Notes to Financial Statements
March 31, 2017
(Unaudited)
Note
1 - Description of Business
Crossroads
Capital, Inc. (the “Company”) was incorporated on May 9, 2008 under the laws of the State of Maryland and is an internally
managed, non-diversified, closed-end management investment company that has elected to be regulated as a business development
company (“BDC”) under the Investment Company Act of 1940, as amended (the “1940 Act”). Effective December
2, 2015, the Company changed its name from BDCA Venture, Inc. to Crossroads Capital, Inc. Effective January 1, 2010, the Company
elected to be treated for U.S. federal income tax purposes as a regulated investment company (“RIC”) under Subchapter
M of the Internal Revenue Code of 1986, as amended (the “Code”). The Company commenced its portfolio company investment
activities in January 2010. The shares of the Company’s common stock have been listed on the Nasdaq Capital Market since December
12, 2011.
The
Company’s current investment objective (the “Investment Objective”) is to preserve capital and maximize stockholder
value by pursuing the sale of the Company’s portfolio investments, limiting expenses and deploying surplus cash as appropriate,
including into yielding investments to offset, in part, operating expenses and, as of March 25, 2016, to monetize the Company’s
portfolio holdings at the earliest practicable date.
On
May 3, 2016, the Board approved a Plan of Liquidation (the “Plan”) pursuant to which the Company plans to convert
into a liquidating trust with the sole purpose of liquidating the Company’s assets and distributing the proceeds to the
Company’s stockholders. The Plan is subject to the approval of the stockholders, which the Board is seeking at a special
meeting scheduled for June 2, 2017 and called for the purpose of approving the Plan and certain related matters as detailed in
the definitive proxy statement filed with the U.S. Securities and Exchange Commission (the “SEC”) on April 17, 2017.
See Note 13 – Subsequent Events.
The
Company is internally managed, although it does receive certain administrative services from 1100 Capital Consulting, LLC (the
“Administrator”), including the provision of personnel to act as certain of the Company’s executive officers,
including the Chief Executive Officer and Chief Financial Officer.
The
Company has entered into agreements with MidFirst Bank to be the custodian of its portfolio securities and Frontier Bank to be
the custodian of the majority of its cash and cash equivalent assets.
Note
2 - Summary of Significant Accounting Policies
Basis
of Presentation
The
accompanying 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, 2017. 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, 2016. 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.
Crossroads Capital, Inc.
Notes to Financial Statements
March 31, 2017
(Unaudited)
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.
|
|
•
|
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 March 31, 2017 valuations of the Company’s portfolio investments that are not publicly traded, an independent valuation
firm assisted the Board of Directors in its determination of the fair value of three investments in the Company’s portfolio.
The Administrator assisted the Board of Directors in its determination of the fair value of all of the investments in the Company’s
portfolio and the funds held in escrow from the sale of investments (“Escrowed Funds”).
ASC
820 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction
between market participants at the measurement date (i.e., the 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.
Crossroads Capital, Inc.
Notes to Financial Statements
March 31, 2017
(Unaudited)
The
Company applies the framework for determining fair value as described above to the valuation of investments in each of the following
categories:
Equity
Investments
Equity
investments for which market quotations are readily available in an active market are generally valued at the most recently available
closing market prices and are classified as Level 1 assets. However, equity investments for which market quotations are readily
available, but which are subject to lockup provisions restricting the resale of such investments for a specified period of time,
are valued at a discount to the most recently available closing market prices and, accordingly, are classified as Level 3 assets.
The
fair values of the Company’s equity investments for which market quotations are not readily available are determined based
on various factors and are classified as Level 3 assets. To determine the fair value of a portfolio company for which market quotations
are not readily available, the Company may analyze the portfolio company’s most recently available historical and projected
financial results, public market comparables and other factors. The Company may also consider other events, including the transaction
in which the Company acquired its securities, subsequent equity sales by the portfolio company, mergers or acquisitions affecting
the portfolio company or the completion of an initial public offering (“IPO”) by the portfolio company. In addition,
the Company may consider the trends of the portfolio company’s basic financial metrics from the time of its original investment
until the measurement date, with material improvement of these metrics indicating a possible increase in fair value, while material
deterioration of these metrics may indicate a possible reduction in fair value. The fair values of the Company’s portfolio
company securities are generally discounted for lack of marketability or when the securities are illiquid. See Note 3 - Portfolio
Investments and Fair Value.
In
cases where a portfolio company completes a subsequent financing with different rights and preferences than the equity securities
the Company holds, or where the Company owns common stock in a portfolio company with preferred stock outstanding or where a merger
or acquisition event involving a portfolio company has been completed or is pending, the Company may consider the aforementioned
transaction to estimate the portfolio company’s equity value.
In
determining the value of equity or equity-linked securities (including warrants to purchase common or preferred stock) in a portfolio
company, the Company considers the rights, preferences and limitations of such securities. In cases where a portfolio company’s
capital structure includes multiple classes of preferred and common stock and equity-linked securities with different rights and
preferences, the Company may use an option pricing model or another appropriate method to allocate value to each equity and equity-linked
security.
Debt
Investments
Given
the nature of the Company’s current debt investments, principally convertible bridge notes issued by venture capital-backed
portfolio companies, these investments are Level 3 assets under ASC 820 because there is no known or accessible market for these
investment securities to be traded or exchanged. Since the Company invested in convertible bridge notes for the primary purpose
of potential conversion into equity at a future date, the fair value of the Company’s convertible debt investments for which
market quotations are not available may be determined on an as-converted to equity basis using the same factors and methodologies
the Company uses to value its equity investments. In making a good faith determination of the value of its convertible debt investments,
the Company generally starts with the cost basis of the investment, which includes the value attributed to the original issue
discount, if any, and payment-in-kind (“PIK”) interest which has been accreted to principal as earned.
If
the Company determines that there is a low likelihood that its convertible debt investments will be converted into equity or repaid,
the Company applies a procedure that assumes a sale of the investment in a hypothetical market to a hypothetical market participant
where buyers and sellers are willing participants. The hypothetical market does not include scenarios where the underlying security
was simply repaid or extinguished, but includes an exit concept. As part of this process, the Company may evaluate the creditworthiness
of the portfolio company, its ability to meet its current debt obligations, the collateral (if any) for recoverability of the
debt investment in the event of default and whether the security lien, if any, is subordinated to senior lenders.
Crossroads Capital, Inc.
Notes to Financial Statements
March 31, 2017
(Unaudited)
Funds
Held in Escrow from 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 $0 and $10,767 during the three months ended
March 31, 2017 and 2016, respectively. See “Income Taxes” below.
When
one of the Company’s loans becomes more than 90 days past due, or if the Company otherwise does not expect the portfolio
company to be able to service its debt and other obligations, the Company will, as a general matter, place the loan on non-accrual
status and generally will cease recognizing interest income on that loan until all principal and interest has been brought current
through payment or due to a restructuring such that the interest income is deemed to be collectible. However, the Company may
make exceptions to this policy if the loan has sufficient collateral value and is in the process of collection. If the fair value
of a loan is below cost, the Company may cease recognizing PIK interest on the debt investment until such time that the fair value
equals or exceeds cost.
Net
Realized Gain or Loss and Unrealized Appreciation or Depreciation
Net
realized gain or loss is recognized when a portfolio company investment or other financial asset is disposed of and is computed
as the difference between the Company’s cost basis in such investment or asset at the disposition date and the net proceeds received
from such disposition (after reduction for commissions and other selling expenses). Net realized gains and losses on transactions
involving portfolio company investments and other financial assets are determined by specific identification. Unrealized appreciation
or depreciation is computed as the difference between the fair value of the portfolio company investment or other financial asset
and the cost basis of such investment or asset.
Income
Taxes
Effective
January 1, 2010, the Company elected to be treated for tax purposes as a RIC under the Code. To maintain RIC tax treatment, the
Company must meet specified source-of-income and asset diversification requirements and distribute annually at least 90% of its
“investment company taxable income” as defined in the Code.
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 March 31, 2017.
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.
Crossroads Capital, Inc.
Notes to Financial Statements
March 31, 2017
(Unaudited)
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.
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 March 31, 2017 and December 31, 2016:
|
|
March 31, 2017
|
|
|
December 31, 2016
|
|
Security Type
|
|
Cost
|
|
|
Fair Value
|
|
|
Percentage
of Portfolio
|
|
|
Cost
|
|
|
Fair Value
|
|
|
Percentage
of Portfolio
|
|
Privately Held Portfolio Companies:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred Stock
|
|
$
|
15,887,896
|
|
|
$
|
7,835,000
|
|
|
|
96.06
|
%
|
|
$
|
22,225,681
|
|
|
$
|
8,648,677
|
|
|
|
93.00
|
%
|
Preferred Stock Warrants
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
%
|
|
|
—
|
|
|
|
191,323
|
|
|
|
2.06
|
%
|
Common Stock
|
|
|
10,333,392
|
|
|
|
—
|
|
|
|
—
|
%
|
|
|
10,333,392
|
|
|
|
155,000
|
|
|
|
1.67
|
%
|
Convertible Notes
|
|
|
296,594
|
|
|
|
56,131
|
|
|
|
0.69
|
%
|
|
|
296,594
|
|
|
|
45,052
|
|
|
|
0.48
|
%
|
Secured Notes
|
|
|
168,448
|
|
|
|
169,374
|
|
|
|
2.08
|
%
|
|
|
168,448
|
|
|
|
164,416
|
|
|
|
1.77
|
%
|
Total Portfolio Company Investments
|
|
|
26,686,330
|
|
|
|
8,060,505
|
|
|
|
98.83
|
%
|
|
|
33,024,115
|
|
|
|
9,204,468
|
|
|
|
98.98
|
%
|
Funds Held in Escrow from Sale of Investment
|
|
|
103,185
|
|
|
|
95,768
|
|
|
|
1.17
|
%
|
|
|
103,185
|
|
|
|
94,907
|
|
|
|
1.02
|
%
|
Total Portfolio Company Financial Assets
|
|
$
|
26,789,515
|
|
|
$
|
8,156,273
|
|
|
|
100.00
|
%
|
|
$
|
33,127,300
|
|
|
$
|
9,299,375
|
|
|
|
100.00
|
%
|
Crossroads Capital, Inc.
Notes to Financial Statements
March 31, 2017
(Unaudited)
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 March 31, 2017 and December
31, 2016:
Description
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total Fair Value
|
|
As of March 31, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
Privately Held Portfolio Companies:
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred Stock
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
7,835,000
|
|
|
$
|
7,835,000
|
|
Convertible Notes
|
|
|
—
|
|
|
|
—
|
|
|
|
56,131
|
|
|
|
56,131
|
|
Secured Notes
|
|
|
—
|
|
|
|
—
|
|
|
|
169,374
|
|
|
|
169,374
|
|
Cash Equivalents:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money Market Funds
|
|
|
1,350,188
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,350,188
|
|
Funds Held in Escrow From Sale of Investment
|
|
|
—
|
|
|
|
—
|
|
|
|
95,768
|
|
|
|
95,768
|
|
Total
|
|
$
|
1,350,188
|
|
|
$
|
—
|
|
|
$
|
8,156,273
|
|
|
$
|
9,506,461
|
|
Description
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total Fair Value
|
|
As of December 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
Privately Held Portfolio Company Securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred Stock
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
8,648,677
|
|
|
$
|
8,648,677
|
|
Preferred Stock Warrants
|
|
|
—
|
|
|
|
—
|
|
|
|
191,323
|
|
|
|
191,323
|
|
Common Stock
|
|
|
—
|
|
|
|
—
|
|
|
|
155,000
|
|
|
|
155,000
|
|
Convertible Notes
|
|
|
—
|
|
|
|
—
|
|
|
|
45,052
|
|
|
|
45,052
|
|
Secured Notes
|
|
|
—
|
|
|
|
—
|
|
|
|
164,416
|
|
|
|
164,416
|
|
Cash Equivalents:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money Market Funds
|
|
|
11,315
|
|
|
|
—
|
|
|
|
—
|
|
|
|
11,315
|
|
Funds Held in Escrow From Sale of Investment
|
|
|
—
|
|
|
|
—
|
|
|
|
94,907
|
|
|
|
94,907
|
|
Total
|
|
$
|
11,315
|
|
|
$
|
—
|
|
|
$
|
9,299,375
|
|
|
$
|
9,310,960
|
|
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 three months ended March 31, 2017:
|
|
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, 2016
|
|
$
|
8,648,677
|
|
|
$
|
191,323
|
|
|
$
|
155,000
|
|
|
$
|
45,052
|
|
|
$
|
164,416
|
|
|
$
|
94,907
|
|
|
$
|
9,299,375
|
|
Sale,
exchange or conversion of Level 3 portfolio company investments
(1)
|
|
(1,323,165
|
)
|
|
(16,835
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(1,340,000
|
)
|
Total
net realized gain (loss)
|
|
(5,014,620
|
)
|
|
16,835
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(4,997,785
|
)
|
Total
net change in unrealized appreciation (depreciation)
|
|
5,524,108
|
|
|
(191,323
|
)
|
|
(155,000
|
)
|
|
11,079
|
|
|
4,958
|
|
|
861
|
|
|
5,194,683
|
|
Fair
Value as of March 31, 2017
|
|
$
|
7,835,000
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
56,131
|
|
|
$
|
169,374
|
|
|
$
|
95,768
|
|
|
$
|
8,156,273
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
net change in unrealized appreciation (depreciation) on Level 3 portfolio company investments held as of March 31, 2017
|
|
$
|
335,000
|
|
|
$
|
—
|
|
|
$
|
(155,000
|
)
|
|
$
|
11,079
|
|
|
$
|
4,958
|
|
|
$
|
861
|
|
|
$
|
196,898
|
|
|
(1)
|
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.
|
Crossroads Capital, Inc.
Notes to Financial Statements
March 31, 2017
(Unaudited)
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, 2016:
|
|
Level 3
Preferred
Stock
|
|
|
Level 3
Preferred
Stock
Warrants
|
|
|
Level 3
Common
Stock
|
|
|
Level 3
Convertible
Notes
|
|
|
Level 3
Secured Notes
|
|
|
Level 3
Funds Held in
Escrow
|
|
|
Total
|
|
Fair
Value as of December 31, 2015
|
|
$
|
32,976,000
|
|
|
$
|
420,000
|
|
|
$
|
80,000
|
|
|
$
|
530,000
|
|
|
$
|
121,759
|
|
|
$
|
688,082
|
|
|
$
|
34,815,841
|
|
Purchases
and other adjustments to cost of Level 3 portfolio company investments
(1)
|
|
244,039
|
|
|
—
|
|
|
—
|
|
|
30,665
|
|
|
46,689
|
|
|
(600,916
|
)
|
|
(279,523
|
)
|
Sale,
exchange or conversion of Level 3 portfolio company investments
(2)
|
|
(10,181,202
|
)
|
|
—
|
|
|
3,515,000
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(6,666,202
|
)
|
Gross
transfers out of Level 3 to
Level 1
(2)
|
|
—
|
|
|
—
|
|
|
(181,990
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(181,990
|
)
|
Total
net realized gain
|
|
1,264,607
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1,264,607
|
|
Total
net change in unrealized appreciation (depreciation)
|
|
(15,654,767
|
)
|
|
(228,677
|
)
|
|
(3,258,010
|
)
|
|
(515,613
|
)
|
|
(4,032
|
)
|
|
7,741
|
|
|
(19,653,358
|
)
|
Fair
Value as of December 31, 2016
|
|
$
|
8,648,677
|
|
|
$
|
191,323
|
|
|
$
|
155,000
|
|
|
$
|
45,052
|
|
|
$
|
164,416
|
|
|
$
|
94,907
|
|
|
$
|
9,299,375
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
net change in unrealized appreciation (depreciation) on Level 3 portfolio company investments held as of December 31, 2016
|
|
$
|
(14,011,721
|
)
|
|
$
|
(228,677
|
)
|
|
$
|
(3,258,010
|
)
|
|
$
|
(515,613
|
)
|
|
$
|
(4,032
|
)
|
|
$
|
7,741
|
|
|
$
|
(18,010,312
|
)
|
|
(1)
|
Purchases
and other adjustments to cost of Level 3 portfolio company investments include purchases of new investments at cost and payment-in
kind interest accreted to principal.
|
|
(2)
|
Exchanges,
conversions and transfers out of Level 3 portfolio company investments and Escrowed Funds are reflected at cost if originally
acquired during the period or at the fair value as of the beginning of the period if originally acquired before the beginning
of the period. Sales of Level 3 portfolio company investments and settlement of Escrowed Funds are reflected at the net proceeds
from such sale or settlement.
|
Portfolio
Company Investment Activity
On
August 24, 2016, the Company announced the engagement of Setter Capital, Inc., a Toronto-based secondary market advisory firm,
to assist it in identifying prospective buyers for its portfolio investments. During the three months ended March 31, 2017, Setter
Capital assisted the Company with the sale of its securities in SilkRoad. During the year ended December 31, 2016, Setter Capital
assisted the Company with the sale of its securities in Metabolon and Centrify. Setter Capital continues to assist the Company
with the sale of its remaining portfolio investments.
On
March 29, 2017, the Company liquidated its entire investment in SilkRoad, consisting of 6,361,938 shares of Series D-1 convertible
preferred stock, 19,132,283 shares of Series D-2 convertible preferred stock and 1,683,460 Series D-1 preferred stock warrants.
The transaction was a secondary market sale for total net proceeds of $1,340,000, resulting in a net realized loss of $4,997,785.
Crossroads Capital, Inc.
Notes to Financial Statements
March 31, 2017
(Unaudited)
Significant
Unobservable Inputs for Level 3 Portfolio Company Securities
In
accordance with ASC 820, the table set forth below provides quantitative information about the Level 3 fair value measurements
of the Company’s portfolio company investments and Escrowed Funds as of March 31, 2017 and December 31, 2016. In addition
to the approaches and inputs noted in the table below, according to the Company’s valuation policy, the Company may also
use other valuation approaches and methodologies when determining the Company’s fair value measurements. The below table
is not intended to be all-inclusive, but rather provides information on the significant Level 3 inputs as they relate to the Company’s
fair value measurements. To the extent an unobservable input is not reflected in the table below, such input is deemed insignificant
or is not applicable with respect to the Company’s Level 3 fair value measurements as of March 31, 2017 and December 31,
2016, respectively. Changes in the inputs in isolation could result in a material change in the fair value measurement, depending
on the input and the materiality of the investment:
|
|
March 31, 2017
|
Investment Type
|
|
Fair Value
|
|
Valuation Approaches /
Methodologies
|
|
Unobservable Input
(1)
|
|
Range
|
|
Weighted
Average
(2)
|
Level 3 Portfolio Company Investments: Preferred Stock
|
|
$
|
6,495,000
|
|
Comparable transactions
|
|
Revenue multiple
|
|
1.4
|
to
|
5.0
|
|
2.9
|
|
|
$
|
7,835,000
|
|
Option pricing model
|
|
Comparable public company equity volatility
|
|
30%
|
to
|
58%
|
|
50%
|
|
|
$
|
7,835,000
|
|
Comparable public companies
|
|
Revenue multiple
|
|
0.6
|
to
|
4.7
|
|
2.8
|
|
|
|
|
|
|
|
EBITDA multiple
|
|
10.4
|
to
|
11.1
|
|
10.7
|
Level 3 Portfolio Company Investments: Common Stock
|
|
$
|
—
|
|
Comparable public companies
|
|
Revenue multiple
|
|
0.6
|
to
|
0.6
|
|
n/a
|
Level 3 Portfolio Company Investments: Convertible Notes and Secured Notes
|
|
$
|
225,505
|
|
Comparable public companies
|
|
Revenue multiple
|
|
0.6
|
to
|
0.6
|
|
0.6
|
Level 3 Funds Held in Escrow From Sale of Investment
|
|
$
|
95,768
|
|
Escrow Discounts
|
|
Indemnity risk discount
|
|
4%
|
to
|
4%
|
|
4%
|
|
|
|
|
|
|
|
Deferred payment discount
|
|
5%
|
to
|
5%
|
|
5%
|
|
(1)
|
The significant
unobservable inputs that may be used in the fair value measurement of the Company’s portfolio company investments in convertible
preferred stock, common stock and warrants to purchase common or preferred stock for which market quotations are not readily available
include: (i) revenue multiples for comparable transactions, (ii) revenue, earnings before interest, taxes, depreciation and amortization,
and price to earnings multiples (collectively, “Multiples”) for comparable public companies, (iii) discount rates and
terminal year Multiples for comparable public companies applied in a discounted cash flow analysis of the portfolio company; and
(iv) a discount for lack of marketability (“DLOM”). For some portfolio company investments, additional consideration
may be given to data from a prior or contemporaneous financing transaction, the last round of financing or a merger or acquisition
event near the measurement date (collectively, a “Precedent Transaction”). Inputs used in deriving an appropriate DLOM
include the time frame in which the portfolio company expects to pursue or complete an IPO or sale/merger and, where put option
models are used to estimate the price of a plain-vanilla, at-the-money put option and the price of an average-strike put option,
inputs may include a range of term and volatility assumptions. A change in the assumptions used for Precedent Transactions and
Multiples may indicate a directionally similar change in the fair value of the Company’s portfolio company investments in
convertible preferred stock or common stock, while a change in the assumptions used for discount rate and DLOM may indicate a
directionally opposite change in the fair value of the portfolio company investment.
|
Additional
inputs that may be used in an option pricing model when applicable include the volatility of equity in comparable public companies,
the risk free interest rate and the estimated time to exit. The significant unobservable input used in an option pricing model
for valuing certain of the Company’s portfolio company investments in convertible preferred stock, common stock and preferred
and common stock warrants for which market quotations are not readily available is the volatility of equity in comparable public
companies. A change in the assumption used for equity volatility may indicate a directionally similar change in the fair value
of the convertible preferred stock, common stock and preferred and common stock warrant investments.
Since
the Company has invested in convertible debt investments, principally convertible bridge notes, for the primary purpose of potential
conversion into equity at a future date, the significant unobservable inputs that may be used in the fair value measurement of
its convertible debt investments on an as-converted to equity basis are the same inputs used by the Company to value its equity
securities (including convertible preferred stock). An option pricing model 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 March 31, 2017.
|
Crossroads Capital, Inc.
Notes to Financial Statements
March 31, 2017
(Unaudited)
|
|
December 31, 2016
|
Investment Type
|
|
Fair Value
|
|
Valuation Approaches /
Methodologies
|
|
Unobservable Input
(1)
|
|
Range
|
|
Weighted
Average
(2)
|
Level 3 Portfolio Company Investments: Preferred Stock
(3)
|
|
$
|
5,985,000
|
|
Comparable transactions
|
|
Revenue multiple
|
|
1.6
|
to
|
5.0
|
|
3.0
|
|
|
$
|
7,400,000
|
|
Option pricing model
|
|
Comparable public company equity volatility
|
|
30%
|
to
|
58%
|
|
50%
|
|
|
$
|
7,500,000
|
|
Comparable public companies
|
|
Revenue multiple
|
|
0.6
|
to
|
4.0
|
|
2.3
|
|
|
|
|
|
|
|
EBITDA multiple
|
|
9.9
|
to
|
10.4
|
|
10.2
|
Level 3 Portfolio Company Investments: Preferred Stock Warrants
(3)
|
|
$
|
n/a
|
|
Comparable public companies
|
|
Revenue multiple
|
|
n/a
|
to
|
n/a
|
|
n/a
|
Level 3 Portfolio Company Investments: Common Stock
|
|
$
|
155,000
|
|
Comparable public companies
|
|
Revenue multiple
|
|
0.6
|
to
|
0.6
|
|
n/a
|
|
|
|
|
|
|
|
Discount for lack of marketability
|
|
23%
|
to
|
23%
|
|
23%
|
Level 3 Portfolio Company Investments: Convertible Notes and Secured Notes
|
|
$
|
209,468
|
|
Comparable public companies
|
|
Revenue multiple
|
|
0.6
|
to
|
0.6
|
|
0.6
|
Level 3 Funds Held in Escrow From Sale of Investment
|
|
$
|
94,907
|
|
Escrow Discounts
|
|
Indemnity risk discount
|
|
4%
|
to
|
4%
|
|
4%
|
|
|
|
|
|
|
|
Deferred payment discount
|
|
5%
|
to
|
5%
|
|
5%
|
|
(1)
|
The significant
unobservable inputs that may be used in the fair value measurement of the Company’s portfolio company investments in convertible
preferred stock, common stock and warrants to purchase common or preferred stock for which market quotations are not readily available
include: (i) revenue multiples for comparable transactions, (ii) 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 DLOM. For some portfolio company investments, additional consideration may be given to data from a Precedent Transaction.
Inputs used in deriving an appropriate DLOM include the time frame in which the portfolio company expects to pursue or complete
an IPO or sale/merger and, where put option models are used to estimate the price of a plain-vanilla, at-the-money put option
and the price of an average-strike put option, inputs may include a range of term and volatility assumptions. A change in the
assumptions used for Precedent Transactions and Multiples may indicate a directionally similar change in the fair value of the
Company’s portfolio company investments in convertible preferred stock or common stock, while a change in the assumptions
used for discount rate and DLOM may indicate a directionally opposite change in the fair value of the portfolio company investment.
|
Additional
inputs that may be used in an option pricing model when applicable include the volatility of equity in comparable public companies,
the risk free interest rate and the estimated time to exit. The significant unobservable input used in an option pricing model
for valuing certain of the Company’s portfolio company investments in convertible preferred stock, common stock and preferred
and common stock warrants for which market quotations are not readily available is the volatility of equity in comparable public
companies. A change in the assumption used for equity volatility may indicate a directionally similar change in the fair value
of the convertible preferred stock, common stock and preferred and common stock warrant investments.
Since
the Company has invested in convertible debt investments, principally convertible bridge notes, for the primary purpose of potential
conversion into equity at a future date, the significant unobservable inputs that may be used in the fair value measurement of
its convertible debt investments on an as-converted to equity basis are the same inputs used by the Company to value its equity
securities (including convertible preferred stock). An option pricing model may also be used to derive the fair value of the conversion
feature of convertible notes. If the Company determines that there is a low likelihood that its convertible debt investments will
be converted into equity or repaid the significant unobservable inputs that may be used in the fair value measurement of the Company’s
convertible debt investments are hypothetical market yields and premiums/(discounts). For non-convertible debt investments, which
the Company generally holds for cash payment at maturity, the significant unobservable inputs that may be used in the fair value
measurement of the Company’s non-convertible debt are hypothetical market yields and premiums/(discounts). The hypothetical
market yield is defined as the exit price of an investment in a hypothetical market to hypothetical market participants where
buyers and sellers are willing participants. The premiums (discounts) relate to company specific characteristics such as underlying
investment performance, collateral, and other characteristics of the investment. In certain investments, the Company may value
its convertible and non-convertible debt investments using a liquidation approach in which case the realizable value of the collateral
would be a significant unobservable input.
Funds
held in escrow from the sale of investments are valued using certain indemnity risk and deferred payment discounts applied to
the amounts withheld.
|
(2)
|
Weighted
average based on fair value as of December 31, 2016.
|
|
(3)
|
As of December
31, 2016, the fair value measurement of the Company’s Level 3 investment in SilkRoad was based on an agreed upon sales price
for a secondary market purchase offer of such securities.
|
As
of March 31, 2017 and December 31, 2016, 28.7% and 32.4%, 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.
Crossroads Capital, Inc.
Notes to Financial Statements
March 31, 2017
(Unaudited)
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
months ended March 31, 2017 and 2016 for: (i) the Company’s portfolio company investments sold during the three months ended
March 31, 2017 and 2016 and (ii) the Company’s portfolio company investments and Escrowed Funds held as of March 31, 2017
and 2016.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
March 31, 2017
|
|
|
March 31, 2016
|
|
|
|
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SilkRoad, Inc.
|
|
$
|
(4,997,785
|
)
|
|
$
|
4,997,785
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Agilyx Corp.
|
|
|
20
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Subtotal - Portfolio Company Investments Sold During Period
|
|
|
(4,997,765
|
)
|
|
|
4,997,785
|
|
|
|
—
|
|
|
|
—
|
|
Portfolio Company Investments Held at End of Period
|
|
|
—
|
|
|
|
196,038
|
|
|
|
—
|
|
|
|
(7,251,497
|
)
|
Total Portfolio Company Investments
|
|
|
(4,997,765
|
)
|
|
|
5,193,823
|
|
|
|
—
|
|
|
|
(7,251,497
|
)
|
Funds Held in Escrow from Sale of Investment
|
|
|
—
|
|
|
|
861
|
|
|
|
—
|
|
|
|
760
|
|
Total Portfolio Company Financial Assets
|
|
$
|
(4,997,765
|
)
|
|
$
|
5,194,684
|
|
|
$
|
—
|
|
|
$
|
(7,250,737
|
)
|
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 months ended March 31, 2017 and 2016, the Company incurred $175,292 and $150,000 of expenses related to the Administrator,
respectively. As of March 31, 2017 and December 31, 2016, the Company had expenses payable to the Administrator of $63,708 and
$191,000, 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. The Administrator also provides support
for the Company’s risk management efforts and generally overseeing the payment of its expenses and the performance of administrative
and professional services rendered to the Company by others.
Effective
December 2, 2015, the Company engaged the services of its Chief Compliance Officer. For the three months ended March 31, 2017
and 2016, the Company incurred $15,000 and $12,000 of compliance fees, respectively. As of March 31, 2017 and December 31, 2016,
the Company had expenses payable to its Chief Compliance Officer of $5,000 and $5,206, respectively.
On
November 10, 2015, the Company’s Board of Directors approved the engagement of US Bancorp to provide administration and
accounting services to the Company pursuant to an Administration Servicing Agreement and a Fund Accounting Servicing Agreement,
respectively. On May 3, 2016, the Board announced the termination of its agreement with US Bancorp, effective as of March 29,
2016. For the three months ended March 31, 2017 and 2016, the Company incurred $0 and $19,447 of expenses, respectively, related
to US Bancorp. The Company did not have any expenses payable to US Bancorp as of March 31, 2017 and December 31, 2016.
Crossroads Capital, Inc.
Notes to Financial Statements
March 31, 2017
(Unaudited)
Joint
Liability Insurance Agreement
For
the policy year ended August 28, 2016, 10% of the total directors and officers liability insurance policy premium and 10% of the
total excess liability policy premium was allocated to and paid by BDCA Venture Adviser, LLC, the Company’s former investment
adviser (“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 indemnitees 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
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. 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 three months ended March 31, 2017.
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. The Board previously authorized several six month extensions of the Company’s
stock repurchase program. On April 13, 2017, the Board authorized a further extension of the Company’s stock repurchase
program for an additional six months to expire on November 10, 2017, or until Company’s conversion to a liquidating trust,
whichever is earlier. 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, without reliance
on the “safe harbor” provisions of Rule 10b-18 under the Securities Exchange Act of 1934, which sets certain restrictions
on the method, timing, price and volume of stock repurchases. 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.
During
the year ended December 31, 2016, the Company repurchased 113,354 shares of its common stock at an average price of $2.08 per
share, including commissions, with a total cost of $235,577. The Company retired all 113,354 shares of its repurchased common
stock during the year ended December 31, 2016, with $113 of the total cost of the retired shares charged to common stock and $235,464
charged to additional paid-in capital. The Company’s net asset value per share increased by $0.02 per share as a result
of the repurchased shares during the year ended December 31, 2016. The weighted average discount to net asset value per share
of the shares repurchased during the year ended December 31, 2016 was 41%.
The
Company accounted for the repurchases of its common stock under the cost method based on the actual cost of the repurchases.
Crossroads Capital, Inc.
Notes to Financial Statements
March 31, 2017
(Unaudited)
Note
7 – Dividends and Distributions
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. The Company did not declare any distributions to stockholders
during the three months ended March 31, 2017 or the year ended December 31, 2016.
Distributions
to the Company’s stockholders are payable only when and as declared by the Company’s Board of Directors. Distributions,
if any, will be from available funds, as determined by the Board of Directors, with the intention of distributing up to 100% of
the proceeds from the sale of the Company’s portfolio investments.
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 has maintained 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 of the Company’s investment
policy and liquidation plan, no dividends are expected to be declared.
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 March 31, 2017, 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. As of December 31, 2016,
the Company recognized $6,067 in additional proceeds in connection with the expense fund related to Xtime’s merger transaction.
The remaining Escrowed Funds are anticipated to be released in November 2017, net of settlement of any indemnity claims. As of
March 31, 2017, the Escrowed Funds were fair valued at $95,768. Although recovery under the stockholder indemnity obligation is
generally limited to the Escrowed Funds, 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.
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.
Crossroads Capital, Inc.
Notes to Financial Statements
March 31, 2017
(Unaudited)
Under
the former Investment Advisory and Administrative Services Agreement (the “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 March 31, 2017, 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 months ended March 31, 2017 and 2016:
|
Three Months Ended
|
|
|
March 31, 2017
|
|
|
March 31, 2016
|
|
Net
decrease in net assets resulting from operations
|
$
|
(400,017
|
)
|
|
$
|
(7,829,825
|
)
|
Basic
and diluted weighted-average shares outstanding
|
9,563,130
|
|
|
9,672,193
|
|
Basic
and diluted net decrease in net assets per share resulting from operations
|
$
|
(0.04
|
)
|
|
$
|
(0.81
|
)
|
During
the three months ended March 31, 2017 and 2016, the Company had no dilutive securities outstanding.
Crossroads Capital, Inc.
Notes to Financial Statements
March 31, 2017
(Unaudited)
Note
10 – Financial Highlights
The
following is a schedule of financial highlights for the three months ended March 31, 2017 and 2016:
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
March 31, 2017
|
|
|
March 31, 2016
|
|
Per common share data
|
|
|
|
|
|
|
Net asset value, beginning of period
|
|
$
|
2.96
|
|
|
$
|
5.06
|
|
|
|
|
|
|
|
|
|
|
Net
investment loss
(1)
|
|
|
(0.06
|
)
|
|
|
(0.06
|
)
|
Net realized loss on investments
(1)
|
|
|
(0.52
|
)
|
|
|
—
|
|
Net increase (decrease) in unrealized appreciation (depreciation) on investments and funds held in escrow from sale of investment
(1)
|
|
|
0.54
|
|
|
|
(0.75
|
)
|
Net decrease in net assets resulting from operations
|
|
|
(0.04
|
)
|
|
|
(0.81
|
)
|
|
|
|
|
|
|
|
|
|
Capital stock transactions:
|
|
|
|
|
|
|
|
|
Repurchases of common stock
(2)
|
|
|
—
|
|
|
|
*
|
|
Net increase in net assets from capital stock transactions
|
|
|
—
|
|
|
|
*
|
|
|
|
|
|
|
|
|
|
|
Net asset value, end of period
|
|
$
|
2.92
|
|
|
$
|
4.25
|
|
|
|
|
|
|
|
|
|
|
Ratios and supplemental data:
|
|
|
|
|
|
|
|
|
Per share market price, end of period
|
|
$
|
2.29
|
|
|
$
|
2.62
|
|
Total return based on change in net asset value
(3)
|
|
|
(1.35
|
)%
|
|
|
(16.01
|
)%
|
Total return based on stock price
(4)
|
|
|
7.51
|
%
|
|
|
(18.38
|
)%
|
Common shares outstanding, end of period
|
|
|
9,563,130
|
|
|
|
9,670,076
|
|
Weighted average common shares outstanding during period
|
|
|
9,563,130
|
|
|
|
9,672,193
|
|
Net assets, end of period
|
|
$
|
27,899,552
|
|
|
$
|
41,071,626
|
|
Ratio of operating expenses to average net assets
(5)
|
|
|
9.07
|
%
|
|
|
3.75
|
%
|
Ratio of net investment loss to average net assets
(5)
|
|
|
(8.44
|
)%
|
|
|
(5.15
|
)%
|
Portfolio turnover
(6)
|
|
|
4.74
|
%
|
|
|
—
|
%
|
|
*
|
Per
share amount less than $0.01 per share.
|
|
(1)
|
Based
on weighted average shares outstanding during the period.
|
|
(2)
|
Represents
the increase in net asset value per share attributable to repurchases of common stock during the period.
|
|
(3)
|
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.
|
|
(4)
|
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.
|
|
(5)
|
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. 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.
|
|
(6)
|
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.
|
Note
11 – Income Taxes
The
Company did not have any net realized capital gains for the year ended December 31, 2016. 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, 2016.
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.
Crossroads
Capital, Inc.
Notes
to Financial Statements
March
31, 2017
(Unaudited)
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 March 31, 2017 and December 31, 2016 were as follows:
|
|
March 31, 2017
|
|
|
December 31, 2016
|
|
Aggregate cost for federal income tax purposes:
(1)
|
|
|
|
|
|
|
|
|
Portfolio company investments
|
|
$
|
26,686,330
|
|
|
$
|
33,024,115
|
|
Funds held in escrow from sale of investment
|
|
|
103,185
|
|
|
|
103,185
|
|
Total aggregate cost for federal income tax purposes of portfolio company financial assets
|
|
$
|
26,789,515
|
|
|
$
|
33,127,300
|
|
|
|
|
|
|
|
|
|
|
Gross unrealized appreciation on portfolio company investments
|
|
$
|
1,896,597
|
|
|
$
|
1,386,597
|
|
Gross unrealized depreciation on portfolio company investments
|
|
|
(20,522,422
|
)
|
|
|
(25,206,244
|
)
|
Gross unrealized depreciation on funds held in escrow from sale of investment
|
|
|
(7,416
|
)
|
|
|
(8,278
|
)
|
Net unrealized appreciation (depreciation) of portfolio company financial assets
|
|
$
|
(18,633,241
|
)
|
|
$
|
(23,827,925
|
)
|
|
(1)
|
Includes
cumulative PIK interest accreted to principal.
|
As
of March 31, 2017 and December 31, 2016, the Company had no undistributed ordinary income or undistributed long-term capital gains
for federal income tax purposes. As of March 31, 2017 and December 31, 2016, the Company had capital loss carryforwards of $7,500,628
and $2,502,863, 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 2014, 2015 and 2016 federal
tax years for the Company remain subject to examination by the Internal Revenue Service. The 2014 and 2015 state tax years for
the Company remain subject to examination by the Colorado Department of Revenue. The 2015 state tax year for the Company remains
subject to examination by the New York Department of Revenue. The 2015 and 2016 state tax years for the Company remains subject
to examination by the Nebraska Department of Revenue.
As
of March 31, 2017 and December 31, 2016, 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 three months ended March 31, 2017 and the year ended December 31, 2016.
Note
12 – Investments in and Advances to Affiliates
During
the three months ended March 31, 2017, the Company had no Non-controlled, Affiliated Investments or Controlled Investments.
During
the year ended December 31, 2016, the Company had one portfolio company investment, Metabolon, which was a Non-controlled, Affiliated
Investment and the Company had no Controlled Investments. On November 29, 2016, the Company sold 1,338,302 shares of its Metabolon
Series D preferred stock in a secondary market sale for total net proceeds of $3,466,202, resulting in a net realized gain of
$1,064,606. The Company continued to own 890,719 shares of Metabolon Series D preferred stock, however, as of December 31, 2016,
the Company’s investment in Metabolon no longer met the definition of a Non-controlled, Affiliated Investment. During 2016,
the Company made no advances to Metabolon. The following is a schedule of the Company’s activity in Metabolon for the year
ended December 31, 2016.
Crossroads Capital, Inc.
Notes to Financial Statements
March 31, 2017
(Unaudited)
|
|
|
|
Year Ended December 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
Portfolio
Company
|
|
Investment
Description
|
|
Amount of Interest and Dividends Credited to Income
(1)
|
|
|
December 31, 2015
Fair Value
|
|
|
Gross Additions
(2)
|
|
|
Gross Reductions
(3)
|
|
|
December 31, 2016
Fair Value
|
|
|
Net Realized Gain (Loss)
|
|
Metabolon,
Inc.
|
|
Series
D Convertible Preferred Stock
(4)
|
|
$
|
—
|
|
|
$
|
6,620,000
|
|
|
$
|
—
|
|
|
$
|
(3,935,000
|
)
|
|
$
|
2,685,000
|
|
|
$
|
1,064,606
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Non-controlled,
Affiliated investments consist of convertible preferred stock, common stock and common stock warrants that are generally non-income
producing and restricted. The convertible preferred stock investment carries a non-cumulative, preferred dividend payable when
and if declared by the portfolio company’s board of directors. Since no dividends have been declared or paid, or are expected
to be declared or paid, with respect to this convertible preferred stock investment, this investment is considered to be non-income
producing.
|
|
(2)
|
Gross
additions include increases in investments resulting from new portfolio company investments, paid-in-kind interest or dividends,
and exchange of one or more existing securities for one or more new securities. Gross additions also include net decreases in
unrealized depreciation or net increases in unrealized appreciation.
|
|
(3)
|
Gross
reductions include decreases in investments resulting from sales and the exchange of one or more existing securities for one or
more new securities. Gross reductions also include net increases in unrealized depreciation or net decreases in unrealized appreciation.
|
|
(4)
|
As
of December 31, 2016, the Company’s investment in Metabolon no longer meets the definition of a Non-controlled, Affiliated
Investment.
|
Note
13 – Subsequent Events
In
preparing these financial statements, the Company has evaluated events after March 31, 2017. Except as set forth below, there
were no subsequent events since March 31, 2017 that would require adjustment to or additional disclosure in these financial statements.
Portfolio
Company Activity
On
April 17, 2017, Suniva Inc. (“Suniva”), of which the Company owns 2,844 shares of Class A Common Stock, filed a petition
for relief under Chapter 11 in the United States Bankruptcy Court for the District of Delaware. This action stemmed from a mixture
of significant downward pressure on solar cell and module prices manufactured by Suniva due to foreign competition, and a significant
increase in debt as part of a planned expansion at Suniva’s Norcross, GA facility.
Plan
of Liquidation
On
April 17, 2017, the Company filed a definitive proxy statement with the SEC to seek approval for the Plan of Liquidation and related
matters at a special meeting of stockholders. The Company also filed a definitive proxy statement with the SEC on the same date
relating to an annual meeting of stockholders seeking a vote on certain nominees to the Company’s Board of Director and
for the ratification of the selection of Tait, Weller & Baker, LLP as the Company’s independent registered public accounting
firm for the fiscal year ending December 31, 2017.
Stock
Repurchase Program
On
April 13, 2017, the Board authorized a further extension of the Company’s stock repurchase program for an additional six
months to expire on November 10, 2017, or until Company’s conversion to a liquidating trust, whichever is earlier. 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, without reliance on the “safe harbor”
provisions of Rule 10b-18 under the Securities Exchange Act of 1934, which sets certain restrictions on the method, timing, price
and volume of stock repurchases. 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.