Notes to Financial Statements
(Unaudited)
Note 1 - Description of Business
Crossroads Liquidating Trust (the Liquidating Trust or the Trust) operates as a statutory trust under the general laws of the State of Maryland following the conversion of Crossroads Capital, Inc. (Crossroads Capital) into Crossroads Liquidating Trust pursuant to a Plan of Liquidation (the Plan). The sole purpose of the Trust is the liquidation of its assets and distribution of its proceeds to the holders of the beneficial interests in the Liquidating Trust.
Prior to conversion, Crossroads Capital, Inc. (Crossroads Capital) elected to be regulated as a business development company (BDC) under the Investment Company Act of 1940, as amended (the 1940 Act). On June 23, 2017, Crossroads Capital and each of the trustees of the Liquidating Trust (the Trustees) executed the Liquidating Trust Agreement (the Liquidating Trust Agreement) in connection with the conversion of Crossroads Capital into Crossroads Liquidating Trust pursuant to the Plan. On June 23, 2017, Crossroads Capital filed Articles of Conversion with the State of Maryland and all of the assets and liabilities of Crossroads Capital became assets and liabilities of the Trust (the Conversion). 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 the net proceeds realized from all of the Liquidating Trust’s assets and in any event on June 23, 2020, 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. These activities include holding the Liquidating Trust’s assets for the benefit of the holders of the Trust Units and enforcing their rights, temporarily investing asset sale 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 Form 8-K whenever an event occurs that requires such a report to be filed or whenever, in the opinion of the Trustees, any other material event relating to the Liquidating Trust has occurred.
The Trust 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. 1100 Capital Consulting, LLC (the Administrator) serves as the Trust’s administrator, performing the administrative services necessary for its operation, including without limitation providing it with equipment, clerical, bookkeeping, accounting and record keeping services.
Note 2 - Summary of Significant Accounting Policies
Basis of Presentation
The accompanying financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America, (U.S. GAAP).
Liquidation Basis of Accounting
Under the liquidation
basis of accounting, all assets are stated at their estimated liquidation value and liabilities, including estimated costs associated
with implementing the Plan, are stated at their estimated settlement amounts over the remaining liquidation period. The net assets
in liquidation represent the estimated liquidation value of the Trust’s remaining assets available to its beneficiaries upon
liquidation. The actual amounts realized for assets and settlement of liabilities may differ materially, perhaps in adverse ways,
from the estimated amounts. The Trust has determined that its liquidation is imminent.
Crossroads Liquidating Trust
Notes to Financial Statements
(Unaudited)
The determination of the estimated liquidation value of a portfolio company may be based on an analysis of available financial results, public market comparables, prevailing discounts in the secondary market for comparable assets and other factors relating to such portfolio company. The Trust may also consider other events, including the transaction in which the securities were acquired, subsequent equity sales by the portfolio company or mergers, acquisitions or other exit events affecting the portfolio company. The Trust considers the rights, preferences and limitations of the securities owned in each portfolio company. Due to the uncertainty in the timing of any anticipated sales dates of the Trust’s portfolio company investments and the proceeds, if any, therefrom, results may differ materially from estimated amounts.
An independent
valuation firm assisted the Trust in its determination of the estimated liquidation value of one investment as of December 31,
2019. The Administrator assisted the Trust in its determination of the estimated liquidation value of all of the Trust’s
portfolio company investments and funds held in escrow as of December 31, 2019.
Use of Estimates
The preparation of financial statements in conformity with U.S. GAAP and under the liquidation basis of accounting requires the Trust to make estimates and assumptions that affect the reported amounts of assets (including net assets in liquidation) and liabilities at the date of the financial statements and the reported amounts of income and expenses during the reported period. Such estimates and judgments could change in the future as more information becomes known, and actual results could differ from these estimates and the differences could be material.
Cash and Cash Equivalents
Cash and cash equivalents include short-term liquid investments in demand deposit accounts and money market funds. Cash and cash equivalents are carried at amortized cost which approximates market value.
Costs to be Incurred During Liquidation
Under the liquidation basis of accounting, an accrual is made for the estimated remaining costs to be incurred during liquidation, including legal expenses, portfolio selling costs, accounting expenses, tax reporting expenses, contractor services, and miscellaneous other expected future costs. Estimates are based on assumptions regarding costs to be incurred in executing the Liquidating Trust Agreement through June 23, 2020, the termination date of the Trust. The actual costs incurred during liquidation may differ, which could reduce net assets available in liquidation.
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. Payment-in-kind (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 Trust did not accrue PIK interest on any of its notes for the years ended December 31, 2019 or 2018. As of December 31, 2019, all of the Trust’s notes were on non-accrual status.
Income Taxes
The Trust is treated as a grantor trust for federal income tax purposes and accordingly, will not be subject to federal or state income tax on any income earned or gain recognized. The Trust beneficiaries will be treated as the owner of a pro rata portion of each asset held by us and will be required to report on his or her federal, state or foreign tax return his or her pro rata share of taxable income, including any gains and losses recognized by the Trust. Accordingly, there is no provision for federal or state income taxes in the accompanying financial statements.
Recently Issued Accounting Pronouncements
There are no previously issued or new accounting pronouncements or changes in accounting pronouncements that have had or are expected to have a material impact on the Trust’s financial statements.
Crossroads Liquidating Trust
Notes to Financial Statements
(Unaudited)
Note 3 - Portfolio Investments
The following table outlines the type of securities held in each of the Trust’s four portfolio companies as of December 31, 2019. See Note 8 – Subsequent Events.
Portfolio Company
|
|
Shares / Principal
|
|
|
Type of Investment
|
|
Agilyx Corporation(1)
|
|
|
16
|
|
|
Common Stock
|
|
BrightSource Energy, Inc.
|
|
|
132,972
|
|
|
Common Stock
|
|
|
|
|
2,134,523
|
|
|
Series 1A Preferred Stock
|
|
|
|
|
108,136
|
|
|
Series 1 Convertible Preferred Stock
|
|
|
|
$
|
205,193
|
|
|
Subordinated Convertible Bridge Notes; PIK interest 11.5%, compounded annually
|
|
|
|
$
|
107,977
|
|
|
Subordinated Secured Notes; PIK interest 11.5%, compounded annually
|
|
|
|
$
|
44,361
|
|
|
Senior Secured Notes; PIK interest 11.5%, compounded annually
|
|
Metabolon, Inc.
|
|
|
890,719
|
|
|
Series D Convertible Preferred Stock
|
|
Mode Media Corporation(2)
|
|
|
1,196,315
|
|
|
Series F Convertible Preferred Stock
|
|
|
|
(1)
|
On January 6, 2020, Agilyx Corporation redeemed the Trust’s entire position of 16 shares of common stock.
|
(2)
|
Mode Media ceased operations and subsequently announced the assignment of substantially all the assets of Mode Media to its liquidating agent in September 2016.
|
The Trust had the following portfolio company activity during the year ended December 31, 2019:
On January 28, 2019, Deem, Inc. completed a merger transaction and the Trust’s 46,461 shares of common stock were canceled. The Trust did not receive any proceeds as a result of the merger transaction.
On April 10, 2019, the Trust’s 2,844 shares of Class A Common Stock in Suniva, Inc. were deemed canceled and extinguished pursuant to an approved plan of liquidation. The Trust did not receive any proceeds as a result of the liquidation.
On July 1,
2019, Zoosk, Inc. (“Zoosk”) completed a merger transaction with Spark Networks SE (NYSE American: LOV)(“Spark”).
In the merger transaction, the Trust’s 715,171 shares of Series E Preferred Stock in Zoosk were cancelled in exchange for
193,793 American Depository Shares (“ADSs”) in Spark and $1,624,093 in cash, $146,987 of which is subject to holdback
and escrow restrictions until December 31, 2020. See Note 7 – Commitments and Contingencies. During the fourth quarter of
2019, the Trust sold its entire position of Spark ADSs in open market sales for total net proceeds of $972,702.
The following table summarizes the estimated liquidation value of the Trust’s remaining portfolio company holdings and funds held in escrow as of December 31, 2019 and 2018 and the change in estimated liquidation value, proceeds received and the net change in net assets in liquidation for the Trust’s portfolio company investments and funds held in escrow for the year ended December 31, 2019.
|
|
Estimated
Liquidation Value
|
|
|
For the Year Ended
December 31, 2019
|
|
|
|
As of
December 31, 2018
|
|
|
As of
December 31, 2019
|
|
|
Net Change in Estimated Liquidation Value
|
|
|
Total Proceeds
Received
|
|
|
Net
Change in
Net Assets in Liquidation from
Portfolio Activity
|
|
Portfolio
Company Investments
|
|
$
|
6,027,000
|
|
|
$
|
160,000
|
|
|
$
|
(5,867,000
|
)
|
|
$
|
2,449,709
|
|
|
$
|
(3,417,291
|
)
|
Funds Held in Escrow from Sale of Investment
|
|
|
—
|
|
|
|
120,000
|
|
|
|
120,000
|
|
|
|
—
|
|
|
|
120,000
|
|
Total
|
|
|
6,027,000
|
|
|
|
280,000
|
|
|
|
(5,747,000
|
)
|
|
|
2,449,709
|
|
|
|
(3,297,291
|
)
|
The Trust
did not have any portfolio company dispositions during the year ended December 31, 2018. During the year ended December 31, 2018,
the Trust received the proceeds from its sale of Harvest Power, which was completed during the prior year and held as a receivable
for investments sold as of December 31, 2017.
Crossroads Liquidating Trust
Notes to Financial Statements
(Unaudited)
The following table summarizes the estimated liquidation value of the Trust’s portfolio company holdings as of December 31, 2018 and 2017 and the change in estimated liquidation value, proceeds received and the net change in net assets in liquidation for the Trust’s portfolio company investments for the year ended December 31, 2018.
|
|
Estimated
Liquidation Value
|
|
|
For the Year Ended
December 31, 2018
|
|
|
|
As of
December 31, 2017
|
|
|
As of
December 31, 2018
|
|
|
Net Change in Estimated Liquidation Value
|
|
|
Total Proceeds
Received
|
|
|
Net Change
in
Net Assets in
Liquidation from
Portfolio Activity
|
|
Portfolio Company Investments
|
|
$
|
6,650,687
|
|
|
$
|
6,027,000
|
|
|
$
|
(623,687
|
)
|
|
$
|
—
|
|
|
$
|
(623,687
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 4 - Distributions
The Plan provides that liquidating distributions will be made at such times as determined by the Trustees in their sole discretion. 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 September 10, 2019, the Trust made a liquidating distribution of $0.35 per Trust Unit to the holders of beneficial interest in the Trust, pursuant to the Plan. The liquidating distribution was apportioned pro rata according to the beneficial unit holders’ respective interest in the Trust.
The Trust did not make any liquidating distributions during 2018.
On July 12, 2017, the Trust made an initial liquidating distribution of $1.60 per Trust 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.
Note 5 - Net Assets in Liquidation
Net assets in liquidation were $1,593,812 and $8,093,375 as of December 31, 2019 and 2018, respectively.
Assets
As of December
31, 2019, the Trust held four portfolio company investments and had total assets of $2,208,346 which were comprised of $1,917,786
in cash and cash equivalents, $280,000 in portfolio company investments and funds held in escrow at estimated liquidation value
and $10,560 in prepaid expenses and other assets. See Note 8 – Subsequent Events.
As of December 31, 2018, the Trust held seven portfolio company invesetments and had total assets of $9,303,072 which were comprised of $6,027,000 in portfolio company investments at estimated liquidation value, $3,246,072 in cash and cash equivalents and $30,000 in prepaid expenses and other assets.
Liabilities
As of December 31, 2019, the Trust had $614,534 in total liabilities, comprised of $27,873 in accounts payable and $586,661 in estimated costs related to the liquidation, including legal expenses, portfolio selling costs, accounting expenses, tax reporting expenses, contractor services, and miscellaneous other expected future costs. As of December 31, 2019, the liability for estimated costs during liquidation included at total of $30,000 of fees to be paid to the Board of Trustees over the remaining liquidation period.
As of December 31, 2018, the Trust had $1,209,697 in total liabilities, comprised of $26,373 in accounts payable and accrued expenses and $1,183,324 in estimated costs related to the liquidation. As of December 31, 2018, the liability for estimated costs during liquidation included a total of $90,000 of fees to be paid to the Board of Trustees over the remaining liquidation period.
Changes in Net Assets
Net assets in liquidation decreased $6,499,563, or $0.68 per Trust Unit, during the year ended December 31, 2019. This decrease in our net assets was due primarily to: (i) a net decrease of $5,747,000, or $0.60 per Trust Unit, in the net estimated liquidation value of our portfolio company investments and funds held in escrow during the period, and (ii) a liquidating distribution of $3,347,096, or $0.35 per Trust Unit, in September 2019; partially offset by: (i) an increase of $2,449,709, or $0.26 per Trust Unit, from proceeds related to the sale of portfolio investments, and (ii) an increase of $144,824, or $0.01 per Trust Unit, as a result of current operating expenses and other activities.
Crossroads Liquidating Trust
Notes to Financial Statements
(Unaudited)
Net assets in liquidation decreased $590,826, or $0.06 per Trust Unit, during the year ended December 31, 2018. This decrease in the Trust’s net assets was due primarily to: (i) a net decrease of $623,687, or $0.06 per Trust Unit, in the net estimated liquidation value of our portfolio company investments during the period, and (ii) an increase of $32,861 as a result of current operating expenses and other activities.
Note 6 – Estimated Costs of Liquidation
Under the liquidation basis of accounting, the Trust is required to estimate the cash flows from operations and accrue the costs associated with completing the Plan, including legal expenses, portfolio selling costs, accounting expenses, tax reporting expenses, contractor services, and miscellaneous other expected future costs. For the year ended December 31, 2019, estimated costs of liquidation decreased $596,663 which consisted of: (i) the completion of cash payments, and therefore a reversal of the related accrual of $476,725 for liquidation costs, and (ii) a reassessment of the estimated portfolio selling costs for the Trust’s remaining portfolio, which resulted in a $119,938 reversal of the related accrual. For the year ended December 31, 2018, the Trust completed cash payments, and therefore reversed the related accrual, for $459,016 of liquidation costs. The Trustees believe that the estimated costs of liquidation represent the remaining costs to be incurred during liquidation as of December 31, 2019. As a result, the Trust estimates that $586,661 of liquidation expenses are expected to be paid over the remaining liquidation period.
Note 7 - Commitments and Contingencies
On July 1, 2019, Zoosk completed a merger transaction with Spark Networks SE (NYSE American: LOV). At the closing of the merger, the Trust was required to set aside $146,987 as security for the indemnity and other obligations of the stockholders under the merger agreement (Escrowed Funds). The Escrowed Funds are subject to escrow and holdback restrictions until December 31, 2020. As of December 31, 2019, the Escrowed Funds had an estimated liquidation value of $120,000. On February 14, 2020, Escrowed Funds totaling $19,983 were released to the Trust from the Zoosk escrow without any offset for indemnity claims. Although recovery under the stockholder indemnity and other obligations is generally limited to the escrow, holdback and expense funds, the Trust may be liable for our pro rata amount of any damages for certain types of indemnity claims not to exceed the cash consideration received by the Trust, provided, however, in the case of the Trust’s fraud or intentional misrepresentation, there is no limitation on liability. The Trust’s indemnity obligations under the merger agreement continue until July 1, 2024, or the fifth anniversary of the merger closing date. The Trust has not been notified of any stockholder indemnity claims.
On November 13, 2017, Harvest Power completed a merger transaction with a third party. In connection with the merger transaction, the Trust entered into a Contingent Payment and Release Agreement with the company, the acquirers and certain other stockholders entitling the Trust to its pro rata interest of certain contingent payments over a four-year period in consideration of and as a condition to the release of certain actions and claims related to Harvest Power.
The Trust maintains a directors and officers liability insurance policy that provides liability insurance coverage for its Trustees and other specified parties. The Trust has also agreed to indemnify its Trustees to the maximum extent permitted by Maryland law subject to the restrictions in the 1940 Act.
As of December 31, 2019, neither the Trust nor its Trustees was a party to any material legal proceedings. However, from time to time, the Trust 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 8 - Subsequent Events
In preparing these financial statements, the Trust has evaluated events after December 31, 2019. Except as set forth below, there were no subsequent events since December 31, 2019 that would require adjustment to or additional disclosure in these financial statements.
On January 6, 2020, Agilyx Corporation (Agilyx) redeemed the Trust’s entire position of 16 shares of common stock for a total purchase price of $1,600.
Crossroads Liquidating Trust
Notes to Financial Statements
(Unaudited)
On February 14, 2020, Escrowed Funds totaling $19,983 were released to the Trust from the Zoosk escrow without any offset for indemnity claims. The released funds included a positive working capital adjustment of $6,741 which will be recognized by the Trust as a short-term capital gain.
Pursuant to the
Plan, the Liquidating Trust is scheduled to complete liquidation activities on or before June 23, 2020. On February 28, 2020, the
Liquidating Trust engaged a market advisory firm to locate potential purchasers and assist selling the remaining assets of the
Trust. The recent global outbreak of COVID-19 has disrupted economic markets and the prolonged economic impact is uncertain. The
operational and financial performance of the Trust’s portfolio companies depends on future developments, including the duration
and spread of the outbreak, and such uncertainty may in turn impact the proceeds, if any, received from the sale of the Trust’s
portfolio assets. The COVID-19 pandemic has impacted the Trust’s ability to dispose of its remaining portfolio company investments
and, as such, it may be necessary to extend the life of the Trust.