FOR THE QUARTERLY PERIOD ENDED June 30, 2015
COMMISSION FILE NUMBER: 814-00852
(Exact name of registrant as specified in its charter)
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.Yes x No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).Yes o No x
The number of shares of the issuer’s Common Stock, $0.01 par value, outstanding as of August 10, 2015 was 19,320,100.
TABLE OF CONTENTS
PART I.
FINANCIAL INFORMATION
Item 1.
Condensed Consolidated Financial Statements
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
i
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
Item 4.
Controls and Procedures
PART II.
OTHER INFORMATION
Legal Proceedings
Item 1A.
Risk Factors
Unregistered Sales of Equity Securities and Use of Proceeds
Defaults Upon Senior Securities
Mine Safety Disclosure
Item 5.
Other Information
Item 6.
Exhibits
ii
See notes to Condensed Consolidated Financial Statements
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
GSV Capital Corp. (the “Company,” “GSV Capital” or “GSV”) was formed in September 2010 as a Maryland corporation structured as an externally managed, non-diversified closed-end management investment company. The Company has elected to be treated as a business development company under the Investment Company Act of 1940, as amended (the “1940 Act”). The Company’s investment activities are managed by GSV Asset Management, LLC (“GSV Asset Management”), and GSV Capital Service Company, LLC (“GSV Capital Service Company”) provides the administrative services necessary for the Company to operate.
The Company’s date of inception is January 6, 2011, which is the date it commenced its development stage activities. The Company’s shares are currently listed on the NASDAQ Capital Market under the symbol “GSVC”. The Company began its investment operations during the second quarter of 2011.
On April 13, 2012, the Company formed a wholly-owned subsidiary, GSV Capital Lending, LLC (“GCL”), a Delaware limited liability company, which was formed to originate portfolio loan investments within the state of California.
On November 28, 2012, the Company formed the following wholly-owned subsidiaries: GSVC AE Holdings, Inc. (“GAE”), GSVC AV Holdings, Inc. (“GAV”), GSVC NG Holdings, Inc. (“GNG”), GSVC SW Holdings, Inc. (“GSW”) and GSVC WS Holdings, Inc. (“GWS”). On July 12, 2013, the Company formed a wholly-owned subsidiary, SPNPM Holdings LLC (“SPNPM”). On August 13, 2013, the Company formed a wholly-owned subsidiary, GSVC SVDS Holdings, Inc. (“SVDS”). Collectively, these entities are known as the “GSVC Holdings”, all Delaware corporations, formed to hold portfolio investments.
The Company’s investment objective is to maximize its portfolio’s total return, principally by seeking capital gains on its equity and equity-related investments. The Company invests principally in the equity securities of what it believes to be rapidly growing venture capital-backed emerging companies. The Company acquires its investments through direct investments with prospective portfolio companies, secondary marketplaces for private companies and negotiations with selling stockholders. The Company may also invest on an opportunistic basis in select publicly traded equity securities or certain non-U.S. companies that otherwise meet its investment criteria.
The interim condensed consolidated financial statements of the Company are prepared on the accrual basis of accounting in conformity with U.S. generally accepted accounting principles (“GAAP”) 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, 2015. The interim unaudited condensed consolidated 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, 2014.
Under Article 6 of Regulation S-X and the American Institute of Certified Public Accountants’ Audit and Accounting Guide for Investment Companies, the Company is precluded from consolidating any entity other than another investment company, a controlled operating company which provides substantially all of its services and benefits to the Company and certain entities established for tax purposes where the Company
20
holds a 100% interest. Accordingly, the Company’s condensed consolidated financial statements include its accounts and the accounts of the GSVC Holdings and GCL, its wholly-owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation.
Certain prior period amounts in the Condensed Consolidated Financial Statements have been reclassified to conform to the current period presentation. The Company has reclassified certain prior period accounts on the Condensed Consolidated Statements of Assets and Liabilities and Condensed Consolidated Statements of Operations to simplify the presentation. Refer to the table below for the reclassifications to the December 31, 2014 Condensed Consolidated Statements of Assets and Liabilities.
There was no net effect on the total assets, liabilities, or net assets as of December 31, 2014 as a result of these reclassifications.
Refer to the table below for the reclassifications to the Condensed Consolidated Statements of Operations.
The preparation of condensed consolidated financial statements requires the Company to make a number of significant estimates. These include estimates of the fair value of certain assets and liabilities and other estimates that affect the reported amounts of certain assets and liabilities as of the date of the condensed consolidated financial statements and the reported amounts of certain revenues and expenses during the reported period. It is likely that changes in these estimates will occur in the near term. The Company’s estimates are inherently subjective in nature and actual results could differ materially from such estimates.
The Company applies fair value accounting in accordance with GAAP. The Company generally values its assets on a quarterly basis, or more frequently if required under the 1940 Act.
Fair value is defined 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. GAAP establishes a framework
21
for measuring fair value that includes a hierarchy used to classify the inputs used in measuring fair value. The hierarchy prioritizes the inputs to valuation techniques used to measure fair value into three levels. The level in the fair value hierarchy within which the fair value measurement falls is determined based on the lowest level input that is significant to the fair value measurement. The levels of the fair value hierarchy are as follows:
Level 1 — Valuations based on unadjusted quoted prices for identical assets or liabilities in an active market that the Company has the ability to access at the measurement date.
Level 2 — Valuations based on observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data at the measurement date for substantially the full term of the assets or liabilities.
Level 3 — Valuations based on unobservable inputs that reflect management’s best estimate of what market participants would use in pricing the asset or liability at the measurement date. Consideration is given to the risk inherent in the valuation technique and the risk inherent in the inputs to the model.
When the inputs used to measure fair value fall within different levels of the hierarchy, the level within which the fair value measurement is categorized is based on the lowest level input that is significant to the fair value measurement in its entirety. For example, a Level 3 fair value measurement may include inputs that are observable (Levels 1 and 2) and unobservable (Level 3). Therefore gains and losses for such assets and liabilities categorized within the Level 3 table set forth in Note 3 may include changes in fair value that are attributable to both observable inputs (Levels 1 and 2) and unobservable inputs (Level 3).
A review of fair value hierarchy classifications is conducted on a quarterly basis. Changes in the observability of valuation inputs may result in a reclassification for certain financial assets or liabilities. Reclassifications impacting Level 3 of the fair value hierarchy are reported as transfers in/out of the Level 3 category as of the beginning of the quarter in which the reclassifications occur. Refer to “Levelling Policy” for a detailed discussion of the levelling of the Company’s financial assets or liabilities and events that may cause a reclassification with the fair value hierarchy.
Securities for which market quotations are readily available on an exchange are valued at the closing price of such security on the valuation date; however, if they are subject to restrictions upon sale (such as lock-up restrictions), they may be discounted accordingly. The Company may also obtain quotes with respect to certain of its investments from pricing services, brokers or dealers in order to value assets. When doing so, the Company determines whether the quote obtained is sufficient according to GAAP to determine the fair value of the security. If determined to be adequate, the Company uses the quote obtained.
Securities for which reliable market quotations are not readily available or for which the pricing source does not provide a valuation or methodology or provides a valuation or methodology that, in the judgment of GSV Asset Management, the board of directors or the valuation committee of the board of directors (the “Valuation Committee”), does not represent fair value, shall each be valued as follows:
22
In making a good faith determination of the fair value of investments, the Company considers valuation methodologies consistent with industry practice. Valuation methods utilized include, but are not limited to the following: comparisons to prices from secondary market transactions; venture capital financings; public offerings; purchase or sales transactions; as well as analysis of financial ratios and valuation metrics of the portfolio companies that issued such private equity securities to peer companies that are public, analysis of the portfolio companies’ most recent financial statements and forecasts, and the markets in which the portfolio company does business, and other relevant factors. The Company assigns a weighting based upon the relevance of each method to determine the fair value of each investment.
The Company engages at least one independent valuation firm to perform valuations of its investments that are not publicly traded or for which there are no readily available market quotations. The Company considers the independent valuations provided by the valuation firm(s), among other factors, in making its fair value determinations. The table below shows the percentages of the Company’s non-publicly traded investments, for which an independent valuation firm was engaged to perform valuations, during the current and prior fiscal year.
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 with readily available market quotations that are subject to sales restrictions may be valued at a discount for a lack of marketability, (“DLOM”), to the most recently available closing market prices depending upon the nature of the sales restriction. These investments are generally classified as Level 2 assets. The DLOM used is generally based upon the market value of publicly traded put options with similar terms.
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 relevant 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.
23
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 generally uses an option pricing model to allocate value to each equity-linked security, unless it believes a liquidity event such as an acquisition or a dissolution is imminent, or the portfolio company is unlikely to continue as a going concern. When equity-linked securities expire worthless, any cost associated with these positions is recognized as a realized loss on investments in the condensed consolidated statements of operations and condensed consolidated statements of cash flows. In the event these securities are exercised into common or preferred stock, the cost associated with these securities is reassigned to the cost basis of the new common or preferred stock. These conversions are noted as non-cash operating items on the condensed consolidated statements of cash flows.
Given the nature of the Company’s current debt investments (excluding U.S. Treasuries), principally convertible and promissory notes issued by venture capital-backed portfolio companies, these investments are Level 3 assets because there is no known or accessible market or market indexes for these investment securities to be traded or exchanged. The Company values its debt investments at amortized cost plus accrued interest which approximates fair value.
The board of directors will ascribe value to warrants based on fair value analyses that can include discounted cash flow analyses, option pricing models, comparable analyses and other techniques as deemed appropriate.
The portfolio companies in which the Company invests periodically offer their shares in IPOs. The Company’s shares in the portfolio companies are typically subject to lock-up agreements for 180 days following the IPO. Upon the IPO date, the Company transfers its investment from Level 3 to Level 2 due to the presence of an active market, limited by the lock-up agreement. The Company prices the investment at the closing price on a public exchange as of the measurement date, subject to an appropriate DLOM. Once the lock-up expires, the Company typically transfers the investment from Level 2 to Level 1 and prices the investment based on the closing price on a public exchange as of the measurement date. In situations where the lock-up has expired, but other factors restrict the sale of the investment, the Company will consider the nature of any restrictions on the sale of the investment. The Company will classify the investment as either Level 2 subject to an appropriate DLOM to reflect the restrictions upon sale or as Level 1. The Company transfers investments between levels based on the fair value at the end of measurement period in accordance with ASC 820.
The carrying amounts of the Company’s other, non-investment, financial instruments, consisting of cash, receivables, accounts payable, and accrued expenses, approximate fair value due to their short-term nature. The embedded derivative liability is carried at fair value.
Securities transactions are accounted for on the date the transaction for the purchase or sale of the securities is entered into by the Company (i.e., trade date). Securities transactions outside conventional channels, such as private transactions, are recorded as of the date the Company obtains the right to demand the securities purchased or to collect the proceeds from a sale, and incurs an obligation to pay for securities purchased or to deliver securities sold, respectively.
24
GSV is a non-diversified company within the meaning of the 1940 Act. GSV classifies its investments by level of control. As defined in the 1940 Act, control investments are those where there is the power to exercise a controlling influence over the management or policies of a company. Control is generally deemed to exist when a company or individual directly or indirectly owns beneficially more than 25% of the voting securities of an investee company. Affiliated investments and affiliated companies are defined by a lesser degree of influence and are deemed to exist when a company or individual directly or indirectly owns, controls or holds the power to vote 5% or more of the outstanding voting securities of another person. Refer to the Condensed Consolidated Schedules of Investments as of June 30, 2015 and December 31, 2014, respectively, for details regarding the nature and composition of the Company’s portfolio.
The Company places its cash with U.S. Bank, N.A., and Silicon Valley Bank, and at times, cash held in these accounts may exceed the Federal Deposit Insurance Corporation insured limit. The Company may invest a portion of its cash in money market funds, within limitations of the 1940 Act.
On December 31, 2013, the Company entered into a Loan and Security Agreement (the “Loan Agreement”) with Silicon Valley Bank, pursuant to which Silicon Valley Bank agreed to provide the Company with an $18 million credit facility (the “Credit Facility”). The Company recorded origination expenses related to the Credit Facility as deferred financing costs. These expenses are deferred and amortized as part of interest expense using the effective interest method over the respective expected life of the Credit Facility. In the event that the Company modifies or extinguishes the Credit Facility, it follows the guidance in ASC 470-50, Modification and Extinguishments (“ASC 470-50”). For modifications to or exchanges of the Credit Facility, any unamortized deferred costs are expensed. As of June 30, 2015, $146,238 remains to be amortized and is included within deferred financing costs on the Condensed Consolidated Statements of Assets and Liabilities.
On September 17, 2013, the Company issued $69 million aggregate principal amount of the Convertible Senior Notes, which bear interest at a fixed rate of 5.25% per year and mature on September 15, 2018 (the “Convertible Senior Notes”) (including $9 million aggregate principal amount issued pursuant to the exercise of the initial purchasers’ option to purchase additional Convertible Senior Notes). The Company recorded origination expenses related to the Convertible Senior Notes as deferred financing costs. These expenses are deferred and amortized as part of interest expense using the effective interest method over the respective life of the Convertible Senior Notes. In the event that the Company modifies or extinguishes its debt before maturity, it follows the guidance in ASC 470-50. For extinguishments of the Convertible Senior Notes, any unamortized deferred costs are deducted from the basis of the debt in determining the gain or loss from the extinguishment. Proceeds from the issuance of the Convertible Senior Notes were offset by offering costs of approximately $3,585,929. As of June 30, 2015, $2,310,277 remains to be amortized and is included within deferred financing costs on the Condensed Consolidated Statements of Assets and Liabilities.
As of June 30, 2015, and December 31, 2014, respectively, the Company had Restricted Cash of $41,181 and $48,889 which is included on the Condensed Consolidated Statements of Assets and Liabilities. Restricted Cash consists of excess funds remaining in escrow after the purchase of the government securities that will be used to make the scheduled interest payments on the Convertible Senior Notes. See Note 9 for further detail. As of June 30, 2015, and December 31, 2014, restricted cash included a $25,000 deposit for the Company’s fidelity bond.
25
The Company’s revenue recognition policies are as follows:
Sales: Gains or losses on the sale of investments are determined using the specific identification method.
Interest: Interest income, adjusted for amortization of premium and accretion of discount, is recorded on an accrual basis.
Dividends: Dividend income is recognized on the ex-dividend date.
Commissions and other costs associated with an investment transaction, including legal expenses not reimbursed by the issuer, are included in the cost basis of purchases and deducted from the proceeds of sales. The Company makes certain acquisitions on the secondary markets which may involve making deposits to escrow accounts until certain conditions are met including the underlying private company’s right of first refusal. If the underlying private company does not exercise or assign its right of first refusal and all other conditions are met, then the funds in the escrow account are delivered to the seller and the account is closed. These transactions are reflected on the Statement of Assets and Liabilities as Escrow deposits. At June 30, 2015, and December 31, 2014, the Company had no Escrow deposits.
Unrealized appreciation or depreciation is calculated as the difference between the fair value of the investment and the cost basis of such investment.
The Company uses the asset and liability method of accounting for income taxes. Deferred tax assets and liabilities are recorded for tax loss carryforwards and temporary differences between the tax basis of assets and liabilities and their reported amounts in the condensed consolidated financial statements, using statutory tax rates in effect for the year in which the temporary differences are expected to reverse. Certain tax attributes may be subject to limitations on timing and usage. A valuation allowance is provided against deferred tax assets when it is more likely than not that some portion or all of the deferred tax assets will not be realized.
The Company evaluates tax positions taken or expected to be taken in the course of preparing its condensed consolidated financial statements to determine whether the tax positions meet the “more-likely-than-not” threshold of being sustained by the applicable tax authority. The Company only recognizes the tax benefits of uncertain tax positions that meet the “more-likely-than-not” threshold. The Company classifies penalties and interest associated with income taxes, if any, as income tax expense. Conclusions regarding tax positions are subject to review and may be adjusted at a later date based on factors including, but not limited to, ongoing analyses of tax laws, regulations and interpretations thereof.
The Company was taxed as a regular corporation (a “C corporation”) under subchapter C of the Internal Revenue Code of 1986, as amended, (“the Code”), for its 2012 taxable year. In September 2014 the Company filed its 2013 tax return as a regulated investment company (a “RIC”) and is seeking to be granted RIC status for its 2013 taxable year, however, the Company will not be eligible to elect to be treated as a RIC for the 2013 taxable year unless it is certified by the Securities and Exchange Commission (the “SEC”) as “principally engaged in the furnishing of capital to other corporations which are principally engaged in the development or exploitation of inventions, technological improvements, new processes, or products not previously generally available” for the 2013 taxable year (such certification, an “SEC Certification”).
26
Although the Company filed an application with the SEC for an SEC Certification for the 2013 taxable year, there can be no assurance that it will receive an SEC Certification. In the event that the Company does not receive such SEC Certification or is otherwise unable to meet all of the qualifications to be treated as a RIC for 2013, it will be taxed as a C Corporation for the 2013 taxable year. Should the Company not qualify as a RIC for 2013, it intends to elect to be treated as a RIC for its 2014 taxable year and 2015 taxable year, if the Company’s management determines that it is in its best interests to do so. For example, it may not be in the Company’s best interests in the event that it experiences large operating losses or has large loss carryforwards. If the Company opts not to do so or is unable to qualify, it will continue to be taxed as a C corporation under the Code for its 2014 taxable year and 2015 taxable year. Refer to Note 8 for further details.
In order to qualify as a RIC, among other things, the Company is required to distribute to its stockholders on a timely basis at least 90% of investment company taxable income, as defined by the Code, for each year, and meet certain asset diversification requirements on a quarterly basis. So long as the Company qualifies and maintains its status as a RIC, it generally will not pay corporate-level U.S. federal and state income taxes on any ordinary income or capital gains that it distributes at least annually to its stockholders as dividends. Rather, any tax liability related to income earned by the RIC will represent obligations of the Company’s investors and will not be reflected in the condensed consolidated financial statements of the Company. Included in the Company’s condensed consolidated financial statements, the GSVC Holdings are taxable subsidiaries, regardless of whether the Company is a RIC. These taxable subsidiaries are not consolidated for income tax purposes and may generate income tax expenses as a result of their ownership of the portfolio companies. Such income tax expenses and deferred taxes, if any, will be reflected in the Company’s condensed consolidated financial statements. At the present time, the Company cannot assure its investors that it will be eligible to elect to be taxed as a RIC for its 2013 taxable year. If it is not treated as a RIC for 2013, the Company will be taxed as a C corporation under the Code for the 2013 taxable year. Until such time as it qualifies and elects to be taxed as a RIC, the Company will provide for income taxes, if any, as a C Corp. The Company intends to elect to be taxed as a RIC for its 2014 taxable year and 2015 taxable year, if management determines that it is in the Company’s best interests to do so.
Basic earnings (loss) per common share, is computed using the weighted average number of shares outstanding for the period presented. Diluted earnings per share is computed by dividing net income (loss) for the period adjusted to include the pre-tax effects of interest incurred on potentially dilutive securities, by the weighted average number of common shares outstanding plus any potentially dilutive shares outstanding during the period. The Company used the if-converted method in accordance with ASC 260 to determine the number of potentially dilutive shares outstanding. Refer to Note 5 for further detail.
Certain capital accounts including undistributed net investment income or loss, accumulated net realized gain or loss, net unrealized appreciation or depreciation, and paid-in capital in excess of par, are adjusted, at least annually, for permanent differences between book and tax. In addition, the character of income and gains to be distributed is determined in accordance with income tax regulations that may differ from GAAP. GAAP requires that certain components of net assets relating to permanent differences are to be reclassified between financial statement reporting and tax reporting. These reclassifications have no effect on the net assets or net asset value per share and are intended to enable the Company’s stockholders to determine the amount of accumulated and undistributed earnings they potentially could receive in the future and on which they could be taxed.
27
In April 2015, the Financial Accounting Standards Board issued Accounting Standards Update 2015-03, Interest — Imputation of Interest (Topic 835): Simplifying the Presentation of Debt Issuance Costs (“ASU 2015-03”). ASU 2015-03 requires companies to present debt issuance costs related to a recognized debt liability in the Condensed Consolidated Statement of Assets and Liabilities as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. Public companies are required to apply ASU 2015-03 retrospectively for interim and annual reporting periods beginning after December 15, 2015.
The Company does not believe that the adoption of any recently issued accounting standards, had or will have a material impact on its current financial position and results of operations.
The Company entered into an investment advisory agreement with GSV Asset Management (the “Advisory Agreement”) in connection with its IPO. Pursuant to the Advisory Agreement, GSV Asset Management will be paid a base annual fee of 2% of gross assets, and an annual incentive fee equal to the lesser of (i) 20% of the Company’s realized capital gains during each calendar year, if any, calculated on an investment-by-investment basis, subject to a non-compounded preferred return, or “hurdle,” and a “catch-up” feature, and (ii) 20% of the Company’s realized capital gains, if any, on a cumulative basis from inception through the end of each calendar year, computed net of all realized capital losses and unrealized capital depreciation on a cumulative basis, less the aggregate amount of any previously paid incentive fees.
The Company did not pay GSV Asset Management any incentive fees for the three and six months ended June 30, 2015 and 2014 under the terms of the Advisory Agreement. The Company has not paid GSV Asset Management any incentive fees since inception under the terms of the Advisory Agreement. However for GAAP purposes, in accordance with the AICPA’s TPA (TIS 6910.2), the Company is required to accrue incentive fees as if the Company had fully liquidated the entire investment portfolio at the fair value stated on the Condensed Consolidated Statements of Assets and Liabilities as of June 30, 2015 and December 31, 2014. This accrual considers both the hypothetical liquidation of the Company’s portfolio described previously, as well as the Company’s actual cumulative realized gains and losses since inception.
For the three and six months ended June 30, 2015, the Company accrued incentive fees of $1,565,339, and $9,777,067, respectively, for financial statement purposes. For the three and six months ended June 30, 2014, the Company accrued incentive fees of $844,633, and $1,814,285, respectively, for financial statement purposes.
GSV Asset Management earned $2,010,385 and $3,931,513 in management fees for the three and six months ended June 30, 2015, respectively. GSV Asset Management earned $1,933,663 and $3,689,859 in management fees for the three and six months ended June 30, 2014, respectively.
As of June 30, 2015, the Company was owed $1,124 from GSV Asset Management for reimbursement of expenses paid for by the Company that were the responsibility of GSV Asset Management. In addition as of June 30, 2015, the Company owed GSV Asset Management $29,325 for reimbursement of other expenses.
As of December 31, 2014, the Company was owed $204,825 from GSV Asset Management for reimbursement of expenses paid for by the Company that were the responsibility of GSV Asset Management. In addition as of December 31, 2014, the Company owed GSV Asset Management $23,396 for reimbursement of other expenses.
28
The Company entered into an administration agreement with GSV Capital Service Company (the “Administration Agreement”) to provide administrative services, including furnishing the Company with office facilities, equipment, clerical, bookkeeping, record keeping services and other administrative services, in connection with its IPO and ongoing operations. The Company reimburses GSV Capital Service Company an allocable portion of overhead and other expenses in performing its obligations under the Administration Agreement. There were $785,036 and $1,587,432 in such costs incurred under the Administration Agreement for the three and six months ended June 30, 2015, respectively. There were $929,701 and $1,838,233 in such costs incurred under the Administration Agreement for the three and six months ended June 30, 2014, respectively.
The Company entered into a license agreement with GSV Asset Management pursuant to which GSV Asset Management has agreed to grant the Company a non-exclusive, royalty-free license to use the name “GSV.” Under this agreement, the Company has the right to use the GSV name for so long as the Advisory Agreement with GSV Asset Management is in effect. Other than with respect to this limited license, the Company has no legal right to the “GSV” name.
Under the 1940 Act, the Company’s investments in Controlled and Affiliated portfolio companies are deemed to be related-party transactions.
The Company’s investments in portfolio companies consist primarily of equity securities (such as common stock, preferred stock and warrants to purchase common and preferred stock) and to a lesser extent, debt securities, issued by private and publicly traded companies. The Company may from time to time, invest in U.S. Treasury Securities. Non-portfolio investments represent investments in U.S. Treasury Securities. At June 30, 2015, the Company had 100 positions in 52 portfolio companies. At December 31, 2014, the Company had 99 positions in 52 portfolio companies. The following table summarizes the composition of the Company’s investment portfolio by security type at cost and fair value as of June 30, 2015 and December 31, 2014.
29
The fair values of the Company’s investments disaggregated into the three levels of the fair value hierarchy based upon the lowest level of significant input used in the valuation as of June 30, 2015 and December 31, 2014 are as follows:
30
In accordance with ASC 820, the tables below provide quantitative information about the Company’s fair value measurements of its Level 3 assets and liabilities as of June 30, 2015, and December 31, 2014. In addition to the techniques and inputs noted in the table below, according to the Company’s valuation policy, the Company may also use other valuation techniques and methodologies when determining the Company’s fair value measurements. The below 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 with respect to the Company’s Level 3 fair value measurements as of June 30, 2015 and December 31, 2014. Significant changes in the inputs in isolation would result in a significant change in the fair value measurement, depending on the input and the materiality of the investment.
31
The significant unobservable inputs used in determining the fair value of the assets and liabilities are shown above. Increases (decreases) in revenue multiples, EBIT multiples, time to expiration, and stock price/strike price would result in higher (lower) fair values all else equal. Decreases (increases) in discount rates, volatility, and annual risk rates, would result in higher (lower) fair values all else equal.
The Company applied the binomial lattice model to value the embedded derivative using a “with-and-without method,” where the value of the Convertible Senior Notes including the embedded derivative, is defined as the “with,” and the value of the Convertible Senior Notes excluding the embedded derivative, is defined as the “without.” This method estimates the value of the embedded derivative by looking at the difference in the values between the Convertible Senior Notes with the embedded derivative and the value of the Convertible Senior Notes without the embedded derivative. The lattice model requires the following inputs: (i) strike price; (ii) estimated stock volatility; and (iii) annual risk rate.
32
The aggregate values of Level 3 portfolio investments and embedded derivative changed during the three and six months ended June 30, 2015 and June 30, 2014 as follows:
33
34
During the three and six months ended June 30, 2015, there were no transfers between levels. During the three and six months ended June 30, 2014, the following transfers between levels occurred as a result of the IPO's of several portfolio companies, as well as the expiration of lock-up agreements described in the table below.
35
The portfolio companies in which the Company invests periodically offer their shares in IPOs, which are typically subject to lock-up agreements for 180 days following the IPO. Upon the IPO date, and the lock-up expiration date, the Company generally transfers its investment from level 3 to level 2, and level 2 to level 1 respectively, due to the presence of an active market. Refer to “Note 1 — Nature of Operations and Significant Accounting Policies — Summary of Significant Accounting Policies — Levelling Policy” for further detail.
No new shares of the Company’s common stock were issued during the six months ended June 30, 2015 or the six months ended June 30, 2014.
The following information sets forth the computation of basic and diluted net increase (decrease) in net assets resulting from operations per common share for the three and six months ended June 30, 2015 and June 30, 2014. The use of the if-converted method as promulgated under ASC 260 considers all potentially dilutive securities in a Company’s capital structure when calculating diluted earnings per share, regardless of whether it would be economically beneficial for a holder of such potentially dilutive security to exercise their conversion option (such as out of the money warrants.) In scenarios where diluted earnings per share are higher than basic earnings per share, ASC 260 prohibits the separate presentation of the diluted earnings per share figure. In scenarios where diluted loss per share is lower than basic loss per share, ASC 260 prohibits the separate presentation of the diluted loss per share figure.
36
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. At June 30, 2015, and December 31, 2014, the Company had not entered into any investment agreements which required it to make a future investment in a portfolio company.
The Company is currently not subject to any material legal proceedings, nor, to its knowledge, is any material legal proceeding threatened against it. From time to time, the Company may be a party to certain legal proceedings in the ordinary course of business, including proceedings relating to the enforcement of its rights under contracts with its portfolio companies. While the outcome of these legal proceedings cannot be predicted with certainty, the Company does not expect that these proceedings will have a material effect upon its business, financial condition or results of operations.
37
The Company and its wholly-owned subsidiaries account for income taxes as C Corporations that are subject to federal and state corporate income taxes. These subsidiaries hold certain pass-through companies in connection with the Company’s proposed qualification as a RIC.
For the three and six months ended June 30, 2015, neither the Company nor its subsidiaries recorded a current income tax expense or benefit since they had net operating losses and capital loss carryforwards from prior years and a net operating loss for these periods. For the three and six months ended June 30, 2014, the Company did not recognize a current income tax expense or benefit for the same reasons.
The Company and its wholly-owned subsidiaries recorded deferred income tax benefits and expenses for the three and six months ended June 30, 2015, which consisted primarily of temporary differences related to certain expenses, net operating losses, capital losses and temporary differences arising from differences
38
between the tax basis and financial reporting basis in underlying investments. For the three and six months ended June 30, 2015 and 2014, the Company recognized net deferred income tax provisions/(benefits) as shown in the table below.
For federal and state purposes, a portion of the Company’s net operating loss carryforwards and basis differences may be subject to limitations on annual utilization in case of a change in ownership, as defined by federal and state law. The amount of such limitations, if any, has not been determined. Accordingly, the amount of such tax attributes available to offset future profits may be significantly less than the actual amounts of the tax attributes.
In September 2014, the Company filed its 2013 tax return as a regulated investment company “RIC” and is seeking to be granted RIC status for the 2013 taxable year. However, it will not be eligible to elect to be treated as a RIC for the 2013 taxable year unless it is certified by the SEC as “principally engaged in the furnishing of capital to other corporations which are principally engaged in the development or exploitation of inventions, technological improvements, new processes, or products not previously generally available” for the 2013 taxable year (such certification, an “SEC Certification”). Although it filed an application with the SEC for an SEC Certification for the 2013 taxable year, there can be no assurance that it will receive an SEC Certification. In the event that it does not receive such SEC Certification or it is otherwise unable to meet all of the qualifications to be treated as a RIC for 2013, it will be taxed as a C Corporation for the 2013 taxable year. Should it not qualify as a RIC for 2013, it intends to elect to be treated as a RIC for the 2014 taxable year and 2015 taxable year, if management determines that it is in its best interests to do so. For example, it may not be in the Company’s best interests in the event that it experiences large operating losses or have large loss carryforwards. If the Company opts not to do so or it is unable to qualify, it will continue to be taxed as a C corporation under the Code for the 2014 taxable year and 2015 taxable year.
Should the Company qualify as a RIC, it generally will not pay corporate-level U.S. federal income taxes on any net ordinary income or capital gains that the Company distributes to its stockholders as dividends and claims dividends paid deductions to compute taxable income. A RIC will not be eligible to utilize net operating losses. However, the net operating losses may become available should the Company disqualify as a RIC and become a C corporation in the future. In the event that the Company qualifies as a RIC, the Company itself will no longer be required to recognize deferred tax assets or liabilities, other than those that may be associated with its taxable subsidiaries, the GSVC Holdings.
39
In the event the Company converts to a RIC from a C Corporation it may be required to pay a corporate-level tax on the net amount of the net built-in gains, if any, in its assets (the amount by which the net fair market value of the Company’s assets exceeds the net adjusted basis in its assets) as of the date of conversion (i.e., the beginning of the first taxable year that the Company qualifies as a RIC) to the extent that such gains are recognized by the Company during the applicable recognition period, which is the ten-year period (or shorter applicable period) beginning on the date of conversion. Alternatively, the Company may make a special election to cause the gain to be recognized at the time of the conversion. In that event, the Company would be required to recognize such built-in gain as if its assets were sold at the time of the conversion. The Company does not anticipate making this election at this time. Any corporate-level built-in gain tax is payable at the time the built-in gains are recognized (which generally will be the years in which the built-in gain assets are sold in a taxable transaction). The amount of this tax will vary depending on the assets that are actually sold by the Company in this 10-year period, the actual amount of net built-in gain or loss present in those assets as of the date of conversion, and the effective tax rates at such times. The payment of any such corporate-level tax on built-in gain will be a Company expense that will reduce the amount available for distribution to stockholders. The built-in gains tax is calculated by determining the RIC’s net unrealized built-in gain, if any, by which the fair market value of the assets of the RIC at the beginning of its first RIC year exceeds the aggregate adjusted basis of such assets at that time. As of January 1, 2013, the Company did not have net unrealized built-in gain. Accordingly, the built-in gains tax will not apply should the Company elect to be treated as a RIC for the 2013 tax year. Should the Company not obtain SEC Certification for the 2013 tax year and it elects to be a RIC for the 2014 tax year, then it is expected that it should not incur built-in gains tax for the 2014 tax year due to the fact that there are sufficient net capital loss carryforwards alone to completely offset recognized built-in gains as well as available net operating losses.
In addition to meeting other requirements, the Company must generally distribute at least 90% of its investment company taxable income to qualify for the special treatment accorded to a RIC and maintain its RIC status. As part of maintaining RIC status, undistributed taxable income (subject to a 4% excise tax) pertaining to a given fiscal year may be distributed up to 12 months subsequent to the end of that fiscal year, provided such dividends are declared prior to the later of (1) the fifteenth day of the ninth month following the close of that fiscal year or (2) the extended due date for filing the federal income tax return for that fiscal year.
The Company believes that its status as a RIC remains uncertain. For purposes of its financial statements, the Company has not recognized any tax benefits as a RIC and continued to provide tax liabilities as though it were a C Corporation through the reporting period including liabilities associated with the uncertain tax position, which arise from taxable temporary differences. As a result of the 2013 tax return filing as a RIC, during the six months ended June 30, 2015, the Company increased gross unrecognized tax benefits to $18,242,537 of which $16,990,027 of unrecognized tax benefits that, if recognized, would affect its effective tax rate by reducing net deferred tax liability. The Company believes that it is reasonably possible that the full amount of unrecognized tax benefits may be reduced within the next 12 months based upon the Company satisfying the RIC Asset and Income tests for the 2014 tax year.
The Company identified its major tax jurisdictions as U.S. federal and California and may be subject to the taxing authorities examination for the tax years 2011 ~ 2014 and 2010 ~ 2014, respectively.
The Company accrues all interest and penalties related to uncertain tax positions as incurred. As of June 30, 2015, there were no interest or penalties incurred related to uncertain tax positions.
40
On September 17, 2013, the Company issued $69 million aggregate principal amount of the Convertible Senior Notes (including $9 million aggregate principal amount issued pursuant to the exercise of the initial purchasers’ option to purchase additional Convertible Senior Notes). The Convertible Senior Notes bear interest at a fixed rate of 5.25% per year, payable semi-annually in arrears on March 15 and September 15 of each year, commencing on March 15, 2014. The Convertible Senior Notes are convertible into shares of the Company’s common stock based on an initial conversion rate of 61.5091 shares of the Company’s common stock per $1,000 of principal amount of Convertible Senior Notes, which is equivalent to an initial conversion price of approximately $16.26 per share of common stock. The Convertible Senior Notes mature on September 15, 2018, unless previously purchased or converted in accordance with their terms. The Company does not have the right to redeem the Convertible Senior Notes prior to maturity.
The terms of the offering require the Company to place a portion of the proceeds of the offering in an escrow account (the “Interest Escrow”) with U.S. Bank National Association (the “Trustee”) under the indenture pursuant to which the notes are issued. Funds in the escrow account will be invested in government securities and will be used to make the first six scheduled interest payments on the notes, unless the Company elects to make the interest payments from the Company’s available funds. The interest payments on the Convertible Senior Notes will be secured by a pledge of the Company’s interest in the escrow account. In accordance with the Interest Escrow, the Company deposited $10,867,500 in an escrow account with the Trustee to purchase U.S. Treasury Strips (“Government Securities”) with an original cost of $10,845,236. At June 30, 2015, the remaining government securities are shown on the Condensed Consolidated Schedule of Investments and have an amortized cost of $5,485,542. The excess funds of $41,181 held in escrow will be used to secure the payment of the notes and is included on the Condensed Consolidated Statements of Assets and Liabilities as “Restricted Cash.”
As of June 30, 2015, the principal amount of the Convertible Senior Notes exceeded the value of the underlying shares multiplied by the per share closing price of the Company’s common stock.
The Convertible Senior Notes are the Company’s senior, unsecured obligations and rank senior in right of payment to any future indebtedness that is expressly subordinated in right of payment to the Convertible Senior Notes, equal in right of payment to any future unsecured indebtedness that is not so subordinated to the Convertible Senior Notes, junior (other than to the extent of the interest escrow) to any future secured indebtedness to the extent of the value of the assets securing such indebtedness, and structurally junior to all future indebtedness (including trade payables) incurred by the Company’s subsidiaries.
The Convertible Senior Notes contain an interest make-whole payment provision pursuant to which holders who convert their notes prior to September 15, 2016 will receive, in addition to a number of shares the Company’s common stock calculated at the applicable conversion rate for the principal amount of notes being converted, the cash proceeds from sale by the escrow agent of the portion of the government securities in the escrow account that are remaining with respect to any of the first six interest payments that have not been made on the notes being converted. Under ASC 815-10-15-74(a), the interest make-whole payment is considered an embedded derivative and is separated from the host contract, the Convertible Senior Notes, and carried at fair value.
41
The Company used a binomial lattice model to estimate the fair value of the embedded derivative in the Convertible Senior Notes. A binomial lattice model generates potential outcomes at various points in time, starting from the date of valuation until the expiration date of the embedded derivative. The estimated fair value of the embedded derivative as of June 30, 2015 is $0 as shown on the Condensed Consolidated Statement of Assets and Liabilities.
The Company entered into the Loan Agreement, effective December 31, 2013, with Silicon Valley Bank to provide the Company with an $18 million Credit Facility. Under the Credit Facility, the Company is permitted to borrow an amount equal to the lesser of $18 million or 20% of the Company’s then-current net asset value.
The Credit Facility, matures on December 31, 2016, and bears interest at a per annum rate equal to the greater of (i) the prime rate plus 4.75% and (ii) 8.0% on amounts drawn under the facility based on a 360-day year. In addition, a fee of $180,000 per annum (1.0% of the $18 million revolving line of credit) is charged under the Loan Agreement. Under the terms of the Credit Facility, the Company must repay all outstanding borrowings so that there is at least one 30-day period every twelve months during which the Company has no balance outstanding. Under the Loan Agreement, the Company has made certain customary representations and warranties and is required to comply with various covenants, reporting requirements, and other customary requirements for similar credit facilities. The Loan Agreement includes usual and customary events of default for credit facilities of this nature, including, without limitation, nonpayment, misrepresentation of representations and warranties in a material respect, breach of covenant, cross-default to certain other indebtedness, bankruptcy, change of control, and the occurrence of a material adverse effect.
The Credit Facility is secured by all of the Company’s property and assets, except for the Company’s assets pledged to secure certain obligations in connection with the Company’s issuance, in September 2013, of the Convertible Senior Notes and, as provided for in the Loan Agreement, as may be pledged in connection with any future issuance by the Company of Convertible Senior Notes on substantially similar terms. As of June 30, 2015, the Company had no borrowings under the Credit Facility, and $18 million unused under the Credit Facility. For the six months ended June 30, 2015, the Company had average borrowings outstanding of $7,486,188 under the Credit Facility.
Borrowing under the Credit Facility is subject to the leverage restrictions contained in the Investment Company Act of 1940, as amended. In addition, under the Loan Agreement, and as provided for therein, the Company has agreed not to incur certain additional permitted indebtedness in an aggregate amount exceeding 50% of the Company’s then-applicable net asset value.
From June 30, 2015 through August 10, 2015, the Company closed on investment purchases of $4,000,000 plus transaction costs as shown in following table. “Total Gross Payments” include the actual cost of an investment, as well as capitalized costs, (such as legal and other fees) associated with entering into a portfolio company investment. Refer to “Note 1 — Nature of Operations and Significant Accounting Policies” for further detail.
From June 30, 2015 through August 10, 2015, the Company sold no investments.
42
The Company is presently in the final stages of negotiations with respect to several private company investments that it anticipates entering into within the next 30 to 60 days, subject to satisfaction of applicable closing conditions. In the case of secondary market transactions, such closing conditions may include approval of the issuer, waiver or failure to exercise rights of first refusal by the issuer and/or its stockholders and termination rights by the seller or the Company. Equity investments made through the secondary market may involve making deposits in escrow accounts until the applicable closing conditions are satisfied, at which time the escrow accounts will close and such equity investments will be effectuated. From June 30, 2015 through August 10, 2015, the Company has not made any such escrow deposits.
As of August 10, 2015, the Company had no borrowings outstanding under the Credit Facility, and $18 million unused under the Credit Facility.
43
This quarterly report on Form 10-Q contains forward-looking statements that involve substantial risks and uncertainties. These forward-looking statements are not historical facts, but rather are based on current expectations, estimates and projections about GSV Capital, our current and prospective portfolio investments, our industry, our beliefs, and our assumptions. Words such as “anticipates,” “expects,” “intends,” “plans,” “will,” “may,” “continue,” “believes,” “seeks,” “estimates,” “would,” “could,” “should,” “targets,” “projects,” and variations of these words and similar expressions are intended to identify forward-looking statements.
The forward looking statements contained in this quarterly report on Form 10-Q involve risks and uncertainties, including statements as to:
These statements are not guarantees of future performance and are subject to risks, uncertainties, and other factors, some of which are beyond our control and difficult to predict and could cause actual results to differ materially from those expressed or forecasted in the forward-looking statements, including without limitation:
Although we believe the assumptions on which these forward-looking statements are based are reasonable, any of those assumptions could prove to be inaccurate, and as a result, the forward-looking statements based on those assumptions also could be inaccurate. In light of these and other uncertainties, the inclusion of a projection or forward-looking statement in this quarterly report on Form 10-Q should not be regarded as a representation by us that our plans and objectives will be achieved. These risks and uncertainties include those described or identified in our annual report on Form 10-K, in the “Risk Factors” section of this quarterly report on form 10-Q and elsewhere in this quarterly report on Form 10-Q. You should not place undue reliance on these forward-looking statements, which apply only as of the date of this quarterly report on Form 10-Q.
44
The following analysis of our financial condition and results of operations should be read in conjunction with our condensed consolidated financial statements and the related notes thereto contained elsewhere in this quarterly report on Form 10-Q.
We, GSV Capital Corp. (the “Company,” “we,” “our,” “GSV Capital” or “GSV”), are an externally managed, non-diversified closed-end management investment company that has elected to be treated as a business development company under the 1940 Act. Our investment objective is to maximize our portfolio’s total return, principally by seeking capital gains on our equity and equity-related investments. We invest principally in the equity securities of what we believe to be rapidly growing venture capital-backed emerging companies. We have also invested, on an opportunistic basis, in select publicly traded equity securities of rapidly growing companies that otherwise meet our investment criteria, and may continue to do so in the future. In addition, while we invest primarily in U.S. companies, we may invest on an opportunistic basis in certain non-U.S. companies that otherwise meet our investment criteria, although in no event will the aggregate value of our non-U.S. investments exceed 30% of the aggregate value of our total investment portfolio.
We acquire our investments through direct investments with prospective portfolio companies, secondary marketplaces for private companies and negotiations with selling stockholders. Our investment activities are managed by GSV Asset Management, and GSV Capital Service Company provides the administrative services necessary for us to operate.
Our investment philosophy is premised on a disciplined approach of identifying high-growth emerging companies across several key industry themes which may include, among others, social mobile, cloud computing and big data, internet commerce, sustainability and education technology. Our investment adviser’s investment decisions are based on a disciplined analysis of available information regarding each potential portfolio company’s business operations, focusing on the company’s growth potential, the quality of recurring revenues and cash flow and cost structures, as well as an understanding of key market fundamentals. Many of the companies that our investment adviser evaluates have financial backing from top tier venture capital funds or other financial or strategic sponsors.
We seek to deploy capital primarily in the form of non-controlling equity and equity-related investments, including common stock, warrants, preferred stock and similar forms of senior equity, which may or may not be convertible into a portfolio company’s common equity, and convertible debt securities with a significant equity component. In general, our preferred stock investments are non-income producing, have different voting rights than common stock and are generally convertible into common stock at our discretion. Our investments generally do not produce current income and therefore we may be dependent on future capital raising to meet our operating needs if no other source of liquidity is available.
The value of our investment portfolio will change over time due to changes in the fair value of our underlying investments, as well as changes in the composition of our portfolio resulting from purchases and sales of new and follow-on investments. The fair value, as of June 30, 2015, of all of our portfolio investments, excluding U.S. Treasury Bills and Strips, was $390,342,659. The following table summarizes the investment purchases we funded during the six months ended June 30, 2015. “Total Gross Payments” include both the actual cost of an investment as well as capitalized costs, (such as legal and other fees) associated with entering into a portfolio company investment. Refer to “Note 1 — Nature of Operations and Significant Accounting Policies” to our Condensed Consolidated Financial Statements for the period ended June 30, 2015 for further detail.
45
The table below summarizes the investments we sold during the six months ended June 30, 2015.
Operating results for the three months ended June 30, 2015 and 2014 are as follows:
46
Operating results for the six months ended June 30, 2015 and 2014 are as follows:
47
Investment income increased to $123,891 for the three months ended June 30, 2015, as compared to $97,033 for the three months ended June 30, 2014. The increase was primarily due to the addition of new loans during the three months ended June 30, 2015 versus the three months ended June 30, 2014.
Investment income increased to $182,915 for the six months ended June 30, 2015, as compared to $137,848 for the six months ended June 30, 2014. The increase was primarily due to the addition of new loans during the six months ended June 30, 2015 versus the six months ended June 30, 2014.
Total operating expenses increased to $6,233,424 for the three months ended June 30, 2015, as compared to $5,875,551 for the three months ended June 30, 2014. The increase of $357,873 was primarily due to an increase in incentive fees, which was partially offset by decreased interest expense and costs incurred under our administration agreement. The increase in incentive fees resulted from the appreciation of our portfolio for the three months ended June 30, 2015 relative to the three months ended June 30, 2014. The primary drivers of the increase in our portfolio’s fair value were 2U, Inc. (f/k/a 2tor, Inc.), Dropbox, Inc., Spotify Technology S.A. and Palantir Technologies, Inc. The decrease in interest expense resulted from the fact that we did not borrow under the Credit Facility for the three months ended June 30, 2015, while during the three months ended June 30, 2014 we incurred interest expense of $353,426 due to borrowings under the Credit Facility. The decrease in costs under our administration agreement was primarily the result of a $115,202 decrease in overhead expenses.
Total operating expenses increased to $19,085,854 for the six months ended June 30, 2015, as compared to $10,724,094 for the six months ended June 30, 2014. The increase of $8,361,760 was primarily due to a significant increase in incentive fees, a smaller gain on the fair value of the embedded derivative and a small increase in management fees, all of which was offset to a small degree by a decrease in costs incurred under our administration agreement. The $7,962,782 increase in incentive fees resulted from the appreciation of our portfolio for the six months ended June 30, 2015 relative to the six months ended June 30, 2014. The primary drivers of the increase in our portfolio’s fair value were 2U, Inc. (f/k/a 2tor, Inc.), Dataminr, Inc. and Dropbox, Inc. The decrease in the gain of $639,000 on the fair value of the embedded derivative is primarily the result of time elapsed until the expiration of the interest make-whole provision on our embedded derivative. The increased management fees are a result of the growth in our total assets, which primarily results from the growth of our investment portfolio for the six months ended June 30, 2015 relative to the six months ended June 30, 2014. The decrease in costs under our administration agreement was primarily the result of a $245,260 decrease in overhead expenses.
For the three months ended June 30, 2015, we recognized a benefit for taxes on net investment loss of $2,494,459, compared to a corresponding benefit of $2,359,369 for three months ended June 30, 2014. The increase in benefit for taxes on net investment loss is due primarily to the $357,873 increase in operating expenses for the three months ended June 30, 2015, as compared to the three months ended June 30, 2014.
For the six months ended June 30, 2015, we recognized a benefit for taxes on net investment loss of $7,718,070, compared to a corresponding benefit of $4,372,283 for six months ended June 30, 2014. The increase in benefit for taxes on net investment loss is due primarily to the $8,361,760 increase in operating expenses for the six months ended June 30, 2015, as compared to the six months ended June 30, 2014.
For the three months ended June 30, 2015, we recognized a net investment loss of $3,615,074, compared to a corresponding net investment loss of $3,419,149 for the three months ended June 30, 2014. The $195,925 increase in net investment loss is a result of the increased operating expenses discussed above, partially offset by the increased benefit for taxes on net investment loss.
48
For the six months ended June 30, 2015, we recognized a net investment loss of $11,184,869, compared to a corresponding net investment loss of $6,213,963 for the six months ended June 30, 2014. The $4,970,906 increase in net investment loss is a result of the increased operating expenses discussed above, partially offset by the increased benefit for taxes on net investment loss.
For the three months ended June 30, 2015, net realized gains on investments were $13,636,614, which resulted from the partial sale of our investment in Twitter, Inc. For the three months ended June 30, 2014, we had $7,249,566 of realized capital losses, which resulted primarily from the sales of Violin Memory, Inc. and Silver Spring Networks, Inc. These losses were partially offset by gains from the sales of our shares in Control4 Corporation.
For the six months ended June 30, 2015, net realized gains on investments were $26,855,017, which resulted from the partial sale of our investment in Twitter, Inc. For the six months ended June 30, 2014, we had $682,179 of realized capital gains, which was due to gains from the sales of our shares of Control4 Corporation and Facebook, Inc., offset by losses resulting from the sales of Violin Memory, Inc. and Silver Springs Networks, Inc.
For the three months ended June 30, 2015, we recognized a provision of $5,567,830 for taxes on net realized capital gains. The provision for taxes on net realized capital gains is due to the significant net realized gains from the sales of Twitter, Inc.
For the three months ended June 30, 2014, we recognized a benefit of $2,959,998 for taxes on net realized capital losses. The benefit for taxes on net realized capital losses was due to the significant net realized losses on the sales of Violin Memory, Inc. and Silver Spring Networks, Inc.
For the six months ended June 30, 2015, we recognized a provision of $10,964,904 for taxes on net realized capital gains. The provision for taxes on net realized capital gains is due to the significant net realized gains for the six months ended June 30, 2015 from the sales of Twitter, Inc.
For the six months ended June 30, 2014, we recognized a provision of $278,533 for taxes on net realized capital gains. The provision for taxes on net realized capital gains was due to gains from the sales of our shares of Control4 Corporation and Facebook, Inc., which were offset by losses resulting from the sales of Violin Memory, Inc. and Silver Springs Networks, Inc.
For the three months ended June 30, 2015, we had a net change in unrealized depreciation of $5,744,399. For three months ended June 30, 2014, we had a net change in unrealized appreciation of $11,472,725. The following tables summarize, by portfolio company, the significant changes in unrealized appreciation (depreciation) of our investment portfolio for the three months ended June 30, 2015 and 2014, respectively.
49
For the six months ended June 30, 2015, we had a net change in unrealized appreciation of $22,039,682. For the six months ended June 30, 2014, we had a net change in unrealized appreciation of $8,399,046. The following tables summarize, by portfolio company, the significant changes in unrealized appreciation (depreciation) of our investment portfolio for the six months ended June 30, 2015 and 2014, respectively.
50
For the three months ended June 30, 2015, we recognized a benefit for taxes of $2,372,190 on the unrealized depreciation of our portfolio investments.
For the three months ended June 30, 2014, we recognized a provision of $4,684,314 for taxes on the unrealized appreciation of our portfolio investments.
The change between the two periods is due to the fact that the change in unrealized appreciation from investments decreased to approximately $5.7 million of unrealized depreciation from approximately $11.4 million of unrealized appreciation as shown in the tables above. The unrealized depreciation for the three months ended June 30, 2015 was primarily due to the unrealized depreciation of our Twitter shares, partially offset by the unrealized appreciation of 2U, Inc. (f/k/a 2tor, Inc.), Dropbox, Inc., Spotify Technology S.A. and Palantir Technologies, Inc. The unrealized depreciation from our Twitter shares resulted from the decline in Twitter’s share price to $36.22 from $50.08 as of June 30, 2015 and March 31, 2015, respectively. Refer to the tables above for the largest components of our change in unrealized appreciation (depreciation).
For the six months ended June 30, 2015, we recognized a provision for taxes of $8,998,803 on the unrealized appreciation of our portfolio investments.
For the six months ended June 30, 2014, we recognized a provision of $3,429,331 for taxes on the unrealized appreciation of our portfolio investments.
The change between the two periods is due to the fact that the change in unrealized appreciation from investments increased to approximately $22.0 million from approximately $8.4 million as shown in the table above. The increase in unrealized appreciation for the six months ended June 30, 2015 was primarily due to the appreciation of 2U, Inc. (f/k/a 2tor, Inc.), Dataminr, Inc. and Dropbox, Inc., which was partially offset by the reversal of our unrealized appreciation caused by the sales of our Twitter shares. Refer to the tables above for the largest components of our change in unrealized appreciation (depreciation).
51
For the three months ended June 30, 2015, the net increase in net assets resulting from operations was $1,081,501.
For the three months ended June 30, 2014, the net decrease in net assets resulting from operations was $920,306.
The change in in net assets resulting from operations for the three months ended June 30, 2015, as compared to the three months ended June 30, 2014, resulted from the increased realized gains, which were largely offset by the change in unrealized depreciation of the portfolio as a whole, as well an increase in operating expenses.
For the six months ended June 30, 2015, the net increase in net assets resulting from operations was $17,746,123.
For the six months ended June 30, 2014, the net decrease in net assets resulting from operations was $840,602.
The change in net assets resulting from operations for the six months ended June 30, 2015, as compared to the six months ended June 30, 2014, resulted from the significant increase in realized gains, as well as the change in unrealized appreciation of the portfolio as a whole, which were partially offset by a significant increase in operating expenses.
Our liquidity and capital resources are generated primarily from the net proceeds of public offerings of our equity and debt securities, advances from our Credit Facility, as well as sales of our investments.
Our primary use of cash is to make investments and to pay our operating expenses. Our current policy is to maintain cash reserves and liquid securities in an amount sufficient to pay our operating expenses, including investment management fees and costs incurred under the administration agreement, for approximately two years. For the six months ended June 30, 2015 and 2014, our operating expenses were $19,085,854 and $10,724,094, respectively.
52
During the six months ended June 30, 2015, cash and cash equivalents increased to approximately $8.0 million at the end of the period, from approximately $3.5 million at the beginning of the period. Net cash provided by operating activities during the six months ended June 30, 2015, consisting primarily of the items described in “— Results of Operations,” was approximately $22.6 million, reflecting purchases of portfolio investments of approximately $10.5 million and proceeds from sales of investments of approximately $40.2 million. During the period, net cash used by financing activities was approximately $18.0 million, reflecting net repayments of borrowings under the Credit Facility.
There were no sales of our equity securities during the six months ended June 30, 2015 or for the year ended December 31, 2014.
As of June 30, 2015, we had no borrowings under the Credit Facility, and $18 million unused under the Credit Facility.
As of June 30, 2015, we had no off-balance sheet arrangements, including any risk management of commodity pricing or other hedging practices. However, we may employ hedging and other risk management techniques in the future.
The timing and amount of our dividends, if any, will be determined by our board of directors. Any dividends to our stockholders will be declared out of assets legally available for distribution. We intend to focus on making capital gains-based investments from which we will derive primarily capital gains. As a consequence, we do not anticipate that we will pay dividends on a quarterly basis or become a predictable distributor of dividends, and we expect that our dividends, if any, will be much less consistent than the dividends of other business development companies that primarily make debt investments. We have made no distributions since inception and are not certain as to when we will be able to distribute dividends in the future. However, if there are earnings or realized capital gains to be distributed, we intend to declare and pay a dividend at least annually. The amount of realized capital gains available for distribution to stockholders will be impacted by our tax status, which remains uncertain.
53
Our current intention is to make any distributions out of assets legally available therefrom in additional shares of our common stock under our dividend reinvestment plan, unless you elect to receive your dividends and/or long-term capital gains distributions in cash. Under the dividend reinvestment plan, if a stockholder owns shares of common stock registered in its own name, the stockholder will have all cash distributions (net of any withholding) automatically reinvested in additional shares of common stock unless the stockholder opts out of our dividend reinvestment plan by delivering a written notice to our dividend paying agent prior to the record date of the next dividend or distribution. Any distributions reinvested under the plan will nevertheless remain taxable to the U.S. stockholder, although no cash distribution has been made. As a result, if you do not elect to opt out of the dividend reinvestment plan, you will be required to pay applicable federal, state and local taxes on any reinvested dividends even though you will not receive a corresponding cash distribution. In addition, reinvested dividends have the effect of increasing our gross assets, which may correspondingly increase the management fee payable to our investment adviser. If you hold shares in the name of a broker or financial intermediary, you should contact the broker or financial intermediary regarding your election to receive distributions in cash.
Although we intend to elect to be taxed as a RIC under Subchapter M of the Code for the 2014 taxable year, we may be taxed as a C Corporation under the Code for our 2013 taxable year. We are unable to make a reasonably reliable estimate of when, if ever, we will become eligible to be treated as a RIC and thereby release the deferred tax liabilities associated with being a C Corporation. In September 2014, we filed our 2013 tax return as a RIC and are seeking to be granted RIC status for the 2013 taxable year. However, we will not be eligible to elect to be treated as a RIC for the 2013 taxable year unless we receive an SEC Certification, for which we have applied. In the event that we do not receive such SEC Certification or are otherwise unable to meet all of the qualifications to be treated as a RIC for 2013, we will be taxed as a C Corporation for the 2013 taxable year. Should we not qualify as a RIC for 2013, we intend to elect to be treated as a RIC for the 2014 taxable year and 2015 taxable year, if management determines that it is in our best interests to do so. If management opts not to do so or we are unable to qualify, we will continue to be taxed as a C corporation under the Code for the 2014 taxable year and 2015 taxable year.
Should we become eligible to be treated as a RIC, we generally will not pay corporate-level U.S. federal income taxes on any net ordinary income or capital gains that we distribute to our stockholders as dividends and claim dividends paid deductions to compute taxable income. In the event we convert to a RIC from a C Corporation, we may be required to pay a corporate-level tax on the net amount of the net built-in gains, if any, in our assets (the amount by which the net fair market value of our assets exceeds the net adjusted basis in our assets) as of the date of conversion (i.e., the beginning of the first taxable year that we qualify as a RIC) to the extent that such gains are recognized by us during the applicable recognition period, which is the ten-year period (or shorter applicable period) beginning on the date of conversion. Alternatively, we may make a special election to cause the gain to be recognized at the time of the conversion. The payment of any such corporate-level tax on built-in gain will be a Company expense that will reduce the amount available for distribution to stockholders. Should we not obtain SEC Certification for the 2013 tax year and elect to be a RIC for the 2014 tax year, then it is expected that we should not incur built-in gains tax for the 2014 tax year due to the fact that there are sufficient net capital loss carryforwards alone to completely offset recognized built-in gains as well as available net operating losses. See “Note 8 — Income Tax” to our Condensed Consolidated Financial Statements for the period ended June 30, 2015 for more information.
On September 17, 2013, we issued $69 million aggregate principal amount of Convertible Senior Notes which bear interest at a fixed rate of 5.25% per year, are payable semi-annually and mature on September 15, 2018, unless previously purchased or converted in accordance with their terms. We do not have the right to redeem the Convertible Senior Notes prior to maturity. The Convertible Senior Notes are convertible into shares of our common stock based on an initial conversion rate of 61.5091 shares of common stock per $1,000 principal amount of Convertible Senior Notes, which is equivalent to an initial conversion price of approximately $16.26 per share of common stock, and which represents a premium of 71.7% to the $9.47 per share closing price of the our common stock on August 7, 2015.
54
The Convertible Senior Notes are our senior, unsecured obligations and rank senior in right of payment to any future indebtedness that is expressly subordinated in right of payment to the Convertible Senior Notes, equal in right of payment to any future unsecured indebtedness that is not so subordinated to the Convertible Senior Notes, junior (other than to the extent of the interest escrow) to any future secured indebtedness to the extent of the value of the assets securing such indebtedness, and structurally junior to all future indebtedness (including trade payables) incurred by our subsidiaries. “Structurally junior” indicates that creditors of a parent entity are subordinate to creditors of a subsidiary entity with respect to the subsidiary’s assets.
The terms of the Convertible Senior Notes offering required us to place approximately $10.8 million of the proceeds of the offering in an escrow account (the “Interest Escrow”) with U.S. Bank National Association (the “Trustee”) to secure the payment of the first six interest payments.
We incurred approximately $3.5 million of legal and other costs associated with issuing the Convertible Senior Notes. These costs were deferred and are being amortized over the life of the Convertible Senior Notes. As of June 30, 2015, of the approximately $3.5 million incurred, approximately $2.3 million remains to be amortized. See “Note 1 — Nature of Operations and Significant Accounting Policies — Deferred Financing Costs” and “Note 9 — Long Term Liabilities” to our Condensed Consolidated Financial Statements for the period ended June 30, 2015 for more information.
The Convertible Senior Notes contain an interest make-whole payment provision that allows note holders who convert their notes into common stock prior to September 15, 2016 to receive a number of shares of our common stock calculated at the applicable conversion rate for the principal amount of notes being converted, as well as the cash proceeds from sale by the escrow agent of the portion of the government securities in the escrow account that are remaining with respect to any of the first six interest payments that have not been made on the notes being converted.
Refer to “Note 9 — Long Term Liabilities” to our Condensed Consolidated Financial Statements for the period ended June 30, 2015 for a detailed discussion of the Convertible Senior Notes and their interest make-whole payment provision.
We entered into the Loan Agreement, effective December 31, 2013, with Silicon Valley Bank to provide us with an $18 million Credit Facility, which matures on December 31, 2016, and bears interest at a per annum rate equal to the greater of (i) the prime rate plus 4.75% and (ii) 8.0% on amounts drawn. In addition, a fee of $180,000 per annum (1.0% of the $18 million revolving line of credit) is charged under the Loan Agreement. Under the Credit Facility, we are permitted to borrow an amount equal to the lesser of $18 million or 20% of our then-current net asset value. The Credit Facility is secured by all of our property and assets, except for our assets pledged to secure certain obligations in connection with our issuance, in September 2013, of the Convertible Senior Notes and, as provided for in the Loan Agreement, as may be pledged in connection with any future issuance by us of convertible senior notes on substantially similar terms. As of June 30, 2015, we had no borrowings under the Credit Facility, and $18 million unused under the Credit Facility.
Refer to “Note 9 — Long Term Liabilities” to our Condensed Consolidated Financial Statements for the period ended June 30, 2015 for a detailed discussion of the Credit Facility.
We entered into the Advisory Agreement with GSV Asset Management in connection with our IPO. Pursuant to the Advisory Agreement, GSV Asset Management will be paid a base annual fee of 2.00% of gross assets, and an annual incentive fee equal to the lesser of (i) 20% of our realized capital gains during each calendar year, if any, calculated on an investment-by-investment basis, subject to a non-compounded preferred return, or “hurdle,” and a “catch-up” feature, and (ii) 20% of our realized capital gains, if any, on a cumulative basis from inception through the end of each calendar year, computed net of all realized capital losses and unrealized capital depreciation on a cumulative basis, less the aggregate amount of any previously paid incentive fees.
55
We did not pay GSV Asset Management any incentive fees for the three and six months ended June 30, 2015 and 2014 under the terms of the Advisory Agreement. We have not paid GSV Asset Management any incentive fees since inception under the terms of the Advisory Agreement. However, for GAAP purposes, in accordance with the AICPA’s TPA (TIS 6910.2), we are required to accrue incentive fees as if we had fully liquidated our entire investment portfolio at the fair value stated on the Condensed Consolidated Statements of Assets and Liabilities as of June 30, 2015 and December 31, 2014. This accrual considers both the hypothetical liquidation of our portfolio described previously, as well as our actual cumulative realized gains and losses since inception.
For the three and six months ended June 30, 2015, we accrued incentive fees of $1,565,339 and $9,777,067, respectively, for financial statement purposes. For the three and six months ended June 30, 2014, we accrued incentive fees of $844,633 and $1,814,285, respectively, for financial statement purposes.
As of June 30, 2015, we were owed $1,124 from GSV Asset Management for reimbursement of expenses we paid that were the responsibility of GSV Asset Management. In addition as of June 30, 2015, we owed GSV Asset Management $29,325 for reimbursement of other expenses.
As of December 31, 2014, we were owed $204,825 from GSV Asset Management for reimbursement of expenses we paid that were the responsibility of GSV Asset Management. In addition as of December 31, 2014, we owed GSV Asset Management $23,396 for reimbursement of other expenses.
We entered into the Administration Agreement with GSV Capital Service Company to provide administrative services, including furnishing us with office facilities, equipment, clerical, bookkeeping services and other administrative services, in connection with our IPO. We reimburse GSV Capital Service Company an allocable portion of overhead and other expenses in performing its obligations under the Administration Agreement. There were $785,036 and $1,587,432 in such costs incurred under the Administration Agreement for the three and six months ended June 30, 2015, respectively. There were $929,701 and $1,838,233 in such costs incurred under the Administration Agreement for the three and six months ended June 30, 2014, respectively.
In February 2013, Mark Moe, who is the brother of our Chief Executive Officer, Michael Moe, joined NestGSV, Inc. (d/b/a GSV Labs, Inc.), one of our portfolio companies, as a Vice President of Business Development, Global Expansion. On August 26, 2014, Diane Flynn, who is the spouse of our president, Mark Flynn, joined NestGSV, Inc. (d/b/a GSV Labs, Inc.), on a contract basis as Chief Marketing Officer. In February 2015, she became the Chief Marketing Officer on a full time basis. Ron Johnson, the CEO of Enjoy Technology, Inc., is the brother-in-law of our president, Mark Flynn.
In addition, our executive officers and directors, and the principals of our investment adviser, GSV Asset Management, serve or may serve as officers and directors of entities that operate in a line of business similar to our own, including new entities that may be formed in the future. Accordingly, they may have obligations to investors in those entities, the fulfillment of which might not be in the best interests of us or our stockholders. For example, as of June 30, 2015, GSV Asset Management also managed GSV X Fund, a global long/short absolute return fund, and Coursera@GSV Fund, LP, a special purpose vehicle comprised of an underlying investment in Coursera stock, and will likely manage one or more private funds in the future.
While the investment focus of each of these entities may be different from our investment objective, it is likely that new investment opportunities that meet our investment objective will come to the attention of one of these entities, or new entities that will likely be formed in the future in connection with another investment advisory client or program, and, if so, such opportunity might not be offered, or otherwise made available, to us. However, our executive officers, directors and investment adviser intend to treat us in a fair and equitable manner consistent with their applicable duties under law so that we will not be disadvantaged in relation to any other particular client. In addition, while GSV Asset Management anticipates that it will from time to time
56
identify investment opportunities that are appropriate for both us and the other funds that are currently or in the future may be managed by GSV Asset Management, to the extent it does identify such opportunities, GSV Asset Management has established an allocation policy to ensure that we have priority over such other funds. Our board of directors will monitor on a quarterly basis any such allocation of investment opportunities between us and any such other funds.
GSV Asset Management is the owner of the “GSV” name and marks, which we are permitted to use pursuant to a non-exclusive license agreement between us and GSV Asset Management. GSV Asset Management and its principals also use and may permit other entities to use the “GSV” name and marks in connection with businesses and activities unrelated to our operations. The use of the “GSV” name and marks in connection with businesses and activities unrelated to our operations may not be in the best interest of us or our stockholder and may result in actual or perceived conflicts of interest.
In the ordinary course of business, we may enter into transactions with portfolio companies that may be considered related-party transactions. In order to ensure that we do not engage in any prohibited transactions with any persons affiliated with us, we have implemented certain written policies and procedures whereby our executive officers screen each of our transactions for any possible affiliations between the proposed portfolio investment, us, companies controlled by us and our executive officers and directors.
We also adopted a Code of Ethics which applies to, among others, our senior officers, including our Chief Executive Officer and Chief Financial Officer, as well as all of our officers, directors and employees. Our Code of Ethics requires that all employees and directors avoid any conflict, or the appearance of a conflict, between an individual’s personal interests and our interests. Pursuant to our Code of Ethics, each employee and director must disclose any conflicts of interest, or actions or relationships that might give rise to a conflict, to our Chief Compliance Officer. Our board of directors is charged with approving any waivers under our Code of Ethics. As required by the NASDAQ corporate governance listing standards, the Audit Committee of our board of directors is also required to review and approve any transactions with related parties (as such term is defined in Item 404 of Regulation S-K).
See “Note 1 — Nature of Operations and Significant Accounting Policies” to our Condensed Consolidated Financial Statements for the period ended June 30, 2015, which describes our critical accounting policies and recently issued accounting pronouncements not yet required to be adopted by us.
From June 30, 2015 through August 10, 2015, we closed on investment purchases of $4,000,000 plus transaction costs as shown in following table. “Total Gross Payments” include the actual cost of an investment as well as capitalized costs, (such as legal and other fees) associated with entering into a portfolio company investment. Refer to “Note 1 — Nature of Operations and Significant Accounting Policies” to our Condensed Consolidated Financial Statements for the period ended June 30, 2015.
From June 30, 2015 through August 10, 2015, we sold no investments.
We are presently in the final stages of negotiations with respect to several private company investments that we anticipate entering into within the next 30 to 60 days, subject to satisfaction of applicable closing conditions. In the case of secondary market transactions, such closing conditions may include approval of the issuer, waiver or failure to exercise rights of first refusal by the issuer and/or its stockholders and termination rights by the seller or us. Equity investments made through the secondary market may involve making deposits in escrow accounts until the applicable closing conditions are satisfied, at which time the escrow accounts will close and such equity investments will be effectuated. From June 30, 2015 through August 10, 2015, we have not made any such escrow deposits.
57
As of August 10, 2015, we had no borrowings outstanding under the Credit Facility, and $18 million unused under the Credit Facility.
We are subject to financial market risks, which could include; to the extent we utilize leverage with variable rate structures, changes in interest rates. As we invest primarily in equity rather than debt instruments, we would not expect fluctuations in interest rates to directly impact our return on our portfolio investments, although any significant change in market interest rates could potentially have an indirect effect on the business, financial condition and results of operations of the portfolio companies in which we invest.
As of June 30, 2015, all of our debt investments bore a fixed rate of interest. As of June 30, 2015, all of our borrowings bore a fixed rate of interest with the exception of the Credit Facility which is indexed to the prime rate. We do not expect a significant impact on net investment income, due to changes in the prime rate, based on its historical stability. The table below, however, indicates the impact an increase in the prime rate would have on our net investment income.
At June 30, 2015 we had no borrowings under the Credit Facility, which allows us to borrow a maximum of $18.0 million. The amount we borrow under the Credit Facility will vary based on our business needs throughout the year. As such, we are not able to forecast our utilization under the Credit Facility. We have thus have assumed full utilization of the Credit Facility to present the largest impact rising interest rates could have on our net income. The table below shows the impact changes in interest rates could have on our net income, based on our Condensed Consolidated Statement of Assets and Liabilities as of June 30, 2015 (assuming no other changes in our investment and borrowing structure).
As of June 30, 2015, we, including our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)). Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective and provided reasonable assurance that information required to be disclosed in our periodic SEC filings is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. However, in evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated can
58
provide only reasonable assurance of achieving the desired control objectives, and management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of such possible controls and procedures.
There have been no changes in our internal control over financial reporting (as defined in Rule 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the quarter ended June 30, 2015 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
We are not currently subject to any material legal proceedings, nor, to our knowledge, is any material legal proceeding threatened against us. From time to time we may be a party to certain legal proceedings in the ordinary course of business, including proceedings relating to the enforcement of our rights under contracts with our portfolio companies. While the outcome of these legal proceedings cannot be predicted with certainty, we do not expect that these proceedings will have a material effect upon our business, financial condition or results of operations.
In addition to the risks discussed below and the other information set forth in this report, you should carefully consider the factors discussed in Item 1A. Risk Factors in our Annual Report on Form 10-K for the fiscal year ended December 31, 2014, which could materially affect our business, financial condition and/or operating results. The risks described in this report and in our Annual Report on Form 10-K are not the only risks facing our company. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially and adversely affect our business, financial condition and/or operating results.
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 made smaller investments in more companies. The following table shows the fair value of the totals of investments held in portfolio companies at June 30, 2015 that represent greater than 5% of our net assets:
Palantir Technologies, Inc. solves critical intelligence and security issues for government agencies, banks, and large institutions.
2U, Inc. (f/k/a 2tor, Inc.) partners with universities, providing technology solutions to help manage students from recruitment to post-graduation job placement, as well as develop and deliver curriculum in a virtual environment.
Dropbox, Inc. is a provider of cloud storage that enables users to store and share files across the internet.
Twitter, Inc. is a social networking company and a real-time information network that allows users to send and receive information.
Our financial results could be materially adversely affected if these portfolio companies or any of our other significant portfolio companies encounter financial difficulty and fail to repay their obligations or to perform as expected.
59
Not applicable.
None.
The following exhibits are filed as part of this report or hereby incorporated by reference to exhibits previously filed with the SEC:
60
61
62
63
64
65
66
67
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
By:
/s/ Michael T. MoeMichael T. Moe Chief Executive Officer and Chairman of the Board of Directors (Principal Executive Officer)
/s/ William F. TanonaWilliam F. Tanona Chief Financial Officer, Treasurer and Secretary (Principal Financial and Accounting Officer)
68