Item
1. Business
Overview
Crossroads
Capital, Inc. (“Crossroads Capital”) was incorporated on May 9, 2008 under the laws of the State of Maryland and elected
to be regulated as a business development company (“BDC”) under the Investment Company Act of 1940, as amended (the
“1940 Act”). The shares of Crossroads Capital’s common stock were listed on the Nasdaq Capital Market from December
12, 2011 to June 22, 2017.
On
May 3, 2016, the Board of Directors of Crossroads Capital approved a Plan of Liquidation (the “Plan”). The Plan and
certain related matters, including the withdrawal of Crossroads Capital’s election to be regulated as a BDC under the 1940
Act and the delisting of its stock from the Nasdaq Capital Market, were approved by the stockholders of Crossroads Capital at
a special meeting held on June 2, 2017 and reconvened on June 23, 2017.
On
June 23, 2017, Crossroads Capital and each of the trustees, consisting of Andrew Dakos, Phillip Goldstein and Gerald Hellerman (the “Trustees”),
of Crossroads Liquidating Trust, a Maryland statutory trust (the “Liquidating Trust” or the “Trust”),
executed the Liquidating Trust Agreement (the “Liquidating Trust Agreement”) in connection with the conversion of
Crossroads Capital into the Liquidating Trust pursuant to the Plan for the sole purpose of liquidating its assets and distributing
the proceeds to the holders of the beneficial interests in the Liquidating Trust. Crossroads Capital filed Articles of Conversion
with the State Department of Assessments and Taxation of the State of Maryland on June 23, 2017, pursuant to which Crossroads
Capital converted to a statutory trust under the general laws of the State of Maryland (the “Conversion”) and all
of the assets and liabilities of Crossroads Capital, including eight portfolio company investments, became assets and liabilities
of the Trust pursuant to the Liquidating Trust Agreement. Stockholders of Crossroads Capital received one unit of beneficial interest
for each share of common stock held by such stockholder on the date of conversion.
The
Liquidating Trust will terminate upon payment to the holders of the beneficial interests in the Liquidating Trust (“Trust
Units”) of all the Liquidating Trust’s assets and in any event upon the third anniversary of the effectiveness of
the Conversion. The life of the Liquidating Trust may, however, be extended to more than three years if the Trustees then determine
that an extension is reasonably necessary to fulfill the purposes of the Trust. The Trustees are authorized to engage the services
of other professionals or service organizations to assist in managing the Liquidating Trust’s affairs. Under the Liquidating
Trust Agreement, Trust Units are not transferable or assignable, except for certain exceptions described in the Liquidating Trust
Agreement. The Trust Units are not certificated, listed on any exchange or quoted on any quotation system. The Liquidating Trust
Agreement provides that neither the Trustees nor anyone associated with the Liquidating Trust may take any action to facilitate
or encourage any trading in the Trust Units. The Liquidating Trust’s activities are specifically limited to conserving,
protecting and selling its assets and distributing the proceeds therefrom, including holding such assets for the benefit of the
holders of Trust Units, enforcing the rights of the holders of Trust Units, temporarily investing such proceeds and collecting
income therefrom, providing for the liabilities of the Liquidating Trust, making liquidating distributions to the holders of Trust
Units, and taking such other actions as may be necessary to conserve and protect the assets of the Liquidating Trust.
The
Liquidating Trust remains subject to the restrictions under the 1940 Act from engaging in transactions with affiliated parties,
except under certain circumstances. The Liquidating Trust is required to file with the U.S. Securities and Exchange Commission
(the “SEC”) annual reports showing the assets and liabilities of the Liquidating Trust at the end of each calendar
year and its receipts and disbursements for the period. The annual reports will describe the changes in the Liquidating Trust’s
assets during the reporting period and the actions taken by the Trustees during the period. The financial statements contained
in such reports will be prepared in accordance with generally accepted accounting principles and will be reviewed by the Liquidating
Trust’s independent registered public accounting firm; the financial statements, however, will not be audited. The Liquidating
Trust will file with the SEC a current report under cover of Form 8-K whenever an event occurs for which Form 8-K requires such
report to be filed for the Liquidating Trust or whenever, in the opinion of the Trustees, any other material event relating to
the Liquidating Trust has occurred.
Distributions
The
Plan provides that liquidating distributions will be made at such times as determined by the Trustees in their sole discretion,
but consideration of potential liquidating distributions shall occur no less frequently than annually, and in any event within
a reasonable period of time following the disposition of the Liquidating Trust’s assets.
On
July 12, 2017, the Trust made an initial liquidating distribution of $1.60 per unit to the holders of beneficial interest in the
Trust, pursuant to the Plan. This initial liquidating distribution was apportioned pro rata according to the beneficial unit holders’
respective interest in the Trust.
Tax
Treatment
For
Federal income tax purposes, the Trust is treated as a “grantor” trust. As such, the Trust itself is not subject to
federal or state income tax. Instead, each beneficiary will be treated as having a direct interest in an allocable pro rata share
of each asset and liability of the Trust. As a result, an allocable portion of all items of Trust income (including any gains
and losses recognized by the Trust), deductions and credits must be reported by beneficiaries on their income tax return(s).
The
Trust will issue an annual information statement to its beneficiaries with tax information for their tax returns. Beneficiaries
are urged to consult with their tax advisers as to their own filing requirements and the appropriate tax reporting of this
information on their returns.
Employees
We
have no employees or executive officers. All of our work is performed by the Trustees directly or through contract services. 1100
Capital Consulting, LLC (the “Administrator”) serves as our administrator, performing the administrative services
necessary for our operation, including without limitation, providing us with equipment, clerical, bookkeeping, accounting and
record keeping services.
Item
1A. Risk Factors
In
addition to other information in this annual report on Form 10-K, the following risk factors should be carefully reviewed because
such factors may have a significant impact on the execution of the Plan and the timing and amount of future liquidating distributions,
if any, to the holders of beneficial interest in the Trust. As a result of the risk factors set forth below and elsewhere in this
Form 10-K, actual results could differ materially from those projected in any forward-looking statements.
Risks
Related to our Liquidation
We
cannot assure of you of the exact amount or timing of any future distribution, if any.
Our
estimate of net assets in liquidation at December 31, 2017 was $8,684,201, or $0.91 per Unit. This estimation is based on a number
of estimates and assumptions, including asset hold periods, expected revenues and expenses and other factors not within our control
such as capitalization rates and market conditions. However, the liquidation and dissolution process is subject to numerous uncertainties
and may result in smaller distributions than anticipated or no remaining capital available for future distribution to our beneficial
unitholders. The precise nature, amount and timing of any future distribution will depend on and could be delayed by a number
of factors including:
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Adverse
changes in general and local economic conditions which affect the market for our portfolio
companies;
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Longer
than anticipated hold periods for our assets;
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Competition
from other companies;
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Fluctuations
in interest rates;
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The
financial condition of our portfolio companies; or
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Increase
in the Trust’s maintenance, insurance and operating costs.
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There
can be no guarantee that that holders of beneficial interests will realize the current estimated liquidation values of our assets
under the Plan.
We
cannot accurately estimate the expected proceeds that the Liquidating Trust might realize from the sale of our portfolio investments
pursuant to the Plan or the timing thereof. The amounts realized may be less than the estimated liquidation values as of December
31, 2017. It is possible that the final liquidation value or the proceeds received from the sale of our portfolio investments
may be less than the value or proceeds an investor might receive from pursuing a strategy of holding such investments through
any potential initial public offering or other sale or liquidity event. It is possible that we will experience substantial differences
in the exit prices ultimately achieved by the Liquidating Trust on our portfolio investments as compared to the respective current
estimated liquidation values. We cannot provide any assurance as to the net proceeds we will receive from the disposition of our
portfolio company investment or the net proceeds, if any, therefrom.
Our
units are not transferable or assignable except for certain exceptions and lack liquidity.
The
Trust Units are not certificated, listed on any exchange or quoted on any quotation system. The Liquidating Trust Agreement provides
that neither the Trustees nor anyone associated with the Liquidating Trust may take any action to facilitate or encourage any
trading in the Trust Units. Under the Liquidating Trust Agreement, Trust Units are not transferable or assignable, except for
certain exceptions described in the Liquidating Trust Agreement. Thus, our beneficiaries do not have authority or power to sell
or in any other manner dispose of their beneficial interests.
We
may be delayed in completing our liquidation.
Our
ability to accomplish the Plan is contingent upon the disposition of our portfolio company investments. Our current timeframe for liquidating is to conclude within three years from our conversion to a liquidating trust. Remaining
contingent liabilities and other factors could cause us to delay liquidation beyond this period. If liquidation is delayed, your
beneficial interests will continue to be illiquid.
If
our liquidation costs or unpaid liabilities are greater than we expect, our liquidating distributions to our beneficiaries may
be delayed or reduced.
Before
making the final liquidating distribution to our beneficiaries, we will need to pay or arrange for the payment of all of our transaction
costs in the liquidation, and all other costs and all valid claims of our creditors. The total amount of transaction costs in
the Plan is not yet known and, therefore, we have used estimates of these costs in calculating the amounts of our projected liquidating
distributions to our beneficiaries. Estimates are based on assumptions regarding costs to be incurred in executing the Plan. The
actual costs incurred during liquidation may differ, reducing net assets available for distribution. To the extent that we have
underestimated these costs in calculating our projections, our actual net liquidation values may be lower than our estimates.
In addition, if the claims of our creditors are greater than we have anticipated, payment of liquidating distributions to our
beneficiaries may be delayed, reduced and/or eliminated.
The
disposition of our portfolio investments will be subject to contingent liabilities.
We
continue to incur liabilities and expenses from operations as we complete the liquidation of our assets. To the extent that these
expenses and liabilities exceed our current estimates they will reduce the amount of assets available for future distribution
to beneficiaries. While we anticipate that our existing cash and cash equivalents will be sufficient to fund our cash
needs for expenses related to completion of the Plan, we cannot provide any assurances that this will be the case.
Liquidation
basis accounting requires certain assumptions that may result in actual results being materially different from those that have
been estimated.
The
Liquidating Trust presents its financial statements in accordance with liquidation basis accounting, which requires us to
make estimates and judgments that affect the reported amounts of assets (including net assets in liquidation), liabilities,
revenues and expenses, and related disclosure of contingent assets and liabilities. Valuation of assets requires management
to make difficult estimates and judgments with potentially incomplete information. Estimates necessarily require assumptions, and changes in such assumptions could materially affect reported results. Estimates are made and evaluated on an on-going basis using information
that is currently available, as well as various other assumptions believed to be reasonable under the circumstances. Due to
the inherently uncertain nature of estimates and the underlying assumptions, the actual values realized for assets and
settlement of liabilities may differ materially, perhaps in adverse ways, from the estimated amounts. The determination of
the estimated liquidation value of a portfolio company may be based on an analysis of available financial results, public
market comparables, market conditions and other factors related to such portfolio company. Additionally, because of
uncertainty in the timing of any anticipated sale date and the proceeds, if any, therefrom, results may differ materially
from estimated amounts.
We
depend on our Trustees and Administrator and the loss of our Trustees or our Administrator’s key personnel could harm our
operations and adversely affect the value of our Units.
We
have no employees or executive officers. All of our work is performed by the Trustees directly, through contract services or
through our Administrator. We have no separate facilities and are completely reliant on our Trustees who have significant discretion
as to the timing of the sales of our assets. We are subject to the risk that the Administrator may terminate its Administrator
Consulting Agreement with us and that no suitable replacement will be found. Furthermore, we are dependent on the efforts, diligence,
skill, network of business contacts and close supervision of all aspects of our business by our Trustees and our Administrator.
While we believe that we could find replacements for these key personnel, the loss of their services could have a negative impact
on our operations and the value of the Trust Units.
Payment
of fees to our Trustees and Administrator will reduce cash available for distribution.
Our
Trustees and Administrator will perform services for us in connection with the liquidation of our assets. They will be paid fees
for these services, which will reduce the amount of cash available for distribution to our beneficiaries.
Risks
Related to Existing Trust Assets
Our
portfolio companies are subject to many risks, including volatility, intense competition, current operating losses, shortened
product life cycles and periodic downturns.
Our
portfolio companies consist primarily of investments in companies in industries that our former investment adviser believed were
poised to grow at above-average rates relative to other sectors, which may have relatively limited operating histories and may
be particularly vulnerable to fluctuations in U.S. and foreign economic environments. Many of these companies have narrow product
lines and small market shares, compared to larger established publicly owned firms, which tend to render them more vulnerable
to competitors’ actions and market conditions, as well as general economic circumstances. Most of these portfolio companies
experience operating losses, which may be substantial, and there can be no assurance when or if such companies will operate at
a profit. A number of our portfolio companies have limited access to capital and higher funding costs, have a weaker financial
position and may need additional capital to expand, complete their business plans or remain in business. They may face intense competition, including
from larger, more established companies with greater financial, technical and marketing resources. These companies generally have
less predictable operating results, may from time to time be parties to litigation, may be engaged in rapidly changing businesses
with products subject to a substantial risk of obsolescence, and require substantial additional capital to support their operations,
finance expansion or maintain their competitive position. The revenues, income (or losses) and valuations of these companies can
and often do fluctuate suddenly and dramatically. For these reasons, our portfolio companies, if rated by one or more ratings
agencies, would typically be rated below “investment grade.” In addition, the companies that were selected for investment
by the former investment adviser were in industries generally characterized by abrupt business cycles and intense competition,
and the competitive environment can change abruptly due to rapidly evolving technology. Therefore, these portfolio companies may
face considerably more risk than companies in other industry sectors. Accordingly, these factors could impair their cash flow
or result in other events, such as bankruptcy, which could limit their ability to repay their obligations to us and may materially
adversely affect the return on, or the recovery of, our investments in these businesses.
Because
of rapid technological change, the average selling prices of products and some services provided by our portfolio companies may
decrease with corresponding rapid speed over their productive lives. These decreases could adversely affect their operating results
and cash flow, their ability to meet obligations under their debt securities and the value of their equity securities. This could,
in turn, materially adversely affect our ability to sell the Trust’s assets and ability to make distributions to holders
of beneficial interests.
Our
investments in private companies present certain challenges, including the lack of available company information, a dependence
on the talents and efforts of only a few key personnel at a given portfolio company, a lack of a diversified product line, a dependence
on several key customers and a greater vulnerability to fluctuating economic conditions.
The
value of our portfolio companies is dependent in large part, upon the abilities of the key management personnel of our portfolio
companies, who are responsible for their day-to-day operations. Competition for qualified personnel is intense at any stage of
a company’s development, particularly so in the growth industries in which we hold investments. The loss of one or more
key managers can hinder or delay a company’s implementation of its business plan and harm its financial condition. Our portfolio
companies may not be able to attract and retain qualified managers and personnel. Any inability to do so may negatively affect
the value of the companies, our ability to sell our interest in such companies, and thus the amount of cash available to distribute
to our holders of beneficial interest.
The
amount of cash available for distribution could be negatively affected if a significant portfolio investment fails to perform
as expected.
Our
total investment in companies may be significant individually or in the aggregate. As a result, if a significant investment in
one or more companies fails to perform as expected, our financial results could be more negatively affected and the magnitude
of the loss could be more significant than if we had smaller investments in more companies.
We
cannot assure you that any of our investments in our portfolio companies will be successful. There can be no assurance as to the
levels of defaults or recoveries that may be experienced on our debt investments. Moreover, as we monetize our investments, the
remaining investments will represent a larger percentage of our assets and a failure of one of such investments to perform will
have a greater impact on our financial results. This could lead to a decline in value of our net assets. We may lose our entire
investment in any or all of our portfolio companies.
Most
of our portfolio companies will need additional capital, which may not be readily available.
Most
of the portfolio companies targeted under our former investment strategy may have limited financial resources and typically require
substantial additional financing to satisfy their continuing working capital and other capital requirements. We cannot predict
the circumstances or market conditions under which these portfolio companies will seek additional capital. Each round of institutional
equity financing is typically intended to provide a company with only enough capital to reach the next stage of development. It
is possible that one or more of our portfolio companies will not be able to raise additional financing or may be able to do so
only at a price or on terms that are unfavorable to the portfolio company, either of which would negatively impact our ability
to make distributions to our beneficiaries. In some cases, financing may be arranged in a manner that would have the interests
of current shareholders reduced if they do not participate in the financing. Some of these companies may be unable to obtain sufficient
financing from any provider of capital under any terms, thereby requiring these companies to cease or curtail operations.
Accordingly, investments in these types of companies generally entails a higher risk of loss than investments in companies that
do not have significant incremental capital raising requirements.
Risks
Related to Our Business in General
Global
economic, political and market conditions may adversely affect our operations and financial condition, including our ability to
make distributions to beneficial interest holders.
The
current worldwide financial market situation, as well as various social and political tensions in the United States and around
the world, may contribute to increased market volatility, may have long-term effects on the U.S. and worldwide financial markets,
and may cause economic uncertainties or deterioration in the United States and worldwide. In June 2016, the United Kingdom held
a referendum in which voters approved an exit from the European Union, which led to disruption and instability in the global markets,
and the implications of the United Kingdom’s pending withdrawal from the European Union are unclear at present. There is
continued concern about national-level support for the Euro and the accompanying coordination of fiscal and wage policy among
European Economic and Monetary Union member countries. In addition, the fiscal and monetary policies of foreign nations, such
as Russia and China, may have a severe impact on the worldwide and U.S. financial markets. These conditions may adversely affect
the value of our portfolio companies and our ability to sell them at acceptable prices.
We
face cyber-security risks.
Our business
operations rely upon secure information technology systems for data processing, storage and reporting. Despite strong security controls, sophisticated hardware, implementation and updating of security
programs, our information and data systems or the similar systems of our vendors and agents could become subject to cyber-attacks. Network, system, application and data breaches could result in operational
disruptions or information misappropriation, which could have a material adverse effect on our business, results of operations and financial condition.
The
failure in cyber security systems, as well as the occurrence of events unanticipated in our disaster recovery systems and management
continuity planning could impair our ability to conduct business effectively.
The occurrence of
a disaster such as a cyber-attack, a natural catastrophe, an industrial accident, a terrorist attack or war, events unanticipated in our disaster recovery systems, or a support failure from external
providers, could have an adverse effect on our ability to conduct business and on our results of operations and financial condition, particularly if those events affect our computer-based data processing,
transmission, storage, and retrieval systems or destroy data. If a significant number of our professional staff were unavailable in the event of a disaster, our ability to effectively conduct our business
could be severely compromised.
We
depend upon computer systems to perform necessary business functions. Despite our implementation of a variety of security measures,
our computer systems could be subject to cyber-attacks and unauthorized access, such as physical and electronic break-ins or unauthorized
tampering. Like other companies, we may experience threats to our data and systems, including malware and computer virus attacks,
unauthorized access, system failures and disruptions. If one or more of these events occurs, it could potentially jeopardize the
confidential, proprietary and other information processed and stored in, and transmitted through, our computer systems and networks,
or otherwise cause interruptions or malfunctions in our operations, which could result in damage to our reputation, financial
losses, litigation, increased costs, regulatory penalties and/or customer dissatisfaction or loss.
We
are dependent on information systems and systems failures could significantly disrupt our business, which may, in turn, negatively
affect our ability to make distributions.
Our
business is dependent on our and third parties’ communications and information systems. Any failure or interruption of those
systems, including as a result of the termination of an agreement with any third-party service providers, could cause delays or
other problems in our activities. Our financial, accounting, data processing, backup or other operating systems and facilities
may fail to operate properly or become disabled or damaged as a result of a number of factors including events that are wholly
or partially beyond our control and adversely affect our business. For example, there could be:
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sudden
electrical or telecommunication outages;
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natural
disasters such as earthquakes, tornadoes and hurricanes;
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events
arising from local or larger scale political or social matters, including terrorist acts;
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These
events, in turn, could negatively affect our ability to make distributions to our holders of beneficial interest.
We
incur significant public reporting costs.
The
Liquidating Trust is subject to certain disclosure requirements. Consequently, we incur legal, accounting and other expenses, including costs associated with reporting requirements applicable
to a company whose securities were registered under the Exchange Act, as well as additional corporate governance requirements and other rules implemented by the SEC, including those imposed by
the SEC staff in connection with our plan to convert into a liquidating trust.
Our
operations could be negatively affected if we become subject to any material legal proceedings, which could cause us to incur
significant expense, hinder execution of the Plan and impair the value of any distributions made to holders of beneficial interests.
We
and our Trustees are not currently a party to any material legal proceedings. However, from time to time, we may be party to certain legal proceedings incidental to the normal course of
our business including the enforcement of our rights under contracts with our portfolio companies, which could cause us to incur substantial expense and negatively impact our operations
by distracting the Trustees, hinder the execution of the Plan and reduce the amount of any distributions made to holders of beneficial interests.
Our
debt investments involve a number of significant risks, including default risk, covenant compliance risk and subordination risk.
Our
debt investments involve a number of significant risks, including risks related to defaults, covenant compliance and subordination.
Approximately 1% of our total assets as of December 31, 2017 consist of debt investments in BrightSource Energy, both secured
and unsecured. If BrightSource Energy is unable to repay our debt investment at maturity, we could suffer a loss which would negatively
impact the value of the Trust.
Federal
Income Tax Risks
Investors
may realize taxable income without cash distributions, and may have to use funds from other sources to pay their tax liabilities.
For
Federal income tax purposes, the Trust is treated as a “grantor” trust. As such, the Trust itself is not subject to
federal or state income tax. Instead, each beneficiary is treated as having a direct interest in an allocable pro rata share of
each asset and liability of the Trust. As a result, an allocable portion of all items of Trust income (including any gains and
losses recognized by the Trust), deductions and credits must be reported by beneficiaries on their income tax return(s). Beneficiaries
will be required to report their allocable share of our taxable income on their personal income tax return regardless of whether
they have received any cash distributions from us. It is possible that units of beneficial interest will be allocated taxable
income in excess of their cash distributions. We cannot assure beneficiaries that cash flow will be available for distribution
in any year. As a result, beneficiaries may have to use funds from other sources to pay their tax liability.