading on a stock exchange and the securities are no longer subject
to any post-initial public offering lockup restrictions. As such, the Company values all of its investments, other than unrestricted
securities in publicly traded portfolio companies, at fair value as determined in good faith by the Company’s Board of Directors,
pursuant to a consistent valuation policy in accordance with the provisions of ASC 820 and the 1940 Act.
Determination of fair
value involves subjective judgments and estimates. Due to the inherent uncertainty in determining the fair value of investments
that do not have a readily available market value, the fair value of the Company’s investments determined in good faith by
its Board of Directors may differ significantly from the value that would have been used had a ready market existed for such investments
and the differences could be material. Changes in fair value of these investments are recorded in the Company’s Statement
of Operations as "Net change in unrealized appreciation (depreciation)."
The Company has a
lead valuation director, who is a non-interested member of the Board and acts as the liaison between the Board and the Company’s
management for valuing the Company's investments. With respect to investments for which market quotations are not readily available,
the Board undertakes a multi-step valuation process each quarter, as described below:
|
·
|
On a quarterly basis, each portfolio company will be analyzed based on the portfolio company’s
most recently available historical and projected financial results, public market comparables, equity or other transactions and
other factors.
|
Crossroads Capital, Inc.
Notes to Financial Statements
September 30, 2016
(Unaudited)
|
·
|
The Company’s management or an independent valuation firm, if involved, will conduct appraisals and make an assessment
of the fair value of each investment, which will be used in deriving a preliminary valuation.
|
|
·
|
The Company's lead valuation director will review and discuss the preliminary valuations with the Company’s management
and the assistance of the independent valuation firm, if any.
|
|
·
|
The Board will discuss the valuations and determine, in good faith, the fair value of each investment in the portfolio for
which market quotations are not readily available based on the input of the Company’s management, the independent valuation
firm, if any, and the lead valuation director.
|
For the September
30, 2016 valuation of the Company’s portfolio investments that are not publicly traded, the Administrator assisted the Board
in its determination of the value of each of the investments in the Company’s portfolio and no independent valuation firm
was engaged for the quarterly valuation process.
ASC 820 defines fair
value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market
participants at the measurement date (exit price). In accordance with ASC 820, the Company uses a three-tier fair value hierarchy,
which prioritizes the inputs used in measuring fair value as follows:
|
·
|
Level 1: Unadjusted quoted prices in active markets for identical assets or liabilities that the Company has the ability to
access;
|
|
·
|
Level 2: Observable inputs other than quoted prices included in level 1 that are observable for
the asset or liability either directly or indirectly. These inputs may include quoted prices for the identical instrument on an
inactive market, prices for similar instruments, interest rates, prepayment speeds, credit risk, yield curves, default rates, and
similar data; and
|
|
·
|
Level 3: Unobservable inputs for the asset or liability to the extent that relevant observable
inputs are not available, representing the Company's own assumptions about the assumptions that a market participant would use
in valuing the asset or liability, and that would be based on the best information available.
|
In instances where
the determination of the fair value measurement is based on inputs from different levels of the fair value hierarchy, the level
in the fair value hierarchy within which the entire fair value measurement falls is based on the lowest level input that is significant
to the fair value measurement in its entirety.
The Company applies
the framework for determining fair value as described above to the valuation of investments in each of the following categories:
Equity Investments
Equity investments
for which market quotations are readily available in an active market are generally valued at the most recently available closing
market prices and are classified as Level 1 assets. However, equity investments for which market quotations are readily available,
but which are subject to lockup provisions restricting the resale of such investments for a specified period of time, are valued
at a discount to the most recently available closing market prices and, accordingly, are classified as Level 3 assets.
The fair values of
the Company’s equity investments for which market quotations are not readily available are determined based on various factors
and are classified as Level 3 assets. To determine the fair value of a portfolio company for which market quotations are not readily
available, the Company may analyze the portfolio company’s most recently available historical and projected financial results,
public market comparables and other factors. The Company may also consider other events, including the transaction in which the
Company acquired its securities, subsequent equity sales by the portfolio company, mergers or acquisitions affecting the portfolio
company or the completion of an initial public offering ("IPO") by the portfolio company. In addition, the Company may
consider the trends of the portfolio company’s basic financial metrics from the time of its original investment until the
measurement date, with material improvement of these metrics indicating a possible increase in fair value, while material deterioration
of these metrics may indicate a possible reduction in fair value. The fair values of the Company’s portfolio company securities
are generally discounted for lack of marketability or when the securities are illiquid. See Note 3 - Portfolio Investments and
Fair Value.
In cases where a portfolio
company completes a subsequent financing with different rights and preferences than the equity securities the Company holds, or
where the Company owns common stock in a portfolio company with preferred stock outstanding or where a merger or acquisition event
involving a portfolio company has been completed or is pending, the Company may consider the aforementioned transaction to estimate
the portfolio company's equity value.
Crossroads Capital, Inc.
Notes to Financial Statements
September 30, 2016
(Unaudited)
In determining the
value of equity or equity-linked securities (including warrants to purchase common or preferred stock) in a portfolio company,
the Company considers the rights, preferences and limitations of such securities. In cases where a portfolio company's capital
structure includes multiple classes of preferred and common stock and equity-linked securities with different rights and preferences,
the Company may use an option pricing model or another appropriate method to allocate value to each equity and equity-linked security.
Debt Investments
Given the nature of
the Company’s current debt investments, principally convertible bridge notes issued by venture capital-backed portfolio companies,
these investments are Level 3 assets under ASC 820 because there is no known or accessible market for these investment securities
to be traded or exchanged. Since the Company invested in convertible bridge notes for the primary purpose of potential conversion
into equity at a future date, the fair value of the Company’s convertible debt investments for which market quotations are
not available may be determined on an as-converted to equity basis using the same factors and methodologies the Company uses to
value its equity investments. In making a good faith determination of the value of its convertible debt investments, the Company
generally starts with the cost basis of the investment, which includes the value attributed to the original issue discount, if
any, and payment-in-kind ("PIK") interest which has been accreted to principal as earned.
If the Company determines
that there is a low likelihood that its convertible debt investments will be converted into equity or repaid, the Company applies
a procedure that assumes a sale of the investment in a hypothetical market to a hypothetical market participant where buyers and
sellers are willing participants. The hypothetical market does not include scenarios where the underlying security was simply repaid
or extinguished, but includes an exit concept. As part of this process, the Company may evaluate the creditworthiness of the portfolio
company, its ability to meet its current debt obligations, the collateral (if any) for recoverability of the debt investment in
the event of default and whether the security lien, if any, is subordinated to senior lenders.
Funds Held in Escrow from Sale of Investments
Funds held in escrow
from the sale of investments ("Escrowed Funds") are valued at fair value by the Company's Board using certain indemnity
risk and deferred payment discounts applied to the amounts withheld.
Interest and Dividend Income
Interest income from
certificates of deposit and other short-term investments is recorded on an accrual basis to the extent such amounts are expected
to be collected and accrued interest income is evaluated periodically for collectability. PIK interest represents contractually
deferred interest computed at a contractual rate specified in the loan agreement. PIK interest may be prepaid by either contract
or the portfolio company’s election, but generally is paid at the end of the loan term. PIK interest is added to the principal
balance of the loan and is generally recorded as interest income on an accrual basis to the extent such PIK interest is expected
to be collected. The Company recorded PIK interest income of $12,190 and $10,139 during the three months ended September 30, 2016
and 2015, respectively. The Company recorded PIK interest income of $34,144 and $29,344 during the nine months ended September
30, 2016 and 2015, respectively. See "Income Taxes" below.
When one of the Company’s
loans becomes more than 90 days past due, or if the Company otherwise does not expect the portfolio company to be able to service
its debt and other obligations, the Company will, as a general matter, place the loan on non-accrual status and generally will
cease recognizing interest income on that loan until all principal and interest has been brought current through payment or due
to a restructuring such that the interest income is deemed to be collectible. However, the Company may make exceptions to this
policy if the loan has sufficient collateral value and is in the process of collection. If the fair value of a loan is below cost,
the Company may cease recognizing PIK interest on the debt investment until such time that the fair value equals or exceeds cost.
Net Realized Gain or Loss and Unrealized
Appreciation or Depreciation
Net realized gain
or loss is recognized when a portfolio company investment or other financial asset is disposed of and is computed as the difference
between the Company's cost basis in such investment or asset at the disposition date and the net proceeds received from such disposition
(after reduction for commissions and other selling expenses). Net realized gains and losses on transactions involving portfolio
company investments and other financial assets are determined by specific identification. Unrealized appreciation or depreciation
is computed as the difference between the fair value of the portfolio company investment or other financial asset and the cost
basis of such investment or asset.
Crossroads Capital, Inc.
Notes to Financial Statements
September 30, 2016
(Unaudited)
Income Taxes
Effective January
1, 2010, the Company elected to be treated for tax purposes as a RIC under the Code. To maintain RIC tax treatment, the Company
must meet specified source-of-income and asset diversification requirements and distribute annually at least 90% of its "investment
company taxable income" as defined in the Code.
Due to the Company's
limited number of investments, it closely monitors its asset composition in order to continue to satisfy the asset diversification
test and maintain its status as a RIC. To maintain its status as a RIC, in addition to other requirements, as of the close of each
quarter end, the Company must meet the asset diversification test, which requires that at least 50% of the value of its assets
consist of cash, cash items, U.S. government securities or certain other qualified securities (the "50% Threshold").
However, the failure to meet the 50% Threshold alone will not necessarily result in the Company's loss of RIC status. In circumstances
where the failure to meet the 50% Threshold is the result of fluctuations in the value of the Company's assets, including as a
result of the sale of assets, the Company will still be deemed to have satisfied the 50% Threshold and, therefore, maintain its
RIC status, provided that the Company has not made any new investments in non-qualifying securities, including additional investments
in non-qualifying securities of existing portfolio companies, since the time that the Company fell below the 50% Threshold. The
Company satisfied the diversification requirement as of September 30, 2016.
As a RIC, the Company
generally will not have to pay corporate-level federal income taxes on any investment company taxable income or any realized net
capital gains that the Company distributes to its stockholders as dividends. Taxable income generally differs from net income for
financial reporting purposes due to temporary and permanent differences in the recognition of income and expenses. In addition,
taxable income generally excludes any unrealized appreciation or depreciation.
The Company is not
required to distribute its realized net capital gains, if any, to stockholders to maintain RIC tax treatment. However, the Company
generally will have to pay corporate-level federal income taxes on any realized net capital gains that the Company does not distribute
to its stockholders. In the event the Company retains any of its realized net capital gains, the Company may designate the retained
amount as a deemed distribution to stockholders and will be required to pay corporate-level tax on the retained amount.
The Company would
also be subject to certain nondeductible federal excise taxes imposed on RICs if it fails to distribute during each calendar year
an amount at least equal to the sum of: (i) 98% of its ordinary income for the calendar year, (ii) 98.2% of its capital gains in
excess of capital losses for the calendar year, if any, and (iii) any recognized and undistributed income from prior years for
which it paid no federal income taxes. The Company will not be subject to this excise tax on amounts on which the Company is required
to pay corporate income tax.
Dividends and Distributions
Dividends and distributions
to common stockholders must be approved by the Company’s Board and any dividend payable is recorded on the ex-dividend date.
The Company may fund
cash dividends and distributions to stockholders from any sources of funds available to the Company. The Company has not established
limits on the amount of funds it may use from available sources to make dividends or distributions. See Note 7 - Dividends and
Distributions.
Recently Issued Accounting Pronouncements
From time to time,
new accounting pronouncements are issued by FASB or other standards setting bodies that are adopted by the Company as of the specified
effective date. Unless otherwise discussed, the Company believes that the impact of recently issued standards that are not yet
effective will not have a material impact on its financial statements upon adoption.
Crossroads Capital, Inc.
Notes to Financial Statements
September 30, 2016
(Unaudited)
Note 3 - Portfolio Investments and Fair
Value
The following table summarizes the composition
of the Company’s portfolio company investments by type of security and Escrowed Funds at cost and fair value as of September
30, 2016 and December 31, 2015.
|
|
September 30, 2016
|
|
|
December 31, 2015
|
|
Security Type
|
|
Cost
|
|
|
Fair Value
|
|
|
Percentage
of Portfolio
|
|
|
Cost
|
|
|
Fair Value
|
|
|
Percentage
of Portfolio
|
|
Privately Held Portfolio Companies:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred Stock
|
|
$
|
27,627,276
|
|
|
$
|
16,655,000
|
|
|
|
94.90
|
%
|
|
$
|
32,937,524
|
|
|
$
|
32,976,000
|
|
|
|
93.06
|
%
|
Preferred Stock Warrants
|
|
|
—
|
|
|
|
450,000
|
|
|
|
2.56
|
%
|
|
|
—
|
|
|
|
420,000
|
|
|
|
1.19
|
%
|
Common Stock
|
|
|
10,333,392
|
|
|
|
170,000
|
|
|
|
0.97
|
%
|
|
|
6,088,558
|
|
|
|
80,000
|
|
|
|
0.23
|
%
|
Convertible Notes
|
|
|
288,374
|
|
|
|
40,000
|
|
|
|
0.23
|
%
|
|
|
265,929
|
|
|
|
530,000
|
|
|
|
1.50
|
%
|
Secured Notes
|
|
|
163,917
|
|
|
|
151,381
|
|
|
|
0.86
|
%
|
|
|
121,759
|
|
|
|
121,759
|
|
|
|
0.34
|
%
|
Subtotal - Privately Held Portfolio Companies
|
|
|
38,412,959
|
|
|
|
17,466,381
|
|
|
|
99.52
|
%
|
|
|
39,413,770
|
|
|
|
34,127,759
|
|
|
|
96.32
|
%
|
Publicly Traded Portfolio Companies:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
%
|
|
|
1,999,997
|
|
|
|
617,998
|
|
|
|
1.74
|
%
|
Total Portfolio Company Investments
|
|
|
38,412,959
|
|
|
|
17,466,381
|
|
|
|
99.52
|
%
|
|
|
41,413,767
|
|
|
|
34,745,757
|
|
|
|
98.06
|
%
|
Funds Held in Escrow from Sale of Investment
|
|
|
97,117
|
|
|
|
83,485
|
|
|
|
0.48
|
%
|
|
|
704,101
|
|
|
|
688,082
|
|
|
|
1.94
|
%
|
Total Portfolio Company Financial Assets
|
|
$
|
38,510,076
|
|
|
$
|
17,549,866
|
|
|
|
100.00
|
%
|
|
$
|
42,117,868
|
|
|
$
|
35,433,839
|
|
|
|
100.00
|
%
|
Fair Value of Investments
The following table
categorizes the Company’s portfolio company investments, money market funds and Escrowed Funds measured at fair value based
upon the lowest level of significant input used in the valuation of such assets as of September 30, 2016 and December 31,
2015:
Description
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
Fair Value
|
|
As of September 30, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Privately Held Portfolio Company Securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred Stock
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
16,655,000
|
|
|
$
|
16,655,000
|
|
Preferred Stock Warrants
|
|
|
—
|
|
|
|
—
|
|
|
|
450,000
|
|
|
|
450,000
|
|
Common Stock
|
|
|
—
|
|
|
|
—
|
|
|
|
170,000
|
|
|
|
170,000
|
|
Convertible Notes
|
|
|
—
|
|
|
|
—
|
|
|
|
40,000
|
|
|
|
40,000
|
|
Secured Notes
|
|
|
—
|
|
|
|
—
|
|
|
|
151,381
|
|
|
|
151,381
|
|
Cash Equivalents:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money Market Funds
|
|
|
12,782
|
|
|
|
—
|
|
|
|
—
|
|
|
|
12,782
|
|
Funds Held in Escrow From Sale of Investment
|
|
|
—
|
|
|
|
—
|
|
|
|
83,485
|
|
|
|
83,485
|
|
Total
|
|
$
|
12,782
|
|
|
$
|
—
|
|
|
$
|
17,549,866
|
|
|
$
|
17,562,648
|
|
Crossroads Capital, Inc.
Notes to Financial Statements
September 30, 2016
(Unaudited)
Description
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total Fair Value
|
|
As of December 31, 2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Privately Held Portfolio Company Securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred Stock
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
32,976,000
|
|
|
$
|
32,976,000
|
|
Preferred Stock Warrants
|
|
|
—
|
|
|
|
—
|
|
|
|
420,000
|
|
|
|
420,000
|
|
Common Stock
|
|
|
—
|
|
|
|
—
|
|
|
|
80,000
|
|
|
|
80,000
|
|
Convertible Notes
|
|
|
—
|
|
|
|
—
|
|
|
|
530,000
|
|
|
|
530,000
|
|
Secured Notes
|
|
|
—
|
|
|
|
—
|
|
|
|
121,759
|
|
|
|
121,759
|
|
Publicly Traded Portfolio Company Securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock
|
|
|
617,998
|
|
|
|
—
|
|
|
|
—
|
|
|
|
617,998
|
|
Cash Equivalents:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money Market Funds
|
|
|
435,882
|
|
|
|
—
|
|
|
|
—
|
|
|
|
435,882
|
|
Funds Held in Escrow From Sale of Investment
|
|
|
—
|
|
|
|
—
|
|
|
|
688,082
|
|
|
|
688,082
|
|
Total
|
|
$
|
1,053,880
|
|
|
$
|
—
|
|
|
$
|
34,815,841
|
|
|
$
|
35,869,721
|
|
The following table
provides a reconciliation of the changes in fair value for the Company’s portfolio company investments and Escrowed Funds
measured at fair value using significant unobservable inputs (Level 3) for the nine months ended September 30, 2016:
|
|
Level
3
Preferred
Stock
|
|
|
Level
3
Preferred
Stock
Warrants
|
|
|
Level
3
Common
Stock
|
|
|
Level
3
Convertible
Notes
|
|
|
Level
3
Secured Notes
|
|
|
Level
3
Funds Held in
Escrow
|
|
|
Total
|
|
Fair Value as of December 31, 2015
|
|
$
|
32,976,000
|
|
|
$
|
420,000
|
|
|
$
|
80,000
|
|
|
$
|
530,000
|
|
|
$
|
121,759
|
|
|
$
|
688,082
|
|
|
$
|
34,815,841
|
|
Purchases and other adjustments to cost of Level
3 portfolio company investments
(1)
|
|
|
244,039
|
|
|
|
—
|
|
|
|
—
|
|
|
|
22,445
|
|
|
|
42,159
|
|
|
|
(606,984
|
)
|
|
|
(298,342
|
)
|
Sale, exchange or conversion of Level 3 portfolio
company investments
(2)
|
|
|
(3,515,000
|
)
|
|
|
—
|
|
|
|
3,515,000
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Gross
transfers out of Level 3 to
Level
1
(2)
|
|
|
—
|
|
|
|
—
|
|
|
|
(181,990
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(181,990
|
)
|
Total net realized gains
(losses) and net change in unrealized appreciation (depreciation)
|
|
|
(13,050,039
|
)
|
|
|
30,000
|
|
|
|
(3,243,010
|
)
|
|
|
(512,445
|
)
|
|
|
(12,537
|
)
|
|
|
2,387
|
|
|
|
(16,785,644
|
)
|
Fair Value as of September
30, 2016
|
|
$
|
16,655,000
|
|
|
$
|
450,000
|
|
|
$
|
170,000
|
|
|
$
|
40,000
|
|
|
$
|
151,381
|
|
|
$
|
83,485
|
|
|
$
|
17,549,866
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net change in unrealized
appreciation (depreciation) on Level 3 portfolio company investments held as of September 30, 2016
|
|
$
|
(13,050,039
|
)
|
|
$
|
30,000
|
|
|
$
|
(3,243,010
|
)
|
|
$
|
(512,445
|
)
|
|
$
|
(12,537
|
)
|
|
$
|
2,387
|
|
|
$
|
(16,785,644
|
)
|
(1)
Purchases and other adjustments to cost of Level 3 portfolio company investments include purchases of new investments at cost and
payment-in kind interest accreted to principal.
(2)
Exchanges, conversions and transfers out of Level 3 portfolio company investments and Escrowed Funds are reflected at cost if originally
acquired during the period or at the fair value as of the beginning of the period if originally acquired before the beginning of
the period. Sales of Level 3 portfolio company investments and settlement of Escrowed Funds are reflected at the net proceeds from
such sale or settlement.
During the nine months
ended September 30, 2016, the transfers out of Level 3 to Level 1 were the result of the exchange of a portion the Company’s
shares of Series F preferred stock and Series D preferred stock held in Suniva, Inc. for shares of Shunfeng International Clean
Energy Limited, a Hong Kong Stock Exchange-listed company ("SFCE") common stock.
The following table
provides a reconciliation of the changes in fair value for the Company’s portfolio company investments and Escrowed Funds
measured at fair value using significant unobservable inputs (Level 3) for the year ended December 31, 2015:
Crossroads Capital, Inc.
Notes to Financial Statements
September 30, 2016
(Unaudited)
|
|
Level
3
Preferred
Stock
|
|
|
Level
3
Preferred
Stock
Warrants
|
|
|
Level
3
Common
Stock
|
|
|
Level
3
Convertible
Notes
|
|
|
Level
3
Secured Notes
|
|
|
Level
3
Funds Held in
Escrow
|
|
|
Total
|
|
Fair Value as of December 31, 2014
|
|
$
|
43,060,000
|
|
|
$
|
340,000
|
|
|
$
|
160,000
|
|
|
$
|
450,000
|
|
|
$
|
109,202
|
|
|
$
|
709,568
|
|
|
$
|
44,828,770
|
|
Purchases and other adjustments to cost of Level
3 portfolio company investments
(1)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
27,428
|
|
|
|
12,557
|
|
|
|
(105,210
|
)
|
|
|
(65,225
|
)
|
Sale, exchange or conversion of Level 3 portfolio
company investments
(2)
|
|
|
(1,380,000
|
)
|
|
|
—
|
|
|
|
1,380,000
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Gross
transfers out of Level 3 to
Level
1
(2)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Total net realized gains
(losses) and net change in unrealized appreciation (depreciation)
|
|
|
(8,704,000
|
)
|
|
|
80,000
|
|
|
|
(1,460,000
|
)
|
|
|
52,572
|
|
|
|
—
|
|
|
|
83,724
|
|
|
|
(9,947,704
|
)
|
Fair Value as of December
31, 2015
|
|
$
|
32,976,000
|
|
|
$
|
420,000
|
|
|
$
|
80,000
|
|
|
$
|
530,000
|
|
|
$
|
121,759
|
|
|
$
|
688,082
|
|
|
$
|
34,815,841
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net change in unrealized
appreciation (depreciation) on Level 3 portfolio company investments held as of December 31, 2015
|
|
$
|
(8,704,000
|
)
|
|
$
|
80,000
|
|
|
$
|
(1,460,000
|
)
|
|
$
|
52,572
|
|
|
$
|
—
|
|
|
$
|
83,724
|
|
|
$
|
(9,947,704
|
)
|
(1)
Purchases and other adjustments to cost of Level 3 portfolio company investments include purchases of new investments at cost and
payment-in kind interest accreted to principal.
(2)
Exchanges, conversions and transfers out of Level 3 portfolio company investments and Escrowed Funds are reflected at cost if originally
acquired during the period or at the fair value as of the beginning of the period if originally acquired before the beginning of
the period. Sales of Level 3 portfolio company investments and settlement of Escrowed Funds are reflected at the net proceeds from
such sale or settlement.
Portfolio Company Investment Activity
The Company had the
following portfolio company activity during the nine months ended September 30, 2016:
|
·
|
On January 13, 2016, Suniva closed a stock-for-stock merger transaction with SFCE. As a result,
the Company’s 10.022 shares of Series F preferred stock and 197.942 shares of Series D preferred stock were exchanged for
2,844 shares of Suniva Class A common stock and 820,868 shares of SFCE common stock. The shares of SFCE common stock were subject
to a lockup period which expired in February 2016.
|
|
·
|
On January 15, 2016, $606,984 was released to the Company from the Xtime escrow without any offset
for indemnity claims.
|
|
·
|
On January 20, 2016, the Board of Directors approved and, on January 25, 2016, the Company signed
an indication of interest to purchase additional Series B preferred stock in Harvest Power as part of an extension offering of
Series B preferred stock (the “Series B Extension”). On February 17, 2016, the Company purchased 244,039 shares of
Series B preferred stock in Harvest Power for a total of $244,039. These newly purchased shares of Series B preferred stock have
the same rights and preferences as the Company’s existing Series B preferred stock, with the exception that all of the Company’s
Series B preferred stock now has a preferred-to-common conversion ratio of 1-to-1.5 versus 1-to-0.5301 previously. Any Series B
stockholder that did not elect to purchase their pro rata share of the Series B Extension was subject to a mandatory conversion
of their Series B preferred shares and Series A preferred shares into common stock. As part of this financing, participating stockholders
were also offered the opportunity to purchase newly created Series B-1 preferred shares. The Company did not elect to purchase
any Series B-1 preferred shares in this offering.
|
|
·
|
On May 17, 2016, the Company completed an investment of $30,459 in BrightSource Energy as part
of a rights offering of senior secured promissory notes to certain holders of BrightSource Energy preferred stock and its promissory
notes. Since the Company purchased its pro rata portion in the debt financing, 52,357 shares of Series 1A non-convertible preferred
stock were automatically exchanged for 52,357 shares of Series 1 convertible preferred stock. In connection with the debt financing,
the maturity date for the July 2014 and August 2014 promissory notes and the convertible bridge notes previously issued by BrightSource
Energy (including those held by the Company) was extended to March 31, 2017.
|
|
·
|
In July and August 2016, the Company sold its remaining position in Tremor Video, selling 299,999
shares of Tremor Video common stock in open market transactions for total net proceeds of $582,613, resulting in a net realized
loss of $1,417,384.
|
Crossroads Capital, Inc.
Notes to Financial Statements
September 30, 2016
(Unaudited)
|
·
|
In August 2016, the Company completed the disposition of its entire position in SFCE, selling 820,686
shares of SFCE common stock in open market transactions for total net proceeds of $110,746, resulting in a net realized loss of
$1,198,707.
|
|
·
|
On August 9, 2016, Deem completed an initial closing of its Series CC-1 Preferred Stock financing
(the "Series CC-1 Financing"). The Company did not participate in this offering. Pursuant to the Series CC-1 Financing,
each share of outstanding preferred stock was automatically converted into common stock (the "Conversion") and a 20-for-one
reverse stock split was effected on all outstanding shares of common stock (the "Reverse Split"). As a result of the
Conversion and Reverse Split, the Company's 929,212 shares of Series AA-1 Convertible Preferred Stock were exchanged into 46,461
shares of Common Stock.
|
|
·
|
On September 15, 2016, Mode Media ceased operations and subsequently announced board approval of
the assignment of substantially all the assets of Mode Media to its liquidating agent, Sherwood Partners, Inc., of Mountain View,
CA.
|
Significant Unobservable Inputs for
Level 3 Portfolio Company Securities
In accordance with
ASC 820, the tables set forth below provide quantitative information about the Level 3 fair value measurements of the Company’s
portfolio company investments and Escrowed Funds as of September 30, 2016 and December 31, 2015. In addition to the techniques
and inputs noted in the tables below, according to the Company’s valuation policy, the Company may also use other valuation
techniques and methodologies when determining the Company’s fair value measurements. The below tables are not intended to
be all-inclusive, but rather provide information on the significant Level 3 inputs as they relate to the Company’s fair value
measurements. To the extent an unobservable input is not reflected in the tables below, such input is deemed insignificant or is
not applicable with respect to the Company’s Level 3 fair value measurements as of September 30, 2016 and December 31, 2015,
respectively. Significant changes in the inputs in isolation could result in a significant change in the fair value measurement,
depending on the input and the materiality of the investment:
|
|
September
30, 2016
|
|
Investment
Type
|
|
Fair
Value
|
|
|
Valuation
Techniques /
Methodologies
|
|
Unobservable
Input
(1)
|
|
|
Range
|
|
|
Weighted
Average
(2)
|
|
Level 3 Portfolio Company
|
|
$
|
16,655,000
|
|
|
Comparable public
|
|
Revenue
multiple
|
|
|
0.7
|
|
|
|
to
|
|
|
|
4.6
|
|
|
|
2.9
|
|
Investments: Preferred Stock
|
|
|
|
|
|
companies
|
|
EBITDA multiple
|
|
|
8.6
|
|
|
|
to
|
|
|
|
9.8
|
|
|
|
9.6
|
|
|
|
|
|
|
|
|
|
Discount for lack
of marketability
|
|
|
9%
|
|
|
|
to
|
|
|
|
29%
|
|
|
|
14
|
%
|
Level 3 Portfolio Company
|
|
$
|
450,000
|
|
|
Comparable public
|
|
Revenue multiple
|
|
|
1.7
|
|
|
|
to
|
|
|
|
1.8
|
|
|
|
1.7
|
|
Investments: Preferred Stock Warrants
|
|
|
|
|
|
companies
|
|
Discount for lack
of marketability
|
|
|
6%
|
|
|
|
to
|
|
|
|
6%
|
|
|
|
6
|
%
|
Level 3 Portfolio Company
|
|
$
|
170,000
|
|
|
Comparable public
|
|
Revenue multiple
|
|
|
0.7
|
|
|
|
to
|
|
|
|
3.0
|
|
|
|
3.0
|
|
Investments: Common Stock
|
|
|
|
|
|
companies
|
|
Discount for lack
of marketability
|
|
|
11%
|
|
|
|
to
|
|
|
|
32%
|
|
|
|
11
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 3 Portfolio Company
|
|
$
|
191,381
|
|
|
Comparable public
|
|
Revenue multiple
|
|
|
0.7
|
|
|
|
to
|
|
|
|
0.7
|
|
|
|
0.7
|
|
Investments: Convertible Notes and Secured
Notes
|
|
|
|
|
|
companies
|
|
Discount for lack
of marketability
|
|
|
15%
|
|
|
|
to
|
|
|
|
15%
|
|
|
|
15
|
%
|
Level 3 Funds Held in Escrow
|
|
$
|
83,485
|
|
|
Escrow Discounts
|
|
Indemnity risk discount
|
|
|
4%
|
|
|
|
to
|
|
|
|
4%
|
|
|
|
4
|
%
|
From Sale of Investment
|
|
|
|
|
|
|
|
Deferred payment
discount
|
|
|
10%
|
|
|
|
to
|
|
|
|
10%
|
|
|
|
10
|
%
|
(1)
The significant unobservable inputs that may be used in the fair value measurement of the Company’s portfolio company investments
in convertible preferred stock, common stock and warrants to purchase common or preferred stock for which market quotations are
not readily available include: (i) revenue multiples for comparable transactions, (ii) revenue, earnings before interest, taxes,
depreciation and amortization, and price to earnings multiples (collectively, "Multiples") for comparable public companies,
(iii) discount rates and terminal year Multiples for comparable public companies applied in a discounted cash flow analysis of
the portfolio company; and (iv) a discount for lack of marketability ("DLOM"). For some portfolio company investments,
additional consideration may be given to data from a prior or contemporaneous financing transaction, the last round of financing
or a merger or acquisition event near the measurement date (collectively, a "Precedent Transaction"). Inputs used in
deriving an appropriate DLOM include the time frame in which the portfolio company expects to pursue or complete an IPO or sale/merger
and, where put option models are used to estimate the price of a plain-vanilla, at-the-money put option and the price of an average-strike
put option, inputs may include a range of term and volatility assumptions. A change in the assumptions used for Precedent Transactions
and Multiples may indicate a directionally similar change in the fair value of the Company’s portfolio company investments
in convertible preferred stock or common stock, while a change in the assumptions used for discount rate and DLOM may indicate
a directionally opposite change in the fair value of the portfolio company investment.
Additional inputs that may
be used in an option pricing model when applicable include the volatility of equity in comparable public companies, the risk free
interest rate and the estimated time to exit. The significant unobservable input used in an option pricing model for valuing certain
of the Company’s portfolio company investments in convertible preferred stock, common stock and preferred and common stock
warrants for which market quotations are not readily available is the volatility of equity in comparable public companies. A change
in the assumption used for equity volatility may indicate a directionally similar change in the fair value of the convertible preferred
stock, common stock and preferred and common stock warrant investments.
Crossroads Capital, Inc.
Notes to Financial Statements
September 30, 2016
(Unaudited)
Since the Company has invested
in convertible debt investments, principally convertible bridge notes, for the primary purpose of potential conversion into equity
at a future date, the significant unobservable inputs that may be used in the fair value measurement of its convertible debt investments
on an as-converted to equity basis are the same inputs used by the Company to value its equity securities (including convertible
preferred stock). An option pricing model valuation technique may also be used to derive the fair value of the conversion feature
of convertible notes. If the Company determines that there is a low likelihood that its convertible debt investments will be converted
into equity or repaid the significant unobservable inputs that may be used in the fair value measurement of the Company’s
convertible debt investments are hypothetical market yields and premiums/(discounts). For non-convertible debt investments, which
the Company generally holds for cash payment at maturity, the significant unobservable inputs that may be used in the fair value
measurement of the Company’s non-convertible debt are hypothetical market yields and premiums/(discounts). The hypothetical
market yield is defined as the exit price of an investment in a hypothetical market to hypothetical market participants where buyers
and sellers are willing participants. The premiums (discounts) relate to company specific characteristics such as underlying investment
performance, collateral, and other characteristics of the investment. In certain investments, the Company may value its convertible
and non-convertible debt investments using a liquidation approach in which case the realizable value of the collateral would be
a significant unobservable input.
Funds held in escrow from the
sale of investments are valued using certain indemnity risk and deferred payment discounts applied to the amounts withheld.
(2)
Weighted average based on fair value as of September 30, 2016.
|
|
December
31, 2015
|
|
Investment Type
|
|
Fair
Value
|
|
|
Valuation
Techniques /
Methodologies
|
|
Unobservable
Input
(1)
|
|
Range
|
|
|
Weighted
Average
(2)
|
|
Level 3 Portfolio Company Investments:
Preferred Stock
|
|
$
|
32,976,000
|
|
|
Option pricing model
|
|
Comparable public company equity
volatility
|
|
|
40
|
%
|
|
|
to
|
|
|
|
70
|
%
|
|
|
51
|
%
|
|
|
|
|
|
|
Comparable public companies
|
|
Revenue multiple
|
|
|
1.0
|
|
|
|
to
|
|
|
|
6.5
|
|
|
|
2.8
|
|
|
|
|
|
|
|
|
|
EBITDA multiple
|
|
|
7.8
|
|
|
|
to
|
|
|
|
7.8
|
|
|
|
7.8
|
|
|
|
|
|
|
|
|
|
Discount for lack of marketability
|
|
|
9
|
%
|
|
|
to
|
|
|
|
29
|
%
|
|
|
13
|
%
|
|
|
|
|
|
|
Discounted cash flow
|
|
Discount rate
|
|
|
20
|
%
|
|
|
to
|
|
|
|
35
|
%
|
|
|
26
|
%
|
|
|
|
|
|
|
|
|
Terminal revenue multiple
|
|
|
1.8
|
|
|
|
to
|
|
|
|
4.3
|
|
|
|
3.4
|
|
|
|
|
|
|
|
|
|
Terminal EBITDA multiple
|
|
|
6.0
|
|
|
|
to
|
|
|
|
6.0
|
|
|
|
6.0
|
|
|
|
|
|
|
|
|
|
Discount for lack of marketability
|
|
|
9
|
%
|
|
|
to
|
|
|
|
29
|
%
|
|
|
13
|
%
|
Level 3 Portfolio Company Investments: Preferred
Stock Warrants
|
|
$
|
420,000
|
|
|
Option pricing model
|
|
Comparable public company equity volatility
|
|
|
40
|
%
|
|
|
to
|
|
|
|
40
|
%
|
|
|
40
|
%
|
|
|
|
|
|
|
Comparable public companies
|
|
Revenue multiple
|
|
|
2.3
|
|
|
|
to
|
|
|
|
2.8
|
|
|
|
2.5
|
|
|
|
|
|
|
|
|
|
Discount for lack of marketability
|
|
|
6
|
%
|
|
|
to
|
|
|
|
7
|
%
|
|
|
6
|
%
|
|
|
|
|
|
|
Discounted cash flow
|
|
Discount rate
|
|
|
25
|
%
|
|
|
to
|
|
|
|
25
|
%
|
|
|
25
|
%
|
|
|
|
|
|
|
|
|
Terminal revenue multiple
|
|
|
4.0
|
|
|
|
to
|
|
|
|
4.0
|
|
|
|
4.0
|
|
|
|
|
|
|
|
|
|
Discount for lack of marketability
|
|
|
6
|
%
|
|
|
to
|
|
|
|
7
|
%
|
|
|
6
|
%
|
Level 3 Portfolio Company Investments: Common
Stock
|
|
$
|
80,000
|
|
|
Option pricing model
|
|
Comparable public company equity volatility
|
|
|
65
|
%
|
|
|
to
|
|
|
|
65
|
%
|
|
|
65
|
%
|
|
|
|
|
|
|
Comparable public companies
|
|
Revenue multiple
|
|
|
1.0
|
|
|
|
to
|
|
|
|
2.0
|
|
|
|
1.5
|
|
|
|
|
|
|
|
|
|
Discount for lack of marketability
|
|
|
22
|
%
|
|
|
to
|
|
|
|
32
|
%
|
|
|
27
|
%
|
|
|
|
|
|
|
Discounted cash flow
|
|
Discount rate
|
|
|
35
|
%
|
|
|
to
|
|
|
|
35
|
%
|
|
|
35
|
%
|
|
|
|
|
|
|
|
|
Terminal EBITDA multiple
|
|
|
6.0
|
|
|
|
to
|
|
|
|
6.0
|
|
|
|
6.0
|
|
|
|
|
|
|
|
|
|
Discount for lack of marketability
|
|
|
22
|
%
|
|
|
to
|
|
|
|
32
|
%
|
|
|
27
|
%
|
Level 3 Portfolio Company Investments: Convertible
Notes and Secured Notes
|
|
$
|
651,759
|
|
|
Option pricing model
|
|
Comparable public company equity volatility
|
|
|
65
|
%
|
|
|
to
|
|
|
|
65
|
%
|
|
|
65
|
%
|
|
|
|
|
|
|
Comparable public companies
|
|
Revenue multiple
|
|
|
1.0
|
|
|
|
to
|
|
|
|
2.0
|
|
|
|
1.5
|
|
|
|
|
|
|
|
|
|
Discount for lack of marketability
|
|
|
12
|
%
|
|
|
to
|
|
|
|
15
|
%
|
|
|
13
|
%
|
|
|
|
|
|
|
Discounted cash flow
|
|
Discount rate
|
|
|
35
|
%
|
|
|
to
|
|
|
|
35
|
%
|
|
|
35
|
%
|
|
|
|
|
|
|
|
|
Terminal EBITDA multiple
|
|
|
6.0
|
|
|
|
to
|
|
|
|
6.0
|
|
|
|
6.0
|
|
|
|
|
|
|
|
|
|
Discount for lack of marketability
|
|
|
12
|
%
|
|
|
to
|
|
|
|
15
|
%
|
|
|
13
|
%
|
Level 3 Funds Held in Escrow From Sale of Investment
|
|
$
|
688,082
|
|
|
Escrow Discounts
|
|
Indemnity risk discount
|
|
|
4
|
%
|
|
|
to
|
|
|
|
4
|
%
|
|
|
4
|
%
|
|
|
|
|
|
|
|
|
Deferred payment discount
|
|
|
—%
|
|
|
|
to
|
|
|
|
10
|
%
|
|
|
5
|
%
|
Crossroads Capital, Inc.
Notes to Financial Statements
September 30, 2016
(Unaudited)
|
(1)
|
The significant unobservable inputs that may be used
in the fair value measurement of the Company’s portfolio company investments in convertible preferred stock, common stock
and warrants to purchase common or preferred stock for which market quotations are not readily available include: (i) revenue
multiples for comparable transactions, (ii) revenue, earnings before interest, taxes, depreciation and amortization, and price
to earnings multiples (collectively, "Multiples") for comparable public companies, (iii) discount rates and terminal
year Multiples for comparable public companies applied in a discounted cash flow analysis of the portfolio company; and (iv) a
discount for lack of marketability ("DLOM"). For some portfolio company investments, additional consideration may be
given to data from a prior or contemporaneous financing transaction, the last round of financing or a merger or acquisition event
near the measurement date (collectively, a "Precedent Transaction"). Inputs used in deriving an appropriate DLOM include
the time frame in which the portfolio company expects to pursue or complete an IPO or sale/merger and, where put option models
are used to estimate the price of a plain-vanilla, at-the-money put option and the price of an average-strike put option, inputs
may include a range of term and volatility assumptions. A change in the assumptions used for Precedent Transactions and Multiples
may indicate a directionally similar change in the fair value of the Company’s portfolio company investments in convertible
preferred stock or common stock, while a change in the assumptions used for discount rate and DLOM may indicate a directionally
opposite change in the fair value of the portfolio company investment.
|
Additional inputs that may be
used in an option pricing model when applicable include the volatility of equity in comparable public companies, the risk free
interest rate and the estimated time to exit. The significant unobservable input used in an option pricing model for valuing certain
of the Company’s portfolio company investments in convertible preferred stock, common stock and preferred and common stock
warrants for which market quotations are not readily available is the volatility of equity in comparable public companies. A change
in the assumption used for equity volatility may indicate a directionally similar change in the fair value of the convertible preferred
stock, common stock and preferred and common stock warrant investments.
Since the Company has invested
in convertible debt investments, principally convertible bridge notes, for the primary purpose of potential conversion into equity
at a future date, the significant unobservable inputs that may be used in the fair value measurement of its convertible debt investments
on an as-converted to equity basis are the same inputs used by the Company to value its equity securities (including convertible
preferred stock). An option pricing model valuation technique may also be used to derive the fair value of the conversion feature
of convertible notes. If the Company determines that there is a low likelihood that its convertible debt investments will be converted
into equity or repaid the significant unobservable inputs that may be used in the fair value measurement of the Company’s
convertible debt investments are hypothetical market yields and premiums/(discounts). For non-convertible debt investments, which
the Company generally holds for cash payment at maturity, the significant unobservable inputs that may be used in the fair value
measurement of the Company’s non-convertible debt are hypothetical market yields and premiums/(discounts). The hypothetical
market yield is defined as the exit price of an investment in a hypothetical market to hypothetical market participants where buyers
and sellers are willing participants. The premiums (discounts) relate to company specific characteristics such as underlying investment
performance, collateral, and other characteristics of the investment. In certain investments, the Company may value its convertible
and non-convertible debt investments using a liquidation approach in which case the realizable value of the collateral would be
a significant unobservable input.
Funds held in escrow from the
sale of investments are valued using certain indemnity risk and deferred payment discounts applied to the amounts withheld.
|
(2)
|
Weighted average based on fair value as of December 31,
2015.
|
As of September 30,
2016 and December 31, 2015, 57.3% and 70.8%, respectively, of the Company's gross assets represented portfolio company investments
and Escrowed Funds valued at fair value by the Company's Board of Directors.
Net Realized Gain (Loss) and Net
Change in Unrealized Appreciation (Depreciation)
The following table
summarizes the net realized gain (loss) and net change in unrealized appreciation (depreciation) for the three and nine months
ended September 30, 2016 and 2015 for: (i) the Company’s portfolio company investments sold during the three and nine months
ended September 30, 2016 and 2015 and (ii) the Company’s portfolio company investments and Escrowed Funds held as of September
30, 2016 and 2015.
Crossroads Capital, Inc.
Notes to Financial Statements
September 30, 2016
(Unaudited)
|
|
Three
Months Ended
|
|
|
Nine
Months Ended
|
|
|
|
September
30, 2016
|
|
|
September
30, 2015
|
|
|
September
30, 2016
|
|
|
September
30, 2015
|
|
|
|
|
Net
Realized
Gain
(Loss)
|
|
|
|
Net
Change in
Unrealized
Appreciation
(Depreciation)
|
|
|
|
Net
Realized
Gain
(Loss)
|
|
|
|
Net
Change in
Unrealized
Appreciation
(Depreciation)
|
|
|
|
Net
Realized
Gain
(Loss)
|
|
|
|
Net
Change in
Unrealized
Appreciation
(Depreciation)
|
|
|
|
Net
Realized
Gain
(Loss)
|
|
|
|
Net
Change in
Unrealized
Appreciation
(Depreciation)
|
|
Portfolio Company Investments Sold During Period
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tremor Video, Inc.
|
|
$
|
(1,417,384
|
)
|
|
$
|
1,447,999
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(1,417,384
|
)
|
|
$
|
1,381,999
|
|
|
$
|
(1,182,240
|
)
|
|
$
|
1,139,004
|
|
Shunfeng International Clean Energy Ltd.
|
|
|
(1,198,707
|
)
|
|
|
1,202,581
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(1,198,707
|
)
|
|
|
1,127,463
|
|
|
|
—
|
|
|
|
—
|
|
Xtime, Inc.
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
13,930
|
|
|
|
—
|
|
Millennial Media, Inc.
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
6,178
|
|
|
|
—
|
|
Subtotal
- Portfolio Company Investments Sold During Period
|
|
|
(2,616,091
|
)
|
|
|
2,650,580
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(2,616,091
|
)
|
|
|
2,509,462
|
|
|
|
(1,162,132
|
)
|
|
|
1,139,004
|
|
Portfolio Company Investments
Held at End of Period
|
|
|
—
|
|
|
|
(249,882
|
)
|
|
|
—
|
|
|
|
(5,342,009
|
)
|
|
|
—
|
|
|
|
(16,788,031
|
)
|
|
|
—
|
|
|
|
(6,053,056
|
)
|
Total
Portfolio Company Investments
|
|
|
(2,616,091
|
)
|
|
|
2,400,698
|
|
|
|
—
|
|
|
|
(5,342,009
|
)
|
|
|
(2,616,091
|
)
|
|
|
(14,278,569
|
)
|
|
|
(1,162,132
|
)
|
|
|
(4,914,052
|
)
|
Funds Held in Escrow from
Sale of Investment
|
|
|
—
|
|
|
|
860
|
|
|
|
—
|
|
|
|
5,830
|
|
|
|
—
|
|
|
|
2,387
|
|
|
|
—
|
|
|
|
17,140
|
|
Total
Portfolio Company Financial Assets
|
|
$
|
(2,616,091
|
)
|
|
$
|
2,401,558
|
|
|
$
|
—
|
|
|
$
|
(5,336,179
|
)
|
|
$
|
(2,616,091
|
)
|
|
$
|
(14,276,182
|
)
|
|
$
|
(1,162,132
|
)
|
|
$
|
(4,896,912
|
)
|
See the accompanying
schedule of investments for the fair value of the Company’s portfolio company investments. The methodology for the determination
of the fair value of the Company’s portfolio company investments is discussed in Note 2 - Summary of Significant Accounting
Policies.
Note 4 - Related Party Agreements and
Transactions
Administrative Services
On November 13, 2015,
the Company’s Board of Directors approved the engagement of the Administrator to provide administrative consulting services
to the Company, including the provision of personnel to act as certain of the Company’s executive officers, including the
Chief Executive Officer and Chief Financial Officer, pursuant to an Administrator Consulting Agreement. For the three and
nine months ended September 30, 2016, the Company incurred $150,000 and $450,000 of expenses related to the Administrator, respectively.
The Company did not engage an administrator during the three or nine months ended September 30, 2015, and, accordingly, did not
incur any administrator expenses during this period. As of September 30, 2016 and December 31, 2015, the Company had expenses payable
to the Administrator of $50,000 and $51,308, respectively.
The Administrator
furnishes the Company with equipment and clerical services, including responsibility for the financial records which it is required
to maintain, and preparing reports to the Company’s stockholders and reports filed with the SEC. In addition,
the Administrator assists the Company in monitoring its portfolio accounting and bookkeeping, managing portfolio collections and
reporting, performing internal audit services, determining and publishing its net asset value, overseeing the preparation and filing
of its tax returns and the printing and dissemination of reports to its stockholders. In addition, the Administrator provides support
for the Company’s risk management efforts and generally overseeing the payment of its expenses and the performance of administrative
and professional services rendered to the Company by others.
Effective December
2, 2015, the Company engaged the services of its Chief Compliance Officer at a monthly rate of $4,000. For the three and nine months
ended September 30, 2016, the Company incurred $12,000 and $36,000 of compliance fees, respectively. The Company reimbursed BDCA
Venture Adviser for the allocable portion of compensation of its Chief Compliance Officer during the three and nine months ended
September 30, 2015, with such expense included in the payment of administrative expenses allocated from BDCA Venture Adviser for
the period. As of September 30, 2016 and December 31, 2015, the Company had expenses payable to its Chief Compliance Officer of
$4,000 and $4,000, respectively.
Crossroads Capital, Inc.
Notes to Financial Statements
September 30, 2016
(Unaudited)
On November 10, 2015,
the Company’s Board of Directors approved the engagement of US Bancorp to provide administration and accounting services
to the Company pursuant to an Administration Servicing Agreement and a Fund Accounting Servicing Agreement, respectively. On May
3, 2016, the Board announced the termination of its agreement with US Bancorp, effective as of March 29, 2016. For the three and
nine months ended September 30, 2016, the Company incurred $0 and $19,447 of expenses, respectively, related to US Bancorp. The
Company did not engage US Bancorp during the three or nine months ended September 30, 2015, and, accordingly, did not incur any
expenses related to US Bancorp during this period. As of September 30, 2016 and December 31, 2015, the Company had expenses payable
to US Bancorp of $18,990 and $11,114, respectively.
Former Investment Advisory and Administrative
Services Agreement
BDCA Venture Adviser,
LLC previously served as the Company’s investment adviser and also provided the Company with administrative services pursuant
to the Investment Advisory Agreement. On October 5, 2015, the Board of Directors approved the termination of the Investment Advisory
Agreement between the Company and BDCA Venture Adviser effective as of the Termination Date. The Investment Advisory Agreement,
which was entered into on July 1, 2014, was approved by the Company’s stockholders at the 2014 Annual Meeting of Stockholders
held on June 16, 2014. All payments due under the Investment Advisory Agreement as of the Termination Date were mutually agreed
upon between the Company and BDCA Venture Adviser and subsequently paid by the Company.
Under the Investment
Advisory Agreement, the Company paid BDCA Venture Adviser a fee for its investment advisory services consisting of two components:
(i) a base management fee and (ii) an incentive fee.
The base management
fee (the "Base Fee") was calculated at an annual rate of 2% of the Company’s gross assets, where gross assets include
any borrowings for investment purposes. The Base Fee was calculated based on the value of the Company’s gross assets at the
end of the most recently completed calendar quarter and adjusted for any equity capital raises or repurchases during the current
calendar quarter. The Company paid the Base Fee through the Termination Date at which time BDCA Venture Adviser’s obligation
to provide services to the Company ended. During the three and nine months ended September 30, 2015, the Company incurred Base
Fees of $321,813 and $1,027,442, respectively. The Investment Advisory Agreement was not in effect during the nine months ended
September 30, 2016.
The incentive fee
was determined and payable in arrears as of the end of each calendar year (or upon the termination of the Investment Advisory Agreement,
as of the termination date), and equaled 20% of the Company’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. For purposes of calculating the incentive
fee, realized capital gains and losses include both short-term and long-term capital gains and losses. The incentive fee actually
payable to BDCA Venture Adviser was consistent with the Investment Advisers Act of 1940. Under the Investment Advisory Agreement,
BDCA Venture Adviser was not entitled to an incentive fee on investment income generated from interest or dividends on the Company's
portfolio company investments.
BDCA Venture Adviser
earned an incentive fee of $635,241 during the year ended December 31, 2014. This earned incentive fee for the 2014 year was
due and payable to BDCA Venture Adviser as of December 31, 2014 and was paid by the Company in March 2015. BDCA Venture Adviser
did not earn any incentive fees during the nine months ended September 30, 2015. The Investment Advisory Agreement was not in effect
during the nine months ended September 30, 2016.
For accounting purposes
only, the Company was required under U.S. GAAP to accrue a theoretical incentive fee based upon unrealized appreciation at the
end of each period while the Investment Advisory Agreement was in effect. The accrual of this theoretical incentive fee assumed
all unrealized balances were realized in order to reflect an incentive fee that would theoretically have been payable to BDCA Venture
Adviser. During the three and nine months ended September 30, 2015, the Company recorded a reduction of theoretical incentive fees
of $1,067,236 and $1,211,809, respectively. The Investment Advisory Agreement was not in effect during the nine months ended September
30, 2016.
The Company also reimbursed
BDCA Venture Adviser for the allocable portion of overhead and other expenses incurred by BDCA Venture Adviser in performing its
administrative obligations under the Investment Advisory Agreement, including the allocable portion of compensation of the Company’s
Chief Financial Officer and Chief Compliance Officer, and their respective staff. The Company reimbursed BDCA Venture Adviser for
allocable administrative expenses through the Termination Date at which time BDCA Venture Adviser’s obligation to provide
services to the Company ended. During the three and nine months ended September 30, 2015, the Company incurred $110,713 and $354,236,
respectively, of administrative expenses allocated from BDCA Venture Adviser. The Investment Advisory Agreement was not in effect
during the nine months ended September 30, 2016.
Crossroads Capital, Inc.
Notes to Financial Statements
September 30, 2016
(Unaudited)
BDCA Venture Adviser
agreed that, to the extent that the Company's Adjusted Operating Expenses (as defined below) in 2015 exceeded $1,500,000 (the “Excess
Amount”), BDCA Venture Adviser would, without recourse against or reimbursement by the Company, waive Reimbursable Expenses
(as defined below) due and owing by the Company and/or pay on behalf of the Company certain Adjusted Operating Expenses, in such
amounts so that the total of the waived Reimbursable Expenses and expenses paid by BDCA Venture Adviser on behalf of the Company
equaled the Excess Amount. "Adjusted Operating Expenses" was defined as the Company's total operating expenses less Base
Fees, incentive fees, any stock issuance costs, any costs related to borrowings by the Company (including any interest and fees),
any litigation costs, expenses or fees and any extraordinary expenses. For purposes of clarity, any operating expenses incurred
by BDCA Venture Adviser and reimbursable by the Company with respect to 2015 (“Reimbursable Expenses”) are included
in Adjusted Operating Expenses.
For accounting purposes,
during the three and nine months ended September 30, 2015, the Company recorded quarterly amounts due from BDCA Venture Adviser,
representing the amount by which its Adjusted Operating Expenses for the period exceeded the prorated amount of the annualized
$1,500,000 Adjusted Operating Expense threshold for such period. During the three months ended September 30, 2015, the Company
recorded a reduction of expenses waived or reimbursed from BDCA Venture Adviser of $68,221. During the nine months ended September
30, 2015, the Company recorded expenses waived or reimbursed from BDCA Venture Adviser of $35,822. During the three and nine months
ended September 30, 2015, the Company incurred $45,052 and $447,567, respectively, of expenses not subject to the annualized $1,500,000
Adjusted Operating Expense threshold. No such agreement existed during the nine months ended September 30, 2016.
Services Provided by Related Parties
RCS Advisory Services,
LLC ("RCS Advisory"), an affiliated entity of BDCA Venture Adviser, previously provided the Company with legal services,
website design and maintenance, and investor relations services. For the three months ended September 30, 2015, the Company incurred
$578 of website design and maintenance and $4,005 of investor relations services provided by RCS Advisory. For the nine months
ended September 30, 2015, the Company incurred $1,755 of legal services, $1,733 of website design and maintenance and $17,955 of
investor relations services provided by RCS Advisory. RCS Advisory no longer provides the Company with services in connection with
the termination of the Investment Advisory Agreement effective as of the Termination Date.
Joint Liability Insurance Agreement
For the policy year
ended August 28, 2016, 10% of the total D&O Policy premium and 10% of the total Excess Policy premium was allocated to and
paid by BDCA Venture Adviser pursuant to a joint liability insurance agreement with BDCA Venture Adviser which allocated the premium
cost of the Company's directors and officers liability insurance policy and the Company's excess coverage policy between the Company
and BDCA Venture Adviser.
On August 28, 2016,
the Company renewed its directors and officers liability insurance policy and its excess liability policy for another policy year
ending August 28, 2017 but no portion of the premium was paid by, or reimbursed by, BDCA Venture Adviser. The Company also acquired
an additional excess liability policy. The continuing directors and officers policy covers the Company's directors, officers, and
other specified parties, insures the Company against loss that it may be required or permitted to pay as indemnities of the Company's
directors and officers, and insures the Company for certain securities claims. The two excess liability policies provide for excess
coverage to the Company's officers and directors in the case of non-indemnifiable claims. To the extent the officers, managers
and employees of BDCA Venture Adviser bring a contractual claim for indemnification against the Company pursuant to the former
Investment Advisory Agreement, the directors and officers liability insurance policy and one of the two excess liability policies
would cover such claims.
Other Transactions with Related Parties
On April 22, 2016,
the Board approved annual fees of $10,000, payable quarterly in advance, to the Chairman of the Board, the Nominating Committee
Chairman and the Compensation Committee Chairman, for each of their services as Chairman. The Company continues to pay an annual
fee of $25,000, payable quarterly in advance, to its independent directors for the services provided by them as a director, and
annual fees of $10,000, payable quarterly in advance, to the Audit Committee Chairman and lead valuation director, for each of
their services as Chairman and lead valuation director, respectively. For the three months ended September 30, 2016 and 2015, the
Company incurred directors fees of $31,250 and $48,750, respectively. For the nine months ended September 30, 2016 and 2015, the
Company incurred directors fees of $86,250 and $105,000, respectively. The Company did not have any fees payable to its directors
as of September 30, 2016 and December 31, 2015. A more detailed description of the Company’s compensation to its Board of
Directors is located in the Amendment No. 1 on Form 10-K/A for the year ended December 31, 2015, which has been filed with the
SEC.
Crossroads Capital, Inc.
Notes to Financial Statements
September 30, 2016
(Unaudited)
On March 25, 2016,
the Audit Committee of the Company’s Board of Directors approved the reimbursement of $125,157 in legal and proxy solicitation
costs incurred by Bulldog Investors, LLC (“Bulldog”), a stockholder and beneficial owner of more than 5% of the Company’s
outstanding common stock, as a result of the contested proxy campaign in connection with the Company’s 2015 Annual Meeting
of Stockholders (“Annual Meeting”). This reimbursement was paid to Bulldog on March 30, 2016 and included the costs
of Bulldog’s litigation against the Company in the Circuit Court of Maryland and the New York Supreme Court and costs associated
with the proxy process and the election of the Company’s new Board of Directors.
The Audit Committee
of the Company’s Board of Directors is required to review and approve any transactions with related parties (as such term
is defined in Item 404 of Regulation S-K).
Note 5 – Equity Offerings and
Related Costs
The Company did not
issue any new shares of its common stock during the nine months ended September 30, 2016.
Note 6 – Stock Repurchases
On November 10, 2015,
the Board authorized a stock repurchase program of up to $1 million for a six month period to expire on May 10, 2016. On January
20, 2016, the Board approved an amendment to this stock repurchase program to allow for greater flexibility, by narrowing the current
“blackout” period during which the Company is prohibited from purchasing shares, and increasing the size of the program
from $1 million to $2 million. On May 9, 2016, the Board authorized an extension of the Company’s stock repurchase program
for an additional six months to expire on November 10, 2016. Under the repurchase program, the Company is authorized to repurchase
shares of its common stock in open market transactions, including through block purchases, depending on prevailing market conditions
and other factors. This stock repurchase program may be extended, modified or discontinued at any time for any reason. Furthermore,
the repurchase program does not obligate the Company to acquire any specific number of shares and all repurchases will be made
in accordance with SEC Rule 10b-18, which sets certain restrictions on the method, timing, price and volume of stock repurchases.
See Note 13 – Subsequent Events.
During the nine months
ended September 30, 2016, the Company repurchased 113,354 shares of its common stock at an average price of $2.08 per share, including
commissions, with a total cost of $235,577. The Company retired all 113,354 shares of its repurchased common stock during the nine
months ended September 30, 2016, with $113 of the total cost of the retired shares charged to common stock and $235,464 charged
to additional paid-in capital. The Company’s net asset value per share increased by $0.02 per share as a result of the repurchased
shares during the nine months ended September 30, 2016. The weighted average discount to net asset value per share of the shares
repurchased during the nine months ended September 30, 2016 was 41%.
During the year ended
December 31, 2015, the Company repurchased 117,510 shares of its common stock at an average price of $4.96 per share, including
commissions, for a total cost of $582,468. The Company retired all 117,510 shares of its repurchased common stock during the year
ended December 31, 2015, with $118 of the total cost of the retired shares charged to common stock and $582,350 charged to additional
paid-in capital. The Company’s net asset value per share increased by $0.02 per share as a result of the shares repurchased
during the year ended December 31, 2015. The weighted average discount to net asset value per share of the shares repurchased during
the year ended December 31, 2015 was 24%.
The Company accounted
for the repurchases of its common stock under the cost method based on the actual cost of the repurchases.
Note 7 – Dividends and Distributions
Distributions to the
Company’s stockholders are payable only when and as declared by the Company’s Board of Directors and are paid out of
assets legally available for distribution.
The Company did not
declare any distributions to stockholders during the nine months ended September 30, 2016.
Crossroads Capital, Inc.
Notes to Financial Statements
September 30, 2016
(Unaudited)
The following table
summarizes the Company’s distributions declared for the year ended December 31, 2015:
Date Declared
|
|
Record Date
|
|
Payment Date
|
|
Amount
Per Share
|
|
|
Source of Distribution
|
2015 Dividends:
|
|
|
|
|
|
|
|
|
|
|
March 26, 2015
|
|
April 15, 2015
|
|
April 29, 2015
|
|
$
|
0.15
|
|
|
Return of Capital
|
March 26, 2015
|
|
June 11, 2015
|
|
June 25, 2015
|
|
|
0.15
|
|
|
Return of Capital
|
March 26, 2015
|
|
September 11, 2015
|
|
September 25, 2015
|
|
|
0.15
|
|
|
Return of Capital
|
March 26, 2015
|
|
December 4, 2015
|
|
December 18, 2015
|
|
|
0.15
|
|
|
Return of Capital
|
Total – 2015 Dividends
|
|
|
|
|
|
|
0.60
|
|
|
|
The Company generally
pays distributions to its stockholders out of assets legally available for distribution, as determined by the Board of Directors,
with the intention of distributing 100% of the Company’s net realized capital gains annually.
On March 25, 2016,
the Company’s Board of Directors adopted a distribution policy with the objective to make special distributions to stockholders
as declared by the Board of Directors in its discretion. Based on the Board of Directors’ change to the Company’s investment
objective to preserve capital and maximize stockholder value and resolution to monetize the Company’s portfolio holdings
at the earliest practicable date, the Company will no longer pay regular quarterly distributions to its stockholders.
If the Company’s
distributions for any year exceed the Company’s net investment income and net realized capital gains, the difference will
be distributed from the Company’s capital and will constitute a return of capital to its stockholders.
In the event the Company
retains some or all of its realized net capital gains, the Company may designate the retained amount as a deemed distribution to
stockholders. In such case, among other consequences, the Company will pay corporate-level tax on the retained amount, each U.S.
stockholder will be required to include its share of the deemed distribution in income as if it had been actually distributed to
the U.S. stockholder and the U.S. stockholder will be entitled to claim a credit or refund equal to its allocable share of the
corporate-level tax the Company pays on the retained realized net capital gain.
For income tax purposes,
distributions paid to stockholders are reported as ordinary income, return of capital, long-term capital gains or a combination
thereof.
The Company maintains
a dividend reinvestment plan (“DRIP”) that provides for the reinvestment of dividends on behalf of its stockholders,
unless a stockholder has elected to receive dividends in cash. As a result, if the Company declares a dividend, stockholders who
have not “opted out” of the DRIP by the dividend record date will have their dividend automatically reinvested into
additional shares of common stock. Although the Company has a number of options to satisfy the share requirements of the DRIP,
it currently expects that the shares required to be purchased under the DRIP will be acquired through open market purchases of
common stock by the DRIP administrator. The shares purchased in the open market to satisfy the DRIP requirements will be valued
based upon the average price of the applicable shares purchased by the DRIP administrator.
Note 8 – Commitments and Contingencies
In the normal course
of business, the Company may enter into investment agreements under which it commits to make an investment in a portfolio company
at some future date or over a specified period of time. As of September 30, 2016, the Company had not entered into any investment
agreements which required it to make a future investment in a portfolio company.
On October 15, 2015,
Suniva completed a stock-for-stock merger transaction with SFCE. Pursuant to the merger agreement, Suniva and its shareholders,
including the Company, are required to indemnify SFCE for certain breaches of warranties and representations made to SFCE, subject
to a cap of approximately 12.5% of the merger consideration received by the Company. Any damages payable by the Company would be
settled through an adjustment to the number of shares of common stock in the surviving company held by the Company and/or SFCE.
On November 18, 2014,
Xtime, Inc., a private portfolio company, completed an all-cash merger transaction with Cox Automotive, Inc. At the closing of
the merger, the Company was required to set aside $809,311 in escrow as partial security for potential stockholder indemnification
obligations under the merger agreement. The $809,311 represents additional cash proceeds that may be released to the Company at
a later date subject to potential indemnity claims. On January 13, 2015, Escrowed Funds totaling $105,210 were released to the
Company from the Xtime escrow without any offset for indemnity claims. On January 15, 2016, Escrowed Funds totaling $606,984 were
released to the Company from the Xtime escrow without any offset for indemnity claims. The remaining Escrowed Funds are anticipated
to be released in November 2017, net of settlement of any indemnity claims. As of September 30, 2016, the Escrowed Funds were fair
valued at $83,485. Although recovery under the stockholder indemnity obligation is generally limited to the escrow fund, the Company
may be liable for its pro rata amount of any damages for certain types of indemnity claims not to exceed the cash consideration
received by the Company, provided, however, in the case of the Company’s fraud or intentional misrepresentation, there is
no limitation on liability. Except as discussed above, the Company has not been notified of any stockholder indemnity claims.
Crossroads Capital, Inc.
Notes to Financial Statements
September 30, 2016
(Unaudited)
The Company maintains
a directors and officers liability insurance policy and two excess liability policies, which provide liability insurance coverage
for its officers, directors and other specified parties. The Company has also agreed to indemnify its directors and officers to
the maximum extent permitted by Maryland law subject to the restrictions in the 1940 Act.
Under the former Investment
Advisory Agreement, absent the willful misfeasance, bad faith or gross negligence of BDCA Venture Adviser or BDCA Venture Adviser’s
reckless disregard of its duties and obligations, the Company has agreed to indemnify BDCA Venture Adviser (including its officers,
managers, agents, employees and members) for any damages, liabilities, costs and expenses (including reasonable attorneys’
fees and amounts reasonably paid in settlement) arising out of BDCA Venture Adviser’s performance of its duties and obligations
under the Investment Advisory Agreement, except to the extent specified in the 1940 Act. Pursuant to the former Investment Advisory
Agreement, the indemnification provision shall remain in full force and effect, and BDCA Venture Adviser shall remain entitled
to the benefits thereof, notwithstanding any termination of the Investment Advisory Agreement.
As of September 30,
2016, the Company was not a party to any material legal proceedings. However, from time to time, the Company may be party to certain
legal proceedings incidental to the normal course of its business, including the enforcement of its rights under contracts with
its portfolio companies.
Note 9 – Changes in Net Assets
Per Share
The following table
sets forth the computation of the basic and diluted per share net decrease in net assets resulting from operations for the three
and nine months ended September 30, 2016 and 2015:
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September
30, 2016
|
|
|
September
30, 2015
|
|
|
September
30, 2016
|
|
|
September
30, 2015
|
|
Net (decrease) increase in net assets resulting from operations
|
|
$
|
(510,622
|
)
|
|
$
|
(5,000,187
|
)
|
|
$
|
(18,156,253
|
)
|
|
$
|
(7,415,219
|
)
|
Basic and diluted weighted-average shares outstanding
|
|
|
9,623,851
|
|
|
|
9,709,456
|
|
|
|
9,649,725
|
|
|
|
9,760,384
|
|
Basic and diluted net (decrease) increase in net assets per share resulting from operations
|
|
$
|
(0.05
|
)
|
|
$
|
(0.51
|
)
|
|
$
|
(1.88
|
)
|
|
$
|
(0.76
|
)
|
During the three and
nine months ended September 30, 2016 and 2015, the Company had no dilutive securities outstanding.
Crossroads Capital, Inc.
Notes to Financial Statements
September 30, 2016
(Unaudited)
Note 10 – Financial Highlights
The following is a
schedule of financial highlights for the nine months ended September 30, 2016 and 2015:
|
|
Nine Months Ended
|
|
|
|
September 30,
2016
|
|
|
September 30,
2015
|
|
Per common share data
|
|
|
|
|
|
|
|
|
Net asset value, beginning of period
|
|
$
|
5.06
|
|
|
$
|
6.82
|
|
|
|
|
|
|
|
|
|
|
Net investment loss
(1)(2)
|
|
|
(0.13
|
)
|
|
|
(0.14
|
)
|
Net realized loss on investments
(1)
|
|
|
(0.27
|
)
|
|
|
(0.12
|
)
|
Net increase (decrease) in unrealized appreciation (depreciation) on investments and funds held in escrow from sale of investment
(1)
|
|
|
(1.48
|
)
|
|
|
(0.50
|
)
|
Net decrease in net assets resulting from operations
|
|
|
(1.88
|
)
|
|
|
(0.76
|
)
|
|
|
|
|
|
|
|
|
|
Stockholder distributions:
|
|
|
|
|
|
|
|
|
Stockholder distributions as a return of capital
|
|
|
—
|
|
|
|
(0.45
|
)
|
Net decrease in net assets resulting from stockholder distributions
|
|
|
—
|
|
|
|
(0.45
|
)
|
|
|
|
|
|
|
|
|
|
Capital stock transactions:
|
|
|
|
|
|
|
|
|
Repurchases of common stock
(3)
|
|
|
0.01
|
|
|
|
0.02
|
|
Net increase in net assets from capital stock transactions
|
|
|
0.01
|
|
|
|
0.02
|
|
|
|
|
|
|
|
|
|
|
Net asset value, end of period
|
|
$
|
3.19
|
|
|
$
|
5.63
|
|
|
|
|
|
|
|
|
|
|
Ratios and supplemental data:
|
|
|
|
|
|
|
|
|
Per share market price, end of period
|
|
$
|
1.81
|
|
|
$
|
4.69
|
|
Total return based on change in net asset value
(4)
|
|
|
(36.86
|
)%
|
|
|
(11.66
|
)%
|
Total return based on stock price
(5)
|
|
|
(43.61
|
)%
|
|
|
4.96
|
%
|
Common shares outstanding, end of period
|
|
|
9,563,130
|
|
|
|
9,676,484
|
|
Weighted average common shares outstanding during period
|
|
|
9,649,725
|
|
|
|
9,760,384
|
|
Net assets, end of period
|
|
$
|
30,523,229
|
|
|
$
|
54,450,450
|
|
Ratio of operating expenses to average net assets
(6)
|
|
|
4.89
|
%
|
|
|
3.71
|
%
|
Ratio of net investment loss to average net assets
(6)
|
|
|
(4.44
|
)%
|
|
|
(2.92
|
)%
|
Portfolio turnover
(7)
|
|
|
1.83
|
%
|
|
|
1.35
|
%
|
|
(1)
|
Based on weighted average shares outstanding during the period.
|
|
(2)
|
For the nine months ended September 30, 2015, net investment loss per share excluding expenses
waived or reimbursed from BDCA Venture Adviser was $0.14. No such agreement existed during the nine months ended September 30,
2016.
|
|
(3)
|
Represents the increase in net asset value per share attributable to repurchases of common stock
during the period. The increase in net asset value per share attributable to repurchases of common stock for the nine months ended
September 30, 2016 was $0.02 per share. However, for purposes of this presentation, the per share amount attributable to purchases
of common stock was decreased by $0.01 per share to a total of $0.01 per share to reconcile the change in net asset value per share
to the other per share information presented.
|
|
(4)
|
Total return based on change in net asset value equals the change in the end of the period net
asset value over the beginning of the period net asset value plus distributions during the period, divided by the beginning of
the period net asset value. The total return has not been annualized.
|
|
(5)
|
Total return based on stock price is calculated based on the change in the market price of the
Company’s shares taking into account distributions reinvested in accordance with the Company’s dividend reinvestment
plan, or lacking such plan, at the lesser of net asset value or market price per share on the dividend distribution date. The total
return has not been annualized.
|
|
(6)
|
Operating expenses and net investment loss for periods of less than one year are annualized, and
the ratios of operating expenses to average net assets and net investment loss to average net assets are adjusted accordingly.
However, for the nine months ended September 30, 2015, incentive fees payable to the Company’s former investment adviser
were not annualized for purposes of calculating the operating expense ratios. The ratio of non-annualized incentive fees to average
net assets was (1.95%) for the nine months ended September 30, 2015. For the nine months ended September 30, 2015, the ratios of
operating expenses and net investment loss to average net assets excluding expenses waived or reimbursed from BDCA Venture Adviser
were 3.79% and (2.99%), respectively. No such agreement existed during the nine months ended September 30, 2016. Because the ratios
are calculated for the Company’s common stock taken as a whole, an individual investor’s ratios may vary from these
ratios.
|
|
(7)
|
Portfolio turnover is calculated as net proceeds from the sale of portfolio company investments
during the period divided by average net assets during the period.
|
Crossroads Capital, Inc.
Notes to Financial Statements
September 30, 2016
(Unaudited)
Note 11 – Income Taxes
The Company did not
have any net realized capital gains for the year ended December 31, 2015. Therefore, no corporate-level federal income or excise
taxes were due and, as such, the Company did not make any provision for federal income or excise taxes as of December 31,
2015.
As of December 31,
2015, the Company’s net investment loss of $3,420,438, representing the Company’s 2015 ordinary loss for tax purposes
which may not be carried forward to future years by a RIC, was reclassified to additional paid-in-capital. The portion of the Company’s
net investment loss attributable to incentive fee expense was also reclassified to additional paid-in-capital as of December 31,
2015 since the Company’s former investment advisory agreement was terminated during the tax period.
The net unrealized appreciation (depreciation)
and the aggregate cost of the Company’s portfolio company investments and Escrowed Funds for federal income tax purposes
as of September 30, 2016 and December 31, 2015 were as follows:
|
|
September 30, 2016
|
|
|
December 31, 2015
|
|
Aggregate cost for federal income tax purposes:
(1)
|
|
|
|
|
|
|
|
|
Portfolio company investments
|
|
$
|
38,412,959
|
|
|
$
|
41,413,767
|
|
Funds held in escrow from sale of investment
|
|
|
97,117
|
|
|
|
704,101
|
|
Total aggregate cost for federal income tax purposes of portfolio company financial assets
|
|
$
|
38,510,076
|
|
|
$
|
42,117,868
|
|
|
|
|
|
|
|
|
|
|
Gross unrealized appreciation on portfolio company investments
|
|
$
|
1,731,277
|
|
|
$
|
6,912,217
|
|
Gross unrealized depreciation on portfolio company investments
|
|
|
(22,677,856
|
)
|
|
|
(13,580,227
|
)
|
Gross unrealized depreciation on funds held in escrow from sale of investment
|
|
|
(13,632
|
)
|
|
|
(16,019
|
)
|
Net unrealized appreciation (depreciation) of portfolio company financial assets
|
|
$
|
(20,960,211
|
)
|
|
$
|
(6,684,029
|
)
|
|
(1)
|
Includes cumulative PIK interest accreted to principal.
|
As of September 30,
2016 and December 31, 2015, the Company had no undistributed ordinary income or undistributed long-term capital gains for
federal income tax purposes. As of September 30, 2016 and December 31, 2015, the Company had capital loss carryforwards of
$3,773,537 and $1,157,147, respectively, for federal income tax purposes.
The Company evaluates
tax positions taken or expected to be taken in the course of preparing its tax returns to determine whether the tax positions are
“more-likely-than-not” of being sustained by the applicable tax authority. Tax positions deemed to meet a “more-likely-than-not”
threshold would be recorded as a tax benefit or expense in the applicable period. Although the Company files federal and state
tax returns, its major tax jurisdiction is federal. The 2013, 2014 and 2015 federal tax years for the Company remain subject to
examination by the Internal Revenue Service. The 2013, 2014 and 2015 state tax years for the Company remain subject to examination
by the Colorado Department of Revenue. The 2015 state tax year for the Company remains subject to examination by the New York Department
of Revenue and the Nebraska Department of Revenue.
As of September 30,
2016 and December 31, 2015, the Company had not recorded a liability for any unrecognized tax positions. Management’s
evaluation of uncertain tax positions may be subject to review and adjustment at a later date based upon factors including, but
not limited to, an on-going analysis of tax laws, regulations and interpretations thereof. The Company’s policy is to include
interest and penalties related to income taxes, if applicable, in general and administrative expenses. There were no such expenses
for the nine months ended September 30, 2016 and the year ended December 31, 2015.
Note 12 – Investments in and Advances
to Affiliates
As of September 30,
2016, the Company had one portfolio company investment, Metabolon, which was a Non-controlled, Affiliated Investment and the Company
had no Controlled Investments. During the nine months ended September 30, 2016, the Company made no advances to this affiliate.
The following is a schedule of the Company’s investments in this affiliate for the nine months ended September 30, 2016.
Crossroads Capital, Inc.
Notes to Financial Statements
September 30, 2016
(Unaudited)
|
|
|
|
|
|
|
Nine
Months
Ended
September
30, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Portfolio Company
|
|
Investment
Description
|
|
Number
of
Shares /
Warrants
|
|
|
Amount
of
Interest and
Dividends
Credited to
Income
(1)
|
|
|
December
31,
2015 Fair
Value
|
|
|
Gross
Additions
(2)
|
|
|
Gross
Reductions
(3)
|
|
|
September
30,
2016 Fair
Value
|
|
Non-controlled, Affiliated
Investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Metabolon, Inc.
|
|
Series D Convertible
Preferred Stock
|
|
|
2,229,021
|
|
|
$
|
—
|
|
|
$
|
6,620,000
|
|
|
$
|
—
|
|
|
$
|
(1,155,000
|
)
|
|
$
|
5,465,000
|
|
Total
– Non-controlled, Affiliated Investments
|
|
|
|
|
|
|
|
$
|
—
|
|
|
$
|
6,620,000
|
|
|
$
|
—
|
|
|
$
|
(1,155,000
|
)
|
|
$
|
5,465,000
|
|
|
(1)
|
Non-controlled, Affiliated investments consist of
convertible preferred stock, common stock and common stock warrants that are generally non-income producing and restricted. The
convertible preferred stock investment carries a non-cumulative, preferred dividend payable when and if declared by the portfolio
company’s board of directors. Since no dividends have been declared or paid, or are expected to be declared or paid, with
respect to this convertible preferred stock investment, this investment is considered to be non-income producing.
|
|
(2)
|
Gross additions include increases in investments resulting
from new portfolio company investments, paid-in-kind interest or dividends, and exchange of one or more existing securities for
one or more new securities. Gross additions also include net decreases in unrealized depreciation or net increases in unrealized
appreciation.
|
|
(3)
|
Gross reductions include decreases in investments
resulting from sales and the exchange of one or more existing securities for one or more new securities. Gross reductions also
include net increases in unrealized depreciation or net decreases in unrealized appreciation.
|
Note 13 – Subsequent Events
In preparing these
financial statements, the Company has evaluated events after September 30, 2016. Except as set forth below, there were no subsequent
events since September 30, 2016 that would require adjustment to or additional disclosure in these financial statements.
Stock Repurchase
Program
On November 7, 2016,
the Board authorized a further extension of the Company’s stock repurchase program for an additional six months to expire
on May 10, 2017.